EastGroup Properties, Inc. (NYSE:EGP) Q4 2023 Earnings Call Transcript

EastGroup Properties, Inc. (NYSE:EGP) Q4 2023 Earnings Call Transcript February 8, 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’ Fourth Quarter 2023 Earnings Conference Call and Webcast. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded. 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 fourth quarter 2023 conference call. As always, we appreciate your interest. Brent Wood, our CFO is also on the call. 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 reflects 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 mark 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 including our most recent annual report on Form 10-K for more detail about these risks.

Marshall Loeb: Thanks Keena. Good morning. I’ll start by thanking our team for a strong quarter and year in which we delivered record FFO per share and record re-leasing spreads. Our team continues performing at a high level and finding opportunities in an evolving market. Our fourth quarter and full year results demonstrate the quality of the portfolio we’ve built and the continued resiliency of the industrial market. Some of the results produced include; funds from operations coming in above guidance up 11.5% for the quarter and 11.3% for the year. For over a decade, 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 occupancy rose 50 basis points from prior quarter to 98.2%.

Occupancy would have been 30 basis points higher, but for a leased and occupied late December acquisition. Our percent lease rose 20 basis points from prior quarter to 98.7%. Average occupancy was 98.1%, which although historically strong, was down 30 basis points from 2022. Quarterly re-leasing spreads reached a record at 62% GAAP and 43% cash. These results broke the previous record set last quarter and pushed year-to-date spreads to 55% GAAP and 38% cash. Cash same-store NOI was strong up 7.5% for the quarter and 8% year-to-date. And finally, I’m happy to finish the quarter with FFO rising to $2.03 per share. Helping us to achieve these results is thankfully having the most diversified rent roll in our sector with our top 10 tenants falling to 7.9% of rents, down 70 basis points from fourth quarter 2022 and in more locations.

We view our geographic and tenant diversity as ways to stabilize future earnings regardless of the economic environment. In summary, I’m proud of the performance last year, especially given the larger economic backdrop. We continue responding to strengthen the market end user demand for industrial product by focusing on value creation via raising rents, development, and more recently acquisitions. This strength allowed us to end the quarter 98.7% leased and push rents throughout the portfolio. Due to current capital markets, we’re seeing broader strategic acquisition opportunities. It’s hard to accurately gauge how large the opportunity may be or when the window may close, but we’re pleased with our ability to acquire newer, fully leased properties with below market rents at accretive yields.

As stated before, our development starts are pulled by market demand within our parks. Based on our read-through, we’re forecasting 2024 starts of $300 million. And though our developments continue leasing with solid prospect interest, we’re seeing longer deliberate decision-making. While we forecast $300 million in starts, we’ll ultimately follow demand on the ground to dictate the pace. Based on the decision-making time frames we’re seeing, I expect starts to be more heavily weighted to the second half of 2024. Further in this environment, we’re seeing two promising trends. The first thing, the decline in industrial starts. Starts have fallen five consecutive quarters with fourth quarter 2023 being roughly 60% lower than third quarter 2022 when the decline began.

Assuming reasonably steady demand, the markets will tighten in 2024, allowing us to continue pushing rents and create development opportunities. The second trend is the rise in investment opportunities with developers who have completed significant site 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 the site development legal risk. Brent will now speak to several topics including assumptions, within our initial 2024 guidance. As always, we’ll update our forecast as the year unfolds. My belief is that when or if interest rates begin to follow confidence and stability within the business community will rise.

Brent Wood: Good morning. Our fourth quarter results reflect the terrific execution of our team, the resilient performance of our portfolio and the continued success of our time-tested strategy. FFO per share for the fourth quarter was $2.03 per share, compared to $1.82 for the same quarter last year, an increase of 11.5%. The outperformance continues to be driven by stellar operating portfolio results and the success of our development and acquisition programs. 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 $235 million at an average price of $171.55 per share. Additionally, we executed on our forward equity program for the first time, securing gross proceeds of $75 million at an average initial price of $183.92 per share.

Subsequent to year-end we settled $50 million with $25 million in commitments still outstanding. Although capital markets are fluid, our balance sheet remains flexible and strong with solid financial metrics. Our debt to total market capitalization was 16%. And for the quarter, our unadjusted debt-to-EBITDA ratio is down to 3.9 times and our interest and fixed charge coverage ratio was 9.6 times. Looking forward to 2024, FFO guidance for the first quarter is estimated to be in the range of $1.93 to $2.01 per share and $8.17 to $8.37 for the year. Those midpoints represent increases of 8.2% and 7.4% compared to the prior year, excluding involuntary conversion gain as a result of insurance claims respectively. Notable operating assumptions that comprise our 2024 guidance include, an average occupancy midpoint of 97.0%, cash same property midpoint of 6.0%, bad debt of $2 million, $300 million in new development starts and $130 million in strategic acquisitions, $55 million of which has already been executed.

During this period of elevated interest rates, we continue to view equity proceeds as our most attractive capital source. In our guidance for the year, we are projecting $465 million in common stock issuances, $75 million of which has already been secured via the forward equity program as mentioned earlier. 2024 has minimal debt maturing with $50 million in August and the remaining $120 million not until December. In summary, we are pleased with our solid 2023 results. Thank you, EastGroup team members that are listening to the call. As we turn the page to 2024, we will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to maintain our momentum. Now Marshall will make final comments.

Marshall Loeb : Thanks, Brent. In closing, I’m proud of the results and the value our team is generating. Internally, operations remain strong, and we continue to strengthen the balance sheet. Externally, the capital markets and overall environment remain clouded. This is leading to the continued decline in starts. So, in the meantime, we’re 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, nearshoring and onshoring trends, and evolving logistics chains for example. We also have a proven management team with a long-term public track record. Our portfolio quality in terms of buildings and markets is continually 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.

With that, we’d like to open up the call for your questions.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Craig Mailman from Citibank. Your line is already open.

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Q&A Session

Craig Mailman : Hey, good morning everybody. Marshall, I just wanted to touch on the acquisition environment getting a little bit better for you guys. You’ve been more of a developer over the last couple of years. What are you seeing from a pricing perspective that on a risk-adjusted basis is compelling relative to where you’re developing? And how much of the remaining kind of — it was about $80 million $75 million embedded in guidance, what’s the visibility on that? And kind of where are the markets that you guys are targeting?

Marshall Loeb: Thanks, Craig. Good morning. And if you’ll allow me, maybe before we dive in, I’ll let the people on the call a little bit of baton switch. We prerecorded the call, Brent Wood has the flu or is under the weather today. So you’ve got Staci Tyler, we’re in Staci’s capable hands and mind. So if you don’t hear Brent, he’ll be back tomorrow, but he’s under the weather today. On the acquisition environment, we’ve been encouraged and the sense that it’s almost two different buckets. On a portfolio of properties, cap rates have remained low, and they feel more competitive. And by portfolio, I’m thinking three or four buildings where our team has been successful in finding opportunities. And if I go back to about the midpoint last year till today we’ve acquired six buildings kind of a little bit of color if it helps so a little over call it $225 million.

The average age is 1.5 years old. So they’ve been new buildings with rents, typically slightly below market where they got leased up. And it’s added about $0.08 a year on our run rate in terms of FFO, if you match it with the equity that we issued in the quarter we closed is kind of how we were looking at it. They’ve all been different and that they’ve been one-off. But in some cases, it’s been a seller who needed to close by certainty. One it was a group that had a property tied up, had gotten at least and needed funds to close so we assumed the contract. A marketing process that didn’t work out the way the brokers, we weren’t originally in it. We came in later. And our pitch has been we may not be your highest offer, but because of our line, and we’ve been issuing equity we’re your certain path to closing.

And two years ago, one year ago that really wasn’t a point of differentiation. And all of a sudden it’s become an ability. And we’ve kind of viewed it as we want to own well-located infill industrial buildings in our markets. Whether we build them or acquire them, we’ll adjust to kind of where the risk returns are. And of that batch, our average call it GAAP cap rate, they’re leased and it’s been about a 6.5% type GAAP return. So that’s what when you compare it to an equity cost in the 4s and a GAAP return at 6.5%, on a blended average, on brand-new buildings that are like usually, we underwrite a year to lease up a development and these were 1.5 years old. So, that’s — that has really been a new development in the market. And I’ll tie it to interest rates.

All of a sudden, people that were underwriting and using low-cost debt, we had a more competitive cost of equity or cost of capital using our equity than we normally do. And I think that window will slam shut on us unfortunately, when interest rates start coming the other way. But in the meantime, we’ve kind of turned over a lot of stones and found some really what I’d call unique situations. But it doesn’t take that many to add $0.08 a year to our FFO. So it’s a longer answer than maybe you were seeking, but that’s really kind of how they’ve played out. And we’ve got I say visibility. We’re always in the market bidding on a handful of properties, in our markets and that’s probably where we are today. Nothing big coming. And the last comment, I’ll make I’ve been a little bit on that bottleneck.

We could have done more. I’ll take the blame for not wanting to use our line — run off our line, and then issue equity. That’s really what led us to add the forward component to our ATM in fourth quarter. So, now it allows us to match-fund the acquisitions, a whole lot better than we did because before I was probably a light switch to the teams in the field saying, we’ve got capital we don’t have capital, and it usually takes six weeks to a month to run through more of the bidding process on a property.

Q – Craig Mailman: Okay. And that’s really helpful. And so that 6.5% is probably, what low 6% high 5s going in. And so when you compare that to your cash on cash, kind of development returns and adjust for cost of carry and risk, you guys kind of view that as very favorable.

Marshall Loeb: Yes. If you look maybe two parts in our supplement and I may be off slightly, but about pages 11 and 12, we’re developing to about a 6.9% gap. So if we can buy a 6.5% and take leasing and construction risk away, I will say and it’s been a function of the teams mainly and the market rents last year what we developed — what we delivered, all leased and it was in the higher 7s. So we’ve been coming out ahead of where we thought we would be thankfully, on our developments. But a new building and that delta between a development and an acquisition all of a sudden, looked more attractive for this moment in time.

Q – Craig Mailman: Okay. And you led me to my next question is going to be the introduction of forward. So really you’ll kind of use the ATM to fund near-term spend that you need and the forward is more forward, when you think you’re going to be kind of closing on an acquisition you may employ that if it makes sense.

Marshall Loeb: Yes. And I think the other thing I think that’s true. And I know, we’ll see you here in a month so more inputs welcome when we sit down. We viewed the forward if it’s an attractive price, an attractive meaning at or above our internal NAV, at or above the Street and we feel pretty good about ideally the uses being it’s our own development pipeline or acquisitions, if we can get out — if we have a year to take down the forward, if we can get out ahead of it and really prefund some so we know we’ve got that capital, but we don’t have to pull it down today, really it’s another kind of tool in the toolkit and a nice one, so because acquisitions are so clunky coming and going. I didn’t want to — I was nervous. I didn’t want to get — run the line up and then you have to issue equity to kind of get back to where you want to be.

Because if we’re using debt, is kind of where you were at you’re buying at a low 6% cash and you’re funding at a low 6% cash today. So we don’t like that. But if we can use our equity, and maybe get a little bit ahead and this — we’ll either use it on development, which we know we’ll have our leap of faith that out of the five properties we’re always bidding on, someone’s going to say yes to us eventually.

Staci Tyler: Yes. And one thing, I would add to that Craig is just the timing. So much of the year, we’re in blackout due to earnings as a public company. So it just gives us flexibility on the timing of when we can receive the cash. We don’t have to be in an open trading window, in order to actually receive the funds. So, that gives us some additional flexibility.

Craig Mailman: If I could slip one more in and maybe if I could squeeze in – by the way congrats on your promotion.

Staci Tyler: I appreciate that. Thank you.

Craig Mailman: The G&A ramp this year looks a little bit more than what you typically have. Is there something one-time in that number?

Staci Tyler: The main driver there about two-thirds of the additional G&A in our 2024 guide is due to a slowdown in development starts. So we have our internal development team that spends their time on development and construction activities. We capitalize a portion of the costs related to that team based on the development projects that they’re working on. So in our guide where in 2023 we had $360 million of development starts and our guide for 2024 million is $300 million so that slowdown in development starts means that we have less in development fees that we’ll be recording. When we record those fees it’s a reduction in G&A and it adds to the basis of the properties. So hopefully, there’s some upside in that hopefully, G&A ends up being less because we’re able to start more development projects.

But to be conservative with making prudent business decisions we felt like it was best to lower the guide for development starts. And in turn that added about $0.05 of G&A compared to 2023. That’s the main driver. And then we – our team is growing as the company grows. So we’re adding a few people to the team and then typical additional investments and other aspects of G&A, ESG and some other matters. But the main driver there is the development phase.

Craig Mailman: Is that partially offset though by lower cap interest drag from starting those projects so is it a full $0.05? Or is it something a little bit smaller?

Staci Tyler: It’s really two separate things. So we have capitalized interest but then these internal development costs are really more personnel costs. So the impact to G&A is for our team’s time that they spend on the development projects. So it’s offsetting salaries and other compensation costs. You’re welcome.

Operator: Your next question comes from Jeff Spector of Bank of America. Your line is already open.

Jeff Spector: Great. Thank you. Good morning. First question, I know we constantly talk about onshore and nearshoring. Marshall I know you mentioned it quickly. I guess could we just touch on that? Anything new there in light of what we’re seeing in terms of potential impact on ports, et cetera? I guess if we could touch on that first. Thanks.