Eastgroup Properties Inc (EGP) 2014 Q4 法說會逐字稿

Hello, everyone, and welcome to today's EastGroup Properties fourth-quarter 2014 earnings conference call.

(Operator Instructions)

Please note this call is being recorded. It is now my pleasure to turn today's conference over to Mr. David Hoster, President and CEO.

Good morning and thanks for calling in for our fourth-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 [entail] certain risk factors and uncertainties that may impact the Company's future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time-sensitive information that's subject to the Safe Harbor statement included in the news release is accurate only as of the date of this call.

The fourth quarter was another productive one for EastGroup. Funds from operations per share represented a strong 8.3% increase as compared to the same quarter last year. We have now achieved FFO per share growth compared to the previous year's quarter in 14 of the last 15 quarters. For the full year, FFO per share grew 7.4% as compared to 2013. This represented the fourth year in a row of increases in FFO per share as compared to the previous year's results.

Continued good leasing activity resulted in a year-end occupancy of 96.3%, which was our highest occupancy since 2000. Same-property net operating results were positive for the 15th consecutive quarter. We continue to expand our development program, and we acquired an asset in Chino, California. At quarter-end, we were 96.3% occupied and 96.7% leased.

As a result, we have now extended our record of occupancy at 95% or above for the six consecutive quarter and we expect this trend to continue through each quarter of 2015. At December 31, our California markets continue to be our strongest, at 97.7% leased, followed by Texas, at 97.3% leased. Houston, our largest market, with over 6.2 million square feet, was 97.6% leased and 97.1% occupied.

In the fourth quarter, we renewed 94% of the over 1.4 million square feet that expired in the quarter, and signed new leases on another 4% of the expiring space, for a total of 98%. We also leased 297,000 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 295,000 square feet since December 31.

For the quarter, GAAP rent spreads were up 7.6%, which was the seventh consecutive quarter of being positive, while cash spreads were up slightly by 0.1%. Looking at just renewal leases, GAAP rent spreads have been positive for 11 straight quarters and cash spreads have been positive for four of the last five quarters. The weighted average lease length was 4.2 years, which is in line with our recent averages for the past several years.

Tenant improvements were $1.42 per square foot for the life of the lease, or $0.34 per square foot per year of the lease, which is also in line with our recent average. The average amount of tenant concessions continues to decline slowly, but leasing conditions remain elevated in many markets. As a result of our continued strong occupancy and improving rent spreads, fourth-quarter same-property operating results increased 5.8% on a cash basis and 3.1% on a GAAP basis.

If lease termination fees are eliminated, the increases in same-property were 4.3% cash and 2.1% GAAP. We expect same-property results to continue to be positive for both categories for each quarter of 2015. But they will be lower due to the large termination fees received in 2014, and also because occupancies for same-property comparisons are above 95%.

Leasing activity is good in all our markets from both organic growth, current customers, and new prospects to the market, and we believe this should continue for the foreseeable future. Leasing of new development space was very slow for the first two weeks of 2015, but has since picked up significantly.

There are obviously a lot of unanswered questions about the effect of the price of oil on Houston's industrial real estate market. Since no one knows when the price of will stabilize, or how long it might be at any specific level, it is difficult to project how it will directly affect our existing Houston assets or the pace of our development program there.

To date, we have not experienced any push back from current tenants or prospects, but we are certainly viewing new developments more cautiously and are being conservative in 2015 projections for Houston. As a result, we expect same-property operating results for our Houston properties to be a negative 2.5% for 2015. Because Houston is our biggest market, we have added a Houston-specific statistics page, page 18, to our supplemental data package this quarter.

During the fourth quarter, we began construction at Sky Harbor 6 in Phoenix with 31,000 square feet, and ParkView in Dallas, which will be a three-building complex with 276,000 square feet. They are projected to have a combined total investment of $22.7 million. Also in the quarter, we transferred West Road II in Houston with 100,000 square feet and an investment of $6.2 million into the portfolio. It is 100% leased.

For the full year, we started development of 17 projects, containing 1.5 million square feet, with projected total costs of $112 million. Six are in three different submarkets of Houston, three in San Antonio, three in Phoenix, two in Charlotte, and one each in Dallas, Orlando, and Tampa. Also in 2014, we acquired 40 acres of land for new development for a combined investment of $4.6 million. These parcels are located in Dallas, Phoenix, and Charlotte.

For the year, we transferred 10 properties with 949,000 square feet into the portfolio. All of these assets are currently 100% leased. Seven are in Houston, and one each in San Antonio, Phoenix, and Charlotte. Looking to 2015, we expect another good year for our development program.

Since the beginning of the year, we have started construction of three buildings with 282,000 square feet and a total projected investment of $20.6 million. Kyrene 202 building number VI, which is actually the third building, but we are calling it number VI, which is in Phoenix, and World Houston 42 and West Road IV are both in Houston. World Houston 42, which will contain 94,000 square feet is 100% pre-leased.

At the beginning of this month, we transferred Horizon I in Orlando to the portfolio at 68% leased. During the balance of 2015, we hope to begin development of at least an additional 10 buildings, with approximately 1.3 million square feet and a total projected cost of $90 million, for a total of $111 million of new starts for the full year. We have not included any potential build-to-suits in these projections.

As of today, our development program consists of 22 projects with over 1.2 million square feet and a projected total investment of approximately $145 million. EastGroup's development program has been and will continue to be a significant creator of shareholder value in both the short and longer term. To date, we have developed over 37% of our current portfolio, adding over 13 million square feet of state-of-the-art warehouse space in our core markets. These assets are currently generating approximately 40% of EastGroup's property net property income.

In December, we acquired Ramona Distribution Center in Chino, California for $9.7 million. Built in 1984, this business distribution building contains 100,000 square feet and is 100% leased to a single customer. As part of the transaction, we assumed a mortgage of $2.6 million. For the year, we acquired three different properties with a total of 635,000 square feet and a combined cost of $51.7 million. The other two acquisitions are in Charlotte and Austin.

Also in December, we sold two of our three Ambassador Row Warehouses in Dallas for $3.7 million. These older assets contain 132,000 square feet and were acquired through a merger in 1998. In 2015, we plan to sell the third Ambassador building, which has 185,000 square feet.

Sales of operating properties for 2014 consisted of five projects with 442,000 square feet at a total sales price of $21.4 million. These are located in Oklahoma City, our exit from that market; Tampa, a very small building; Houston, two older properties reducing our concentration there; and Dallas. These transactions resulted in total gains of $9.3 million. During 2015, we project sales of approximately $10 million. Keith will now review a variety of financial topics, including our guidance for 2015.

FFO per share for the quarter increased 8.3% as compared to the same quarter last year. Our growth in FFO continues to be from development, acquisitions, same-property results, and debt refinancing. An additional factor was that lease termination fee income, less bad debts, increased FFO by $397,000 comparing the fourth quarter 2014 to 2013.

FFO per share for the year increased 7.4% compared to 2013. Lease termination fee income, net of bad debts increased FFO by $982,000 compared to 2013. Same-store NOI increase for the year was 2.3% for GAAP, 1.8% if you exclude termination fees, and 3.4% for cash, 2.7% if you exclude termination fees.

During the fourth quarter, we sold 301,852 common shares under our continuous equity program at an average price of $66.26 a share, with gross proceeds of $20 million. (sic - see press release "$20 million") Page 13 in the supplemental package details our sales of common shares through the continuous equity program during the year. Our outstanding bank debt was $99 million at year-end, and with bank lines of $250 million, we have $151 million of capacity at December 31.

Debt-to-total market capitalization was 31.4% at December 31, 2014, compared to 33.3% at December 31, 2013. For the year, our interest in fixed charge coverage ratios were 4.1 times, an improvement from 3.8 last year. The debt-to-EBITDA ratio was 6.4 for the year and adjusted debt-to-EBITDA was 5.5 times; and page 21 in the supplemental package shows the adjustments.

We have a mortgage note payable due April 5, 2015 that we can prepay with no penalty on March 5, 2015. The note had a balance of $58 million at December 31, 2014 and has an interest rate of 5.5%. We reached an agreement to borrow $75 million from a bank and it is expected to close in early March 2015. The effective interest rate is 3.03% and has a seven-year term. The unsecured loan is interest-only until maturity.

In December, we paid our 140th consecutive quarterly cash gas distribution to common shareholders. This quarterly dividend of $0.57 per share equates to an annualized dividend of $2.28 per share. This was the Company's 22nd consecutive year of increasing or maintaining cash distributions to its shareholders. Our dividend-to-FFO payout ratio was 64% for the year.

Rental income from properties amounts almost of our revenues so our dividend is 100% covered by property and net operating income. FFO for 2015 is projected to be in the range of $3.57 to $3.67 per share. Earnings per share is estimated to be in the range of $1.21 to $1.31.

A few of the assumptions we used for the midpoint are: occupancy rates are projected to average 95%; same-property NOI increase of 1.1% for GAAP and 1.2% for cash; acquisitions of $50 million of operating properties in the second half of the year; development starts of $111 million; repayment of two mortgages coming due in 2015, with balances at December 31, 2014 totaling $84 million; unsecured debt financing of $150 million; common stock sales of $50 million; total G&A of $15.8 million, with $4.7 million projected for the first quarter.

The first quarter is lumpy because of the accounting for stock grants, which is consistent with past years. G&A for the year will increase by an unusually large amount, primarily due to the costs associated with Mr. Hoster's retirement and the CEO succession. Mr. Hoster's vesting on his restricted stock awards is accelerated from the normal four- and five-year vesting periods, and we will have an overlap of Mr. Hoster and Mr. Loeb for most of the year.

We estimate these higher costs to be approximately $0.08 per share. The 2015 FFO per share midpoint is $3.62, which is an increase of 4.3% compared to 2014 results. After adjusting for the $0.08 per share of G&A costs discussed above, the increase is 6.6%. Now David will make some final comments.

As most of you know, I have been talking about retirement, given that I will be 70 this summer. Our press release on CEO succession two weeks ago finally made it official. I will retire as CEO at the end of this year. I do plan to stay very much involved with EastGroup as Chairman of the Board of Directors, subject, of course, to shareholder and Board elections.

As announced in the press release, both the Board and I are extremely pleased and excited to welcome Marshall Loeb back to EastGroup, where he began his real estate career. He will become President and Chief Operating Officer March 1 and then Chief Executive Officer and a Director as of January 1, 2016.

I personally believe his return helps ensure the consistency and continuity we are seeking through this transition. I look forward to working directly with Marshall again over the next 10 months, and then as Chairman, for many years in the future. He will be an excellent addition to our team and its culture.

Keith and I will now take your questions.

(Operator Instructions)

Jamie Feldman, Bank of America Merrill Lynch.

Sticking with the CEO succession plan, can you just provide a little bit more color on the decision process and the merits of Marshall and what you think will make him a good CEO going forward?

This process -- I have been talking for many years about that I was going to work two more years after that year, and two years ago, I finally said I mean it this time. We had many discussions at the Board level about it, but at that point, the corporate governance nominating committee became the primary driver in the process. But it's important to note that our Board has been involved with every step through it.

We looked both internally and externally. We viewed Marshall halfway in between. At the beginning of the process, a number of candidates decided that they were not interested in the job and that they like doing what they were already doing better than being CEO and being the face up front of the Company. As the process continued, we believe that Marshall met every one of the criteria that we had written out initially.

He rose from an Asset Manager at EastGroup to a Senior Vice President, went to Phoenix and opened our western regional office there, and then eventually moved on to be both the CFO and a COO with other entities, and picked up invaluable experience, not always in easy situations there. Almost importantly, having worked at EastGroup for nine years, Marshall certainly was part of our culture, understood it fully, and the employees that -- an awful lot of these are existing employees today remember him well and look forward to him coming back and joining us again.

I pointed out to a lot of people, he is a whole lot nicer than I am, so I think you will enjoy working with him.

Thank you for the color.

Just turning to the guidance, you said average occupancy of 95% but you are at 96.3% now, and you said in your comments, you don't see it dipping below 95%. Can you just give us some color on just how conservative these numbers might be, especially on the same-store and with the minus 2.5% that you are projecting for Houston and the occupancy, as I mentioned?

Let me describe that process a little bit. 96.3% is a great number, but you certainly cannot, when you have a multi-tenant portfolio, project that going forward, because then all you have is downside of your numbers. Most people view 95% as a stabilized number, and so we expect same-property occupancy to be lower in 2015 than it was in 2014, just because that is about the only way you can conservatively project it. That's just part of how we view it.

In terms of rental increase, we expect that to be positive over the year, especially in GAAP numbers and in our renewal leases, but the way we calculate it, we could always have a down point on cash at one of the quarters. Another factor to keep in mind there, as Keith pointed out in his remarks for the year of guidance and I mentioned in the fourth quarter, we had an unusually large number of big termination fees in 2014, and so that when you adjust for that, the numbers are higher.

Maybe this is a point I make, that we worry about fundamentals, obviously. We're trying to have -- we work toward full occupancy, raising rents at every point that we can given what's going on, in the various submarkets with the individual properties, but even on our overall projections, it's important to look at what our bottom line comes out. If we use the NAREIT definition, which we do for our guidance and our actual numbers, our FFO growth, even with our conservative guidance, is 4.3%.

As Keith mentioned, if you add back the transitions costs, we are at 6.6%, and in our guidance we assume no termination fees above bad debt in 2015, so if you look at the same number for 2014, and add that back, and again, I am doing all the things that make us look better, obviously, but you add that back, our FFO growth guidance in 2015 is 7.9%.

So some of those bottom-line numbers need to be kept in perspective, as people focus on just fundamentals sometimes too much. I don't like to say that our guidance is conservative, or overly conservative, but if you look at 2014, our original guidance they are was $3.42 a share and primarily based on occupancy, but some other positive factors like financing, we did end the year at $3.47. Again, just trying to put some of it in perspective on how we do guidance.

Okay, thanks. I appreciate it and I appreciate that Houston page in the supplemental, too. I'll let someone else ask a question.

Emmanuel Korchman, Citi.

Just a follow-on, on Jamie's question. Do you have in your guidance identified move-outs that you know are going to be coming out, or is it strictly that you don't think that these mid-96% occupancy numbers are sustainable?

Both. We create our guidance not off of averages or formulas, we look at every suite, every space, and determine what we think is going to happen with it during the year. The real subjective part comes when you try to determine how long the vacancy is going to exist or how long it's going to take existing vacancies to be leased.

So we look at the numbers, and I personally look at all our assumptions for every property, and if I think we are being overly optimistic, because everybody thinks they are good enough to lease up a building between now and the end of the year, if the occupancies at the end of the year look unrealistically high, we go back and plug some vacancy, because you just never know which customers might be unannounced move-outs for one reason or another. So I'm going to say, it's a combination of both.

Just for modeling purposes, if we wanted to look for the trends for the year, how do you think that occupancy would trend down for the year?

We think that every quarter is going to be 95% or slightly above. We, historically, have dropped -- and that's quarter-end numbers -- we have historically dropped in January and February, and we don't see that happening as much this year as in the past. We've had some big drops historically. I don't see that this year.

Thanks, David.

Gabriel Hilmoe, Evercore ISI.

David, just sticking with Houston, there are some large move-outs hitting this year that you've talk about in the past, but could you provide a little bit more color just on expectations for back fillings in that space, just given the same-store outlook for Houston?

As I mentioned before, we are over 97% occupied, and given the known move-outs and just expecting that there should be some slowdown in leasing there, although we haven't seen it yet, is how we come up with the negative same-property operating results for Houston. The move-outs we have are primarily non-energy-related and for reasons that have nothing to do with what is happening with the price of oil. These move-outs have been known for a while. We are losing a 3PL to a build-to-suit, we are losing a cellular company, we are losing a high-tech company in some of the bigger move-outs. So far, I've been saying, nothing is related to energy.

Do you have the square footage of what you know today that's actually going to be moving out of the portfolio this year?

Yes, but I am not going to get into the detail of each one of the move-outs or expected move-outs just for competitive reasons.

Okay. Just final one for me, just on the development starts guidance for this year, you're running at a similar rate to what you did last year. Is that a reasonable run rate in your mind for the next couple of years just in terms of expected starts with the develop pipeline?

I would certainly hope so. With a little bit of luck, it might be higher. From our regional numbers, we think some of the Houston starts might be slower in terms of timing because we are going to look for a little more lease-up of the existing buildings in that part before we start the next phase, but we are expecting and seeing some pick-up in our Florida markets and in San Antonio where hopefully we will make up for that.

All right. Thank you.

Alexander Goldfarb, Sandler O'Neill.

David, I don't know if Brent is on the phone or not, but if he is, and if he is not then obviously will defer to you, but if you could just give us some color on what the tenants are talking about as far as leasing activity from, call it, Thanksgiving time frame to now? Your answer to the prior question was that none of the move-outs are energy-related and that all of them were known.

So it sounds like these are fine, it sounds like you are being conservative on the occupancy, and yet we still read all the nasty headlines and you hear about drillers cutting back, which sounds like maybe that would pressure some of their warehouse needs in Houston. So just curious what the chatter is now versus, call it, Thanksgiving time when OPEC made the decision?

In talking to brokers in Houston, and I spoke with Brent earlier this morning anticipating some of these questions, and an up-to-date responses is so far nobody has experienced the pushback and prospects that they've been talking to or an existing customers who have been talking about expansion or lease renewals.

What you don't know and I always have to throw a counter in, what you don't know, is what companies that could be prospects in the six months, you never hear about. But so far, we are in negotiations with both -- for new development space -- for both energy and non-energy-related entities and so we're keeping our fingers crossed, but so far so good.

What is your sense on the brokers? They are telling you that as these negotiations go, tenants are presumably going to -- they are going to beat you up more on rent or more on leasing incentives, or how should we think about it manifesting itself, so that if we see something that we say this was anticipated versus, oh my god, this is a surprise, we weren't expecting this impact or that impact?

It's too early to tell on those details. On the different things you have mentioned, it's all of the above. Nobody seems to be panicking as landlords, either with existing space or new construction. We are not hearing of people immediately starting to offer incentives that weren't there before or anything like that.

A number to look at is the overall vacancy in industrial space at the end of each quarter, and so far it was very good for the fourth quarter. Of course, there was not much time in there for it to drop, but looking at each quarter of year-end. The other factor will be in our portfolio or any other is how long is it taking to lease the new development space.

We always pro-forma 12 months. We have been spoiled, as I've said before, in amazing amount of lease up during construction, and we have expected all along for that to slow down and in many cases to take the full 12 months. So those are statistics to look at going forward in seeing what the effect might be.

Two positive things that people are talking about already is that some spec developers, using other people's money, have put new industrial developments on hold and construction general contractors are saying that they would expect some of the construction costs to start coming down --because they have really exploded in Houston -- to start coming down in the second half of the year, so we will see what happens there.

Okay. Then a question for Keith. Keith, on the $0.08 CEO transition cost, is all that ratable through the year or is there, I'm guessing, Marshall's component may be ratable, but David's acceleration may be year-end?

It's pretty much ratably through the year, so a little lower in the first quarter, but it all rounds to about $0.02 each quarter.

Okay, great. Thanks a lot.

Brendan Maiorana, Wells Fargo.

David, you mentioned it was little slow from a leasing perspective just the first couple of weeks of the year and picked up later in January. Is that attributable to anything, or is it just slow to start to the year?

Every year is a little bit different, but in hindsight, it was just slow to start the year. My level of optimism, and our regular leasing call a week ago Monday, jumped from where it was three weeks before, given the significant pick-up in new development leasing. Not signed leases yet, but prospects that are looking and asking for detailed proposals.

As your portfolio is very highly occupied and it has been that way for a number of quarters, how are you approaching rent growth outlook for 2015? Are you able to push more now than maybe a few quarters ago, or are the market statistics still have enough vacancy in it that you can't be quite as aggressive as maybe a 95% or 96% occupied portfolio would suggest?

It's the latter. What you can do with rents is a very localized thing when you look at an individual sub market and how many good alternatives a prospect has. We are always pressing on rents. Then the other factor in there is, on how we give that statistic, is what the previous user in that space was paying.

Houston had a down quarter in rents because we had a 77,000-square food tenant that had moved out. We released the space. The previous tenant had been in a holdover rent from a 1.5 year or two years and so that distorted the Houston number for one quarter. We are still not so big that we are not going to get some individual space distortions in individual markets, but we do not build in a specific rent increase into our guidance; it all just comes down to our final same-property operating result comparison.

Sure. And then Keith, Houston energy tenants are 25% of your Houston portfolio, that's about 5% of overall. Is there any credit concerns among your tenants there or do you feel that they are all pretty well heeled, even with energy prices dropping significantly?

We certainly follow very closely any longer-term lease with any company where we are putting in an inordinate amount of improvements or anything like that. We are not worried about any of our energy customers today. Again, it's way too early to jump to any conclusions. The energy business is not going to come to a screeching halt.

Understood. Last one.

ATM issuance, $50 million is down from where it has been, but it seems like your net investment activity is about the same. How are you thinking about issuing stock current -- do you feel you got a little room to move leverage up? And how do you balance the stock issuances or the outlook for this year versus maybe some asset sales, which are pretty low, inflated at least, for 2015?

All of the above. When you get down to it, we look at the pricing of the stock. We look at what we see in timing of new development starts and of acquisitions. Our debt and its ratios are historically at probably the best ever, so we have got a lot of room to maneuver on all those.

Okay. All right, great. Thanks.

Ki Bin Kim, SunTrust.

Going back to the CEO succession topic. Just curious why not an internal candidate or a candidate internally that were higher up in the totem pole pulled themselves out of the running?

Ki Bin, I am not going to get into the personnel issues any more than what I've already said. We had a well thought out, extended process that considered internal and external, and we couldn't be more pleased with the results. Our internal team has been part of that process from the very beginning and we are all committed to continue the great track record we have had and the culture that has made EastGroup what it is.

Okay. If I think about EastGroup and your stock over the past several years, one of the things that really made it work with the Management team, obviously, is your past track record in capital deployment and balance sheet management. I am just comparing from 2013, about a year going forward, your NAV per share increased 17% and while -- GRT, I know Marshall wasn't the CEO at GRT, but at the same time period, decreased about 9%, and part of that was the capital deployment rate.

So from the outside looking in, it does seem like there is a little bit of an aura of maybe that premium that was attached to EastGroup's stock starting to ever slightly recede? Just now, if I'm looking at it. So my question is, what is it that I don't know and the market doesn't know about Marshall and the merits that you -- obviously, you know him way better than I would -- that gives you confidence that EastGroup does not change its stripes at all going forward?

I have known Marshall well since 1991. Our senior people, all six, the other five senior people have known him for not quite that long, but an extended period of time. We have kept in close touch while he was with other entities, and I said, not always easy situations and certainly not in a controlling situation as a CEO, so I have all the confidence in the world of his abilities and I saw what he accomplished for us when he was with EastGroup previously.

Secondly, as we had in the press release and I just reiterated, I am not going away. I might not be doing the conference calls hopefully, but I am going to be Chairman for the foreseeable future subject, of course, to both the shareholders and the Board, and the majority of my net worth and Keith's net worth are in EastGroup shares, so we certainly don't plan on having anything wild and crazy occur at EastGroup. Understanding all that was a major factor in our choice for my successor.

Okay. Thank you.

John Guinee, Stifel.

First, David, in all seriousness, we really want to thank you for all of your years of service at EastGroup. You have done a stunningly good job and we hope you will remain active at a Board level.

Thank you. Appreciate that.

Then on the flip side, I have got to ask you, you've said that Marshall, who was also very well regarded is a whole lot nicer. How tough is that?

(Laughter) there is a low bar. I will agree to that.

I have great confidence. Your team is exceptional and your strategy will remain without much modification. Keith, on a curiosity point, you refinanced or you had a $58 million of debt payoff at a 5.5%. You refinanced it at $75 million, 3.03%, seven-year term. Why not go 10 or 15 years, given the current the situation in the debt markets?

As you know, we are not doing the $250 million bond index, so you have to, for the 10-year money, you have to go outside the banks to private placement guys, and we were just finding that the rates on the seven-year money were so much better than the 10-year money that it just pushed us to the seven-year.

Okay.

The 10-year would've been great to get, but the seven-year worked in our maturity schedule and looked good.

John, I would also add that one of the sets of numbers that we ran internally was to say you make the difference between the seven- and 10-year rates for seven years and then how high does the -- what the additional cost or refinancing the additional three years, how does that compare to what you would save for seven years, and there was really no comparison.

Okay. All right. Very fair. Then second, another curiosity question, Keith, it looks to me like your earnings per share was $1.08 in 2013, $1.52 in 2014, but your guidance actually is $1.21 to $1.31. Why would earnings per share decline year-over-year?

Gains are the biggest thing in that property sales. We take those out in FFO and so FFO has depreciation and gains taken out, but earnings per share has both of them in there and it makes that very--

[So you got] artificially high earnings per share in 2014?

We had gains--

It was just under $10 million. You had $9 million-plus and we have not projected any gains for 2015 because we haven't totally identified what we might sell.

$9.2 million of gains in 2014.

Got you. Okay. Thank you. Good luck, David.

Thank you. I am sure we'll be talking in the future.

Eric Frankel, Green Street Advisors.

Within your development pipeline for this year, could you actually break out how much of the starts were probably designated for Texas, and Houston, more specifically?

I am not going to get into the timing of each one because they slide up and back depending on the leasing that we do with the previous building in that park. But in our guidance, it's just over one-third would be Houston. I don't want get into anymore detail because what we had originally projected in 2014, a couple dropped out because of slower leasing, and we picked up Dallas, which was a 3W development that was almost $20 million that pushed it up. So it's one of those things that's always changing based on the leasing that's done or the opportunities that we identify.

Have you seen any changes in property values in Houston? Any trades that have come up in the last couple months that are more interesting per se than the last year or so?

No, there is very little that I am aware of that's transacted in Houston since the price of oil started down. In talking to some income property brokers, their estimate, and this is just an estimate from talking to buyers and sellers, is that the cap rate in Houston might move up 25 or at most 50 basis points to bring it closer in line with what has been experience in Dallas. So instead of a 4.75% for a really strong A property, it might be a 5%, but we will address that again next quarter, and hopefully we will have some experience to report.

Great. Thanks. My follow question is regarding your Houston tenancy. We obviously appreciate the additional disclosure this quarter. Can you define what's an oil and gas tenant, and specifically, do you include 3PLs in that category that have oil and gas customers?

No, because we don't include 3PLs because there's no way for us to know whether none of their business or one-half their business is related to energy. We had discussions with our team in Houston and come up with what we think are directly-related energy companies, and if the price of oil goes to $10, there is certainly going to be a bigger domino effect, as we saw with the housing crash for the last recession, or as part of the last recession. So it's just directly related companies that the pre-lease of World Houston 42 is with a valve company that's clearly 100% energy, so that's how we have identified them.

Okay. Do you know what proportion of your tenant base is 3PLs in Houston?

I don't have -- I would have to get back to you on that. I don't have that statistic.

Okay. Thank you. I'll jump back in the queue.

Vance Edelson, Morgan Stanley.

When you think about your own prospective development, it's geographically dispersed. Which states would you say seem the most appetizing now, assuming that Texas, which accounts for four out of the 11 projects listed as prospectives, moves further down the list, just due to the uncertainty there. Which of the others become more of a priority?

Clearly, Orlando and Tampa in Florida. We just tied up another small piece of land in Phoenix. So we see, as I mentioned earlier, a pick-up in demand for our type users there. So we are optimistic of what we can achieve in that metro area. And we are still very optimistic in San Antonio. It is somewhat affected by the Eagle Ford shale play, but it had a steady growth before the energy taking off, and we looked at our entire portfolio there and only two customers are directly energy-related. In Dallas, we have one energy-related customer. So we think those will still be good cities for us.

Okay. That's helpful. Then just shifting gears, could you give us a feel for the latest trends in terms of private demand across the broader portfolio, not just Texas, what type of buyers are you getting the call from? And if you can differentiate between class A versus the class B and C bids in the market that would be great?

In the last quarter, I don't have any good class A statistics for you. But there seems to be a pretty strong demand, or I should say, continued strong demand for industrial space for both A and B users. There is just a lot of capital out there. The bigger transactions that you've read about recently have been more B space, but those are all of course, in the eyes of the beholder. To answer your previous question on 3PLs, it was about 25% of our Houston portfolio is 3PL and that's tied to World Houston because we are around the airport and with the good freeway access.

Okay, got it. Then it sounds like there have not been too many land transactions and it's too early to really tell if there's an impact yet, but last quarter you had mentioned that in Texas there had been higher land prices. Any chance, given your past experience that, that plateaus some and maybe even drops, given what's going on with oil, and then perhaps 2015 could be seen as an opportunity to grow the land bank there. Do you think that's realistic?

It is still way too early to tell what's going to happen with demand for industrial land. Sellers of industrial land tend to be pretty sticky with their prices and determine what they think they should get and are willing to wait for the market to come to them. I have not heard of any land transaction that have occurred since Thanksgiving with the price of oil going down.

So I don't have any definitive details on that. My guess is, as I say, that the land prices will probably stay where they are. There shouldn't be scared sellers, and the positive for development will be in the lower construction costs, but not lower land costs.

Okay. Thank you, David.

Craig Mailman, KeyBanc Capital.

Just one quick one on Houston. The rent spreads there were flattish last quarter and negative this quarter. Is, along with the no move-outs there, is this a bigger piece of the negative same for you are expecting or is this just space that's been vacant more than a year and it's just lumpy?

One of the spaces I mentioned, in the fourth quarter we had a customer, 70,000 square feet some, that had paid holdover rents for well over a year, so we compared to that number, and we will have one of those in 2015 also, a large tenant moving to a build-to-suit in another location. So that's part of that figure, but it's not due to anything happening with the market. It was that customer's rent went way up because they were a short-term user.

Great. Thank you.

Derek Van Dijkum, Credit Suisse.

Just a couple of questions on leasing for your developments. I know you are starting a project, ParkView in Dallas, 275,000 square feet. Can you just talk about the tenant demand in that market and what made you comfortable starting 275,000 to 276,000 square feet on spec?

Take a step back. We are a spec developer and we have just been spoiled, as I mentioned, over the last couple of years, coming out of the recession and we had an unusual amount of pre-leasing. If we are comfortable with a market, we are comfortable building spec. What makes us a little more comfortable than normal in that location, in Dallas, is that this is one of -- there are three buildings in this complex that are geared to our business distribution type user, our multi-tenant set-up.

Most of, and I don't have the statistics right in front of me, of the new developments in northwest Dallas, and in particular up in Grapevine and Flower Mound, where our development is, are geared to the bigger users. So we think that we will have a niche in the marketplace. So when you look at a market study, we think there is an opportunity for our small- to medium-sized user.

Got it. Turning to Houston, 10 West, can you talk about why you feel comfortable taking more leasing risk Houston again?

It's the type building, Ten West -- the one we've just started is -- the names all get mixed up, but it's West Road, that's 65,000 square feet, and with it's mirror image next to it, West Road I, is 60%-some leased and we have several good prospects to take it to 100%. West Road IV is a front-park near-load multi-tenant design, and so there is good demand for that type space.

Out in Test West Crossing, out in Katy, those buildings are designed for a little higher office finish, above our normal 15%. They have extra parking, extra glass, and we continue to have good activity out there. Our last building there, number 8, we will not be starting until we are much farther along with 6 and 7 from a leasing standpoint.

Got it. Thank you very much.

Steve Sakwa, Evercore ISI.

Not to beat a dead horse on the oil in Houston, but oil prices have definitely bounced here in the last couple of days, and some of the oil indices are up maybe 10% the 15%. I'm just curiously, when you think about demand, and as you talk to tenants, is it -- the potential issue more about the volatility in the price, the absolute level, and if it's more about the absolute level, where do you think that number would need to settle out in order to get the market back on its feet?

I've read about 100 different articles with about 100 different opinions on that, so I am not a good one to put out a number. The positives are, as you say, that oil has bounced back a little bit. Some other factors that are positive, and I'm always trying to look for good things in bad news, is that the cost of renting a rig is down, the cost of labor is dropping for oil field workers, and the technology with the hydraulic fracking is improving with every month. It takes one-half as long now to drill a well as it did a year or two ago, so that the economics are always changing.

As always, it's going to be probably the marginal operators, whether the manufacturing parts, the drilling, or the marginal rig owners or drillers that are going to feel the effect of a slowdown before others. We certainly believe there is going to be a slowdown to some extent, and that's why we have built our numbers the way we have, but we are not assuming any crash or significant drop that will affect what is going to happen for the rest of 2015, which is a nebulous answer, but I wish I knew more to give you a better one.

Okay, thanks.

Bill Crow, Raymond James & Associates.

David, as you think about energy -- I'm sorry about this one, more Houston question -- but upstream is the area that's generating the negative headlines, downstream is very active and creating jobs, do you have an exposure to downstream, or is your portfolio too far west of where all that activity is going?

The downstream that I read about is basically with the petrochemical business, and because the price of energy is down, and that's a big cost for those companies, that their business is supposed to be very strong in 2015. What I've read is that, that tends to be a blue-collar business and what's on the west side of Houston is white-collar, and white-collar is going to be more affected.

But as long as there is job growth to some degree in Houston, which is generally predicted, and economic growth, which is predicted, although slower than what it has been historically, Houston is not going to be where it was, but it is still going to be a good place to own industrial real estate.

Very good. Thank you.

(Operator Instructions)

Eric Frankel, Green Street Advisors.

Just one more from me. Can you, David, talk about the supply outlook for markets outside of Houston, in terms of competition?

Orlando has started to have a pick-up in development. Dallas, of course, speaks for itself, from what we've already said. Still, very little new competition and really none in our type building in San Antonio and tampa. It's picking up, the smaller users competition, in Phoenix, but so far it's not been a negative for us.

It's still too early to talk about oversupply other than what might happen in Houston if there is a major slowdown in the energy business. So we're still very optimistic about what's going to happen in our other development markets, say, Orlando, Tampa, Dallas, Phoenix, San Antonio.

Okay. Thanks. It's been a long call. I appreciate you taking time in for all the questions.

As always, Keith and I will be available for questions for the rest of the day, if we didn't fully answer what was asked to your satisfaction, or did not touch on some of the topics you would like to touch on, so please give us a call. Thanks.

I would like to thank everyone for your participation in today's conference. You may now disconnect. Please have a good day.