EastGroup Properties, Inc. (NYSE:EGP) Q1 2024 Earnings Call Transcript

EastGroup Properties, Inc. (NYSE:EGP) Q1 2024 Earnings Call Transcript April 24, 2024

EastGroup Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the EastGroup Properties First Quarter 2024 Earnings Conference Call and Webcast. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, April 24, 2024. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Marshall Loeb: Good morning, and thanks for calling in for our First Quarter 2024 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.

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 on our most recent Annual Report on Form 10-K for more detail about these risks.

Marshall Loeb: Thanks, Keena. Good morning. I will start by thanking our team for another strong quarter. The team continues performing at a high-level and finding opportunities in an evolving market. Our first quarter results demonstrate the quality of the portfolio we’ve built and the resiliency of the industrial market. Some of the results produced include Funds From Operations rising 8.8%, excluding a 2023 involuntary conversion. For over a decade now, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year, truly a long-term trend. Quarter end leasing was 98% with occupancy at 97.7%. Average quarterly occupancy was 97.5% which although historically strong, is down from first quarter 2023.

Re-leasing spreads for the quarter were solid at 58% GAAP and 40% cash with cash same-store NOI rising 7.7% for the quarter. Finally, we have the most diversified rent roll in our sector, with our top 10 tenants falling to 7.8% of rents, down 70 basis points from first quarter 2023 and in more locations. We view our geographic and revenue diversity, as strategic paths to stabilize future earnings regardless of the economic environment. In summary, we are pleased with our performance out of the gate for 2024, while being mindful of the near-term economy. Today, we are focused on value creation via raising rents, acquisitions and development. This allowed us to end the quarter 98% leased and continue pushing rents throughout the portfolio. On the acquisition front, we continue to patiently search for the right opportunities.

We’re excited to acquire Spanish Ridge in Las Vegas, which we announced earlier in the year. This acquisition also allowed us to move to self-management in the market, further raising our returns. In keeping with our strategy of targeting high-growth markets, we are excited near term to enter the Raleigh market, a market we’ve looked at years. And similar to a number of our other markets were attracted to its economic stability and growth, due to the mix of state capital, large educational presence, technology companies which follow the university presence, topography constraints for new development and long-term population growth. Our acquisitions will continue to be guided by two criteria; one, to be accretive; and secondly, raising the long-term growth profile of the portfolio, thus creating NAV as well.

As we’ve stated before, our development starts are [referred] (ph) by market demand within our products. Based on our REIT through, we are forecasting 2024 starts of $260 million and though our developments continue leasing with solid prospect interest, we’re seeing longer deliberate decision-making. As always, we ultimately follow demand on the ground to dictate pace. Based on the decision-making time frames we’re seeing, I expect our stocks to be more heavily weighted to the second half of 2024. Within this environment, we are seeing two promising trends. The first thing, the decline in industrial starts. Starts have fallen six consecutive quarters with first quarter 2024 being over 70% lower than third quarter 2022 when the decline began.

Assuming reasonably steady demand, the markets will tighten later in 2024, allowing us to continue pushing rents and create development opportunities. The second trend is the rise in investment opportunities with developers who’ve completed significant site prep work prior to closing and need capital to move forward. This allows us to take years off our traditional development time line and materially reduce site development legal risk. Brent will now speak to several topics, including assumptions within our 2024 guidance. My belief is that when or if interest rates begin to fall and/or global turmoil settles, then confidence and stability within the business community will rise.

Brent Wood: Good morning. Our first quarter results reflect the terrific execution of our team, the solid overall performance of our portfolio and the continued success of our time-tested strategy. FFO per share for the quarter exceeded the mid-point of our guidance range at $1.98 per share compared to $1.82 for the same quarter last year, an increase of 8.8% excluding voluntary conversion gains. As a reminder, we typically incur about one-third of our annual G&A expense in the first quarter primarily due to the accelerated expense of newly granted equity-based compensation for retirement-eligible employees, which totaled approximately $1.7 million during the quarter. From a capital perspective, we continue to access the equity market.

During the quarter, we settled shares for gross proceeds of $50 million. And after quarter end, we settled an additional $25 million, all at an average price of $183 per share. We have an additional $52 million in commitments still outstanding at an average price — at an average share price of $180. Debt maturities are minimal this year with $50 million in August and $120 million in mid-December. Although capital markets are fluid, our balance sheet remains flexible and strong with increasingly healthy financial metrics. Our debt to total market capitalization was 16.3%, unadjusted debt-to-EBITDA ratio decreased to 4 times and interest and fixed charge coverage increased to 10.4 times. Looking forward, we estimate FFO guidance for the second quarter to be in the range of $1.99 to $2.07 per share and $8.17 to $8.37 for the year which is unchanged from our prior guidance.

Those midpoints represent increases of 7.4% compared to the prior periods, excluding insurance-related gains on involuntary conversion claims. The range midpoints for cash same-store growth and occupancy remained unchanged from prior guidance. We increased our reserves for uncollectible rent by $500,000 to $2.5 million or 0.39% of revenue. This is the result of our uptick in bad debt in the first quarter that was driven primarily by three tenants in varying industries. Overall, our collections remain healthy. We also increased our G&A guidance by $900,000 to $20.8 million. Much of the increase relates to less capitalized development costs as a result of lowering our projected development starts for the year. In closing, we were pleased with our first quarter results, especially considering the economic uncertainty and prolonged higher interest rate environment.

And as we have in both good and uncertain times in the past, we will rely on our financial strength, the experience of our team and the quality and location of our shallow bay portfolio to lead us into the future. Now Marshall will make final comments.

Marshall Loeb: Thanks Brent. In closing, I’m proud of our first quarter results and the value our team is creating. Internally, we continue to grow earnings while strengthening the balance sheet. Externally, the capital markets and the overall environment remain clouded which has led to continued decline in starts. In the meantime, we are working to maintain high occupancies while pushing rents. And in spite of the uncertainty, I like our positioning as our portfolio is benefiting from several long-term positive secular trends such as population migration, near-shoring and onshoring trends, evolving logistics chains and historically lower shallow bay market vacancies. We also have a proven management team with a long-term public track record.

Our portfolio quality in terms of buildings and markets is improving each quarter. Our balance sheet is stronger than ever, and we’re expanding our diversity in both our tenant base, as well as our geography. We would now like to open up the call for questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jeff Spector from Bank of America. Please go ahead.

Jeff Spector: Thank you. Marshall in your opening remarks, you talked about the resiliency in the sector. Clearly, the market – there is some angst here, right on that comment or on the resiliency, I should say. So I guess, I wanted to focus my question a bit more on that and the comments around leasing decisions taking a bit longer economic uncertainty because consumption remains strong, e-commerce has been rising. Like is it simply because of the Fed and rates? Is it tenants took too much space? Like could you just talk about this a little bit more?

Marshall Loeb: Okay. Sure. Hi, good morning Jeff. Happy to add my color. And on the resiliency, yes we see it and believe it is there. And maybe if I take a — maybe a look back, I look at today and kind of a look ahead. So we have had this great run the last handful of years, us as well as our industrial peers. And then I think, we’ve had kind of this historic run right now. You touched on it, I view it as combination of interest rates. And earlier in the year, everyone thought they were about to drop in March, and then it was June and now it’s maybe December that keeps getting pushed out along with just a lot of troubling global unrest. And I think, my kind of analysis, I think short-term decisions more like retail and things like that, the consumer is holding up well.

And if you went through our portfolio, what’s been interesting for couple of quarters. Now we have prospects and have conversations on our vacant spaces, I think, people are really taking a wait and see. They’re maybe waiting for a little more business confidence. So we’ve seen supply coming down, and there is just a lot of people on the sidelines. There’s been — we put it in our slide deck, if people have a chance to go to our Investor Relations on our website, it’s Slide 14, where renewals have really picked up in our sector. So I think, there is a lot of people taking a wait and see. So right now, we’re — I’m glad we’re still 98% leased. We are pushing rents, supplies dropped. What we need is that kind of third leg of the stool is a pickup in business confidence.

And then I think you’ll see — we’ll have probably a several year if not several quarters, several year growth spurt. Again, I see that resiliency, as you mentioned, e-commerce isn’t slowing down, on-shoring near-shoring people and companies moving to the Carolinas, Florida, Texas, Arizona, all of our markets. So it’s been a great few years longer-term. I’m still really excited about where we fit kind of our part of the playground. And I think right now, people are pushing off. I think if you can put off a 40,000 — 50,000 foot expansion, which is an awful lot of our development leasing, about one-third of it is existing tenants I think people are saying, let’s wait a quarter or two and maybe get a little more settled environment.

Jeff Spector: Okay. And then if I could ask a follow-up. You also commented that you think the markets will tighten later in 2024. Anything more to elaborate on that? Any specific timing fourth quarter, third quarter, more into 2025?

Marshall Loeb: I’m hopeful. Just look, we’ve had six quarters and counting of a lack drops and starts. And our product, thankfully shallow bay has had less — significantly less deliveries and availability as a result of availabilities than kind of the bigger box. So I think, as people gain this confidence, I’m kind of with our tenants and our prospects. I keep thinking in 90 days, we just need a little bit of economic good news. And so that’s why I think, when people do — if I use a retail analogy, do come back to the store, there won’t be much inventory on the shelves. And for our product type, it will go away pretty quickly. And we’ll — that will pick up another leg of pushing rents and then really development that I think so much of our development competition is local regional developers, and they don’t have the balance sheet and the teams, and we have the land and the permits, we will be able to come out of the gate on development a lot earlier than our private peers.

Jeff Spector: Thank you.

Marshall Loeb: You’re welcome.

Operator: Thank you [Operator Instructions] Your next question comes from the line of Eric Warden from BMO Capital Markets. Your line is now open.

Eric Warden: Hi, good morning everyone. I just want to talk a little bit about the acquisition opportunities as they appear to be increasing. I mean I was hoping you could speak to the cap rate expectations for the remainder of the year. And how they compare to your development yields in the current pipeline? Thank you.

Marshall Loeb: Okay. Sure. Good question. And really — maybe noticing, maybe as far back a year ago that our development leasing, although we’re signing development leases. So I don’t want to discount that. We signed a good half dozen more kind of our projects made movement during the quarter. It’s just not moving as rapidly as it was at the peak. But then we noticed acquisitions, we’ve always been in the market for acquisitions. We were just getting more yeses. So to-date, if I roll the Raleigh acquisition that we mentioned in — what excites me as well have bought seven projects for about $200 million — a little under $280 million, and those buildings are just over a year old on kind of a weighted average. So everything we’ve been buying is new, and it raises the growth profile going forward of our company.

And we’ve added a dime on kind of matching the quarter, the equity raised versus the going in [GAAP] (ph) yield that adds a dime to our earnings. So we view this as a nice way. You kind of — to maybe be nimble when the development is slowing but the acquisition window opens up, let’s pivot that way. This year, so we were able to pick up a fair amount kind of third and fourth quarter last year. This year has been a little more competitive out of the gate. We are still seeing cap rates, if it’s a portfolio, it’s really low cap rates, like sub-five and things like that, and it doesn’t even have to be a large portfolio, but kind of four or five buildings were people can put some dollars out. That’s still very competitive. What we’ve bought has been more one-off and someone needing to close quickly.

That’s — our pitch has been — we have — especially when — with Brent and the team implementing a Ford ATM, we have the funds raised and we can close in roughly about a month, and that wasn’t a differentiating factor in the past. But certainly in the last year, having capital and being able to close quickly has allowed us to kind of move forward. I think, it is disappointing on the development leasing front [debt] (ph) interest rates look like they’re going to be higher for longer, but I do think it will keep the acquisition especially second half of the year, we were able to be more competitive. I think people get their capital allocation at the beginning of the year. It has been a little more competitive first quarter, although I’m glad we got the Raleigh opportunity, and I’m optimistic on the acquisitions front that we’ll still be able to go find basically new development type properties and a GAAP yields that are maybe I think our average has been in the 6.25% to 6.5%.

So in our development yields, they’ve come in above pro forma have been at around 7%. So the team has done a nice job of sourcing some really good opportunities and that delta between development versus a brand-new 100% lease building, where the rents may be slightly below market, we view as a Raleigh attractive risk return. And I think, that window will slam shut when interest rates start to move. So I think it’s a moment in time, and we’ll be back to being developers again. But we’ll keep trying to buy. But I think it’s really what the markets open, and I thought it would be shut by now, but I think it will have another couple of quarters of hopefully finding those opportunities, assuming the capital is available to us as well in the market.

Eric Warden: Thank you very much.

Operator: Your next question comes from the line of Craig Mailman from Citi. Your line is now open.

Craig Mailman: Hey, good morning. Marshall, I just want to go back to your commentary clearly that things are taking longer. With that in mind, though from a leasing perspective, you guys had a big first quarter for new leasing volume. Could you talk a little bit about kind of the cadence of that, and what the pipeline looks like into 2Q so far relative to the volume you had in 1Q.

Marshall Loeb: Yes. Thanks, again, I’m happy kind of a – good morning Craig, we actually signed more leases in first quarter this year than we did last year by a few hundred thousand. So that was good news, and it is really flat or it’s roughly flat with fourth quarter of ’23. So we’ve got good leasing volume. And if it is help like on an e-mail from one of our guys in the field and his description was tire kickers abound. So we’ve got activity, and we’ve got in some cases, leases out. And even one of our team members said, I used to get excited when we sent leases out, and I still do, but I’m not — they don’t — I’m not waiting at the mailbox. If people want space I think the dollar commitment has gotten so big, that’s what has people hesitating a little more, and there is not a fear of if I don’t take this, it won’t be available tomorrow.

So I feel good and I think it will be kind of like the acquisition window. I’m hopeful it turns pretty quickly. And if it does, we’ll see it — and we’ll move our development starts back up. But for the time being, look, it is a cyclical long-term business. So we said, all right, let’s be a little more though we’re always thoughtful, but maybe a little more thoughtful on how we — when do we want to be delivering these buildings. We have said, look, I would rather wait a quarter or two, to deliver the buildings and be a quarter or two early and wait. So the prospects are out there, it is getting them to pull the trigger, but it’s not that there is during the GFC by comparison, I remember someone making the comment I’d offer more free rent, but I don’t have anyone to offer it, too.

There literally weren’t prospects. Now we’ve got people, we’ve got leases out in conversations. It’s really getting them out of the red zone and leases signed. So that makes me feel a lot better than hey, there is just no tours, and we are holding a broker open house and no one showing up and things like that. It is — and thankfully, again I think we’ve got two of the three legs of our stool. We’re 98% leased. There is no supply, so the inventory is going to be really low when things do turn here. And we just need a little bit of momentum on the demand side. And I think, that will either be kind of the global environment feeling a little more secure and/or at least thinking interest rates are finally going to come back down. And look, I guess, as a flip side, you raised interest rates as fast as we did as a country in 2022, and now you’re moving into mid-2024, it starts to weigh on our tenants.

It’s got to.

Craig Mailman: And apologies if you answered this already, but the – quarter it looked like maybe Orlando and LA, were partly contributors to that. Is this sort of a one-off kind of hit retention? Or is there something going on? Any other move-outs this year to contend with?

Marshall Loeb: No. You broke up just for a moment, Craig but I think on our LA moves, thankfully, this year, we do have two tenants moving around. The good news there knock on wood, we are close, and one hasn’t moved. So we have got really kind of two spaces in LA, it’s definitely one of our choppier markets. And as everyone’s been talking about LA has been messy. But thankfully, if we can get two leases signed. We will backfill both of those spaces. So it is really — the market is not great, but thankfully it’s a little under, call it, 6% of our NOI. And if we can land these two that we feel reasonably confident as you can get before the signed lease comes back, then that puts LA to bed for the balance of 2024. And hopefully, the market has — which we think it will longer-term, will heal and normalize a little bit before we absent a bankruptcy before we have to deal with anything else in LA.

So we lost two tenants, but I think we’re going to backfill and one fairly quickly because one tenant hasn’t even moved out yet, and we’ve got a good solid prospect that we’re closer to a knock on wood, closer to a deal with.

Craig Mailman: Okay. And then just if I could sneak one more in. Guidance assumes a pretty good ramp up through kind of the back half of the year. How much of that is kind of already baked given deliveries and on the development side and commencement timing on leases versus kind of speculative activity that you need to hit to get to that guidance?

Brent Wood: Yes. Craig, I will jump in. I would say three quarters to go, so it’s hard to say it’s all baked. But I will say it’s not. It’s not overly dependent, for example for development starts. We have that pretty heavily weighted to the back half of the year and even further really more heavily weighted to fourth quarter. So if that was to go back, say if we were to — if market were to be slow, and we were rolled development starts back even more, it would have a little less of an impact than we did earlier in the year just because again we’ve got that weighted toward the back end. We’ve only got about 7 — I think 7.5% rollover remaining for this year. So we’ve already put to bed over half of our roll for this year. So there is obviously three quarters ago, there is moving parts, but it is not overly dependent, I would say, on a lot of external factors in terms of a lot of acquisitions or banking on getting a lot of development starts in the second quarter or anything like that.

And our occupancy, how they were budgeting it to slowly go down through the year, there is no particular lease or large lease or two, that you could say is really going to move those numbers one way or the other. So as Marshall said, if demand hangs in there, we feel like that we basically had a good quarter, maintained our guide and feel optimistic about what we have got out there as it relates to again, not being dependent on any one or two big factors to occur. Yes.

Craig Mailman: Thanks Brent.

Operator: Your next question comes from the line of Bill Crow from Raymond James. Your line is now open.

William Crow: Thanks. Good morning guys. Two-parter on lease economics, if I could. How much — you cited the wait and see attitude by the tenants. So I’m wondering how much of that is maybe encouraged by the tenant reps who are maybe seeing some weakness in rent growth and they are thinking the economics might get a little bit better as time goes by. And the second part of that is, have we now seen a peak in annual ramp-up rate, we kind of got up to that 4%, 4.5%. Is that starting to come down a little bit?

Marshall Loeb: Hi, good morning Bill. I think it’s kind of plateaued maybe. And again, maybe it’s — I’m a self-professed, glass is half full. I think we ran up to four, I think we’re taking a breather. I said it’s like we’re in a construction zone. You’re still heading in the right direction. You just got off the freeway, you’re in a construction zone. And I’m really optimistic when the economy turns, given where supply and how many private guys that had gotten into the development business have kind of been weeded out or on the sidelines, we’ll have to start again. I think there’s going to be a pretty big space squeeze. So we’ve not seen so much as — I don’t think the tenant rep brokers not perception isn’t saying wait and see.

I think it is the tenants themselves, and again, especially — look, I’ve always said, our development leasing is less risky than our peers because it’s so much dependent on our existing tenants. I think people are pushing expansions off until they have to make a decision right now. And that’s what we are seeing. And we are still seeing those, but I think it’s kind of a wait and see, and let’s push off the 50,000 foot expansion, another quarter or two. But we’re seeing the economics of the leases hold in there pretty firm other than maybe some free rent here or there, and I’ll probably say LA, is a little bit — is a choppier market given availability there. And we really aren’t seeing a whole lot of the things you would see during a downturn, we are not seeing a lot of subleases.

We’ve seen some — typically some smaller ones, and our lease term fees are really historically low this year. We’re not — the other thing you see in a downturn is people wanting to buy out of their lease. So I think it’s – we are in more of a – we are still moving forward. Look, our earnings are projected to grow about 7.5% this year. We beat our internal guidance in first quarter and even slowing down development starts and some — and raising bad debt, I’m happy we were able to maintain in spite of kind of getting — taking maybe a little more conservative approach towards the balance of the year. And look, I hope we are wrong. And people will say we’re conservative historically, and I hope we’re proving them right that things get better.

And I like that we’ve got the tenant activity. I think it’s — if you’re not worried about the global economy right now, I appreciate that our tenants are a little more thoughtful about it.

William Crow: And thank you for that. If I could just follow up the increase to the tenant or the bad debt reserve, it’s pretty minor. But what’s going on with the watch list? Are you starting to grow increasingly concerned? And is that specific to any industry types?

Brent Wood: No. Bill, this is Brent. Yes, it was a little bit of a frustrating quarter in that. 50% of our total bad debt for the quarter was driven by one tenant, a home decor sort of high-end group out of Southern California that — that wound up a bit surprisingly — wind up filing for bankruptcy. And so their cash balance wasn’t even that high. But when you have a tenant, you deem them uncollectible, they had almost $300,000 straight-line balance. So that was the bigger hit. So that was 50% of the quarter total amongst one tenant And then we had a logistics company and a jewelry/beauty supply, retailer type company. You add those two to the other one for those three, and that was 83%. So it just coincidentally, I think, but all three of those were in California.