Eastgroup Properties Inc (EGP) 2012 Q3 法說會逐字稿

Good morning and welcome to EastGroup Properties' third quarter 2012 earnings conference call. At this time, all participants are in listen-only mode. (Operator Instructions). Please note today's call is being recorded. Now it is my pleasure to introduce David Hoster, President and CEO.

Thank you. Good morning and thanks for calling in for our third quarter 2012 conference call. We appreciate your interest in EastGroup. As usual, Keith McKey, our CFO, will be participating in the call.

In addition, this quarter, Brent Wood will also be part of the call. For those of you who do not know brand, he is EastGroup's Senior Vice President located in Houston and is responsible for all our Texas markets where most of our new investment activities are occurring. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

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 describe 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 is subject to the Safe Harbor statement included in the news release is accurate only as of the date of this call.

Thank you. The past 90 days have been productive for EastGroup. Funds from operations of $0.76 per share for the third quarter met the midpoint of our guidance and represented an increase of 1.3% as compared to the same period last year. This was the sixth consecutive quarter of FFO growth when compared to the previous year's quarter.

Same property operating results were positive for also the sixth consecutive quarter. Occupancy increased to 94.3%, our highest level in 16 quarters. Our Houston development program continues to expand. We acquired a California property and additional buildings are under contract, and we have taken advantage of the attractive debt and equity markets.

Looking at property operations, same property net operating income increased 0.1% with straight-line rent adjustments and 0.8% without. In the third quarter on a GAAP basis, our best major markets after the elimination of termination fees, were Dallas, up 10%; Phoenix, up 8%; and Houston, up 7%. The trailing same property markets were South Florida, down 22%; Jacksonville, down 14%; and Charlotte, down 6%. The primary differences between the quarters were basically due to changes in property occupancies in the individual markets.

As I said, occupancy at September 30 grew to 94.3%, a 120-basis-point increase from the end of the second quarter, and well ahead of our internal projections. We expect occupancy to remain in the 94% range, give or take a little through the balance of the year.

Our Texas markets continue to be our best, performing at 97.5% leased and 97.2% occupied. Houston, our largest market, with over 5 million square feet, was 98% leased and 97.7% occupied.

In the third quarter, we renewed 66% of the 722,000 square feet that expired in the quarter and signed new leases on another 6% of the expiring space for a total of 72%. We also leased 554,000 square feet that had either terminated early during the quarter or was vacant at the beginning of the quarter. In addition, we have leased and renewed 402,000 square feet since September 30.

The changing GAAP rents was a negative 2.6% for new and renewal leases combined, but a positive 3.8% for just renewal leases. The change in cash rents was a negative 9.6%. We still believe that rent spreads should become positive overall during the second half of 2013.

The average lease length in the quarter was 3.9 years, which was longer than last quarter but in line the average over the last 8 quarters. Tenant improvements were $1.67 per square foot for the life of the lease, or $0.43 per square foot per year of the lease, which is above our average for the past year but in line with our two-year average.

During the last quarter's earnings call, I reported that leasing activity had slowed in a number of our markets other than those in Texas. That lull last approximately 30 to 45 days, followed by a big pickup in activity in the late August and September which allowed us to achieve our strong quarter-end results.

As previously reported, we acquired the 84,000 Wiegman Distribution Center II in Hayward, California in August for $7.5 million. Constructed in 1998, it is 100% leased to two customers. This acquisition increased our ownership in the San Francisco Bay area to over 1 million square feet which are presently 100% leased.

We are currently under contract to acquire, subject to normal due diligence, a package of five buildings with 722,000 square feet and a 4.1-acre piece of land for future development, all in Dallas, for approximately $41 million. The buildings, which are 95% occupied, and the land are in the Valwood industrial park in the city's northwest submarket where most of our existing Dallas assets are located. We expect to close the transaction before the end of the year.

From a disposition standpoint, our Braniff Park West distribution center in Tulsa is currently being marketed for sale. It contains 259,000 square feet and two multi-tenant buildings and is 100% leased.

At September 30, EastGroup's development program included 13 properties with a total of 870,000 square feet, and a projected combined investment of $65.9 million. These buildings are currently 51% leased. In the third quarter, we started construction of five buildings with 279,000 square feet and a total projected investment of $21.2 million. All are in Houston and include World Houston 34, 35 and 36, one of which is pre-leased; Beltway Crossing XI, the final building in that park, and Ten West Crossing I, which is also pre-leased.

In the fourth quarter we've begun development of World Houston 37 with 101,000 square feet and World Houston 38, which is a 129,000-square-foot build-to-suit. They will be the third and fourth buildings on our World Houston expansion land which we acquired 13 months ago.

We also currently have two development land parcels under contract to acquire subject to normal due diligence -- 26 acres in northwest Houston and 42 acres in southwest Charlotte. Looking forward, we see the opportunity for approximately $40 million in development starts during the first 4 to 5 months of 2013.

Brent will now review our activity in Houston specifically and Texas in general.

Thanks, David. I'm glad to be participating on the call today, especially in light of our current activity in Texas. Texas has become our largest ownership state and currently contains most of our new activity. A combination of favorable economic and demographic tailwinds, combined with our great location and on-the-ground presence throughout Texas has proven to be a very positive combination for us.

This is most evident in Houston, EastGroup's largest market. Indicators across the board continue in a positive direction. 12-month trailing job growth is up 3.5%, or 89,500 new jobs, which puts the overall job count well above pre-recession levels continued population growth increasing at twice the national average since the 2010 census. Correspondingly, the housing market is healthy and stable with inventory at its lowest level since February 2007, and Houston has led the nation is residential construction permits since January 2011 with Dallas coming in at number two.

The oil and gas industry continues to prosper and expand. New technologies and the discovery of vast energy resources across North America have further fueled exploration, research, development, refining, manufacturing at all of the energy-related sectors. A great deal of this growth and spending occurs in Houston which has in many ways become the energy capital of the world.

This growth has built opportunity for EastGroup. The strength of the Houston market and our locations have led to a very active development pipeline which currently includes 11 buildings totaling 827,000 square feet, either in lease-up or under construction, including North Houston 37 and 38, that, as David mentioned earlier, have broken ground. At first glance, those figures may seem uncharacteristically high, but we are pleased that a number of these buildings represent build-to-suits, and as a result this pipeline of activity is already 57% leased.

Our World Houston development, located next to George Bush Intercontinental Airport, continues to lead the way. Its operating portfolio of 2.4 million square feet is currently 98% leased. The road and infrastructure work related to the World Houston expansion on the 133-acre golf course site acquired late last year has opened up additional opportunities for us. We are pleased to announce our third build-to-suit even though the road infrastructure will not be completed until year-end. The 587,000 square feet in the World Houston development pipeline is 60% leased and will increase our holdings in World Houston to 3,035,000 square feet.

As a side note, we have entered into an agreement with the City of Houston whereby our infrastructure costs and our expansion land, including all road and underground utility costs, land costs for right-of-way and engineering costs can be reimbursed up to $7 million with an additional cap of $2 million for interest carry. The reimbursement will be captured over time based on the increase in appraised real estate values within a defined local economic impact area. The agreement terminates at the earlier of our reimbursement of actual costs or 19 years.

Another successful development for us has been our Beltway Crossing business park in northwest Houston. Our buildings I through XIII total 742,000 square feet and are currently 100% leased. In the development pipeline, building IX is 100% leased and our tenant will be moving in before month's end, and building X is 50% leased and occupied. This leasing activity shortly after sale completion prompted construction of our final Beltway Crossing building, number XI, containing 87,000 square feet that should be shelf complete in February.

In EastGroup fashion, upon completion, we will have created a high-quality business park of 11 buildings containing just shy of 1 million square feet, but we've depleted our land inventory in this proven and successful submarket. As David mentioned earlier, that has led us to place 26 acres of land under contract that will allow us to build five multitenant buildings containing approximately 370,000 square feet in a business park setting, a recurring and successful theme for the Company.

And lastly for Houston, we are excited that we broke ground on our first building, a small 30,000-square-foot build-to-suit and our Ten West Crossing development in west Houston, and more specifically in Katy, if you're familiar with the area. We purchased this 42-acre site in June for the eventual development of approximately eight buildings totaling 580,000 square feet. We are in the design and permitting phase of 10 West II and III that will total 114,000 square feet, and will offer a mix of business service and front park reload distribution space. We anticipate starting construction on these two buildings early next year.

Briefly, in San Antonio, we're pleased with the recent uptick in leasing activity at our Thousand Oaks business park development, where Thousand Oaks 1 is now 28% leased and Thousand Oaks 2 is 58% leased with active prospects for both buildings. We have our permit in hand for our third and final building, a 66,000-square-foot front park reload distribution facility and in light of our recent leasing success, we expect to break ground near year-end.

As for Dallas, due to market conditions, development opportunities are still limited. However, we are very pleased with the number of high-quality investment packages we've seen over the last six months which has resulted in us successfully placing one portfolio under contract, as David mentioned earlier. It appears this pipeline of investment packages will continue into next year.

So as I trust you can gather, we have a lot of exciting things happening in Texas. As one person who recently visited our office put it, seeing is believing, and provides a better understanding of these groups' program, so come see me in Houston.

Keith will now cover a number of financial topics.

Good morning. As discussed, FFO per share for the third quarter increased 1.3% compared to the same quarter last year. A non-cash expense of $269,000, or $0.01 per share related to an interest rate swap was recorded in the third quarter which reduced FFO. Bad debt expense net of lease termination fee income was about the same as last year. FFO per share for the nine months increased 5.5% compared to the same period last year. Bad debt expense in 2012, net of lease termination fee income for the nine months, reduced FFO by $343,000 when compared to last year. Debt to total market capitalization was 33.7% at September 30.

For the quarter, the interest and fixed charge coverage ratio was 3.6 times and debt to EBITDA was 6.4. During the third quarter we repaid a $4.1 million mortgage loan with an interest rate of 5.64%.

Our floating-rate bank debt amounted to 2% of total market capitalization at quarter end and we have no debt maturing for the remainder of 2012. Bank credit line debt was $46 million at September 30 and with credit lines of $225 million we had $179 million of capacity at quarter end. The bank credit facilities mature in January 2013, and we are currently in discussions with our banks on a new facility.

We continue to sell shares under our continuous equity program to keep our debt ratios in line as we acquire and develop properties. We sold 98,375 shares for $5.3 million in the third quarter, and subsequent to September 30 have sold 357,692 shares for $19.1 million, or an average of $53.50 per share. Year-to-date, we have sold 1,869,090 shares for $95 million at an average sales price of $50.83.

We closed an $80 million unsecured term loan with a six-year term, interest-only payments and a fixed rate of 2.92%. In September, we increased our quarterly dividend by $0.01 per share and paid our 131st consecutive quarterly cash distribution to common stockholders. This dividend of $0.53 per share equates to an annualized dividend of $2.12 per share. Our FFO payout ratio was 70% for the quarter.

Rental income from properties amounts to almost all of our revenues, and our dividend is 100% covered by property net operating market. And, again, we believe this revenue stream gives stability to the dividend. FFO guidance for 2012 has been narrowed to a range of $3.07 to $3.09 per share and we maintained the midpoint $3.08 per share. Earnings per share is estimated to be in the range of $0.95 to $0.97.

Now David will make some final comments.

As stated earlier, the third quarter was a very productive one for EastGroup and we expect to maintain our positive momentum through the balance of this year and well into 2013. We are especially encouraged by the growth of our development program and the potential for attractive acquisitions. We will now take your questions. Thank you.

(Operator Instructions). Gabriel Hilmoe, UBS.

Good morning guys. David, can you talk a little bit about demand from the small local users and how that's been trending relative to, say, the larger bulk users that were a little stronger over the summer? Just trying to get a sense of what the smaller local tenants are saying in terms of space needs and how much that contributed maybe to the pickup in activity that you saw in late August and September.

As I always say, each market is a little bit different, but we are starting to see a little more activity from those smaller users, but it still hasn't gotten back to where it was before the recession or where we would like it to be. And I think part of that is from, as we've discussed many times, housing industry. I think in the last call, I said maybe we have seen one housing industry-related prospect in our various markets. That has changed. We are now starting to see a few more, particularly when you're looking at single-family housing, particularly in Texas, with activity in Dallas and San Antonio.

We don't see it in Houston; I think that's because just the location of our buildings, possibly our Katy location will attract some of those type users. We have a little prospect activity in the Las Vegas from housing. Florida, we are not seeing the single-family housing activity, but some from both commercial construction and multi-tenant residential.

So it's picking up a little bit, but not so much that we can get excited about it yet. Our increase in occupancy between the second and third quarter ends was really in all size spaces, so we can't point to any one and say we did better there.

Okay. And then just in terms of pricing and what you're seeing in your markets, how have you seen pricing trending for class B product relative to the A's? I'm just trying to get a sense of whether that gap between A's and B's has been tightened any further since, say, the summer 60 days ago.

I want to not just talk about A's and B's, but A through C or D. I would say there is some compression between A's and B's, not any from the C's yet. But, there is still have not been, I think, enough transactions closed that you can identify and have any real statistical significance on that compression in cap rates between A's and B's. If anything, there's even a little more of the lowering among the A's, or certainly they have stayed low compared to what they were a year ago. We hope our asset in Tulsa will be a reflection of a compression for a B property.

I think Ross had a quick one too as well.

Two quick questions for you. First, how much pressure are you feeling on real estate taxes in Florida and Texas specifically?

I've not heard people talk about any big jump in real estate taxes. And maybe since almost 100% of our leases are net or triple net, those are passed through to our customers. They are certainly always looking at total cost to them for occupancy. But if there's pressure upward in industrial, it's filled by all owners. Where you see more pressure is in California, where when an asset changes hands, there's usually a very large jump because of Proposition 13 that has held back the rates until a purchase and sale occur. But nothing yet, to answer your question.

Alright. Second question, on the occupancy side, you've obviously had a nice recovery. Do you feel as though there's any real upside in your portfolio at this point, or do you really feel like you're maxing out here?

I always like to feel that there is a little bit of upside since most people talk about valuations and all at 95%. And before the last recession, we operated a good many quarters above 95, and maybe even one above 96. So that we see some upside there. I think from a same property operating standpoint, there's a little more room in occupancy, but the real change is going to come in rents, and an awful lot of that is going to be determined what happens to the overall economy.

Appreciate it, thanks David.

Jamie Feldman, Bank of America.

Thank you. David, I know you had commented you think leasing spreads turned positive back half of 2013. Can you give us a little more color on a quarterly basis, kind of what to expect here and whether you thought this quarter's were better or worse than expected?

The third quarter was slightly worse than expected. As you recall, in the second quarter, we were a little bit surprised on how good the rent spread calculations were, and at that time, I recall I said that it was -- one quarter does not a trend make, and we'll just have to wait and see whether that's an aberration. The overall numbers were -- oh, excuse me -- then, I went out to the people in the field; they thought the third and fourth quarters would be about the same as the second quarter. It turned out they were just a little optimistic, and the combined numbers were down more like -- I think between the second and -- first and second quarter numbers that we achieved in the third quarter. But I think the positive was the plus number on renewals for GAAP rents.

And we think that going forward, that number is going to continue to be positive and probably improve. The real unknown is how we do on the vacant spaces. So it's not going to be positive by the end of the year, or if is, it would be just breakeven. So we really have not looked at it on a quarter-to-quarter basis yet because we're still in the process of doing our '13 budget projections.

For the vacant space, are you comparing -- even if it's empty, you're comparing new leases signed versus the last lease?

Absolutely (multiple speakers)

(multiple speakers) Okay.

And that's a good point, Jamie, because not all industrial REITs or office industrial companies do that. We are trying to give you every bit of information possible. So we compare whether the tenant moved out yesterday and a new one moved in today, or whether that space has been vacant for three or more years, and whatever that previous user was paying is compared to what the new lease says.

Basically, if it was vacant, it's still incremental NOI regardless of the negative leasing spread.

Absolutely. (multiple speakers)

Do you know, if you were to back those out, what your spread would have been? If it's purely --

No, that's not something we have ever calculated, because I'm not sure what it would tell us. And we've just always done it one way and want to keep it consistent.

Okay. And then looking forward to next year, can you talk a little bit about the expiration schedule? I think you have like 20% of the portfolio rolling. (multiple speakers)

I don't think it's that high, but it is higher than average next year. And there's no question that that presents a big challenge. And we've had many discussions with our asset people in the field about pushing to do earlier than maybe average renewals, which sometimes it's hard to do in industrial, but push for that. And they are all aware of -- there's more turnover next year than we've had over the last couple of years. So like I say, we recognize there is a challenge there.

Do you have a sense of, like, know moveouts already?

Sure. You always have known moveouts and known renewals that you're working on, and some of the moveouts were especially where people are going to buy their own building or build their own building; never happened. Or the time horizon gets much greater than they think. So it's hard to pin those exact numbers down, but yes, you always know about some moveout, some renewals.

And then just the last question back to Brent. What are your thoughts on the sensitivity of demand in Houston to the price of oil? And then listening to debates this week, certainly a lot of discussion on alternative energies. What are your kind of longer-term thoughts on the Houston market if we do become more energy-independent and shift to different kinds of uses?

As a general statement, I would say obviously all of that is positive. The oil and gas companies within Houston right now are a big part of what we are seeing activity-wise. But, with oil prices above $100 a barrel and with gas rebounding, natural gas rebounding from its low point of mid-1s now being it mid-3s, we are seeing all of these companies expand and grow.

Where the breakeven point with oil certainly north of $70 as a general benchmark for them, so they are in good shape there. The natural gas drilling has slowed down with the lower pricing, but the oil drilling has picked up. Most of that and the rig rate count is down just a little bit.

So the long-term feel within the city is positive, and what I can't tell you is that if you drive around the city, you see all of these companies with significant expansions right now. ExxonMobil is building a very large campus up near where I live, north side of Houston just south of Woodlands. It's going to have 10,000 employees. As you drive around town, you've got Weatherford, Halliburton, GE Oil & Gas, Phillips 66, Mustang, Subsea7 -- all of these companies are significantly expanding their facilities. A lot of these companies are putting lots of infrastructure in the Eagle Ford Shale over in southwest Texas. So it's certainly -- Houston is still tied to oil and gas, about 50% of the economy, and right now there is still optimism in terms of the strength of the industry.

Thank you.

Craig Mailman, KeyBanc Capital.

Just to go back to the rent spreads for a second, just given where you guys have occupancy now, it would seem like you have a little bit more pricing power. I know you just talked about the calculation of [Fidelity] with -- on new leases versus the vacant space. Beyond that, is it just that the condition of some of your markets you guys are just outperforming by so much that it's hard for you to push rents? Or is there something else going on?

No, I think it's the former, as you said. We are generally well ahead of the market occupancies. And it's nice to talk about pushing rents, but when it gets right down to it, you have to look at each space that's vacant or are renewals being discussed. and determine how many good alternatives your prospect or tenant has. If they've got 8, 10, 12 good alternatives, you try to push rents, and no matter how good your location or quality of your building is, you're not going to sign the lease. If they have one or two good alternatives, you have pricing power. As you point out, we are well ahead of the occupancy you see in our markets, so there's got to be a little bit of a catch-up there. It doesn't have to get all the way up to our levels; it probably never will. But the closer it gets, the less alternatives that a prospect has and the more power we have to move those rents.

Okay, and just kind of dovetailing that to same-store NOI, I know you said the benefit from occupancy is obviously more marginal at this point. Could we see same-store go negative in early '13 before it kind of reaccelerates as spreads turn positive?

There's always that possibility. I think if it went negative, it would be a very small number, just like it was a small number up this past quarter. But I think that would be temporary. And that's -- it's one of the nice things that we have with our strategy is, if internal operations, the growth there is growth in same property slows or is flat for a quarter or two, the great growth we are having in our development program and our ability to buy good assets we think pick up any slack that's there, and should allow us to continue to grow FFO or FAD, however you want to look at, it in spite of seeing a potentially flat same-store number.

So we should probably still see same-store positive for full year '13. I know you guys haven't given guidance yet, but is that a fair assessment, you think?

We haven't finished our numbers, is my number one reason for not doing it. And we have traditionally given our guidance in the February call covering the fourth quarter. It allows us to be more accurate by having some more operations under our belt before we tell the world where we think we are going to end up the year.

And then on the development ramp, I know you said you could start another $42 million in the first four or five months of next year. Brent was talking about some more activity in Houston, San Antonio, but then you guys bought some land in Charlotte. Is it fair that we may see a more geographically diverse development pipeline next year? Have conditions improved and often other markets?

We think so. A lot can happen between now and first quarter and end of first quarter next year. But yes, if everything works out with the land we have under contract in Charlotte, we would hope to start development of buildings there. We have several sites in Chandler, on the south side of Phoenix, where we think the number can justify new construction. We've bought a site earlier in the year in Denver where it would be a smaller building, but it's next door to our Rampart 3 building which we developed a few years ago. So we see starting something there. And depending on leasing in Florida, we have one remaining building in our Southridge development that's ready to go. And we would hope that by maybe midyear next year the numbers would justify some construction in Tampa. So we have two good development locations there where we can put multiple buildings in each.

And one last one on the financing strategy, you guys have used the ATM pretty well here to match fund on the development side. Just your thoughts with -- it sounds like acquisition activity could improve here in 2013. Just your thoughts on instead of maybe doing so much on the ATM, waiting and maybe doing a marketed deal -- is that something that may be in the outlook?

It all depends on the size of capital that we need to fund our program. The ATM, as you point out, has worked extremely well for us, because we can match funds. The second factor is we like the cost of the ATM at basically a 1% fee versus a larger deal where there's a 3% or 4% investment banking fee, 3% or 4% discount, and if there's any marketing involved with it, then there's usually an additional discount jammed up with there. So we think how we do it is extremely efficient. It fits our strategy.

Okay, thanks guys.

Brendan Maiorana, Wells Fargo.

Thanks, good morning. So for David, or maybe Keith, so how much have you pre-funded, if you will -- if you look at where your balance sheet metrics are today, how much you've raised? And how much -- if you just do that Dallas acquisition, you'd finished the development that you've got, that you're planning to do in the back half of this year in the fourth quarter, and maybe if you start the $40 million of starts in the first half of next year -- is your balance sheet okay with what you've raised thus far on the ATM?

There's a couple ways to answer that. A lot of it will depend on what our stock price is, whether we issue different -- additional shares. We have a tremendous amount of borrowing power, as you can tell by looking at our ratios and our debt levels. But we, I think in the last, call talked about we are at a lower debt to total market cap level than we historically have been, and we like this level around 35% versus 40% or 45%. So again, a lot of it will depend on how many of these potential developments and acquisition transactions occur. And we don't have to match everything dollar for dollar, but we have been conservative and we want to stay conservative.

I mean, just is it fair to say that you think that a 35% debt to market cap and -- call it 6.5 times-ish debt to EBITDA is sort of the metrics that you guys are now comfortable with?

Yes.

Okay, that's helpful. The Dallas acquisition, I know going back maybe a year ago, maybe it was a little less than a year ago, there were couple of portfolios that were out there. It's a market that you guys clearly have stated that you want to grow in, and I think a couple of those deals that came up you -- I don't want to see you stretched for, but maybe were lower going in yields than historically we might have expected from EastGroup. Is that the same with this transaction that's under contract now?

I'm not sure that you could say that we have some hurdle high or low that we shoot at. Every market has a different market rate on yield, given varieties of quality. And in today's world, sophisticated world, you don't steal things. So when we close the transaction we will report the yields that we see generated by the investment, and let you determine then whether we stretched or not.

Alright, fair enough. So -- but you also I think mentioned that you're seeing more just investment opportunities in general. What -- without talking about Dallas, just in general if you're looking at development yields that are -- let's call it with an 8 handle on them, where are you comfortable buying acquisitions, stabilized acquisitions today?

Every market is very, very different. We have different goals and strategies in each market on what we're going to do. We bought the Hayward asset at sub-6, obviously, but we think we've achieved some of the things we were trying to do there. And I'll just throw out -- I mentioned some people in that Hayward market, our average occupancy there is 400 basis points above the average occupancy over 10 years that the portfolio has had. So it's obviously a market where you do better because of the strength of it year in and year out, so a lower yield has more upside, obviously. So each one is different. And as you will see where we buy in different markets, there's going to be a 50- to 100-basis-point spread in yields, because that's what the market is, and some of those reflect the potential upside and others reflect where the institutions are buying.

There have been a large number of packages that have been out in Dallas, and we think there are going to be a large number going forward. Dallas is a market where a lot of REITs are there, almost every major institutional investor is there, industrial, and so there's just a lot of trading of assets. So we see more opportunity to buy there. The numbers as we look at them today don't justify us doing new development, so if we're going to grow, acquisitions are the way to go. Somewhat very different in Houston where the numbers justify new development. We are not a buyer of assets, even though there are a good many portfolios that are in the market have changed hands, so you can see us with the emphasis on development there. So this is an example of we do what we think makes sense in each individual city or market.

Sure. Okay, thanks guys.

Chris Caton, Morgan Stanley.

Thanks. David, maybe I could just follow-up on Houston. Where do you see pricing in Houston today and some of those packages that are being marketed?

Brent can add (inaudible), but it's the A quality assets, A, A-minus are selling at a 95% occupancy at about 6.0. The B-minus to C-plus are selling ratably and the low 8s.

Yes, thanks for that. And also in Houston, maybe Brent also can chip in on this, but you've been developing 8-plus range. Can you talk about the factors influencing that going forward? So, how do you see land pricing trending, how do you see construction costs trending, and obviously market rents -- say over the next year?

We expect to get those similar yields going forward. And a big part of that is that we have the best locations for industrial in the city. And we can charge some rents higher than others do and still get the deal because they want to be in our locations. I'll let Brent add to that.

There has been post-recession, as you might imagine, a larger appetite for land, so we've seen the land costs push up $0.50 to $0.75, maybe as much as $1 a foot in land, still mostly in Houston, the upper $3 range where maybe pre-recession it was low $3 range. Construction costs are up 3% to 5% over the past year, so they've come up a little bit. We think the materials part of that is going to level out. I don't see that escalating a lot.

What we are experiencing in Houston is more of a labor and profit margin fee from contractors. All of the subcontractors and general contractors suddenly over the last six months have a lot of business to bid and quote, and so they are more comfortable now putting a little more margin of their own in there, and that's a little harder to predict going forward. But that's one cost component that I see over the course of the near-term increasing. But all in all, I think costs are going to remain well within range of us to continue with what we are doing, and we are very comfortable. We have a great basis in our Houston land as we talked about, so we feel that we are going to be competitive in the near term.

That's very hopeful, thanks. And just to clarify -- was that a land foot (multiple speakers) in Houston?

Yes.

Just to follow up on an earlier conversation on lease expirations next year, looks like you have a little bit more rolling in Florida across Jacksonville, Orlando and Tampa. David, maybe you could just speak to the trends that you've seen there in terms of the pickup over the last 45 days or so, or just the general velocity in that market. How do you feel about your Florida markets right now?

We feel very good about Tampa, pretty good about Orlando and not very good about Jacksonville. South Florida, we're in Broward and Palm Beach counties, and Dade County/Miami is strong, but the demand has not pushed very far north. We had hoped by now that demand would pick up they are as people either couldn't find space or wanted a lower price space and would move north. That's not happened yet. So only time will tell there. But the economy in Tampa has picked up very nicely, and it's getting better, tourism is up, convention business is up, all -- there's actually home construction in Orlando now. So we are very comfortable with those two. Jacksonville just seems to be a very flat today.

Thanks very much for the color.

Alex Goldfarb, Sandler O'Neill.

Great. Good morning. Just going back to your earlier comments on the housing tenants, you had mentioned that you weren't really seeing them come back, especially not in Florida. Do you need them to come back to get back on all eight cylinders, or are you seeing growth from other small-size tends that as long as those other tenants grow, they'll pick up the slack, and therefore you don't need the housing tenants to be what they were a number of years ago to be firing on all cylinders again?

I think we view the housing coming back, which we've signed one or two leases max and none in Florida related to them yet. It's icing on the cake; it's dessert, because we are over 94% occupied today without them. So as they come back and we think we have the best locations for them, which was proven out during the housing boom time, that it should really give us additional occupancy and particularly pricing power when that comes. It's one of the optimistic things to look forward to, whereas you've heard us say many times, what we've really filled up with over the last couple years has been the basic industries, the basic human needs -- energy, healthcare, clothing, consumer type products, food and beverage. So housing comes back, it should just be a nice big plus for us.

So again, just following up on the previous Florida question, as you look to next year, it's not as though you're banking on housing tenants rebounding to help get rents positive there. Your view is that rents will get positive there on their own. If the housing tenants come back, hey that's great, but it's not needed for those rents to turn positive.

Correct. And in Florida, the way we look at our portfolio today, will probably be the last set of markets to turn positive.

Okay. And then just the final question is -- Vegas, you guys made an acquisition there a number of years ago. Just in the conversations over time it seems like it's a tough market to buy more in. Is there some point at some period of time where you say just we are not seeming to get traction there and logistically to have someone monitor that market, it doesn't make sense? Or, is your view that, hey, it's a great market, and even if it takes us two or three more years to build on that position, we are willing to stick it out and it does make logistics sense for us?

We think that, at some point, Las Vegas is starting to come back a little bit, but will come back very strongly. There's never going to be another Las Vegas; there's never going to be the capital available to do something like that to compete with it. So we think it will come back, and we believe we will have additional opportunities to build there. It's very easy to cover that little asset out of our Phoenix office, and our fellow on Phoenix, his mother lives in Las Vegas. So it's really easy for him to get up and have a free place to stay when he goes there. So we don't see any timetable that we need to exit.

Okay. Thank you.

Paul Adornato, BMO Capital Markets.

Hi David. Just one quick question. You may noticed that Iron Mountain has decided to pursue REIT status. I was wondering if they have talked to you about their intentions for their leased real estate.

We have not gotten any indication that in any of our various locations -- they must be in 6 or 8 buildings with us anyway -- that they plan to leave. We have one maturity lease next year, and we are in discussions for them to renew that lease. So if they are planning to pull out of industrial buildings, we've not heard of any of that yet. That could certainly happen into the future, but my impression is they're not far enough along to have announced anything along those lines.

Okay. And are any of the Iron Mountain leases in single-tenant buildings?

My recollection is no.

Okay, thank you.

They have spaces in our multi-tenant facilities.

Great, thanks.

John Stewart, Green Street.

Thank you. Brent, since we've got you on the line, could we get you to speak to the broader supply picture in Houston? I know a lot of what you guys have under construction are build-to-suits. But it seems that the fundamentals you're describing have not been lost on your competitors, both public and private. So, can you kind of help put the market supply picture in perspective for us?

Yes, that's a good way to put it. It's not happened in a vacuum and it's becoming more crowded party, so to speak. We've seen -- we were the first in Houston to come out post-recession with buildings and were quickly followed with the REITs. People had readily available cash, Liberty, DCT, to a lesser extent ProLogis. We all began to get pretty active. And what we've seen in the last six months and what's being talked about with projects going forward is we are finally seeing some of the regional and local developers having put their deals together with equity partners and those type things, and so now groups like that are joining in.

So it always bothers me a little bit that there is -- you'd just as soon do it with no competition, but I think it's still at a healthy level. But as with any cycle, with things continuing to be strong and grow, there will be more space put on the market, more competition. But to date, it's pretty diverse across the city. Most of that development is happening in 3 or 4 different submarkets. We feel real good about our locations compared to those, but I think you will see, certainly, more supply over the course of the near term.

We believe we outperformed with the competitors before the recession, and we think we've improved our land position since then. So we are reasonably confident. Also, a lot of what's been announced is in bigger buildings -- well, bigger from Houston's standpoint, not bigger from California's standpoint -- and, as a result, not competitive with our business distribution product.

When you say bigger from a Houston perspective, David, what size are you talking about?

Over 200,000 square feet.

Okay.

Cross dock type buildings, or buildings with a much higher office finish than we do.

Got it. And then I think you had referenced low A through B quality assets in Houston. Can you help us put some parameters around what Tulsa might look like?

We are assuming that it could be anywhere from high 7 to the high 8s. We've got a lot of interest in these two buildings. They're extremely well located. They are older, but they are extremely well located. They've got a great leasing history not too far from the airport, right -- tucked up in a major interstate interchange. So we have been pleased so far with the activity and we'll get the bids on them in another couple weeks.

Okay. And, lastly, could I ask Keith to kind of comment on balance sheet strategy and timing? Last quarter, we talked more about the prospect of obtaining a second unsecured rating, and how does that process look like? At what point might we see you tap the unsecured market?

We are still looking at unsecured. We've probably planned to do unsecured financing, continue that and not do secured. We are talking with some credit rating agencies and hope to get another one on that soon. And as David said, we hope to keep a lower leverage. We thank all those things will add up for us and make it more attractive for us in the future on financing.

Do you think you might hear back from the rating agencies first half of next year?

I think so.

Okay, thank you.

Bill Crow, Raymond James.

Good morning, guys. David, a couple of questions for you. The first one is, as you think about your roll-over next year, rough terms, how many of those leases were signed post-market correction, and how many were still at the higher rents from pre-correction?

We've got a lot of looking at that. I guess we still have about -- of what's turning probably about 35% are post-market. What's hard to match up is you have vacancies that were post -- excuse me -- pre-recession, or pre-recession leases; you've got vacancies that are post-recession leases, and until we get into each suite, each space as part of our 2013 budget, it's very difficult for us to point a finger at what spaces are going to lease. Is it going to be the post-recession lease space vacancy or the pre-recession leases space vacancy? And then come up with an accurate number on it, and whatever number we give you, we'll be off a little bit, then I'll hear about it next quarter. So I'm going to mumble on that one until we get our budgets done.

If we used, say, 65% was pre-correction for next year, just how does that change in '14?

No, I think the numbers would be reversed on that. The 34% would be pre-correction. (multiple speakers)

So it's a big swing year, when we go from '13 to '14?

No, ask me that again, I'm getting confused here.

If you said that 65% of the leases roll next year maybe --

No, excuse me, I meant 65% have rolled.

So only 35 go back to higher market rents that are going to be more of a challenge. (multiple speakers) again further in 2014, right?

But there are so many different ways to look at that. And when -- we've got vacant space today that we are going to lease, and some of that is -- if you want to compare higher rent space versus lower rent space. And so it's how you project how that is leased and when it is leased is how we're going to end up reporting the numbers.

No, I got it. I mean I think it's became clear to more people that you include the vacant space (multiple speakers)

And then to confuse your list a little bit more, you look at -- of the space that pre-recession leases that haven't turned, a bunch of them are going to turn in '14, '15 and 16 because they were longer-term development leases. So we are not going to see those turn in '13.

Got you.

So, like I say, until we get down to what we think is going to happen in each individual space, it's hard to say what we think is going to happen to rents, and some of it is scientific analysis that we have been doing, and some of it is just gut feel.

Fair enough. Let me go to an easier question here, which is can you kind of give us a feel for how much of the lease in the third quarter was seasonal in nature, and how much of kind of it, if we are at that 94, 94.5 level through the fourth quarter, what sort of drop-off you would expect in the first quarter?

We always have a lot of leases that generally are expiring 12/31 or end of January. So we have not -- I have not looked at our January numbers, but I assume we will dip in January. I think we've done that in the last 4 out of 5 years compared to year-end. We have right now -- if I recall correctly, just one good sized seen seasonal lease in New Orleans.

Very good. Thank you guys. Appreciate it.

Mitch Germain, JMP Securities.

Good afternoon. Maybe for Keith, have you seen any change in the way banks are approaching financing for development?

We finance development through our bank line, and so we will borrow straight from it. And then as it gets above $100 million or so, then we go out and either issue equity or get fixed rate financing. So we don't get construction loans on that, so I'm not very familiar with that.

Okay, I thought maybe from your chatter with the banks, you'd gotten a sense that they were maybe more open or not. David -- go ahead, I'm sorry Keith.

They are open to -- they like their term loans, and they used to do, back in previous year, in '11 and maybe the first part of '12, they were doing term notes past five years. But now they've gone back to just five years and under on their term notes.

Okay. And then, David, just looking at that acquisition pipeline you noted, would you refer to it as more core or possibly more value-add?

I would say core. I mean, that's -- and people are looking at properties like we are, at what 95% occupancy numbers are. Sometimes it's hard to determine a cap rate or what the market cap rate is if there are in-place rents that are still above market. What we've looked at recently, the in-place rents are on average about right at market, which is the portfolio we bought in Tampa in December, and the one in Dallas we hope to close before the end of the year. That's where it makes it a whole lot harder to evaluate what really hit the market yield or cap rate on this portfolio. But as more time passes and more of the leases have turned and it's easier to do that.

Thank you.

Jamie Feldman, Bank of America.

I'm sorry. I was hoping you guys could quickly comment on the Charlotte land acquisition, and your thoughts on that market going forward for growth.

The Charlotte market had a dip, but not as great as Florida, Arizona or Southern California markets did and has strengthened a good bit recently. And we think with this land acquisition, which is just west-southwest of the airport, a stone's throw from a new intermodal facility that the city is building next to the airport, it's right up in interstate interchange and the previous owner put in the road and utilities. So we think that once we get the zoning, we should be able to do some construction, and if the existing rents in that sub-market justify spec development. So we are very upbeat on that and see that development will probably be our way to grow in Charlotte, rather than any big portfolio purchases, unless the exact right thing comes along.

The office market in Charlotte is very different than the industrial market because of what's happened with the big banks and all. But we are optimistic on the industrial side.

Thank you.

We have no further questions and queue.

Okay. Thank you, everybody, for calling in. As many of you have heard me say, I am more optimistic today about what we're going to be going over the next 12 months than I was 12 months ago, with one caveat. As long as the government doesn't screw it up and we have the fiscal cliff actually happening, or some other things that kill the economy, we've got a lot of very positive things happening at EastGroup. As always, if we didn't fully explain any of your questions or cover any issues, please don't hesitate to call Keith or me, and Brent will be in the office this afternoon too. So anything you want to direct at him, you can do that. Again, thank you.

That concludes today's program, have a great day. You may disconnect at this time.