EastGroup Properties, Inc. (NYSE:EGP) Q3 2023 Earnings Call Transcript

EastGroup Properties, Inc. (NYSE:EGP) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good day, everyone, and welcome to the EastGroup Properties Third Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please also note today’s event is being recorded. And at this time, I’d like to turn the floor over to Marshall Loeb, President and CEO. Sir, you may begin.

Marshall Loeb: Good morning, and thanks for calling in for our third quarter 2023 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call. And since we’ll make forward-looking statements, we ask that you listen to the following disclaimer.

Keena Frazier: Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website. And to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.

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Forward-looking statements in the earnings press release, along with our remarks, are made as of today and reflect our current views about the company’s plans, intentions, expectations, strategies and prospects based on the information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remarks whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Please see our SEC filings, included in our most recent annual report on Form 10-K for more detail about these risks.

Marshall Loeb: Thanks, Keena. Good morning, and I’ll start by thanking our team for strong quarter. They continue performing at a high level and capitalizing on opportunities in a fluid environment. Our third quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial market. Some of the results produced include funds from operations coming in above guidance up 13% for the quarter and 11% year-to-date. For over 10 years now our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year, truly a long-term growth trend. Demonstrating the markets normalizing trend, our average quarterly occupancy and quarter-end occupancy are down from both third quarter 2022 and June 30.

The quarterly occupancy was historically strong at 97.7% just down from what were at peak levels. And our percentage lease, however, remained consistent with June 30 at 98.5%. Our quarterly releasing spreads reached a record at approximately 55% GAAP and 39% cash. These results pushed year-to-date spreads to 53% GAAP and 37% cash. Same-store NOI was solid up 6.9% for the quarter and 8.1% year-to-date. And finally, I’m happy to finish the quarter with FFO rising to $2 a share. Helping us achieve these results is thankfully having the most diversified rent roll in our sector with our top 10 tenants falling to 8.2% of rents, down 70 basis points from third quarter 2022, and in more locations. We view the geographic and tenant diversity as ways to stabilize future earnings regardless of the economic environment.

In summary, I’m proud of our year-to-date performance, especially given the larger economic backdrop. We continue responding to strengthen the market and user demand for industrial product by focusing on value creation via raising rents, developments and, more recently, acquisitions. This strength allowed us to end the quarter 98.5% lease and push rents throughout a wider portfolio of geography. Due to current capital markets, we’re seeing broader strategic acquisition opportunities. It’s hard to predict how large the opportunity may be, but we’re pleased with our ability to acquire newer fully leased properties with below market rents and attractive initial yields. As we’ve stated before our development starts are pulled by market demand within our parts.

Based on our read through we’re forecasting 2023 starts of $360 million. And while our developments continue leasing with solid prospect interests, we’re seeing more deliberate decision making. In this environment, we’re also seeing two promising trends. The first thing that decline in industrial starts, starts to fall in now for 4 consecutive quarters, with third quarter 2023 being roughly two-thirds lower than third quarter 2022. Assuming reasonably steady demand, and in 2024, the markets will tighten, allowing us to continue pushing rents and create development opportunities. The second trend we’re seeing is being with developers who’ve completed significant site work prior to closing with the forward so [ph] window tightening, it’s allowed us to step into shovel ready sites and several markets such as Tampa, Denver, Austin, et cetera.

And Brent will now speak to several topics including our assumptions within the updated 2023 guidance.

Brent Wood: Good morning. Our third quarter results reflected terrific execution of our team, the strong overall performance of our portfolio, and the continued success of our time tested strategy. FFO per share for the third quarter was $2 per share, compared to $1.77 for the same quarter last year. $0.05 of FFO were attributable to an involuntary conversion gain recognized as a result of roof replacements that were damaged in storms, along with related insurance claims. Excluding the gain, FFO per share for the quarter exceeded the upper end of our guidance range at $1.95 per share, an increase of 10.2% over the same quarter last year. The outperformance continues to be driven by stellar operating portfolio results and the success of our development program.

From a capital perspective, the strength in our stock price continued to provide the opportunity to access the equity markets. During the quarter, we sold shares for gross proceeds of $165 million at an average price of $177.14 per share. During this period of elevated interest rates, equity proceeds have been our most attractive capital source. And our updated guidance for the year, we increased our stock issuance assumption by $110 million to $585 million, $465 million of which is complete. During the quarter, we repaid two loans totaling $52 million, including our loan remaining secured mortgage. The company’s debt portfolio is now 100% unsecured. Also, we refinanced $100 million unsecured term loan with a 45 basis point reduction in the effective fixed interest rate, while the maturity date was unchanged.

That will produce interest savings of approximately $2.25 million over the remaining 5 years of term. Although capital markets are fluid, our balance sheet remains flexible and strong with record good financial metrics. Our debt-to-total market capitalization was 18%. Unadjusted debt to EBITDA ratio was down to 4.1 times, and our interest and fixed charge coverage ratio increased to 9.1 times. Looking forward, FFO guidance for the fourth quarter of 2023 is estimated to be in the range of $1.98 to $2.02 per share, and $7.73 to $7.77 for the year, a $0.12 per share increase over our prior guidance. Those mid points represent increases of 9.9% and 10.7% compared to the prior year, respectively. The revised guidance produces the same-store growth midpoint of 7.8% for the year, an increase of 50 basis points from last quarter’s guidance.

We also increased the midpoint of our average occupancy again by 10 basis points to 97.9%. This is the result of outperforming our budget expectations in the third quarter, along with continued optimism for the final quarter of the year. In closing, we were pleased with our third quarter results and are well positioned to close out the year as we have in both good and uncertain times in the past, we rely on our financial strength, the experience of our team, and the quality and location of our portfolio to lead us into the future. Now, Marshall will make final comments.

Marshall Loeb: Thanks, Brent. In closing, I’m proud of the results our team is creating. Internally, operations remain strong, and we’re constantly strengthening the balance sheet. Externally, the capital markets and the overall environment remain clouded. And while never a pleasant experience, it’s leading to further declines in starts. In the meantime, we’re working to maintain high occupancies while pushing rents. And in spite of all the uncertainty I liked our positioning. More specifically, our portfolio is benefiting from several long-term positive secular trends, such as population migration, evolving logistics chains, onshoring, nearshoring, et cetera. We have a proven management team with a long-term public track record.

Our portfolio quality in terms of buildings and markets improves each quarter. Our balance sheet is stronger than it’s ever been. And we’re expanding our diversity both in our tenant base as well as our geography. We’ll now take your questions.

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