Eastgroup Properties Inc (EGP) 2015 Q1 法說會逐字稿

Good morning, and welcome to the EastGroup Properties' first-quarter 2015 earnings conference call.

(Operator Instructions)

Please note: This call may be recorded. I will be standing by if you should need any assistance.

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

Thank you. Good morning, and thanks for calling in for our first-quarter 2015 conference call. We appreciate your interest in EastGroup. In addition to Keith McKey, our CFO, Marshall Loeb, President, and Brent Wood, Senior Vice President, will be participating on the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

The discussion today involves forward-looking statements. Please refer to the Safe Harbor language included in the Company's news release announcing results for this quarter that describe certain risk factors and uncertainties that may impact the Company's future results, and may cause the actual results to differ materially from those projected.

Also, the content of this conference call contains time-sensitive information that's subject to the Safe Harbor statement included in the news release, is accurate only as of the date of this call. The Company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which can be found on the Company's website at www.EastGroup.net.

Thank you. The first quarter continued EastGroup's strong earnings momentum. Funds from operations per share met the upper end of our guidance, and represented a 6.1% increase, as compared to the first quarter of last year.

We achieved quarter-end occupancy of over 96% for the third consecutive quarter, which exceeded our internal expectations. Same-property cash net operating results were positive for the 16th consecutive quarter; and we continued to expand our development program, which has been a major value creator for us for many years.

At quarter end, we were 96.2% occupied, and 97.0% leased. As a result, we have extended our record of occupancy at 95% or above for the seventh consecutive quarter, and we expect this trend to continue through each quarter of 2015.

As of March 31, our California markets continued to be our strongest at 98.6% leased, followed by North Carolina at 97.7%, and Texas at 97.0%. Houston, our largest market with over 6.2 million square feet, was 97.2% leased, and 96.4% occupied. In the first quarter, we renewed or signed early renewals for 1.9 million square feet, and signed new leases on another 208,000 square feet of expiring space.

We also leased 360,000 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 205,000 square feet since the end of the quarter. For the quarter, GAAP rent spreads were 11.1%, which was the eighth consecutive quarter of being positive, while cash spreads were up 3.5%.

Looking at just renewal leases, GAAP rent spreads have now been positive for 12 straight quarters, and cash spreads have been positive for five of the last six quarters. The weighted average lease length was 4.0 years, which is in line with our recent results. Tenant improvements were $1.16 per square foot for the lease term, or $0.29 per square foot per year of the lease, which is about a third below our recent average.

As a result of our continued strong occupancy and improving rent spreads, first-quarter same-property operating results increased 4.4% on a cash basis, and 2.9% on a GAAP basis. 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 were above 96% for the second half of last year.

Overall, leasing activity continues to be good in all our major markets, and we are especially encouraged by the increased demand from smaller users in the 15,000- to 25,000-square-foot range. On a quarter-to-quarter basis more specifically, we are experiencing increased prospect activity in all our Florida markets.

Since the price of oil and its effect on Houston's industrial real estate markets has been a major topic of discussion, we thought it would be good for Brent Wood to make some comments on Houston. For anyone who does not know Brent, he is one of our three regional Senior Vice Presidents, and is based in our Houston office, with responsibility for all EastGroup's operations in Texas. Brent?

Good morning. I want to begin my comments with a reminder of the strength of the Houston economy as we were faced with a sudden drop in oil prices late last year. Since the bottom of the recession, the city has added 465,000 net new jobs, or nearly 3 times the jobs lost during the recession, including 105,000 new jobs in 2014. Employment growth is expected to slow this year, but economists are still projecting 30,000 to 50,000 new jobs for 2015. Houston's February unemployment rate fell to 4.3%.

Population growth has been equally impressive, adding 500,000 new residents in the past four years, including 138,000 new residents in 2014. This momentum has helped to offset the immediate impact of lower oil prices, within the industrial market specifically showing some resiliency through the first quarter of the year. The vacancy rate pushed 10 basis points lower to 4.9%, even with 1.5 million square feet of new development space being delivered. That was the result of 2 million square feet of positive net absorption during the quarter.

Although market fundamentals remain favorable, there is some impact being felt in the market as a result of the uncertainty in the upstream oil markets. To date, this has primarily been a slowdown in deal velocity. As demonstrated in the first quarter, lease transactions are still getting done, but the prospective tenant pool seems to have less depth.

As you might expect, this is felt most in the newly developed buildings, where owners, including us, are being more aggressive to lease space. This has resulted in free rent incentives entering the equation again, but on a moderate level thus far.

From an operating portfolio standpoint, conditions remain stable for most high-quality institutional portfolios. This holds true for EastGroup. Our operating portfolio finished the quarter above 97% leased, and rents were up 6.8% on a cash basis, and 14.4% on a GAAP basis. Just as last quarter's rent decrease was not a trend, the same is true this quarter, as numbers on a quarterly basis can be easily swayed by individual transactions.

In the near term, we expect cash rents to be relatively flat, while GAAP spreads post single-digit positive results. Our original projections for Houston showed a 2.5% decrease in same-property operating results. Our revised number improves to a 1.8% decline.

We continue to see prospect activity at our development projects, but it is less consistent than we have enjoyed over the past several years. With current levels of activity, we believe that our projects will continue to enter the portfolio substantially leased during our budgeted 12-month lease-up period. As always, our direct results and on-the-ground feedback will dictate the potential for future new project starts.

As previously reported, we started construction of three development projects in the first quarter, with a total of 282,000 square feet, and total projected costs of $20.6 million: Kyrene 202 Building VI in Phoenix, and West Road IV and World Houston 42, both in Houston. The 94,000-square-foot World Houston 42 is 100% pre-leased.

Also during the quarter, we transferred four buildings with 333,000 square feet, and a total combined investment of $23.5 million into the portfolio: Horizon I in Orlando, Kyrene 202 II in Phoenix, and Steele Creek II and III in Charlotte. They are currently 84% leased.

In April, we initiated construction of two additional developments, Horizon III in Orlando with 109,000 square feet, and Oak Creek VIII in Tampa with 108,000 square feet, which is 100% pre-leased. They have a combined projected investment of $15.3 million.

As of today, our development program consists of 21 projects with 2 million square feet, and a total projected cost of $144 million. For the full-year 2015, we hope to start a total of 1.7 million square feet of new development, with a combined investment of $122 million. These projections include just two additional buildings in Houston, at our World Houston Park.

We did not have any operating property acquisitions in the first quarter, and currently do not have any under contract to purchase. In January, we sold a small parcel of land in New Orleans for $170,000, and recorded a gain of $123,000, which was included in first-quarter FFO.

In April, we sold the last of our three Ambassador Row warehouses in Dallas, which had 185,000 square feet, for $5.3 million. We expect to record a gain of approximately $2.9 million in the second quarter.

Keith will now review a variety of financial topics, including our updated guidance for 2015.

Good morning. FFO per share for the quarter was $0.87, compared to $0.82 for the quarter last year, an increase of 6.1%, and was $0.01 above the midpoint for our guidance. The $0.01 increase was primarily due to better net operating income from occupancy.

We also lost $0.01 per share from bad debts. Bad debt expense for the year in 2014 was virtually zero, compared to $355,000 for the first-quarter 2015. Three customers drove 75% of the increase, and only 11% of this total relates to Houston. In sum, bad debt, net of termination fees, reduced FFO by $294,000 in first-quarter 2015, compared to an increase of $106,000 in first quarter of 2014.

Our debt metrics remain strong. Debt to total market cap was 33.1% at March 31. For the quarter, the interest and fixed charge coverage ratios were 4.2 times. The debt-to-EBITDA ratio was 6.5 times, and the adjusted debt to adjusted EBITDA was 5.9 times.

Our bank debt was $114 million at March 31. And with bank lines of $250 million, we had $136 million of borrowing capacity at quarter end, plus the accordion feature on our bank line.

In March, we paid off secured debt with a balance of $57.4 million and an interest rate of 5.5%, and closed a $75-million unsecured financing with an effective interest rate of 3.031%. Due to both the weakness in the stock price in the first quarter, and good existing debt ratios, we sold only $108,000 of shares in our continuous equity program. Our projections for 2015 still assume the sale of $50 million of common stock for the year.

Also in March, Moody's affirmed EastGroup's issuer rating of Baa2 with a stable outlook, and Fitch ratings affirmed the Company's issuer rating of BBB with a stable outlook.

In March, we paid our 141st consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.57 per share equates to an annualized rate of $2.28 per share. Our dividend-to-FFO-payout ratio was 66% for the quarter. Rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property net operating income; and again, we believe this revenue stream gives stability to the dividend.

We have increased the midpoint of our FFO guidance for 2015 from $3.62 to $3.65 per share. This is a 5.2% increase compared to 2014 results. The $0.03 increase in the midpoint is primarily due to an increase in property net operating income.

We increased average occupancy from 95% to 95.8%, and increased same-property NOI from 1.1% to 2.0%. Earnings per share is estimated to be in the range of $1.28 to $1.38.

Now, David will make some final comments.

Industrial property fundamentals continue to be good, and are actually improving further in many of our markets. Our development program is growing, and our balance sheet is strong, as Keith just reported. We like where we are, and what we are doing.

We will now take your questions.

(Operator Instructions)

And we'll take our first question from Jamie Feldman from Bank of America-Merrill Lynch.

I guess just starting out, I think you had commented that you're seeing particular strength in North Carolina, California, and Florida, and among smaller tenants. Can you give us a bigger picture of what you're seeing in the local economies there, and as you're thinking about, maybe you raised your guidance once, but what would get you even more positive through the end of the year? And what you're seeing in those markets that could drive it?

Well, just about all of the $0.03 increase on our raise in guidance is due to growth in NOI, due to occupancy. And one of the big factors in being able to have a little more confidence about that is that we've reduced the amount of footage, square footage maturing or terminating in 2015, from over 14% at year-end to about 7.5% today. So we've almost cut it in half, by reducing expirations by 2.2 million square feet. So that's really where that confidence comes from.

Higher occupancy, obviously, will give us increased opportunity for better results in the midpoint of our guidance, but what we've done, as you see from the press release is increased average occupancy for the year from just over 95% to 95.8%. So I'm not sure how much room is left there. We have a goal of staying above 96%, but just from looking at stabilized results, that's tough to do.

Before the last three quarters that we've had over 96%, look back the last 15 years, and there was only one quarter previously where we were over 96%. So we think where we are today is a pretty good accomplishment. As you mentioned, the markets have shown great improvement.

Florida recovery has trailed significantly. Texas, I think a factor, forgetting Miami which has been strong for a long time, the rest of Florida is in migration picking back up on a quarterly basis, and tourism picking up, and a little bit of a pick-up in housing. So we think that's going to continue.

Charlotte has an growing industrial base and not that much new property being built. I think we're the only ones building what we call our business distribution building. So that's helped us a great deal there.

Phoenix is a market where the large users dominated, starting -- coming out of the recession three or four years ago, and now as I mentioned, it's one of the clearest ones where smaller users have picked up a lot, and that's why our occupancy there has improved. Hopefully I've answered your question.

Yes, thank you. And then I guess just a follow-up, focusing on Texas and Houston specifically. I guess first question is, we've been hearing more and more from brokers that there's really been a split in the market between the east side and the west side of town. East side benefiting more from the gas and west side getting hurt more from oil.

I think your land and development pipeline is more on the west. I think most of the REIT development is on the west. How should we be thinking about the bifurcation in the market?

Let me start, and then I'll turn it over to Brent. The west side of town is not where really the decision makers live and you're over there to serve primarily the port, and some of the petrochemical related operations. So if you've driven out there, it's a very different environment than what you see in the rest of Houston. But Brent, I'll let you give some specifics.

Jamie, the blue collar job growth out there is certainly a positive for the city this year. That's really, the positive job growth that the economists are talking about, that's where it's occurring. That's going to offset some of the white collar jobs lost on the west side.

But from an industrial perspective, that's limited impact, the port's so far removed from where everybody lives, operates. It's 35 miles or so from west side of Houston, inner west of side out to the border, and even further than that to some of the residential communities. So from most of the prospects that we'll be out there will be, as David, port oriented, petrochemical oriented.

It's an unattractive part of the city in terms of you wouldn't do your Chamber of Commerce events out in that part, but it's a good economic driver. But from an industrial standpoint, you're not going to see us or really any of the other players other than some bulk spec construction occur out there. There's really not a barrier to entry. There's a lot of land out there.

So the last thing I'd say, World Houston, we're really against the line, I saw on your chart there, right there at 59 and Beltway up north. Our tenants there like access to the airport, obviously, but also the easy access that it provides over to the east side, to the port. We do have some of our freight forwarding tenants that bring in containers from the port, and that type thing. Again, they can then go from there and go to the communities that they live in. They're not going to operate those facilities out on the east side.

And then just a follow-up on that. What are you seeing just in terms of excess space in current leased space? Is there a risk now we'll see a lot of sublease come back because of unused capacity?

We haven't seen that so far, Jamie. It's really the operating portfolios, ours included, have been still highly leased. So not much shadow space to speak of at all.

It's more just been the development space that's been coming online, people still trying to fill that as we go, and people are continuing to make progress through it. As I mentioned, the prospect depth has just been more shallow, but deals still getting made.

The vacancy up north has drifted up more than the other submarkets, but that's a direct correlation to where people delivered space. Those are the most desirable sub-markets.

Some of that development space that's come into the market has pushed that a little bit. But no sub-tenant space, really on a material level to speak of.

Great. Thanks. I appreciate it.

And we'll go next to George Auerbach from Credit Suisse.

Brent, you talked about the slowdown in deal velocity and less depth in the pipeline. I was wondering if you could maybe quantify for us how much lower the demand pipeline is today, versus last year. And if possible, split that between oil and gas tenants, and more consumer driven tenants.

Let me plug that into my formula real quick. It's hard to put a number on it. Just from the overall prospect depth, just talking to leasing guys, the number of proposals we're putting out, it's just less. I can't say if that's half as much or what.

It's a tight situation. If you have a prospect for a space, you know in your mind if you don't make that deal that you don't have another guy standing behind him, where before maybe there was two or three. So I don't want that to mean it's dropped 67% or anything, but it's been slower, but again, deal's getting made. There's been even oil and gas related prospects in the market, and continue to be in the market.

We've signed some, the deal we signed at World Houston 41 was an oil and gas oriented type group going in there for a training facility. We have one good prospect right now. They were in the market for 90,000 feet, they're a valve company. They're now looking at 45,000 square feet.

It's an example where they lowered or lessened their desired amount, but they're still in the market to transact the deal at 45,000 square feet. I'm glad they did, because at 90,000 square feet, we wouldn't have been in the hunt, because we didn't have the space. So it's just slower. I can't put a number to it.

And I guess Brent, you've been in the market a long time. Do you think that tenant activity comes back just with the oil price here stabilizing in the $50, mid-$50 range or do you think you need to see oil higher for the tenant activity to come back?

We're seeing, the activity we're seeing now with the price -- with the problem having just hit us very quickly towards the end of the year. Certainly, if the price goes up it's going to benefit, but I opened my comments with, I think people lose track of the four or five year dynamic growth the city's had. We're trying to find a place for 500,000 people to live, work, buy all their goods.

A lot of new companies have relocated to Houston, Texas in general but Houston specifically, for the business-friendly environment. If the city can post any positive job growth, I've been telling David as long as the number doesn't have a bracket on it at the end of the year, I think the city will have some activity, just from the metropolitan growth. And then if oil and gas comes back, the sooner the better, and that could be the impetus to push it further along. I think we'll be okay through the end of the year in terms of the activity.

Thanks, Brent. One last question for David or Keith. As you think about funding the development pipeline going forward, are there any thoughts changing the funding strategy to rely less on equity and more on asset sales, just given that your stock is trading at a 6.5% implied cap rate?

I'll try to answer that first, and Keith can add something. In our own projections, if we issue no equity this year, which I'd be surprised if that occurred, if we issued no equity, our debt to total market cap would still only be 35%. So we're very -- because we've kept such a clean and strong balance sheet, it gives us tremendous flexibility going forward.

Great. Thanks, guys.

And we'll go next to Vance Edelson from Morgan Stanley.

Terrific. Thanks. So for either David or Brent, could you talk about Texas beyond Houston? You've got the development starts in Houston, and you also just bought property in San Antonio.

It's painting a picture of overall bullishness. So could you just give us a feel for whether there's any contagion at all from the price of oil across this state, or are other markets moving along as if nothing's changed?

Vance, the other markets are moving along, as if nothing's changed. It's been maybe a surprise to me, it hasn't had any impact, especially in Dallas. It's a non-event to those guys there. I was a at a conference, breakfast conference thing a couple weeks ago, and it's just not a topic there. They're much more tied to Fortune 500, to the national economy, with their more bulk distribution type oriented market.

We looked within our own portfolio. We of course have the Houston supplemental sheet in here now. But in Dallas, we have one oil and gas oriented tenant in our portfolio. In San Antonio we have three, and one of those three is a lease we just signed within the past couple months.

San Antonio, you'd think because of its proximity to the Eagle Ford it might be more impacted, but it's still so close to Houston that people didn't put a duplicate operation in San Antonio. Most of that activity went out into the oil field itself.

So those areas, if you were in a small community out there, I'm sure you're feeling the impact, or Midland and Odessa. Outside of Houston it's not been any impact we've seen at all in the market.

Okay. That's great to hear. And then David, I'll give Brent a break and move on to another region. So you mentioned the California strength. Could you comment on whether the West Coast port slowdown during the negotiations had any impact on business, or whether that was really just a blip for you?

Our customers out there tend not to be major distributors, they're distributing like in our other markets, to the metropolitan area where they're located. So we have not had any feedback.

I guess we did have one customer whose business was hurt because they didn't get their product in time, but other than that, nobody's going to change their plans as a result. Again, I think that -- if it's going to have an effect, it's going to be farther out in the Inland Empire, in the big boxes that are distributing to a large region. It's generally not our type of customer.

Okay. Makes sense. One last question from me. You had a small profit on the land sale in New Orleans, and you've also been actively acquiring land. So can you give us a feel for how land prices are trending, and whether any markets throughout your regions are more heated than others?

Well, until a couple months ago, I would say Houston was very heated. The price almost doubled, I guess, from a couple years ago. But it's too early to tell right now what -- there haven't been enough land transactions to be able to say that it's still up there, or it's coming down.

The property that we bought in San Antonio we've been working on for two years, and it was out of a land fund. So I'm not sure that's -- how to value that from the standpoint of prices going up.

South Florida, they've shot up, and that's one of the reasons we've had trouble, a great deal of trouble finding sites to grow down there through development. And we're seeing in Orlando, prices moving up also, because there are developers looking to come to that market.

That's very helpful. Thanks.

And we'll go next to Brad Burke from Goldman Sachs.

Maybe staying on the topic of land. With the land purchases in the quarter, I wanted to get a sense of how well the land bank you currently have lines up with where you actually want to develop. Maybe give us some guide posts on how we should think about land purchases going forward, as a percentage, to support development?

That's a hard one to answer, because it's changing with every month or every quarter. For example, we had not budgeted or projected any development in our Oak Creek project on the Southeast side of Tampa, and a prospect came along, and we were able to do a pre-lease, 100% pre-lease of a building there. So we thought we had plenty of land now. We're looking again to add some land in that submarket.

We never seem to have enough land in the greater Phoenix Metro area, because that's an area where we've gotten smaller pieces like we just announced, and are going to put one or two buildings on it, rather than an entire park. We did one there, Sky Harbor. But an entire park like we're trying to do in other markets. As demand changes, it changes how we look at it.

But as I said before, we're feeling -- we're missing out on some of what's going on in South Florida, and would certainly like to own more land there. In Charlotte, we have additional land under contract to further expand our Steele Creek development. So it's deal by deal.

Okay. I appreciate it. And also wanted to touch on the continuous equity program. I think this is the least we've seen you issue in a quarter in over four years.

So I wanted to know whether we should think about you being more tactical in selling shares going forward? And just wanted to get a sense of your conviction in the $50 million figure that you continue to guide the to, David, based on some things that you said today. It sounds like you have less conviction that you'll actually hit that number versus maybe a quarter ago.

Well, we did very little, as Keith reported, in the first quarter, for two reasons. One was that the price dropped right after we thought about doing it. And secondly, we didn't and maybe even in some ways more importantly, we weren't buying anything.

We've sold a property and an awful lot of our development program is in the second half of the year. So we didn't feel pressured to do it. This is just something we evaluate continually going forward.

Okay. I appreciate it. Thanks, guys.

And we'll go next to Brendan Maiorana from Wells Fargo.

Brent or maybe David, so I think you had in Houston three or four tenants that I thought were around 300,000 square feet, that were expected move-outs. Your roll in Houston is down to 268,000 square feet from over 600 at the beginning of the year. Did you address some of those, or did those tenants that were the expected move-outs hit in Q1, or are some of those still expected for the latter half of the year?

We've had some of that, Brendan, roll through the numbers thus far and we've of had some success back-filling some of that space. Of the 268,000, we've still got about 143,000 square feet of known move-outs. Of course, there may be other tenants move out.

But 143,000 amongst two tenants. That will happen in the second quarter. That's reflected in our budgeted numbers having that occupancy dip a little in the middle of the year as a result of that. So we've worked through a good portion of it, and a little bit left to go.

Okay. Great. And Brent, I guess given that you've got two projects that at least are in the budget to start at World Houston, I you gather that means that you expect that the leasing activity on the two World Houston projects that are in lease-up now still feels pretty good, and you'd expect to get lease-up before commencing construction on the two additional projects there?

Yes, we feel good about it currently. World Houston 39 is a building, we're at 50% but the next lease we sign, it goes to 100%, because it was a two tenant small cross dock. Then World Houston 41 we pushed to almost 60%. I think one more lease there, we would be feeling good about that as well.

So yes, but a lease at each of those, and we could see moving forward. We put that more toward the back of the year, just being conservative hopefully. At current levels, if the market doesn't slow more, we would hope to do that. That's right around the corner at our largest park and so we still have that plugged into the numbers.

Okay. Some of our approach too, is if you can't build at World Houston you're probably not going to build anywhere in the Houston market, given its success and central location, and quality of the park. So that's -- and I would add to that in our development numbers, we increased something, I guess $11 million or $12 million from our first-quarter guidance, and if we did not start either of those buildings, they wouldn't affect this year much, because they're end of the year, as Brent said.

But also it would just reduce our number back to the original guidance we gave a couple of months ago. So Houston development from starts has very little effect on FFO numbers for 2015.

Yes, understood. So my next question, just looking at the progression for the year, you did $0.87 in the quarter, and you took a $0.01 hit on bad debt expense. Net of that, you beat your own guidance, and certainly were above the midpoint.

Next quarter is $0.90. So it implies back half of the year, $0.93, $0.94. My recollection was the G&A, the higher G&A costs this year, were ratable throughout the year, throughout the quarters. But it was higher in Q1. So how much of that growth in earnings is driven by a drop-off in G&A in the back half of the year versus just better NOI progression, and the development deliveries?

In the first quarter we had $4.5 million of G&A and you were correct, it gets ratable over the last three quarters about $3.8 million, $3.5 million, in that range. $15.6 million we're projecting for the year. So it does drop off from the first quarter.

Okay.

As we reported in our previous call, there's a transition expense in there, which will certainly go down next year. It's part of Marshall coming in and my moving out.

And so just last one, David, high level, on the capital outlook or equity issuance, or what have you. If your share price remained at just call it $60, and you're getting the returns on the development that you get, I assume that you still think that issuance of equity at $60, you're still creating value, growing earnings if you're putting that capital into development. Is that a fair outlook?

I would say yes, absolutely. But I don't want to put a number on where we might be issuing shares when and if we do. But you're correct. That's one of the ways that we look at the decision.

Sure. Okay. All right. Thanks.

And we'll go next to Ki Bin Kim from SunTrust Robinson Humphrey.

Could you put your lease spreads and the vintage of those lease spreads into some perspective? What is the average vintage of what was coming due in 2015 and what is expected to come due in 2016?

We don't report that individually, because when we talk lease spreads, it gets very complicated, because unlike a lot of other companies, we include re-leasing of space that has been vacant, could be one, two or three years. And when we talk a lease spread, we compare today's rent or the new customer's rent today to the previous customer's rent, no matter how far back in time it was.

And so those lease spreads on an individual quarter can be affected by which vacancies we actually lease. And we can talk later, and I'll give you some long-winded examples about how that's difficult to report. So that's -- and that's why I, in my prepared remarks, pointed out how positive they have been for renewal leases, because that's I think a much better apples-to-apples comparison.

Okay. Maybe I'd ask it in a different way. If you had to in your internal budget projections for this year, and I'm not sure if you worked on it for next year as well, but if you had to draw a picture, it seems like we're -- if I look at the trend of lease spreads, whether it be new or renewal, seems like we're climbing up that camel's hump, right?

Just curious what does that -- if we reach that really favorable vintage year, or the mix of leases coming due, what does that peak lease spread -- on a new or renewal basis, what does that number ultimately look like. And where do you think if the US industrial markets settle out where they are today in terms of maybe a couple percent of rent growth per year, what is that ultimate plateau of lease spreads we should expect from your portfolio?

That's not a number we've tried to calculate. What I can tell you is some of our historical experience.

You have to keep in mind that when you look at cash rents, that a very large percent of our leases have built in bumps that probably are averaging maybe 2.75%. We haven't calculated that exactly, but have to keep that in mind.

If you look back at the 2006 to 2008 period, which as a recovery time, we were for, gosh, 8, 10 quarters in there, GAAP rents were up double-digit, well, anywhere from high 9% to 16% or 17%, and cash rents, because of the bumps weren't up nearly as much. They were up a couple of percent to 7% or 8%.

And it's all on the timing of when they roll, because although our average lease length on vacant space and renewals is 4 years, the average lease length in the portfolio is about 5.25 years. And so it's which leases are turning when, and that's not something we've tried to individually look at. We just budget each space each quarter on what we think is going to happen for the balance of the year in that space.

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

And we'll go next to Alex Goldfarb from Sandler O'Neill.

Brent, to continue the Houston theme and appreciate you being on the call, can you just -- when we read in the headlines about the cutback in rigs and drilling and roughnecks, can you just talk about how that manifests into Houston industrial demand, and then specifically how that impacts your portfolio. That way, just have a better understanding when we read stuff in the paper, how we can translate it to the market?

Yes, that's a good question. It's a tricky question, because you picked up on a lot of the jobs and layoffs that's been talked about have been in the oil field itself. We haven't seen the direct impact of that yet.

Obviously, all the leases don't roll at one given time to where people readjust their square footages overnight. As I alluded to earlier, we've got a prospect that was looking at more square footage, and now they've downsized it.

I will say there's still a fair amount of oil and gas prospect activity that are still seeing their businesses grow due to the midstream and downstream industries, the petrochemical plants that are being built, LNG plants. There's tens of billions of dollars of plants under construction along the Louisiana, Texas coast.

We were talking earlier about blue collar job growth on the east side, that's picking up some of the slack. It is literally picking up some of the workers that were in the oilfield that are going over to East Houston and working on these construction jobs.

Alex, there's not been an immediate dot we could connect from saying, hey they shut down this many rigs, so it's done this to our tenants. I'm sure some are more impacted than others, but nothing that tangible I could give you quantitatively at this point.

So overall your exposure to exploration type tenants is -- how much of your exposure in Houston is for that versus other parts of the energy sector?

I don't really have a -- we don't have that broken down. I'm not sure we would know it. Within each oil and gas particular user, they may be doing a number of things, upstream, downstream.

I would say most of these oil and gas companies, and they've had a very strong string of years, most of these companies are in a very stable financial position for the most part, because if you haven't made money over the last five years in Houston oil and gas business, you probably deserve to go out of business. So it's not been, this early in the process, a stress point for most of the companies in terms of that.

Okay. And a then point of clarification, Brent. Did you say you are now expecting Houston to be negative 1% NOI versus originally negative 5%?

It's negative -- it was negative 2.3% or 2.5%. Now it's 1.8%, down 1.8%. Without term fees, it's down just 0.3% for the year.

Okay, you were just giving actual -- okay, that's fine. Next question is, David, you spoke about doing a lot of proactive leasing this quarter. Can you just talk about some of the ways you incented?

Presumably, you were always aggressive on the leasing front. Was there anything different that you did this year, more aggressive on rents, or is this just normal, that you are always being proactive on the leasing front?

I think it's normal. We didn't have any change in strategy or memo from Jackson to the people in the field to give more concessions, or get more aggressive. It's just what we try to do every day in leasing, is to raise occupancy, and it sounds stupid to say, but raise occupancy and push rents as hard as we think we can, in any given submarket.

Every lease is different. I think it's a real positive that we're 96%-plus occupied and that we're getting the results we are, and I think it's a direct reflection of the quality of our assets and location of those assets, and the states where we're operating, where there's pro business environments and above average growth in population and jobs.

Okay. Appreciate it. Thanks.

And we'll go next to Erin Aslakson from Stifel.

John Guinee here. Two comments or two questions, one for David and one for Marshall.

David, for the first time in four or five years on a national basis, development starts in industrial have declined for first quarter 2015. Do you think that was an aberration, maybe weather related, or do you think supply is in check nationally?

Maybe a little bit of both.

If I had to bet, I would say it was an aberration, but I think a certain amount of it is the local small time developer is having trouble still borrowing money. And so the developments that we see under way are the REITs who are well-capitalized, and regional merchant-type builders that have attracted institutional money.

In Houston, as a specific set of examples is, there are a number of developers who bought a site, drew up plans, and immediately were trying to pre-sell the building, and that worked a couple of times. Where an institution came in and was going to buy an empty building and probably get a yield halfway between having to pay for it new and leased up, versus what you would get like we do it, taking all the risk.

And that has stopped very quickly in Houston, because the institutions have backed off on taking that risk. So let's look at that question again next quarter.

Okay. Great. And then Marshall, first welcome you aboard. Congratulations.

Thank you.

And then one thing that David has done extraordinarily well, or the entire team at EastGroup has done extraordinarily well is keep G&A down, in an era where G&A is going up egregiously. Do you think you can keep G&A at that $13 million number going forward, annually?

Gosh, I hate to commit to a set number this early on. I think we certainly will aspire to keep G&A at the level it is today, or around that, or certainly in check, depending where the asset size goes and markets we're in, and things like that. I admire the track record they've had on G&A run rate over the years, and that's something we'll try to keep in check and in line with our industry.

He gets rid of me next year, so that's the first big step.

You could double your G&A and keep it in line with the industry if that's what you wanted.

That's a good idea.

Thanks for giving me a big runway.

David, you better unretire. Thanks a lot.

And we'll go next to Michael Bilerman from Citi.

Manny Korchman here with Michael. If we think about the explorations in 2015, you took care of issues. And it looks like a bunch of those were pushed on a short-term basis a year to three years, and some stuff further than that. How many of those were new leases that were just shorter term, and how many were renewals in place, just to keep the space occupied?

We had a couple of leases. I think, or most of the question there on volume was low. We had a couple renewals we did, you're right, were 14 months. I think we had a 23 month.

You noticed our energy-related tenants that went basically down for this year but the number picked up for 2016, and that's because we did renew one group 14 months over into the next year. But that was just a couple examples.

But for the most part, most of the transactions were in the typical three to five year. There were just a couple that were short-term in nature.

Were you driving them to be short-term, or were the tenants coming to you, and saying we don't want to make a decision now? Let's just push it?

I didn't push any five year leases. I didn't ask them to go back to one. We were pushing as much as we could.

Some of these tenants different for a lot of different reasons may need that lesser term. The one oil and gas one we did for a short term, actually FMC Technologies, they're building a campus and eventually going to move onto that campus. We're always pushing for as much term and as much rent as we can get.

And then maybe another one for Marshall. You've been on for I guess a little bit over a month now. What have you seen that surprised you, if anything?

A couple of surprises, I guess, as I think about it. One, I've been a shareholder of the Company for years, and followed it, and kept up with friends here. The quality of the portfolio surprises me.

I'm still getting out. I've seen a number of the markets. Next week I'll see three more markets. But the quality is actually -- it's all what your expectations are, is better than I expected, and I think as David alluded to earlier, you see that in the re-leasing spreads, and in the occupancy.

Another surprise and maybe I know you've covered retail as well, where there's lower new developments, you read about the wall of capital, but being out, investing in industrial, being out in Dallas last week, I said to David, you really see that wall firsthand of we're out, where our ParkView development is, and there is just every industrial REIT, institutional owner owns a building or has tied up land, just the competitiveness on acquisitions, is probably pretty intense there.

I think the other good news differentiating it, though, is although you see a lot of that development in Houston and in Dallas, not all in -- thankfully not all industrial development is equal, and the majority of what we drove by that's getting built are the big box, bombers, as one of our guys calls them, for the large single tenant users. And that business distribution centers where we focus, there's really very little development being delivered there, thankfully.

But there is a lot of money chasing industrial product, which is good for our NAV, and it's hard on our acquisition front. So those have been probably the two big surprises.

The other non-surprise which was great, is I think I was referred to as I semi-insider coming back, or semi-outsider. The culture I left here years ago is still here and intact, and it's made it fairly easy adjusting. I've been here a month, and it feels like two months, type thing.

It's been a pretty easy moving car to jump into because of the people and the team here. So that's my -- ask me again next quarter, but so far, those are my take-aways.

You know we'll keep asking. Thanks.

And we'll take our next question from Jeremy Metz from UBS.

It's actually Ross Nussbaum here with Jeremy. I don't know who wants to take this one, but David, following the succession at the CEO position, we've received some questions from your investors regarding the CFO role, and what Keith's plans are for the future, and how much longer he plans on sticking around.

Well, I'm not nearly as old as David is, first off. But I plan to be around for a while, and I'll work very well, I think, with Marshall, and we've known each other for a long time so I expect to be here for a while.

Appreciate that. While I've got you, the line of credit, you've got about $115 million out on your $250 million of lines. What's the game plan for terming that out at this point?

We project a $75 million loan in the latter part of the year. Rates have been good all the year. I don't really see them going up that much. So I don't think it's any urgent need for us to go out and get a 10 year term right now.

So we'll probably stay with our plan of getting another $75 million in the fall. We've got $50 million of acquisitions, I guess, projected, which may or may not happen, and we may have more than that. So depending on how that also plays is depending how much capital we'll need also.

Does the stock now being at $60, which is give or take toward the lower end of where it's been for the last two years, does that influence at all how you're thinking about that debt equity mix over the next year?

We would like to get equity mix in there, no doubt about that. But we are in a good position, where we can pick and choose the times that we get in.

And as you saw in the first quarter, we thought there was weaknesses in the stock, and we wanted to wait a while on that. We'll just have to play that as it goes along during the year.

The last one, Marshall, I've got this one for you. You've been at three different REITs and three different property types in the last, what, 15, 20 years.

I'm curious what lessons do you bring back to EastGroup from being at Parkway and Glimcher, that you think having seen EastGroup operate a decade plus ago, are there best practices that you've picked up from those organizations, that you think can be implemented at EastGroup, or is it plug and play?

Gosh, that's probably a longer conversation over a beer at NAREIT, or something like that. I think EastGroup has proven be a great performer over a long time, in up and down cycles. So it's certainly not a turnaround situation where you come in with a meat cleaver and make wholesale changes. This continued to evolve.

Yes, I hope there's things I have learned. You learn things in every different situation, property type or context.

A good friend had a sign over his desk that just said lease space, collect rent. I think whether it's retail, or office or industrial, if we can do that, good things follow, whether it's financings or stock price and things like that.

So yes, there's a lot of things we'll gradually evolve or do, that you hope you bring to the story or to the team, but I think those will -- I guess, reading some of the analyst theses, I would say certainly the plans aren't to make any major changes here, but we also have to continue to evolve. And as Brent stated, we haven't lost anyone.

Or he reminded me, we've added Marshall, so I think my goal, where is my stress, is really more to continue implementing the strategy as effectively as it has over the past 20 years, and if we can do that it will be a success. And hopefully you bring some things you can blend into the team, and they'll grab me by the sleeve if I'm off, or they'll be open minded if I have, hey, have you thought of this?

Okay. And are you -- I appreciate that. Are you relocated yet or are you commuting? How's that playing out?

I am relocated and have a house that's mostly full of boxes still, here in Jackson, and have my former home, it's available if you need a seasonal address in Columbus, Ohio.

I think I'll end the call there. Thank you.

And we'll take our next question from Eric Frankel from Green Street Advisors.

This is Dillon Essma with Eric. We just wanted to touch on, are you seeing or concerned with more supply in those markets that are starting to pick up more, in Charlotte and Florida and things, in those markets?

That's something we're always looking over our shoulder and worrying about. So far in Charlotte, there's nobody else building our business distribution product in our submarket. It will probably happen, but it been big box development there and most of it in a whole different quadrant than where we are.

We are seeing some competitive development in Orlando, none in Tampa today, but that will probably happen. San Antonio, there's very little development going on, and none where we are building, and none of our product. So we're pretty optimistic within our different development markets at this point.

One thing I will say, and I've been saying this for probably a year, is that as new supply does come online, that our lease-up periods, and this is certainly going to be true in Houston, our lease-up period is going to probably take a little longer, and maybe be the full 12 months that we pro forma for each development. We've been spoiled over the last couple years with a lot of lease-up during construction, and as soon as the doors open.

Traditionally multi-tenant industrial really doesn't start to lease until the building's done, the landscaping is in. It's just a very different time schedule for prospects than it is in other property types.

Thanks. That's it.

And we'll take our last question from Craig Mailman from KeyBanc Capital Management.

Hey, guys. Not to beat the dead horse here on Houston, but Brent, just want to go back to your comments about free rent coming back to the market, particularly the new development side. And just what the free rent levels are today versus six months ago.

And you've been there for a couple cycles. How far behind are the rent declines that some of the developers are going to start giving as incentives to lease up space, if they're sitting on vacancy?

The second part, I'd be curious to see. I don't know how much anyone might be willing to compress their pro forma some and move rates down to try to get deals. To date, it's been more, as I mentioned on the free rent side, pre-end of the year before the oil price really dropped in November. You probably had the token one or two months free just to move the guy and help him justify his moving expense.

Maybe that's moved to three or four months. And again, if you had the right credit in your deals, that's like saying maybe there would be a little more. But that would compare to say back in the recession where we might be six, seven months. So it's certainly not to that level.

It's more as a carrot to try to lure someone over. If you have an empty building, you give a few more months free it's easier to justify that and to see that guaranteed cash flow, so it' really not that big a surprise that we're seeing people gravitate to that. So far on the rent side, for the most part, guys have held pretty firm.

I would add that when you have a development with a 12 month lease-up projection and you have a good prospect as you're finishing construction, it's not very painful to give somebody a number of months of free rent, because they're still leasing during that 12 month pro forma period. It's when you get beyond that, it becomes painful if that occurs.

I guess all the comments you guys had together with just slowing lease velocity and less depth of the tenant pool, and now guys are getting free rent, I would assume some less well-capitalized developers than you guys, or some of the other guys with pension fund money, are maybe getting a little bit worried here. We haven't seen it yet, and clearly the concern in the market with oil prices not rebounding here is how long this is going to last, and the rig count comments by Schlumberger today. We haven't seen the crack in Houston yet, and it seems like things are still good today, but it's -- I guess I'm trying to get at when do people get a little bit more worried, and just the rent cuts start coming?

Our experience to date is that with merchant building developers, merchant builder developers, that they are very reluctant to cut rents because they lose their promote, and so we haven't seen that starting to happen yet. Everybody has a different opinion what's going to happen in Houston, but it seems that the people outside Houston are a whole lot more worried about it than a lot of the people in Houston.

And it's just a couple summary closing comments on that. We try to point out to people that Houston's not going to turn out the lights and shut the door. It still has positive job growth.

Sure, it has been probably the leading city with growth in the US up to now, but if it falls back, and as Brent said, remains at all positive, we think we're going to do very well there. It's not going to lead our FFO growth, but it's certainly going to be a contributor, and we believe that the other cities that we've talked about already have picked up the slack, plus some.

And that's how we can project the higher FFO that we have. So, sure, things have changed there. Like I say, nobody's turning out the lights and shutting the door and heading for the exits, as some people in other parts of the country might be thinking.

But we appreciate everybody's interest in EastGroup and calling in, and we will be available for a while if we didn't cover your questions, or you didn't get a chance to ask one. Please just give any one of the four of us a call at the office. Have a good weekend.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.