Eastgroup Properties Inc (EGP) 2014 Q3 法說會逐字稿

Good morning and welcome to the EastGroup Properties Third-Quarter 2014 Earnings call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question and answer session.

(Operator Instructions)

Please note, this call may be recorded. I will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to Mr. David Hoster, President and CEO.

Go ahead, sir.

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

Thank you.

As you have seen from yesterday's press release, EastGroup continued its positive momentum during the third quarter. Funds from operations per share exceeded the midpoint of our guidance and represented a 7.2% increase over 2013 third-quarter results. The $0.89 per share was the highest quarterly FFO in our history. And we have now achieved FFO per share growth, as compared to the previous years quarter, in 13 of the last 14 quarters.

Our quarter end occupancy of 96.2% was our highest occupancy since the third quarter of 2000. Same property cash operating results were positive for the 14th consecutive quarter. And we continued to grow our portfolio and create shareholder value, primarily through our development program.

At quarter end, as I said, we were 96.2% occupied and 96.8% leased. As a result, we have extended our record occupancy at 95% or above for the fifth consecutive quarter. We expect this trend to continue at least through the balance of the year.

At June 30, our California markets continue to be our best at 97.8% leased, followed by Texas at 97.4% leased. Houston, our largest market with over 6.1 million square feet, was 96.7% leased and 96.4% 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 81% of the over 1.4 million square feet that expired in the quarter and signed new leases on another 7% of the expiring space for a total of 88%. We also leased 813,000 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 181,000 square feet since September 30. Between now and the end of the year, we have leases with only 467,000 square feet, or 1.4% of the portfolio scheduled to expire.

For the quarter, GAAP rent spreads were up 6.9%, which was the sixth consecutive quarter of being positive, while cash rent spreads were slightly negative by 0.4%. Looking at just renewal leases, GAAP rent spreads have been positive for ten straight quarters; and cash spreads have been positive for three of the last four quarters. The weighted average lease length was 4.1 years, which is in line with our recent averages for the past several years.

Tenant improvements were $1.30 per square foot for the life of the lease, or $0.32 per square foot for the year of the lease, which is well below our recent average. The average amount of tenant concessions continues to decline slowly, but leasing commissions remain elevated in many markets.

As a result of our combined strong occupancy and improving rent spreads, third-quarter same property operating results increased 5.9% on a cash basis and 3.7% on a GAAP basis. These are our best same property operating results in seven years, going back to the third quarter of 2007.

At September 30, our development program consisted of 19 projects, with 1.6 million square feet and a total projected investment of approximately $116 million. These buildings are currently 33% leased, which is below last quarter's total due to the large number of 100% leased properties transferred to the portfolio. Our developments are located in Houston, San Antonio, Phoenix, Orlando, Tampa, Charlotte and Denver.

We started construction of four projects during the third quarter. West Road III and Ten West Crossing 7 in Houston, Thousands Oaks 4 in San Antonio, and Madison II and III in Tampa. They totaled 339,000 square feet with a total projected investment of $23 million. Also during the quarter we transferred six properties with a combined 584,000 square feet and a projected total investment of $3.9 million into the portfolio. They're located in Houston and San Antonio, and are currently 99% leased.

In the fourth quarter, we expect to begin construction of three more projects with 430,000 square feet and a projected combined investment of $32.2 million -- two in Phoenix and one in Dallas. These will increase our development starts for 2014 to almost 1.7 million square feet and a projected investment of approximately $121 million. This is our second highest level ever.

We did not have any operating property or development land acquisitions during the third quarter. But we do currently have a 100,000-square-foot building in Chino, California, under contract to purchase, which should close in the fourth quarter.

We did complete three operating property sales during the quarter. In July we sold a small building, Tampa West 6, with 9,000 square feet in Tampa for $743,000. And at the end of September, we closed the sale of Clay Campbell with 118,000 square feet and Kirby with 125,000, both in Houston, for $13.4 million. The gains for all three totaled $7.4 million.

We also sold a small parcel of land in Orlando as part of an eminent domain transaction for $141,000 at a gain $98,000. In the fourth quarter, we hope to sell two older Dallas buildings, which were mentioned in our last call.

Keith will now cover a number of financial topics.

Good morning.

FFO per share for the third quarter was $0.89 compared to $0.83 for the same quarter last year. Accretive acquisitions and development, along with an increase in same property net operating income, were all contributors to the increase. Termination fees net of bad debts increased $771,000, about $0.02 per share, from the same quarter last year.

FFO per share for the quarter was $0.01 higher than our projected midpoint, primarily due to strong same property NOI results. FFO per share for the nine months was $2.55, as compared to $2.39 per share for the same period of 2013, an increase of 6.7%. And as always, we calculate FFO based on the NAREIT definition.

Debt to total market capitalization was 32.3% at September 30. For the quarter, the interest in fixed charge coverage ratios were 4.2 times and debt to EBITDA was 6.2 times. Adjusted debt to EBITDA was 5.5 times. All of these measures were improvements compared to the same quarter last year.

During the third quarter, we repaid a $26.6 million mortgage loan with an interest rate of 5.68% and closed on the funding of a $75 million unsecured term loan. The term loan has a five-year term, interest only payments, and an effective interest rate of 2.846%.

We have a 50% undivided tenant in common interest in Industry Distribution Center 2, and this investment is accounted for under the equity method of accounting. EastGroup and the property co-owner have a nonrecourse first mortgage loan secured by the property. The loan has an interest rate of 5.31% and was scheduled to mature in 2030; however, the lender exercised its option to call the note on June 30, 2015. EastGroup's share of the mortgage was $5.1 million at September 30, 2014. Also, now we can prepay the loan with no penalty.

We continue to sell shares under our continuous equity program to keep our debt ratios in line as we acquire and develop properties. In the third quarter, we sold 310,410 shares for gross proceeds of $20 million, $64.41 per share, and have sold 944,548 shares for $60 million, or an average of $63.52 per share for the year. Our guidance for the fourth quarter assumes the issuance of an additional $17.5 million through the ATM before the end of the year.

In September, we increased our quarterly dividend by $0.03 per share, 5.6%, and paid our 139th consecutive quarterly cash distribution to common stockholders. This dividend of $0.57 per share equates to an annualized dividend of $2.28 per share. Our FFO payout ratio was 64% for the quarter, and we have maintained or increased our dividend for 22 consecutive years and have increased it for 19 of those years. Rental income from properties amounts to almost all of our revenues. So our dividend is 100% covered by property net operating income, and we believe this revenue strength gives stability to the dividend.

FFO guidance for 2014 has been increased and narrowed to a range of $3.45 to $3.47 per share. And the midpoint was increased from $3.45 to $3.46 per share. This is the third time we have increased the midpoint of our guidance for 2014. Earnings per share is estimated to be in the range of $1.53 to $1.55.

Now David will make some final comments.

As I have been saying for a number of quarters, this is a good time to be in the industrial real estate business. Fundamentals continue to improve. Our pricing power is strengthening. Occupancies remain good, and we continue to see new development opportunities. Our conservative and flexible balance sheet allows us to take advantage of this attractive industrial property environment.

Keith and I will now take your questions.

(Operator Instructions)

Kevin Varin, Citi.

Hi. How are you guys doing?

Good morning.

I just wanted to ask you on the build-to-suit side of the Business. It seems to be slowing down a bit. Can you just talk about what you're seeing on that side of the development discussions?

After doing a number of build-to-suits in late 2012 and 2013, we have not done any -- did not have any build-to-suit starts or announcements in 2014, which is a little bit of a surprise. We would like, and do expect, that we will have one or two next year. Where we had primarily our build-to-suits, which were in Houston -- there is enough new development that we feel that prospects now have enough choices to be able to obtain space that fits their needs when they need it, and are not worried about having something -- a building built especially for them. So, I think that's a reason that we've seen the slowdown in Houston.

In several other markets, in particular Orlando, we're putting out actually more proposals today than we have over the last couple of years put together. So, that's what gives me the optimism that we will be doing some in the future.

Third thing I would add is that, given the size buildings that we develop, our build-to-suits tend to run from around 100,000 square feet to 200,000 square feet. And, at least in Texas, the build-to-suits that we are hearing about or see announced tend to be at least 2 or 3 or 5 times that size. And we don't compete or try to compete in that category.

Thanks. And just one last question: You've been able to maintain pretty attractive development yields in the pipeline. And I just wanted to get a sense -- as you kind of think into the next 12 months or so, just based on the rising construction costs and just overall increase in competition from developers in your market, do you see any kind of pressures on those yields at all? And I just kind of wanted to get a sense of your thoughts on that.

Yes. We're starting to see some of the pressures. And as -- I think we maybe even said in the last quarter's call, we've certainly reported to our Board that over the next 12 to 18 months we would expect to see some development yields drop anywhere from 25 to maybe even up to 50 basis points on new announced developments. Some of it is related to, as you say, construction costs.

Some of it, where we need to add land, the cost of the land is going to be higher than what we have today. And then, I think maybe a smaller portion will be related to competition. But, yes, they should go down a bit, but not dramatically. And if our yields are 7.75% to a little bit over 8%, that's still very attractive given our cost-to-capital and what we feel that we could possibly sell buildings for, given the current markets in which we're developing, although we obviously have no plans to sell anything we're building.

Okay. Thank you.

Thank you.

Ross Nussbaum, UBS.

Hey, guys. Good morning.

Morning.

I got a couple things here; let's see where we are going to start. Do you have a sense of what your same-store occupancy did from Q2 to Q3? Because it looks like putting those newly leased delivery developments into the numbers sort of skewed the number up.

That's not -- I have to admit, that's not something that we've compared, same-store occupancy. I'm sure it's probably a little bit higher, but that's just a guess. We always seem to be comparing current quarter to a year ago's quarter, rather than previous quarters the same year. But we can look into that and let you know, but that's not something we've calculated.

Yes, I can follow-up with you on that. All these years I've covered you, it just dawned on me that that wasn't a same-store number.

If I think about your lease roll next year -- we look at the quarter and say: Everything looked great. The only thing you can pick on a little bit might be the cash leasing spread. So, as we go forward into next year, if my math is right, your leases are expiring at about $5.45 a square foot. Do you have a sense of where that is, against market?

No, that's not something that we calculate, for a whole variety of reasons. We really take a look at what our actual budgeting is for each space, every quarter, as we are looking at what's going to roll. And we're just now in the process of putting together our 2015 numbers.

One -- comments that you mentioned that the small negative drop in cash on leases -- lease spreads -- I think it's important to note that when we look at the leases that were down, that, on a GAAP, and looking at a sample that's over 90% of leases, those over 8,000 or 9,000 square feet, and on a GAAP basis, only three leases, or less than 10%, have negative. And on a cash basis, over 80% were positive.

And then, one of the things that I think skews our numbers a little bit is that most of the leases that were negative were on spaces that had been vacant a year or more. So that, we're comparing something that was not what ended yesterday and a new lease signed today. We were comparing new leases, quarter compared to a year up to -- in one case, almost three years of vacancies. So, it's old rent. But the positive, obviously, is it was a vacant space that's been leased, so even more than the announced rent goes to the bottom line. So, we think the trend is clearly in the right direction.

Okay. Last question for me: You sold a couple assets in Houston in the quarter. Was there anything specific about those properties? Or are you trying to manage your exposure to that market since you've just delivered some more product into it?

A little bit of both -- and those two assets were both built in the early 1980s. So, they're older. We think we maximized most of the upside in them. One of them is down on the south side of town that -- we went down there for specific reasons. It didn't work out. We weren't able to add other buildings down there. So, it really didn't fit.

Good news on the sales was we were pleasantly surprised with the cap rates here, 30-, 34-year-old buildings, and I would call -- everybody grades their buildings differently, but these were -- one is probably a B or B-minus, and the other is a C or a C-plus. And one we sold basically a 6% cap rate, and the other was -- and 95% occupancy -- and the other at a 6.75% cap rate for the buyer, again, 95% occupancy.

So, I think when people look at NAVs, in particular, for what we have in Houston, that should say a lot. If two of our oldest assets there sell in that range, it says a lot about what else we have there, given approximately 80% of what we have there, we built. As I mentioned in the prepared remarks, there are two older buildings that are even older than these two that we are working on selling in Dallas, and would hope to sell before the end of the year, but a few details have to be worked out.

Jeff Peel, Goldman Sachs.

Hi. Thank you. Good morning.

Good morning.

Just first I'd like to start off -- for Florida. It looks like you had a strong quarter there, which hasn't been the case for a little while. So, just wanted to know what's driving this strength, and whether it's just one really good quarter or whether you're seeing real momentum in these markets?

We are seeing increased leasing activity, particularly in Tampa, which, coming out of the recession, had been very strong for us, and then seemed to go quiet for four or six quarters. And that's starting to pick up. The only negative in Florida is that we're still seeing some of the bigger rolldown in leases, and, as I had mentioned earlier, it's primarily leases where we've had some vacancy for a while. So, we're pleased with the pickup in activity, but we're still probably going to experience negative lease spreads there in the fourth quarter and probably some into 2015 next year.

Okay, thank you. And then just turning to your balance sheet, wanted to get a sense of how you're thinking about that? You did -- just did a loan under 3%. And I'd imagine you can get even lower today. But you're still building to 8% or better yields in development. So, just wanted to get a sense of whether you'd be willing to layer in a little more debt going forward, or should we think about the capital structure staying the way it is currently?

We plan to keep the capital structure where it is today. We think that our attractive debt ratios, low debt to total market cap, have helped us in our -- multiple on the stock because of that conservatism, and we're always looking into what new -- a new loan might be today. And just anecdotally, we found out just in the last week, as rates have had a precipitous drop, that some lenders won't even quote you today. And the spreads that were there when the 10-year was higher -- those spreads have increased because lenders are waiting for a shakeout of what's actually going to happen over the next few weeks with interest rates. So, yes, we're looking into it, and, as always, the amount of debt we take on is going to be determined by what debt matures, and what new acquisition and development opportunities we see that we'll be funding.

Okay. And then just -- I want to also just turn to Texas for a moment. Are you starting to see weaker energy prices dampen any of the acceleration or enthusiasm in your Texas markets?

No. I can say clearly no because we've been talking to our Texas people the last couple of days. I think it is way too early to determine whether the drop in oil prices is going to be permanent, whether it is going to bounce back up, go lower. And what we've seen to date is prospect -- we just signed two leases this week with oil-field-related companies, and they expressed no hesitation or worry about what was happening there.

I think something else that needs to be kept in mind on what is going on in Texas, and Houston in particular, is that the price of oil is only one factor, and drilling for oil could slow down a bit if the prices stay down. But there seems to be no change in the demand or activity on petroleum when you look at midstream and downstream. The pipelines are continually being built. There are plans to put out a whole lot more money there.

And then, you step back, and with the low price -- or historically low price of natural gas, there have been announcements that add up to somewhere between $70 billion and $90 billion in Texas for expansion and creation of liquid natural gas facilities to export it. Tremendous expansion with the chemical industry, fertilizers, resins, plastics. And so, I think even with low oil, none of that should slow down.

Houston has just become the number-one port in the country for exports. And of course, you'd expect from the oil companies, but they still put out the -- they strongly believe that the long-term demand for energy is going to continue to grow. So, we'll talk again on that topic next quarter, see if we've felt any effect. But so far, nothing at all.

Okay. And you wouldn't expect the weaker energy prices to dampen any of the new developments as well going forward?

I would hope some of our competitors would feel that way, but we have not sensed that yet.

Okay, great. Thank you so much.

I would add one other thing that -- and I'm sure it has nothing to do with the drop in oil prices, but the amount of industrial under construction dropped about 25% from the second quarter to the third quarter. And there could be a lot of other reasons for that. But at least that's trending in the right direction, from our standpoint.

Okay, great. Thank you.

Thank you.

Jamie Feldman, Bank of America Merrill Lynch.

Great, thank you. So, I guess just sticking with the Houston oil question, when you were talking to your team in Texas over the last couple of days, historically has there been a price point where the economy starts to feel pain? And I know -- I agree with you on everything you're saying about natural gas. But just, if you look back at history, is there a number that makes them nervous?

Again, I'm certainly no expert on oil and gas business. But what they say out in Texas, and you read, is that the threshold is -- for oil -- is around $70 to $75 a barrel, and that probably if it stays at that level or lower for any period of time, the peripheral companies and some of the independents will probably cut back on oil drilling. But the national companies look on a much longer-term horizon.

I think the other thing that it is hard to look at historically is so much of the drilling today is the hydraulic fracking, and that has not been going on so long that there has been any slowdown. The only issue before was on the pricing of natural gas. But only time will tell on this. I'd say there's not enough history with the hydraulic fracking to come up with a price yet that will really slow things down.

Okay. That's very helpful. And your comments on Florida and kind of Tampa getting better -- if you look out over the next year or so, what are the markets you do think you'll see acceleration and demand, maybe rent growth and more development opportunities?

We see Florida picking up, and, as mentioned earlier, we're starting two small buildings in Tampa, partially because our land basis is so low, we can come in at today's rents and have a good yield. But we'd expect that to increase and be able to do more building there.

In Orlando, we are seeing a pick-up, and we have two new buildings at Horizon that have seen good activity. And as I mentioned earlier, we are putting out some good proposals for additional building users in that Horizon Park. So, we're optimistic from that standpoint.

We're looking for land in Broward and Palm Beach Counties, but don't have anything there to announce. Jacksonville -- we don't see rents anywhere near a level to do development. And although, in Fort Myers, rents are moving up because there is so little product, we think we're way off from building there. But I'm not very good at predicting where rents are going to go, so we just base it on what we're experiencing at the point we're ready to analyze a new development.

Okay. That's very helpful. And then, I think you said you were buying a building in Chino. Can you guys just provide some color on how you're thinking about Southern California right now? I think it's showing up as one of the markets that may start to see vacancy rise as new (multiple speakers) comes online. What is your big picture on that area?

Well, the small picture, to start with, is this building is 100% leased. So -- and is for a number of years. So, we are not too worried from that standpoint.

The second factor is that Chino, as you know, is really the far western Inland Empire and is a whole lot less affected by all the new development out in Ontario and East of Ontario. So, we are seeing strong leasing activity closer in, and that is where our properties are. So, at this point, as you see from our data, we are 100% leased in Los Angeles. And certainly, we'll have a little bit of turnover there, but are optimistic in keeping above average occupancies because of the in-fill-type locations. Chino used to be -- not in-fill but with what happened farther east, it's clearly in-fill today, and there's very little land for new development there. So, that shouldn't affect us.

Okay, thank you. And just one housekeeping question: The assets that you sold in the quarter -- are those reflected in discontinued operations? Because it looks like there's nothing there on the income statement.

It's up above now. They changed the rules on that, so we don't have to put it down there now.

Okay. All right, great. Thank you.

Thank you.

Vance Edelson, Morgan Stanley.

Great. Good morning, guys.

Good morning.

So, back to Texas, could you provide an update on Austin and what you've seen so far? Any incremental thoughts the past quarter, and whether you're getting comfortable enough to start thinking about future expansion?

As you know, the building there, the four-building complex that we acquired in the second quarter is 100% leased, and we have no leases turning this year or next year. So, we're very comfortable with what we're doing there. We would very much like to have additional acquisitions, and we've looked at a little bit of land, but development is difficult in Austin, and might even, in some ways, be more difficult than California because of all the regulations. But our goal is to grow to at least over 1 million square feet there.

And traditionally, we've gone into a new market, had a number of purchases, gotten comfortable with that market, and then begun development. And that worked very well for us in San Antonio and Charlotte. Las Vegas has been much harder, and so we haven't been able to grow there. But our long-term goal was to own, operate and develop, so that we're well over 1 million square feet in Austin.

Okay, that's helpful. And then, shifting gears -- in terms of it being a good time to sell some non-core assets, sounds like you have some lined up in Dallas. Can you talk about the demand for these types of buildings where the value has already been maximized, and how that relates to the strength of the private money flows? Do you feel like demand is still on the rise, and who are the typical buyers?

I think the demand is probably still on the rise a little bit. And everybody looks at an asset differently, in terms of what the upside is. And we've always been a cluster of assets, or at least attempted to do that. And when it hasn't worked, over time, we've sold off the outliers geographically, and that really included the two projects in Houston.

On the bidding on those assets, there were no other public companies. They were institutions or private REITs. And they have lots of money and they need to put it out, and, in many cases, the numbers don't work with a low-5% or sub-5% cap rate, and the B assets are, where they're available, a little higher yield. And so, that seems to be where -- that we see today more activity than in the pure A assets.

Okay, that's good to hear. And then, last one for me: Could you just update us on competitive new supply? Which of your markets are seeing the most new builds, and how well is it being absorbed?

Well, in our markets, it's primarily Dallas and Houston. And so far, it has been well absorbed, and the vacancy rates are still at historic lows. In Houston, they haven't -- the vacancy rates have not moved up at all yet. So, it continues to be good.

Also in Dallas, in particular, [a huge] number of the buildings are the big boxes. Over 80% of what's under construction there is 300,000 square feet and above. And I think there's six buildings that are 1 million square feet and above. So, big total numbers, but none of that competes with what we own or with what we started -- or hope to start building in the fourth quarter. But given all the construction, we are always looking over our shoulder just to make sure we know what is going on, and we are not stepping too far out.

Okay, that's terrific. Thanks, David.

Thank you.

Ki Bin Kim, SunTrust Robinson Humphrey.

Thanks. Just a couple quick questions. First, on San Francisco, if I compare your numbers from the third quarter and second quarter, it looks like nothing's really changed in terms of occupancy or the percent of annualized base rent for the whole portfolio. But, at least in the third quarter, you have this very large 42% increase in same-property NOI. Just curious on what -- the details behind that?

Okay. We had -- and I think used to show up on our list of 10 largest tenants -- is two buildings in Hayward that are almost next door to each other that International Paper leased. They are moving into a consolidation in a build-to-suit, and that was announced a while ago. So, they've been trying to sublet, and we've been working on leasing the space. And so that we found a user for one of the buildings.

International Paper, as most big companies will do, pay a termination fee that saves them some money, and gets them out from under a lease when they are not using the space. And that is the big jump in same-property operating results in San Francisco. The new tenant moved in without a day of downtime. So, we were very pleased with how that transaction worked out.

So, does that number include a lease termination fee?

Yes.

So, what would your overall same-property NOI be without the lease termination fee?

In San Francisco?

Portfolio.

Oh.

I've got that, if you want it.

Please go ahead.

GAAP numbers in the third quarter -- it was 3.7% with termination fees, and 2.0% without termination fees.

Okay. And I guess a similar thing for cash, right? I just have to do the math?

Cash was 5.9% with termination fees, and 3.9% without termination fees.

Okay. And then, just second question for me: Even with that adjusted for lease termination fee income -- the GAAP versus cash -- I mean, you are enjoying a pretty nice benefit from the cash -- from the [free] line adjustment helping your cash NOI numbers. Just curious: Is that from free rent burning off or, on a portfolio level, are we past like the midpoint of lease trajectory where we're now getting the benefit of cash income? And I guess my question really lends to: When does that merge to a similar number with cash and GAAP?

I don't think that ever comes together because almost 100% of our leases have built-in bumps, increases, and most markets we get annual increases of 3% or close to that. In Texas, it tends to be every 18 or 30 months in a lease. And so, the straight-lining includes that -- those bumps.

And so, basically, what we're doing is: When we compare that on rent spreads, it's the average rent from the previous lease to the average rent on the new lease. So, those numbers are always changing, and GAAP should go up as we do less straight -- excuse me, free rent tied into those straight-line numbers. And I think that trend is going to continue.

Okay. All right, thank you.

Thank you.

Brendan Maiorana, Wells Fargo.

Thanks. Good morning. David, so, I think that you mentioned last quarter, and I think it was included in guidance, that you thought there were likely to be a little bit of occupancy pressure in Q3. But your occupancy moved up from 95% to over 96%. So, was that just driven by better activity in Tampa? And then it looked like you leased up a bunch of space in Charlotte, or was there some other areas where you gained that you didn't expect to?

You touched on where the biggest gains were. But what happened is we expected to really drop below 95% over a quarter or two, and then come back up to 95% or a little higher in September. And we did not drop below in July and August, and then did some good leasing in September. So, really, our operating numbers for the third quarter don't reflect 96.2% occupancy because that was a September quarter and number.

As to Charlotte, if you recall, back in May, we bought a [vault] building and it sits between two of our other buildings, Ridge Creek 3. That is what we call it. We bought it with 55% occupancy and 122,000-square-foot vacancy. And in September, we leased that and the tenant took occupancy in the second half of September. So, that also helped our occupancy numbers at quarter end, but, like I say, didn't do a lot for FFO for the quarter.

Got it. So, if the 90 -- so, if you ended the quarter at 96.2%, your guidance for Q4 is 95.8% average, I think, for the quarter. Are you sort of suggesting that the 95.8% for the fourth quarter -- that average occupancy is higher than what your average was during Q3?

It's going -- I think I understand what you're saying. But the average occupancy is going to be higher in Q4, but we know of some move-outs in Q4 that, unless we're pleasantly surprised, we will end the quarter below 96%.

Yes, okay.

Which is a nice thing to have to be talking about, whether it's going to be mid-95% or 96%.

Yes. It's a pretty good neighborhood to be in.

So, I guess the real question is: As we think about next year, doesn't look like, at least out of your major top tenants, that you've got expirations next year. I think maybe Tower Automotive in Mississippi is one, but I think that's it.

That's at the end of the end of year, too.

Yes, right, December 31. So, do you feel like you can keep operating in this 95.5%, 96% occupancy zone for an extended period of time? You've been there in the past, but it hasn't been for that long of a period. But do you feel like you can, if the economy holds up next year?

Well, it's pretty hard to budget at 96% because then the only way you have to go if something trips you up is below that. We are doing, as I mentioned, our budgeting for 2015 right now. And I sit down with each of the asset people and go over every lease that is coming up of roughly 15,000 square feet and above, and we're just starting that process. My guess is that, with a little bit of luck, we should average 95%. It's a stabilized number.

Okay. That's helpful.

That's just a gut feel. That's not anything from running any numbers at this point.

We won't hold you to it. Any big guys out there that we should be thinking about for next year -- the big expirations that you have on the watch list?

I'd rather not go into all that now and name them, just from a competitive standpoint.

Sure. Fair enough.

You and I can talk maybe later about a couple of specific ones that are happening. But we have -- up front, we've pointed out that we have more square feet maturing in 2015 than we had -- we historically have. But we've already gotten a good start on renewing those or working on the spaces that we think will be vacated. In our minds, the good news on that -- the mitigation of that risk is that we're having that much roll into improving markets.

Yes. So, that's just kind of my next and last question, and maybe touches on a question earlier. I know you sort of don't forecast out what the rent spread numbers are going to be because who knows where the expiring rents are going to be? But just from an overall perspective, if the portfolio is 96% occupied now, how are you guys pushing rents now versus maybe 6, 12 months ago, given that the portfolio overall is so well occupied?

We're not really looking at how we're doing in an individual market. You have to look at a submarket, and see what the vacancy is around you. And the example I always give is if a prospect has five or six or eight good alternatives, it's a lot harder to push rent than if they have zero or one or two alternatives. And what we ask our asset people in the field to do is to understand the alternatives, the rents being asked, the quality of that space compared to ours. And then, given that information, figure out how hard they can push rents.

And because we're generally, almost all the time, having an occupancy higher than the overall market. And in most cases, higher than the other institutional owners. So, it's what's going on in that individual submarket and that size space rather than more general statistics.

No, I understand that. So, I guess what I was trying to drive at is: Does it feel like your -- the market dynamics and your individual dynamics are in more of a competitive advantage situation now than they were maybe at the early part of the year, just on balance?

Yes. Fundamentals are better. And so, we should do better, but I am not in a position to give you a number on how much. But we should do better, no question.

Okay. That's helpful. And then, Keith, do you have the stat -- I think you guys have provided it on past calls -- how many pre-2009 leases are rolling over the next several quarters?

I do. Let's see --

I think it's about --

We've got 6.6% left at September 30.

But, Brendan, I would add that I'm not sure how meaningful that number is, when most of our negative rent spreads that we experience are on leases that have been vacant for a while -- or on spaces that have been vacant for a while. And as a result, it doesn't make for a really valid comparison. That's why I've been pushing for a long time -- look at what we do on renewals, because that's really apples-to-apples comparison, both renewals on cash and GAAP. Because, as I mentioned earlier, if the space has been vacant for three years, we release it, and there's a negative rent spread, it shows up in the statistics, but in fact it's a real bonus for the bottom line because we're collecting rent on a space we weren't before, plus collecting the CAM charge.

Yes, understood. Okay, thanks for the time.

Thank you.

Alexander Goldfarb, Sandler O'Neill.

Good morning. Just want to follow-up that line of question on the leasing and the occupancy. Do you find that -- are you telling the field to go out, and try and generate more vacancy? Like, trying to go after tenants who you think aren't likely to renew or may have more space than they would need in some of your submarkets that are tighter, where you would like to take their space and re-let it to higher-paying tenants?

Seldom have we ever chased out a tenant that's paying rent. You tend to lose them, one, if you can't meet their needs, whether it is expansion or contraction. And we usually do a pretty good job of that because of our parks where we've got a number of buildings where we can move them into a bigger or smaller space.

Where we've run off tenants is where they signed a lease, some particularly in Florida, where they signed a lease at the depth of the recession, and we, or the previous owner of the building was buying occupancy with a bottom of the market rent, and we're now coming in and seeking anywhere from 100% to 200% rental increase. And those lower rent payers tend to move under those circumstances because, whether it's in an up or down market, they're looking for the cheapest space possible. So, we lose them that way.

Okay. But as far as actively manage -- if we look in other sectors, whether it's office or retail, we'll see a number of landlords seeming increasingly going after tenants, either to lock them in so they don't go elsewhere or because they just have tenants who aren't -- either have too much space who are paying or really too much space and aren't really paying for what it's worth, where the landlord is able to get it [down]. It doesn't sound like, in your portfolio, that's something that's really an option. Is that correct?

We go to them with a market rent, and either they pay it or they don't pay it. And you go from there.

Okay. And as far as the buyers of the B assets, whether it's the Houston or the Dallas stuff that you're marketing, whether it's the private REITs or private buyers, are these all industrial buyers or are these more pools of yield-oriented people where they're -- as long as it is a certain yield, they're agnostic of product type?

In the different properties that we have sold or are selling, they have either been tenants in the space who want to own their own facility or dedicated industrial buyers.

Okay. And then, just a final question for Keith. G&A was higher in the quarter than we expected. Obviously, you guys have had a good year this year, so I'm assuming that the field is getting excited for year end. Should we expect elevated G&A through the balance of the year? Or was the third quarter just a one-time?

I think the third quarter is a little higher. It should go down in the fourth quarter, and it's kind of been a little lumpy this year. The first quarter is usually highest because that is when bonuses from the previous year are calculated. And then it drops back down in the second quarter.

Third quarter would increase because we had increase for some cash bonuses that were meeting some projections. But fourth quarter should be down, and then we should end at 5.8% of revenue, which is the same thing as last year, although has increased from last year. So, we're projecting about $12.8 million of G&A.

Okay. Thank you, Keith, and thanks, David.

Thank you.

Craig Mailman, KeyBanc Capital.

Hey, guys. A couple quick ones: What is -- as we look into 2015 -- the average bump that you guys are going to get next year?

Well, we, historically, within individual leases, as I mentioned, we get 3% or close to it on an annual basis in most of our markets. Texas, you get a higher bump in the middle or two-thirds of a way through a lease. And so, our average is probably high-2% built into the leases.

Okay, that's helpful. And then, as we look at -- I know a lot of people have asked about rent spreads already -- just curious, as you look at Houston this quarter relative to last quarter, there was a big drop, but it looks like you guys pulled ahead 300,000 square feet of expirations from 2015. Maybe just give a little bit more color there. Was there one lease in that number that skewed it down, or is the mark-to-market in that segment kind of waning for you guys here?

I wouldn't get too wrapped up in any one quarter because that certainly doesn't really mean a trend. But I don't recall that there was any specific lease that kept it down. There's more competition for the bigger customers than there was before, but we don't feel any more competition for the medium to smaller users. There's not anything specifically or any specific lease that I would point to that brought that down. I think that's just statistics for the third quarter.

Okay. That's helpful. And then, the one stat -- could you guys just give us a sense of what average occupancy in the same-store pool was for the quarter versus the same period last year?

That's not something that we've figured. We can look at it and maybe talk to you later. But that's -- those change so dramatically each quarter because of what comes in and out of that pool because it has to -- those properties have to have been in for the entire quarter in both years. So, that swings back and forth. We've not, as I say, calculated that -- those two different occupancy numbers.

Okay, great. Thank you, guys.

Thank you.

Eric Frankel, Green Street Advisors.

Thank you. Obviously, there's been a lot of questions that have been answered already. But, David, maybe you can comment on the Chino acquisition a little bit further. From what I understand, you've avoided the coastal market just because the cap rates have tended to be a little bit lower than where you've been developing and buying in the last few years. So, just want to get your rationale on that acquisition?

Well, we're not -- we don't give purchase price or a yield number until after the transaction closes because different things could happen between the time it's under contract and when you actually close. So, that's information we'll report to you next quarter or in a press release if we do that on the purchase.

Okay. And the final question I have is just regarding the unsecured bond market. I would assume that you have your own [secured] credit ratings ready to go. And it seems that you have roughly a little over $80 million of mortgage debt coming due next year, as well as a pretty big sizable balance on your line of credit. So, Keith or David, wanted to get your thoughts on a possible [note or] offering next year?

I think we'll still probably do either a bank term loan -- we're looking at maybe a seven year. We've got a hole in our maturity schedule in 2022. And so, seven year would work fine there, and also a private placement for the 10-year market. The rates are really good right now in both of those areas, and we are looking at that right now.

But I think we can pre-pay that first mortgage that's due in April, 30 days earlier. So, maybe March 5. We would like to probably get a -- something in January, February -- something like that. But it still appears a little far off to get the $250-million bond index for us yet. So, probably wait on that.

Okay, thanks. That's it for me.

Good. Thank you.

Bill Crow, Raymond James.

Good morning, guys. David, what's going up faster, cost-to-construct all-in or market rents?

That's a good question. I would say, off the top of my head, that it's cost-to-construct. And I think that's going to have two things happen.

One, some of the yields might come down a bit, especially when you throw in higher land costs if you're having to buy land today. And the other factor is: Rents will need to go up if people want to maintain yield or stay close to what was originally pro forma'd when they started talking about a transaction. But it's a little difficult to point a finger exactly on what the increase is, but in talking to our different markets, it's somewhere between 10% and 15% increase over the last 12 to 18 months. And I don't expect that to slow down too much.

All right. And then, from a supply perspective, are you seeing new players enter the field, especially in Texas? The guys -- the one-off guys that are building one facility -- they're back now? Is that fair?

To some extent, yes. And in Houston, you're starting to see some local developers who have lots of equity with bank financing build buildings. Those buildings tend to be, as you just mentioned, one-off. They tend not to have as quite as attractive locations or they are not built the way -- with a lot of the extras that we put on our buildings to try to be right up there in all the lease presentations.

Right. Okay. And then, finally for me, David, we're all focused on Texas from a supply perspective. But if we were going to, say, look out four quarters from now, what market outside of Texas would the street be focused on from purely a supply concern basis?

I don't -- we're not building in Miami, but I think that has its supply issues. And we're right next door, so we stay on top of that. I don't see any other market right now that could have over-building.

Orlando -- a number of developers have announced future developments that haven't started, but the vast majority of those now are in larger buildings that shouldn't compete with us too much. So, we're always looking over our shoulder, but the real markets with lots of new development are the two in Texas.

Okay. That's it for me. Thank you.

Thank you.

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Hotty Toddy.

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