Eastgroup Properties Inc (EGP) 2013 Q3 法說會逐字稿

Good morning and welcome to the EastGroup Properties third-quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. Now it is my pleasure to introduce David Hoster, President and CEO.

Good morning and thanks for calling in for our third-quarter 2013 conference call. We appreciate your interest in EastGroup. As usual, Keith McKey, our CFO, will be participating in the call. 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's subject to the Safe Harbor statement included in the news release is accurate only as of the date of this call.

Thank you. The third quarter was another productive one for EastGroup. Funds from operations of $0.83 per share, again, exceeded the upper end of our guidance range and represented an increase of 9.2% as compared to the same period last year. We have achieved FFO per share growth as compared to the previous year's quarter in 9 of the last 10 quarters. Strong leasing activity increased occupancy to 95.7%, the highest level since the third quarter 2007. Same property cash rent operating results were positive for the 10th consecutive quarter.

We continue to expand our development program with development leasing exceeding our internal projections and we increased the midpoint of our guidance by $0.03 per share to $3.23 per share for 2013 -- the second increase this year. As of September 30, we were 95.7% occupied and 96.3% leased. Both figures represent increases over the end of the second quarter and we're well ahead of our internal expectations. These results reflect both the improving industrial leasing fundamentals in every one of our markets and the quality of our assets.

Prospects are becoming more decisive and moving to lease more quickly. We have moved past the stage of just a flight-to-quality and are now experiencing a real increase in both customer expansions and new users to the marketplace. As might be expected, our Texas markets were the best at 98.2% leased followed by our California markets at 97.9% leased. Houston, our largest market with 5.6 million square feet, was 98.7% leased and 98.5% occupied. For the first time in a long time all of our core markets were above 91% leased and occupied. In all of our major markets rents from the higher quality assets are increasing and should continue to improve as market vacancies continue to decline.

It is foo early to say that we are in a landlord's market or that we have real pricing power, but we are certainly heading in that direction. Looking forward, we expect occupancies to remain in the 95% range for the balance of this year. In the third quarter we renewed 62% of the 1.5 million square feet that expired in the quarter and signed new leases on another 24% of the expiring space for a total of 86%. We also leased 562,000 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 279,000 square feet since September 30.

For the quarter GAAP rent spreads on renewal leases were up 3.5% and up 0.3% on new leases. Cash rent spreads were negative 2.4% on renewals and negative 6.3% on new leases. Average lease length was five years, which is well above our averages for the past several years, and probably reflects prospects' growing confidence in the economy. Tenant improvements were $1.98 per square foot for the life of the lease or $0.40 per square foot per year of the lease, which is slightly below our recent average. The average amount of concessions continues to slowly decline. As a result of our strong leasing, third quarter same property operating results increased 1.7% on a cash basis and 2.2% with straight line rent adjustments.

As previously reported, we purchased Interchange Park II in Charlotte in July for $2.4 million. This business distribution building, which was constructed in 2000, contains 49,000 square feet and is 100% occupied by a single user. It is located adjacent to our Interchange Park I in the city's north submarket. We currently do not have any properties under contract to acquire.

Looking at dispositions, we sold a 2.2 acre parcel in our new Horizon Commerce Park development in Orlando in July for $1.4 million and recorded a small gain. In Tampa we currently have two small buildings under contract to sell and hope to sell two additional small buildings before year-end. We're also working on the potential sales of several older properties in Dallas.

Our development program has a long successful record of creating and accumulating value for our shareholders over the past 17 years. We have added 11.5 million square feet of quality state-of-the-art assets and, as a result, have now built over 1/3 of our current portfolio through our development efforts. During the third quarter we continue to grow our development pipeline ending the quarter with five buildings in lease-up and nine under construction. They contained over 1.3 million square feet with a combined projected investment of $91.4 million. They are currently 55% leased.

During the quarter we began construction of five buildings with 574,000 square feet and the total projected cost of $37 million. Two of these are 100% pre-leased. Also during the quarter we transferred four buildings with 233,000 square feet into the portfolio -- Southridge X and World Houston 34, 35 and 36, all of which are 100% leased. Since the end of the quarter we have started Rampart IV in Denver with 84,000 square feet, a projected cost of $8.3 million. Year-to-date, we have started 13 developments with 1.2 million square feet and an expected investment of over $84 million. Our 2013 guidance assumes additional development starts of approximately $10 million for a total of $94 million for the full-year.

Keith will now review a number of financial topics.

Good morning. FFO per share for the third quarter increased 9.2% compared to the same quarter last year. Acquisitions, development and same-property net operating income were all contributors to the increase. FFO per share for the quarter was also $0.02 higher than our projected midpoint, primarily due to such strong same-property NOI results. Debt to total market capitalization was 33.1% at September 30. For the quarter the interest in fixed charge coverage ratios were 3.9 times and debt to EBITDA was 6.5 times. Adjusted EBITDA -- debt to EBITDA was 6.2 times.

During the third quarter we repaid a $33.5 million maturing mortgage loan with an interest rate of 4.75% and closed the private placement of $100 million of unsecured notes. The $100 million of notes have a fixed interest rate of 3.8% with principal payments of $30 million in 7 years, $50 million in 10 years and $20 million in 12 years. We plan to prepay a $50.2 million mortgage on December 5, 2013, with no penalty. The mortgage note is due on January 5, 2014, and has an interest rate of 5.75%.

In September we entered into an unsecured term loan for $75 million with a seven-year term and interest only payments. The loan has an interest rate of LIBOR plus 1.4% subject to a pricing grid for changes and the Company's credit rating. We also entered into two interest rate swaps to convert LIBOR to a fixed rate providing an effective fixed interest rate of 3.765% on $60 million and 3.7% on $15 million. The loan is scheduled to close on December 20, 2013.

We continue to sell shares under our continuous equity program to keep our debt ratios in line as we acquire and develop properties. In the third quarter we sold 296,435 shares, or $17.9 million, or $60.34 per share, and have sold 579,198 shares for $34 million, or an average of $58.70 per share for the year. Our guidance for the fourth quarter assumes the issuance of an additional $17.5 million of shares through the ATM before the end of the year.

In September we increased our quarterly dividend by $0.01 per share and paid 135th consecutive quarterly cash distribution to common stockholders. This dividend of $0.54 per share equates to an annualized dividend of $2.16 per share. Our FFO payout ratio was 65% for the quarter. We have maintained or increased our dividend for 21 years and have increased it for 18 of those years.

Rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property and operating income. And, again, we believe this revenue stream gives stability to the dividend. FFO guidance for 2013 has been increased and narrowed to a range of $3.22 to $3.24 per share and the midpoint was increased from $3.20 to $3.23 per share. This is the second time we have increased the midpoint of our guidance for 2013. Earnings per share is estimated to be in the range of $1.04 to $1.06 per share.

Now David will make some final comments.

We had a strong third quarter following a strong second quarter, both of which were led by good leasing ahead of our expectations in both the portfolio and our development program. Our balance sheet is as strong and flexible as it has ever been and we believe is well structured to take advantage of future opportunities for the remainder of this year and well into 2014.

Keith and I will now take your questions.

(Operator Instructions)

Michael Bilerman, Citi.

Good morning. This is Kevin Van with Michael. The 90% occupancy guidance for the fourth quarter seems a bit light to us given the 95.7% occupancy in the third quarter and a higher lease rate. Could you help us bridge the gap on that?

Well, simply to stay above 95% or get back above 96% is still not easy to do in our various markets, given what's going on there with the market occupancies well below where we are. So, we just think it's conservative and is lined with our current budget for the balance of the year.

But are you expecting -- David, this is Michael speaking -- is there a certain amount of fallout to average 95? If you start the quarter 95.7, one would imagine you were expecting a fair amount of fallout to get down to an average level and you don't have that much rolling.

No. We have a tenant that's in several buildings in Houston that is moving. They were bought out, I think it was by Schlumberger, and they're moving to a new campus out in Katy. So, we're going to lose some there. And, again, part of it is just what our internal projections are. Do I hope to beat 95% on average? Yes. But there's not a lot of room on the upside to beat it by a lot.

Okay. Thanks. And then also could you break down the tenant demand? Like has there been any incremental change in the housing related talents and so on?

Absolutely. We have not, this quarter, actually quantified in every market the growth in housing-related talents. But we are seeing a steady increase in both prospects and signed leases. And, I guess, also I should add, in expansions internally. Sometimes the large in which they related to housing. We just announced a while ago a 202,000 square foot build-to-suit, which is going to be World Houston 40, in that development with Mattress Firm. So, I guess that's related to housing because that's where mattresses usually end up.

We're seeing, out in Katy, two prospects that are both related to housing that we've not signed either yet, but are dealing with them. And a pickup, really, in all the other markets. But maybe the next conference call we'll actually quantify the amount of square footage that we've executed for the year with housing tenants. But it's a clear pickup.

Is there any other tenants that are -- you see a lot of? Because you saw so many occupancy gains in the quarter, so is there any other strong tenants out there?

We're seeing continued in medical with the pharmaceutical fulfillment that filled our latest -- our second to last building in Orlando. The newest building was just filled by a group expanding related to the convention center, which I guess referred to as a tourism. We signed a 300,000 square foot lease in Charlotte with Conn's, the electronics retailer; again, consumer oriented.

In Houston there's still a lot of energy and the backup to energy because of the growth in population in jobs. There's a lot of new construction, so some of that's related to commercial construction, probably at least in the short term more than even residential construction.

I'd say again, it's still in the basics. But as I mentioned in my prepared remarks, the good thing is we're seeing our existing customers starting to expand, and we're starting to see new prospects entering the market. And both of those facts are really what drive up occupancy and eventually allow you to really move rental rates.

Okay. Thank you.

Brandon Cheatham, SunTrust Robinson Humphrey.

Thank you. Good morning. Just real quick, you mentioned that concessions have continued to decline, and we saw that in this quarter as well. Would you say that that's a result of a shift in leverage somewhat from the tenant to the landlord? And what are your expectations for that going forward?

To continue to decline, but do it fairly slowly. There's less free rent being given when you look at how many months it is per year of the lease and, in particular, in our development leasing, where it somehow it seems easier to give free rent there because you've built in a lease-up period, we've significantly reduced the free rent. Also, in the concessions is there a lot less of broker incentives, bonus commissions, an extra percent or two to the procuring broker, that sort of thing.

So it comes from all sides on that. But that comes down slowly, and it's part of the shift of the mentality or the psychology from a prospect or tenant market to a little bit more of a landlord market as prospects realize there are less choices out there and that if they don't keep moving and make a decision, somebody else is going to lease that space out from under them. And that takes a while for that to shift, but they say it's happening.

Okay. And then can you just talk about some of the proposals for new space compared to the supply that's coming online in your markets, and if there's any concerns about supply outpacing demand in any particular market?

Well the only market where we're seeing a significant -- the only market that we operate in where we see a significant increase, or almost any development of industrial space, is Houston. And so far that's been absorbed fairly readily.

Depending on whose statistics you look at there, if you -- one brokerage firm, if you add spec and build-to-suit together, it's about 9.9 million square feet of new construction. If you look just at spec, it's 6.2 million square feet and that's in a base around 500 million to 550 million square feet and year-to-date absorption is about 4 million square feet.

So, for the year it will probably be about evened out, I think. But I think we're going to need to address that question again, and in 6 to 12 months if some of that newer space doesn't lease as quickly as developers would like. And we'll see if that has any damper on rents on new space, which eventually could reduce the yields that developers are expecting by at least a little bit.

But so far, Houston's been able to absorb it. There's little or no development in the rest of our markets. A number -- we're the only one building spec at this time. San Antonio, Charlotte -- there is a little bit of additional spec development in Orlando now but a lot of these markets just aren't strong enough for people to -- the merchant building types to jump back in.

Now just one last question -- on the $75 million unsecured at 3.75, that was a private market deal. Do you have a sense for what that would be in the public market? And how does that compare to the 4.5% that you guys quoted in the second quarter?

Well the 4.5 was on the 10-year note and we were looking at 10 and 7. We had a nice little hole in our maturity gap -- maturity schedule where we could put 7-year in and when we were looking at 10 versus 7, the 10-year was almost 1 percentage point above. So it was actually above the 4.5 when we were looking several weeks ago at about 4.7%. Decided to go with the 3.7%.

Okay. All right. Thanks a lot, guys.

Jamie Feldman, Bank of America.

Thank you. I was hoping you could talk a little bit about some of your weaker markets or, if you look at the same-store page, the ones that have been the biggest drag on the same-store growth, and just how the recovery is coming along there? Mostly the Florida markets and California?

The Florida markets are all -- it's a little bit fits and start improvement. In the third quarter, and really the end of the second quarter, we saw some very positive movement in both Jacksonville and Tampa. Tampa had been slow in the first quarter. Nobody had a good explanation for that other than just timing and it has picked up a good bit for us in the third quarter. But on the comparative basis last year was very strong.

Jacksonville, we had hoped to by the end of the third quarter be over 90% and got up to 91.9% occupied there. So that was a positive. We had a lot of leases turning, but there's been good activity and, as a result, we're able to improve that. So, we've been pleased with the improvement in Florida, although the averages are still below the Company totals. California -- there's really not been that much change that we just haven't had much turning. So, I don't think right there it's been really statistically significant. We have a vacancy of one of the two buildings in our Yosemite development, or property, in Northern California. And with only 1 million square feet there that's really affected the same-store.

Along those lines, what are your latest thoughts on leasing spreads and maybe your outlook on when they can turn positive? And if you look at your leases rolling in 2014, what your sense is of the mark-to-market?

Well, again, you've heard me say many times, it's what numbers do you compare to which numbers? I've been preaching that we probably give too much information, because I'm not sure if any of our office industrial or industrial peers give the information on renting vacant space where that space has been vacant for more than a year, which is what we do.

So after some thought we've decided that really the most important numbers from a trend standpoint to look at are renewal rates. And if you look at our renewals on a GAAP basis, we've been positive now for six quarters. And I think GAAP is an important number to look at in today's environment given that 92.5% of our leases have bumps in them and those bumps average from a little over 2% to 3%. And so that in many cases what we're doing is with the renewal over leasing, the vacant space is making the first year's rent not go up or make it attractive as not really a teaser rate, but to keep somebody and then have annual bumps thereafter that don't get included in the statistics that we report.

So if you look at 2014 and -- which we have -- and say okay, how many leases were signed in 2008 and earlier are turning in 2014? It's 1% of our portfolio, 1.0% of our portfolio of 33 million square feet turning next year are leases signed 2008 and before. So, I think that that should be a good indicator that the leasing spreads, no matter how you look at them, are going to appear a lot more positive during 2014 than they have in 2013.

Okay, great. And then finally, just thinking about your -- where you think the path of development goes here and comparing it to your land bank, do you feel pretty well positioned? Do you think you need to buy land in specific markets based on where this recovery seems to be heading?

We are actively looking for land in Southeastern Florida, not really Dade County but Broward and Palm Beach, because we would very much like to grow down there and that market continues to improve. A lot of new building in Dade County, but not in the other two yet.

We have a couple little pieces of land in Dallas but we'd like to have a bigger piece there to do a series of buildings. So we've been looking in that market. A lot of competition trying to do the same thing.

We like what we have in Charlotte. That has been a surprisingly good market. Third quarter and for the full 9 months of this year, and we're hoping to tie up some additional land there before the end of the year.

We're pretty much set in Houston right now and we'll have development going in three different locations, but the success of our Katy location has us looking for additional land out on the far west side. And the completion of that Grand Parkway for about 1/3 of its distance in the next two years we think is really going to open up that area for industrial development.

Phoenix -- as you could see in our statistics, we just leased the spec building that we started earlier, Chandler Freeways. We leased it about a month before it was to be completed to a single tenant and hope to start on some land -- other land we have in Chandler where we can put, I think it's five buildings, but are looking for land there for our business distribution product but not any big bulk buildings, which is most of what the development is in that on the west side of town.

Okay, great. Thank you.

Craig Mailman, KeyBanc.

Good morning, guys. David, of that 6 million square feet of spec in Houston, how much of that is comparable to your product at World Houston and some of your other parks in Houston?

The direct competition right now, the World Houston, is Trammell Crow with the money partners building two of our type buildings on the east side of the airport. And then on the west side, Verde and Liberty both have some buildings that for the larger tenants will be competitive with us. Some of the other buildings, both on the west side and on what Duke's doing on the east side, are bigger, more cross-stock, over 200,000 square foot facilities that we're not going to have any direct competition with.

Out in Katy, Transwestern has a development almost across the street from us. But we've been signing leases well ahead of what they're doing because of the quality, extra pizzazz we've put on our buildings out there.

Then we hope to start development in, if not before the end of the year, first quarter, on our West Road development right off of Beltway 8. And it's a little too early to tell who might we be directly competing with there, but an awful lot of what's going on is the bigger cost stock. Well, in Houston, bigger is over 200,000 square feet.

So haven't put an exact number of square feet to compete with us directly, but when we had competition on all those locations before the recession we did pretty well. So we think we can continue to outperform, but maybe not quite at the pace that we've seen at World Houston over the last year and a half, which has been pretty amazing.

So I know you're -- it's too early for 2014 guidance here, but you guys have done $94 million, or expect to do $94 million. It starts this year. Are you -- it sounds like on the margin, maybe at least a little more cautious heading into 2014 given the new development? I mean could that potentially slow, or would you -- I mean would it ramp from here?

Well it's all based on leasing. We don't set goals. You give goals to developers and they'll go ahead and build it. So it's all based off of what we're doing with the existing spec buildings that we're creating in our various parks. So, I could see Houston slowing a little bit, but I would hope that Orlando would pick up.

We've got one building in our construction there now that we can start one or two more there next year, maybe be able to do a build-to-suit. We have two attractive locations in Tampa that I'd hope we would be building on at least one of those early to mid next year.

We have some good land on the west side of San Antonio where we would like to add buildings. And the early interest in our Steele Creek Charlotte park has us encouraged that we'd be able to do a couple of buildings there next year. So, some of the other markets we'd like to see a pickup that would hopefully more than make up with any potential slowdown in Houston.

Okay. That's fair. And then just I noticed in the Chandler asset you guys leased post quarter end, it looks like you guys had underwritten or were expecting a little bit of higher yield last quarter. Is that still within your tolerance range for an 8 yield on Arizona? Or is there any dynamic there that kind of brought it down the 40 bps?

We might have brought it down 25 to 30 basis points from an 8.3 to a little over an 8.0. We jumped at that because we thought if we could remove the leasing risk, which is really what we see as the only risk -- construction risk has been pretty minimal for us. The leasing risk -- if we could eliminate that before the building is actually brought to market, we'll jump at 8 yields all the time. And then that allows us to move into our Kyrene 202 park that's a couple of miles away from Chandler freeways and hopefully start two buildings there first quarter next year.

One of our stated goals is to have 150 basis points spread at the minimum on what our pro forma yields are compared to what we could sell a building for. And I think new quality buildings in Phoenix at this point would certainly be sub 6, or at the worst a 6.0. So we've got a very good spread on that. And so that's -- we did that intentionally understanding where we were going with it.

Great. Thank you, guys.

Alex Goldfarb, Sandler O'Neill.

Hi. Good morning. How are you? First question is just going to 2014. One, you've got Iron Mountain that's expiring in January. But more, you've got a huge amount of expirations with the US Postal Service. So maybe if you could just talk us through like when tenants -- how far out tenants typically renew. And then as far as the US Postal Service, are those tenants that typically, once they rent space they tend to renew or do they actively go out and seek -- it would seem like they just keep renewing in place, but I didn't know if federal cutbacks or anything -- maybe they're looking to close any locations.

So far with the Post Office we have no indication that they will not renew, and we are in renewal discussions with a couple of those locations already. So, there's a certain level of, as you point out, if they're there, they're a whole lot easier to renew.

They do not have to -- like a GSA -- if they go to new space, they have to bid it out. It becomes a very complicated process. Renewals are very easy or relatively easy. So we're optimistic on the Post Office and we are optimistic on Iron Mountain. They tend not to pick up and move, given how difficult and expensive that is. So we're optimistic that will be a renewal also.

Okay. And second question is, Keith, you have about $75 million in maturing mortgages next year. I think based on your prior comments it sounds like it's pretty safe to say that you guys will pay that off with new unsecured issuance. Correct?

Correct.

Okay. And then just given what rates have done since you guys originally priced your unsecured this year, how much do you think new unsecured term loans, or private placement, is up from where you originally did your deal earlier this year?

We did a 3-, 8-, 10-year, and we struck that deal in, I think, March, and I would say that would be around 4.5 now.

Okay. And then -- okay. That's perfect. Listen, thank you.

Brendan Maiorana, Wells Fargo.

Thanks. Good morning. David, listening to your occupancy comments, is it fair for us to sort of think about the -- an average occupancy, even in a pretty strong market, that it's difficult for the portfolio to be above 95% for an average for a year if you just kind of think about some frictional vacancy and tenants moving around?

If we look back at peak, I guess you want to really go back to 2006, 2007, early 2008, we were averaging -- or we were finishing quarter end, which is probably a reasonable number to average anywhere from second quarter of 2006, 94%. We were over 96% one quarter, and mid to high 95% for about five or six quarters. I think one of the big factors is going to be is how much new supply comes on the market. And so far, other than Houston, at least in our sunbelt markets, it's nonexistent. So, I think that gives us a better chance to stay in the 95% to 96% range. Certainly, I don't think you can -- it's difficult, obviously, to average 96% for any period of time. But I would hope that we could average 95%, give or take a little bit for the foreseeable future.

Sure. No, that's helpful. And then that stat that you provided that pre-2008 in pre-rents that are expiring next year is helpful. Do you have a sense of what that number was this year?

It was a lot higher. Let me see if I -- let me pull out one of my sheets here. It was about half again as high, I guess.

So it was about 2% versus 1% for 2014? Okay. Yes, that's great. And then --

But the other thing too is I've -- as you hear me say many times, when you look -- when we release vacant space, the statistics can get out of whack when we compare -- it's which vacant space and when did it become vacant? Where it's very different comparison if the space has been vacant one month versus whether it's been vacant two or three years. So, that's where I come back and say, to me, the apples-to-apples comparison is renewals.

Yes, right. So, we should sort of think about the renewal spreads, 2013 versus what may happen 2014 given the drop in the rollover of the pre-2008 leases.

And hopefully increase in the slow increase in market rents in our various markets.

Sure. Yes. Well, the good thing about your stats is that you don't have a lot of vacancy to fill. So, that won't be a burden on you come next year. Just last question, any sense of yield that you're likely to get, or cap rates on the dispositions that you mentioned?

They're going to be -- well in Dallas we're looking in the 7's when you average the buildings together, which because Dallas is a strong market, that's better pricing for us than it certainly would have been a year or two ago. The little buildings in Tampa harder to put a cap rate on those because one of them is vacant. So if you put that in there, it's probably a mid-7, but a couple that are leased are going to be around a 9.

They're older, smaller buildings. And these were buildings that when we bought that large Tampa portfolio in December of 2011, we announced that there were 6 small buildings that didn't fit us, and that we were going to sell those over time. Two we had put in our TRS immediately and sold those. And then the other four went into the portfolio because we thought we could improve the leases. And so we're waiting for the two-year Safe Harbor on selling those assets.

Yes. Okay. Great. Thanks for the color.

John Guinee, Stifel.

Just another great quarter, David. How are you doing?

Thank you. We've got a good group in the field.

If we think about this over the long term, it looks to us like over the last three years that you're getting one way or another rather 20% to 24% annual lease rollover or, said another way, leases signed equal about 20%, 24% of total inventory. And it looks like you're bouncing around $3 a square foot for releasing costs when you blend new and renewal. And then, basically the GAAP positive, cash negative, has been around a while. What of those three major metrics do you see moving in the next couple years, and which way do they move?

I think you're high. We can go through some more details later, but I think you're high on the roll because we're generally looking at about -- our average lease length when you put in the development properties is over five years. And we're now signing longer leases and what's rolling on a regular basis.

So we're usually looking at about I think an 18%, 19% most on the roll. I think leasing commissions are going to come down a little bit because we're still paying some higher commissions in some markets like Phoenix. And I think if you look back historically on our TIs per year lease, those are going to come down a little bit. But they're always affected by 5% of space that we have that's service center or R&D with a higher office finish. But certainly market rents are going up. So, that should, I think, be the biggest plus factor.

Got you. Okay. Just to clarify, the way I was looking at this is over the last nine months your total -- I mean your four categories of lease signed is about 5.6 million square feet. If you annualize that, that's about 7.4 million square feet off of a 32 million square foot base -- gives you roughly 23%. But we can talk about that a little more.

Yes. I think the second quarter historically has more leases signed. It's not a pro rata 25% each quarter or anything like that. We'll go over that later. The second quarter is always way high for us.

Great. Okay. Thank you very much.

Vance Elderson, Morgan Stanley.

Hi. Thanks for taking the questions. So you're active on the development front given the strong demand you're anticipating, but beyond Houston, the competitive development is nonexistent, as I think you called it. Do you think your competitors are not as optimistic about the fundamentals, or is it that they still have plenty of space, as you mentioned earlier? Or, perhaps, they're just not as well funded, or some combination of these factors?

I think a lot of our REIT peers have a strategy of building bigger buildings. And so in some of our markets they're not -- there's not a demand for that yet because most of the Florida markets -- they're not big distribution centers like an Atlanta or Chicago or the west side of Phoenix. So some of them have not jumped in for that reason.

Secondly, some of them don't have the land positions that we do. And then to jump around on your question a little bit, we're only seeing the merchant builders come back in in the strongest markets where they're attracting institutional money as a partner or participant in one form or another, as we see in Houston, where I think AW, Clarion and some others who want additional exposure to industrial real estate have found the best way to do it is to hook up with a developer.

What we've seen absolutely zero of is the smaller local developer who traditionally would go to a bank or insurance company and get a construction loan and a takeout. We've not seen any of that yet. But we expect to see, as markets improve, some of our peers start to do some more development. But very few people build our business distribution type product, which helps.

Okay. Makes sense. And then speaking of the land bank, you've been able to secure a pretty nice basis with some of the recent land deals, like the Municipal Golf Course in Houston, but not a lot of properties currently under consideration for acquisitions. Is that a reflection of your discipline that you really don't want to consider anything unless it brings with it a special situation, so to speak, in terms of being unusually attractive? Or are you willing to really go out and pay market price and just have a fair basis as opposed to an attractive one?

I think one of the reasons that we have -- that we build at a higher yield than some of our peers is because of the way we were able to buy land during recession periods and, in many cases, buy land from either distressed sellers or sellers that just made up their mind it was time to sell and a time when there was -- there weren't a lot of buyers. That's worked well for us and I won't go through all our examples on that.

But another factor is we've been able to buy larger pieces of land that way where we can create parks and go through one phase after another of new buildings, building on that land. Right now Houston is a tough place to buy industrial land because everybody's looking for it. So some of the prices we're hearing are 1.5 or 2 times what we have in some of our land. Again, which makes us more competitive when we start pitching on build to suits or building spec. But it's -- we're always looking for additional land because if you need it tomorrow is the point where you have to pay up for it.

Got it. Okay. Very helpful. Thanks, David.

Eric Franco, Green Street Advisors.

Thank you. David, can you just talk about the potential sales of your property in Dallas? I think the theory a couple months ago was that Class B and C quality buildings have probably taken the brunt of the interest rate increases, but that doesn't seem to be the case. Can you comment?

Well one of the sales we're talking about, our tenant had an option to buy the building and they've gone ahead and exercised that and it's a price that we both think is attractive. The other -- I don't want to go into too much detail because it's not completed yet, but Dallas and Houston have become very attractive markets for buyers. And I would guess these older buildings are viewed as value-add and when a market is strong is the time to sell some properties that you've been thinking about for a while. So that's -- we feel fortunate that that's fit together.

Thanks. Are you seeing that trend outside of Texas?

Not really, because we haven't tested the market. But in talking to the industrial sales brokers that with the higher interest rates, pricing has not really changed much in the A markets. It's the B or C product in the B or C markets where the interest rate has made a difference to the higher leverage buyers and where they've been the cash flow buyers. But the A markets still seem to have a lot of demand.

Thanks for the color. And then I guess the final question is on land. Do you believe -- I guess what you're talking with terms of land price increases is just related to Houston and maybe Dallas. Could you say how -- what's the effect been on other markets?

There's just not been enough land transactions to, I think, be able to generalize on what's happening because, in a lot of markets, developers are not out actively seeking land. Prices are high in South Florida just because everything seems to be high priced in South Florida. But in other markets, there's not been a lot of competition for land like there is in Dallas and Houston.

A lot of developers have looked at a city like Houston and said, gee, I need to be there if I'm going to be developing industrial anywhere. So they come in and then it gets very competitive for the better located sites. And the last factor is that basically no landowner wants to sell his land for industrial because we need a lower land cost than any other use. They'd rather sell it for office or retail or apartments. So, that always becomes an issue even though in Houston there's basically no zoning.

Thanks, David. And your disclosure is great. Please don't change it.

Thank you.

Bill Crow, Raymond James.

Thanks. Good morning, guys. David, are there any markets -- any of your core markets where you just say development for 2014 is off the table? Period?

Good question. I have to think about it for a point. I would say I don't see development occurring in Jacksonville, maybe in Ft. Myers as we go through the Florida markets. There's really no dock high space available there now and the market's certainly recovering.

El Paso, I guess we'd call it core market because it's Texas, but I don't see us doing any development there at this point. There's still way too much vacancy and the rents haven't moved enough. Tucson, we view it somewhat of an extension of Phoenix and that market is recovering, but very, very slowly. So I would not expect any development there.

We'd like to look for some more land -- have looked for more land in Denver. That seems to be an improving market for our type product. As I mentioned, we'd like to expand the development that we're doing in Charlotte because of the strength of that market and a lot of the institutional type developers have pulled out of that market, which makes it more appealing for us from a competitive standpoint. Did I miss any cities?

I think you got them.

California, all the land's too expensive. So we're not going to -- we've not been able to find any to build to our kind of cap rates.

David, would you consider entering a new market through development, or do you feel like you have to have existing properties to better understand the market?

I don't want to ever say never, but that's historically not how we've done it. When you look at the two most recent markets, I guess over the last 8 or so -- 10 years, San Antonio and Charlotte, we went in, bought property, got comfortable with the market, comfortable with all the things that were going on there, the brokerage community, got comfortable with us and then started building.

So that's historically how we've done it and, more than likely, would continue to do it that way. We did go into Ft. Myers and start building, but we couldn't find anything to buy that fit our quality criteria. And first three buildings worked real well, and then we hit the recession. So, we don't see the opportunity to buy there, probably only to build in the future.

All right. Then finally for me, David, can you just give us your current thoughts on DC as a prospective market.

I've not studied it really enough yet. I've always liked that Northern Virginia, Dulles Airport area from a growth standpoint. But again, that seems to be a market if you're buying quality, the prices are high, cap rates low due to the fact that a lot of investors -- well, until recently were very comfortable being the nation's capital. I don't know how that's going to be viewed going forward from a real estate standpoint as the government seems to have fits and starts and struggle with cutbacks. But that's an area that we casually look at on a regular basis, as we do in Austin and the research triangle.

All right. Thank you.

Thank you.

And we have no further questions at this time.

Again, thank you, everybody, for your interest in EastGroup. And as always, Keith and I will be available for a while to answer any questions that we might not have covered or you'd like to talk to us directly about. Thank you.

This concludes today's program. You may now disconnect at any time.