Eastgroup Properties Inc (EGP) 2014 Q1 法說會逐字稿

Good morning, and welcome to the EastGroup Properties first-quarter 2014 earnings conference call.

(Operator Instructions)

Now, it is my pleasure to introduce David Hoster, President and CEO.

Good morning, and thanks for calling in for our first-quarter 2014 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 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 first quarter was another productive one for EastGroup. Funds from operations of $0.82 per share exceeded the upper end of our guidance range, and represented an increase of 7.9%, 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 11 of the last 12 quarters.

Quarter-end occupancy was again above 95%. Same-property cash operating results were positive for the 12th consecutive quarter. And our development program increased to 21 buildings, with over 1.8 million square feet.

Occupancy at March 31 was 95.1%, our third consecutive quarter over 95%, which exceeded our internal projections by about 100 basis points. We expect occupancy to slip slightly below 95% in the second quarter, and then finish the third and fourth quarters above that level.

At quarter end, our California markets were our best, at 97.9% leased, followed by our Arizona markets at 96.7%, and Texas at 96.5%. Houston, our largest market, with over 5.8 million square feet, was 97.5% leased. Leasing activity continues to be good in all 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 first quarter, we renewed 78% of the 1.4 million square feet that expired in the quarter, and signed new leases on another 8% of expiring space, for a total of 86%. We also leased 265,000 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 267,000 square feet since March 31. Between now and the end of the year, we have only 2.2 million square feet, or 6.8% of the portfolio, scheduled to expire.

For the quarter, GAAP rent spreads on renewal leases were up 8.7%, and down 0.9% on new leases. Cash rent spreads were down 0.4% on renewals, and down 6.1% on new leases. Combined, GAAP rents were up 6.2%, the same as in the fourth quarter, and cash rents were a negative 1.9%. GAAP rent spreads on renewal leases have now been positive for eight consecutive quarters; a strong trend.

The weighted average lease length was 4.4 years, a slight decrease from the previous two quarters, but well above our recent averages for the past several years. This probably reflects prospects' growing confidence in the economy.

Tenant improvements were $1.35 per square foot for the life of the lease, or $0.31 per square foot per year of the lease, which is below our recent average. The average amount of tenant concessions continues to decline slowly, but leasing commissions remain elevated in most markets. As a result of our continued strong occupancy, first-quarter same-property operating results increased 1.2% on a cash basis, and 1.4% on a GAAP basis with straight-line rent adjustments.

During the quarter, we significantly expanded our development program to take advantage of improving market fundamentals and increasing demand for new, state-of-the-art industrial space. We began construction of 11 buildings containing in a combined 894,000 square feet, with projected total costs of $65.1 million: 4 buildings are in three different submarkets of Houston; 2 are in San Antonio; 2 in Phoenix; 2 in Charlotte; and 1 in Orlando.

Also during the first quarter, we transferred three properties to the portfolio: Chandler Freeways in Phoenix, Steele Creek I in Charlotte, and Ten West Crossing III in Houston. They contain a total of 265,000 square feet, have a combined investment of $19.5 million, and are 100% occupied.

In addition, at the end of the quarter, we acquired 29 acres of land in the north DFW Airport submarket of Dallas for $3 million. It will support the future development of approximately 325,000 square feet in four buildings. In Charlotte, we also have approximately 60 acres under contract to purchase for the expansion of our development program there.

During the balance of 2014, we hope to begin development of at least an additional seven buildings, with approximately 450,000 square feet, and a total projected cost of over $32 million. We have not included any potential build-to-suits in these 2014 projections.

As of today, our development program consists of 21 buildings with over 1.8 million square feet and a projected total investment of approximately $133 million. These buildings are currently 33% leased, reflecting the large number of properties which were recently started.

In March, we sold our 58,000-square-foot Northpoint Commerce Center in Oklahoma City for $3.6 million, which generated a small gain. Northpoint was our last remaining asset in Oklahoma. Over the balance of the year, we expect to have additional property sales of approximately $10 million to $12 million. We did not have any operating property acquisitions in the first quarter, but we currently have an asset in Charlotte under contract to purchase for approximately $15 million.

Keith will now review a number of financial topics, including our earnings guidance for the balance of 2014.

Good morning. FFO per share for the quarter was $0.82, compared to the $0.76 for the first-quarter last year, an increase of 7.9%, and was $0.02 above the midpoint for our guidance. The increase was primarily due to higher property net operating income from occupancy gains and lower G&A costs from capitalization of costs because of increased development activity. We calculate FFO in accordance with the NAREIT definition.

Debt to total market capitalization was 31.3% at March 31, 2014. For the quarter, the interest and fixed charge coverage ratios were 3.8 times, the debt-to-EBITDA ratio was 6.5 times, and the adjusted debt to EBITDA was 6.1 times. These debt metrics were similar to those for the first quarter of 2013.

Our bank debt was $99 million at March 31. And with bank lines of $250 million, we had $151 million of borrowing capacity at quarter end, plus the accordion feature on our bank line.

Our continuous equity program continues to provide timely equity funding. We sold 321,645 shares in the first quarter, for gross proceeds of $20 million, or $62.18 per share. In February, we increased the shares available to sell in our continuous equity program and have provided a scheduled detail in our equity program in the supplemental package.

Also in March, Moody's affirmed EastGroup's issuer rating of Baa2 with a stable outlook.

In March, we paid our 137th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.54 per share equates to an annualized rate of $2.16 per share. Our dividend-to-FFO-payout ratio was 66% for the quarter.

Rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property and net operating income. We believe this revenue stream gives stability to the dividend.

We have increased the midpoint of our FFO guidance for 2014 to $3.44 per share. This is a 6.5% increase compared to 2013 results.

We released a correction on same-property NOI cash guidance. We had 2.0%, and the corrected amount is 2.6%. We apologize for the error.

Earnings per share is estimated to be in the range of $1.20 to $1.30.

And now, David will make some final comments.

As I stated during the last quarter's call, this is a good time to be in the industrial property business, and that should not change for the foreseeable future. In addition, given our strong, flexible, and conservative balance sheet, we believe that we are well positioned to take advantage of the increasing opportunities in this improving environment.

Keith and I will now take your questions.

(Operator Instructions)

Jamie Feldman with Bank of America.

Great. Thank you and good morning.

I'm hoping you could talk a little bit more about the new development projects that entered the pipeline this quarter. Just a little bit more detail on each of them, what gives you comfort on getting started spec? And then also bigger picture on where you think we are in the development cycle concerning potential excess supply risk.

First of all, let me remind everybody that, traditionally, we have been a spec builder. If you look back at what we were doing, really, as we grew our development program from about 2000 up through 2008, almost every one of those buildings was built spec, and we project a 12-month lease-up as part of our pro forma in presenting them pro forma yields. So, I don't think that should be viewed as unusual; we've just been spoiled over the last couple of years with the amount of pre-leasing during construction and the number of build-to-suits that we've been able to sign up, both in 2012 and 2013.

In usual, most of our developments are subsequent phases in existing parks, and -- or new parks that are reasonably close to where we have just finished development. I will touch on the first quarter starts and try not to give too much detail, to eat up too much time.

Steele Creek III in Charlotte, that was some preleasing for tenants. So we started that building, and because of the leasing that was the leasing activity we have in II and III, we have announced the start of Steele Creek IV, a small building that is just the next phase in that park.

Ten West Crossing 6 out in Katy, Texas outside of Houston, again, the amount of leasing that we've done in the first five buildings convinced us it was time to start that additional 64,000-square-foot building. World Houston 41 is a front-park, rear-load building, and our spec, World Houston 37, which is a similar type building, is now over 80% leased. So, good reason to start the next building and not be without any front-park, rear-load space.

Kyrene I and II are in Chandler and very close to the Chandler freeways that we finished last fall and leased before it was done. So, we thought again, showed the strength of that market. West Road I and II are in Houston, just off Beltway 8, and as we have finished up our Beltway Crossing and have it 100% leased, this was just the next phase. And we've been pleased with the activity of leasing interest, even though we haven't even tilted the walls on that building.

In San Antonio, Alamo Ridge I and II are on the west side of the city, where we own two parks that have had good leasing activity, and we felt that there was demand to do some spec building there. Nobody else is building our type building, or anybody even building in that submarket.

Horizon II in Orlando, we've had -- haven't signed any leases at Horizon I, but have had very good interest in that building. It's 24 clear; Horizon II is 30 clear. We have prospect to sign a lease for one-third of the building, but they needed to have it 30 clear. That gave us reasoning to kick that one off.

Quick review of what's going on with those developments: the fact that we are not higher leased, as I mentioned in my remarks, is most of these buildings don't even have the walls tilted yet, but, we are pleased with the progress we've made.

As to the how we view the markets, Houston is the only market where we are building that there is any significant competition, and it's certainly occurring there. But we think the strength of our locations, the quality of the buildings, our reputation, and the amount of -- and probably most importantly, the amount of absorption in the market, shouldn't restrict us in terms of being able to lease these buildings in the pro forma 12 months or obtain or be close to the yields that you see in our supplemental data.

In our other markets, there is maybe only one or no other developers building like Charlotte, San Antonio, Orlando, and so that I think we are a long way off from too much supply being an issue. To use a baseball analogy, maybe we are in the middle innings in Houston, except that that could go into extra innings, the way the strength of the market is, with all the statistics on that city's growth. And in the other markets, we are only in second or third inning, at best. Hopefully, that answers your -- a long-winded answer.

That is very, very helpful. Thank you.

Michael Bilerman with Citi.

Good morning, this is Kevin Varin with Michael. What are you seeing in the build-to-suit pipeline? How are discussions trending with potential tenants?

We are seeing now, more interest in build-to-suit or preleasing in Orlando and San Antonio and a little bit less in Houston, at this point. I think maybe there is less need for it in Houston, given the amount of new construction. The thing that -- since I'm talking about Houston, the thing that's very different in Houston in this the cycle than in previous cycles, is the developers are doing much bigger boxes and they are leasing.

When I say bigger, a big building in Houston, historically, has been 250,000 square feet or greater. Those have leased, and there are supposedly prospects out there for buildings of that size and bigger. Houston is -- the range of what's looked for in that market is expanded significantly in this cycle.

Thank you and one last question. With more and more investor demand for industrial assets, how much competition are you facing when looking at deals, and also how is this impacting valuations?

There's no question that in the acquisition market, there is a tremendous amount of demand that's not being met by the supply of properties, core A properties for sale. Institutions are all complaining that they are under-allocated to industrial, and as a result, the cap rates remain at close to historic lows or at historic lows. I would say at probably historic lows in Texas, anyway.

I've heard that some of these investors don't want to -- most of the investors don't want to come off the core assets, but they are starting to go to some of the secondary -- what are viewed as secondary markets in order to get core assets. I've been told by brokers that the volume of transactions was down the first quarter compared to last year, but that they expect that to catch up in the subsequent quarters. Although, I don't think there's any way in the world that the demand is going to be met through more assets coming to market.

So, I would expect cap rates to remain at the current low levels for the foreseeable future. As a result, it makes it harder for somebody like us to -- or anybody to buy in especially some of the very hot markets, like Southern California.

Okay. Thank you.

Thank you.

Vance Edelson with Morgan Stanley.

Thank you. Congratulations on the solid results.

Sticking with development for a moment, was there anything you can point to that made you want to pull the trigger on getting a bit more aggressive on development starts this past quarter in particular, when the improving fundamentals have been with us for some time now? Did you see anything really incremental on the demand side over the winter that made you want to really ramp up the construction?

A couple of things: I would say, one, as you mentioned, the fundamentals continue to improve in all our markets. And we, obviously run the numbers on a pro forma what kind of rent it takes to be building to achieve the yields that we are looking for. And as rents start to move in these different markets, those numbers work better than they would have in the past.

Secondly, the leasing that we've achieved in some of our existing parks, like World Houston or Beltway Crossing or Ten West Crossing, Katy, have -- we don't want to be sitting there without any available product. So as a building leases and we build confidence in the market, we started a new building.

If you go back and just coming out of the recession, we were looking to be two-thirds or 75% leased to start a new building. Now, we're looking probably 35% or 40% leased to start the next building, just to keep properties in the pipeline. So, it was a lot of different factors.

Okay, that's very helpful. And then shifting to the pricing side, could you give us your sentiment on the relatively high lease expirations coming up next year in 2015? Do you view that as almost pure opportunity on pricing? Is it something that gets you excited, or is there a significant portion that dates back to the last cycle and could be rolled down?

To be honest with you, I'd still worry about 2014. And a lot of the 2015 terms are going to be at the end of the year, so we've got plenty of time to deal with those. We actually have also started talking to a number of the larger 2015 rolls to move those farther out. But, obviously, like to have those roll in an improving market. We are optimistic on what we will do with them, but it's way too early for us to start to look at what kind of benefit that's going to give us.

So the US Postal Service expiration, speaking of 2014, do you think you have a good chance of renewing with them?

We've already renewed in the last six months, the two biggest post office leases. And it's my understanding that we have come to terms on both of the smaller ones in Tampa. The documents just haven't been signed yet.

Great. Thanks a lot, David.

Thank you.

Andrew Schaffer with Sandler O'Neill.

Continuing with your baseball analogy, what inning is EGP in, in regards to the size of its [selling] pipeline? Industry expected to peak in 2015 and then begin to moderate?

Again, that's getting ahead of us. It all depends on leasing. I will suggest that you shouldn't annualized what we did in the first quarter. So, it all depends on leasing. For us, if the leasing goes strongly on what's under construction now, or that's just been finished, we will do more than $100 million in starts this year. If it goes a little bit slowly, we won't.

Again, so much of, as I said before, of what we do is based on -- in existing parks. So if the building leases, we start the next one. And World Houston, we look at it even more specifically in that whether it's a front-park, rear load or a cross-stock. We want to have both of those type of facilities with new first-generation space available. It's a little early to suggest what's going to happen in 2015 in 2016.

Okay, and then when you look at that -- the leasing levels and the expected starts, are there certain feelings you have or internal control that you monitor in terms of total construction cost as a percent of assets or enterprise value?

Yes, we have, but we are not even close to that. Before the recession, we had one year where we were a little over $120 million in starts, and we are a bigger Company today than we were then. So, it's a -- rather than a hard-line you either cross or don't cross, it's all a combination of what's going on in the markets, what the fundamentals are, what we are doing with our asset in the parts where we want to build, and what we see is happening with the overall US economy. So, there are too many other factors. We slowed down not because we went over a line or had a ceiling, we slowed down because we saw the markets were starting to come apart.

Okay, and secondly, in regards to rent trends for development and -- is it safe to assume that in certain markets, costs are increasing the rate at which you're seeing your rent pro formas grow? And has that made you table certain projects in these markets that you were expecting to start earlier this year?

There's no question that construction costs are going up. This is shell construction costs. It's 4% to 5% there. In Houston, just because there's so much construction, everything from highways to office buildings, construction costs last year were up 3% to 4%, and already this year, probably up another 3%. But with the land inventory we have, and you see the increase that we've had in rents, and the fact that shell construction cost is only about 50% of your total cost of a development, construction costs have not been a limiting factor yet. Hopefully, it will be for some of our competition.

Thank you. That's it for me.

Thank you.

Brendan Maiorana with Wells Fargo.

Hello, good morning. Probably the question, first for David. The seven development projects that you expect to start later this year, are some of those in markets where you don't have development today, like in Dallas or Tampa?

The only one where we are not already developing would be Tampa. We have two locations in Tampa: one our Madison land, and not too far further south, our Oak Creek land. And we would hope to, with a little bit of good movement in rents in Tampa, be able to start a couple of buildings at Madison.

The land that you picked up in Dallas, is that not ready to commence development on? Or is it that you feel like the market -- you have to be a little more patient?

We will be going full speed to -- we already started a layout of -- there are two -- there's a bigger parcel and a smaller one. The layout of the bigger parcel where we would put three buildings, two rear loaders and a front loader. And we have not put that in our projections, because we first have to finish the layout, design the buildings, get them permitted. So, with a little bit of luck, those could be a late 2014 start, but right now, they are early 2015 start in our mind.

Okay, that's helpful. And then I think you mentioned that you've got some land in Charlotte under contract; I think you might have said 60 acres. Is that the parcel that's adjacent to the -- to your existing Steele Creek project?

Yes. It's a series of parcels.

Great, and then last question for Keith on the guidance. So you did $0.82 in Q1; your midpoint of your guidance is $0.84 for Q2. To get to the midpoint of the full-year guidance suggests that you're $0.89 a quarter in the back half of the year.

Doesn't sound like occupancy is ramping that significantly. You've got more development spend, but you are also issuing some capital or some equity on the ATM. What drives the big increase in the back half of the year? It doesn't seem like there are that many moving parts that would drive a $0.05 incremental increase from Q2 to 23 and Q4.

Well, we expect -- I will jump in on it, because most of it would be from operations, where they said in my prepared remarks that we probably going to drop down, again, this is budgeted, our pro forma data, about 94.5% in the second quarter and then work our way back up to over 95% for third and fourth quarters.

Also, we've got some acquisitions built in, and we have development assets that will be coming into the portfolio: I think World Houston 40, Ten West crossing 5 that are both 100% leased that will come in mid or end of the third quarter. So, that's where we see the improvement on a quarter-to-quarter basis, but just overall operations.

But there's nothing unusual that would cause Q2 to maybe be lower than what you expect in the back half of the year like margins or higher G&A or something like that?

No. It's lower occupancy, and, like I say, development properties that are under development today, but are already 100% leased. When they come into the portfolio in the third quarter, it gives us a nice little pop. Plus, as I say, we've budgeted some acquisitions for the third and fourth quarters, which are hard to predict, but we figured we had to put something in there, because we have managed to buy every year for as far back as I can remember.

Understood, just a point of clarification: so the under construction stuff, the things that are pre-leased, understand that those are going to come in and contribute. In the guidance, the projects that are under construction where the completion date is later this year, but the stabilization date or conversion date isn't until next year, there's not a presumption of lease-up of those assets and significant NOI contribution in guidance, is that correct?

No, what we show on our development summary is what's in our guidance. They are not two separate sets of projections.

Okay. Got it. Thank you.

(Operator Instructions)

John Guinee with Stifel.

Happy Easter.

You too, thank you.

An ancillary curiosity question, David, you have 29 acres in Dallas, $3 million box, a shade over $100,000 an acre. I'm assuming that's raw land. When you -- what's your per FAR, or per buildable to take something from raw land to get it pad ready? I.e., what's your pad-ready land basis on something like that deal?

I'm going to have to look that back up, John. It's in our proposal investment committee. It would take me a minute to dig that out. In that land -- that land, we think we got for a very good price for a number of reasons: one is, some of it is not usable, so -- but we wanted to report the total acreage that we bought. Secondly, that has been a market where there's been a higher price on land where developers can do big boxes. It's in Flower Mound.

The people developing up there have not looked for the smaller buildings, which is what we do. We think that's a factor. And it was not heavily marketed, it hadn't been for a while, but we are happy with the buy on it. We can talk later about what the net -- what the FAR is; I just don't have that in front of me.

We will just chat next week. Enjoy. Thank you.

Thank you.

Brandon Cheatham with SunTrust.

Thank you. Most of my questions were answered, but following up on the development pipeline. Are there any markets that are of particular interest that you expect to focus on going forward? On the same vein, you mentioned Tampa might be an area that you focus on later this year. Is that -- you are starting to see the market pick up in that market?

Yes, slowly. Tampa seems to cycle. It was through some of last year it was very strong; then it seemed to actually go slightly negative for a couple of quarters; then in just the last 30 days, it started to pick back up. The way we look at it is for our size user. We would still like to be a developer in South Florida, in Broward or Palm Beach County, so we continue to look for land there.

And we continue to look for land in the existing markets where we are building. You always have to be looking out ahead. So we are looking in San Antonio, additional land in Houston, and we are very excited about having a piece of land to build on in Dallas. And we will continue to look for additional sites for our type product in that large market.

So you expect Houston might stay at similar levels today?

I would hope so, yes. And I'd say, we are building of three different sub-markets. It's generally different type users, because users decided where they want to go, and if they want to be out in Katy, you're not going to convince them to go by the airport or the other way around.

That's it for me. Thank you.

Thank you.

George Auerbach with ISI Group.

Thank you. Good morning.

For David or John, you seem to have more occupancy upside in Tampa and Jacksonville verse your other major markets. Can you comment on the pace of activity in those markets, relative to expectations coming into the year?

They are both roughly on budget, but as I mentioned before, I didn't say Jacksonville, but Jacksonville and Tampa have been slow for a number of quarters. We've done well on renewals, but not leasing vacant space, and it seems to cycle. You go a couple of quarters where there are people looking for big spaces, and then it goes down to small spaces. It's all what you have available and what prospects you are looking for.

I think we have some good upside in both of those markets, but particularly Tampa, since we have so many square feet there and we have land to build. I think Tampa has more upside, certainly than Jacksonville. Orlando, though, that's -- of the three, that's our strongest market right now.

Are you seeing the pipeline of activity better in Tampa and Jacksonville today versus six months ago, or is it still --?

I would say better today than 90 to 120 days ago, but we haven't -- that's just people looking. Next call, we will tell you how we did.

Great. Thank you.

Thank you.

Eric Frankel with Green Street.

Thank you. David, can you talk about where you see occupancy dropping next quarter?

We just have a couple of move outs that we know about. For example, in Jacksonville, we have a full building user that bought their own building that is over 100,000 square feet. We have a couple of move-outs in Tampa, and those are related to where they had very low rents during the recession and aren't willing to pay up. So they will be moving out.

And we have -- in Phoenix, and Chandler, we have a full building user that is 70,000 square feet that is consolidating in another building. But it's not -- other than what I mentioned there, it's just spread in 10s and 20s and 30s.

Okay, thank you. We had noticed that the gap between the cash and GAAP [beneath] spreads is fairly wide this quarter. I was just wondering, is there any extenuating circumstances behind that gap?

I would say no, and I also always have believed that one quarter isn't a trend. Again, you'd have to look at two or three quarters on what's happening with rents or TIs or anything else related to leasing, because we are still at a size where a couple of big leases here or there are can affect the numbers either up or down. Just looking at one quarter doesn't make a lot of sense, I think, at this point.

Thank you. Finally, going back to the amount of investor interest in the industrial sector, maybe you could comment on the types of buyers out there and maybe some of the motivation for the seller, for some sellers. Because you just notice there is probably a few billion dollars worth of assets now in the market.

I think you have to, when you look at -- you can't look at what's national statistics; you have to look at the markets where the institutional investors want to be, or generally already are and want to expand or want to be. And the institutions are the ones that set the pricing. It's the obvious industrial distribution markets around the country, plus a couple of others, like now Orlando is picking up from that standpoint. And Houston certainly has over the last couple of years.

The sellers are generally, of the core properties, are the owners who have them in a fund, and the time horizon of that fund has expired or about to expire, and investors want to recycle the cash. That's what we are seeing. There seems to be a -- a good percentage of what's on the market is not core. That's going to have a very different pricing of 150 or 200 basis points higher cap rates in individual markets than you'd see the core A properties bringing. And if you get to some of the secondary markets, again like, I think right now Orlando would probably be viewed as a secondary market, there are probably 100 basis points -- 35 to 100 basis points higher than in a Dallas or Houston, certainly, Southern California.

But, I would also add, there hasn't been enough transactions that I think have closed in the last -- in this year, to have again, any meaningful statistics. It's just in talking to brokers, the demand for core industrial far exceeds the supply. And the buyers are the full range, from REITs to the pension-fund advisors, some of whom now are hooking up with merchant builders to develop new assets. That's the easiest, the only way they can get industrial assets and they plan to hold them, not flip them.

I've been reading that there is a good many foreign investors looking at US industrial. But to date, we have not seen where we've been in a competition that we've gone head-to-head with any of those. Or we didn't realize they were foreign, if they were.

Could you see yourself being a more prominent asset recycler if the benign conditions continue?

I think it all gets down to, the assets like in Houston or Southern California, they have low cap rates, because investors believe those assets have a lot of upside. So, if you sell those assets, what do you do with the proceeds to own core assets that have as much upside as what you are selling?

What we are going to continue to sell are the assets that we think have run their course, or are in markets like in Oklahoma City, that don't have much upside. And we are going to be selling those at higher cap rates, because of where they are or the quality of the building. We are hoping to sell some assets both in Dallas and Houston.

And the appeal today is that although there's a big spread on those B assets compared to A on a cap-rate look, is that as the A assets have come down, so have the B and B minus ones. And so we think we can sell at cap rates that are very attractive compared to what we would have been able to do a couple of years ago.

Thank you very much.

Thank you.

Bill Crow with Raymond James.

Good morning. David, as you talk about the supply versus demand by investors for institutional properties, could you talk about what's happened between the spread to build versus acquire? And how that is influencing your expectation for the length of the cycle?

I think the length of the cycle is still long, just because most markets haven't even gotten to a point where it justifies building or justifies doing much building. Where the cap rates have really come down, it's just allowed us to build at a much bigger spread to what we could sell the building for, than we had -- we were able to do a couple of years ago.

So in Houston, what we are building should sell from around a 5, given what we've seen transact. So, we are building it close to 300 or a little over 300 basis points in comparison. In our thinking, it allows us to believe that we are taking on less risk, because if it leases more slowly and we miss our pro forma bit, we still have an awfully good spread over what that building or buildings could be marketed for.

I am looking at your cost to construct, develop at upper 60s a square foot, is that right, based on your schedule?

Each one of our -- you have to look at each one of the buildings where front-park, rear-load is going to be -- oh, I don't know, $10 a square foot more than a cross-stock. And different markets, for example, in Phoenix, land is more expensive than what it's historically been in Texas. So, that goes into it.

The other thing that we pro forma on all our front-park, rear-loads is about a 15% office build out. A lot of the other developers that are building bigger buildings with pro forma probably a 5% to 8% office build out. That's going to be a big difference in those numbers.

Last question, how many markets of your major markets ballpark percentage that you can buy cheaper than you can build today for like assets?

That's a good question. Probably, just a handful. But the problem is, is that when you say buy, it's pretty hard to hit a like asset for our fairly disciplined, business distribution-type product in the locations where we want to be.

So, another big benefit for us in building, is we end up with a product that we think is extremely well located and built to the prospect's needs or demands for that submarket. So, you are not buying somebody else's vision of what a tenant wants or their vision on how to maximize return as a merchant builder, or how that vision has changed over the last 10 years. So, that's one of the reasons we end up building more than we buy.

Understood. Thank you.

(Operator Instructions)

Jamie Feldman with Bank of America.

Two quick housekeeping questions: to confirm, has your occupancy outlook changed at all from last quarter, where I think you said you would dip below 95% in the second quarter, and then get back above 95% by year-end?

Our second-quarter numbers, compared to where we were originally, are very slightly higher than -- in terms of comparison. But when you look at June 30, it's just about the same, but we are looking a little bit better. Again, that's a long way out, September and December. Actually, December isn't the same. It's a very slight increase for the remaining three quarters over what we originally projected.

Okay. What are you assuming for leasing spreads for the rest of the year?

I don't -- we don't calculate that number. We just try to lease every space at the best rent we can get it and win the battle to keep the customer or track the prospect. We've never been very good at guessing leasing spreads, and that doesn't give us information that helps us increase FFO. So, we've never taken the time and effort to come up with those numbers.

Do have a sense of mark-to-market of what's expiring this year and next year?

No.

No, okay.

Again, that information doesn't affect how we operate the Company, so we haven't bothered to do it. As I said, when we've tried to do it in the past, we've generally been wrong. So, we just may concentrate our effort on leasing the space at the highest rent possible.

Thank you.

(Operator Instructions)

I'm showing no further questions at this time.

As always, we thank you for your interest in EastGroup and keep an eye. We will be here for awhile, if you have any clarifications that you think you need to touch base with us on. Thank you. Have a great weekend and good holiday.

Thank you for joining us today, ladies and gentlemen. This does conclude today's program. We appreciate everyone's participation. You may disconnect at any time.