Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Funds from operations (FFO) rose by 8.5%, demonstrating strong financial performance.
- Quarterly leasing was at 97.4%, with occupancy at 97.1%, indicating high demand for properties.
- Cash same-store NOI increased by 5.3% for the quarter and 6.5% year-to-date, showing solid growth.
- The company has a diversified rent roll, with the top 10 tenants accounting for only 7.8% of rents.
- EastGroup Properties Inc (EGP, Financial) entered the Raleigh market, expanding its geographic footprint.
Negative Points
- Average quarterly occupancy, although strong, is down from the second quarter of 2023.
- The company noted that decision-making by prospects is still deliberate, indicating potential delays in leasing.
- Debt maturities are approaching, with $50 million in August and $120 million in mid-December.
- The industrial market is experiencing a decline in new starts, which could impact future growth opportunities.
- Bad debts are running ahead of expectations, indicating potential financial strain on some tenants.
Q & A Highlights
Q: What has changed in the acquisition market since Q1, and how do you see it evolving post-election or after the first interest rate cut?
A: Marshall Loeb, Independent Director: The acquisition market has become more competitive since Q1. We are seeing more one-off deals and opportunities in newer buildings within existing markets. The guidance raise this quarter was driven by securing a couple of bids on newer buildings. We are still pitching on other buildings and may increase guidance later in the year based on due diligence outcomes.
Q: Can you provide more details on the demand for shallow bay products and your ability to push rents despite concerns about flattening market rent growth?
A: Marshall Loeb, Independent Director: We have embedded growth in our portfolio, with GAAP releasing spreads consistently above 50%. Although national reports show 7-8% rent growth, we are seeing mid-single digits. Our occupancy guidance is conservative, and we are trending ahead of our budget. There are no major known move-outs that would significantly impact occupancy.
Q: How do you balance the use of forward ATM versus direct market issuance, given the current stock price and market conditions?
A: Brent Wood, CFO: We evaluate the most attractive source of capital at the moment. Recently, we issued equity at an average price of $172.25 per share to de-risk our balance sheet and fund acquisitions. We aim to blend equity issuance over time, considering market conditions and our capital needs.
Q: What caused the slowdown in tenant demand six to twelve months ago, and why is it picking up now despite no significant changes in the economy?
A: Marshall Loeb, Independent Director: A year ago, leasing decisions were slowing due to uncertainty about a hard landing and interest rate cuts. Now, tenants are getting used to the new norm and are making expansion decisions. Additionally, lower supply over the past two years is leading to a tighter market, which is improving demand.
Q: How does the recent UPS performance impact your leasing demand, and are there any concerns about profitability and high labor costs?
A: Marshall Loeb, Independent Director: We monitor large tenants like UPS, but our top 10 tenants account for less than 8% of our revenue, providing diversity. While high labor and utility costs are challenging, the economy is improving. UPS is not a major tenant for us, representing less than 0.4% of our revenue.
Q: How does the current stock price influence your capital deployment strategy, and will it lead to more aggressive investments in Q4 and 2025?
A: Marshall Loeb, Independent Director: We try to decouple stock price from capital deployment decisions. We maintain discipline in acquisitions and follow field-driven development starts. Our strategy is to buy assets that create long-term NAV and start new developments based on leasing performance.
Q: Why did you increase same-store guidance by only 10 basis points, and is it more of an art than science?
A: Brent Wood, CFO: The increase is based on actual performance and conservative assumptions for the rest of the year. We have been beating our midpoint guidance, and the slight increase reflects our steady improvement. Our occupancy is projected slightly lower in the second half, but we are optimistic about continued positive performance.
Q: What are you waiting for to start new developments, and could some starts be pushed into 2025?
A: Marshall Loeb, Independent Director: We typically start new phases when the last phase is well-leased. We are monitoring competition and supply in markets like Austin and Phoenix. Our $260 million start guidance is conservative, and we may adjust based on leasing performance and market conditions.
Q: Are you seeing increased competition for shallow bay acquisitions from new players, and what cap rates are you observing?
A: Marshall Loeb, Independent Director: Yes, there is more competition, especially for larger portfolios. Cap rates for one-off acquisitions are in the fours, driven by existing in-place NOI. Larger portfolios attract more attention and compress cap rates.
Q: How do you view equity issuance and debt payoffs in 2025, and where do you see leverage trending?
A: Brent Wood, CFO: We evaluate the most attractive source of capital, currently favoring equity due to lower interest rates. We expect to continue using equity in early 2025, but we are open to debt if rates become more attractive. Our leverage is at an all-time low, providing flexibility for future investments.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
