Eastgroup Properties Inc (EGP) 2006 Q1 法說會逐字稿

Welcome to today’s teleconference, at this time all participants are in listen only mode. Later you will have the opportunity to ask questions during a q and a session. Please note this call may be recorded.

I will now turn the call over to Mr. Hoster. Mr. Hoster you may begin.

Thank you. Good morning and thanks for calling in for our first quarter 2006 conference call. 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 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 the results for this quarter that describes certain risk factors and uncertainties that may impact the company’s future result and may cause actual results to differ materially from those projected. Also, the content of this conference call contains time sensitive information that subject to the Safe Harbor Statement, including a news release, accurate only as of the date of this call.

Thank you. Operating results for the first quarter met the mid-point of our guidance. Funds from operations were $.71 per share as compared to $.64 per share for the first quarter of last year, an increase of 10.9%.

This year’s first quarter included approximately $.03 per share gain from the sale of land. If this gain was not included FFO per share would have increased by 6.3%. With or without the gain, the first quarter represented East Group’s seventh consecutive quarter of increased FFO as compared to the previous year’s quarter. Please note that we continue to calculate funds from operation based on [inaudible] definition of FFO, which excludes gains on the appreciable real estate.

In analyzing first quarter operations, we had an increase in same property operations of 5.0% without the straight-lining of rents, and with straight-lining same property quarterly results improved by 3.8%. This was the 11th consecutive quarter of positive results for both measures. On a gap basis, our best major market for same property results in the first quarter, after the elimination of the termination fees for the San Francisco Bay area, which is up 17.8%, New Orleans up 17.2%, Los Angeles up 8.9% and south Florida up 6.3%. The trailing same property markets were Memphis down 33% and El Paso down 27%. The differences are basically all due to changes in property occupancies in the individual markets. Occupancy at March 31st was 93.8% as compared to 91.2% at the end of the first quarter of last year, an increase of 2.6%. As in previous years, occupancy declined from year-end as a result of short-term holiday leases. This decrease was not as much as expected due to good leasing activity during the quarter. Occupancy in our four core states, Florida, Texas, California, and Arizona was 94.7% as compared to 86.9% in the non-core markets. El Paso and Memphis are the only two major markets that are under-performing.

Our leasing statistics for the first quarter showed improvement from the fourth quarter. Overall, of the 1.2 million square feet of leases scheduled to expire, we renewed 56% and released another 25% for a total of 81%. In addition, we leased another 366,000 square feet of vacant space.

As you can see in our supplemental information, we achieved rent growth, growth for cash, and gap calculations. Increases of 1.8% for cash and 8.9% for straight-lining of rents. Our average lease length was up to 4.8 years and our average lease size was over 15,000 square feet. On the negative side, tenant improvements were slightly higher than average at $1.78 per square foot for the length of the lease and $.37 per square foot per year of the lease. The leasing activity of our development properties continues to be good with increased prospects’ interest and seven new leases signed in the 60 days since our last conference call. This activity combined with continual improvement in our development markets has allowed us to increase our projected new development start this year to over $80 million. These starts of course, will have little affect on our 2006 FFO, but represent a strong base for FFO growth in 2007 and 2008 as the completed properties lease-up.

In March 31 our development program consisted of 14 properties containing 914,000 square feet with a total projected investment of $66 million. Eight of the properties were in lease-up and six under construction. Geographically the developments are diversified in four states and six different cities and overall are currently 29% leased.

In the first quarter we transferred three properties from the development program into the portfolio. Southridge V in Orlando, Palm River South II in Tampa, and Executive Airport II in Fort Lauderdale. The three contained a total of 207,000 square feet and 100% leased. In the second quarter we expect to transfer Southridge I, which is also 100% leased into the portfolio.

During the first quarter we began construction of Southridge VI with 81,000 square feet in Orlando and Oak Creek V with 100,000 square feet in Tampa. In early April we started construction of three buildings totaling 160,000 square feet and our Freeport Tech development in Northwest Houston. These starts increased the size of our development program to over 1,000,000 square feet. Depending on the timing of permit approvals, we could start up for an additional four buildings and three different markets this quarter. We did not acquire any new land for development during the first quarter, but we do expect to purchase 18 acres at Sky Harbor Business Park in Phoenix this quarter. It will support 271,000 square feet of development, which we plan to start before the end of the year. It’s previously reported we have 20 acres under contract to purchase at Fort Meyers to add to our original ten-acre acquisition there. Including these two expected acquisitions our land inventory will be 287 acres with the potential to develop approximately 3.7 million square feet of new industrial space.

Our development program has been, and we believe will continue to be both a creator of share holder value and a major contributor to FFO by adding quality, state of the art assets to our portfolio. Including our development properties and lease-up and under construction we have developed 26% to East Group’s current portfolio.

As previously mentioned, we sold a parcel of land in Madisonville, Kentucky in January. This $825,000 price generated a gain of $777,000 of which $596,000 was recognized in the first quarter with the balance deferred. We also sold a small parcel of land in Dallas in lieu of an eminent domain combination, which resulted in a $53,000 gain. In early March we sold three of our Memphis properties containing 533,000 square feet for a price of $15,175,000. The transaction generated a gain of $400,000 and reduced our ownership in Memphis to five buildings with less than 500,000 square feet. We currently are in negotiations to sell an additional 125,000 square foot property there, a transaction, which we hope to close in the second quarter. We did not acquire any properties during the first quarter, but currently have one small building in Dallas under contract to purchase.

Keith will now review a variety of financial topics.

Good morning. As David stated, FFO per share for the quarter increased 10.9% compared to the same quarter last year. Bad debt expense was $113,000 for the first quarter of 2006 compared to $99,000 in the same quarter last year. Lease termination fee income was $185,000 for the quarter compared to $168,000 for the first quarter of 2005. Debt to total market capitalization was 30% at March 31,2006 for the quarter the interest coverage ratio was 3.5x and a fixed charge coverage ratio was 3.2x, which was in line with past quarters. A floating rate bank debt amounted to 7.8% of total market capitalization for [audio gap]. We have three mortgages that mature in 2006 totaling $36.3 million at March 31, 2006. Two of these mortgages are with the same lender and we were able to sign an application on a new mortgage on the same properties for $38 million. A non-recourse note will have a ten-year term and a 20-year amortization. We were able to go ahead and fix the rate at 5.68%. This loan is scheduled to close in August 2006. We expect to borrow an additional $60 to $70 million in mortgage loans in 2006 also.

In March we paid our 105th consecutive quarterly distribution to common stock holders. This dividend represented an increase of 1% over the previous quarter’s dividend and made 2006 the 14th consecutive year of dividend increases. This quarterly dividend of $.49 per share equates to an annualized dividend of $1.96 per share. The FFO pay out ratio continues to decrease to a 69% for the quarter. FFO guidance for 2006 remains the same, with a range of $2.77 to $2.87 per share. An earnest per share is estimated to be in the range of $.92 to $1.02.

Now, David will make some final comments.

We continue our positive momentum during the first quarter. It was our seventh consecutive quarter of increased FFO as compared to the previous year’s quarter, with our 11th consecutive quarter of positive same property operations. FFO per share for the past two quarters represented the two best quarters for FFO after adjustments for gains, in our history.

Our development program continues to expand in both properties under development and land in our pipeline. Our balance sheet remains strong and flexible for future growth.

Keith and I will now answer your questions. Thank you very much.

[Operator instructions] We will take our first question from the site of John Stewart. John, you may now begin.

Hi it’s John Stewart here with John Lit. David how big is the Dallas acquisition that you have paid up?

It’s only 59,000 square feet and it’s vacant, so depending on the speed of leasing and the rehab we’re going to do on the building, we would hope maybe to have some income in it in the fourth quarter.

It looked like you dialed back your acquisition forecast for the year a bit. Two questions on that, first of all can you give us some color on the acquisition pipeline and then is it fair to infer that—the fact that you’re standing [pat] on guidance while rationing down your acquisition forecast would suggest that the core is performing better than you’d expected?

The core is doing very well. We’re just trying to be conservative on the acquisition front. The good news is over the last three or four weeks we’ve seen more properties offered for sale than we had previously during this year, so we have some encouragement there. The difficult thing is just projecting acquisitions. It could be anywhere from 10 million to 100 million depending on pricing and individual properties offered for sale. Clearly, the industrial market though continues to be highly competitive for purchases. We’re somewhat encouraged by the fact that we’ve made some offers in the last couple of weeks and continue to see more offerings than we had for the first three months of the year.

Then lastly, on the last quarter call you talked about the leasing the minimum of the development pipeline can you give us some additional color there and whether we should expect to see any announcements in the near term?

Does it mention in the last call 60 days ago that we had a lot of activity and we were going to be able to announce some better leasing, which I believe we did as you can see in our supplemental data. Even some good leasings occurred since the end of the quarter up to our press release yesterday and we see that continued activity. Which is very encouraging. The other factor is that we’re seeing a lot of tenants, customers who are needing expansion, have time left on their lease and that gives us the opportunity to move them into new buildings that we have under construction. We also have increased interest and potential build-to-suits of customers we already have. It’s all heading in the right direction and the only thing that seems to be holding us back right now is the pro meeting process which seems to be more complicated and time consuming in every market. We’re trying to get ahead of that on some buildings, but we’re very pleased with the direction of our leasing activity.

So, in other words, the large activity you were referring to on the last call is largely reflected in the leasing statistics?

It continues to be out there, this for an example the last call was 0% leased, we’re now 79%. Southridge we were 0% leased and we’ve signed leases with three credit tenants and we’re now up to 85% in the last 60 days. In Chandler, Santan 10 II, we had no lease at 60 days ago we’re at 40% and a lease is out for signature to take us to 100. On additional buildings that are under construction, we have some good prospects.

That’s helpful, thank you.

Thank you, we will take our next question from the site of Paul Morgan, you may now begin.

Morning. The majority it looks like of your vacancy is in your Texas portfolio, I just want to get a stem from you whether you see improvement there and whether, possibly, you expect development increasing in those markets may be hampering in the vacancy in that portfolio, maybe turning ahead leasing supplemental?

El Paso, I’d like to believe has bottomed out, the activity there is picking up slowly we think that by the end of the year we will have some improved occupancy. Dallas activity is just picked up, but not significantly. Houston remains very strong for us. The worry in Houston is that in the next 12 to 18 months that there’s going to be a good bit of over-building from new development. We’re ahead of a lot of that with buildings that we have under construction now, and I think our locations will allow us to out perform, but Houston has begun to attract a lot of out of town developers who are building product that’s somewhat similar to ours. That’s the market we’re most concerned about, new competition. So far, that’s not affected our leasing and even with that over-building, land costs are so much higher and building costs are higher so that there’s probably going to be an opportunity for rent growth on the second generation buildings just because the new development is going to be so much more expensive.

Then there’s a couple of markets where there’s a fair amount of expirations this year, LA, Phoenix, any update on how those look in terms of getting ahead of that?

So far, it’s going very well. Phoenix has one of the strongest industrial markets in recent memory right now, and a big difference with the new development that’s occurring there it tends to attract the big box builders and we have a whole lot less competition for our 5 to 50,000 square foot user multi-tenant building, so although you’re going to see a lot—are hearing a lot of announcements of new construction there, it’s not going to compete with the product that we have, so we’re very encouraged with what’s going on in Phoenix.

Are you comfortable there’s roll-ups in those expirations especially?

It appears to be. Los Angeles seems to be getting stronger. The vacancy rate has even come down some more in the last quarter. We’re optimistic about how we’re going to be able to operate there.

Last question, David you mentioned there was a pick-up in assets on the market in some of your core markets recently, is there any indication whether the pricing is moving one way or the other from a cap rate or per square foot perspective?

I wish I could say that I thought that the cap rates were going to rise a little bit, but I don’t think that’s the case. There’s still too many dollars, too much capital chasing too few industrial properties. If there’s going to be any change I think it will be in the $5 million and less properties where the buyer’s are looking to finance the purchases and with rising interest rates that could affect cap rates a bit, but in the larger transactions they generally aren’t financed. I don’t see any indication or any reason that the cap rate should rise.

[Operator instructions] We’ll take our next question from the site of Paul Adornado. You may now begin.

Thanks, good morning. I was wondering if you could give us a little bit of a better sense of the momentum regarding the development pipeline, you have $66 million in the pipeline under construction or in lease-up and you said that you thought that you could get to about $80 million perhaps by the end of the year? What are the chances that starts could be better than that and what do you think the chances are that perhaps in ’07 that you might have more than $100 million in the pipeline?

Good question, for us to go higher than we are today it will take getting some permitting accomplished before year-end like in Phoenix, to allow our Sky Harbor development to start. Secondly, we are talking to a number of prospects about build-to-suits within our existing parks and if we are able to sign one or more of those that could have effective increasing starts above the $80 million number. Very strong leasing also could cause that number to pick up. We’re not really looking too hard to where we’re going to be in ’07 in starts yet, simply because a lot of that depends on how we do in ’06.

Next question would be looking at your non-core markets are there any opportunities perhaps to trade out of those markets given that you do have some other uses for the cash at this point through development or acquisitions?

I wish we had more opportunities for acquisitions, only time will tell whether that works or not. With our very low debt to total market capitalization we don’t feel any pressure to sell anything to provide capital. We have talked about the sale of our Auburn Hills Michigan building to a number of buyers selling something outside of Detroit is not the easiest thing to do in today’s world. We have no fear about holding that asset because it’s credit tenant with eight years left on the lease, but that could be a possible sale and we’re always looking at the possibility of selling some of the properties, like our small building in Oklahoma City, but that’s a market like Memphis where the building has to be leased-up to maximize the sales price. Depending on some leasing of those buildings as in our additional Memphis buildings will determine what other assets we might sell between now and the end of the year.

Okay, thank you.

Thank you.

[Operator instructions] We’ll take our next question from the site of Chris Hailey. Chris Hailey you may now begin.

Hey guys, it’s Greg Korondi with Chris, good morning. Following up on some of the earlier questions I was wondering if you guys could talk a little bit more about the development yield, an acquisition yield, in specifically Southern California, Arizona, and Southern Florida.

You’ve picked markets that it’s close to impossible to buy anything, where to buy land to develop that’s an easy answer.

So, can you walk me through a little bit—

First of all on land, we found that particularly in Southern California and in South Florida, industrial land is now priced at a level where it’s close to impossible if not possible to buy it and build a product for rent and get anywhere near a reasonable yield. What we’re seeing in both those markets are industrial condominium developers being able to pay a much higher price for the land in building and selling individual buildings or selling individual suites within buildings and some of those South Florida developers now moved into Orlando and Houston. Whether those products will work in those markets, only time will tell, but what it’s done is inflate the land prices so high that it doesn’t make any sense. For example we had a piece of land next to one of our Carson properties industrially zoned. We stretched and thought we could make the numbers work at $18 per square foot for the land. An industrial condominium developer paid $25 per square foot for industrial land, that’s amazing. Phoenix, there’s still opportunities to buy land. From a cap rate standpoint, southern California seems to be if it’s a good property it’s a 5 cap rate and if it’s not a very good property it’s probably high 5 cap, so we don’t even try to fool with those. South Florida is not quite as bad, but very aggressive bidding on [inaudible] with their foreign money looking to be placed there. Phoenix there’s been almost nothing for sale, so it’s hard to pinpoint cap rates there, but they may move down closer to California numbers. [inaudible]

Following up on that do you mind telling me a little bit about your Fort Meyers land that you guys have locked up?

We bought just under ten acres last year and depending on the permitting process, hope to be under construction late June to July with about 126,000 square feet in two buildings. I was down there Monday of this week and it’s amazingly hot market. There’s industrial land for sale that’s $10 to $12 per square foot. We did not pay that amount so we’ll feel very fortunate. A booming market and very little industrial land available everybody wants to use it for residential and make more money.

Then the land that you guys locked up this quarter, or in the process of locking it up was south of those figures?

Yes, we tied that land up last summer, I think, and we had to get through a rezoning process that’s going to take almost a year and so we have last year’s prices on it.

Finally, off on the development pipeline you mentioned competition in Houston that’s your biggest land position. What do you think the implications are there for development yields?

We are developing now in three different sub-markets in Houston and I believe we have the best location in each of those three sub-markets. Also, we have the buildings in place or under construction and we’re well ahead of our competition from just having the product available from a time standpoint. Thirdly, so, far what we’ve seen in the pricing of the new development, they’re asking rents are above what we’ve been asking so we see that as a positive, but there’s no question 12-18 months from now if everybody builds what they say they’re going to, there’s going to be too much product and I think from our standpoint it’ll affect yield slightly and probably just cause slower lease-up.

Do you think there’s an upside to your three projects you have going now?

Absolutely.

Great. Thanks.

Thank you.

[Operator instructions] We will pause momentarily for questions to queue up. It appears at this time we have no further questions.

Again, we appreciate everybody’s interest in East Group and as always Keith and I are available to answer any questions that might come up later as you view some of the information that we’ve published. Thank you.