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EastGroup Properties, Inc. (EGP)

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EastGroup Properties Inc. (EGP)

Q1 2018 Earnings Conference Call

April 20, 2018 11:00 AM ET

Executives

Marshall Loeb - CEO, President & Director

Brent Wood - CFO & EVP

Analysts

Jamie Feldman - Bank of America Merrill Lynch

Alexander Goldfarb - Sandler O'Neill

Emmanuel Korchman - Citi

Eric Frankel - Green Street Advisors

John Guinee - Stifel

Blaine Heck - Wells Fargo

Rich Anderson - Mizuho Securities

Presentation

Operator

Good morning, and welcome to the EastGroup Properties First Quarter 2018 Earnings Conference Call. [Operator Instructions]. It is now 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 first quarter 2018 conference call. As always, we appreciate everyone’s 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 first quarter saw a continuation of EastGroup's positive trends. Funds from operations per share came in above guidance, achieving an over 17% increase compared to first quarter last year which launched 20 consecutive quarters of higher FFO per share as compared to the 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, positive same store NOI results and strong re-leasing spreads. And as these statistics bear out, the current operating environment is allowing us to steadily increase rents and create value through ground up development along with value add acquisitions. At quarter-end, we were 97% leased and 96.4% occupied and this marks 19 consecutive quarters [indiscernible] second quarter 2013 our occupancy has been approximately 95% or better, truly a long-term trend.

Drilling into our specific markets at quarter end, a number of our major markets, including Orlando, Tampa, Jacksonville, Charlotte, Dallas, 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 94.5% leased.

Supply, and specifically, shallow bay industrial supply, remains in check in our markets. In this cycle, the supply is predominantly institutionally controlled. And as a result, deliveries have remained disciplined and as a byproduct of institutional control, it's largely focused on big box construction.

Rents continued their positive trend rising over 9%, on cash basis and almost 19% on a GAAP basis. Overall, with roughly 95% occupancy, strengthening markets, rise in construction pricing and disciplined new supply, we continue seeing upward pressure on rents.

First quarter same-property NOI rose 4.3% on a GAAP basis and average quarterly occupancy was 96.3%, up 70 basis points from first quarter 2017. Given the intensely competitive and expensive acquisition market, we view our development 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 part, the average investment for our business distribution buildings is below $10 million and we target a 150 basis points minimum projected investment return premium over market cap rates. At March 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 and further, we're continuing to see cap rate compression in our markets.

During first quarter we began construction on two buildings, totaling 170,000 square feet with a total projected investment of 12 million and then coming out of the pipeline we transferred three buildings totaling 347,000 square feet with an investment of approximately 30 million into the portfolio at a 100% leased. As of March 31, our development pipeline consisted of 17 projects in 10 cities, containing 2 million square feet with a projected cost of $165 million, which is 51% leased.

For 2018, we project development starts of 120 million and 1.4 million square feet. One of the things I’m excited about this year is a greater number of development markets. This diversity reduces risk while also raising our odds to grow the development pipeline. More specifically, you'll see us continue development within our successful parks in places like Charlotte, Dallas, Orlando and San Antonio.

Additionally, we restarted Phoenix development in mid-2017, and recently broke ground in Houston for the first time since 2015. The third and final leg of this stool is we have active developments in new markets such as Miami, Austin and Atlanta.

I’m also excited about where we stand in terms of our projected pipeline so early in the year. As a reminder, our leasing results are what drive our next start. So, the 120 million in projected startups consist of 10 separate projects and are pleased that we wielded the gun or have approval for seven of those 10 starts now and while we’re not raising our projections it's the development leasing is progressing as hoped.

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