Eastgroup Properties Inc (EGP) 2007 Q4 法說會逐字稿

Welcome to the EastGroup Properties Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity to ask questions during our Q&A session. Please note this call may be recorded.

I will now turn the program over to the President and CEO, David Hoster. Go ahead, sir.

Thank you. Good morning and thanks for calling in for our Fourth Quarter 2007 Conference Call. 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 describe certain risk factors and uncertainties that may impact the Company's future results 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 included in the news release, is accurate only as of the date of this call.

Thank you. Operating results for the fourth quarter met the upper end of our guidance range. Funds from operations were $0.86 per share as compared to $0.72 per share for the fourth quarter of last year, an increase of 19.4%. The $0.01 per share above the mid range of fourth quarter guidance was due to the combination of a number of small, positive factors.

If gains on sales of land are excluded from the results, FFO per share increased 7.0% in the fourth quarter of 2007 as compared to previous year's fourth quarter. For the year, FFO was $3.12 per share compared to $2.81 per share for '06, an increase of 11.0%. If you eliminate both termination fees and gains on sales of land from each period, the increase would have been 7.2%. Please note that we calculate funds from operations based on NAREIT's of FFO which excludes gains on depreciable real estate.

We continue to achieve positive same property net operating results in the fourth quarter but at a slower pace than the first three quarters of the year. Same property quarterly results improved by 2.6% without the straightlining of rents and with straightlining, increased by 1.4%. Without termination fees, results were 2.0% and 0.9%, respectively. This was the 18th consecutive quarter of positive results for both measures.

The reduced rate of growth in same property results for the quarter was due to the high level of occupancy in the fourth quarter of '06. Consequently, the increases in the fourth quarter of '07 are due primarily to higher rents rather than improved occupancy.

For the year, same property results were up 4.4% for cash and 3.6% for GAAP. In the fourth quarter on a GAAP basis, our best major markets after the elimination of termination fees were Houston, which was up 10.9%, Dallas up 7.3%, San Antonio up 6.8%, and Los Angeles up 2%. The trailing same property markets were El Paso, down 14.1%, and Tampa, down 1.8%.

The differences between quarters are basically all due to changes in property occupancies in the individual markets. Occupancy at December 31 was 95.4%, a slight decrease from the end of the third quarter. Our California markets were 99.4% occupied and Florida was 95.5%. Houston, our largest single market with 3.9 million square feet was 99.5% occupied.

Over the last 90 to 120 days, leasing activity has slowed from being strong to just good. Prospects are still looking for space but there are fewer of them and it now takes longer to complete lease negotiations. With the slowdown in new industrial construction, most of our markets currently appear to be in equilibrium. That simply means we have to work harder for each prospect as compared to a year ago.

Our leasing statistics for the fourth quarter illustrate the slower but generally good real estate fundamentals in our markets. Overall, of the 1.2 million square feet of leases that expired in the fourth quarter, we renewed 45% and released another 21% for a total of 66%. This is below our average of 85% for the year. In addition, we leased 202,000 square feet of space that was vacant at the beginning of the quarter. As you can see in our supplemental information, we continue to achieve good rent growth in the fourth quarter with a 17.3% increase for GAAP with straightline and 7.9% without the straightlining of rents. These figures are both above our '07 averages.

Our average lease length for the quarter was 3.9 years which is slightly below the average for the year. Tenant improvements were $1.52 per square foot for the life of the lease, or just $0.39 per square foot per year of the lease which is also below our '07 average.

At December 31, our development program consisted of 22 properties with 2.3 million square feet and a total projected investment of $154 million. This is approximately the same size that it was at September 30. Ten of the properties were in lease up and 12 under construction. Geographically, these developments are diversified in four states and seven different cities and overall are currently 42% leased. During the fourth quarter, we transferred four properties with 268,000 square feet that are currently 95% leased, into the portfolio. Also in the past quarter, we began construction of three properties with 279,000 square feet. Each of these is an additional phase in an existing successful development.

Overall in '07, we had development starts of $120 million with a total of 1.8 million square feet. We transferred 14 properties with 959,000 square feet and an investment of $74 million into the portfolio and these transferred properties are currently 99% leased.

From a land standpoint, we absorbed 107 acres into development and purchased 102 acres for new development. At December 31, our land inventory contained 252 acres with a potential to develop approximately 3.4 million square feet of new industrial space.

Looking at 2008, we see a probable slowdown in new development starts to between 60 and $70 million. This total could be higher or lower depending on potential build-to-suit opportunities and of course, market conditions. We will be sensitive to the economy and are able to adjust this program quickly if necessary. As you have heard us state many times, our development program has been and we believe will continue to be, a creator of significant shareholder value. We are not a merchant builder. We are not developing to generate immediate gain through the sale of newly created assets. Our goal as a developer is to add quality, state of the art investments to our portfolio and thereby increase total returns to our shareholders in both the short and long term. Including properties in lease up and under construction, we have developed 32% of our current portfolio.

In December, we acquired the 78,000 square foot Concord Distribution Center in southeast Denver for $6.1 million. Concord is 100% leased to three customers and is in the Centennial Airport submarket where our other Denver properties are located.

For the full year, we completed seven property acquisitions with a total of 1.1 million square feet and a combined investment of $57.3 million. These purchases are located in Charlotte, San Antonio, Dallas, Tucson, and Los Angeles. Our only building disposition during the year was the previously reported sale of the 152,000 square foot Delp I property in Memphis for $3.275 million. This transaction which generated a gain of just over $600,000 reduced our ownership in Memphis to a net investment over just barely over $2 million.

In the next two weeks we are scheduled to close on the acquisition of a portfolio of properties in metropolitan Charlotte, North Carolina for a total purchase price of $41.9 million. The portfolio consists of five buildings with 669,000 square feet in four different locations at 9.9 acres of developable land. The distribution buildings which were constructed between 1989 and 2006 are currently 86% leased to 14 customers. This acquisition will increase EastGroup's ownership in the Charlotte market to over 1.6 million square feet and we plan to open an office there later this year.

Keith will now review a number of financial topics.

Good morning. As David reported, FFO per share for the quarter increased 19.4% compared to the same quarter last year. Lease termination fee income was $133,000.00 for the quarter compared to $6,000.00 for the fourth quarter of 2006. Bad debt expense was $268,000.00 for the fourth quarter compared to $132,000.00 in the same quarter last year and gain on land sales was $2,579,000.00 for the fourth quarter of 2007 compared to $129,000.00 in the same quarter of last year. The net effect of these items increased FFO per share by $0.05 for the fourth quarter as compared to last year. FFO per share for the year increased 11% compared to last year. Lease termination fee income was $1,149,000.00 for 2007 compared to $410,000.00 for last year. Bad debt expense was $737,000.00 for '07 compared to $718,000.00 for last year and gain on land sales was $2,602,000.00 for 2007 compared to $791,000.00 for last year. The net effect of these items increased FFO by $0.20 per share compared to last year.

Debt to total market capitalization was 36.9% at December 31, 2007. For the year, the interest coverage ratio was 3.7 times and the fixed charge coverage ratio was 3.4 times which is comparable to last year. Our floating rate bank debt amounted to 8.3% of total market cap at year end.

We are very pleased to have completed two major debt transactions recently. In early January, we renewed our credit facility with an increased capacity, lower interest spreads, and improved covenants. We attribute this to our good relationships with our banks and income stream from property rental income and strong debt ratios. We also executed an application for a $78 million non-recourse first mortgage loan at an attractive fixed rate of 5.5% which is expected to close in March. Both of these transactions were accomplished in a difficult financial market.

In December, we paid our 112th consecutive quarterly distribution to common stockholders. This quarterly dividend of $0.50 per share equates to an annualized dividend of $2.00 per share. Our dividend to FFO payout ratio improved to 64% for the year compared to 70% in 2006.

Rental income from properties amounts to almost all of our revenues so our dividend is 100% covered by property and net operating income. We believe this revenue stream gives stability to the dividend.

FFO guidance for 2008 which was announced on January 8th is expected to be in the range of $3.20 to $3.30 per share. Earnings per share is estimated to be in the range of $1.01 to $1.11.

Now David will make some final comments.

We continue to achieve positive development and operating momentum but with a slowing economy, we plan to be more defensive in both our development and acquisition activity. Although leasing velocity has slowed from peak levels, it is still relatively good overall. Our same property operating results, rent growth, occupancy levels and development leasing are all good. Our balance sheet remains strong and flexible.

Keith and I will now take your questions. Thank you.

At this time, if you would like to ask a question please press the * and 1 on your touchtone phone. You may withdraw your question at any time by pressing the # key. Once again, if you would like to ask a question, please press the * and 1 on your touchtone phone.

One moment please while we queue up for any questions.

We'll take our first question from Irwin Guzman with Citi. Go ahead please.

It's Michael Bilerman. Irwin Guzman is here with me as well. David, just a question, you talked about the leasing environment slowing a little bit but it's still good. What are you seeing? Is there any market specific trends that are giving you some pause, concern?

No, I would say it's basically every market has slowed a bit. Houston continues to be our strongest market but there are just less prospects out there today than there were in the fall of last year. 12 months ago, it was almost like just taking orders for space. It's becoming more of a tenant market versus a landlord market and people, competitors that have had space vacant for a long time are starting to get nervous and we're starting to see the first signs of bonus commissions, a little bit of free rent, that sort of thing to attract both brokers and prospects and it's not to the point where the market is totally turned. It's just more of a market where you have to work harder to nail down the prospects and we were just spoiled for a couple of years.

Right, I think Irwin had a few questions also.

Good morning.

Good morning.

On your -- I noticed one of the developments that you brought in this quarter, Castillian Research, the yield dipped from what you were previously expecting of around 9% to 6.5%. As you think about the rest of your development pipeline and targeting 9.5% yields, do you think there are any projects out there where the risk of that yield compressing has increased?

No, not any significant compression. On Castillian, we were doing that with a partner which is unusual for us. It's a service center type property which is stepping out a little bit for us that we thought would make sense in Santa Barbara and I think in the long run it will. The City, as we went through the approval process, forced us to do a lot more in terms of earthquake work and that sort of thing so our costs were up and then in the same period, our operating expenses went up so we think that was an unusual one but we're comfortable with the value of the asset.

As I was saying, the rest of our development portfolio over the last 60 days we've had some where the projected yield has gone down a little bit and some where it's gone up a little bit but as I mentioned in my prepared remarks, we plan to be a little more defensive than we have been in the past and if we lose 20 or 30 basis points in order to nail down a good credit tenant, we still think those developments are going to be successful and good contributors to FFO going forward.

And in terms of the 60 to 70 million of starts that you mentioned for this year, can you talk about which markets you're planning to target and whether those intentions have changed over the last three to six months in terms of where you're going to be starting those developments?

Our plans have not really changed because almost all of those developments are in areas where we have a large number of properties and we think we have a real feel for what's going on in the marketplace and are generally just subsequent phases to current buildings that are up and leased or in lease up today. The only one that comes right to mind that we'd be stepping out is doing something in Tucson and we've not done anything there for awhile but it's still a very strong market.

And in terms of the existing portfolio, El Paso has been one of your weaker markets for awhile but do you expect any -- which markets are you a little bit more concerned about potentially over the next 12 months or do you expect any negative same store performance to start creeping in any particular market?

I think Florida is going to be a tough market for two reasons. One, of course everybody is aware of housing problems there but also Florida has been such a strong market for us over the last couple of years. It's pretty hard to show improvement over what we've accomplished so the bar is just set very high there so that's going to be a tougher one to beat previous years' numbers on but I think it's more of we did so well there before rather than that we're not going to do as well in the future.

That's it for me. Thank you.

Thanks.

We'll take our next question from Mitch Germain with Banc of America Securities. Your line is open.

Good morning.

Good morning.

David, specific markets in terms of development, are you seeing within any specific market that some of the speculators are departing?

Absolutely. A year to two years ago, in particular local developers would build industrial buildings or little industrial parks and were able to flip those quickly to generally institutional buyers right after they were done when they were empty and at cap rates that were very close to projected lease up cap rates because there was such a demand for new industrial product in the end markets, and there is little or none of that happening today. Particularly in Houston a number of developers did that, were successful, and have not reentered the market with new construction. So I think there's going to be -- there is a period of less speculative development and I think that's good for us.

Just as a reminder, of the $120 million that you started this year, how much of that was build-to-suit?

About $30 million I guess. We're doing the build-to-suit for United Stationers in Orlando which is a little over $20 million and we're doing a building for Carrier where they're going to take two-thirds of it in San Antonio. Those are the two primary ones.

Okay, and out of your 60 to 70, is any of that -- is that all speculative at this point or is any of that committed build-to-suit?

That's all speculative.

That's all speculative.

Yes.

And just a quick modeling question for Keith, interest income ran a bit higher this quarter. Should we expect that to trail back to historical?

On which category?

Interest income.

Interest income. We got some interest income on the condemnation award that will not continue so that will --

That's what I figured.

$160,000.00 on that?

Yeah, 160 on that.

Fantastic. Thanks guys.

Thank you.

We'll take our next question from the site of Brendan Maiorana with Wachovia. Go ahead please.

Good morning. Can you give us a perspective on the pricing of the pending Charlotte acquisition whether it be in yield terms, price per foot terms versus the deals that you've done a year ago? I'd just like to get a perspective on how pricing has changed in '08 versus '07.

When we report the sale, I'll give you some more details on that but we believe that the cap rate we're getting on this package is somewhere between 25 and 50 basis points higher than it would have been 12 months ago. It's a high quality group of buildings in strong submarkets, relatively new and we think a real strategic purchase for us.

Is there a qualitative difference between the packages of this year versus last year?

This package is, every building in it is either equal to or better than everything we already own in Charlotte and that's not to downgrade what we already own there. It's just the quality of this portfolio.

Thank you.

Once again, if you would like to ask a question please press the * and 1 on your touchtone phone.

We'll take our next question from the site of Matt Conrad with FBR. Go ahead please.

Hi, good morning gentlemen. Thanks for taking my call. If you could just maybe anecdotally tell us what you're hearing from your tenants, I understand that leasing velocity has slowed but can you get an idea of their long term plans? Are they kind of taking a wait and see approach or can you just let us know what you're hearing particularly in Florida?

It's more of a wait and see and I think as a result, a lot of users and potential users don't have long term plans because they're a little nervous about what's going on. All you have to do is listen to the economic news on television or read the big newspapers especially New York newspapers and it's almost as though recession is going to be self fulfilling from all the predictions but everybody is nervous so they're less quick to make long term commitments unless it's something that they've been working on for awhile, and each market is a little bit different.

Right, and moving back to Florida, it looks like Jacksonville was pretty weak as far as activity. Is there any seasonality there?

No, not -- somehow we always go a little bit lower in occupancy in the first quarter than we were in the fourth quarter but other than that, there doesn't appear to be any seasonality. We didn't have any holiday related short term leases this year like we've had sometimes in the past and part of this is because our occupancy was so high. We didn't have that extra space to lease out that way.

Right, and so you said that first quarter is usually lower than fourth. Do you expect that trend to continue this year?

Yes.

Okay, thanks a lot.

Thank you.

We'll take our next question from the site of Mack Overton with Morgan Keegan. Your line is open.

Good morning. Just a couple of things -- one, would you say, are you in a position of kind of sitting back and licking your chops about potential investments that you're going to be able to make given the environment or is it steady as she goes in terms of making new acquisition investments?

I think it's steady as she goes and maybe being just a little more hesitant in looking at properties. People are writing and talking about and there's probably been a little bit of increase in cap rates but you have to remember that in industrial properties, the cap rates never went nearly as low as in big city office buildings and apartment complexes, so there is going to be less movement up. There weren't three and four -- there were very few times there three and 4% cap rates in industrial and that's one of the nice things about industrial. You don't get as big swings in it. The statistics that I've heard and read on, institutional capital coming into real estate, it's still going up. The pension funds are still committing additional dollars to the real estate markets so although there probably will be some continued increase in cap rates, the A properties and A locations, A markets, aren't going to have a whole lot of movement because there are still a tremendous number of dollars chasing them.

Okay, and then a separate question is -- I'm looking through your development summary. There are four projects under construction that slipped one to three months. Three of them slipped three months. Was that just kind of -- is that a factual result or is that an intentional slippage on your development?

Unintentional. So much of industrial building is just poured concrete that if there is a lot of rain, that puts us behind. That particularly happens in Houston. Also, we don't show it as complete until the landscaping is in and so that can also be delayed if we don't have a prospect that we're pushing to get into the space. We like to think we can build a building between five and six months and sometimes bigger buildings and bad weather cause that to move out to six or seven months.

Okay, and then just one other last qualitative kind of question to make sure I interpret it right is that is your reduction in projected development starts in 2008. That does reflect you just kind of pulling in your horns given the economic environment. Is that accurate?

Yes, and combined that we don't project doing any build-to-suits or pre-leased deals and a year ago, the markets were very strong and we were being leased -- we always project a 12 month lease up and we were getting leased up in three, four, five months and that allowed us to start subsequent buildings in a development a lot faster than we'd anticipated so last year I think we projected about $75 million in starts and ended up at 120. It wasn't us just being more aggressive. It was a reflection of how good the markets are and that really determines what we start, not some prearranged schedule.

Thank you.

And then Keith, your total capital spending budget this year?

On debt? How much debt we're going --?

No, total capital spending.

Acquisitions of properties we were projecting $40 million in the first half and $10 million in the second half and then on development, the 60 to $70 million.

Okay, thanks.

Thank you.

We'll take our next question from the site of Philip Martin with Cantor Fitzgerald. Go ahead please.

Yes, good morning all. Question on lease expirations in 2008, can you talk about pre-leasing there? I know you've said it's slowing but it's still good but can you talk about any pre-leasing work you have done so far?

At 12/31, we showed about -- well, it shows 15.28% maturing and that we're going to have to deal with. Six weeks into the year, we've reduced that to 13.5%.

Okay, okay, and I know that leasing has slowed but given the fact that there's less construction and you have relatively high occupancies, is this giving you some pricing power in your markets?

As you can see from our fourth quarter results, we continue to be successful in raising rents. I would say historically what happens is as a market slows is rents are one of the last things to come down. You start with a little bit of free rent which we're seeing in just about all our markets, just a little bit. Then you start giving bonus commissions, especially on spaces that have been vacant for an extended period. You start giving a little bit higher TI allowances. We're not seeing that yet. And then finally, you start to cut rent and we're obviously not seeing that either so I think as the markets all end up in some form of equilibrium, we'll probably see, and we project, slightly lower rental increases in '08 than '07. It's still up.

So they're still up and given your, what seems to be a good sense of your individual markets, what has to happen in your opinion for rents to be cut here? Are we even close to that in your markets?

That's the big question. The way I described it, we were at a very high level of activity where the markets were great. It was pretty easy to lease space with the quality of properties that we have and their good locations. We've gone from great to good and we seem to have been at good for three or four months and the question is do we stay there or does it turn back down and we go into a full blown recession like we were in, in 2001, where there were just very few prospects out there? And that's when you start cutting rents.

Okay.

If I knew the answer to that question --

I know it's a difficult one but it sounds, and I don't want to put words in your mouth, but it sounds generally speaking that the markets are healthy at this point. Certainly that could turn if the economic slowdown is worse than we think but right now they appear pretty healthy and leasing activity is still good.

In terms of your FFO guidance for 2008, can you talk about some of the assumptions that went into that?

I think those are -- Keith can talk specifically about them but we give some I think good ranges in that January press release.

We gave average occupancy of 93.5% to 95.5%, same property NOI increase from zero to 2.5 and we did not break it down between occupancy and rental increases, just the same property NOI.

Is it -- are there any land sales in there or anything like that?

No.

No.

Okay, and there's no acquisitions?

Well, we projected the $40 million in the first half of '08 which we've already -- that's the Charlotte announcement -- and an additional $10 million in the second half which we don't have right now. We just think we'll pick up something else.

Okay, but other than that there's nothing other than the $50 million in there roughly?

That's correct.

Okay, I just wanted to double check that. Okay, that is all I have. Thank you very much.

Thank you.

We'll take our next question from the site of Paul Adornato with BMO Capital Markets. Your line is open.

Hi, good morning guys. I was wondering if you could comment on construction costs -- materials and labor -- and also land values.

The bad news is that we're starting again to see increases, announced increases, in the cost of steel and concrete which somewhat seems counterintuitive with the residential market slowing but both of those prices are going up. Anything related to petroleum like the roof products or PVC pipe is fairly stable. In some areas, labor appears to be down a bit. There are more subcontractors looking for work so they're doing more of calling us rather than us calling them but we are just recently seeing announcements for higher concrete and steel prices. I think in Houston, concrete is going up April 1 another $4.00 a cubic yard, something like that.

And land values?

That's awfully hard to tell. Most people with land are usually asking a fat price and they'd rather sell it for some use other than industrial because they can get more money for it. We are seeing a little bit more flexibility I guess in land sellers but we're generally building on in-fill sites, close in sites so that we're not benefiting from somebody with residential land looking to get out in a hurry and allowing us to convert it to industrial because of our in-fill construction. But if you're out on the fringe of development, yes, the land prices appear to have come down there.

Okay, thank you.

We'll take our next question from the site of Chris Lucas with Robert Baird. Your line is open.

Good morning guys.

Morning.

Just a couple of quick macro questions. David, are you guys seeing any change in the flow of properties available for acquisition at this point?

I would say it's a -- historically, January and February seem to be a slower time of the year. I think a lot of sellers decide in January and February what they want to sell for the year, then pick a listing agent and so it usually picks up in March and April. I think also, and I just hear and I don't know this for a fact, that there are a number of sellers who are worried about the difficulty in a buyer finding financing, so they're putting their sale on hold until the financial markets shake out a bit but I think maybe when we're on our first quarter conference call we'll be able to give you a better answer to see if it has picked up like it historically does or whether the sellers seem just to stay on the sidelines.

Okay and then can just help me understand what the cap rates are for your type of product, kind of broadly in your markets?

Every one is so different and there have been so few transactions over the last 60 days that I've heard about a cap rate, I can't be real specific. I have talked to a number of brokers and what I've been told is in the southeast anyway, that for your A-type properties, core properties as pension fund people refer to them, cap rates have come up zero to 25 basis points and for B properties, they're up 50 to 100 plus basis points and if you've got a not so good property in a tertiary location, you're going to have difficulty selling it today because of the financing on it. But cap rates still seem to be, for good industrial, pretty sticky.

Okay great, thank you.

We have a follow up question from Mitch Germain with Banc of America Securities. Your line is open.

Yes, can you just remind me quickly, we've got a pretty broad range in your occupancy assumption and your end of the year toward the top of it. Kind of directionally, what should we assume for the year or is the larger cushion just really more of a safety net?

It's more of a safety net. I mean, if every one of the assumptions hit the good end of it, we'd blow the roof off in earnings or if they all hit the bottom of it, of our assumption ranges, we'd have some really low occupancy and low FFO so there's a lot of give and take in there. Overall, we would expect that we would operate at an occupancy level somewhat below what we were able to achieve in '07 simply because of the economy.

Great, thanks.

Thank you.

We appear to have no further questions at this time.

In thanks to everybody for their interest in EastGroup and as always, if we've missed something or not fully answered a question, don't hesitate to call Keith or me later today. Thank you.

This concludes today's teleconference. Thank you for your participation and you can disconnect at any time.