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EastGroup Properties, Inc. (EGP)

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Eastgroup Properties, Inc. (EGP)

Q2 2018 Earnings Conference Call

July 20, 2018, 11:00 ET

Executives

Marshall Loeb - President, CEO & Director

Brent Wood - EVP, CFO & Treasurer

Analysts

James Feldman - Bank of America Merrill Lynch

Emmanuel Korchman - Citigroup

William Catherwood - BTIG

Craig Mailman - KeyBanc Capital Markets

Ki Bin Kim - SunTrust Robinson Humphrey

Eric Frankel - Green Street Advisors

John Guinee - Stifel, Nicolaus & Company

William Crow - Raymond James & Associates

Blaine Heck - Wells Fargo Securities

Zachary Silverberg - Mizuho Securities United States

Presentation

Operator

Good morning, and welcome to the EastGroup Properties Second Quarter 2018 Earnings Conference Call. [Operator Instructions]. Now it is my pleasure to introduce Marshall Loeb, President and CEO.

Marshall Loeb

Thank you. Good morning, and thanks for calling in for our second quarter 2018 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating in the call and since we'll make 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's 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, Tina. The second quarter saw a continuation of EastGroup's positive trends. Funds from operations came in above guidance, achieving a 7.6% increase compared to second quarter last year, excluding insurance proceeds. This marks 21 consecutive quarters of higher FFO per share as compared to the prior year, and we're especially pleased with second quarter FFO given our equity raise. The strength of the industrial market is further demonstrated through a number of our metrics such as another solid quarter of occupancy, strong same-store NOI results and positive releasing spreads. As the statistics bare out, the current operating environment is allowing us to steadily increase rents and create value through ground-up development along with value-add acquisitions.

On leasing, we were 97% leased and 96.4% occupied, and this marks 20 consecutive quarters, or since second quarter 2013, where occupancy has been approximately 95% or better, truly a long-term trend. Drilling into specific markets at quarter end, a number of our major markets, including Orlando, Jacksonville, Charlotte, Phoenix, San Antonio, San Francisco and L.A. were each 98% leased or better. In Houston, our largest market was 95.8% leased. And while still our largest market, Houston has fallen from roughly 21% of our NOI to a projected 14% at year-end. 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, the deliveries remain disciplined, and as a byproduct of this institution controlled, it's largely focused on big-box construction.

Our quarterly same-property NOI growth was strong at 6.5% GAAP and 6.4% cash, and we're also pleased with average quarterly occupancy at 96%, up 110 basis points from second quarter of 2017.

Rent spreads continue their positive trend, albeit at a slower pace this quarter. Rents was 2.7% cash and 11.9% GAAP. After removing an R&D property in Santa Barbara, these figures rise to 4.9% and 13.5%, respectively. Further, our year-to-date GAAP releasing spreads unmuting this R&D space are 16.1%. The takeaway being that the industrial market remains solid with rising rents. We simply had an unusual mix this quarter versus our prior several quarters. And 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 managed the risk as the majority of our developments are additional phases within an existing park. The average investment for our business distribution buildings is below $12 million, and we target 150 basis point minimum projected investment return premium over market cap rates. At June 30, the projected return on our development pipeline was 7.7%, whereas we estimate the market cap rate in the upper 4s. Further, we're continuing to see cap rate compression in our markets.

During second quarter, we had fluid development pipeline as we began construction on 5 properties totaling 719,000 square feet with a total projected investment of $65 million. And coming out of our pipeline we transferred 6 buildings totaling 705,000 square feet, for an investment of approximately $57 million.

Four of our five completions rolled into the portfolio at 100%, and the one exception was progress center in Atlanta, which we anticipated as it was a December 2017 value-add acquisition. In sum, we removed 35% of the previous quarter's pipeline and added the same into the current pipeline. This high-volume transition dropped our percent leased from 51% to 27%, and as context, this change is reflective of the volume of early stage projects rather than the state of the market. At June 30, our development pipeline consisted of 17 projects in 10 cities containing 2 million square feet with a projected cost of $171 million. And for 2018, we're raising our projected development starts to $140 million and 1.7 million square feet.

Read the rest of this transcript on seekingalpha.com