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EastGroup Properties, Inc. (EGP)

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EastGroup Properties Inc. (EGP)

Q1 2017 Earnings Conference Call

April 21, 2017 11:00 AM ET

Executives

Keena Frazier - Investor Relations

Marshall Loeb - President and Chief Executive Officer

Keith McKey - Chief Financial Officer

Brent Wood - Senior Vice President

Analysts

Rich Anderson - Mizuho Securities

Eric Frankel - Green Street Advisors

Craig Millman - KeyBanc Capital Market

Jamie Feldman - Bank of America

Emanuel Korchman - Citi

Blaine Heck - Wells Fargo

Alexander Goldfarb - Sandler O'Neill

John Guinee - Stifel

Rob Simone - Evercore ISI

Sumit Sharma - Morgan Stanley

Bill Crow - Raymond James

Ki Bin Kim - SunTrust

Presentation

Operator

Good morning and welcome to the EastGroup Properties' First Quarter 2017 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. [Operator Instructions] Please note this call may be recorded.

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 first quarter 2017 conference call. As always, we appreciate your interest. Keith McKey, our CFO and Brent Wood, Senior Vice President and CFO in waiting 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 first quarter saw a continuation of EastGroup's positive trends. Funds from operations exceeded our guidance, achieving 8.8% increase compared to first quarter of last year. This marks 16 consecutive quarters of higher FFO per share as compared to the prior year's quarter.

The strength of the industrial market is demonstrated through a number of our metrics such as another solid quarter of occupancy, leasing volumes setting our quarterly record, positive same store NOI results and record positive GAAP 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% leased and 95.6% occupied. Occupancy has exceeded 95% for 15 consecutive quarters and as market commentary, we've never achieved this level of occupancy for this longer time.

Drilling into specific markets at March 31, a number of our major markets including Orlando, Jacksonville, Charlotte, San Francisco and LA were each 98% leased or better. Houston, our largest market with over 5.9 million square feet which is down from over 6.8 million square feet in first quarter of 2016 was 95.5% leased.

Supply and specifically shallow bay industrial supply remains in check in our markets. In this cycle, supply is predominantly institutionally controlled. And as a result, deliveries remain disciplined and also as a byproduct of the institutional control, it's largely focused on big box construction. In fact a recent CBRE study showed shallow bay deliveries still below pre-recession levels.

Rent spreads continued their positive trend for the 16th consecutive quarter on a GAAP basis, rising over 17%. Overall, with 95% occupancy, strengthening markets and disciplined new supply, we continue seeing outward pressure on rents.

First quarter same property NOI rose on a cash and GAAP basis by 5.9% and 3.7% respectively, average quarterly occupancy was 95.6%, down 10 basis points from first quarter.

We expect same property results to remain positive going forward though increases will continue to reflect rent growth as at 95% to 96%, 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 our Houston based Senior Vice President with responsibility for EastGroup's Texas operations. Brent?

Brent Wood

Good morning. Our Texas markets finished the first quarter at a combined 95.1% leased, while our Houston portfolio finished the quarter at 95.5% leased, up from 93% last quarter and ahead of our projections.

The Houston industrial market exhibited solid fundamentals at quarter end. The market vacancy rate was 5.2%, which remained to near record low. There was 3.1 million square feet of positive net absorption in the first quarter, which marked the 24th consecutive quarter of positive absorption.

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.

I mentioned in the last call that we signed a total of 30 leases during 2016, 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. That trend has continued as we signed 15 leases in the first quarter, 10 were new tenants and five were renewals.

The lease totaled 470,000 square feet, which represents our most activity in a quarter excluding builder suits since first quarter of 2013. The good news is that there continues to be prospects in the market to backfill vacant space. Our leasing efforts have reduced our scheduled expirations for 2017 from its peak of 17.7% down to 10.8% as of March 31st.

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