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EastGroup Properties, Inc. (EGP)

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EastGroup Properties Inc. (EGP)

Q3 2018 Results Earnings Conference Call

October 19, 2018, 11:00 AM ET

Executives

Marshall Loeb - President, CEO & Director

Brent Wood - EVP, CFO & Treasurer

Analysts

Jamie Feldman - Bank of America Merrill Lynch

Alexander Goldfarb - Sandler O’Neill

John Guinee - Stifel

Rich Anderson - Mizuho Securities

Bill Crow - Raymond James

Manny Korchman - Citi

Craig Mailman - KeyBanc Capital

Eric Frankel - Green Street Advisors.

Jason Green - Evercore

Presentation

Operator

Good morning, and welcome to the EastGroup Properties Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the call over to Marshall Loeb, President and CEO.

Marshall Loeb

Good morning, and thanks for calling in for our third quarter 2018 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call this morning and since we'll make forward-looking statements, we ask that you listen first 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 [ph]. Our team performed well this quarter as a result it was a strong quarter where the continuation of EastGroup’s positive trends. Funds from operations came in ahead of guidance achieving an 8.3% increase compared to the third quarter last year. This marks 22 consecutive quarters of higher FFO per share as compared to the prior year quarter.

We are especially pleased with third quarter FFO given its equity raise year-to-date has far exceeded our original budget. The strength of the industrial market and our team is further demonstrated through a number of metrics such as another solid quarter of occupancy, 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 and value-add acquisitions. At quarter end, we were 97.1% leased and 95.7% occupied. This marks 21 consecutive quarters since third quarter 2013 where occupancy has been 95% or better truly a long term trend.

Looking at our specific markets at quarter end, several of our major markets including Phoenix, Orlando, Los Angeles, San Francisco and Charlotte were each 98% leased or better and Houston our largest market was 97% leased.

While still our largest market Houston has fallen from roughly 21% of NOI to a projected 14% at year end. Supply and specifically shallow bay industrial supply remains in check, in this cycle supply is predominantly institutionally controlled and as a result deliveries remain disciplined and as a byproduct of the institution control, it's largely focused on big-box construction.

Our quarterly pool same-property NOI growth was strong at 6.2% cash and 5% GAAP. We were pleased with average quarterly occupancy at 95.7%, up 50 basis points from third quarter of 2017, while rent spreads continued their positive trend rising 5.6% cash and 16.6% GAAP respectively.

Further, our year-to-date GAAP releasing spreads are 15.6% and when omitting Santa Barbara R&D space, they’re 16.3%.

Given the intensely competitive and extensive acquisition market, we view our development program as an attractive, risk adjusted path to create value. We effectively managed development risk as the majority of our developments are additional phases within an existing park. The average investment for our shallow bay business distribution buildings is below $12 million, and while our threshold is 150 basis point projected investment return premium over the market cap rates, we’ve been averaging 200 to 300 basis point premiums.

At September 30, the development pipelines projected return was 7.6% whereas we estimate an upper 4 as market cap rate. During the third quarter, we began construction in four cities on properties totaling 670,000 square feet with a total projected investment of $53 million.

Coming out of the pipeline, we transferred two 100% lease buildings totaling 286,000 square feet. Demonstrating the strength we are seeing the market, our development pipeline and value add percent lease rose from 27% to 43% even with the five new additions and two 100% leased buildings transferring out.

As of September 30, our development pipeline and value add properties consisted of 20 projects in 11 cities containing 2.5 million square feet with a projected cost of $220 million and for 2018 we originally projected $120 million in starts. Today, that forecast is $145 million.

Additionally, we have several projects that pending weather and obtaining permits will either commence late 2018 or create a solid start for 2019. One of the things I’m excited about has been this greater number of development markets. This diversity reduces our risk and continues enhancing our ability to grow the pipeline.

During the quarter, we acquired Allen Station, a two building 227,000 square foot, 87% lease property and Allen Texas a Northeast Dallas suburb for $25 million. We also acquired the 115,000 square feet Siempre Viva Center in San Diego for $14 million. This property which became vacant post-closing, is now 100% leased. And on the disposition front, we closed the sale of the 50 plus year old 125,000 square feet 35th Avenue Distribution Center in Southwest Phoenix for roughly $8 million or slightly sub-6 cap rate.

Read the rest of this transcript on seekingalpha.com