Eastgroup Properties Inc (EGP) 2013 Q4 法說會逐字稿

Good morning and welcome to the EastGroup Properties fourth quarter 2013 earnings conference call.

(Operator Instructions)

Please note, this call may be recorded.

Now it is my pleasure to introduce David Hoster, President and CEO. Please go ahead, sir.

Good morning, and thanks for calling in for our fourth quarter 2013 conference call. We appreciate your interest in EastGroup.

As usual, Keith McKey, our CFO, will be participating on 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 statements, included in the news release, that is accurate only as of the date of this call.

Thank you.

The fourth quarter was another productive one for EastGroup. Funds from Operations of $0.84 per share met the upper end of our guidance range and represented an increase of 7.7%, as compared to the same period last year. We have now achieved FFO per share growth, as compared to the previous year's quarter, in 10 of the last 11 quarters. For the full year, FFO was $3.23 per share, an increase of 4.9% over our per share results for 2012. This represented the third year in a row of increases in FFO per share, as compared to the previous year's results.

Continued good leasing activity resulted in a year-end occupancy of 95.5% and a lease level of 96.2%. Same property net operating results were positive for the 11th consecutive quarter. We continued to expand our development program. And we have projected a midpoint of $3.42 per share for our 2014 guidance, a 5.9% increase over 2013 results.

As I just mentioned, occupancy at December 31 was 95.5%, our second consecutive quarter over 95%. During the first two quarters of 2014, we project occupancy to drop slightly below 95% and then increase above that level in the third and fourth quarters, resulting in an average of 95% for the year.

At year-end, our California markets were our best at 99.2% leased, followed by our Texas markets at 97.2%, and North Carolina at 97%. Houston, our largest market at 5.8 million square feet, was 97.9% leased. Leasing activity continues to be good in all of our markets, from both organic growth of current customers and new prospects to the market. And we see no reason for this to change over the foreseeable future.

In the fourth quarter we renewed 74% of the 1.7 million square feet that expired in the quarter and signed new leases on another 10% of the expiring space for a total of 84%. We also leased 240,000 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 609,000 square feet since December 31.

For the quarter, GAAP rent spreads on renewal leases were up 9.4% and down 2.4% on new leases. Cash rent spreads were up 2.5% on renewables and a negative 8% on new leases. Combined, GAAP rents were up 6.2%, and cash rents were a small negative 0.3%. GAAP rent spreads on renewal leases have now been positive for seven consecutive quarters, a strong trend. The weighted average lease length was 5.0 years for the second straight quarter, which is well above our recent averages for the past several years, and probably reflects prospect's growing confidence in the economy.

Tenant improvements were $1.66 per square foot for the life of the lease or $0.33 per square foot per year of the lease, which is slightly below our recent average. The average amount of tenant concessions continues to decline slowly, but leasing commissions remain elevated. As a result of our strong occupancy, fourth quarter Same Property Operating results increased 1.4% on a cash basis, and 1.7% with straight-line rent adjustments.

In December, we sold three small operating properties in Tampa in separate transactions for a total of $3.2 million, generating gains of approximately $800,000. These buildings, which contained a total of 49,000 square feet, had been acquired in a large package in late 2011.

We originally planned to sell a number of additional assets during the year; but for a variety of reasons, these potential transactions were delayed. As a result, we expect to have a larger number of sales in 2014.

We did not have any property acquisitions in the fourth quarter, and currently have several offers out for both land and buildings, but nothing under contract at this point. For the year, we acquired Northfield Distribution Center in Dallas, and Interchange Park II in Charlotte for a total of 837,000 square feet, and a combined investment of $72.4 million.

Guidance for 2014 assumes acquisitions of $50 million in the second half of the year and sales of approximately $15 million. During the fourth quarter, we began construction of Rampart IV in south Denver. It will be a multi-tenant business distribution building containing 84,000 square feet with a projected total investment of $8.3 million. Also in the quarter, we transferred Beltway Crossing XI and World Houston 38, with a total of 215,000 square feet to the portfolio. Both of these Houston assets are 100% leased.

For the full year, we started 13 projects containing almost 1.2 million square feet, with projected total cost of over $85 million. Six are in two different submarkets in Houston, two in Charlotte, two in Orlando, and one each in San Antonio, Phoenix, and Denver. 3 of the 13 are build-to-suit's.

For the year, we transferred 14 properties with over 1 million square feet into the portfolio. These assets are currently 94.8% leased; 9 are in Houston, 3 in Orlando, and 2 in San Antonio.

Since the beginning of the year, we have started construction of seven buildings with 559,000 square feet, and a projected total investment of $42 million. Four in Houston in three different submarkets, two in Phoenix and one in Charlotte.

We have also transferred three properties to the portfolio. Chandler Freeways in Phoenix, Steel Creek I in Charlotte, and 10 West Crossing III in Houston. They contain a total of 265,000 square feet and are 100% occupied.

During the balance of 2014, we hope to begin development of at least an additional 10 buildings with approximately 760,000 square feet and a total projected cost of over $50 million. We have not included any build-to-suit's in our 2014 projections.

As of today, our development program consists of 17 buildings with over 1.5 million square feet, and a projected total investment of approximately $110 million. EastGroup's development program has been; and is again, a significant creator of shareholder value in both the short and longer term.

To date, we have developed over one-third of our current portfolio, adding over 11.6 million square feet of state-of-the-art warehouse space in our core markets. These assets are currently generating approximately 38% of EastGroup's property net operating income. In addition, since 2010 all of our developments have been built to LEED standards.

As previously announced, we are pleased to have Eric Bolton as a new member of our Board of Directors. Eric, of course, is the Chairman and CEO of Mid-America Apartments.

Keith will now review a number of financial topics including our earning guidance for 2014.

Good morning.

FFO per share for the quarter increased 7.7% compared to the same quarter last year. Lease termination fee income, less bad debts, decreased FFO by $23,000, comparing the fourth quarter of 2013 to 2012. We continue to benefit from acquisitions, development, same property results, and debt financing.

FFO per share for the year increased 4.9% compared to 2012. Lease termination fee income, net of bad debts, increased FFO by $467,000 compared to 2012.

During the fourth quarter, we sold 310,887 common shares under our continuous equity program at an average price of $64.33 a share, with gross proceeds of $20 million. Page 13 in the supplemental package details our sales of common shares through the continuous equity program during the year. Our outstanding bank debt was $89 million at year end; and with bank lines of $250 million, we had $161 million of capacity at December 31.

In December 2013, we repaid a mortgage loan with a balance of $50.1 million and an interest rate of 5.75%. Also in December, we closed a $75 million unsecured loan with a seven-year term, interest only payments, and an effective interest rate of 3.752%.

Debt to total market capitalization was 33.3% at December 31, 2013, compared to 33.6% at December 31, 2012. For the year, our interest and fixed charge coverage ratios were 3.8 times, an improvement from 3.5 last year. The debt to EBITDA ratio was 6.7 for the year and adjusted debt to EBITDA was 6.1 times, and page 20 in the supplemental package shows the adjustments.

In December 2013, Fitch Ratings affirmed EastGroup's Issuer Default Rating of BBB with a stable outlook. Previously in March 2013, Moody's assigned an Issuer Rating of BAA2 with a stable outlook. In the future, we plan to primarily issue unsecured debt for future financings.

In December, we paid our 136th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.54 per share equates to an annualized dividend of $2.16 per share. This was the Company's 21st consecutive year of increasing or maintaining cash distributions to its shareholders. Our dividend to FFO payout ratio was 66% for the year; and as we always say, rental income from properties amounts to almost all of our revenues so our dividend is 100% covered by property net operating income.

FFO for 2014 is projected to be in the range of $3.37 to $3.47 per share. Earnings per share is estimated to be in the range of $1.21 to $1.31.

A few of the assumptions we use for the mid-point: our occupancy rates are projected to average 95%; same property NOI increase of 1.2% for GAAP purposes and 2.6% for cash, the cash number was not included in the press release; acquisitions of $50 million of properties in the second half of the year; development starts of $95 million; a mortgage with an outstanding balance of $26.9 million at December 31, 2013, and an interest rate of 5.68% matures in October; issuance of new unsecured fixed rate debt of $65 million at 4.75% in the fourth quarter; and total G&A of $12.4 million, with $3.8 million projected for the first quarter.

The first quarter is lumpy because of the accounting for stock grants, which is consistent with past years. We have been active in selling shares under our continuous equity program. In addition to the $54 million sold in 2013, we project selling an additional $70 million in 2014.

We believe we have a strong balance sheet and we favor a conservative approach to financing our acquisition and development programs. In 2014, FFO per share midpoint is $3.42, which is an increase of 5.9% compared to 2013 results.

Now, David will make some final comments.

This is a good time to be in the industrial property business. Market vacancies are declining, rents are increasing, and we are seeing a growing number of new development opportunities.

As Keith said, our balance sheet is strong, flexible, and conservative; and we have a strong track record of generating growth in FFO per share.

Keith and I will now take your questions.

(Operator Instructions)

We'll take our first question from Gabe Hilmoe, with UBS.

Thanks. Good morning.

David or Keith, on the same store NOI guidance, the 1.2% gap, and then Keith I think you said 2.6% for cash? I guess --

Yes.

I guess at this time last year, I think you put out a range for 2013 of -- I think it was down 1% to plus-1% gap, end of the year at plus 1.3%. When you look at the business, and all the moving parts for occupancy and rent spreads, how much conservatism in your opinion is potentially baked into the same-store forecast for 2014?

I would say conservatism in occupancy. Last year our results were well ahead of our own projections, due to higher occupancy than we had originally budgeted or projected.

We're projecting, as Keith said, 95% on average for occupancy in 2014. And a big factor in that is when we looked at our year-end numbers, some of them were very high and we're very proud of them, but it's hard to project numbers of 97%, 98% in our larger markets where we have multi-tenant buildings and a lot of leases turning.

Our goal would be certainly to beat the 95%, but you always have surprises in both directions, so we generally aren't going to project anything higher under almost any circumstances above 95% and change.

Okay. And then just one more.

The cash renewal spread turned positive in the quarter. I guess, when we look into 2014, what should we expect, as you do have some leases from 2008 and 2009 rolling through the portfolio next year?

We expect the rent spreads to continue to improve as they have over the last couple of years, in particular the last couple quarters. But they're going to be aberrations in that, because we're going to have some big leases that were signed still before the recession, or that were signed before the recession and that customer moved out and they've been vacant for a while.

So that when we re-lease those, we compare today's rent to that old rent number, no matter how long the space has been vacant. So we expect improvement, but it might be up and down a bit as we go forward.

Thank you.

Thank you.

We'll take our next question from Jamie Feldman with Bank of America-Merrill Lynch. Please go ahead.

Great. Thank you very much.

Sticking with rents here, can you just talk generally about what you're seeing in market rents' potential growth, both in 2013 and what you're seeing for probably 2014?

In talking to our people in the field, which we do regularly, and we just had a leasing call last Monday to discuss some of this, basically rents are moving up in every one of our markets, and leasing activity in every one of our markets is as good, and in most cases better, today than it was in the late fourth quarter or in the first couple of weeks of January.

People always refer to a holiday slowdown. That doesn't always occur, but I think we experienced that this year. And the last two or three weeks overall we've been very pleased with that pickup. I don't think we're very good at projecting where rents are going to be, because each lease has a different set of competitors, but as I mentioned before, we think it's going to be positive compared to where we have been.

Okay. And then, back to the guidance, just your occupancy assumption. Can you walk through what you're thinking on the development pipeline? If you look at some of the assets that are less than fully leased, can you maybe walk through how you're thinking about what you can do in those, and how that rolls into the guidance?

Our numbers assume additional leasing in the few developments that rolled into the portfolio in 2013 and still had some vacancy, in particular in San Antonio, although it was small amounts. Our guidance includes leasing up, and in the properties that are just gone into the lease-up stage, or will, we continue to assume a 12-month lease-up unless the actual leasing is better than that. So it's a 12-month lease-up.

So, some that will roll into the portfolio in the next six months, we're projecting it will take the lease-up into 2015. One of the things that helped our numbers a good bit in 2013 was that development leasing was well ahead of what we had projected for that full-year lease-up period.

Okay. And are there any markets where the conditions have actually weakened since you started construction?

No. Clearly, Houston has significantly more competition because of all the new development, but so far we have not lost, that I'm aware, of any prospects based on rent to a new development competitor. I'm not saying that won't happen, but any prospects we've lost have been -- they'd rather be in a different location than where we are.

How do you think about your Houston supply versus other stuff that's getting built? You have a little bit of a different product, right?

Yes, that's a hard thing. When you look at the overall new development statistics, they can be a little scary, because I think new development now is exceeding last year's absorption, depending on whose numbers you look at. But we have to narrow it down.

I don't have numbers on it to geographic competitors in different submarkets and size users. There's a number of our competitors are building bigger buildings, cross docks, 200,000 to 300,000-400,000 square feet, which are not going to compete with us for prospects. But there are a number that are putting in more of our business distribution-type product. But as I said, so far we don't think we've lost anybody related to that, and we've been able to, in several instances, clearly outperform nearby competition.

Okay. And then just finally, it sounds generally as we listen to your commentary in the call, it does sound like -- am I correct in hearing that business still feels better than it did even last quarter?

Absolutely.

Okay.

As I said, this is a good time to be in the industrial property business, and it's a whole lot more fun than it's been for a good many years.

Okay. Great. Thanks, guys.

Thank you.

We'll take our next question from Vance Edelson with Morgan Stanley.

Great. Thanks. Good job in the quarter.

David, you hinted in the past at the possibility of providing more housing granularity. Not sure if you're ready with anything too specific, but if you could expand on housing as a driver?

It seems like every quarter you give us a new item to think about. Last quarter it was mattresses; the quarter before that, furniture. Anything new you can share on the housing impact?

It continues to be a contributor to demand. It's picked up. I have to admit, we did not add up all the numbers of leases over the last quarter related to housing, but we're seeing a pick-up in overall prospects related to construction, commercial construction, other types of construction, not just housing, and we're seeing more and more prospects consumer-related. As you mentioned, furniture, floor covering, that sort of thing.

So, it's becoming a bigger factor, but it's not dominant in any way; it's just a nice extra in the markets where, especially like Houston and San Antonio and a little bit in Dallas, where housing is very strong.

Okay. Makes sense.

And then following up on the pricing question, some of your peers seem to speak more aggressively about pricing power having arrived. And now the occupancy guidance suggests we're kind of leveling out here.

Maybe it's due to conservatism, and it's partially due to the new builds coming online, but it also presumably means you're opting to raise the rents more than push any closer to 100% occupancy. Plus, you're burning off those pre-2009 old leases, which works to your advantage.

So, any reason to think that this combination of factors won't result in what you'd call real pricing power in 2014?

We certainly have more pricing power than we did 6 or 12 months ago. It's not as strong as I'd like it to be, and, as I mentioned earlier, we just don't work very hard on projecting what rents are going to be far into the future. We just try to work each lease the best we can, and in most cases we come out ahead of our own projections.

But pricing power is better than it has been, and, as I mentioned in my introduction, concessions over tenants have gone down a good bit. They're still trickling down, but brokers still seem to have a pretty strong sway. And that's going to be the next step from a concession standpoint is hopefully some -- hopefully no brokers are listening -- reduction in the commissions that all jumped during the recession.

Okay. That's good color.

And then finally, no acquisitions during the quarter. Could you just elaborate a little more on how much of that is due to competition from outside capital moving more towards your industrial markets? What's the financing availability for local speculators? Is it getting more difficult at all to add to the land bank due to higher prices, and so forth?

On operating properties, traditionally the first quarter there's not as much on the market, we seem to see. Maybe it's because a lot of institutions take the first couple months of the year to decide what they're going to sell and who's going to list it.

So we would anticipate more acquisition opportunities going forward for the rest of the year than we've seen to date. We've just not looked at very much. We have offers out on a couple of buildings: one I don't think we're going to get; another we've got a reasonable chance on buying.

There is clearly more capital chasing industrial assets, particularly in the hot markets, which for us -- Houston, Dallas, South Florida. Less competition but less properties probably coming on the market in Charlotte, San Antonio, Las Vegas. And we look at things in California, but everything seems to be so expensively priced, we don't hold out much hope for proving to be able to do something there.

From a land standpoint, it is much harder to buy land today in Houston. A broker said to me that $5 square foot industrial land is the new $3 a foot land that we all looked at a couple of years ago. So prices are up, and there's a lot more competition for it.

And fortunately, in a number of these markets we did a good job of buying land during the recession and got some prime land at well below today's market prices because other people weren't in a position to buy. So, that's a positive, but we're continuing to look for land in a number of our markets and hope by the next call to be able to announce a couple of more at least small land acquisitions for future development.

Okay. We look forward to that. Thanks, David.

Thank you.

We'll take our next question from Michael Bilerman with Citi. Please go ahead. Your line's open.

Good morning, this is Kevin Baron with Michael.

Based on what you see in the market, how large could the development pipeline become in 2014 over and above guidance? And how much spec are you willing to take on?

Well, our guidance is basically 100% spec. We have not budgeted any build-to-suits or pre-leased buildings, because historically we haven't had any; and we've been always comfortable building our size multi-tenant business distribution facility, spec.

And I'd like to remind people that most of what we're building spec is a subsequent phase of an existing park, so we don't think we're taking the risk that you do when you're pioneering out, where you have no other investments.

So last year, we were able to do three build-to-suits. The year before, started three build-to-suits. The year before, I think we started four build-to-suits.

That's going to be where -- if we're going to get to $125 million or higher in 2014 or early 2015, it's going to come from being able to do some of these pre-leased build-to-suit type transactions in addition to the spec. And when you look at our projections at the beginning of 2013, because of the build-to-suits and the strong leasing and the spec buildings, we have basically doubled what we had originally projected for starts.

Now, I wouldn't think that, that would be possible this year, but we could certainly get to $125 million or above with strong leasing and a couple of pre-leased buildings.

Thanks.

Thank you.

And we'll take the next question from Brandon Maiorana, with Wells Fargo.

Good morning.

David, just on the development starts, are there a lot of -- build-to-suits historically haven't been something that you guys have done a lot of. Are there a lot more prospects -- or are there sizable levels of prospects now? I know you've done a lot in Houston over the past couple of years, but not something historically that's been the market that you guys have targeted on the development side.

There are a couple that we have proposals out on today, but historically we haven't done it. One of the reasons has been that the yields -- before the recession, the yields in our mind got ridiculously low, because it was such a competitive business.

The advantage that we have today is, we've got a good land bank. It's pretty hard to win build-to-suit bid if you can't show where the building's going to be. And it really helps us to be able to do that and show our park environments, like World Houston or 10 West Crossing out in Katy in Houston; or Horizon, our new development in Orlando.

And, I think that's been a big factor in us getting build-to-suits that we wouldn't have before over the last couple years. So, I think that land position gives us a better than average shot at these future build-to-suits.

Okay. That's helpful. And then given --

Let me add one other thing.

For us, a big build-to-suit is about 200,000 square feet. We're not interested in competing on what you get a lot of publicity on, or Amazon buildings, or Walmart fulfillment centers, where they're 500,000-600,000 square feet or over 1 million square feet. That's a whole different game that we don't play in.

Understood.

Given that you have an attractive land bank and attractive basis in your land, and that the market does feel like it's firming up in many of your markets -- and I think as you've put it, you feel more optimistic now than you have previously -- should we think about the yields on your development pipeline as potentially moving higher because your land is at your cost basis and you're pushing rents up? Or is there pressure on development yields because there's more supply that's coming out, and it's a little bit more of a competitive market?

That's a good question, because that's something we've debated internally. And I guess the answer is a little bit of everything.

But, one of the ways that we've looked at it is that, if we can fill a building a little bit faster by not being too aggressive on the rents and still have a very attractive yield at 100%, probably over an 8% yield -- if we can still achieve that and we can put a building into production six or nine months earlier and get the next building going, that -- as a public Company, how we do business, that's better off for us in both the short and long term than missing out on some transactions in order to get a little bit higher yield or very slightly higher valuation on the building.

That higher valuation is more important if you're a merchant builder and you're looking to sell the building once it's leased up. We like a little higher volume without too much diminution of yield.

Understood.

I guess if I'm hearing your comments correctly, that stuff that's under construction has generally been targeted mid-8% yield. And it sounds like we should expect that the additional $50 million or so of projects that you start will be in that ballpark.

Correct. An example of what I just described is Chandler Freeways in Phoenix, or Chandler and suburb of Phoenix, where we projected initially an 8.3% yield. We had a prospect come along as we were finishing -- there was still a month to go before finishing the building. They were willing to take the whole building and move in one month after it was completed, and we were willing to give up 30 basis points of yield to have that building immediately go into the portfolio 100% occupied and paying.

So, that's an example where we accepted a slightly lower yield but still 8% in order to have that building contributing sooner.

Okay. That's helpful. Last one.

Keith, on the FFO progression, the Q1 guidance, I think midpoint is $0.80. That implies about $0.87 of FFO for the remaining three quarters. If I think about the G&A impact of Q1 just going away in subsequent quarters, that's probably a couple of pennies.

It sounds like you've got occupancy that will remain fairly low -- not low, but lower than where your average will be in Q2. So, should we expect that, thinking about your overall guidance for the year relative to where Q1 is, and where it seems like the trends are going for Q2, that there's a pretty big ramp-up in FFO per share in the back half of the year?

We do have it increasing, but if you look at compared to 2013, we're averaging probably 5% to 7% each quarter on increases from the previous year. So, it is increasing, but it's staying about steady from what we've done in 2013.

Historically, the first quarter has been lower for us compared to the preceding fourth quarter and for the remaining three quarters of the year.

Okay. All right.

I wanted to clarify, because I think you mentioned something about occupancy remaining low in Q2 as well, and that it was picking up. So I wasn't sure if there was maybe more of a back-half ramp in 2014 relative to what -- 2013, where you had a nice pick-up in Q2, and then pick-up in Q3 and Q4 as well.

Occupancy's going to be down but it's still going to be 94% and change, so it's not like it's a big drop.

Thanks.

Thank you.

We'll go next to Brandon Cheatham with SunTrust. Please go ahead.

Good morning. Thanks for taking my question.

Just on the lease renewals in the fourth quarter, can you break out how many of those were signed during the downturn -- 2008, 2009 -- and how does that compare to the lease expirations you have coming due in 2014?

I'd have to dig back to answer the first part of your question. I think we only have -- we have less than 150,000 square feet terminating in 2014 that was signed prior to 2009.

Okay.

So, that number is going down significantly each year. Well, it jumps up next year, but that's a whole other story. I don't have the numbers in front of me to answer the first part of your question.

Sure.

If you call us back, we can --

I can follow up offline.

On same-store NOI guidance, the 1.2%, can you break out the components, how you get there? And how much maybe this decrease in occupancy may drag on that, if it, let's say, is a conservative guidance?

Yes. Occupancy up or down has been the major driver of same-store results, I think, for us and everybody in our peer group. And one of the things that helped us be -- having the highest number in our peer group a few years ago was the big moves in occupancy. And since we've gotten to the 94%, 95% range, it's harder to drive it, obviously, from an occupancy standpoint, where others are now coming closer to that range and making their numbers look good. So, it's a big factor.

I can't give you how much is -- I don't have it -- how much is related to strictly rents, and how much to occupancy. But from an occupancy standpoint, we're going to look better in the first two quarters because those were lower occupancy quarters than the third and fourth, where we were over 95%. Unless we're able to push it up over 96% in the third and fourth quarters this year, they're going to be lower than we should have in the first two quarters.

But basically all that number is from pushing rents? For the same-store NOI guidance?

No, it isn't, because if you looked, our average occupancy for 2014 is 95%. It was not that high in 2013. Our average occupancy in 2013 was about 60 basis points lower.

So, there's a certain amount of the same-store that's related to that 60 basis point increase in occupancy. But, it's clearly the rolling of rents will be better in 2014 than it was in 2013, which was better than 2012.

You talked about the Houston market, but when we look at how much you've been developing in that area over the past couple quarters, do you expect that to remain at similar levels? Or tick down based on what you're seeing in your markets and your competition?

We don't expect to do as much in Houston in 2014 as we did in 2013 because, as I mentioned before, we had three build-to-suits in 2013, and I think it was four or pre-leased buildings in 2012. And we don't project any of that in 2014. So, as a result, there will be less development unless we're able to lock up a couple build-to-suits.

Okay. Thank you.

I think that's more build-to-suit difference versus additional competition; but ask me the question again in about 6 months and we'll see.

All right. Thanks.

And we'll take the next question from Andrew Schaffer with Sandler O'Neill. Please go ahead.

Thank you.

Just want to get your comments on the Universal Wilkes lease that is expiring at the end of 2014. Can you talk about the ongoing discussions and what your expectations are?

He's our partner, and we each own 50% of the building. So, we're optimistic that his company will remain in the building, or otherwise he somewhat shoots himself in the foot. So, we don't think that will be an issue.

Okay. Thanks. And this one's for Keith.

When you're lining up these unsecured loans to turn out the line of credit, are you preferring to use an LS fixed rate? Or float rate and then swap it to fixed?

We've done both. I would prefer just to get a flat fixed rate, but if the rates are not good enough as quoted by private placement lenders, then where we swap -- when we go to banks and get seven year term loans from banks, and then we go and swap the rates.

Okay. Thanks. That's it from me.

We'll go next to Craig Mailman with KeyBanc Capital. Please go ahead. Your line is open.

Keith, can you remind us what the occupancy ramp is expected to be for the year to get to that 95% average? I know 1Q and 2Q come down. Just trying to get the magnitude.

The spread that we show from the low to the high is 94.0% up to 95.6%. So it's not a big spread.

Okay. I'm just trying to get from the ending occupancy in 4Q, what's the 1Q dip expected to be?

It could be up to 150 basis points, but we're ahead of that now, so I'm guessing it's 100.

Okay. That's helpful.

And then, David, I'm curious -- the rent spreads are definitely trending in the right way. I'm just wondering, do you guys feel like you're being aggressive enough with rent increases and escalators that you're putting in the rents? Or do you feel there's more room to be more aggressive?

I would think our asset people in the field are tired of hearing me talking about pushing rents. So my guess is that they would say we're being aggressive, but that's something that we discuss regularly. And when I see an aberration way down or way up on a lease, we have a discussion about it. So I can understand what's going on.

So, a long-winded answer, Yes, I think we're being pretty aggressive. You just have to -- a value judgment -- are you going to lose a customer, and how long is it going to take to re-lease it? And, we have some leases that were signed at ridiculously low rents during the depth of the recession, and we're very willing to lose the customer because they're not going to pay. Others, it all depends.

Okay. And then just lastly, is there any shift that you're seeing in the Houston market from a tenant perspective? I know you guys are a little bit different product, but we're seeing Liberty start a 400,000-square foot building, which seems big for that market. Is there more Dallas-type tenants migrating to Houston now? Or is that maybe an isolated case where maybe they have something else going on?

Well, they like to build those big buildings, and we're happy to have them build those big buildings than the ones that compete with us. So, we applaud them.

But, I think on average the size of the buildings in Houston are going up, but not anywhere near what happens in Dallas.

Thank you.

Houston is not a regional distribution hub like Dallas is, so there have not been very many of those big buildings. But they're more the 200,000 to 300,000 than there have been in the past, and those seem to have leased well. So, I assume there will be more built like that.

Great. Thank you.

We'll go back and try Mr. John Guinee, go ahead your line's open.

Is it working now?

We hear you.

Okay. Couple soft ball questions, snow ball questions.

Keith, you've got a pretty high debt on your secured mortgages. Any chance that you can access or pay those off earlier than the maturity date? Or pretty much stuck with them because of egregious prepayment penalties?

Your last part is correct. We analyze all of our mortgages, and it just does not benefit us to pay them off early because of the prepayment penalties.

Got you. Okay.

Second, David, the sweet spot of your business is a 50,000-, 60,000-, 80,000-square foot buildings. What's the average build-out in these? Can you remind me, if I look at the development page, are you building these out to a 5% office percentage? 25%? Or is it just all over the place?

It's similar all over the place, depending on prospect requirements. But we generally have budgeted them at 15% office build-out, and --

Okay.

And I'm not sure -- very rare circumstance where we go above 25%. It's usually 15% to 20%.

Okay. And then if you do the analysis, clearly you guys have a great cost of capital and you also have the talent to do it. But you tend not to chase the big build-to-suit deals that are, as we all know, very competitively bid and priced relatively aggressively.

Are you just choosing not to bid those at all? Or are you losing those by 25 basis points or 100 basis points? How's the math on that work?

We don't always find out how much we've lost something by.

I think one of the biggest factors, John, is that most of our land -- and our goal with land is to be more infill type locations, and so our land cost is going to be higher than somebody who's on the fringe of development, or well outside a Metro area. And that's where the larger build-to-suits like an Amazon tend to go.

And so just the location is one factor related to cost, and I would guess we're losing -- we haven't lost a lot recently. In the past, it could be 100 basis points. We're willing to have our yield go down 25 to 50 basis points to get the 100,000- to 200,000-square foot build-to-suit.

Perfect. Okay. Thank you.

Thank you.

We'll take the next question from Eric Frankel with Green Street Advisors. Please go ahead.

Thank you.

Could you just mention what A/B in terms of your development starts for the later half of the year, just the geography?

We hope to build some more on the west side of San Antonio; hope to do more in Charlotte at our Steel Creek development, which so far has been extremely well-accepted, it's just south of the airport, right on interstate interchange. We hope to do some new development again in Tampa, which has been quiet for us for a good many years.

Additional development at our Horizon project along the Beachline Expressway in Orlando, and several more in Houston. We mentioned in the press release -- or I did in my remarks -- West Road, which is a new project for us that will be probably five buildings, 400,000 and some square feet; it's right off Beltway 8 and Interchange with West Road. It's in the northwest, north-northwest submarket, industrial submarket of Houston.

So, I think that pretty much covers it. We are looking for land in South Florida, but that's expensive and hard to find in good locations. And we continue to look in the Phoenix market.

Great. Speaking of which, could you maybe comment on the value of land in markets other than Houston?

No, I don't have the figures in front of me. We can talk offline on some of those. I can look up.

It's a wide range of different values in different locations. For example, just in Phoenix, if you're out on the west side it's a very different number than what you see in Chandler or Tempe, which is much more infill. When you look at the land prices, you have to look, obviously, at what sort of infrastructure needs to be added -- requirements for ponds, internal roads, all those sorts of things -- that can really run up your per square foot land costs.

And finally, could you just comment on the drop of occupancy in Houston for the quarter? Is that at all supply-influenced? Or is it just kind of the rhythms of the market?

I think it's more the rhythm of the market. We had an energy company that was acquired by Schlumberger move out to Katy, to a new campus. They were in one full building and two partial buildings, and we re-leased -- tenants have not moved in yet -- re-leased the full building and the larger of the two partial buildings. So that could affect fourth quarter numbers a little bit, and will affect the first quarter, but we're seeing very good activity.

Okay. Thank you.

Thank you.

And we'll take the next question from George Auerbach with ISI Group. Please go ahead.

Great. Thanks. Just one from me.

David, I know you're not selling that much this year, but any thoughts on how the pricing spread between A markets and B markets have trended over the last six months? And along those lines, any change in investor interest in primary versus secondary?

We just haven't seen enough properties trade in the last 60 days or 90 days to have too much of a statistical response to that. The A and B markets are, I would say, anywhere from 100 to 150 basis point difference. And A and B product or A and C product, non-institutional, would be 150 to 200-plus basis point spread. I mean, the three little buildings that we sold in Tampa were to individual investors, and the average of that was -- they were just over 9% cap rate.

And, almost everything we're going to sell is going to be at a higher cap rate than what we buy or build, simply because that's almost by definition -- something without the growth potential that your new assets have is going to be less expensive when you put it on the market. Somebody's buying cash flow rather than upside.

So I guess is it fair to say that buildings this year and moving forward are going to be that lower 10% of the portfolio, so probably in the 8%, 9%-type cap rate?

Let's say mid-7% and up. Mid-7% to 9% on what we would sell.

Great. Thank you.

Thank you.

We'll take a follow-up from Jamie Feldman with Bank of America-Merrill Lynch. Please go ahead.

Great. Thank you.

So, I just was hoping you could provide a little bit more color on the vacancy you expect in the first half of the year. Where are those spaces, and what's your prospects to backfill them, and what are you guys assuming?

We can go offline and I can walk through some of the tenants individually because it would take a while, but it's nothing unusual or anything extra large. We just historically -- and I think some of the other industrial REITs experience this -- have a dip in the first quarter. And that's because you have some Christmas or holiday-related leases like we had 50,000 square feet with the post office, and a vacancy in World Houston. And lots of times when somebody wants to extend their lease short-term to October, November, you tell them they have to do it until the end of the year.

So, we just historically have more turnover in the first quarter. And from our leasing call last Monday, people are more optimistic than they have been for quite a while. Just a nice pickup in activity in the last three or four weeks.

We can talk later on some of the individual tenants, but it's -- there's no, I think, trend or geographic area that's suffering any more than any other. And the whole time we're only dropping 100 basis points.

Okay. It sounds like it's more, you're assuming it's going to happen given the seasonality, rather than known move-outs at this point?

It's a combination. Lots of times people say they're going to move out because they're building their own building, or they're buying their own building, and it takes them longer than they think so they stay longer than what you budgeted.

Some of the tenants are already out. Some are known move-outs. Some are still questionable.

I think the big thing that's going to change our numbers is just better leasing some of the space faster than we've projected.

Okay. Thank you.

That's what drove our numbers in 2013, was higher occupancy from better leasing, both in the portfolio and in the development pipeline.

So, thank you.

It appears we have no further comments at this time. I'll turn the program back over to our presenters for any closing comments.

Again, thank you, everybody, for your interest in EastGroup. Keith and I will be available for any additional questions that we weren't able to cover, or didn't cover enough for you during the call. Thank you.

This concludes today's program. We thank you for your participation. You may now disconnect at any time.