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EastGroup Properties, Inc. (EGP)

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EastGroup Properties Inc. (EGP)

Q4 2016 Earnings Conference Call

February 02, 2017 11:00 AM ET

Executives

Marshall Loeb - President and CEO

Keith McKey - CFO

Brent Wood - SVP

Keena Frazier - IR

Analysts

Manny Korchman - Citi

Craig Mailman - KeyBanc Capital Markets

John Guinee - Stifel

Alexander Goldfarb - Sandler O’Neill

Jamie Feldman - Bank of America Merrill Lynch

Blaine Heck - Wells Fargo

Brad Burke - Goldman Sachs

Sumit Sharma - Morgan Stanley

Rich Anderson - Mizuho Securities

Eric Frankel - Green Street Advisors

Rob Simone - Evercore ISI

Presentation

Operator

Good morning and welcome to the EastGroup Properties’ Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call may be recorded. [Operator Instructions]

And it is now my pleasure to turn the conference over to Mr. Marshall Loeb, President and CEO. Please go ahead, sir.

Marshall Loeb

Thank you. Good morning and thanks for calling in for our fourth quarter 2016 conference call. As always, we appreciate your interest. Keith McKey, our CFO and Brent Wood, Senior Vice President are also participating on the call. Since we’ll make forward-looking statements, we ask that you listen to the following disclaimer.

Keena Frazier

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 is subject to the Safe Harbor Statement included in the news release, is accurate only as of the date of this call. The Company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which can be found on the company’s website at www.eastgroup.net.

Marshall Loeb

Thanks, Keena. The fourth quarter saw a continuation of EastGroup’s positive trends. Funds from operations exceeded our guidance, achieving a 14.9% increase compared to fourth quarter last year. This marks 15 consecutive quarters of higher FFO per share as compared to the prior year’s quarter. Per share FFO was the highest in the company's history in 2016, breaking the records we set in 2015 and 2014. Furthermore, our 2017 guidance is projected to break this record. The strength of the industrial market is demonstrated through a number of our metrics such as another solid quarter of occupancy, leasing volumes, positive same store NOI results and continued positive re-leasing spreads. In summary, our increasing FFO and dividend proved the success we're seeing in all three prongs of our long term growth strategy.

At quarter end, we were 97.3% leased and 96.8% occupied. Occupancies exceeded 95% for 14 consecutive quarters as market commentary, we've never achieved this level of occupancy for this long. Drilling into specific markets at December 31, a number of our major markets including Orlando, Tampa, Charlotte, San Francisco and Los Angeles were each 98% leased or better. Houston, our largest market with over 5.9 million square feet down from over 6.8 million square feet in January 2016 was 93% leased. Supply and specifically shallow bay industrial supply remains in check in our markets. In this cycle, supply is predominantly institutionally controlled. As a result, deliveries remain disciplined and also as a byproduct of the institutional control, it's largely focused on big box construction being over 300,000 square feet. Rent spreads continued their positive trend for the 15th consecutive quarter on a GAAP basis. Overall, with 95% occupancy, strengthening markets and disciplined new supply, we continue seeing outward pressure on rents.

Fourth quarter same property NOI rose on a cash and GAAP basis, average quarterly occupancy was 96%, up 30 basis points from 2015. We expect same property results to remain positive going forward though increases will continue to reflect rent growth as at 95% to 96% occupied, we view ourselves as fully occupied. The price of oil and its impact on Houston's industrial real estate market remains a topic of discussion.

We thought it appropriate for Brent to again join today's call. Brent is one of our three regional Senior Vice Presidents and is based in Houston with responsibility for EastGroup's Texas operations. Brent?

Brent Wood

Good morning. Our Texas markets finished the year at a combined 95.2% leased while our Houston portfolio finished the quarter at 93% leased, which was unchanged from the prior quarter. The Houston industrial market exhibited solid fundamentals at year end. The market vacancy rate decreased 20 basis points to 5.1%, which is near record low. There was 2.1 million square feet of positive net absorption in the fourth quarter, which marked the 23rd consecutive quarter of positive absorption and raised the year-to-date total to 6.7 million square feet. Meanwhile, developers continue to show restraint with the construction pipeline containing only 2.4 million square feet of speculative space, which is down to a level not seen since 2011.

Even though the overall Houston industrial market remains stable, there is an undercurrent of tenants downsizing upon their lease expiration, which is producing a lot of movement within the market. We have not been immune to this trend. For example, last year, we signed a total of 30 leases, 20 were new tenets and only 10 were renewals. A more typical year would be the inverse of those results. Two renewals to one new lease and our activity so far this year has continued in this same manner. In January, we signed four new leases, totaling 175,000 square feet, the two renewals totaling 63,000 square feet. The good news is that there continues to be prospects in the markets. Our early leasing efforts have already reduced our scheduled expirations for 2017 from its peak of 17.7% down to 12.8% as of January 31st.

With the number of known move-outs throughout the year, we will continue our focus on maintaining occupancy. As a result, we have been cautious with our Houston budget assumptions included in our guidance. Our leasing assumptions for 2017 reflect occupancy reaching a low of 88% in third quarter before gradually rising to end the year at 92%. Looking into 2018, only 7% of our Houston portfolio [Technical Difficulty] which is less than half of the square footage we faced in 2016 or 2017. The diversification of our development platform within Texas continues to produce results. Our 2017 potential development starts include additional phases to existing parks in Dallas and San Antonio, while the combined occupancy at year end for the Texas markets, excluding Houston, was 97.1%.

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