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Edited Transcript of EGP earnings conference call or presentation 23-Apr-19 3:00pm GMT

Q1 2019 Eastgroup Properties Inc Earnings Call

Jackson Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Eastgroup Properties Inc earnings conference call or presentation Tuesday, April 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent W. Wood

EastGroup Properties, Inc. - Executive VP, CFO & Treasurer

* Keena Frazier

* Marshall A. Loeb

EastGroup Properties, Inc. - President, CEO & Director

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Eric Joel Frankel

Green Street Advisors, LLC, Research Division - Senior Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* Jason Daniel Green

Evercore ISI Institutional Equities, Research Division - Analyst

* Jill Ryann Sawyer

Citigroup Inc, Research Division - Senior Associate

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Richard Anderson

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the EastGroup Properties First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this call may be recorded.

It is now my pleasure to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [2]

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Thank you. Good morning and thanks for calling in for our first quarter 2019 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. And since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

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Keena Frazier, [3]

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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's subject to the safe harbor statement included in the news release is accurate only as of the date of this call. The company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which can be found on the company's website at www.eastgroup.net.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [4]

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Thanks, Keena. Our team performed well this quarter, starting the year off with a strong tone. Some of the positive trends we saw were funds from operations coming in above guidance, achieving a 5.3% increase compared to first quarter last year. This marks 24 consecutive quarters of higher FFO per share as compared to the prior year quarter. Based on the quarter and the market strength, we further raised our annual FFO guidance by $0.05 a share. The vitality of the industrial market is further demonstrated through a number of metrics such as another solid quarter of occupancy, strong same-store NOI results and positive releasing spreads. As the statistics bear out, the current operating environment is allowing us to steadily increase rents and create value through ground-up development and value-add acquisitions.

At quarter end, we were 97.7% leased and 96.9% occupied. This marks 23 consecutive quarters where occupancy has been roughly 95% or better, truly a long-term trend, and short demand continues growing for our in-fill location, small bay buildings. Several markets exceeded 98% leased, and Houston, our largest market, was over 97% leased. And while still our largest market, Houston has fallen from roughly 21% of NOI to slightly below 14% for 2019.

Supply and specifically shallow bay industrial supply remains in check in our markets. In this cycle, the supply is predominantly institutionally controlled, and as a result, deliveries remain disciplined. And as a byproduct of the institutional control, it's largely focused on big-box construction.

Our same-property NOI growth was 4.5% cash and 3.7% GAAP. We were also pleased with an average quarterly occupancy of 96.9%, up 60 basis points from first quarter 2018. Rent spreads continued their positive trend, rising 5.3% cash and 14.2% GAAP, respectively.

Further, the quarterly results were materially impacted by 125,000 square-foot Houston lease where the rents declined. Pulling that 1 lease out of our pool, our cash in GAAP numbers rise to 10.6% and 20.2%, respectively.

Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk-adjusted path to create value. We effectively managed development risk as the majority of our developments are additional phases within an existing park. The average investment for our shallow bay business distribution buildings is $12 million. And while our threshold is 150 basis point projected investment return premium over market cap rates, we've been averaging 200 to 300 basis point premiums.

At quarter end, the development pipeline projected return was 7.3% whereas we estimate an upper 4 as market cap rate. During the first quarter, we began construction on 5 buildings in 5 different cities totaling 650,000 square feet. While coming out of the pipeline, we transferred 300% leased projects, totaling 421,000 square feet into the portfolio with an average yield of 7.4%.

At quarter end, our development pipeline consisted of 19 projects and 10 cities, containing 2.5 million square feet with a projected cost of $230 million. For 2019, we're raising our projected starts to $160 million. And as color commentary, the $148 million in starts we had last year were a record, so we're excited to raise this year's forecast.

And as further color on our 2019 starts, we project starting over 70% of those by midyear. So as the year progresses, we'll continue to revisit projected starts.

And finally, our activity is spread over 9 different cities. This geographic diversity reduces risk while enhances -- while enhancing our ability to grow the development pipeline.

The first quarter was relatively quiet for acquisitions, but our pipeline was active. We're committed to acquire 3 separate off-market properties. We expect to close soon on a 2-building 142,000-square-foot new development at the DFW Airport, which is currently 19% leased for a total investment of $15 million.

Next, we have a 7-acre site in a Miramar area of San Diego under contract for $13 million, which will accommodate 125,000-square-foot building. And finally, we're reacquiring 2 buildings totaling 142,000 square feet in Phoenix. We sold the buildings to the Arizona Department of Transportation in 2016, but they were not torn down during freeway construction. And as a result, we'll reacquire the buildings for just over $9 million and invest an additional $2.6 million to redevelopment.

On the disposition side, we sold World Houston 5, a 51,000-square-foot building for $3.8 million in first quarter. Brent will now review a variety of financial topics included on our 2019 guidance.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [5]

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Good morning. We continue to experience positive results due to superior execution by our team in the field and the strong overall performance of our portfolio. FFO per share for the first quarter exceeded the upper end of our guidance range at $1.20 per share compared to first quarter of 2018 of $1.14, an increase of 5.3%. As noted in the earnings release, we reported FFO of $1.16 per share during the first quarter of 2018.

In connection with our adoption of the NAREIT funds from operations white paper titled 2018 Restatement, we now exclude gains and losses on sales of nonoperating real estate from FFO. For comparison purposes, we adjusted the prior year results to exclude the gain on a land sale and the gain on the sale of a partial interest in a private plane. As tradition for each group, we will continue our standard of reporting FFO as defined by NAREIT.

Our protracted strong performance both operationally and in share price have continued to allow us to strengthen our balance sheet. While this is demonstrated in metrics in the earnings release and supplemental information, what is less obvious and perhaps sometimes overlooked is the diversity in our revenue stream. Our 39.6 million-square-foot operating portfolio consists of an average tenant size of 28,000 square feet, and our average building size is 100,000 square feet. Accordingly, 58% of our rental revenue is sourced from tenants smaller than 50,000 square feet, and 84% of our rents are from tenants smaller than 100,000 square feet. We're benefiting from both our tenant and geographic diversity where we have a presence in 13 of the 15 fastest-growing metropolitan areas in the U.S., mitigating concentration risk for our shareholders.

Looking forward, FFO guidance for the second quarter of 2019 is estimated to be in the range of $1.17 to $1.21 per share and $4.84 to $4.94 for the year. Those midpoints represent an increase of 2.6% and 4.9% compared to the prior year restated, respectively, and an increase of $0.05 per share in the midpoint of our guidance for the year.

You may recall that in second quarter of 2018, we had a $1.2 million involuntary conversion gain that is included in FFO. Excluding that gain, the midpoint of second quarter FFO guidance represents a 5.3% increase over prior year.

Our first quarter results, combined with the leasing assumptions that comprised an updated guidance, produced an increase in both average occupancy for the year from 96.2% to 96.4% and an increase in cash same-property range of 30 basis points to 3.8% to 4.8%.

Other notable assumption guidance revisions include: increasing development starts by $19 million; increasing value-add property acquisitions by $55 million; increasing termination fee income by $315,000 due to known upcoming fees; and increasing our estimated common stock issuance by $85 million as the direct result of finding more opportunities to invest capital.

In summary, our financial metrics and operating results continue to be some of the best we have experienced, and we anticipate that momentum continuing throughout 2019.

Now Marshall will make some final comments.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [6]

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Thanks, Brent.

Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on the strength we're seeing, we continue investing in, upgrading and geographically diversifying our portfolio. As we pursue opportunities, we're also committed to maintaining a strong healthy balance sheet with improving metrics as demonstrated by the equity we raised the past few years. We view this combination of pursuing opportunities while continually improving our balance sheet as an effective strategy while -- to manage risk while capitalizing on the strong current operating environment. The mix of our team, our operating strategy and our markets has us optimistic about our future.

And we'll now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Jamie Feldman from BAML.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [2]

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So I was hoping you could talk a little bit more about the supply picture, and we have seen stats showing it is creeping in, in some markets. Just, I mean, can you just give more color around your building size and where you may be seeing some supply? And maybe what gives you some comfort that this can continue for some time where your product takes a little bit more protected than some of the others?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [3]

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Jamie, it's Marshall. Thanks, and good question. You'll see some large supply numbers especially in the major markets. At least in our markets, we'll see it in Dallas, Atlanta, certainly Inland Empire. And then really, what we do or have our teams do a good job of really digging into it, I'd say long term, if you said, what keeps you guys up at night, we would say finding in-fill -- good in-fill sites that are -- that we can get zoned industrial that we can develop into parks. So we know how hard it is to find land for that next park. I'll give our team credit that they keep -- seemed to keep coming up with the next site, but we struggle and the brokers we work with struggle.

A couple of stacks to throw at you that will kind of demonstrate it. And in Dallas, for example, there's -- and these are CBRE stats that I'm quoting. There's 22.7 million square feet under construction, but 10 buildings count for over 45% of that 22 million. So really, it gives you an idea of -- and our average building size is 100,000 square feet, what we developed may get up to 120,000, 130,000 square feet. So if you think of the depth of those buildings and our average tenant size being around 28,000, 30,000 feet, they just aren't configured that you could not divide even a 400,000- or 500,000-square-foot building to accommodate that. So I was surprised that only 10 buildings account for moving towards half of that supply in Dallas.

And then in Atlanta, for example, the market is 6% vacant, but shallow bay and -- I don't know CBRE's definition, it's probably a little bit larger than our average building, it's only 3.7%. So the vacancy rate drops pretty dramatically. And in Atlanta, there's 19.3 million square feet under construction. Last year, they absorbed a little over 18 million. So it's pretty much in parity even in the big-box, but there's 8 buildings that are over 900,000 square feet under construction. So both in Dallas and Atlanta and maybe those are extreme in terms of larger markets. And most of what's being delivered is big-box, and we seem to see that pattern whether we're in Denver, Dallas, Atlanta, Houston where our peers are -- it's nice for our smaller sites helps are so much larger. So for them, a Clarion, a Heitman, a AEW, whoever, to put the capital out they need to, they need to go to the edge of town and build a 600,000-foot building. And by design, our tenants can't make those spaces work if they can't get the loading doors if the buildings are too deep. If that -- hopefully, that answers your question.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [4]

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Okay. And yes, that's great. That's helpful. And then I guess for Brent, just sticking with or moving to the guidance. So you lowered your bad debt expense outlook by $100,000 and you increased your termination fees. Can you just talk about the moving pieces and then maybe also just address your credit watch list and anything we might need to think about here?

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [5]

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Sure, Jamie. On term fees, we did up guidance $315,000. That's primarily being driven by one known large second quarter termination fee of $525,000. It's a 50,000-square-foot space in Tampa. The company was closing their North American location. We negotiate what we felt was an attractive termination fee. It represented just in excess of 16 months of rent. We feel confident backfilling the space timely. So we felt like net-net would come out ahead. And so that was the primary single driver. It wasn't any kind of rush of people wanting out of their spaces per se, which is really driven by that one particular transaction. Bad debt, we continue to be very pleased. The first quarter is just $129,000, which was about $100,000 less that we had budgeted. Just looking at our AR for the -- the good news is just a potpourri of just miscellaneous here and there, pretty standard items. Last time, we reported Mattress Firm had affirmed the bulk of all their leases with us. They remained current. We've had no issue there. So bad debt, AR, term fees, all of that, it feels good. This early into the year, it feels good.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [6]

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Now I'll add to that. And Jamie, I'll give you and Josh credit. You had pulled a report together showing tenant concentration and happy to see our top 10 tenants have drifted down. We were 8.3% at the end of the year. We're 8.1% this quarter. So our largest customers -- some of them are in multiple locations, multiple buildings as I believe that because, per your reports, it's the lowest concentration within the industrial sector. And then even when I look to our top 10 tenants, there's a couple of things going on where I think that percentage is -- one, if the company grows and then specifically within those tenants where that number should keep drifting down the next 2 to 3 quarters.

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Operator [7]

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And our next question comes from Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [8]

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So just a few questions for you guys. On the guidance, Marshall, you guys on the fourth quarter call granted the year ended definitely at low point as far as the capital markets were concerned, but you guys still spoke about your portfolio being strong and tenant demand healthy, and yet pretty strong improvement in the guidance from the initial just a few months ago to now. So is this just that you guys were just too overly cautious when you laid out your initial numbers? Or has something really fundamentally changed in the portfolio operations that's led to this improvement? Because it doesn't sound like it's anything really onetime apart from that $0.01 of lease term. It sounds like it was just core operations driving it, which $0.05 jump this early in the year. Look, it bodes well for shareholders, but it seems pretty dramatic in just a few months' time.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [9]

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A fair question. And my answer is, which was it, it's almost a yes and then it was a little bit of both. And that we were pleasantly surprised. This was a record quarter for us and to average 96.9% occupied. Last year, we averaged our company-wide 96.1%. And typically, we would say a building is full at 95%. So our occupancy surprised us to the upside. I don't think we were overly -- we did see a little bit of a pause in the world within our tenants, not all of them, but a fair number, especially the larger the tenant, probably the more -- they hit the pause button. A little bit, it's hard to tell over the holidays, but a little bit, the world was pretty nervous in December and probably the first half of January, and that feels now like it was 2 years ago. The tenant demand has picked back up, and people seem to have kind of moving beyond that time with the government shutdown and trade wars and things like that. So I think it's our job, and we kid about being often paranoically optimistic. So we were worried about where things were going to head back in January and a little bit cautious, although things were still moving and then they have improved since then. So I don't like to think we weren't overly cautious based on what we heard. And really, in the economy, things go better than they did a couple of years ago based on everything we read and certainly even more so what we see on the ground.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [10]

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And Alex, this is Brent. I would just add to that, that you've mentioned moving that much earlier in the year, I would contend that moving early in the year by a fair amount is a little easier to do, and then we beat by $0.02, then we raised by an additional $0.03, which at this time of the year basically essentially comes out about a penny a quarter. As you get later in the year, obviously, it's harder to move that delta as much. And as Marshall said, the good news it's being -- and to your point, that's not really -- no onetime items. It's being driven by property net operating income. And especially I just want to point out from our development pipeline, not included in same store, all the developments that have rolled in since January 1 of '18, and those properties are contributing more and faster than we're guiding to quarterly. They continue to outperform, which we'll take that as long as it can happen.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [11]

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Okay. And then, Brent, that leads me to the second. Part of that $0.05 in total increase, you guys also increased your ATM activity for increased investments. So maybe if you can just provide a little bit more color on the acquisition yields. And then, two, given how quickly you're able to match whether it's chicken and the egg, whether it's better ATM, so hey, guys, go out and get more acquisitions or hey, we have acquisitions if we have better ATM, whichever. It sounds like between the acquisition front and the fact that Marshall, I think you said 70% of the starts are going to be by midyear. It sounds like investment activity in the back half of the year could ramp up even more, which I'm guessing would benefit on the earnings front given that you wouldn't do one without the other. So maybe you can just talk a little bit about the interplay between the cost of the ATM versus the cost in the accretion of the acquisitions.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [12]

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Yes, I'll start and then let Marshall talk more specific about the assets but I would -- it's clear to say that acquisitions are driving our capital. And being at 21%, I think we ended the quarter at debt-to-total market cap. We obviously have a very strong balance sheet, so we're not issuing in an effort to continue to lower that. And as we stated in the last call, we'd be a little more conscious of trying to line up ATM issuance with opportunity. And so opportunity will drive what we do or don't do on the ATM, but that's assuming that the prices there and we like it. But right now, we view it as readily available. So I'll let Marshall touch on it, but as long as each -- whether it's development value-add or an acquisition, as long as they stand on their own merit and make good what we feel like are good long-term sense, then we certainly are apt to do it.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [13]

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Thanks, Brent. And really, in terms of color, probably 2 buckets. We feel some visibility on the $50 million in acquisitions this year, although that's the most -- that's the hardest bucket to fill given the competition and everybody's got a checkbook, so we really aren't different from the other bidders, but feel comfortable -- more comfortable today on that front than we would have, say, 60, 90 days ago in our last call. And then the value-add, we like long term. They're probably -- or they are, they're better benefits for 2020 than 2019. And kind of just walking through them, the 2 interstate common buildings that we're buying back in Phoenix, we had a 4-building complex. We knew the Arizona DOT was going to acquire them, so we kind of stopped spending money for obviously a couple of years before they acquired them. It's been a couple of years since they've had them. So those will take a little bit to redevelop and re-lease. We like it long term, and we think we'll be just north of a 7 in terms once it's redeveloped. So a development type yield on a value-add there and DFW, they're brand-new buildings, 18%, 19% leased with good activity, but by the time we get the leases signed, the TI is done and the tenants in, and that's in the high 6s type yield. And then the San Diego land that we disclosed, it's -- what I like about it, it's right just east of San Diego of the 805 freeway, which -- in Miramar, so we're just north of Miramar naval air station. It's a former car lot, so it's really a better lot than we typically see for industrial land, and it's really a last mile location right on the other side of the 805 is La Jolla. So if you want to get products delivered quickly into La Jolla that -- we think it's a great site and I said the biggest problem is I wish it was a bigger site. We have a ground lease on it, so we'll get a return until we -- until they decided what -- when their release expires really and then we'll develop it. So if we like all 3 acquisitions, it'll just take a minute before we can really get them stabilized and in the portfolio. And so it's probably more 2020, but Brent will raise the capital for us to close this year.

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Operator [14]

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And our next question comes from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [15]

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Great. Hey just sort of curiosity questions. I'll

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off then could you address them. I noticed somewhere you bought a property with a 40-year ground lease, which seemed a little bit unusual. Can you talk about maybe some options you have on the background lease at the end of the 40th year? Second, in your in-fill development strategy, how often are you actually buying greenfield dirt versus second-generation development where an existing asset is being demolished? And then third, when you're leasing up your development, how much of the lease-up is basically moving existing tenants of yours into a new building, and how much is filling up those buildings with new non-EastGroup tenants?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [16]

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Thanks. I'll try to answer those and Brent can chime in. Tell me what I missed.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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That was just one question.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [18]

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On the ground lease, fair observation and good observation. And if you studied DFW, I think the number is 18,000 acres that, that airport has. And their typical lease is a 40-year ground lease. So that's -- there's all types of industrial. It's really a who's who in terms of national developers that are there on those ground leases as well as hotel, retail office. So the first -- we have, call it, 39 years left on our 40-year ground lease. Some of the older ones, they'll be precedent set well before we roll and go back into DFW to renew. So we looked at it in terms of pricing. Maybe walking you through the weeds. But if it were fee simple and it is right at the exit, just off one of the tarmacs at DFW, it's probably a 4 3/4 yield in the market. And then in talking to some of the brokers probably 50 basis point premium to get -- go from fee simple to a ground lease, so that's probably around 5 1/4. And as we underwrote market rents and carry and things like that, we're 6.5 to 7 type yield. So we feel like we're getting paid for the premium of the ground lease there. And it really ties into your second question, most of what we're looking at, as I mentioned earlier, we struggle to find good sites. We'd rather it be fee simple, but there's simply nothing left at the airport. And in talking to our guys, the good problem they had, they have 1 vacancy in our Dallas portfolio, I mean tenants that wanted to expand. So buying these buildings at DFW, we prefer them to be fee simple, but we'd like this location especially given the prominence of DFW Airport over the next 40 years and how that continues to grow.

Most of what we do build is still greenfield, but all of it seems to have a story where we're relocating someone or -- like Churchill Downs, it was semi-green, we tore the stables down in Miami and we do things -- we're looking at a site in Texas that a church would relocate off of or here, a ground lease. They all -- we kind of apologized to our Investment Committee. We promise we're not trying to make things complicated, but in-fill sites get harder and harder to find, and we'll certainly do more and more redevelopment.

And then what's nice about having the parks, where I'll probably call it moving towards 50% of our development leasing, is we have someone in -- I'll pick Charlotte and Steele Creek III and they need more space, so they'll either do a renewal, early renewal and expansion in Steele Creek IX or they'll -- or we'll relocate them if they really want to be in one location into the new building. So that's part of our pitch in the market to tenants.

If you're in World Houston or Steele Creek or Kyrene, we can accommodate your growth, and every tenant usually probably overestimates. Most people are optimist of how much they're going to grow, but we like that ability when it's midterm of someone's lease because then they can't move down the street, that we can accommodate your growth and fill up our parks. So it's probably approaching half of our development leasing is the economy's good and tenants are expanding. And then the good news about a good economy, the spaces we're getting back are typically below market. They'll be vacant a little bit, but typically they're -- the leases are a couple or 3 years old, and so those are below market, so we get an early add-back to go backfill those spaces as well.

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Operator [19]

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And our next question comes from Ki Bin Kim with Suntrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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Your tenant retention ratio dropped a little bit this quarter? I mean it's just 1 quarter in a past long history of really high retention, but anything noteworthy there?

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [21]

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This is Brent. We had -- yes, Ki, we had a tenant in California, one of our larger tenants that sublet 135,000 square feet to 3 tenants. Their lease still runs for a number of years. And basically, those subtenants we signed leases with them to then lease behind that tenant out into the future and just trying to stick to the way we've quote, "always done things", we thought the fairest way to treat that, we basically treated that square footage during the quarter as a "nonrenewal", which technically it won't be at that point. It will not be renewable. We've leased the space behind that. So I would definitely call the quarter a little bit that skewed -- the retention percentage, but again just in being comparison-friendly to how we've handled that type of situation in the past, we treated it the same. So I think you'll definitely see that click back upward in absence of not having another anomaly like that.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

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And is there any, maybe besides this quarter, any kind of discernible trends on why tenants choose not to renew?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [23]

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Usually, if we can't renew them, they -- I think the biggest problem that we run into in some cases is we don't have the space for them and they're growing. I would think that. Typically, we average over time around 70% -- or a little over 70% is kind of our historical average. But in Tampa, where we had the termination, it was a European company and their business model just did not work in the U.S. So they closed or a bankruptcy or probably what we see more and more is they're growing and we try to have that next development ready. But if we don't have the space, that's probably where we lose -- that's probably our biggest reason right now is not able to accommodate growth. But that said, I still think by the end of the year, we'll average 70% or low 70s tenant retention.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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Both on the high-class problems.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [25]

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Knock on wood, I hope so.

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Operator [26]

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And our next question comes from Manny Korchman with Citi.

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Jill Ryann Sawyer, Citigroup Inc, Research Division - Senior Associate [27]

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It's Jill Sawyer here with Manny. Marshall, getting to your earlier comments on oversupply in the Atlanta market and also with the same-store results in the quarter, any perceptions of that market or desire to grow in that market changed?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [28]

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In Atlanta, Jill? I'm sorry, is that what you're thinking about?

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Jill Ryann Sawyer, Citigroup Inc, Research Division - Senior Associate [29]

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Yes, Atlanta.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [30]

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Now we -- okay. Yes, we like Atlanta, and we'd like to grow there. We're just adding -- in the last week, I've hired someone kind of at the vice president level. It's a backfill of a spot, but they'll be based in Atlanta. And John Coleman, our regional, moved to Atlanta. So we like the market a lot. With our product type being under 4% vacant -- as I mentioned, there's over -- I guess if it helps, 19 million square feet under construction, but absorption last year was over 18 million square feet. So the market is -- Dallas and Atlanta are a little bit and that -- if you'll read the supply and it kind of takes your breath away, but then you look at the absorption over the last few years and what's being delivered keeps getting absorbed, and thankfully, where the numbers get a little bit shocking, it is because of those 600,000-square-foot buildings and up that most of our peers gravitate to. So we're pursuing growth but trying to be disciplined in Atlanta. And we just came in second unfortunately on the building in the last week trying to acquire it. So we'll kind of picking our battles and try to stay disciplined, but we like the market long term, and it's right in our backyard and kind of identified that, call it, 10:00 to 2:00 on the map. Right now, we're kind of 12 to 2, what they call the golden triangle of Atlanta seems to be a good fit for our type building and our -- where the path of growth is also in Atlanta up north in terms of residential -- higher end residential. So hopefully that's helpful.

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Jill Ryann Sawyer, Citigroup Inc, Research Division - Senior Associate [31]

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Okay. Great. And any interest in looking at bigger acquisitions or maybe bigger portfolios just given where your stock price is trading?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [32]

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We look at those. And yes, interest, the bigger the -- usually we'll kid the bigger the portfolio and the better the sales package, the more intense the competition is. And it just gets priced to perfection, really, where we would -- our acquisitions will look maybe 2 to 4 years in the future and not a 10-year arduous run like a lot of our peers. And that typically no one underwrites a downturn in years, 5 through 7 type thing. So we try not to go too far out there and assume too much in terms of rent growth. And maybe as a result of that, it makes it awfully hard. We like them. We certainly picked up the value-add acquisitions this quarter. We like those as almost a shadow development pipeline in terms of getting a good attractive return and managing the risk for our shareholders. And we feel more comfortable on our acquisition assumptions. So we'll stay at it. It's just -- it's hard in Atlanta. There was a package we looked at in the last year, and we were 1 of 24, 25 bids in the initial round, and it's just hard to -- if you're the winner of it, I'm not -- it's hard to believe you're the winner of it almost. Time will tell, it will take a few years on just how competitive the wall of global capital for industrial as the brokers talk about is real and we lose a lot of bids each month on those. But we'll keep trying, and I hope we can surprise you with one at some point.

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Operator [33]

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And our next question comes from Craig Mailman with KeyBanc Capital.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [34]

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Marshall, just maybe a follow-up on your competition talk. You guys -- it sounds like the yields on some of these value-add places pretty close to development without the construction risk. Can you just kind of talk about what the competition was for these and how you source them?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [35]

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Each of -- now good question. And each of these was off market. And in no particular order, in Dallas, our guys there called on the developer. It's a local regional developer and kind of developed a relationship, and I think it was going on a year before he agreed to sell that. And then again, I think we like the yield there. We need to get it leased, but we had good activity. So far, Interstate Commons in Phoenix was an anomaly a little bit, and that we had sold the buildings to ADOT and had a right to repurchase if they didn't tear them down. And now the freeway work is done so our visibility and access is even better. And thankfully, they didn't tear our buildings down in the process. So there, we had a right to repurchase at appraised value. So again, off market there. And then the Miramar land, it's a little bit the same. It's a 20-year relationship that we've had with a group out of Southern California based in L.A. And they had tied up this land thinking it was friends-and-family deal and we cajoled them a little bit and letting us participate in it and doing a 95-5 JV. So we're excited about the site, and it's turning over a lot of stones to maybe find a small deal here or there. But hopefully, they add up over the course of the year for us.

So when it goes to market, we'll bid on it, but it's awfully hard to be the winning bidder in that case. And it's really driving around in a car with a broker and they'll say, if you logged in an offer on this, this seller may be willing to sell. And that's -- all of them are long shots, but that's almost a better path to buy things for us or find value-adds than to wait and get the e-mail blast that everybody gets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [36]

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That's helpful. And unlike the DFW deal, it sounds like the developers got sort of a construction fee. I mean is there anything on the back end that they try to negotiate with you?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [37]

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Yes. No, no thankfully, not on that. It was -- they were -- and on those, a lot of times, and I don't know in this case, I know who the developer is, but I don't know how his financing is arranged. Usually, they've got a financial partner, and we'll get you into your IRR promote and you can go down the road and build your next building, which is really what they typically want to do. And so they'll make some money and take some chips off the table and he'll probably move on to his next development, but no promote down the road for him. And he was doing the leasing in-house, which is good for him but we like having a third-party broker that's really fully focused on leasing. And so we think hopefully we can pick up some leasing velocity by stepping in. He did a nice job finding the site and designing the buildings, and hopefully we'll take the back half of it from here.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [38]

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That's helpful. And then just separately, you guys have a little bit of a different product mix than some of your peers have. I'm just curious, how the -- we all know demand is good, but you guys have had sort of a presence in some of your legacy EastGroup markets for a long time. I mean how have your guys in the ground seen the demand composition change? Has there been a change? Or is it sort of evolving as e-commerce and how those types of tenants evolved?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [39]

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We would say -- and Brent chime in. It's -- our traditional tenants are still there. And typically, almost all of them -- it's about 1,500, 1,600 tenants doing well and kind of if you almost call it old economy, the floor supply guy, the granite tile, the HVAC contractor, different industries like that, all want to be closer to their customer and they typically are doing well. And as that evolves, also in our legacy market, the traffic gets worse in Tampa and in Dallas and in Houston. So we'll see them like in Dallas. That's what we like about Fort Worth is you may need Goodman HVAC who is a tenant in Dallas also needed a facility in Fort Worth because it's -- you could spend all day in traffic. And when your air conditioner is out in Dallas in July, you want someone there immediately. So we see a little bit of that evolution. And then each quarter, there's more and more e-commerce tenants. So people change their model like Lowes is a tenant we've worked with recently. The retailer where no one drives home with a washer or dryer or refrigerator, but they've leased space with us -- a couple of spaces from us as they roll out their strategy. So you buy it in the store or buy it online and it gets delivered from an EastGroup facility, and that's been a new change. So some e-commerce, some just people closing physical brick-and-mortar and we're lower rents. But if it's lower rents and close to the consumer, we can be that last touch and get it to your house fairly quickly.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [40]

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Yes. And the only thing I would add to that, Craig, is a lot of times, I think it is -- a lot of it is dictated on tenant psychology. And I think across the board and all our markets, the tenant psychology, how they feel about their business and overall economy is good. And so anytime you have that kind of underlying the current is a positive. And then also, I think we have enough depth and activity in most of our markets where there's competition for spaces. You can always equate this a lot to residential because people relate to that better. But if you're looking at a home and there's very little activity, you don't feel that pressure to get that offer out very quickly. But if you're looking at residential market where it goes on market and if don't put the offer in, in 24 hours, it's going to be gone. So there is that sense of urgency, which are all signs of a landlord market but there is that bit more sense of urgency in our markets, too, which when all that adds up, and like Marshall said with a varying type tenants that are out there, it's all stacking up to just be solid deep activity.

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Operator [41]

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And our next question comes from Jason Green with Evercore.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [42]

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Given a good portion of the guidance increase is due to better-than-expected impact from development, is there any additional upside to that development impact for fiscal year '19? Or is everything more or less baked into guidance at this point?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [43]

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I hope. I guess I'll preface it by saying I'm an optimist, but we did move it this quarter by -- call it, the $19 million and 70%, a little north of that or starts in the first half of the year. So we have our development starts. And really our leasing -- what I love about our model is rather than incorporate, we decide, hey we are going to go and build an 800,000-foot building south of Atlanta or on the southwest side of Phoenix, it's really almost like a retail store where they're out of inventory and we deliver the next building to put on the shelves. So we keep a shadow development pipeline, and that's still a pretty good material size out there. So they're -- I'm hopeful there could be upside to our $160 million. Although I'm also -- talking to the guys in the field appreciative that $160 million would be a record this year in terms of starts for us. So we used to say $100 million in starts and have worked our way up to $140 million and $160 million. And so our -- we'll push it as much as the market allows us to. And Brent and the team had done a nice job of deleveraging the balance sheet, which I like having a more -- as we stretch on some operational risk and a good market, let's also keep our balance sheet almost as a hedge safer and safer. So with luck, I'd love to bump to 160 up another -- one of these quarters and have that news for you and that will really depend on what our tenants want to do.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [44]

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And I would just add to that, Jason. We are a little more back-end weighted in the year with our FFO grows especially the third and fourth quarters, and that is being driven pretty heavily by what we're factoring in for developments and value-add. When I say developments and value-add, I'm talking about properties that had been added into the portfolio since 1/1/18, in other words, they're same store property so outside of same-store increase. So we have a fair factor in first quarter. I think we had about $3.3 million of property net operating income from that development pot, and we're looking by fourth quarter of that growing to $5.7 million. So it is playing a large and significant role, and we're counting on it, continuing to push through the rest of the year.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [45]

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All right. And then maybe we could just touch on development costs and how those are impacting your yields and how development costs have been trending over the last 12 months.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [46]

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Yes, good question. We think rents will keep following, and I guess as an aside, and it's easy to say if we pull the one lease out in Houston, we would've had record GAAP releasing spreads at over 20%. So you're seeing a tight market and construction cost, rising construction cost, push rents we feel like. But concrete prices, steel prices have gone up. And then underlying all that, it's a good economy. So all of the GCs and all of the subs are busy, and we've even heard stories of competition at one of our sites trying to hire the workers away during construction, just the labor shortage is also pushing rents up. So it's probably moved, our yields are 7.3%, 7.4%. I think what we're doing from memory, what we rolled into the portfolio was a 7.4%, what's in the portfolio is a 7.3%. Miami is a little bit lower yield but lower cap rate, so it should come down, but those probably would have been about 7.5% 2 years ago. It's just construction prices continue to creep up in a good economy. So that's certainly something we watch and talk about a fair amount.

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Operator [47]

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And our next question comes from Bill Crow with Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [48]

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Marshall, I'm just curious with your in-fill portfolio, are you seeing increased demand from grocers? I mean that's -- one of your retailer seems to be growing. And what is your thought about getting into, at least partially if not fully, refrigerated space on new developments?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [49]

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Good question, and we've read about that, and that certainly seems to be the trend where things are going. And I know there's even a cold storage REIT that's gone public, what, in the last year, a year and change. We -- and Brent, chime in because he's had direct experience with it. We like keeping our buildings fairly generic. But when you get to that freezer/cooler space, sometimes you can have issues. One, the equipment gets dated fairly quickly and then sometimes, two, it can damage the slab and some issues like that. So we -- and some of the tenants are also start-ups. So we steered away from a start-up in the Bay Area just because the TIs were heavy. It was an online grocery delivery and just thought in a tight market, we had better options. And we could -- thinking about if something happened in the next tenant down the road. So we may be missing it, and it seems to be a growing area, but we really have that pursued it or focused on it because I like having about $0.40 per square foot per year of TI when our tenants move out. It's what our average is. Brent, you've lived with it. You had a bad experience or two on that.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [50]

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Bill, it's -- the challenge with freezer/cooler space as Marshall said, ideally you know the front end going into it, that's what you're building for because there are design specific things you would do to protect your slab, protect your sub slab, meaning the dirt underneath the concrete to keep it from not freezing and then unfreezing and then structural issues. So there would be some commitment of TI or building-specific improvement that you would ideally want to do on the front end. And then your very small percentage chance for us that we would lease to an actual grocer then you sought that money into the building and it doesn't actually get utilized. So in a build-to-suit situation, we would definitely be a little deeper. And you'd want plenty in terms but then you can design it more specifically. But on a "day in, day out" basis, it's just not something prevalent enough that we've seen to warrant changing and taking on that additional capital risk on the front end.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [51]

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So within your markets, you're not seeing Publix or Kroger clamoring to get direct-to-consumer space or anything like that?

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [52]

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Delivery from the store where you buy it, click it online, pull up, then they bring it out and pick it up, certainly that. But we've not seen a lot of grocers yet out in the market, and it's something that's been trying for a long, long time. We signed a lease with a group called GroceryWorks.com back in like 2000, about 18 years ago, and that didn't work at that time. And here we are 18 years later and still people are trying to figure out how to make groceries online work. So it will get there in some of the heavy metropolitan areas, really densely populated, but I don't see that in the near term being a big catalyst in industrial lease up, not traditional space.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [53]

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I guess I've seen Walmart out looking. And again, if you could do dry goods, we certainly would. But I wouldn't say -- good question. I've read more about it than we've seen it in terms of people clamoring whether -- as you said Publix, Kroger, H-E-B in Texas, people like that just haven't seen it.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [54]

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And one last one for me, and this may be premature, but certainly there's talk in California about the Prop 13 changes. Have you done a preliminary assessment of what that might mean to you?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [55]

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Thankfully we've owned some buildings for a fair amount of time in California. So we would have some tax jobs. Everything -- almost all of our lease, knock on wood, not a 100%, but high 90% are going to be triple net. So we could pass it through, and all of our peers would have it, I guess, depending on how recently they acquired their building, it could hinder rental rate growth in California. In short term, it would have minimal effect but -- because we've passed it through to our tenants and it would be an impact on them. It would be when those leases roll our ability to push those rents to market, that everything's, knock on wood, generally well below market in California, if it's just a few years old and some of that may end up being CAM rather than rent, which what would happen under Prop 13. So we're watching it and have read about it, and then just know there will be -- I can't imagine, Irvine Company, Watson Land, Carson Land, there will be some huge players that get involved in the lobbying for this. It would be pretty heavily impacted, I would imagine, how this plays out.

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Operator [56]

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And our next question comes from Eric Frankel with Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [57]

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Can we just talk about Houston? And I think lease roll down. I see fundamentals in the market are better there, but there seems to be a fair amount of supply in the market. I'm just wondering if that lease roll was an anomaly?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [58]

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I would call it -- good -- fair question, good one, an anomaly in the sense that it was a single -- I guess what rolled in Houston, what kind of the details of it, it was a single tenant pre-lease/build-to-suit, 125,000 foot leased up at World Houston. And that tenant, it was about 3/4 office within the 125,000 feet. And a fair amount of that was 50-50 mezzanine office. So second story office, and that tenant also had a 3PL. They were able to use an outside yard storage, so they consolidated, moved out during the downturn. We sat on the space for a couple of years with it vacant, and then decided this is a little bit of a unique animal. And we had a similar situation in Phoenix a couple of years ago where you end up with a building, tie it to freezer/cooler. When a tenant -- when a building becomes pretty specific for a tenant's use, it makes it harder to re-lease it. So after a 10-year lease with annual bumps, and it sat there vacant, we decided to stretch and just make the deal we could. So without that, again, our GAAP numbers would have been, as a company, just over 20%. And even in Houston, our GAAP re-leasing spreads would have been 19%. So we can't pick and choose our metrics, obviously, and we're not doing that. But if it helps you, out of 84 of the 85 leases we signed this quarter, all looked -- you kind of nod your head and nod along here, we had a pretty tenant-specific building that rolled -- sat vacant for a while and we finally just said, all right, I know my fingerprints are on the gun whether we should have done it or not. Hey, let's just take the tenant in hand and -- partially guilty to Brent's given me a look, if my fingerprints are on it. Let's do this deal and move on and Brent's only defense has been, hey, I wasn't there to do the renewal as well I would've gotten a better rate, which was the original deal. Any color, Brent, or it got covered?

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [59]

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Yes, I think that covers it. I think the bigger point is that the 19% GAAP is what would have been absent that one lease. And talking to guys in the field, we don't anticipate -- we do think that's a one-off situation, not a -- we've got 4 more of these coming over in the next couple of quarters. So fully expect that to jump off back up. I would just point out, too, that Texas -- that pulled Texas down in just -- again without that one lease, we'd go from 3% to 16% as a GAAP increase, which is really where we've been as a run rate as a company for the past when we were there '17, '18. And really minus that lease, we're slightly better than that first quarter '19.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [60]

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A couple -- I'll throw back a couple of other just kind of Houston stats. I was glancing at it. The overall market is 5.4% vacant, and the north market where our World Houston park is 6.2% at the end of first quarter, which is the lowest it's been since 2012. So we were encouraged by that. And then Houston is a little bit of an anomaly market for us as well. And that rents in the north market are pretty much back to peak. And usually, when we say that, people would refer to the downturn, but in north Houston, that actually is they're back to where they were in 2015. So as Brent said, and we think this was an anomaly and it's glad to see the market recover back to where we were in 2015. So that was a more -- much more recent downturn than the balance of our markets.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [61]

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Okay. Appreciate the additional color. Just a follow-up question on external growth and acquisitions and asset pricing. I think you've alluded to a pretty competitive environment, but maybe you could quantify where you think stabilized cap rates have trended for some of the markets you're targeting or there are -- our cap rates down 10, 20, 30 basis points than, say, 6 months ago?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [62]

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Yes, they -- I would say broad brush kind of the major markets is kind of what we hear and see, L.A., Dallas, Atlanta, maybe Miami, they're high 3s, maybe the 4, and you can get prices per square foot that are pushing $150, $200 per square foot land, approaching $60 a square foot in L.A., which is -- and then San Diego in the 40s. Or we've seen a $70 per square foot land comp in San Diego, and these are all industrial sites.

And then what we've heard, again, one I'll quote, CBRE. They said they've been predicting cap rates would compress in the secondary markets, meaning Charlotte, Denver, Phoenix, Tampa, those type of markets. And last year, they did compress there. So now you're in the 5 to 5.5 in most of those markets, and it is a long laundry list of international capital that we've seen coming into U.S. industrial. We've been the favorite asset class. We met with -- Brent and I met with HFF recently, and their comment was there's a bid-ask spread in about every product type right now that there's more dry powder on the sidelines than they've ever -- kind of as they measured or kept track of, and there's a bid-ask spread and all product types but for industrial, and if there's such demand, it's the most efficient product when they bring properties to market.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [63]

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That's interesting. And just one quick follow-up question. It's related to, I guess, the grocery question you -- that was mentioned earlier. Is -- are tenants investing at all more in sort of equipment handling budgets just to move product more quickly through your facilities, so more robotics, are there more just general automation that's occurring in some of the new leases that have been signed?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [64]

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I would say generally, yes. Usually, the larger the tenant, and probably the better capitalized the company, certainly, like we have FedEx in a number of locations, they're cutting edge on that. And tenants do, do that -- certainly, all of them are doing it a little more. It's just a matter of what their product is and how fast and what their balance sheet looks like. But we think with the labor shortage, I think it will keep trending that way, and they'll get more efficient and how they're moving product through the warehouse and probably -- and again, we think we're early on smaller spaces closer to consumers so they can get that quick delivery.

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Operator [65]

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And our next question comes from Rich Anderson with SMBC Nikko.

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Richard Anderson, [66]

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Brent, did you mention the rise in the G&A guidance from a couple of months ago in your prepared remarks? I don't think I heard it. But if you didn't, I'd love to know what the nature of it is.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [67]

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Yes. Rich, good to speak with you. Good to hear you. Yes, G&A was up a bit, and a little bit of it is comped and restricted stock oriented, but there is some component of it that relates to a South Florida lawsuit that we've been involved with, but that was discussed in the notes to the 10-K. It will be discussed very summarily in the 10-Q. They'll be out in the next day or 2. We incurred, I think, $320,000 of that cost related to defending ourselves from that suit, which we feel is without merit, but yet you have to defend yourselves. And then we have some cost down into the year to deal with that. So there are a few moving pieces up and down, but I would say that was the new piece that primarily drove the increase that you see there in the guidance.

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Richard Anderson, [68]

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Okay. Good enough. And then for Marshall, anyone, I'd like to sort of ask a question about risk management. There's nothing wrong with your balance sheet, of course, but you're increasing your development spend. You're going after value-add acquisitions and given the demand that's out there for your product, but what are you looking for to not go forward, but just take a step backwards? You're getting 200 to 300 basis point premium spreads versus acquisition and development. If that number starts trending down, is that sort of a foreshadow that maybe we've got to take our foot off the accelerator? Or is it maybe the spread between lease and occupancy, which is only 80 basis points now? What are some of the things that you're looking for to manage, not this year, but 2 or 3 years from now?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [69]

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A fair question. And usually, we'll target -- our kind of our internal rule of thumb is 150 basis point premium kind of we do a development over market cap rates. And again, thankfully, we've been north of that. And then typically, when we do our underwriting, we'll use the yields we project on current market rents, so we won't put an inflation factor on rents, albeit we've benefited from those over the past few years. So if that number gets closer to 150, we certainly would take our foot off the accelerator or alike as our model where I compared us to retail earlier. If we're delivering buildings and they're not leasing up and during the downturn in Houston, we were able to stop -- we stopped development. I'll give our model credit for working. And same time in Phoenix, we -- a couple of years ago, we had vacancy and some fairly -- within our portfolio and then some new developments. And we really stopped development and really stopped looking at acquisitions until we kind of caught up and digested what was on our plate. We've done a little bit. We're about there in Atlanta. But even more recently, we have added some value-add product in Atlanta, had vacancy. And so we had -- there, we've said, all right, let's kind of finish and catch up to what our own internal supply is in that market before we really pursue new acquisitions or new land sites. So we try to almost market by market and if what's on the shelves isn't moving, we won't add to the shelves there. And unless it's a compelling reason and if we've developed vacancy, I don't want to go to our Investment Committee and say the fourth -- third or fourth vacant building's a charm, let us build another one. We'll really get our first buildings leased up and then go back to committee.

But when things are good, we'll -- I kind of view it if we can build those yields, we'll try to make hay while the sun shines where it's been the last couple of years and keep a safe balance sheet because when things do slow down, they may slow down quickly. So I like it we're trying to be more geographically diversified in case it slows down in one market and not in other, and then just kind of watch each development.

Knock on wood, our last 16 developments that we've started and we'll miss 1 or 2 here probably coming up. But if all rolled into the portfolio, we'll roll them in the earlier when they get 90% leased for 1 year past completion, but our last 16 have all rolled in at 100%, which -- that's an anomaly. But that to me feels like, okay, the market's telling you to kind of keep doing that and keep creating that value for our shareholder until you see it start to split up, and then we'll play defense again.

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Richard Anderson, [70]

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All right. Fair enough. And just one comment. I mean if you're making churches move to accommodate your industrial buildings, I'd just -- perhaps not walking outside during a lightning storm. And that's all I have.

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Operator [71]

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And it does appear that there are no further questions over the phone at this time.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [72]

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Thank you. Thanks, everyone, for your time. Appreciate your interest in EastGroup, and we're certainly available for any follow-up questions you may have. Take care.

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Operator [73]

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This does conclude today's program. Thank you for your participation. You may disconnect at any time.