Eastgroup Properties Inc (EGP) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instruction will follow at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. David Hoster, President and CEO. Thank you. You may begin.

Thanks for calling in. We appreciate your interest in EastGroup. Keith McKey, our CFO, will also be participating in the call.

Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

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 is subject to the Safe Harbor statement included in the news release and is accurate only as of the date of this call.

Thanks. Operating results for the third quarter of 2003 met our guidance. Funds From Operations for the three months was 53 cents per share, compared with 62 cents per share for the third quarter of '02. This is a decrease of 14.5 percent, but the reported results for both periods include significant non-recurring items.

The third quarter of this year has a one-time charge of 9 cents per share for the write-off of the original issuance costs for our Series A Preferred Stock, which was redeemed in July.

The third quarter of '02 included 2 cents per share of gains on the sale of securities.

If both periods are adjusted for these two items, FFO would be, in the third quarter of this year, 2 cents higher, or 3.3 percent.

For the first 9 months of the year, FFO was $1.74 per share versus $1.93 per share the same period last year.

Gains on securities were 2 cents per share in '03, compared to 9 cents per share last year, a 7 cent per share decrease.

Please note that we continue to calculate Funds From Operations based on NAREIT's definition of FFO, which excludes gains on depreciable real estate.

In the third quarter, same property operating results were up 1.5 percent on a GAAP basis, which included straight lining of rents, and were flat without straight lining of rents. For the 9 months, same property results on a GAAP basis were flat. At this time last year, we projected that same property results would turn positive this quarter, so we were pleased to have achieved it.

On a same-property GAAP basis for the third quarter, our best markets were New Orleans, which was up 24.4 percent; Orlando, up 14.9 percent; Dallas, up 9.7 percent; Los Angeles, up 7.8 percent; and Jacksonville, up 6.7 percent. These markets all had higher occupancy, making the difference as compared to last year.

The markets significantly down for the quarter were Memphis, 19.4 percent; Phoenix, 7.2 percent; and Fort Lauderdale, 3.6 percent. Again, the decreases are primary due to shifts in occupancy between the two periods.

Year-to-date, our best markets have been New Orleans, up 28 percent; Dallas, up 10 percent; and Jacksonville, up 7 percent.

After a strong leasing finish at the end of the second quarter, the third quarter was one in which we seemed to simply tread water, ending the quarter and 91 percent occupied and 91.6 percent leased.

The encouraging news is that most of our markets experienced both a good increase in general inquiries and specific new space requirements since Labor Day. This new activity has not yet translated to increased occupancy, but is obviously a positive step in that direction.

We originally had over 20 percent of our portfolio scheduled to expire this year. This exposure now stands at 1.6 percent.

Lease rollover for 2004 currently represents 15.5 percent of the portfolio, and we expect to reduce it by several percentage points by year-end.

Occupancy in our four core states of Florida, Texas, California and Arizona was 92.7 percent at September 30th, as compared to 82.7 percent in our noncore markets, with both categories basically flat from the end of the second quarter.

Looking at third-quarter leasing statistics, we renewed or re-leased 70 percent of the 1.2 million square feet that expired and leased 395,000 square feet of vacant space. Combining both renewals and new leases, we experienced the following statistics -- average lease length was 3.3 years; average leased size was 16,000 square feet; there was an average decrease in rents of 10.1 percent, consisting of a 13 percent decrease of new leases and a 6.9 percent decrease on renewals; and the average cost of tenant improvements was $1.03 per square foot over the life of the lease.

Our leasing results continue to show that the larger the space, the greater the concessions, with the Los Angeles market being the only exception.

In the third quarter, we experienced a 7.8 percent decrease in rents on leases under 25,000 square feet, and a 14.8 percent decrease -- almost twice the amount -- on leases greater than 25,000 square feet. These statistics illustrate the continuing necessity of sacrificing rent for occupancy.

Although it appears that rents have bottomed out in most markets, we expect to continue to experience a decrease in rents on average as lease roll for at least the next twelve months.

An analysis of the reasons tenants do not renew their leases shows that, in the third quarter, approximately 37 percent of the square footage vacated was due to changing space needs, 35 percent moved from the submarket, and 21 percent vacated due to bankruptcy or closing of the business.

From a statistical standpoint, eight of our markets showed improved occupancy figures for the third quarter, while three were down and one has not yet reported. Orlando, Tampa and Jacksonville experienced the most improvement. Dallas, the San Francisco Bay area and Denver showed declines. Overall, Memphis continues to be our weakest market, with an industrial vacancy rate of approximately 20 percent. For EastGroup directly in the third quarter, San Francisco and Dallas experienced higher vacancy, while Orlando and Phoenix had the most improvement.

At September 30th, our development program consisted of seven properties, six containing 478,000 square feet were in lease-up, and one with 65,000 square feet was under construction. These seven developments contain 543,000 square feet with a projected total cost of $30 million. This represents an average cost (inaudible) $4.3 million and 78,000 square feet per property. Our average projected cost per square foot is $55. The seven properties are currently 31 percent leased and are geographically diversified in three states and five different cities.

During the third quarter, we transferred the 32,000 square foot Metro Airport Commerce center here in Jackson to the portfolio. We also began construction of San Tan 10 (ph), a 65,000 square foot business distribution building in Chandler, Arizona. Completion of construction is scheduled for the first quarter of next year. The Tempe Chandler submarket has consistently outperformed the overall Phoenix industrial market.

Last week, we began construction of World Houston 17 and our World Houston International Business Center development. This 66,000 square foot building is a build-to-suit facility for Devon Energy Production Company and has a projected total cost of $3.4 million. The building is scheduled for completion in the second quarter of next year and will increase our World Houston portfolio to 1.3 million square feet. When added to our development program, World Houston 17 increases the percentage leased to 39 percent.

From a future development standpoint, we closed on the acquisition of 72 acres in Orlando in September. This land is strategically located (indiscernible) site in Orlando Central Park along the Beeline Expressway, which is a very established submarket. We will create a master plan business park to be named SouthRidge Commerce Center, which is projected to have an eventual buildout of approximately 750,000 square feet and ate to 11 business distribution-type buildings. Site development costs are projected to total approximately $2 million as the park is developed. Construction of the first building is scheduled to begin in the late first quarter of next year.

We see SouthRidge as a logical extension of our successful development program in Orlando, where we have a regional office and over 1 million square feet of industrial space. As we repeatedly state, our development program has been and will continue to be a major contributor to FFO.

Over the past six years, we have developed 50 properties containing 3.5 million square feet. Development provides us the opportunity to add new, state-of-the-art properties to existing clusters of assets in targeted submarkets. The impact of our development program is illustrated by the fact that, including properties in lease-up and under construction, we have developed over 20 percent of EastGroup's current total portfolio.

In the third quarter, we acquired the 118,000 square foot Shady Trail Distribution Center in Dallas for a price of 4.4 million. Shady Trail, which was built in 1998, is located in the Walnut Hill/Stemmons Freeway submarket, where we already own five other properties. The building is currently 50 percent occupied and is projected to generate an unleveraged, stabilized yield upon lease-up of approximately 9.5 percent.

Last week, we closed on the acquisition of Crown Park Commerce Center in Tampa for a price of $4.9 million. Constructed in 2001, Crown Park contains 72,000 square feet, is currently 100 percent leased to five tenants and is projected to generate an unleveraged first-year yield of approximately 9.5 percent. This acquisition increases our ownership in the Tampa International Airport submarket to 976,000 square feet and our overall Tampa portfolio to 1.9 million square feet.

During the third quarter, we sold a 2.6 acre parcel of land in Orlando for $405,000 and recorded a small gain. Currently, we have a distribution building in Tampa under contract to purchase and no properties under contract to sell.

Now, I turn the call over to Keith to talk about the financial aspects.

Good afternoon. First, I would like to discuss two accounting pronouncements that have been in the news lately. In our second-quarter earnings release on July 21st, we discussed the original issuance costs on the preferred stock we redeemed earlier that market. At that time, we reduced guidance by 9 cents a share for FFO and diluted earnings per share for those cost that occurred in the third quarter.

Secondly, looking at FAS 150, we have one partnership, and it is consolidated for financial statement purposes. This partnership does not fall within the Scope of FAS 150, which requires valuing the minority interest at fair value, so there's no change from our previous accounting.

We completed three capital transactions during the third quarter. In July, we sold 1,320,000 shares of 7.95 percent Series D Cumulative Redeemable Preferred Stock and generated net proceeds of 32.3 million. Also in July, we redeemed all of our outstanding 9 percent Series A Preferred Stock for the reference amount of 43.125 million. In August, we closed a 45.5 million, nonrecourse first mortgage. It was secured by 10 properties with a fixed interest rate of 4.75 percent. It had a ten-year term and a 25 year amortization period.

In addition, during the third quarter, the holder of our Series B Cumulative Convertible Preferred Stock converted 850,000 preferred shares to 965,940 common shares. Of the original 2.8 million preferred shares issued, 550,000 Preferred Shares were outstanding at September 30th of '03.

Debt-to-total market capitalization was 37 percent to at September 30th, and we continue to have good debt ratios. By the third quarter, the interest coverage ratio was 3.8 times and the fixed charge coverage ratio was 3.3 times.

In September, We paid our 95th consecutive quarterly dividend. The quarterly dividend of .475 cents per share equates to an annualized dividend of $1.90 per share. This represents a payout ratio of 90 percent, but if you add back the 9 cent cost of the original issuance costs on the preferred stock, the payout ratio is reduced to 77 percent.

Total bad debt expense for the third quarter was $158,000, and that was less than 1 cent per share. Lease termination fee income was 216,000, approximately 1 cent per share, and in the third quarter of last year, it was 119,000 in the third quarter.

FFO guidance for this year has been narrowed to a range of $2.35 to $2.38 per share. This is close to prior guidance of $2.33 to $2.39 per share. In December, we will provide guidance for 2004.

Earnings per share for 2003 should be in the range of 70 cents to 73 cents. No gains on securities or gains on sale of depreciable property have been projected for the fourth quarter.

Now, David will make some final comments.

In summary, we believe that EastGroup is well positioned to take full advantage of the anticipated future growth from the U.S. economy.

Our second and third-quarter capital transactions have improved an already strong and flexible balance sheet. Same-property results have turned positive. Leasing activity appears to be headed in the right direction. Our development program is a good land inventory for future growth. Finally, our strategy is simple and it is working -- quality, multi-tenant buildings clustered around transportation features in growth markets.

Now, Keith and I will be happy to answer any questions you all might have.

Thank you. (OPERATOR INSTRUCTIONS). Tony Howard of Hilliard Lyons.

Good afternoon, David and Keith. Several questions -- first, as far as the mortgage debt that was issued in the third quarter, the 45 million, that seems like a relatively pretty good attractive rate. What's the possibility of doing further refinancings (indiscernible) using mortgage debt?

Well, we hit it pretty good I think when we struck that rate, and our spread was 120 over the ten-year treasury, which was 355 at the time, which has moved to now to -- what -- 420 or something like that? So, we're looking probably at 5.5 rate in a comparable time now. But what we like to do is carry some bank debt and than as that bank debt moves up because of acquisitions and development, and then reduce that by going out and getting a fixed rate. So, we will probably do some more of that, but we don't anticipate doing it until probably the middle of next year.

Okay. A couple of questions on Page 14 of the supplement - you're seeing average rent renewals declining. If I'm not mistaken, in the second quarter, you had a 8.8 or so percent decrease year-over-year and now it's down to 10.1 percent or so of decrease. That's both down from the first quarter and stuff, so it seems like -- and I think you mentioned this -- to keep occupancy at levels (indiscernible) cost to rent. Can you further expand on that, as far as the -- you know, what you're seeing out there as far as when do you expect to hit bottom?

I think, overall, if we are not at the bottom in most markets, we're very close to it. I'd like to believe that the increased leasing interest will help stabilize rents. Rent stabilization seems to happen before there's a reduction in free rent, and I think really what it's going to take in the marketplace is a couple of good prospects not being able to lease their number one or number two choices on space, increase their sense of urgency, and then we're going to be able to say that we've really experienced a turn.

But even if we are at the bottom on rents, there's still going to be a roll-down of rates over -- I'd say at least the next twelve months -- as markets strengthen.

The further segment that -- David, would that require an increase in square footage from, say, your top 10 users, or would you have to go out there and find new people to rent? What's the prospect in that regard?

It would be a combination of both, but I think it's primarily going to be from new users in the market as well as companies expanding -- and are looking for better and larger spaces than maybe their current landlord can't supply. But we do have a couple of spaces that we're talking to a couple of our bigger, current users in taking, so that I think we should make leasing progress from both sides, but primarily from companies that are not customers today.

Keith, a couple of clarifications -- is there any clarification as far as the remaining Series B preferred -- the owner of this? (indiscernible) consider converting off of the remaining amount into the common? It is there any kind of timetable for that? Because it should be fairly well over the conversion price.

I think they've shown that they are willing to get out, and I think, depending on market conditions, you'll see them go ahead and convert.

That would probably be over the next three to six months.

I guess that was taking into consideration as far as your guidance, narrowing your guidance for the fourth quarter?

No, we kept that the same, but it did affect earnings per share primarily when you convert from the preferred to common on that diluted share computation, but we did not assume any more conversion for our guidance.

Okay. Final question, David -- as far as -- given the difficult environment, what are you seeing out there, especially given that you've sured up your balance sheet as far as possible acquisitions and maybe some large block of acquisitions?

We have not come across a package of properties that contains a whole package of our type of desired acquisition, of business distribution-type buildings. We've been pleasantly surprised that in the last couple of months that we have been able to find some newer, more recently built assets in our most desirable submarkets, like the Shady Trail purchase that we did in September, the Crown Park one we just announced last week in Tampa. I mentioned we have one other in another submarket in Tampa that is actually next door to a building we already own, that we're working on. Up until -- I'd say just a couple of months ago, we had not been able to find that type property in any kind of volume. It's helped us make up for a reduction in our development program, which has slowed a bit, as we've talked about in the past, due to softer leasing conditions.

Now, going forward, it's very hard to predict how much addition property acquisitions it will have.

(OPERATOR INSTRUCTIONS). Art DeHavner (ph) of A.G. Edwards.

Good afternoon. I was questioning the upcoming seasonal business that you generally encounter, and I was wondering if you could provide any details on how -- I mean, I guess we're entering that time period where you would start to see some interest. Can you give us any kind of details on what kind of space needs that you general see and any kind of comparisons?

In New Orleans, we've had a short-term tenant in 99,000 square feet; that lease expires in the near future. We have a Christmas user taking that space, I think, through the middle of January, so that's the same user that took it last year, so that's positive.

At this point, we do not have some of the other users that we've traditionally had related to Christmas, and maybe that will come. But the one in New Orleans, although a big one, is the only one that's on the horizon right now.

Okay. Can you give us an idea on historically how much space do these tenants generally pick up?

Last year, we had the post office take about 50 or 60,000 square feet in Houston at World Houston. Then we had Wal-Mart take space in both Tampa and Fresno, so I would guess that we are maybe going to be 50 to 75,000 square feet below Christmas use this year than last year unless somebody steps up in the next couple of weeks, which can always happen.

Okay. Moving on, I may have missed this, but I clearly heard you say that you predicted same-store results to turn positive a year ago. What are we looking for in the fourth quarter of this year?

To still remain positive and be, I would guess, pretty much we are today, give or take a little bit.

Our next question is from Dennis Ryland, Private Management Group.

I was wondering if you could provide a little color on what the average (indiscernible) on the portfolio versus what you think the market is? Sort of related to that, are there specific effects based on the concentration that we have near your port locations and how that is playing out?

Could you repeat the first part of the question? I didn't hear it.

What your perception is on your average receiverance versus what the market rents are.

I believe the rents we're getting today are pretty reflective of the submarket that they are in. In industrial real estate, you can outperform the submarket a little bit but never a lot over an extended period of time. We have not made any calculations that say that our current rent roll is so many dollars per square foot, or cents per square foot, above what the current market is in each one of our locations because that changes so regularly. All it takes is a couple of big leases to sign and tighten up a submarkets and it makes a big difference, so we haven't run those numbers specifically.

As to being around airports, we have had, on average, higher occupancy. I don't have a specific number for you, but we have had higher occupancy in those submarkets versus the general submarkets that we are in. Maybe some of that's related to the fact that we tend to have the smaller tenants around the airport, where the big bulk users, which is much more the competitive space today, is farther out on the edge of development.

I am showing no further questions.

Well, thanks again for calling it, and as always, Keith and I are available for any additional questions that you might have, so please don't hesitate to give us a call. Thank you for your interest in EastGroup!

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect, and have a great day.