EastGroup Properties, Inc. (EGP)

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EastGroup Properties, Inc. (EGP)

Q3 2010 Earnings Call Transcript

October 22, 2010 11:00 am ET

Executives

David Hoster – President and CEO

Keith McKey – EVP, CFO, Treasurer and Secretary

Analysts

Chris Caton – Morgan Stanley

Ki Bin Kim – Macquarie Capital

Alex Goldfarb – Sandler O'Neill

James Feldman – Bank of America

Paul Adornato – BMO Capital Markets

Brendan Maiorana – Wells Fargo

Sri Nagarajan – FBR Capital Markets

Mitch Germain – JMP Securities

Presentation

Operator

Good day, everyone, and welcome to the EastGroup Properties third quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call maybe recorded and I will be standing by if you should need any assistance.

And it is now my pleasure to hand the call over to Mr. David Hoster, President and CEO. Please go ahead, sir.

David Hoster

Good morning, and thanks for calling in for our third quarter 2010 conference call. We appreciate your interest in EastGroup. Keith McKey, our CFO, will also be participating in the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

Unidentified Participant

The discussion today involves forward-looking statements. Please refer to the Safe Harbor language included in the company’s news release announcing results for this quarter that describes certain risk factors and uncertainties that may impact the company’s future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time-sensitive information that’s subject to the Safe Harbor statement included in the news release is accurate only as of the date of this call.

David Hoster

Thank you. Operating results for the third quarter met the midpoint of our guidance range. This was the 19th consecutive quarter that we either met or exceeded the quarterly guidance midpoint. Funds from operations were $0.70 per share as compared to $0.76 per share from the third quarter of last year, a decrease of 7.9%. This decrease was primarily due to a decrease in the same property operations and increased interest expense mainly resulting from lower capitalization of interest this past quarter.

For the nine months, FFO was $2.14 per share as compared to $2.39 per share for the same period of '09, a decrease of 10.5%. Same property net operating income for the third quarter declined 4.8% with straight-line rent adjustments and 6.5% without. These figures represent a decrease from what was experienced in the first two quarters, due primarily to the fact that there were significantly less termination fees in the third quarter.

On a sequential quarter basis, we experienced positive same-property results over the second quarter after the elimination of termination fees. In the third quarter, on a GAAP basis, our best major markets for same property results, again after the elimination of termination fees, were San Francisco, which was up 26% and Houston, which was flat. The trailing same-property markets were Los Angeles, down 27%; New Orleans, down 18%; and Dallas, down 15%. Although average rents were declining, the difference between quarters is basically due to changes in property occupancies in the individual markets.

EastGroup’s occupancy at September 30 was 88.3%, an increase of 110 basis points over our June 30 occupancy and 210 basis points above March 31 results. Looking forward, we continue to project occupancy to increase to at least 89% by the end of the year.

Please note that these statistics include our development properties that were moved to the portfolio at the earlier of 80% occupancy or one year after shelf [ph] completion. Our Texas markets were the best at 94.6% leased and 92.5% occupied at the end of the quarter. Houston, our largest market with over 4.8 million square feet, was 97.5% occupied. Our most challenging major markets continue to be Phoenix at 75.8% occupied and Tampa at 80.4% occupied.

Looking at third quarter leasing statistics, we renewed 90% of the 943,000 square feet that expired in the quarter and leased another 621,000 that had either terminated or expired during the quarter or was vacant at the beginning of the quarter. Our renewal rate of 90% is a record for us and especially impressive given the generally depressed market environment in which we operate.

As shown by our occupancy results, we are achieving progress in leasing, but activity is still very shallow. We cannot call it good yet, but it is positive and we expect to achieve increased occupancy through the end of this year. There is activity in all of our markets, but prospects continue to expect cheap rent with significant concessions and feel a little sense of urgency since they have so many lease alternatives.

As you can see in our supplemental information, GAAP rents in the third quarter decreased 8.5% and cash rents declined 12.6%, an improvement over the second quarter and about the same as our first quarter results. Our Arizona and Florida markets continue to have the largest rent decreases after having achieved the largest increases several years ago. We expect to report negative rent growth until occupancy is recovered to the 93% to 94% level. This was the case coming out of the last recession.

Average lease length was 5.2 years, which was above our average for the past year. Tenant improvements were $2.49 per square foot or $0.48 per square foot per year of the lease. The $0.48 represents our average for the last four quarters, but is higher when compared to the last eight quarters.

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