Good morning, and welcome to the EastGroup Properties Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Good morning, and thanks for calling in for our second quarter 2021 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating in the call. And since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

Please note, that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website, and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements, as defined in and within the safe harbors, under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today and we undertake no duty to update them, whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors, including those directly and indirectly related to the outbreak of the ongoing coronavirus pandemic that may cause actual results to differ materially. We refer to certain of these risks in our SEC filings.

Good morning and thank you for your time. We hope everyone is enjoying their summer. I'll start by thanking our team for a great quarter. They continue performing at a high level and reaping the rewards of a very positive environment. Our second quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market. Some of the results the team produced include funds from operations coming in above guidance, up 10.5% compared to the second quarter last year and $0.03 ahead of our guidance midpoint. This marks 33 consecutive quarters of higher FFO per share, as compared to the prior year quarter, truly a long-term trend. Our second quarter occupancy averaged 96.8%, up 20 basis points from the second quarter of 2020. And at quarter end, we're ahead of projections at 98.3% leased and 96.8% occupied. Our occupancy is benefiting from a healthy market, with accelerating e-commerce and last-mile delivery trends. Quarterly re-leasing spreads were among the best in our history at 31.2% GAAP and 16.2% cash. And year-to-date, those results are 28% GAAP and 16% cash. Finally, cash same-store NOI rose by 5.6% for the quarter and 5.8% year-to-date. In summary, I'm proud of our team's results, putting up one of the best quarters in our history. Today, we're responding to the strength in the market and demand for industrial product, both by users and investors by focusing on value creation via development and value-add investments. I'm grateful we ended the quarter at 98.3% leased, matching our highest quarter on record. To demonstrate the market strength, our last three quarters were the highest three quarterly rates in the company's history. Looking at Houston, we're 96.5% leased, with it representing 12.3% of rents, down 150 basis points from a year ago and is projected to continue shrinking. Brent will speak to our budget assumptions, but I'm pleased that we finished the quarter at $1.47 per share in FFO and are raising our 2021 forecast by $0.09 to $5.88 per share. Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top 10 tenants only accounting for 7.9% of rents. As we've stated before, our development starts are pulled by market demand. Based on the market strength we're seeing today, we're raising our forecasted starts to $275 million for 2021. This represents a record annual level of starts for the company. And to position us following the pandemic, we've acquired several new sites with more in our pipeline along with value-add and direct investments. More details to follow as we close on each of these opportunities. And Brent will now review a variety of financial topics, including our 2021 guidance.

Good morning, our second quarter results reflect the terrific execution of our team, strong overall performance of our portfolio, and the continued success of our time-tested strategy. FFO per share for the second quarter exceeded our guidance range at $1.47 per share and compared to the second quarter of 2020 of $1.33, represented an increase of 10.5%. The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly the quick re-leasing of vacated space during the quarter. From a capital perspective, during the second quarter we issued $60 million of equity at an average price over $162 per share, and we issued and sold $125 million of senior unsecured notes, with a fixed interest rate of 2.74% in a 10-year term. In June, we amended and restated our unsecured credit facilities, which now mature July 2025. The capacity was increased from $395 million to $475 million, while the interest rate spread was reduced to 22.5 basis points, and our ongoing efforts to bolster our ESG efforts we incorporated a sustainability-linked metric into the renewal. That activity combined with our already strong and conservative balance sheet has kept us in a position of financial strength and flexibility. Our debt-to-total market capitalization was 17%, debt-to-EBITDA ratio at 4.9 times, and our interest and fixed charge coverage ratio increased to over 8 times. Our rent collections have been equally strong. Bad debt for the first half of the year is a net positive $90,000, because of tenants whose balance was previously reserved that brought current exceeding new tenant reserves. Looking forward, FFO guidance for the third quarter of 2021 is estimated to be in the range of $1.46 to $1.50 per share and $5.83 to $5.93 for the year, a $0.09 per share increase over our prior guidance. The 2021 FFO per share midpoint represents a 9.3% increase over 2020. Among the notable assumption changes that comprise our revised 2021 guidance, include: increasing the cash same-property midpoint by 18% to 5.2%, increasing projected development starts by over 30% to $275 million and increasing equity issuance from $140 million to $185 million. In summary, we were very pleased with our second quarter results. We will continue to rely on our financial strength, the experience of our team, and the quality and location of our portfolio to carry our momentum through the year. Now, Marshall will make some final comments.

Thanks, Brent. In closing, I'm excited about our first half of the year. We're ahead of our forecast and are carrying that momentum into the back half of the year. Our company, our team, and our strategy are working well as evidenced by our quarterly statistics, and it's the future that makes me the most excited for EastGroup. Our strategy has worked the past few years, and we're seeing an acceleration, and a number of positive trends for our properties, and within our markets. Meanwhile, our bread and butter traditional tenants remain and will continue needing last-mile distribution space in fast-growing Sunbelt markets. These along with the mix of our team, our operating strategy, and our market has us optimistic about the future. And we'll now open up the call for any questions.

We will now begin the question-and-answer session. Our first question is from Daniel Santos of Piper Sandler. Please go ahead.

Hey, guys. Thanks for taking my questions, and congratulations on a strong quarter. So my first one is on development yields, last quarter you spoke about potentially seeing some development yield pressure. But from your results it seems like you've been able to maintain fairly consistent yields. So I guess, I would ask for some commentary there.

Sure, good morning. Thanks for the question, Dan. I admit I may have missed the mark in my predictions. However, I want to recognize the team for their efforts. Construction costs have been increasing, and delivery times are still extending. I anticipate continued downward pressure on our development yields. On the bright side, the market has been favorable, allowing us to counteract this with rent growth, maintaining those seven yields. Looking back at last year, it’s encouraging to note that cap rates have decreased. They’re low in our major markets like Los Angeles, Dallas, and Atlanta, and have dropped by about 50 to 70 basis points across nearly all significant markets. Consequently, our spread between development yields and market value is now closer to 300 basis points. Most of our developments are likely around four, and in some instances even below four. While I expect further decreases, thankfully there is still room for that to happen, which could present profitable opportunities for EastGroup.

Perfect. That's super helpful. My next question is more of a big picture question. Employers across the country have all lamented about the labor shortage and the number of unfilled positions. But it seems like despite that tenants are still growing and taking more space. So I guess my question is, are you seeing any sort of on-the-ground impact from the labor shortage as far as taking space? Or are tenants really commenting that their expansion is hindered by the labor shortage?

Good question. Typically, the larger the tenant, the more it makes sense for them to consider labor challenges. Brokers have mentioned that key factors include rent, tenant improvement allowance, lease term, and the location of their labor pool, which is becoming increasingly significant. For us, this year we’ve experienced more leasing activity than anticipated, and it seems to be continuing into the latter half of the year. However, we're noticing increases in construction costs and prices due to labor issues. While we are managing to get projects done, those are the areas where we feel the impact the most. There’s certainly inflation affecting us, and labor remains a consideration, but so far it hasn’t impacted our leasing.

Got it. That's it for me. Thank you.

Thanks, Dan.

Thanks, Dan.

The next question is from Emmanuel Korchman of Citi. Please go ahead.

Hey this is Chris McCurry on with Manny. Just a quick question on development starts. So with the increase in development starts guidance, can you just provide some commentary on funding sources, and the balance between common stock as well as dispositions and how this may impact the acquisition pipeline?

Good morning. This is Brent. The positive news is that we have strong access to capital through both equity issuance and the debt markets. As we mentioned this quarter, we've renewed our credit facility, raising our total capacity from $395 million to $475 million, and we are pleased to have reduced our rate by 22.5 basis points, which will have a significant impact over the year. From a capital perspective, we are not constrained. Our team is finding more challenging opportunities, but we have the capacity to pursue them. Our asset sales are primarily about responsibly managing our portfolio rather than addressing capital needs; we do not require capital in that way. We believe our stock price is attractive relative to estimated NAV, and the debt market conditions are favorable. Currently, our debt-to-EBITDA ratio is at 4.9, and our debt to total market cap is in the range of 16% to 17%. Therefore, we are in a very strong position regarding capital sources.

Got it. And just a quick follow-up on, can you comment on some of the markets you are focused on expanding in right now? And are some of your top-performing markets this quarter a good read-through on where you'll choose to grow?

Good question, Chris. This is Marshall. Certainly, we think about our portfolio allocation in a longer-term perspective. Over the past few years, we've been focusing on reducing our exposure in Houston while still remaining active in that market. It's encouraging to see a 50 basis point drop from quarter to quarter down to the low 12s, and we expect that to continue. We're currently under-allocated in the western markets like California, Denver, and Las Vegas, which we are keen to grow in, even though they are quite competitive. We also like Miami and are continuing to develop there. Austin and Dallas have been very active markets for us, and we want to expand our footprint in those areas as well. Brent and I work on managing the portfolio allocation, and as it sometimes happens, it’s a favorable time to sell some assets. This gives our teams the flexibility to pursue the right opportunities for creating value. If it means selling an older asset, that's a positive challenge since there are still over 1,000 opportunities available for us to reinvest that capital into our development pipeline. I hope this helps clarify our long-term outlook, similar to how one would approach a 401(k) allocation.

Got it. Thank you.

Sure.

The next question is from Elvis Rodriguez of Bank of America. Please go ahead.

Good morning guys and great quarter. Perhaps Marshall you can share an update on your Atlanta land acquisition? And I know you mentioned some potential opportunities to acquire more in the balance of the year. In particular, how much runway does that give you to develop in Atlanta? And then also what are the markets that you're currently looking into?

I hope you're doing well. I recently visited Atlanta and want to commend John Coleman and our team there. The acquisition this quarter was an addition to a parcel on I-20 West that we bought at the end of last year, which we aim to put into production later this year, depending on steel deliveries and timing. They have a few sites we're navigating through zoning and permitting; the pricing is a bit more challenging in Atlanta compared to most of Texas. However, there is still considerable opportunity for growth in Atlanta. At the end of last year, we secured three buildings on a value-add basis that we agreed to purchase upon completion, and I'm pleased to say the team has executed well; all three are now part of the portfolio and fully leased, with a blended yield around 6.8% to 6.9%. This effectively minimizes the construction risk, as the market cap rate for each is about 4%. We appreciate the value creation from this. We're also exploring other markets, which depend on our available land. In Charlotte, we are running low on land in Steele Creek and have publicly announced available land the airport authority is selling. Charlotte and Austin are markets we like, and we have land parcels there. We're also working on land in Phoenix and Dallas. Securing quality parcels is becoming increasingly difficult as more developers are entering the industrial market, which has become more widely recognized for its strength. We've got several hundred acres tied up and are progressing through due diligence. We hope to close as many of these as possible by year's end if we can navigate permitting, zoning, and other time-consuming processes.

Thanks Marshall for the update. And then perhaps you can maybe speak to the tenant retention in the quarter and how you look at that versus rent growth sort of like that push and pull of keeping a tenant and the revenue in the portfolio versus really pushing for that higher rent that you can probably expect from a new tenant?

Sure, that's a good question. Generally, we prefer to retain high-performing tenants long-term. Fortunately, almost all tenants, around 90%, have their own broker before they meet with us, which means they are informed about the market and will negotiate rents. This year, we've seen a lower tenant retention rate than usual, around 31%. Typically, we retain about 70% of our tenants, while last year the figure was closer to 80%. Two main factors have contributed to this decline. First, when COVID hit last year, many tenants understandably paused their growth plans, leading to a temporary situation where most stayed put. Now that the economy is stabilizing, we are seeing tenants expanding again, which has aided our leasing efforts. Several of our developments have involved existing tenants taking on additional space, moving from one building to another, for example. Secondly, I want to commend our team for working with some tenants who had deferred rent in 2020. Despite facing challenges, the tight market has allowed us to focus on improving our tenant quality rather than just increasing rents. We've vacated some large spaces, like a 190,000 square foot Amazon lease we signed in San Diego during the first quarter, where the previous tenant faced difficulties. Similarly, another tenant in Southern California was succeeded by a stronger tenant in the second quarter, resulting in good re-leasing spreads in both instances. Our top 10 tenants account for less than 8% of our portfolio, which I find encouraging. While we aim to push rents, we want to avoid creating vacancies, as most tenants are now aware of market conditions by the time negotiations conclude.

Thank you.

Sure.

The next question is from Tom Catherwood of BTIG. Please go ahead.

Thank you, and good morning, everyone. Marshall, in your opening remarks, you mentioned the ongoing demand from e-commerce tenants, particularly for last-mile delivery. It seems like we've been discussing last-mile delivery in gateway cities for some time now. However, with population growth in the Sunbelt, it appears there's been increased focus on faster fulfillment. How are your markets progressing with the development of last-mile distribution facilities? Are you observing any changes in how your tenants are utilizing your shallow base space for this?

Yes, we definitely see an increase in leasing activity this year related to third-party logistics and last-mile delivery. We've noted a rise in retail-focused tenants securing space for delivery purposes. As brokers have pointed out, the market is increasingly driven by the need for faster delivery of goods and services. In many cases, this involves major HVAC companies and those supplying pool services, particularly in regions like Atlanta or Dallas, where quick responses are essential when HVAC systems fail. E-commerce, especially with the influence of Amazon Prime, has set new expectations for delivery timelines. Over the past 18 months, Amazon has been a significant space consumer, and it appears they are not slowing down. Other retailers need to find ways to compete with Amazon in terms of pricing and delivery. Our properties are well-positioned to support retail tenants involved in e-commerce or delivery services, especially with efficient, strategically located buildings designed for last-mile logistics. While major markets like Los Angeles and New York are advanced in this area, cities like Dallas, Phoenix, Atlanta, and Miami are catching up, particularly in Miami where our location is ideally situated near affluent residential areas along the coast.

Got it. Appreciate that Marshall. And then final for me. You've picked up some additional value-add properties this quarter, kind of two parts. First, when you're doing underwriting of value-add versus stabilized, what's the kind of spread in terms of yield that you're typically underwriting on these deals? And then second, are there some markets that have more opportunities for value-add than others right now? Obviously, you've been active in Atlanta and Greenville so far. But kind of what are you seeing as far as trends in specific markets?

Historically, we developed to a level of seven, but now we’re down to four, with potential value-add returns around the mid-5s to 6. While the spread is about half of what it used to be, we avoid risks associated with land, zoning, and construction, leading to lower returns. Our teams have performed excellently, yielding strong returns comparable to our development yields but without the associated risks. Currently, the appetite for industrial is substantial. We shifted towards value-add projects as acquisition lease products became pricey; we decided to take on leasing risks ourselves. The market appears to be increasingly tolerant of vacancy, which has led to diminishing spreads for value-add projects. Our success hinges on relationships with developers, often collaborating with their financial partners to coordinate transactions that benefit both parties. We're seeing more developers list with national brokerage firms, influencing pricing. Instead of us buying at a six when the market’s at four, we're now observing that the market is offering a cap rate of about 4.25, narrowing the spread significantly as concerns about vacancy decline due to the influx of capital and limited investment opportunities.

Understood. Thank you, Marshall.

Yes. Sure. Thanks, Tom.

The next question is from Dave Rodgers of Baird. Please go ahead.

Hey, everyone. It's Nick standing in for Dave. I have a question about utilization. Store shelves seem to be quite empty while our warehouses are relatively full, and we're seeing an increase in import activities. What explains the gap in getting products to consumers in this market?

I believe that demand is strong right now, and we can see this reflected in our leasing and tenant growth. However, there are significant challenges with the supply chain that won’t be resolved quickly. There is still a backlog of ships at the ports of Los Angeles and Long Beach, and issues like the Delta variant have further complicated matters. This means we're often buying what is available rather than what we would ideally choose. This situation is also putting pressure on our development pipeline because delays in receiving materials, typically sourced from China, are impacting our projects. It's currently more expensive and takes longer to finish our spaces, but our competitors are facing the same issues. This is contributing to our high occupancy rates and leasing percentages, which we expect to maintain for a few more quarters, unless we experience another significant economic shutdown due to COVID.

Thanks for that. I have a question regarding development. Last quarter, you mentioned a build-to-suit opportunity in San Diego. Have any tenants expressed interest in build-to-suit opportunities on your land bank? What is your interest level in that?

Yes, good catch or good note. Yes, we were happy about that and that we were planning a multi-building park and it worked for Amazon for a facility there. So we're under construction. Hopefully, we'll deliver it in the first quarter of next year. And really we set our goal when we bought the land. We like the building design, although it's a building, rather than five or so, which we originally had planned for this site, but we are seeing more and more of that. The tenant sizes seem to be growing and we've got another one or two. You never know. I mean it's always competitive for those pre-lease opportunities. But if we can manage the construction risk, which we have by the time we give them their bids. But if worst case, we run out of land, which was our goal when we acquired it and now we're looking for other sites in San Diego. So we'll find that. But we had a bunch of land in Atlanta or in San Diego in the fourth quarter and suddenly we're out. So now we're scrambling to find the next land parcel. But I hope we'll see a few more and more of those and where cap rates are, we think we're getting a great return with a long 12-plus year lease with Amazon on that side.

Great. Thanks, guys.

Sure.

This concludes our question-and-answer session. I would like to turn the conference back over to Marshall Loeb for closing remarks.

Okay. Thanks, everyone for your time. I appreciate your interest in EastGroup. I know it's a busy earnings season. Any follow-up questions Brent and I are certainly available and hopefully see you in person at a conference before too long. So thanks again.

Thanks, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.