Eastgroup Properties Inc (EGP) 2015 Q2 法說會逐字稿

Good morning, and welcome to the EastGroup Properties second 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. It is now my pleasure to introduce Mr. David Hoster, CEO. Please go ahead.

Good morning, and thanks for calling in for our second 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 also be participating on the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

The discussion today involves forward-looking statements. Please refer to the Safe Harbor language included in the Company's news release announcing results for this quarter. That describe certain risk factors and uncertainties that may impact the Company's future results, and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time sensitive information that is subject to the Safe Harbor statement included in the 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 second quarter saw a continuation of EastGroup's strong earnings momentum. Funds from operations per share exceeded the upper end of our guidance, and represented a 9.5% increase as compared to the second quarter last year. These results continued our track record of increases in FFO per share, as compared to the prior-year's quarter for 9 consecutive quarters and in 16 of the last 17 quarters. I think that's important enough to repeat. These results continued our track record of increases in FFO per share as compared to the prior-year's quarter for 9 consecutive quarters and in 16 of the last 17 quarters. Quarter end occupancy eclipsed 96% for the fourth consecutive quarter, again beating our internal expectations. Same property cash net operating results were positive for the 17th consecutive quarter. And we continued expanding our development program, which has been a major value creator for us for many years.

With that overview, I will turn the call over to Marshall for more operational details.

Thanks, David. At quarter end, we were 97.1% leased and 96.2% occupied. Our occupancies exceeded 95% for eight consecutive quarters, a trend we project continuing for the balance of 2015. At June 30, our California markets continue to be our strongest at 99.3% leased. Followed by North Carolina at 98.2%, and Texas at 97.2%. Houston, our largest market, with over 6.3 million square feet, was 96.6% leased and 95% occupied.

In second-quarter we renewed or signed early renewals on one million square feet, signed new leases on another 168,000 square feet of expiring space. We also leased 490,000 square feet that had either terminated early during the quarter, or was vacant at the beginning of the quarter. In addition, we've leased and renewed 244,000 square feet since June 30. Cumulatively, this translates into over 1.9 million square feet of leasing or 5.7% of our portfolio.

For the quarter, GAAP rent spreads were up 10.5%, which was our ninth positive quarter, while cash spreads rose 2.1%. For renewal leases only, GAAP rent spreads have been positive for 13 straight quarters, and cash spreads have been positive for six of the past seven. Our average lease length was 3.9 years, in line with recent results. Total leasing costs were $0.64 per lease year for second quarter, and $0.56 per square foot per year, year to date. As a result of continued, strong occupancy and rising rents, second-quarter same property operating results increased 5% on a cash basis and 4% on GAAP. Year to date, property NOI increases for cash and GAAP were 4.7% and 3.5%, respectively. We expect same property results to remain positive for both categories each quarter of 2015. But the trends will decline due to large termination fees in 2014, and same property occupancies exceeding 96% during the second half of last year. Simply stated, at over 96%, we view our sales as functionally, fully occupied. Overall, the leasing activity continues to be strong in each of our major markets. And we're especially encouraged by increased demand from small users in the 15,000 to 25,000 square foot range. On a year-to-date basis, we're experiencing our biggest improvements in our Florida markets.

The price of oil and its impact on Houston's industrial real estate remains a major topic of discussion. We thought it appropriate for Brent to again join today's call. For anyone who doesn't know Brent, he is one of our three regional Senior Vice Presidents, and is based in our Houston office with responsibility for all of EastGroup's Texas operations. Brent?

Good morning. The operating results for our Houston portfolio continued to exceed our budgeted assumptions. Our operating portfolio finished the quarter at 96.6% leased, while reducing our remaining 2015 roll over exposure to less than 1%. We are pleased to have decreased our scheduled expirations from 15.7% originally to this low number, while maintaining solid occupancy, especially in light of the known move-outs expected entering the year. Rents for the quarter were up 5% on a cash basis, and 12.3% on a GAAP basis. As for same property operating results, our original 2015 projections for Houston showed a 2.5% decrease, which was revised upward last quarter to a decline of 1.8%. Our updated projections now reflect a same property operating decline of 1.2% for the year, and 0.3% positive, excluding termination fees. We are encouraged that we are now projecting a 3% same property increase in the fourth quarter, excluding termination fees.

During the quarter, we completed 11 lease transactions. Three were renewals, six filled existing vacancies, and two were for development properties. One brought World Houston 39 to 100% leased and occupied, and converted it to the operating portfolio in June. While the other development lease was at West Road I, also bringing it to 100% leased. It will transition into the portfolio when the tenant occupies in September.

The Houston industrial market also continues its resilient performance. The vacancy rate decreased another 10 basis points to a record low of 4.8%. This was driven by 1.1 million square feet of positive net absorption, which marked the 17th consecutive quarter of positive net absorption, totaling more than 27 million square feet over that period. Meanwhile, the construction pipeline totaled 6.3 million square feet at quarter end, which is 35% lower than the post recession peak, and down 29% from last quarter. Overall, it appears that the deceleration in deal velocity has moderated. And I anticipate the latter half of the year will look similar to the first half whereby existing operating properties continue to perform steadily, while it will be more competitive to lease newly developed space. Our projected development starts for the remainder of the year include just two Houston buildings late in the year totaling 216,000 square feet, both at World Houston. As always, our direct results and on the ground feedback will dictate the potential for future, new project starts. David?

Looking at our development program, we began construction of five buildings in three business parks during the second quarter which total 541,000 square feet, for a combined projected investment of $39 million. These included Oak Creek [VIII] in Tampa, a 108,000 square foot 100% pre-leased building; Horizon III and IV in Orlando, totaling 232,000 square feet, which combined for 43% pre-leased; and Eisenhauer Point I and II in San Antonio, which totaled 201,000 square feet. Meanwhile, as Brent just reported, we transferred one property into the portfolio during the quarter. The 94,000 square foot World Houston 39 at 100% leased. Since quarter end, we've also transferred World Houston 42, also with 94,000 square feet and 100% leased to the portfolio.

As of today, our development program consisted of 21 projects, with 2.1 million square feet and total projected costs of $150 million. This compares to 19 projects for 1.75 million square feet, with projected costs of $129 million at March 31. This represents a $28 million or an approximately 22% increase in our development pipeline. We grew the pipeline in Orlando, San Antonio and Tampa, while Houston shrank with the completion of the 100% leased World Houston properties.

For the full-year 2015, we hope to start a total of 1.6 million square feet of new development, with a combined investment of $114 million. These projects include just two additional buildings, as Brent mentioned, in Houston at our World Houston Park. We have not acquired any operating properties year to date, and presently do not have any under contract to purchase. During the second quarter, we invested $11.8 million in three new land positions within our existing markets. These included the 38 acre Eisenhauer Point parcel in San Antonio, 28 acres we've named CreekView 121 in Dallas, and five acres for 10 Sky Harbor in central Phoenix. In April, as previously reported, we sold the last of our three Ambassador Royal warehouses in Dallas with 185,000 square feet for $5.3 million and recognized a gain of $2.9 million in the second quarter, which of course was not included in FFO. During the third quarter, we plan to offer an older property in Houston for sale.

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

Good morning. FFO per share for the quarter was $0.92, compared to $0.84 for the same quarter last year, an increase of 9.5%. Operations have benefited from an increase in property net operating income related to same properties, developments and acquisitions, while lower interest rates have reduced interest expense, even as debt has increased. FFO per share for the six months was $1.79, as compared to $1.66 for last year, an increase of 7.8%. Debt to total market capitalization was 34.9% at June 30, 2015. For the quarter, the interest and fixed charge coverage ratios were 4.5 times, and debt to EBITDA was 6.4. The adjusted debt to adjusted EBITDA ratio was 5.7 for the quarter. Floating-rate bank debt amounted to 4.8% of total market capitalization at quarter end. Bank debt was $133 million at June 30, and with bank lines of $250 million, we had $117 million of capacity at quarter end.

In July, we negotiated terms to amend our unsecured bank credit facility to extend the maturity date by 2.5 years from January 5, 2017 to 4 years from closing. And, to lower our rates from LIBOR plus 117.5 basis points, and facility fees of 22.5 basis points to LIBOR plus 100 basis points on a facility fee of 20 basis points, for a net annual savings of 20 basis points. We will also expand the facility by $75 million to $300 million. And our working capital line from $25 million to $35 million, for a total of $335 million up from $250 million.

Also in July, we entered into an agreement in principle with two insurance companies under which the Company plans to issue $75 million of senior unsecured private placement notes, which are expected to close in October. The 10 year notes will have a weighted average interest rate of 3.98%, with semiannual interest payments. Even though we did not sell any common stock under our continuous equity program in the second quarter, our debt metrics remained good. We project selling $25 million over the remainder of 2015. In June, we paid our 142nd consecutive quarterly cash distribution to common stockholders. This dividend of $0.57 per share equates to an annualized dividend of $2.28 per share. Our FFO payout ratio was 62% for the quarter. And rental income from properties amounts to almost all of our revenues, our dividend is 100% covered by property and that operating income. And we believe this revenue stream gives stability to the dividend. FFO guidance for 2015 has been narrowed to a range of $3.63 to $3.71 per share. And the midpoint was increased from $3.65 to $3.67 per share. At the midpoint, we are projecting a 5.8% increase in FFO per share compared to last year.

Now, David will make some final comments.

Industrial property fundamentals are solid, and further improving in the vast majority of our markets. Based on this strength, we continue investing, diversifying and growing our development pipeline. We are also committed to maintaining a strong, healthy balance sheet. We like where we are, where our industrial markets are, what we are doing and the results it creates for our shareholders.

We will now take your questions.

Thank you.

(Operator Instructions)

Blaine Heck, Wells Fargo.

Good morning. I know you guys put up pretty strong operating margins, and I think expenses actually went down a little bit sequentially. Was there anything specific there? And how sustainable do you think those margins are going forward?

Actually our overhead was up related to our transition of me out of CEO to Chairman of the Board. But the actual operating expenses at the properties tend to move a bit with occupancy, and with timing on when they're accrued. But all flush out together at the end with our triple net leases. So if that hasn't answered your question on that, you can give us a call later.

There were some items in Tampa that we pushed back that we benefited in second quarter that will even -- as David said, even out in third. So I don't know -- I wouldn't call it a new run rate so much as a timing aberration.

Okay, fair enough. And then CapEx was a little bit higher this quarter I think because of roof repairs. Was there anything specific that was related to and should we expect any elevated spending going forward?

Probably not elevated, you're right. In City of Industry out in Los Angeles, we had a large roof we replaced. So that was about 40% of the CapEx. So the good news is, that's out of the way. We have some more roof work coming up in El Paso, I know. But I don't think -- it's not permanently elevated so much as timing, and the second quarter is always a bigger quarter for us just timing of when everybody finished the annual budget, and get your bids in and start your CapEx in second and third quarter.

I would just add on the property operating expenses, that last that last year we had bad debt in the quarter, and this year we had none. So it made the percentages go down a little bit.

Okay, that's helpful. And then last one, the 95.9% average occupancy guidance implies a little bit in the second half of the year. Are there any known move-outs that you have coming up that might be behind that? Or is it maybe related to under leased developments coming online?

No, we have a big single building user moving out in Phoenix that probably effects that some as just our overall projections. And we expect occupancy in the third and fourth quarters to range from just over 95.5% to just over 96%. And would hopefully finish the year right about at the 96% number.

Okay, great. That's helpful, thank you.

Jamie Feldman, Bank of America Merrill Lynch.

Great, thank you. It looks like you guys took down your total development starts guidance for the full year by about I think $10 million. I assume that's one project. Can you talk about what's changed?

That was two additional buildings, we looked at as one project in Tampa. That instead of probably a fourth quarter start, it will be a first or second quarter start next year. And that was just related to slow overall leasing activity in the general Tampa market.

Okay. And then how do you think about, I know you have additional equity raises in your guidance for the back half of the year. How do you think about raising equity versus selling assets, and what kind of hurdle rate do you guys -- what kind of returns do you need to make those capital decisions? And what if stock remains under pressure for the back half of the year?

Well that's something obviously we talk about on a very regular basis. As I mentioned in the prepared remarks, we're selling an older property, actually the first one we purchased in Houston way back in 1994. That will be going on the market, and we will be doing, because of the tax consequences, with a large gain, hopefully a 1031 exchange as part of that transaction. As to additional stock sales, we'll just have to wait and see what happens with the market. And if we're selling below an NAV, or how far below an NAV. Because if it's just a slight discount, when you look at our blended cost to capital at that point, any potential, small dilution we think is way overcome. And ends up with accretion if we're able to invest those dollars in new development where we'd be making at least probably a 200 basis point spread over -- going in combined cost to capital.

Okay, that's helpful. And then finally, what kind of mark to market on your leases is baked into your same-store outlook for the back half of the year?

We don't add up that total and report it, because we've never been very good at doing that. We're just -- these are just the numbers that the people in the field, as we revise our budgets each quarter have identified as potential rents for replacement customers or leasing of a vacant space.

But we certainly expect that our rent spreads, as we report them, which are sometimes different than some others do. But the way we report them will remain positive for the foreseeable future.

Okay, all right. Thanks, everyone.

Brad Burke, Goldman Sachs.

Good morning, guys. It looks like you trend the supplemental disclosures on development. So I just want to understand what the thought process was there? And I was also hoping you'd give us some color on whether you've seen any meaningful changes in the development yields you'd expect with your Texas projects?

Answer that several different ways. So first of all, for number of years, our people in the field have pushed us to not give individual yields, projected yields on each development building for competitive reasons. And you can really back into what the rents are projected to be, which can be an issue when you're looking at 100% pre-leased buildings or build-to-suit. So we have finally decided that made sense, and decided to give cumulative yield totals for the properties that are in lease up and a separate number for those in construction. If you look at what has happened to the yields on a weighted average for the third -- well for the end of the second quarter going forward as compared to what we had at the end of the first quarter, there is a lot of ups and downs. But overall, it's a 10 basis point drop, nothing significant. And we look particularly in Houston to see if the slowing a bit of that market has affected our projected yields, and those yields were just a 10 basis point drop. Also some of that is affected by what rolls out at 100% leased, and what rolls in generally in the construction. With no leasing, and the same with rolling into lease up.

That makes sense. And I guess sticking with the Houston properties that are either in construction or in lease up. It looks like, of all of those, you really only had leasing activity on one of those. So I wanted to know whether that was in line with what you would have expected? And then, Brent, just get your quick thoughts on how you're thinking about the traffic on those properties. And when we ought to be thinking about the timing of the lease up?

The timing of the lease up is certainly hard to project. We actually had movement on two of them. But one in lease up that you're probably noting is West Road I, which went from 62% to 100%. But then also the World Houston 39 property, which has dropped to the bottom of the schedule. Because it rolled into the portfolio, we moved it from 50% leased last quarter to 100%. So we moved both of those to 100%.

The activity overall, on the development side, there's still activity. We've tried to get a little more aggressive with trying to retain the tenants. We seem to be slower out at Katie, as we mentioned the last time. But we're still seeing activity that gives us hopes of making our 12 month lease periods, with the properties in northwest which is our West Road business Park and then up north at World Houston. So all in all, I'm pleased with where we are. You would always like to do more leasing activity in the development pipeline. But if we can move a couple of properties out of quarter at 100%, I'd take it.

Okay. And then just the last one for me on leverage. The debt to cap ticked up to 35%, and it certainly seems like you are more inclined use debt than equity near term. So just update and thoughts if there are any on how you're thinking about leverage, and what kind of thresholds we might see you be willing to go up to.

If you go back ten years, we said that our goal was to be plus or minus 40% debt to total market cap. And then as we were able to issue a good bit of equity, and just had a little different view on leverage, we said that -- stated that our goal was give or take 35% where we're at today.

And again, because of the extra equity, we were able to attractively raise over the last couple years. And the high stock price helping that total cap number, we were down to 30% or 31%. But 35% give or take is where we'd like to be where we're very comfortable being, and as I said, where we stated was a goal several years ago.

Okay, thank you very much.

Thank you.

Vance Edelson, Morgan Stanley.

Terrific, thank you. First, just following up on your closing remarks, David, about the fundamentals.

Could you give us some big picture shots on how you feel about the remaining duration of this cycle? If we consider that you have 22 projects underway now, and Tampa notwithstanding, that's still almost doubled in a year and a half. So there's certainly a degree of optimism there, so if you could just describe your level of confidence in the remaining length of the cycle.

I hate to project too far out, but let me state it a different way. That right now, we do not see any slowdown in leasing activity or market statistics in any of our major markets. And some are just improving faster. Tampa and as you can see from the occupancy numbers in Phoenix, have trailed the Texas markets and the California markets coming out of the recession. And I'd like to think they still have a long run of recovery to go. And we're not seeing any real signs of over building for new development in any of our markets.

Houston, which we probably should and everybody expected, the amount of new development has slowed significantly, as Brent had previously stated. And the absorption is still there. Dallas, the amount of new construction has slowed a bit, and the absorption remains strong. So that we're not seeing any indications that we're near the end of the recovery cycle for industrial real estate. And, as I say, some of the markets still haven't fully recovered from the recession, so we're optimistic about where we're going with it.

Okay, that's really helpful perspective. And then with the land purchases that you've completed and that you're working on now, could you comment on pricing and the competition for the parcels? And related to that, I think you had mentioned a few months ago that you'd like to buy more land in South Florida. But none of the land purchases during 2Q or subsequent to the quarter were in that region. So is that proving to be a challenge?

Very much so. The pricing from Dade up Broward, Palm Beach County, has gotten to per square foot numbers where we haven't been willing to take the step to take it down and start spec development. One of the ways we've discussed it internally is that land prices are at a level today for industrial development, where you can't afford to buy it. And assume you're not going to build anything for three to five years, which you could do during and make that assumption during the recession. We're looking at the prices today, and the land that we're acquiring, I think their market rates on the land. And as a result, we wouldn't be doing it if we didn't see development kicking off in the next 12 months.

Okay.

Which what this land in Dallas and Louisville we hope to be under construction in the next six months there. Land in San Antonio, we are already under construction there. Just haven't gotten the zoning permits cleared up. And in Phoenix, the piece we bought there, we should be under construction in the next 30 to 60 days. And these are prices that work in our pro forma, as long as you start right away.

Okay, that makes sense. And then lastly, you had a healthy gain on the one property sale during the quarter, and you mentioned one more I think in Houston that might be on the block. Beyond that, do you see other embedded or unrealized gains across the portfolio that you might be able to capitalize on with additional sales? And how much of a priority is that?

We see gains I guess maybe over generalizing basically every one of our properties. Because of the length of time we tell them, the quality of the assets, and the recovery from the recession. So it's one of those issues that selling a property like the one in Houston is going to create a very high gain. And since our dividend is pretty close to taxable income at this point, there is room to absorb a big gain. So we're looking to do 1031 exchanges, whether it is into another operating property or into development land. And looking at it from a development land standpoint, it's a nice way to take those proceeds and reinvest them in development through a number of land purchases. So that's really the goal there. And of course there's a delay to actually get the construction underway, and get those yields from new development. But it's a big part of our thinking going forward.

So just to clarify, it's more one-off basis versus any type of concerted effort to sell properties into this strength?

Yes. That's the way we've done it for 20 years of picking out selected assets, trying to time the sales process. So that we can maximize the price, and have the most dollars to reinvest in, in however we do that.

And I'm going to agree with David. I think the only thing if you looked at, I would say, any things we've talked in terms of as we manage the size of Houston. That was part of the reason why we picked this older asset in Houston. And if you fast-forward, is we like the Houston market a lot, and want to keep growing there and developing there. But we may prune from the bottom of our portfolio over time. And then there are certain that assets like a Memphis where we've got one asset, but at the right time and the right price we would -- it would make sense to exit that market. But the good news -- I guess it's good news, is we'll have tax gains on almost all of these to manage our way through. And those will have dividend implications.

Okay, great. Thank you, both.

Craig Mailman, KeyBanc.

This is actually Laura Dixon here with Craig. I just had a follow-up question on the landsite purchase question. What are the expected yields on the land that you're acquiring for some of these upcoming development projects like Eisenhauer Point?

They'll range from, and this is at 100% occupancy as we report them in our supplemental. From 7.5% to probably 8.25% which is a little bit lower than what we've been spoiled with over the last couple years. But this is something that I've been saying for almost two years. That as land prices increase and construction costs increase, that our yields are going to drop anywhere from 25 to 50 basis points for new development. But still be at least 200 basis points above what we think we could sell those assets for, and well above any cost to capital allocation. Dallas is a market now where there are some sales that are being reported at 100% occupancy at sub 5% yields. So if we can build to a 7.5% or a little bit higher, that's an awful lot of value creation with new development.

Okay, great. And then, just another question on the -- I guess again, go with -- I'm on oil prices. But any change in tenement sentiment given the recent pullback in oil prices, and just kind of curious what types of tenants are currently the most active?

Well the most recent pullbacks has been in the last couple of weeks. So things certainly don't react that quickly. But most companies at this point have dialed in for the overall decrease, and there's some expected volatility, whether it's lower $50s, upper $50s, if it drops to the upper $40s, if it can get over $60. That type movement right now doesn't I guess locally is somewhat anticipated, so it hasn't quickly persuade decisions. We've seen activity, as I mentioned in my comment, the deceleration, we've seen it moderate maybe flatten out. And there's still activity in the market, operating portfolios are doing well, renewals have been consistent.

So vacancy for most high-quality portfolios like ours is not an issue. And as I mentioned earlier, it's just that little extra competition to back fill either vacant space or newly developed space. So when people are looking at the bottom line, that's the higher rent type property. So that's where our focus especially is in making those particular deals. And that activity has been at a pretty consistent level over the last several months, especially Northwest and North.

I would add that there seems to be no effect of the drop in oil prices either from last year or recently in either Dallas or San Antonio. And some people have identified San Antonio as an oil related economy. It certainly hasn't been for industrial space in metropolitan San Antonio. So, no effect there.

Okay, thanks. And then if you'd just talk about the types of tenants that are more most active right now?

It's across the board, and each market is a little bit different with each different economy. We seem to still have the three PL's being good construction, both commercial and residential is positive. And then what's been growing coming out of the recession is consumer goods that the economy increases. There is no one single area. Medical has been strong, especially in Florida, where there are more of us that are older and taking more pills and more medicine. But there's no one business charge at this point.

Okay. Thank you very much.

Thank you.

Alexander Goldfarb, Sandler O'Neill.

Good morning, down there. Just a few questions. David, just getting back on the capital allocation, how has the stock's performance or lack thereof this year impacted the way you guys look at external investment as far as new development sites, et cetera?

Have you guys ratcheted back materially your external capital thoughts? Or right now, given where your leverage is and conceivably you just view the stock's depression as temporary, that you haven't altered any of your external investment thoughts?

I would agree with the second part of your statement, the drop in the stock price is still less than five or six months old. So although we talk about many alternatives, it certainly hasn't yet appeared to be a long-term issue. Secondly, it hasn't slowed our development program at all because we think we're giving above-average yields that work even if we issued some stock today. The change has really been in acquisitions. And part of that is a slightly higher cost to capital, but a big part of it is the continued compression in cap rates in the Sun Belt. And in talking to brokers since the first of the year, class A and B industrial product is selling at anywhere from 15% to 25%, 30% cap rates lower yields than it was at the end of last year. And so then when you combine the lower yields in most of our major markets with a slightly higher cost to capital, there is just not the opportunity there.

So I think if we were able to sell stock, we still would have been reporting that we hadn't bought anything yet this year. The stock price has not changed that. But that's a discussion we have regularly about what's going on, and what might happen. But fortunately we have such a strong development program, it hasn't affected and we don't think it's going to affect our growth going forward.

And then on the taxable, Marshall, you mentioned that you guys have made money on your assets. So as you sell, it would put pressure on the dividend that you'd have to pay out. Should we interpret that you guys are hesitant to sell more assets or take -- use the strong cap rate environment the sub five in Dallas', for example. To sell more to fund the development program because you don't want to pay special dividends? Or are you saying that you're hesitant to really ramp up dispositions? Because by the time you'd get the brokers involved and do all the paperwork, actually it's probably easier just to sell equity. And the cost difference between the two when you net it out may not be that different even where the stock is today?

We are not believers in special dividends, and I can go into a long dissertation on that at another time with you if you'd like. The basic answer is that you don't get credit for much, other than for about a day. And you're shrinking the Company and people wonder why your FFO is high the next quarter, or the next year. But what we're doing is -- and we'll be going forward is like with this potential sale in Houston is to 1031 the proceeds into either operating assets, or more likely land acquisitions. Which is a way to recycle it into development. And this is something each group has been doing since the mid-1980s. I suppose we've done 35 or 40 1031s in the history of the Company. So we're very comfortable doing that. And again, always being a selective seller, because usually what you want to sell that has last upsides it's going to sell at a higher yield than where you can, if you are buying assets, put that money, so we do that very selectively.

And then just finally, David, to that point. If you could just refine it just to help us. How much pricing discount or spread is there between the discount of the stock issuance versus asset pricing? So for example, if you can sell an asset, you guys right now in our numbers are trending at like a [6.4%], [6.3%], something like that. Does that you would be willing to take a 25 basis point discount to sell stock, versus selling an asset, or is it 50 basis points? Can you just help us understand how much of a spread there is where selling assets is preferable to issuing equity at the current level?

Since we don't publish an NAV, I don't think this is the place to go into a discussion of what price we'd sell stock and how we would view a discount. But at any point in time, it's going to be changing. So I wouldn't want to be tied down with an answer that says, well at this number, we do exactly this or that. So the opportunities change every day, every week going forward.

Okay. Thank you.

Thank you.

Manny Korchman, Citi.

Good morning. Just looking at your land bank at the moment, how much development could that support? And if you look at that on a time basis or a number of months, how much runway do you have from here on the development side?

I think that we have enough land to do development for the next couple of years. But when you look at the land bank, it is not always exactly where you want it to be. And so that we are every day thinking about additional land purchases in markets where we'd like to be doing more development than we are today. And Dallas I think is a perfect example of that. Where we had very little land, it didn't really fit what we wanted to do with it, and actually we're offering some land for sale in Dallas today. But we bought land a year ago in Flower Mound, North of the airport, and are developing that. And this most recent acquisition is Louisville, it's a little further north and east that we'd be developing that.

So the opportunity spectrum changes regularly, and always jumping into something. It took us two years to work out the Eisenhauer Point land in San Antonio. And so always trying to find something there. And as previously mentioned, we've not done a very good job of finding development land in South Florida, no matter how hard we've tried. So we will be continuing to look there. And we are attempting to sell some of the pieces of land that don't fit our strategy at this point in time where we don't see the markets appropriate for our type buildings. And so hopefully, we'll be having some land sales over the next 12 to 24 months.

Great. And then can you just give us an update on the remaining known move-outs for the remainder of the year?

Just from a competitive standpoint, we're not going to go into a lot of detail. But as I mentioned, we have a large single tenant building that's going have a tenant vacate in Phoenix. We have a building -- we have a large tenant in two buildings in Northern California. They announced they were going to build to suit. We've filled over half the space already. We're going to lose them, and we're going to lose the tenant in Southern California. So overall, those are two markets where if you're going to have a vacancy and probably pretty good since they're both so strong.

And we project ending the year right around 96% occupancy. So as we stated, so we've got some known move-outs. Thankfully, we're through the -- Brent did a nice job managing through the known move-outs in Houston, mostly hit us in the second quarter. And it will be touch and go whether we hit 96% for one more quarter at the very end of the year.

Great. Thanks, guys.

Thank you.

John Guinee, Stifel.

Thank you. Focus a little bit on Southern California, David or Marshall, if you could. That market is doing extraordinarily well from the statistics we've seen. And then second, it's a whole different paradigm in terms of development yields, et cetera, but is there anything that would cause you to buy land in Southern California?

The answer to that is simply, yes. But we want to be able to get the development spreads that we're getting in other markets to take that risk. So yes, we actively look at land. A problem there is an awful lot of land has a long, drawn out expensive process to bring it to the point where you can build on it. But no, that market is very strong, and we've said for a number years wish we owned more in both Southern California and Northern California. There seems to be no real weakness in either of those areas.

And then Keith, it looks to us like the first half of the year had a very manageable net income of about $0.76 a share. How much is your taxable income for the first half of the year? And what's your taxable income projection? I'm just trying to better understand your dividend payout issues.

We're still projecting a low return of capital for this year, but we could not absorb some of these gains that David is talking about from the property sales. But we're in pretty good shape right now on the dividend. We will revisit it in September at our Board meeting, and that's the traditional time that we increase the dividend.

Well then be a little more specific, what was your taxable income for the first half of the year and what are you expecting it to be for the full-year?

John, that's not something that we report because it bounces all over. So it obviously goes into our dividend decision, as Keith said, which will be made in about six weeks at our early September Board meeting. Those are -- taxable numbers are not numbers that we report during the year.

You could.

Sure.

Thanks. Nice quarter, nice job, guys.

Thank you.

Eric Frankel, Green Street Advisors.

Thank you. I was wondering if you could help just explain the pretty wide spread between GAAP and cash releasing spreads this quarter?

On the rents?

Yes, on releasing. So it looks like as well over 800 bips between your GAAP releasing spreads and cash releasing spreads. So I just want to know if there's any kind of funny one-time items in there that skewed that?

No, just a little bit of speculation. But as the markets continue to strengthen and we move I guess more towards a landlord's market rather than a tenant market, that we're giving less free rent. And as a result, the GAAP rents are going to increase. Because that's 80% of our leases have bumps of one sort or another in them, and less free rent is going to generate a bigger spread between the two.

Okay. So you're saying that free rents on the prior period is probably what is influencing the difference?

More or less free rent in this period.

Okay.

Compared to the prior period, yes.

Okay. Obviously you touched upon the expensive acquisitions market, and it doesn't sound like your fully confident in your acquisitions guidance for this year. Is that fair to say?

Well we did lower it from $50 million to $25 million, I guess which shows less confidence in what we think we're going to do. The difficult thing is projecting acquisitions. Because you can have nothing one day, and then the next day see a great offering and be looking at a $50 million or $75 million package or property. So, there are some interesting packages out there today that we are planning to bid on and fairly aggressively, I guess. But, that's a tough number to nail down because it can be zero or it can be [$100 million].

Yes, that's certainly true. You were referencing the really competitive development, the development market for land in various markets. Obviously, South Florida, you highlighted. What you think a merchant builder is willing to accept on doing spec development today? So you said you can't carry it for a long period of time. What do you think -- would think they're they are building compared to what you thin is relative?

I think most merchant builders are in it for the fees and a quick flip. So they are not land banking, they are ready to build and flip. And we saw a lot of that in Houston a year, 18 months ago, and everyone's different. We saw in Houston where people were announcing the building, and it went on the market before construction ever started. And they were selling, let's say, probably the low [six] to a buyer or institutional buyer who was willing to take the leasing risk. So it's across the board. But I think it's -- if they can't build in good fees and a kicker or participation when they're looking at their pro forma, they're not going to proceed. And certainly in Houston, that seems to have come to a screeching halt.

So it sounds like, well so Houston is obviously the exception. I don't see that development is going to slow down there, but in other markets it sounds like you're saying to even the low 100 basis point range on spreads? Obviously fees and how many factors of that?

We don't do enough of that to give you a -- it would just be pure speculation give you an answer on that. Because everything we tell you would be third or fourth hand information. What you do see is continuing that we mentioned a number of calls before is that institutional money can't buy enough industrial to fit what they'd like to have.

And so as a result, they'll go into partnership or pre-sale pre-purchase with a merchant builder in order to get that exposure to industrial. And so that's what we're seeing as more of a competition in different markets, plus REITs, then somebody who's building it on a bank line and trying to flip it.

Okay, that's great. You've had enough questions for the day. Thank you.

Thanks.

Bill Crow, Raymond James.

Good morning, David. Just everything you've said about development and the yields on cost on acquisitions point to construction that should be ramping up even faster than it is. And you talked about Dallas has actually slowed down. I understand Houston. Why are we not seeing greater development today?

I still think in many cases it's availability of land, and availability of capital for financing. So that the local developer maybe other than in a couple Texas markets has not come back into the picture yet. And as I just mentioned before, it's REITs and it's institutional investors who are doing it with merchant building partners. So that other spec development is using the institutional money or using institutional banking, institutional money, to obtain loans to proceed. And I think there's also still a certain level of caution.

I think Houston showed us where the caution was starting to get thrown to the wind where people were building and trying to flip it before they even moved the dirt. So that was an extreme, and we're just not seeing that yet in other markets. And then touch back on land, it's hard, especially in Florida to find the land where you've got all the kinds of permits you need to proceed with. I think our land in Orlando took us two years from the time we put it under contract to where we could start actually building on it. And as I always like to point out, most sellers in a hot market don't want to sell for industrial use because it's the low rent. You're talking $5, $6, $7 a foot where they do some sort of a sale to a commercial user office or retail, it can be two or three times that. A quick example, in Louisville and Dallas, it took us a while to work out a transaction because the seller wanted to sell the land for retail. We convinced him to sell us the back half of the land with a quick close, and then they could do the expensive retail on the front half. So long winded answer to that's why we're not seeing more development.

And, David, I just to isolate two items. What's going on? Can you generalize the construction cost increase on an annualized basis across your portfolio or your markets? And then number two, do you think the financing for development is getting easier? It's unchanged, is it getting harder? How would you classify that for all those folks out there that might want to build?

I don't think it is probably somewhat unchanged over the last 12 months. It's still -- lenders require a lot of equity and personal guarantees still. So that stops a certain amount of it, and I'll let Brent comment on construction costs.

Construction costs, I'd say, are up 3% to 5%, Bill, in the Texas markets. And I would assume that John would probably say about the same thing in Florida, and that's been a running 3% or 5%. So it's been up post recession a fair amount, but that's been offset with our yields we've been able to obtain, so I would put in that range somewhere. And in terms of what the developers can get from lenders, most of the developers are cash in some form or fashion. Whether it's REIT or institutional groups, there's just not that many guys that are beholden to a strict bank of construction loans to build. That's generally a smaller portion of the subset that's out there developing.

That's it for me, thank you.

It appears we have no further questions at this time.

Good. Again thanks, everybody, for your interest in EastGroup. And at least for a while, all of us will be available to answer any questions we didn't cover on the call. So don't hesitate to try to contact us. Thank you.

That does conclude today's conference. You may disconnect at any time, and thank you for your participation.