Good day, and welcome to the EastGroup Properties Second Quarter 2022 Earnings Conference Call and Webcast. 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 2022 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call this morning. 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 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 reflect our current views about the company's plans, intentions, expectations, strategies, and prospects based on the information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remarks, whether as a result of new information, future or actual events, or otherwise. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Please see our SEC filings, including in our most recent annual report on Form 10-K for more detail about these risks.

Good morning, and thank you for your time. I'll start by thanking our team for another strong quarter. They continue performing at a high level and capitalizing on opportunities in a positive fluid environment. Our second quarter results were strong and demonstrate the quality of our portfolio and the industrial market strength. Some of the results produced include funds from operations coming in above guidance, up 17% for the quarter, well ahead of our initial forecast. This marks 37 consecutive quarters of higher FFO per share compared to the prior year quarter, truly a long-term trend. Our quarterly occupancy averaged 98.1%, up 130 basis points from the second quarter of 2021. And at quarter end, we're ahead of projections at 99.1% leased and 98.5% occupied. For perspective, each of these represent record levels for the company. Similarly, quarterly re-leasing spreads were strong at 37% GAAP and over 22% cash. Year-to-date, re-leasing spreads are similar at 35% and 22% GAAP and cash respectively. Finally, cash same-store NOI also reached a quarterly record at 9.5% and stands at 9% year-to-date. In summary, I'm excited about our results year-to-date and the positioning this gives us for the balance of the year. Today, we're responding to strength in the market and user demand for industrial products by focusing on value creation via raising rents and new development. I'm grateful we ended the quarter 99% leased and to demonstrate the market strength in our last 7 quarters have each been among the highest quarterly rates in the company's history. Another trend we're seeing is widespread rent growth. Re-leasing spreads have trended higher than in 2021 and more importantly, across a broader geography. I'm happy to finish the quarter with $1.72 per share in FFO and raised annual guidance by $0.15 at the midpoint to $6.90 per share, up 13.3% from 2021's record level. Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top 10 tenants only accounting for 8.8% of rents. As we've stated before, our development starts are pulled by market demand within our parks. Based on the strength we're seeing, we're raising forecast 2022 starts to $350 million. We'll closely monitor leasing results along the way and expect to update our guidance throughout the year. Given the shift in capital markets early in the second quarter, we're taking a measured approach on new building investments. We are, however, evaluating new development sites given the level of demand and the longer time frame often required to put sites into production. In the midst of this transition, I'm very pleased with our Tulloch Corporation acquisition. The portfolio consists of 14 properties, totaling 1.7 million square feet with 85% of the NOI coming from the San Francisco Bay Area and 15% from Sacramento. Strategically, the properties mirror our own portfolio very closely in terms of building size, tenant sizes, and infill locations. Secondarily, it raises our capital allocation to San Francisco up to 7% within California up to 21% and further reduces our concentration in Houston, which is down 150 basis points from last year. Brent will now speak to several topics, including our updated projections within our 2022 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 $1.72 per share and compared to the second quarter of 2021 of $1.47, represented an increase of 17%. The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth. From a capital perspective, macro concerns of investors have caused the stock market to decline, including our share price. As a result, we did not issue any equity during the second quarter, apart from the Tulloch acquisition. We have been intentionally deleveraging the balance sheet over the past several years and are in a position to pivot to debt proceeds for capital sourcing. During the second quarter, we issued a private placement of $150 million of senior unsecured notes with a fixed interest rate of 3.03% and a 10-year term. We also agreed to terms on a $125 million senior unsecured term loan that has 2 tranches, one for $75 million with a 5-year term and another for $50 million with a 2-year term. The tranches have effective fixed interest rates of 4.0% and 4.09%, respectively. We expect to fund and close the loan in late August. Subsequent to quarter end, we agreed to terms on the private placement of 2 senior unsecured notes totaling $150 million. One note for $75 million has an 11-year term and an interest rate of 4.90%, and the other $75 million note has a 12-year term at an interest rate of 4.95%. The notes are expected to be issued and sold in October. As a reminder, the company does not have any variable rate debt besides the revolver facilities and our near-term maturity schedule is light with only $115 million scheduled to mature over the next 2 years. Our balance sheet remains flexible and strong with healthy financial metrics. Our debt to total market capitalization was 19.5%. Unadjusted debt-to-EBITDA ratio is down to 4.95x, and our interest and fixed charge coverage ratio has risen to 9.1x. Looking forward, FFO guidance for the third quarter of 2022 is estimated to be in the range of $1.71 to $1.77 per share, and $6.84 to $6.96 for the year, a $0.15 per share increase over our prior guidance. The 2022 FFO per share midpoint represents a 13.3% increase over 2021. A few of the notable assumption changes that comprise our revised guidance include increasing our average month-end occupancy by 30 basis points to 97.8%, increasing the cash same-property midpoint from 7.4% to 8.5%, removing any additional common stock issuance, and increasing debt issuance by $125 million. In summary, we were pleased with our second quarter results, and 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 remainder of the year. Now Marshall will make final comments.

Thanks, Brent. In closing, I'm proud of the results our team created for the first half of the year and the position it leaves us in for the balance. Portfolio operations remain historically strong as our results indicate. That said, capital markets and the overall environment became fluid during the second quarter. While it's never enjoyable to navigate such conditions, I have a couple of thoughts that may prove helpful. First, our team has worked together through several downturns and forecast downturns before. Our strategy may shift, but it's not unchartered waters. Secondly, the industrial market has been so red hot in the past few years that some level of market concern, when viewed in a longer term context, is healthy for a sustained positive environment. Meanwhile, our buildings are as full as they've ever been, and rents are rising throughout the portfolio. We'll work to keep occupancy high, continue pushing rents, and listen to tenants and prospects to accommodate their demand in the market, as we've always done in good and bad times. While the world may be anticipating a choppy environment, I remain excited about EastGroup's future. There are several long-term positive secular trends occurring within last-mile shallow-bay distribution space and Sunbelt markets that will play out over the years, such as population shifts and evolving logistics chains. These trends, combined with our talented team, our operating strategy, and our markets, keep me optimistic about the future. I will now open up the call for any questions.

Our first question comes from Connor Mitchell with Piper Sandler.

So you guys have touched on it a little bit with the industrial sector being red hot and widespread rents, but there seems to be no signs of leasing slowdown or tenant pushback. So my question is, do you believe that the industrial sector as a whole is immune, or maybe it's more EastGroup's portfolio that's behaving differently from the market?

Good morning, Connor. I'd like to think, as is often the case with such questions, the answer is yes, with variations. I believe last mile, as we've stated for a few years, is probably an earlier inning compared to big box as companies continue to work through supply chains and logistics change with the growth of e-commerce. So hopefully, we're a little more insulated. That said, I don't believe the industrial market is immune. We're not feeling the downturn. We certainly don't see it in our numbers, having finished the quarter at a record high percentage leased. However, if you're watching the news and reading headlines, there are certainly enough clouds on the horizon prompting us to be cautious with our capital and planning. I’d like to think we'll weather it better than the average company and even the average industrial REIT. The market has been so hot that we've even made a bit of a joke that when you know the stock market's overheated, you're riding an Uber and your driver is giving you stock tips. But the number of new industrial developers or new entrants in the market has significantly increased over the last few years. Therefore, a bit of unease and choppiness we view in the longer term as probably healthy and may present some opportunities during downturns, as competitive conditions making it hard to find acquisition opportunities. Historically, we've found our best acquisitions during downturns.

Great. And then just kind of following up on that last part there. It does seem that there's a little slowdown in the change or the outlook for the acquisitions and development. So can you just please address how the impact of rising interest rates and a depressed stock price are impacting your future investment decisions?

I'll start, and then I'll let Brent touch on it. Currently, given the timing—early in the second quarter, as the stock market moved, and following expectations that interest rates would rise throughout the year, we've pulled back on acquisitions. I'd say that rather than actively bidding, we're in monitoring mode regarding several core investment acquisitions and value-add opportunities we pursued over the previous few years, mainly due to limitations in our access to capital. Additionally, we're still in a price discovery phase concerning many assets' pricing. Acquiring land—especially for new parks—takes time due to zoning, entitlements, and other factors. By the time those processes conclude, we might have entered a recession. We're active on land acquisition but have significantly curtailed our efforts elsewhere. Brent, would you like to address the balance sheet side?

Yes, sure. Connor. Obviously, with a sudden market decline throughout the quarter—including our stock—our issuance was not viewed as attractive. Hence, we saw zero ATM issuance. This is reflected in the assumption changes for the remainder of the year, where we pivoted from equity to a greater focus on debt. Thankfully, our balance sheet is flexible and remains robust. As we secured debt under favorable terms and are committed to maintaining a strong position, we would prefer to access equity when market conditions become favorable. So while we are focusing on debt for now, should the stock price rebound in the future, we might consider going back to equity.

The next question comes from Jeff Spector with Bank of America.

Great. First question, Marshall; just on visibility into 2023. Clearly, in a great position. I know sometime this fall, you'll start your budgeting process, and I am sure there are clouds on the horizon. But I guess from where you sit versus, let's say, prior years, what's your confidence level or thoughts on visibility for at least the first half of '23? How are you feeling?

Sure. And good question. As we look ahead to 2023, we'll indeed delve deeper into our budget in the coming months. However, I feel positive as we head into next year. In the prior year's average renewal, we experienced a GAAP increase of a little over 30%, but we've been at 35% this year-to-date. Thus, while the agreements for rent increases have been established, they may not yet affect our quarterly run rate as many expirations have yet to come. This year, we've observed more widespread rent increases. While we benefited significantly from California's larger spaces last year, the increases have been more geographically diverse this year—from Florida seeing 40% to Las Vegas and Austin witnessing similar growth. With inflation concerns and supply chain difficulties on the horizon, we're cautiously optimistic, particularly if we do not encounter significant demand hits. Additionally, we've moved 5 buildings out of our development pipeline this year, all of which are now fully leased, which is a positive indicator as we have 14 more buildings set to deliver between now and the end of the first quarter—12 of which are already 100% leased.

Very helpful. My one follow-up then is, I guess, if you could tie those comments into your increased development start guidance. I guess, how do we reconcile those concerns with your development guidance?

Certainly, they tie together. If it helps, regard our development starts; we’ve structured them like stacking shirts in a retail store, where our parks are built out in phases. When our teams indicate that they are out of inventory, we proceed with the next building or two. Thus, our starts are driven predominantly by the field’s response to market demands. We've seen a shift towards cautious corporate decisions, yet many projects are being propelled forward by direct requests from the field seeking more space. While we've effectively moved from a $250 million start figure this year, we notice that a shortage of new product demands in combination with rising construction demands generates the pressure to deliver earlier and increase under construction occupancy rates.

Our next question comes from Connor Siversky with Berenberg.

Just want to jump back into development capacity briefly. Considering the aggregate 70 million square feet under construction in Dallas, would you be looking to potentially sell some of that exposure in favor of maybe some of the more coastal markets with better future supply growth dynamics?

Good question. Dallas does have a significant amount of construction ongoing. However, I would say no. The construction we see isn't what would drive us to exit the market. If we were to sell in Dallas, it likely wouldn't coincide with new construction trends. In fact, a majority of what is under construction relates to larger box facilities. Good product in infill locations remains in high demand, and we're seeing strong rent increases here. Therefore, we maintain a positive outlook on Dallas and surrounding markets despite the increase in competition from newer entrants in the industry.

Got it. I appreciate the color there and the comparison to LA and its overflow dynamics. Just one more quick one. On the dividend, we saw a pretty meaningful hike last year. With the positive provisions in guidance, it seems like we're trending towards another increase, but could you offer some color here on how that might relate to the increasing debt load over the course of the year? How would higher interest expenses impact your ability to raise the dividends?

Yes. This is Brent, Connor. Next quarter is traditionally when the Board and we reevaluate the dividend and decide on adjustments. I believe we began the year at a midpoint guide of $6.63, which has now risen to $6.90, demonstrating that the year is going well. Therefore, while we can't predict specifics, it’s reasonable to assume that the dividend will increase correspondingly. The rise in interest expenses falls mostly into the margin category. The debt we’ve secured is already included in our projections, allowing for a clear assessment of expected property net operating income growth. So we anticipate maintaining adequate coverage moving forward.

Our next question comes from Michael Carroll with RBC Capital Markets.

I wanted to see if you can talk a little bit more about construction costs and how much they've increased in your underlying markets—and maybe the three buildings that you broke ground this quarter. How much higher are the budgets on those projects versus the buildings that you built in those parks previously?

Yes, construction prices continue to increase. It's an evolving situation. For instance, in Florida, concrete prices have risen significantly compared to previous projects in the same area, and overall, increases might be around 35% to 40%. Various timeframes on delivery and costs of materials like roofing might add to this complexity. Moreover, our industry is facing supply issues, which prolongs construction timelines. Given the rising rents, we can still maintain favorable yields despite these expensive construction costs. While it’s challenging to complete buildings in a timely manner, a continued demand offers reassurance because our existing portfolio generates additional revenue as rents continue to rise.

And that 40% number is that over roughly the past 12 months? And does this construction cost increase influence the types of buildings that you want to break ground on? Or are rents just too strong to consider altering your plans?

The 40% number is probably closer to 24 months rather than strictly 12 months. The cost increases are influencing our decisions, but we still feel confident about our business model. Some efficiencies can arise from constructing larger projects, but we prefer maintaining our development strategies instead of altering the types of buildings based on construction pricing. We’d rather manage costs than modify our overall strategy.

Our next question comes from Craig Mailman with Citi.

Just circling back to development and capital deployment. I do not want to put words in your mouth, Marshall, but putting all the commentary together, it seems like the potential for perhaps slower starts into next year is more a function of capital availability and pricing, maintaining leverage metrics rather than market demand. Is that a fair characterization?

I would say that's not quite accurate. We're indeed being more cautious with capital decisions. For instance, while our regional teams are requesting additional inventory due to high lease rates, we are considering pacing our new development starts. However, unlike my concerns from last year about this year's starts potentially decreasing, we're projecting to surpass last year's numbers, even if we slow down somewhat in 2023. Moreover, my confidence remains high regarding leasing demand. We may need to extend our timeline if specific projects don't lease as quickly as anticipated.

Yes, Craig. If prolonged, we must be cautious; however, our EBITDA is consistently growing, ensuring that our debt metrics remain in check even with rising costs. We aim to keep our debt-to-EBITDA under 6% and currently maintain a favorable range. This strategy enables us to remain flexible while monitoring capacity changes pertaining to both our balance sheet and market conditions.

If you had to peg a number, what is the nominal amount to represent your debt capacity, and what leverage levels would you want?

I wouldn’t assign a specific number; it fluctuates continuously alongside our EBITDA, which we aim to maintain under 6%. However, our current debt levels position us favorably. This metric is more informative than putting an absolute dollar figure on it.

Yes, Craig. The fluctuations in our situation are constant, and we should note that our revenue is increasing, which helps maintain favorable leverage levels. Overall, remaining flexible is critical to our ongoing strategy while being cautious amid changes.

Our next question comes from Ronald Kamdem with Morgan Stanley.

Great. Just two quick ones. The first is, when you're talking to tenants, what commentary are you hearing about their inventory levels? Are they trying to build more stock or are they satisfied with current levels?

Overall, tenants appear to be short on inventory due to ongoing supply chain issues and are seeking ways to increase their inventory levels. Despite various market dynamics, requests for additional space seem to be rising. In our negotiations, we've observed larger tenants are taking on more space than initially intended as they navigate inventory needs. This reflects an ongoing demand environment among logistics service providers.

Great, that's helpful. Also, just a quick one regarding Amazon—any updates? There were notable announcements about their portfolio. Are you seeing any changes in your interactions with them?

Yes, we have not seen much impact specific to our interactions with Amazon. They’re primarily focused on retaining existing leases, and our relationships with them remain strong. We have four spaces leased to them, and the vast majority of their lease agreements won't expire until late 2033 or later. The expected inventory giveback news may have been exaggerated; the true number seems to be in the 10 million square foot range rather than 30 million. Consequently, while they are declining to relinquish any leases, we don’t perceive significant risk in our dealings with them.

Our next question comes from Vince Tibone with Green Street Advisors.

Could you discuss the key building blocks to revise same-store guidance? Given the leasing spreads year-to-date and revised occupancy and bad debt guidance, I’m having trouble aligning my estimates. Is free rent timing significantly impactful this year?

Free rent timing has been relatively consistent and minimal compared to previous years. A lot of our rental increases come from property net operating income performance rather than on G&A or interest. I’d be happy to discuss this further offline—there may be specific areas where we can align better.

That sounds good. Quick follow-up: Can you comment on whether you expect leasing spreads in the back half to remain similar to the first half, or do you foresee an acceleration?

For the back half of the year, it’s reasonable to assume leasing spreads will remain consistent with recent quarters. Our team on the ground operates conservatively, ensuring we adequately capture rental growth.

Our next question comes from Amit Nihalani with Mizuho.

Can you quantify the increase in demand from 3PLs and whether you've experienced any slowdown from e-commerce?

Regarding demand from 3PLs, there has been a notable uptick; however, I can't provide specific figures at this moment. E-commerce activity has slowed somewhat, particularly for larger retailers such as Amazon. We continue to engage with them in negotiations, as various logistical adjustments are being considered across the board.

Are any particular markets concerning for you from a supply perspective?

Overall, there are increased supply pressures across major markets, but no specific market is a cause for concern at this time. Although the supply of major markets like Atlanta, Dallas, and Phoenix is elevated, we remain fully leased in those areas. The supply chain bottlenecks are evident, primarily affecting large box retailers rather than our product type.

Our next question comes from Jon Petersen with Jefferies.

Great. On escalators, how are those trending? Are any inflation components being considered from either side?

Historically, escalators would range from 2.5% to 3%, but that has shifted towards a norm of about 4% recently. Most discussions concerning lease terms show a consistent increase. However, I have not observed an uptick regarding CPI adjustments yet.

Can we continue the conversation on your cost of capital? Given the market dynamics and your metrics—your FFO yield on 2023 estimates is about 4.5%, yet your debt was issued at 4.9%. If debt costs are rising, shouldn't your equity value become increasingly attractive?

I agree with your observations. The numbers indicate that equity may become more appealing if costs of capital continue to rise. It ultimately comes down to market perception and the NAV evaluations. We're in proximity to optimal behavior but still actively monitoring our metrics to ensure performance aligns well with our investments.

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

Thanks, everyone, for your time. We appreciate your interest in EastGroup. If there are any follow-up questions, we're certainly available, and hope to see many of you soon at the next upcoming conference. Take care.

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