EastGroup Properties, Inc. (EGP) Earnings & Analysis

Latest quarter

EastGroup reported third-quarter revenue of $199.4 million, above the consensus estimate of $197.9 million and up from $182.1 million a year earlier. Adjusted EPS, as counted by the consensus, was $2.45, compared with the $2.43 estimate. The company reported diluted EPS of $1.46, up from $1.26 a year earlier.

The filing attributes higher property net operating income to same-property operations, newly developed and value-add properties, and acquisitions, partly offset by property sales. EastGroup said funds from operations per diluted share rose primarily because of the increase in property net operating income, partly offset by higher interest expense.

Gross margin rose to 74.0% from 73.6% a year earlier, while operating margin was 41.6%, compared with 40.7%. EastGroup’s free cash flow was −$65.7 million, compared with −$85.1 million in the prior-year quarter. The filing also says average rental rates on new and renewal leases increased compared with the former leases on the same spaces.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

CEO Marshall Loeb said demand had been steady for several consecutive quarters, and that the company continued to see leasing prospects. CFO Staci Tyler said cash same-property net operating income exceeded the company’s projections, helping funds from operations surpass its guidance midpoint.

Asked about occupancy, Tyler said new and renewal leases accounted for most of the quarter’s outperformance. She said some tenants stayed beyond their lease terms and others moved in early, while tenant retention was higher than projected. Tyler said the company raised its fourth-quarter occupancy guidance because leases signed during the third quarter were now being occupied.

President Reid Dunbar said development leasing had picked up, and that EastGroup intended to start projects as demand dictated. He said data-center-related uses contributed to new leasing activity. Loeb said rent growth varied across markets, with California stabilizing unevenly, and that rising construction costs could support higher rents.

On acquisitions, Loeb said the company had earlier expected it might miss its acquisition goals, but opportunities emerged during the third quarter. He said capitalization rates had risen in some transactions and that EastGroup had won later acquisitions without increasing its bids. “That buyer pool seems thinner than it was,” he said. Loeb added that the company wanted to remain disciplined about financing and acquisitions.

Tyler said EastGroup planned to settle forward equity agreements during the fourth quarter to repay bank credit facility borrowings while funding investment activity and debt maturities. Asked about tenant credit, she said bad debt remained in line with its historical average and “The tenant watch list remains steady.” Tyler said the company was not detecting problems concentrated in a particular tenant industry or geography.

Asked about rent growth, Tyler said fourth-quarter projections were generally in line with results achieved so far during the year, but she was not ready to provide specifics for the following year.

Guidance

Tyler said EastGroup raised its full-year funds from operations guidance midpoint to $9.65 per share and its cash same-property net operating income growth assumption midpoint to 7.50%. She said the company also raised its expected full-year development starts to $390.0 million and acquisitions to $360.0 million.

For the fourth quarter, Tyler said EastGroup expected funds from operations of $2.47 to $2.53 per share, with the midpoint above its previous projection. She said the company planned $105.0 million of fourth-quarter development starts.