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EastGroup Properties, Inc. (EGP)

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EastGroup Properties, Inc. (EGP)

Q1 2019 Earnings Conference Call

April 23, 2019 11:00 AM ET

Company Participants

Marshall Loeb - President and Chief Executive Officer

Brent Wood - Chief Financial Officer

Keena Frazier - Director of Leasing Statistics

Conference Call Participants

James Feldman - Bank of America Merrill Lynch

Alexander Goldfarb - Sandler O'Neill & Partners, L.P.

John Guinee - Stifel, Nicolaus & Co., Inc.

Ki Bin Kim - Suntrust Robinson Humphrey, Inc.

Emmanuel Korchman - Citigroup

Craig Mailman - KeyBanc Capital

Jason Green - Evercore ISI

William Crow - Raymond James & Associates, Inc.

Eric Frankel - Green Street Advisors

Richard Anderson - SMBC Nikko Securities America, Inc.

Presentation

Operator

Good morning and welcome to the EastGroup Properties’ First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call maybe recorded.

It is now my pleasure to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Marshall Loeb

Thank you. Good morning and thanks for calling in for our first quarter 2019 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.

Keena Frazier

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, Keena. Our team performed well this quarter, starting the year off with a [strong tenant]. Some of the positive trends we saw were funds from operations coming in above guidance, achieving a 5.3% increase compared to the first quarter last year. This marks 24 consecutive quarters of higher FFO per share as compared to the prior year quarter.

Based on the quarter and the market strength, we further raised our annual FFO guidance by $0.05 a share. The vitality of the industrial market is further demonstrated through a number of metrics, such as another solid quarter of occupancy, saw strong same-store NOI results and positive releasing spreads.

As the statistics bear 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 97.7% leased and 96.9% occupied. This marks 23 consecutive quarters, where occupancy has been roughly 95% or better, truly a long-term trend and short demand continues growling for our in-fill location small-bay buildings.

Several markets exceeded 98% leased and Houston our largest market was over 97% 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, the supply is predominantly institutionally controlled, and as a result, deliveries remained disciplined, and as a byproduct of the institutional control, it's largely focused on big box construction.

Our same-property NOI growth was 4.5% cash and 3.7% GAAP. We're also pleased with an average quarterly occupancy of 96.9%, up 60 basis points from first quarter 2018. Rent spreads continued their positive trend, rising 5.3% cash and 14.2% GAAP respectively. Further, the quarterly results were materially impacted by 125,000 square foot in Houston lease where the rents declined. Pulling that one lease out of our pool, our cash and GAAP numbers rise to 10.6% and 20.2% respectively.

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 park.

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 basis point to 300 basis point premiums. At quarter-end, the development pipeline projected return was 7.3%, whereas we estimate an upper 4 as market cap rate.

During the first quarter, we began construction on five buildings and five different cities totaling 650,000 square feet. While coming out of the pipeline, we transferred three 100% leased projects totaling 421,000 square feet into the portfolio with an average yield of 7.4%.

At quarter-end, our development pipeline consisted of 19 projects in 10 cities containing 2.5 million square feet with a projected cost of $230 million. For 2019, we're raising our projected starts to $160 million and as color commentary the $148 million and starts we had last year were a record. So we're excited to raise this year's forecast.

And as further color on our 2019 starts, we project starting over 70% of those by mid-year. So as the year progresses we'll continue to revisit projected starts. And finally, our activity is spread over nine different cities. This geographic diversity reduces risks while enhancing our ability to grow the development pipeline.

First quarter was relatively quiet for acquisitions, but our pipeline was active. We're committed to acquire three separate off market properties. We expect to close soon on a two building 142,000 square foot new development at the DFW airport, which is currently 19% leased for total investment of $15 million.

Read the rest of this transcript on seekingalpha.com