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EastGroup Properties, Inc. (EGP)

EGP 
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EastGroup Properties Inc. (EGP)

Q4 2018 Earnings Conference Call

February 7, 2019 11:00 AM ET

Company Participants

Marshall Loeb – President and Chief Executive Officer

Brent Wood – Chief Financial Officer

Conference Call Participants

Joshua Dennerlein – Bank of America Merrill Lynch

Alexander Goldfarb – Sandler O'Neill

Bill Crow – Raymond James

Manny Korchman – Citi

Brendan Finn – Wells Fargo

Craig Mailman – KeyBanc Capital

Ki Bin Kim – SunTrust

Aaron Wolf – Stifel

Eric Frankel – Green Street Advisors

Presentation

Operator

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

Marshall Loeb

Thank you. Good morning, and thanks for calling in for our fourth quarter 2018 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on 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. Our team performed well this quarter, finishing what was in many ways, a record year for EastGroup. Some of the positive trends we saw were funds from operations came in at guidance, achieving a 3.5% increase compared to fourth quarter last year. This marks 23 consecutive quarters of higher FFO per share as compared to the prior year quarter.

For the full year, FFO was 9.6% and we're pleased with the fourth quarter and annual FFO growth, given that equity raised during 2018 far exceeded our original budget. The strength of the industrial market is further demonstrated through a number of metrics, such as another solid quarter of occupancy, same-store NOI results and positive re-leasing spreads.

As the statistics bear out, the current operating environment is allowing us to steadily increase rents and create value for ground up development and value add acquisitions. That said, we are mindful of the larger global turbulence and we realize we're not immune to an economic slowdown. We're not seeing that on the ground but government shutdowns, trade wars and the lack of economic confidence they create could eventually impact our tenants and our markets.

At year-end, we were 97.3% leased and 96.8% occupied. This marks 22 consecutive quarters or since third quarter 2013, where occupancy has been approximately 95% or better, truly a long-term trend. Several markets exceeded 98% and Houston, our largest market, was 96.6% leased. And while still our largest market, Houston has fallen from roughly 21% of NOI to slightly below 14% for 2019.

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 have remained disciplined and as a byproduct of institutional control, it's largely focused on big box construction. Our quarterly pool same property NOI growth was 5.5% cash and 3.4% GAAP and we're also pleased with average quarterly occupancy at 96.5%, up 10 basis points from fourth quarter 2017.

Rent spreads continued their positive trend, rising 7.9% cash and 16.6% GAAP, respectively. GAAP re-leasing spreads for the year were 15.8% and when omitting the Santa Barbara R&D space were 16.3%. Given the intensely competitive and expensive acquisition market, we view our development program as an attractive, risk-adjusted path to create value. We effectively manage development risk as the majority of our developments are additional phases within an existing product.

The average investment for our shallow bay business distribution buildings is $12 million. And while our threshold is 150-basis-point projected investment return premium over market cap rates, we've been averaging 200 to 300 basis point premiums. At year-end the development pipelines projected return was 7.4%, whereas we estimate an upper 4% as market cap rate.

During the fourth quarter we began construction on two buildings, totaling 139,000 square feet and coming out of the pipeline we transferred four 100% leased buildings totaling 381,000 square feet.

For the year, we transferred 14 properties, totaling 1.7 million square feet in 10 different cities into the portfolio and all but one of these a value-add acquisition, transferred over to 100% leased. As of year-end, our development pipeline consisted of 17 projects in 11 cities, containing 2.3 million square feet with a projected cost of $206 million.

For 2019, we're projecting 140 million in starts. As color of commentary, the 140 million in starts for 2018 was a record level, so we're pleased to forecast maintaining that run rate. And while at a record run rate we are addressing heightened economic volatility in several ways.

First, roughly 40% of our 2019 starts will happen in the first quarter. Second quarter accounts for about a third of the annual volume and so that by mid-year, we will have started around three quarters of our projected annual volume. Hopefully, we're being conservative for the second half of the year and as we gain economic clarity, i.e. lease space, we'll revisit projected starts.

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