Eastgroup Properties Inc (EGP) 2014 Q2 法說會逐字稿

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

(Operator Instructions)

Now, it's my pleasure to introduced David Hoster, President and CEO.

Good morning and thanks for calling in for our second-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's subject to the Safe Harbor statement and included in the news release is accurate only as of the date of this call.

Thank you. EastGroup continued its positive momentum during the second quarter. Funds from operations per share were at the midpoint of our guidance, and represented a 5% increase over 2013 second-quarter per share results. We have now achieved FFO per share growth as compared to the previous year's quarter in 12 of the last 13 quarters. Quarter-end occupancy was at or above 95% for the fourth consecutive quarter. Same property cash operating results were positive for the 13th consecutive quarter. Rental rate spreads were positive for both cash and GAAP. And we entered Austin, Texas, which is a new market for us.

At quarter end, we were 95% occupied and 95.7% leased, maintaining our trend of occupancy at 95% or above. We expect a slight dip in occupancy over the next two months, and then an increase back above 95% for the balance of the year. At June 30, our California markets continued to be our best at 97.6% leased, followed by Texas at 97% leased. Houston, our largest market with over 5.8 million square feet, was both 97.8% leased and occupied.

Leasing activity is good in all our markets from both organic growth of current customers and new prospects to the market. And we believe this should continue for the foreseeable future. In the second quarter, we renewed 55% of the 999,000 square feet that expired in the quarter, and signed new leases on another 19% of the expiring space for a total of 74%. We also leased 363,000 square feet that had either terminated early during the quarter or were vacant at the beginning of the quarter. In addition, we have leased and renewed 176,000 square feet since June 30. Between now and the end of the year, we have only 1.1 million square feet, or 3.5% of the portfolio, scheduled to expire.

For the quarter, GAAP and cash rent spreads were up 12.9% and 5%, respectively. This is the first time that both have been positive since the third quarter of 2008, and although a single quarter's results do not indicated trend, we believe rental rate spreads will continue to be positive going forward. In addition, GAAP rent spreads on renewal leases have now been positive for nine consecutive quarters. The weighted average lease length was 3.8 years, a slight decrease from the previous four quarters, but in line with our recent averages for the past several years. Tenant improvements were $1.94 per square foot for the life of the lease, or $0.51 per square foot per year of the lease, which is above our recent average. The average amount of tenant concessions continues to decline slowly, but leasing commissions remain elevated in a number of our markets.

As a result of our continued strong occupancy, second-quarter same property operating results increased 2.6% on a cash basis and 1.8% on a GAAP basis, with straight-line rent adjustments. At June 30, our development program consisted of 21 buildings with over 1.8 million square feet and a total projected investment of approximately $135 million. These buildings were 46% leased at quarter end, which is a good level given that two-thirds of the properties are still under construction. Yesterday afternoon, we signed a 50,000 square foot lease at Kyrene 202 Building 1, which increased this total of 49% leased, and that building is now 67% leased.

Our developments are located in Houston, San Antonio, Phoenix, Orlando, Charlotte, and Denver. We did not start any new developments or transfer any properties from the development programs in the portfolio during the second quarter. However, we have started construction of two new developments since the beginning of July, both which are subsequent phases in existing successful EastGroup parks. West Road Business Park III in Houston will be 78,000 square feet, with a projected investment of $5 million. In Thousand Oaks Business Park 4 in San Antonio will have 66,000 square feet and has an estimated cost of $5.1 million. Also subsequent to quarter end, we transferred Ten West Crossing 2 in Houston and Thousand Oaks 3 in San Antonio to the portfolio. They have a total of 112,000 square feet and are both 100% leased.

We continue to be on track to add at least another $20 million of construction starts. The year was just under $100 million of new development starts for the full year. The second quarter was an active one for acquisitions. In May, we acquired Ridge Creek Distribution Center III in Charlotte for $14.5 million. Constructed in 2013, this bulk distribution property contains 270,000 square feet and sits between our Ridge Creek I and II buildings in Charlotte Southwest industrial submarket. It is currently 55% occupied by two customers.

In June, we entered the Austin market with the purchase of Colorado Crossing Distribution Center, with 265,000 square feet for price of $27.2 million. Built in 2009, the four building multi-tenant business distribution complex is 100% leased to six customers. We have been looking to potential investments in Austin for a number of years, and Colorado Crossing gave us the opportunity to acquire a state-of-the-art asset in the airport submarket. Subsequent to quarter end, we sold our 9,000 square foot Tampa West VI building, which was the last of six small Tampa buildings we had acquired as part of a large portfolio several years ago. We are currently marketing for sale two older assets in Houston and two older buildings in Dallas. We do not presently have any operating properties under contract to purchase.

Keith will now cover a number of financial topics.

Good morning. FFO per share for the quarter was $0.84, compared to $0.80 for the same quarter last year. An increase of 5%. Operations have benefited from lower interest rates on refinancing mortgage debt and an increase in property net operating income related to developments, acquisitions and same property results. Acquisition costs reduced FFO by $160,000 for the second quarter. FFO per share for the six months was $1.66 as compared to $1.56 for last year, an increase of 6.4%.

Debt to total market capitalization was 31.5% at June 30, 2014. For the quarter, the interest and fixed charge coverage ratios were 3.95 times, and debt to EBITDA was 6.61. The adjusted debt to adjusted EBITDA ratio was 5.87 for the quarter. All of these metrics were improvements from June 30, 2013.

Floating rate bank debt amounted to 4.8% of total market capitalization at quarter end. Bank debt was $142 million at June 30, and with bank lines of $250 million, we've had $108 million of capacity at quarter end. On July 10, we repaid with no penalty a mortgage that was scheduled to mature on October 10, 2014. Outstanding balance was $26.6 million and the loan had an interest rate of 5.68%. In July, we entered into an unsecured $75 million term loan agreement, which is expected to close on July 31, 2014. The loan will have a five-year term and interest only payments. It will bear interest at the annual rate of LIBOR plus an applicable margin, currently 1.15%, based on the Company's senior, unsecured, long-term debt rating.

The Company entered into an interest rate swap agreement to convert the loans LIBOR rate component to a fixed interest rate for the entire term of the loan, providing a total effective fixed interest rate of 2.846%. The maturity fits well with our maturity schedule, which it has only $55 million due in 2019. We continue to convert to unsecured debt as we climb both in our development program and acquisitions with unsecured debt, and also, repay mortgage debt with unsecured debt.

In the second quarter, we sold $20 million of common stock at an average price of $64 per share, and year-to-date have sold $40 million through our ATM. We plan to sell an additional $35 million over the remainder of 2014. In June, we paid our 138th 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 64% for the quarter. Rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property net operating income. We believe this revenue stream gives stability to the dividend.

FFO guidance for 2014 has been narrowed to a range of $3.42 to $3.48 per share. And the midpoint was increased from $3.44 to $3.45 per share. The midpoint for the third quarter is $0.88 per share and $0.91 for the fourth quarter. For those quarters, we are projecting GAAP same property increases of 2.1% and 3.2%. Strong development leasing and contributions from our acquisitions already closed this year. With our cost of capital benefiting from lower interest rates and a good stock price, we are projecting a 6.8% increase in FFO per share from last year.

Now, David will make some final comments.

As I've been saying for the last several quarters, this continues to be a good time to be in the industrial real estate business in the Sunbelt. And we see no reason for this to change for the foreseeable future. Given our strong, flexible, and conservative balance sheet, we believe that we are well positioned to take advantage of the opportunities in this positive environment.

Keith and I will now take your questions. Thank you.

(Operator Instructions)

Jamie Sullivan from Bank of America.

Hello, this is actually Steven Salnick with Jamie. Congrats on the quarter, guys. I have two questions. The first one, looking at your new guidance in cash and extra NOI.

Just looking at the second half of the year, that's going to imply a pretty large ramp over the third quarter and the fourth quarter. Is there any way you could take us through both the both the third quarter and fourth quarter to see what your growth should be going into 2015? Because, just like looking at the numbers, it's setting you guys up for a great start to 2015.

We have not run any numbers in detail on 2015, obviously. Still working on 2014. But to review what Keith had said, we have a number of big contributors.

One is the development NOIs that we assigned leases with customers who were scheduled to move in in August and September, beginning of October. That's some pretty big numbers from that standpoint.

Secondly, with the two acquisitions, and in particular the Austin one, then we have a nice addition to NOI. Being able to replace the mortgage that Keith discussed that was paid off with a significantly lower debt on the five-year term loan with banks, will have a good savings, there.

Occupancy will be, probably, from the occupancy of the Company, will probably be about the same as it was last year. But to confuse it a little bit, occupancy at a company at the end of the quarter is different than the occupancy of the same property pool. And that same property pool, third and fourth quarters, particularly fourth quarter compared to the fourth quarter of last year, the occupancy is higher, so we will be picking up from there.

And then finally, a bit of pickup from rate improvement for the fourth quarter this year as compared to the fourth quarter of last year. And it's pretty close to impossible to give you a very specific breakdown on each one of those contributions, because other than occupancy and rent growth, all the others have similar offsetting associated costs with them based on cost of capital and all. So, it's a combination of all the things I just mentioned.

And I would just add, in the 3.2% that we quoted for same property increase in the fourth quarter, about 1% of that comes from the termination fees.

Okay. Thanks. That answers my second question on occupancy, too, and the differences between the two.

But in terms of markets and looking at cash leasing spreads, can you guys drill down into the markets that contributed to those positive cash spreads? Do you have specifics around that at all?

Let me give you somewhat of a general answer to that and maybe this will answer some other people's pending questions, also. Is that over the last several years, we've had significant roll down in rents in Florida and Arizona, and a slow pick up and roll up in rental rates in Texas and California and North Carolina.

What we are seeing at the midpoint of this year is that Florida and Arizona, it's about a net zero or very slight down in comparing rents. While the pickup in the other markets has given us a gain. So that we are having very little offset from those two states where that were hit hardest from the recession.

Another factor that I need to keep in mind is a lot of what we call the recession leases are rolling now. The ones where we've bought occupancy by significantly lowering rent. And I think that's a factor in us renewing less leases in the second quarter is that where some of these tenants were looking at 50% to 100% rent increases, they are moving out and we are able to release the space at today's market, which is giving us a nice pop.

And looking into the third and fourth quarters, there obviously still some leases that are going to have negative spreads, but those spreads are significantly reduced and there are less of those leases and more positives in the other states. So, that's where we are pretty comfortable stating that we think that we're going to remain positive going forward.

There could always be an exception with a big lease now and then. But it makes us more optimistic than we were 90 to 180 days ago.

Great. Thank you, both.

Ross Nussbaum from UBS Securities.

Good morning. David, can you talk a little bit about your decision to sell a few of those older buildings in Dallas and Houston? What prompted that?

Was it what could supply demand in those markets? Was it specific to those buildings? Just help us walk through that a little bit?

What has gotten our attention, and we are not ready to report cap rates yet, but when you look at B, there's B minus, hate to call them C, maybe in Dallas they are C plus 'cause it's older assets that we acquired in some mergers, that cap rates on those B assets have come down significantly, really, in the last 12 months, I think.

The class A industrial assets in both Dallas and Houston are, in my mind, historical lows, and it's just taken a little bit of time for the investors who want to be in those markets to start looking at the B assets. And so, I think we're going to be selling those assets at anywhere from 150 to 175 basis point lower cap rate than we would have a couple of years ago.

Secondly, we're growing very quickly in Houston with new development and just saw this as an opportunity to lessen our concentration there by at least a little bit. And the two assets that we're selling, one is in the submarket where we were never able to buy additional assets, and the other is somewhat the same.

So, as we concentrate on specific submarkets there, those two didn't fit as much.

Are you as worried as some may be about the supply numbers that you've been seeing in Dallas this year and where that might be trending?

Without quoting all the wonderful statistics on Dallas and Houston in terms of job growth, population growth and absorption, always looking over your shoulder in development. But, so far, in both cities, the development has been absorbed and their vacancy rates have not gone up. And in fact, are at historic lows.

Now, to answer little bit broader question on that is I don't think there's any question that there is going to be more competition for new development space and that it's going to get tougher to lease it. I've said for a while, that the REITs and us, in particular, we've been spoiled.

We were the first to start building spec in our markets and we're able to get the pent-up demand, and we have been leasing more space than we ever dreamed of while these buildings were under construction. And we've gotten spoiled with that, as I say.

I think what's going to happen, as more competition comes onto the market, we are going to fall back the way it was done 10 years ago, which is there is not going to be much leasing during construction and we'll have our normal 12 month lease up on the time the shell is complete 365 days later, and we always build that spread of lease-up time into our pro formas anyway.

And that's the way we did it with just about all our developments through the last decade and we did real well with it. So, I say, we're spoiled, it's going to be a little bit tougher, but we're not worried yet about losing too much.

I think another important thing, when you look at these statistics is to not look at the summary numbers for any market or even the summary numbers for some submarkets, but to look at the size of the buildings. In Dallas, in particular, we'll add a couple statistics, here.

As I say, the warehouse vacancy is at historic low. There continues to be strong absorption. The 15th consecutive quarter of positive numbers for that.

20 million square feet of positive absorption over the last year. And of the 15 million square feet that's under construction, which represents 2% to 3% of the market, 78% of those buildings are 300,000 square feet or larger, and six of them are 1 million square feet or more.

So, I think when you start worrying about overbuilding, I think you have to burrow down to look at those big buildings. And that's what has happened in Phoenix over the last six to nine months.

Where as we came out of the recession, a lot of leasing was done in the big buildings. There was a shortage. As usual, a bunch of people jumped in to build the buildings.

Now, there seems to be overbuilding and broker concessions in all of the big buildings on the West side, where the demand has moved to the smaller spaces that we have in that 25,000 to 50,000 square foot range. We track our competition within individual submarkets rather than look at the bigger picture.

A couple quick comments on that in Houston. There is, obviously, a lot of construction, but not much of it, so far, is directly competitive with us geographically or size.

A big building in Houston used to be 250,000 square feet. People are now throwing up 350,000 to I even heard one announced at 600,000 square feet. And that could kill the upper end of the market, but again, it should have little effect on our multitenant business distribution buildings.

Appreciate it. Thanks, David.

Kevin Varin from Citi.

Hello, good morning. Just to start off, what characteristics attracted you to the Austin market and what gave you the confidence to enter the market at this point?

We have done very well over time in Dallas, Houston, San Antonio. And El Paso, we do fine, but not as well as in the any other markets. So we like Texas.

Austin is, depending on whose statistics you look at, one of the fastest, if not the fastest growing city in the country. It's always been somewhat of a tech area that seems to be growing with the very much pro-business environment. And the high education of the population and the attractiveness of the city, overall.

Statistically, over the last few quarters, there's been negative absorption from an industrial standpoint, but that's pretty much all based on Dell Computer pulling out of a number of very large buildings, primarily manufacturing. So, we see it as really, in some ways, an extension of our San Antonio operation, which has been very successful just 70 miles up the road.

And so, we've been looking there, as I said, for a number of years, and either didn't like the high office buildout of what we were looking at, or the age of the building, or the quality of the buildings at Colorado Crossing, net all our criteria, just about. So, the idea to jump on that one.

When we enter a market like that, our goal is to have, this is a very rough goal, 1 million square feet within three years. We've exceeded that when we moved into San Antonio and Charlotte, and it hadn't worked quite as well as in Las Vegas, although we still hoped to grow there.

We have the same desire in Austin. And at some point we would like to develop there. It's by far the toughest city in Texas to develop in because of all the schools and guidelines that are unlike the other parts of Texas. But, what we've done in the past is by in a market, start to grow through acquisitions, and as we get very comfortable with that market and submarkets, look to start development.

Okay. Thanks. And then, can you just provide us with an update for housing related tenants? Have you seen any improvement or slowdown in the recent months?

That seems to go in spurts. And I can't give you -- we really didn't look at the last couple quarters, specifically, at housing.

But we are continuing to see housing related activity, Tampa, for one, and Houston and Dallas, both, because the tremendous growth in population, which is leading to both single and multifamily construction.

So, it is not a dominant driver, but it certainly is something that just adds to the demand for our type spaces, in particular. We're glad to see it.

And then just my last question. Just based on, so continue on the dispositions, based on what you are seeing on the cap rate compression that you discussed for the class B assets, how many more assets are in the portfolio today that you would consider non-core that maybe you could trend over the next -- it doesn't have to be a series because know you guys have already issued guidance, that are kind of over and above the guidance range that you put forth?

I don't know, it depends on how deep we want to go on different things. We really haven't quantified that. We don't expect to sell anything else other than what I mentioned this year and hope we are able to sell the four buildings in Texas, and if not, we will push them into next year.

We really have not started to plan on what we might put on the market next year. I think a lot of it's going to depend on occupancy of the buildings and what's happening to any of these class B asset cap rates in those individual markets.

Okay, thank you.

Craig Mailman of KeyBanc Capital.

Good morning, guys. Just on same store this quarter, was there anything on the expense side or lease term side that drove the big acceleration relative to the last couple of quarters? Or is it mainly better occupancy and rent spreads?

We had an increase in property taxes that increased the expense ratio up 29%. And that was the main thing that we had.

On same store, it's a little higher occupancy than where we were last year and better rents.

Okay. The tax issue was a drag though, right? You guys didn't get a rebate or anything?

Well, no. What happens is when the taxes go up, we pass through everything on space that's leased, and so the higher occupancy, the more we pass through.

What happens when you look at the expense ratio, if you add the increased taxes, which was particularly in Texas, real estate taxes to both the nominator and denominator, the ratio goes up, although it doesn't affect NOI.

Okay. And then, on the rent spreads side of things, I know it's a little early to look into 2015, but for the next couple quarters, is that 5% mark a good way to think of where rent spreads may come in? Or is it any thoughts on the magnitude of it, here?

And also, just your thoughts on asking rent growth in your different markets? Has there been any slowdown in Houston and Dallas? Or has that kept placed with what we've seen the last couple quarters and opposite what's going on in Florida and Phoenix?

A lot of questions, there. First of all, we really haven't tried to quantify anything next year and that's not something that we spend a lot of time looking at, anyway. We just try to have the best rent possible on every space when it comes up, and we've never been very good at trying to determine embedded rent growth or anything like that because you're seldom ever right on that.

It makes for a good discussion, but you're seldom ever right. We have not seen any slowdown in rent growth in Dallas, in Houston, yet. I suppose there could be some as more development comes online, but the development rents are at the top of the market to begin with.

Second factor to keep in mind there, is that the cost, about the cost of everything in development is going up, so that if developers want to maintain a yield hurdle, they're going to have to raise rents. Because cost of land, if you go out and buy it today, is a good bit higher than it was a few years ago, and the cost of construction in Houston, I've been told, is up about 7% year over year.

So, as I say, unless people start to accept lower yields, rents are going to have to go up. And if the high end rents go up for new premium space, that should be beneficial for second-generation space.

But, think the last question, all our markets are showing improved asking rents. Depending on whose statistics you look at, it's a wide range and I'm not sure how accurate anybody's statistics are. But they're getting better and we obviously benefit from that.

And then just last quick one. I don't know if you guys have quantified this, but the rent spread improvement this quarter, how much of that do you think is just from higher market asking rents versus just a mix of what's expiring and what you guys have leased that was vacant?

We've not tried to break that down. Because you have to remember that when we report rents spreads, we don't do it the way some others do, because on leasing vacant space, a lot of times the rent spread is based on what the previous tenant was paying a number of years ago.

And so, we think that averages out over time, but we've not tried to break that down in any way. But what we are looking at is what we've achieved in the second quarter and roughly what we think is going to happen over the balance of the year.

Great. Thank you.

Vance Edelson from Morgan Stanley.

Hello, great job on the quarter. Just curious what you are hearing on the occupancy rates of your competitors and whether that's still placing a regulator, so to speak, on your own ability to raise rents? Or are even your smaller competitors starting to get to the point where they can be more selective with tenants?

That's a hard one to put your finger on. We, historically, have had higher occupancy, and all REITs should have higher occupancy than the market occupancy given, where we're coming from.

And each submarket is different because when you're dealing with a prospect or an existing customer, you're always looking at what their alternatives are, and I think all the REITs are working to push occupancy as hard as they can. I think we're going to see more competition in the cities, as I mentioned, where there is new development, that sometimes a particularly private developers get nervous and will cut rate to put somebody in the building to cover their debt.

And, but I think as there's more development space available, there's going to continue to be a split in the buildings that are higher quality. And the better locations are going to outperform those that are not as prospects have more and more choices.

Almost any submarket where we're building, you could point out where a building is not as attractive or doesn't have as good access, or whatever, has leased poorly over compared to us over almost any period of time.

Okay. That's helpful. And then, any interest from tenants that want to buy and lease back the building they are using?

We've heard about that picking up some of the larger box space and maybe with so many of your buildings being within parks that you own, it's just not practical. But any indications of interest from tenants that could be a barometer of their own confidence going forward?

Well hopefully, for example, the buildings we are trying to sell in Dallas, one of the tenants would like to buy them. So, they are always the best prospects on a sale, but usually what happens is when somebody wants a build-to-suit, and they determine they want you to build it for them, but they want to own it. And in certain circumstances, we'll do that.

But, as you mentioned, if it's in one of our parks, we would like to control 100% of the park 'cause we think that adds value to the park and to the individual building. So, we've run off some deals where we wouldn't have the tenant own their building in our park.

Okay. Makes sense. And then, typically, it's been the smaller companies that have led the way out of recession and then been more early cycle. This time, it's been a bit different.

Do feel that's an accurate statement? And do you feel like the smaller companies are starting to expand, providing some later cycle strength that we can look forward to?

Absolutely. And I think Phoenix is probably the clearest example of that, as I mentioned before, where the big boxes on the West side filled up very quickly, generating a lot of new development.

And our type tenants, it was what happened to them in the last six months, and particularly last three months, that leasing has picked up very much for us, both in development properties and existing space. And I think we're seeing that also in Dallas, where we have executed three good leases in the 20,000 square-foot range, and I think in the last 45 or 60 days, on spaces that had been vacant for a while and very little activity.

So, it really is moving to those tenants, that size tenants, that have been our bread and butter, historically. It gives us some optimism for a while, anyway.

Okay. That's great. Thanks, David.

Alexander Goldfarb of Sandler O'Neill.

Good morning down there. First, just a quick question for Keith, and then, David, we get to you. Keith, on the debt deal that you guys are about to do, the five-year deal, can you just give a sense for what the spread difference was between when you looked originally, the 4.75% was 10 year that you were thinking verse what you actually did 5 year?

So when you went to price it, can you give a sense of what the banks were quoting you for 5 year today verse 10 year? And then you said you filled in a 5 year hole, but just curious if rates are very good right now, did you not have a hole in 10 year? Can you just give some color?

We had planned to do a 10 year, and earlier in the year the rates on private placement and our bond index were about the same and then they started widening up. You saw some real good deals, I think Mid-America did a real nice 10-year public debt at around 3.25%.

That started looking good. But we could not get those kind of quotes for private placements, and so the margin was widening there, but the 5 year continued on down. I do not remember what the 5 year was when we quoted the 4.75%.

So we started looking more at the 5 year since our 10-year rates did not come down. We were still looking at about 4.25%. So we did calculations on 5 year, if we did a 5 year like the 2.85% number, and at the end of five years, what interest rate would it have to be to breakeven with 4.25%, and the 5 year look appealing to us, and then we did have that hole in the maturity schedule.

Okay. So it sounds like, obviously, the banks had gotten a lot more aggressive. David, on your comments earlier on the industrial side, sorry, on the size, the development size that you cited a bunch of stats that showed a lot of the development is focused on the bigger boxes, over 500,000 square feet.

Can you just give a sense for how much of that is being driven by capital that needs to be put to work versus actual demand? And then the opposite part of that question is you talked about B and C cap rates really tightening up. Would you say that's typical of a normal industrial cycle, or is this atypical and more reflection of how the bid for yield is just continuing across because of where rates are?

I think a little bit of everything on both your questions. On institutions, seem to like the bigger boxes. And a number of the REITs seem to be doing bigger boxes. You can put more money out at one time.

It's easier to get land because those bigger boxes tend to be on the fringe of development. And we're seeing institutions who are funding development as a way to acquire industrial because they can't buy enough of it by simply going into the market and trying to buy A-quality buildings.

Now, how much of that -- I would say the developers would tell you it's all driven by demand, but only time will tell on that. An interesting side like to that, Alex, is the last week, earlier this week, CBRE put out an interesting research piece. They do this every week on real estate, different topics.

But it's entitled Small US Industrial Properties Play an Important Role in a Complex Supply Chain, and it talks about how generally you can probably do better with a smaller building that's in an infill location where users have to be, which it sounds like we wrote the article. But, later on, I can send you a copy of that if you can't get it from CBRE, but it's like a verification of our strategy.

The second part of your question, the compression of cap rates, and sometimes compression maybe isn't the right word. But in Dallas and Houston, particularly, the class A cap rates have dropped so low, I fear it could be low five digit Dallas and some sub five in Houston. And I think in some ways, that drags down the other cap rates because of the large spread.

But there is clearly, they're a group of funds that are out there that are more yield oriented than the names that you generally recognize. And so, they want to be in the major markets, and just because an asset is identified as a B doesn't mean it doesn't work real well in its submarket.

So, we can sell a couple of these assets we've been talking about for a while at a lot higher prices than we thought a couple of years ago. And that, plus thinking it's time to do some other things, has had us put them on the market. And so far, we've been very pleased with the offers that we've gotten.

David, would you say that this compression, the bid for the BMC is typical of our real estate cycle? Or did this surprise you and, therefore, you decided, hey, let's put some stuff on the market?

No, I think it's somewhat typical and some property brokers would tell you that it's been slower in coming than we thought it would be.

Okay.

And again, where it's really happened is in the markets where the A asset cap rates have gone way down. And so, in comparison, the yield looks pretty good for those markets. Now, there are other markets where the B and C cap rates have not come down much.

Okay. The final question is on your Austin purchase, it had a higher level of office buildout than typical.

Is Austin the only market where you're comfortable taking the higher level of office buildout? Or do you see opportunity given the yield differential to find those sorts of opportunities in other markets?

I think Austin, historically, has had a higher office buildout and is dock high of buildings because of the nature of high-tech industry there, where they want climate controlled space where they can be more dropped ceilings.

So I think our Austin purchase had about a 24% office buildout. So, the fact that that's more common in that market made us more comfortable than we might be in another market with that.

Secondly, two of the tenants with the highest office buildout have longer-term leases. So that gives us some comfort, also.

So are there other markets that you'd do the same thing, or Austin is a one-off?

We have looked in the research triangle area in North Carolina viewing that as an extension of what we're doing in Charlotte so successfully. And the buildings there are similar to Austin, or even higher office buildout.

We just haven't seen a mix of assets there that we wanted to try to acquire, but we'll continue to look there, also. But it's, again, it's what is normal in a market or a submarket, because you don't want to be the outlier and have problems releasing when a lease terms.

Thank you.

Brendan Maiorana from Wells Fargo.

Thanks. A couple of nitpicky questions. Keith, if I am looking at your guidance correctly, I guess it suggests there is about $500,000 of net terms fees back half of the year.

I think you said, is all of that going to hit Q4? If so, that's about maybe a little over $0.01 of FFO and about 125 basis points or so to same store in Q4, is that right?

I think it was about $400,000 that we're calling in Q4.

$400,000, okay. All right, great. Thanks.

The occupancy outlook, David, it seems like your month-to-month leases increased this quarter, and I think you are expecting occupancy to dip more in Q2 than it did. And you mentioned in your prepared remarks that occupancy is going to dip a little bit in Q3.

Was there something that -- was it just a delay in timing of when some of the moveouts happened? Or what's causing the little drop in Q3 before you make it back and then some in Q4?

No, that's something that we've been projecting since early on in the year. There is no single event or a couple of leases being pushed out that has caused that.

We've had the benefit of a couple of customers we thought were going to move out are not going to. That gives us a little more confidence in the third and fourth quarters, but there are no unusual event. We just historically, which is nice, at least a little bit outperformed our occupancy projections.

Yes. Okay. No, that's helpful.

And then just in terms of the term, just it moved down, really, pretty modestly, but it was down a little bit, relative to where you guys were the length of lease term in Q2 versus Q1. Did any of the term or change in lease structure, did that drive any of the rent spreads?

Was there anything? Or was it just the improvement, as you talked about overall market, that you kind of look at things apples to apples and you just feel better about your ability to push as you go forward?

The latter. There wasn't any event, again, or series of things that we can point to that caused the length of the lease to drop a little bit. The high threes is historically where we've been over an extended period of time.

Three quarters of over four years was really the exception, rather than the rule. So, we'll see where it comes out next quarter. But I would guess it would probably be at 3.8 to 4.

Okay. Great. Last one. Development, we talked a lot about that on the call, here.

You picked up the parcel in Dallas. I would imagine that you guys would probably become comfortable starting your product in Dallas at some point this year. Tampa seems like the other market where you've got sizable exposure and the ability to develop there.

Those are your two main markets where you are not developing right now. Would we expect to see starts maybe in those two markets as you go forward in the back half of the year?

We'd like to build in Tampa and that's actually in our projections, but I could see that one slipping to early next year. But at the same time, we do not have Dallas in our projections.

And I think our goal is to, with a little bit of luck, to start that in 2014. So, that would push us over $100 million of starts for 2014.

And we'll take a close look at what we're doing in Chandler with Kyrene 202 having just signed the lease that took two-thirds of the larger of the two buildings there. A little more leasing activity and we will start a third building in that six building complex.

We harp on all our development starts are based on leasing. We lease more space, we start more buildings. And leasing slows down, we delay starts until the building in the park that's under construction or just finished leases up to a point that gives us comfort to start the next one.

Yes. Okay. But it's those three that seemed like the ones where it's probably most up in the air as whether or not it's 2014 or 2015 start?

Right, and it's based on what's going on in those markets. You can always get a delay in a permit for so many reasons.

But it's going to be based on leasing and I will be a little bit disappointed if we don't start over $100 million this year. But then again, where we start in December or January really doesn't make a lot of difference, other than how we talk about it.

Yes. Absolutely. All right, well thanks, guys.

Eric Frankel from Green Street.

Thank you. David, can you just discuss, regarding the leasing spreads, what's the average percentage of releases that were rolling over at the time this period, especially versus last quarter?

I don't have that statistic, Eric. That's not something we look at. And again, as I tried to explain, the way we calculate it on leasing vacant space, we could be leasing the space that was vacated the day before or two years before.

That affects the numbers on that. What is encouraging to us is not that they were both just positive, but they were both positive by a good spread. And what we've done is gone and looked at where we think we are going to be in the third and fourth quarter and expected to remain, those two statistics, to remain positive through the balance of the year.

Sure. I just think it makes a pretty big difference as 90% of your leases that were rolling over were signed in 2009 versus 50%, call it. Just makes a big difference in the stats and you probably want to consider going forward.

I think something that's encouraging for us in those numbers is that we only renewed 55%. That's not encouraging that we only renewed 55% of the leases. But the fact that what we released and the vacancy that we leased, you generally are probably going to get lower rents on those numbers and we still were very positive.

That's a very fair point.

And the other thing is, some of these statistics, we don't bother to look at because it doesn't determine how we operate our business. They're nice statistics, I guess, but it doesn't help us decide what to lease and when or for how much.

No, that makes sense. My next question, just regarding the land acquisition environment, maybe you can touch upon whether how typical it's become? Whether there's just a lot more bidders for well located land that you usually look for?

There's no question that there's more people looking for industrial lands. And looking at our markets, where we are developing or would like to develop, Dallas and Houston are both examples of lots of developers looking for land and land prices moving up.

I might have said on the last call, a broker in Dallas -- excuse me, in Houston, said that $5 a square foot is the new $3 a square foot for industrial land. So that's another reason that new developments are going to have to push rents in order to get their yields.

If you take an extra $1 a square foot and you get a third coverage, you are talking about $3 a square foot under the building and so you want to get an 8% yield on that. That's another $0.24 on an annual basis in rents you have to get to not have your yields go down.

So, there's going to be fits and starts on rent going up as development comes online. But anybody starting today is going to have to have higher rents than anybody that started building a year or two ago.

Thanks. Final questions regarding the unsecured debt market. Keith, can talk about your strategy of maybe when and how you'd like to tap the public debt market?

I would like to as soon as we can, but we are just not building up to the $250 million without having to wait six to nine months, and we did not want to miss the window on the good interest rates.

Great. Thank you.

Brad Burke from Goldman Sachs.

Hey, guys. Just a quick one from me. Looking at a couple of the developments in Houston, it looks like there was an uptick in some of the stabilized yield expectations.

So just wondering what's driving that increase? And if there's any reason to think that we ought to extrapolate that improvement across the rest of your Houston developments?

No, I don't think you can extrapolate that. And the number of cases, our yield will have gone up a few basis points because of additional improvements that a tenant on a longer-term lease is requiring, so it cost to us a little more. So we get an additional yield for that.

For example, on our West Road II building, the tenant there manufacturers a heavy wire that's used in offshore drilling and we had to reinforce the parking lot and reinforce some of the slab in terms of their being able to use heavier equipment to be able to deal with that, and so we got an additional yield. Also, you put in a pro forma yield and you always try to beat it a little bit, and sometimes you are better at it than others.

Okay. I appreciate it. That's helpful.

Gabriel Hilmoe from ISI group.

Thanks. Keith, just a clarifying question on the cash same-store NOI guidance. Can you walk through how you see that ramping in the third and fourth quarter?

I think you said 4Q was expected to beat 3Q and that includes the term fees. But is there anything in the way of term fees or anything impacting 3Q the upside? I'm just trying to clarify the parts that are driving the second half for cash same-store NOI?

The numbers I quoted were for GAAP on the 2.1 and 3.2 for third and fourth quarter. For cash, were projecting 4.6 to 5.8. Increasing it there. We've had some fees of $82,000 coming in through the finished quarter, and $600,000 coming into the fourth quarter.

Okay. Perfect. Thank you.

And we have no further questions at this time.

Thank you, all, again for your interest in EastGroup. And as always, Keith and I are available for questions that we might not have been clear on answering or we didn't have a chance to cover. Again, thank you for your interest in EastGroup and we will talk to next quarter.

This does conclude today's program. You may now disconnect and have a wonderful day.