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EastGroup Properties, Inc. (EGP)

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Eastgroup Properties, Inc. (EGP)

Q3 2017 Earnings Conference Call

October 20, 2017, 11:00 ET

Executives

Marshall Loeb - CEO, President & Director

Brent Wood - CFO & EVP

Analysts

James Feldman - Bank of America Merrill Lynch

Blaine Heck - Wells Fargo Securities

Emmanuel Korchman - Citigroup

Alexander Goldfarb - Sandler O'Neill + Partners

Craig Mailman - KeyBanc Capital Markets

Robert Simone - Evercore ISI

Richard Anderson - Mizuho Securities

Christopher Darling - Green Street Advisors

Presentation

Operator

Good morning, and welcome to the EastGroup Properties Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. Now it is my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead.

Marshall Loeb

Thank you. Good morning, and thanks for calling in for our third quarter 2017 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. And since we'll be making forward looking statements, we ask that you listen to the following disclaimer.

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. 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, Kina. The third quarter saw a continuation of EastGroup's positive trends. Funds from operations was at the high end of our guidance, achieving a 3.8% increase compared to third quarter last year and actually up 5.9% when excluding land sales. This marks 18 consecutive quarters of higher FFO per share as compared to prior year quarter.

The strength of the industrial market is further demonstrated through a number of our metrics, such as another solid quarter of occupancy, reaching a record quarter-end percent leased, positive same-store NOI results and quarterly high records for re-leasing spreads. In summary, our increasing FFO and dividend prove the success we're seeing in all 3 prongs of our long-term growth strategy.

At quarter-end, we were 97.4% leased and 95.6% occupied. This is our highest percent leased in over a decade, and as market commentary, we've never maintained this high level of occupancy for this long.

Drilling into specific markets at September 30. A number of our major markets, including Orlando, Jacksonville, Charlotte, Phoenix, San Francisco and Los Angeles, were each 98% leased or better. And Houston, our largest market with over 5.5 million square feet, down from over 6.8 million square feet in first quarter 2016, was 94.1% leased.

Supply, and specifically, shallow bay industrial supply, remains in check in our markets. In this cycle, the supply has been predominantly institutionally controlled. As a result, deliveries remained disciplined. And as a byproduct of institutional control, it's largely focused on big box construction. In fact, a CBRE study showed shallow bay deliveries remained below prerecession levels.

Rent spreads continued their positive trend for the 18th consecutive quarter on a GAAP basis, rising approximately 21%, which represents a quarterly high record. And overall, with roughly 95% occupancy, strengthening markets and disciplined new supply, we continue seeing upward pressure on rents.

Third quarter same-property NOI rose on a GAAP basis by 3.1%. Average quarterly occupancy was 95.2%, which was down 60 basis points from third quarter 2016. Also similar to last quarter, there was 180 basis point margin between percent leased to occupied. This is an atypically large margin. It's driven by several lease signings where build-out and permitting are underway. And while quarterly occupancy rose 70 basis points sequentially, we're still turning a number of signed leases into occupying tenants. It will take a few months to begin seeing the full impact of these results. We expect same-property results to remain positive going forward. The increases will continue to reflect rent growth. As with mid-90s occupancy, we view ourselves as fully occupied.

Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk-adjusted path to create value. We believe we effectively manage development risk as the majority of our developments are additional phases within an existing park. The average investment for our business distribution buildings is around $10 million. We develop in numerous states, cities and submarkets. And finally, we target 150 basis point minimum projected investment return premium over market cap rates. At September 30, the projected return on our development pipeline was 8%, whereas we estimate the market cap rate for completed properties to be in the low to mid-5s. Further, we're continuing to see cap rate compression in the majority of our markets.

During third quarter in our development pipeline, we began construction in Orlando on the 104,000 square foot Horizon X building. And on the other end of the pipeline, we transferred 2 properties totaling 278,000 square feet into the portfolio, each 100% leased.

As of September 30, our development pipeline consisted of 13 projects in 9 cities, containing 1.7 million square feet with a projected cost of $138 million, which is 43% leased. Finally, during the quarter, we acquired a 40-acre development site in San Antonio, with plans to ultimately develop 5 buildings totaling approximately 620,000 square feet. For 2017, we project development starts of over $100 million and 1.3 million square feet. What's gratifying is our ability to reach this level again in 2017 with no Houston starts.

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