Eastgroup Properties Inc (EGP) 2002 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the call, please the star followed by the zero on your touchtone phone. As a reminder, ladies and gentlemen, this conference is being recorded. I'd now like to introduce your moderator for today's conference, Mr. David Hoster, president and CEO. Please go ahead, sir.

Good afternoon and thanks for calling in. We appreciate your interest in East Group. Keith McKey, our CFO will also be participating in the call. Since we will be making forward-looking statements today, we refer you to the cautionary language in the disclaimer on these forward-looking statements located both in our press release and on the second page of our supplemental information package.

As reported in yesterday's press release, total funds from operations for the first quarter were 63 cents per diluted share, the same as for the first quarter 2001. FFO before gains on securities was 61 cents per share, a decrease of 3.2 percent. Two cents per share gain was generated by the sale of REIT securities in the first quarter of this year. Please note that we continue to calculate funds from operations based on definition of FFO which excludes gains on depreciable real estate.

EPS for the first quarter were 22 cents on a diluted basis compared to 27 cents per share last year. The decline was primarily due to increased depreciation expense resulting from the additions of new assets to our portfolio.

The FFO results are in line with our internal projections but fall short of consensus estimates. We previously did not give quarterly guidance. Internal projections showed lower figures for the first two quarters with improvement in the third and fourth rather than the annual total evenly spread over the four quarters.

Same store results for the first quarter were down by 2.8 percent. This was totally due to lower occupancy in the portfolio. On a same store basis for the quarter, our best major markets were Los Angeles, up 8.2 percent, and Orlando, up 6.8 percent. Houston, the East Bay of San Francisco and Fort Lauderdale were each up between 2 and 3 percent. Our secondary markets in Tucson, Denver, and Jackson were also up.

The down markets were New Orleans, 31 percent; Phoenix, 26 percent; and Memphis, 20 percent. Leasing interest and general activity picked up in New Orleans, but Phoenix and Memphis remained frustratingly quiet. If the operating results from these three cities were removed from our total, same store results for the first quarter would have been up 1.9 percent.

We are of the opinion that our markets as related to industrial properties have hit their respective bottoms with the possible exceptions of Memphis and Phoenix. A number of our markets have begun to show slow improvement. The problem with that, although we are experiencing increased leasing activity we are not converting that interest to signs leases at the pace we previously projected. Several factors appear to be causing this. Prospects have come to understand that we are all now in a tenants' market. There is a great deal of window shopping occurring long before prospects really need their space, and these prospects seem to feel no urgency to step up and execute leases.

With lots of choices available them, they have no need to hurry the process. As a result, we are projecting a postponement of the significant leasing improvement until the fourth quarter of this year or early in 2003. This has caused us to reduce our FFO guidance for the balance of 2002. Keith Macky will cover this in more detail later in the call.

Two months ago, we reported that occupancy would decrease to 90 percent and then turn back up. Due to several unexpected non renewals and to delays in executing new leases in negotiation, we were 88.8 percent occupied and 90.1 percent leased at March 31st. At the risk of putting my foot back in my mouth I see a slow improvement from these levels over the balance of the year, but as previously stated, the improvement will be slower than what we had originally anticipated.

Looking at first quarter leasing statistics, we renewed or released 51 percent of the 640,000 square feet of leases expiring, a fairly small sample. Combining both renewals and new leases, we experienced the following averages. Lease length was 3.4 years; lease size was 11,000 square feet. There was a decrease in rents of 2.8 percent and the amount of tenant improvements was 97 cents per square foot. That's 97 cents over the life of the lease, not per year.

These averages are pretty much on the same trend as we've experienced in each of the quarters last year. As always, we analyze the reasons tenants do not renew their leases. In the first quarter, the largest factors were that 38 percent moved out of the sub market; 17 percent closed down their businesses, and 16 percent indicated we could not accommodate their expansion or contraction needs.

Since we are only several weeks past the end of the first quarter, we do not yet have updated and meaningful vacancy statistics for our major markets. Looking at direct experience on the ground, South Florida is the only market that we can call relatively strong, with Orlando, Los Angeles and Houston falling into the good category. In South Florida we are 100 percent leased in our existing portfolio and have several proposals out for space in our new Fort Lauderdale development which is just starting. In Houston, although statistics show job growth turning negative, we have executing three leases for vacant space in the last 45 days and have another three new leases out for signature for a total of 130,000 square feet.

At the other extreme is Memphis and Phoenix where there seems to be a feeding frenzy by owners and brokers over any real, live prospects. As you have heard us repeatedly state, our development has been and will continue to be a major contributor to FFO. During the first quarter, we transferred two development properties that had reached stabilized operations from the development pipeline to the portfolio. World Houston square feet at our World Houston development and two was 60,000 square feet in Tempe, Arizona. Both properties are 100 percent leased and achieve their pro forma yields.

We currently have five development properties with 456,000 square feet in lease up and four under construction with 376,000 square feet. These nine developments total 832,000 square feet and have a projected total cost of $44.5 million. This translates to an average cost of $4.5 million and 92,000 square feet per property. These developments are presently 50 percent leased.

Even though overall market statistics show that most cities are still experiencing increased industrial vacancy rates, we have been able to identify specific markets in which we see development opportunities for our business distribution type product. This is a building that is generally a rear-load facility with an office finish of approximately 15 to 20 percent. It has a clear height of 24 feet, a depth of 140 to 180 feet and is extremely tenant flexible.

Later this month we will begin construction of 128,000 square feet in two additional buildings at our World Houston development adjacent to George Bush Continental Airport. Our existing one million square feet and the 136,000 square feet under construction and in lease up are presently 98.4 percent leased. In June, we will initiate development of the 108,000 square foot Expressway Commerce Center just north of the Tampa International Airport. When completed, it will increase our cluster of assets in this strategically situated sub market to 865,000 square feet. Our properties there are 99 percent leased.

The size our Tower Automotive build to suit here in Jackson has been increased by 30,000 square feet to 200,000 square and we are presently in discussions with Tower about an additional expansion. Although dependant on leasing progress and existing assets, we hope to begin construction of new development in Orlando, Tampa and Chandler, Arizona, later this year.

During the first quarter, we closed the sale of the 47,000 square foot Carpenter Duplex in the sub market of Dallas for a price of $1.2 million and generated a small gain on the transaction. We currently are negotiating a contract for the sale of the 259,000 square foot Braniff Distribution Center in Tulsa to an investor-user for approximately $7.5 million. If consummated, the transaction should close before the end of the second quarter and generate a gain of approximately $2 million. We are negotiating a contract for the acquisition of several smaller properties to add to an existing cluster of assets but interestingly enough, we are seeing very few assets for sale that fit our criteria.

Our 2001 annual report has been mailed, so you should received it in the next couple of days if it hasn't arrived. Please take special note of the total return on performance chart on page two. It graphically our track record in creating value for our shareholders in both the short and long terms.

We are not happy with the current lack of progress in leasing. We are confident that as the economy turns we will achieve significant improvement. Our balance sheet remains strong and flexible and we are well positioned to take advantage of new opportunities as they are identified.

Now, I'll turn the call over to Keith McKey, our CFO.

Good afternoon. As David reported, we are disappointed in our leasing activity but we do have a number of good things happening. Our capital structure is solid. Debt to total market capitalization was 35.9 percent at March 31st with good debt ratios. For the quarter, the interest coverage ratio was 4.2 times and the fixed charge coverage ratio was 3.4 times. Floating rate debt is approximately 11 percent of total market capitalization.

In the next few weeks we plan to sign an application for a $40 million non-recourse mortgage loan, 10-year term, 25-year amortization, and right now an interest rate at below 7 percent at today's rates. Although this will hurt FFO because we're paying around 3 percent for short term debt, we believe that long term rates are attractive at this time and we should take advantage of them.

In March, we paid our 89th consecutive quarterly dividend. The quarterly dividend was increased from 45 cents per share to 47 cents per share, an increase of 4.4 percent in the first quarter. Over the past 10 years, the average annual increase for the dividend was 6.4 percent. Adjusted funds from operations were 58 cents per diluted share, an increase of 3.6 percent over last year. Major adjustments from FFO to adjusted FFO were straight line rents of one cents per share and capital expenditures of 5 cents per share. And the dividend payout ratio to adjusted FFO is 81 percent. Total debt expense for the first quarter was $186,000 bad debt expense and lease termination fee income was minimal, only $15,000 during the quarter. And last year it was zero.

We have reduced our FFO guidance for 2002. The reductions are due strictly to the timing of improvement in occupancy and our range for occupancy is in the 89.5 percent to 90.5 percent range. We reduced the same store change to a range of negative 2.5 percent to a negative .5 percent. And NOI from development projects was reduced to 12 cents per share. Quarterly guidance of FFO is provided in the press release, with leasing improving in the fourth quarter.

We're also providing guidance on gain on securities. All of our other REIT shares were sold except Pacific Gulf for gains of 7 cents per share. Gains of 2 cents per share were recorded in the first quarter and 5 cents per share will be recorded in the second quarter. The two-cent gain projected in the third quarter is from the expected final payment from the Pacific Gulf liquidation. We do not include gains on appreciable real estate consistent with the definition of FFO endorsed by .

Earnings per share before gains on depreciable property should be in the range of $1.03 to $1.10 using the same assumptions. And now, David and I would like to answer your questions.

Thank you. Ladies and gentlemen, at this time if you have a question you will need to press the one on your touchtone phone and you'll hear a tone acknowledging your request. Your questions will be taken in the order that they are received. If your question has already been answered, you may remove yourself from queue by pressing the pound key. In addition, if you are using a speaker phone, please pick up your handset before pressing the button. One moment for the first question.

of AG Edwards, please state your question.

OK, thank you. You guys addressed this briefly about your quantity guidance this year. Can you kind of give us some color on the pretty significant pop from third quarter to fourth quarter? Since that's only three to four months away, I guess what is going to change in the leasing environment in the next three to four months that you see that's going to provide for that pop?

We have a lot more lookers and a lot more proposals are out for leases, a good many of them with people that we think are very serious prospects. And hopefully we're not overly optimistic on that. But we feel that we're going to begin to start to tie down some of those leases and have increased occupancy starting some time mid to late third quarter and that improvement carrying over into the fourth quarter.

OK. I mean that's at-the 256 is at the stated low end of your range that you've provided. And as Keith said, we're going to feel some of the dilution from the refinancing of the debt here shortly. I guess-

That's included in the numbers also.

Right. What kind of acquisition volume do you see or do you not plan any into these figures?

We have a minimal amount of about $5 million just reflecting an acquisition that we're in the process of working today.

OK. So there's no more that's kind of built into your model right now.

No. No, and anything that we are able to find that fits our criteria between now and then will be a plus in meeting these numbers.

OK, thank you.

Thank you.

Thank you. Ladies and gentlemen, for any additional questions, please press the one at this time. Remember to pick up your handset before doing so. , Salomon Smith Barney, please state your question.

Good afternoon or good morning. I guess it's afternoon at this point. I was just, you know, wanting to get some additional color on the new starts on the development side that you're potentially going to start this year. Just what are your expectations on, you know, pre-leasing before those things get started or, you know, the demand in those markets, you know, given the sort of difficult leasing environment that's causing you to move ahead with developments at this time?

Let me talk about a number of them individually. In South Florida in Fort Lauderdale we have a great site that's just a throw from the end of the Fort Lauderdale Executive Airport runway. Our properties in the Fort Lauderdale/Pompano sub market are 100 percent leased. We've had leasing interest off our sign and in fact we're just moving dirt. It's a three-building complex we're going to build the first two initially of 85,000 square feet and we think that that is a really strong market or as strong as any that we're familiar with to be building new product. We have a number of tenants in that sub market who have expressed an interest in expanding into a new building. We have not signed any of them yet but we find that is encouraging for building there.

At World Houston we just finished two buildings. A third one will be finished in another 30 days and that including all our other million square feet-we have one 18,000 square foot vacancy. So we think that we have really identified a tremendous sub market there and I'm just disappointed it's taken us an extra three or four months to get these two buildings under construction. We think that there's some really good potential leasing there also from the fact that the airport is expanding and it's going to force some of the current air cargo tenants who don't need to be on the tarmac to be seeking space. So we want to be in a good position to appeal to them. This development has outperformed I think every other sub market in Houston so we're optimistic about that being a good start.

In Tampa, the east side of Tampa continues to be relatively soft. We have two buildings designed and approved, ready to go there, and no plans to start them at this point. We've got some more leasing to do on our own buildings that are already existing on the east side. But at Tampa International Airport, our type product, a product is pretty much full. There's a good bit of vacancy there but it's in our competitors' service center higher office finish buildings. And so we think that that's a strong sub market and it's appropriate to start construction.

As to other starts, in Orlando we have our Sun Port development. Two buildings are 100 percent leased. The third building which we completed last December is 60 percent leased today. We have good activity looking at most of the rest of the space and as that leases up to somewhere probably 75 to 80 percent we will start the fourth building and that would be about a 60,000 to 65,000 square foot building. So we're not talking about big commitments. This third building has three tenants already signed up and we would expect two to three more to fill it. So it will fit our typical tenant type rent roll.

In the Chandler sub market of Phoenix we're starting to see some slight indications of the high tech sector which is concentrated there looking for some new space. We bought last September the South Park Building, 70,000 square feet. It was totally vacant when we bought it and it's now 100 percent leased and real close to pro forma rents. We think that maybe if that kind of progress continues in that sub market even though the west side of Phoenix is over built and very, very quiet, the southern market of Chandler which is truly an in fill site market could offer us some opportunity.

As we've said all along, we're looking at what kind of success we're having in specific markets with the assets that we already have there. But I think you see that, like near the end of the last year, the volume of our development has slowed down a bit. We still see the opportunities in in-fill pockets where it makes sense to keep moving forward.

Thanks. Just wanted to also get some-your views on-you know, maybe a couple of the bigger ones where you have the most activity-just what you're seeing in terms of market rent. You know, what you think the potential for additional deterioration there is and what if anything that's done to your expectations on yields on new developments that you're starting today.

We have lowered our expectations on a couple of the new developments . Tampa, specifically, by about 50 basis points on the yield. And that's related to slightly lower rents that we anticipated earlier. We're also finding though that with the reduction in construction we have some construction costs coming down. Not significantly, but enough to help the numbers. We're finding the deterioration in rents in the bigger spaces because that's where the real vacancy is around the country and where the competition is the toughest.

I think we're going to-we have seen and continue to see a rent deterioration in Memphis and I think it can be fairly dramatic there. The only good news from our standpoint and most people that are there, the rents are some of the lowest in the country to begin with so that the vacancy doesn't hurt quite as much and the 10 to 25 percent reduction in rent is a much smaller number than it is in for example the West Coast markets.

We're seeing a little bit of deterioration in rents in the northwest part of Houston because that's the overbuilt area from an industrial standpoint. And again the bigger spaces and we're reducing rents just to compete.

I'm thinking about a couple of the others. The west side of Phoenix people are buying leases meaning that they'll reduce rents to whatever it takes to get the tenants. We've had to reduce rents and will continue to reduce rents on that front. But those are the sub markets where we have no plans for future development. But again, I just-to repeat myself, the bigger the space, the more likelihood of the rent reduction occurring.

Great. And just one final-to follow up on that. In your markets for your type of space, you know, is rent the key negotiating point or are you seeing also, you know, pressures on TIs and things like that? Or-and just I guess to what degree are those two things being traded off?

I would say it's rent and starting to get requests for some free rent. There's only so many improvements you can put in your average industrial building. And so that you don't get it becoming very fancy like it can be in an office building with all sorts of paneling and more expensive fixtures and all. Most industrial building improvements are pretty straightforward. So we're not seeing the pressure on TIs. It's much more on rent and throwing in a couple of free months. And then what we do in that situation-for example, if it's a five-year lease and you give two or three months free rent, you end up with a 62- or 63-month lease. I think in industrial there's going to be much more pressures on the rent-free rent, than improvements.

Great. Thanks a lot.

Thank you.

Thank you. , please state your question.

Hey, guys. How are you doing?

Fine, thanks.

Great. I just-I missed the detail on that $40 million loan that you were mentioning earlier and I was wondering if you could just repeat that for me.

Yeah, we're talking to a group about- hopefully we'll sign an application here in the next two weeks and it will be a non-recourse, 10-year maturity, 25-year amortization and right now the rate is under 7 percent.

Excellent. OK, thanks a lot.

OK.

Thank you. Ladies and gentlemen, if there are any additional questions, please press one at this time. Remember to pick up your handset before doing so.

Again, if there are any questions, please press one.

Pardon me, sir. There are no further questions at this time.

Thank you. And thanks, everybody, for calling in. And as always, please don't hesitate to call Keith or me with anything that comes up that you didn't ask on the call or that you pick up from reading our press release and supplemental information or annual report. Again, thank you and see you next quarter.

Ladies and gentlemen, that does conclude your conference call for today. You may all disconnect and thank you for participating.