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EastGroup Properties, Inc. (EGP)

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EastGroup Properties Inc. (EGP)

Q4 2017 Results Earnings Conference Call

February 01, 2018, 11:00 AM ET

Executives

Marshall Loeb - CEO, President & Director

Brent Wood - CFO & EVP

Analysts

Jamie Feldman - Bank of America

Alexander Goldfarb - Sandler O'Neill

Emmanuel Korchman - Citi

Eric Frankel - Green Street Advisors

Ki Bin Kim - SunTrust

Craig Mailman - KeyBanc Capital

Blaine Heck - Wells Fargo Securities

John Guinee - Stifel

Rich Anderson - Mizuho Securities

Rob Simone - Evercore ISI

Presentation

Operator

Good morning, and welcome to the EastGroup Properties Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions]. Please note, today’s conference may be recorded and I will be standing by if you should need any assistance. It is now my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead sir.

Marshall Loeb

Thank you. Good morning, and thanks for calling in for our fourth 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 may be found on the company's website at www.eastgroup.net.

Marshall Loeb

Thanks, Tina. The fourth quarter saw a continuation of EastGroup's positive trends. Funds from operations came in above guidance, achieving a 5.6% increase compared to fourth quarter last year and this marks 19 consecutive quarters of higher FFO per share as compared to prior year.

The strength of the industrial market is further demonstrated through a number of our metrics, such as another solid quarter of occupancy, positive same store NOI results and strong 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% leased and 96.4% occupied. And while we are pleased with these numbers They will each by 50 basis points higher but for a largely vacant value add mid-December acquisition.

Drilling into specific markets at year end, a number of our major markets, including Orlando, Tampa, Jacksonville, Charlotte, Phoenix, San Francisco and Los Angeles, were each 98% leased or better. And Houston, our largest market with 5.5 million square feet, down from over 6.8 million square feet in early 2016, was 95.7% 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 remained disciplined and as a byproduct of institutional control, it's largely focused on big box construction.

Rent spreads continued their positive trend for the 19th consecutive quarter on a GAAP basis, rising over 15%, further for the year our GAAP release and spreads were up almost 17%. Overall, with roughly 95% occupancy, strengthening markets, rise in construction pricing and disciplined new supply, we continue seeing upward pressure on rents.

Fourth quarter same-property NOI rose on a GAAP basis by 5.2%. And average quarterly occupancy was 96.4%, up 40 basis points from fourth quarter 2016. We expect same property results remain positive going forward though increases will 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 below $10 million. In 2018, we plan to develop in a broader range of cities and we historically have. And finally, we target 150 basis point minimum projected investment return premium over market cap rates. At December 31, the projected return on our development pipeline was 8%, whereas we estimate the market cap rate for completed properties to be in the low 5s.

Further, we're continuing to see cap rate compression in the majority of our markets. During fourth quarter we began construction on four buildings and three cities, totaling 352,000 square feet with total projected investment just under $32 million.

And as of December 31, our development pipeline consisted of 18 projects in 11 cities, containing 2.2 million square feet with a projected cost of $185 million, which is 48% leased.

For 2018, we project development starts of 120 million and 1.4 million square feet. And one of the things I’m excited about this year is a greater number of our development markets. This reduces our risk and also raises our chance of growing the development pipeline during the year. More specifically, you'll see us continue developing within our successful parks in markets like Charlotte, Dallas, Orlando and San Antonio.

In addition, we restarted Phoenix development mid 2017, and we're recently broken ground in Houston for the first time since 2014. The final and third leg of this stool is we'll have active developments in new markets such as Miami, Austin and Atlanta.

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