EastGroup Properties, Inc. (EGP)

EGP 
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EastGroup Properties (EGP)

Q2 2008 Earnings Call Transcript

July 24, 2008 11:00 am ET

Executives

David Hoster - President and CEO

Keith McKey - CFO

Analysts

Irwin Guzman - Citigroup

Michael Bilerman - Citigroup

Paul Adornato - BMO Capital Markets

Mitch Germain - Banc of America

Chris Lucas - Robert W. Baird & Company

Nap Overton - Morgan Keegan

Chris Haley - Wachovia Securities

Presentation

Operator

Welcome to today's teleconference entitled the EastGroup Second Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during our Q&A session. Please note this call may be recorded.

I would now like to turn the call over to your moderator for today, David Hoster, President and CEO of EastGroup Properties. Please go ahead, sir.

David Hoster

Good morning, and thanks for calling in for our second quarter 2008 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 Company Representative

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, 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 second quarter exceeded the upper end of our guidance range. Funds from operations were $0.80 per share as compared to $0.74 per share for the second quarter of last year, an increase of 8.1%. The $0.02 per share above the midpoint of our second quarter guidance was due to good property operating results and lower-than-projected interest expense. For the first six months of 2008, FFO was $1.63 per share compared to $1.46 per share for the first half of last year, an increase of 11.6%.

We continued to achieve positive same-property net operating results in the second quarter, but at a slower pace than a year ago. Same-property quarterly results improved by 2.7% without the straightlining of rents and with straightlining, increased by 0.9%. Without termination fees, these results were 2.5% and 0.8%, respectively. This was the 20th consecutive quarter of positive results for both measures.

For the second quarter on a GAAP basis, our best major markets, after the elimination of termination fees, were Los Angeles, which was up 10.2%; Phoenix, up 6.7%; and Houston, up 6.5%. The trailing same-property markets were South Florida, down 12.2%, and Tampa, down 5.4%. The reduced rate of growth in same-property results for the quarter was due to the high level of occupancy in the second quarter of last year. Consequently, the overall increases in the second quarter of '08 are due primarily to higher rents rather than improved occupancy as we have seen in the past.

Occupancy at June 30 was 95%, a 60 basis point increase from the end of the first quarter. Our California markets were 98.1% occupied and Texas was 95.4%. Houston, our largest market with 3.9 million square feet, was 98.1% occupied.

As we have discussed in our last several conference calls, leasing activity has slowed significantly from its peak in the first half of last year, reflecting a general economic slowdown. The good news is that there are still prospects looking for space, although there are fewer of them and it takes longer to complete lease negotiations. Prospects understand that they have more lease alternatives than before, and, as a result, do not feel any urgency to act.

Our leasing statistics for the second quarter illustrate the generally good real estate fundamentals in our markets. Overall, of the 919,000 square feet of leases that expired in the quarter, we renewed 85% and re-leased another 5% for a total of 90%. This total is well above our average, and, combined with a decrease in average lease length, we believe reflects the desire of customers not to make major new lease commitments in an uncertain economic environment. In addition, we leased another 341,000 square feet of space that was vacant at the beginning of the quarter, a good indication that there are still users out in the market.

As you can see in our supplemental information, we continued to achieve rent growth in the second quarter with a 9.4% increase for GAAP with straightlining of rents, and 1.2% without straightlining. The lower-than-average cash rent growth was due to a large renewal at UBC in Santa Barbara, an R&D building, and a previous above-market-rent lease renewal with Houston.

The increase in average tenant improvements to $2.16 per square foot for the life of the lease, or $0.59 per square foot per year of the lease, was the result of leases at UBC and at Metro, a service center in Phoenix. We expect TI expense to be lower for the balance of the year.

At June 30, our development program consisted of 23 properties with 2 million square feet and a total projected investment of $144 million. Fifteen of the properties were in lease-up and eight under construction. Geographically, these developments are diversified in four states and nine different cities, and overall, are currently 33% leased, a slight improvement from the first quarter.

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