Eastgroup Properties Inc (EGP) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

Please note this call may be recorded, and I will be standing by if you should need any assistance. Is now my pleasure to turn your conference over to Mr. David Hoster, CEO. Please go ahead.

Good morning, and thanks for calling in for our third-quarter 2015 conference call. As always, 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 describes certain risk factors and uncertainties that may impact the Company's future results, and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time-sensitive information that is 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 third quarter saw a continuation of EastGroup's positive trend in operations. Funds from operations achieved a 5.6% increase as compared to third quarter last year. This represents the tenth consecutive quarter of higher FFO per share as compared to the prior year's quarter. It also marks the 17th time in the past 18 quarters that we have exceeded the prior year's quarterly results.

Per share FFO was the highest in the Company's history in 2014, and we expect to exceed that amount again in 2015. Our continued growth in FFO per share allowed us to increase the quarterly dividend for the fourth consecutive year, this time by 5.3%. We've now maintained or increased our dividend for 23 consecutive years, and in fact, raised it in 20 of those 23 years.

Our same-property cash net operating results have now been positive for 17 consecutive quarters. And our increasing FFO and the dividend are being driven by the success of all three prongs of all our long-term growth strategy.

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

Thanks, David.

At quarter end, we were 96.6% leased, 95.8% occupied. Occupancy has now exceeded 95% for nine consecutive quarters, a trend we project continuing into fourth quarter. This basically represents full occupancy for a multi-tenant portfolio. As commentary on the market, we've never achieved this level of occupancy for this long a time period.

Drilling down into market specifics at September 30, North Carolina was our strongest market at 98.8% leased, followed by Texas at 97.1, then California at 97%. Houston, our largest market, with over 6.5 million square feet was 97.1% leased and 96.1% occupied.

Supply remains largely in check. And looking further into the supply figures, in a number of our markets you would see that supply is largely comprised of big box deliveries being 250,000 square feet and above. So by design, we simply don't compete for the same prospects.

Meanwhile, in other markets such as Fort Myers, Jacksonville, Tucson, El Paso, there's been little to no spec development since the downturn. And our markets where the fear of over-building is the greatest, such as Dallas and Houston, we're seeing declines in new construction while new deliveries are being absorbed. In short, the market discipline has been strong.

In mid-July, we experienced somewhat of a slowdown in prospect activity. But it picked up again in early September, especially in development leasing where we signed five new leases in the last several weeks.

Rent spreads continued their positive trend for the tenth consecutive quarter on a GAAP basis. This also marks our third consecutive quarter for double-digit releasing spreads. With 95% occupancy, strengthening markets, and disciplined new supply, we're comfortable with this trend.

Third-quarter same-property operating results rose on a cash and GAAP basis during the quarter. And viewing our third-quarter same-store NOI, please remember there was a large termination fee in third quarter 2014, reducing GAAP results by 130 basis points. We expect same-property results to remain positive going forward. Though increases will reflect rent growth as at 95% to 96% occupied, we view ourselves as fully occupied.

While it's a testament to the quality of our portfolio to reach full occupancy so early in the cycle compared to our peers. It's making quarterly same-store NOI comparisons challenging, as others are reaching full occupancy later in the cycle.

As our occupancy demonstrates, leasing activity remained strong in each of our markets. And we're especially encouraged by increased demand from smaller users in the 15,000 to 25,000 square foot range. On a year-to-date basis, we're experiencing the biggest improvements in our Florida and North Carolina markets.

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

Good morning. We continue to be pleased with the operating results for our Houston portfolio.

The operating portfolio finished the quarter at 97.1% leased, which is up 50 basis points from second quarter. While our remaining 2015 rollover exposure is less than 1%. Looking forward, the scheduled expirations for 2016 of 15.4% is slightly less than the typical year, and the average tenant size within the rollover is 30,000 square feet.

Rents for the quarter were up 6.7% on a cash basis, and 13.9% on a GAAP basis. As for GAAP same-property operating results for the quarter, the 3.3% decline in third quarter was due to slightly lower average occupancy, and a bad debt reserve reversal in the third quarter last year. Our budget assumptions for the fourth quarter produce a GAAP and cash same-property operating increase of 2.2%, excluding termination fees.

For the year, our original 2015 projections for Houston showed a 2.5% decrease in GAAP same-property operating results which has now been revised to a decline of 1.5%, and virtually flat year-over-year, excluding termination fees. Through the first three-quarters of the year, we have converted three buildings from our development program into our operating portfolio totaling 292,000 square feet, that are 100% leased with an average weighted straight-line yield of 8.3%.

The Houston industrial market continues its resilient performance. The vacancy rate decreased another 10 basis points to a record low 4.7% as of September 30. This was driven by 1.8 million square feet of positive net absorption, which marked the 18th consecutive quarter of positive net absorption totaling more than 29 million square feet over that period.

Meanwhile, developers have demonstrated restraint with the construction pipeline declining to just 5.3 million square feet at quarter end which is 45% lower than the post recession peak, and down 16% from last quarter. The 5.3 million square feet under development represents just 1% of the total Houston industrial market.

Despite the overall decrease in prospect volume this year, leases continued to be made in most sub markets in a broad range of sizes. I anticipate we will begin next year similar to this year whereby, existing operating properties continued to perform steadily, while it will be much more competitive to lease newly developed space. As a result, development yields should continue to experience some declines, as a reduced number of prospects are aggressively pursued. Our projected development starts for the remainder of the year include just one potential building at work Houston totalling 130,000 square feet. As always, our direct results and on-the-ground feedback will dictate the potential for future new project starts. Marshall?

Given the intensely competitive and expected acquisition market, we view our development program as an attractive risk-adjusted path to create value. We believe we effectively managed development risks through a diverse development program.

The majority of our developments represent additional phases within an existing part. The average investment for our business distribution buildings is below $10 million, and we develop in numerous states, cities and sub markets. And finally, we target 150 basis point minimum projected investment return premium over market cap rates. At September 30, the projected investment return of our development pipeline was 8.1%, whereas, we estimate the market cap rate for completed properties to be in the mid 5%s.

During third quarter, we began construction on buildings in Charlotte and Phoenix with a total of 201,000 square feet for a projected combined investment of $14 million. Meanwhile, we transferred three properties into the portfolio, including two 100% leased Houston assets. As of today, our development pipeline consists of 21 projects with 2.1 million square feet with total projected costs of $157 million. And of that amount, we've already invested $115 million.

With the Houston industrial property sales market remaining strong, we're actively moving towards reducing the size of the Houston portfolio. We're under contract to sell the 232,000 square foot Northwest Point Business Park, with an expected November close. Due to the large tax gain the sale creates, we'll reinvest $15 million to $16 million in proceeds through a 1031 exchanges into development land, and are evaluating two possible Austin acquisitions.

Post this disposition, we've identified a number of other Houston assets which we'll be bringing to market in early 2016. As we exit these assets and grow in other markets, the portion of our NOI coming from Houston will decline, and the quality of our Houston portfolio will continue rising.

During third quarter, we invested $6.2 million to increase our land holdings within two existing successful business parks. The two investments were $6 million for 30 acres, which lies within World Houston, and 200,000 for 4 acres adjacent to Steele Creek and Charlotte. Keith will now review a variety of financial topics, including our updated guidance for 2015.

Good morning.

FFO per share continues to increase compared to the same periods last year. The third quarter increased 5.6%, following increases in the first quarter of 6.1% and the second quarter of 9.5%. The third quarter increase was noteworthy, since the combination of termination fees and bad debts from the third quarter of 2014 to 2015 decreased FFO by $910,000, or $0.03 per share.

Bad debts in the third quarter were driven by two Florida tenants, a medical supply company in Orlando and a Jacksonville office supply company. Houston, meanwhile, had only $2,000 of bad debt. Accretive acquisitions and development, increases in same property net operating income and lower interest rates were all contributors to the increase, and we calculate FFO using the NAREIT definition.

Our debt to total market capitalization is creeping up, because of our reluctance to sell shares at these levels. Our FFO multiple at the end of third quarter was 14.4, one of the lowest levels in years, despite record FFO.

We are looking at dispositions to fund acquisitions, and carefully looking at development. But even with stock sales below what we wanted and a reduced stock price, debt to total market cap was 35.8%. With the quarter interest coverage it was 4.6%, and debt to EBITDA was 6.3%. Adjusted debt to EBITDA was only 5.6%.

We were pleased with the terms for my $75 million unsecured 10-year notes with interest rates under 4% issued in October. We're in good shape on our new bank line, and the next maturity date, debt maturity, is September of 2016. In September, we increased the quarterly dividend by 5.3%.

So in summary, FFO per share is increasing. We increased the dividend, and the balance sheet is in good shape. FFO guidance for the midpoint was not changed. We estimate fourth quarter FFO per share of $0.94, which is 3.3% increase from the fourth quarter of 2014. And the year at $3.67, which is a 5.8% increase from prior year.

I would like to point out the disclosure in the guidance section of the press release. We updated guidance assumptions, and also compared them to previous guidance. We welcome comments on our disclosure.

Now David will make some final comments.

In summary, industrial property fundamentals are solid, and further improving in the vast majority of our markets. Based on this strength, we continue investing, diversifying, and harvesting our development pipeline.

We're also committed to maintaining a strong, healthy balance sheet, as Keith reported. 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.

(Operator Instructions)

We'll take our first question from Juan Sanabria with Bank of America. Your line is open.

Thank you. I was just hoping you could speak to how we should view -- how you were thinking about funding growth opportunities, whether they be acquisitions or developments, as we look into 2016. Particularly with regards to using the ATM.

Let me answer that several different ways, Juan. First of all, acquisitions that we will make, I don't want to say never, but it probably will not be done unless it's through 1031 exchanges. And the properties we are now looking to acquire in Austin will be purchased that way. We recognize where our cost of capital is, and due to the reduced stock price.

Secondly, through some of these exchanges, we are buying development land, which you can do. And then we see development giving us a -- continuing to give us value creation. As Marshall pointed out, if we're building to an 8% or 8% plus yield and creating assets that are valued on a capitalization rate of 5.5% to just below 6%. Each new development dollar invested that way does a tremendous amount for NAV.

With the ATM, as you saw, we did not project any issuance in the fourth quarter. But we've run some numbers, lots of numbers. And if you sell -- if we sell stock at a slight discount to NAV, and I underline slight, the value creation between the yield and the cap rate on these new developments is very, very accretive. And at some point, if you would like to check with one of us later to run through those numbers, I think you'll agree with us.

And one last item. From a balance sheet standpoint, we were aggressively selling stock through our ATM over the last couple of years, knowing that at some point, everything cycles. And improved all our debt metrics to levels that were the best in the Company history. And so we believe it gives us some pretty good borrowing power over the next 12 to 18 months to invest in new development. Without upsetting a strong balance sheet.

Great. Thanks. And just one follow-up question from me with regards to planned dispositions, specifically around Houston. Any sense of dollar value or percent of portfolio exposure you would like to reduce Houston to? And why sell now, as an ancillary or subset to that question? And how have you seen cap rates move versus, I guess, the last nine months or nine months ago when the oil swoon started?

Cap rates for industrial assets in Houston have moved probably at most 25 to 35 basis points up. There were two major sales announced, acquisitions announced, over the last couple of months. Where a REIT bought a package on the east side at, I think, a 5.2% yield, and then an institutional buyer bought some newer properties at about the same yield.

We are very pleased with the yield we hope to receive on the sale of Northwest Point from how much we would like to reduce in Houston. Internally, we have decided that no EastGroup market should have 20% or more of its NOI of the Company's total.

So without giving you too many specific numbers, our goal is to reduce that NOI contribution from Houston below the 20% figure. And market conditions, leases, things like that are all going to determine exactly which properties we sell and the timing of those sells. But as we said in the prepared remarks, we've been selling older properties in Houston for a couple of years now. And plan to be selling the older ones as the new developments roll into that Houston portfolio. Resulting in a higher overall quality, and we think with more upside.

Thank you very much.

Thank you.

We will go next to the site of Craig Mailman with Keybanc. Your line is open.

Hey, guys. Just to follow up on that last question. So it seems like maybe the selldown in Houston is more a function of increasing exposure in other markets, and maybe less of near-term larger asset sales in Houston. Is that the right way to think about it?

I would say it's both. We're certainly not going to be fire sailing anything in Houston as a knee-jerk reaction to the price of oil dropping. As I mentioned before, we just think that having over 20% of NOI from any one city is not the kind of diversification we want. We jumped over that because we had such an incredibly successful development program there, and new properties were rolling in.

We're selling one good sized property before the end of the year. We sold three buildings last year. So we're just going to pick up the pace. But certainly not over react or announce that we're going to sell a quarter or a third of properties, or anything like that.

Because that's not how EastGroup has operated over the last 25 years. Everything has been measured in an evolution of portfolio and diversification. We'll just keep doing the same thing because it's worked pretty darn well.

If you were to look at your Houston exposure, what percentage of the 6 million plus square feet is non-core in your view?

I'll jump in. I wouldn't describe any of it necessarily as non-core. Just some of it are in sub markets with age. All our properties there, as you have seen from our lease percentage, have performed well over time. It's just a few properties that we haven't developed that probably in the near term don't have as much up side value. So we will put those out there into the market.

And to follow up David's comments on cap rates. Really, the 25 to 35 basis point increase has been more verbal from the investment sales brokers. But as David mentioned, one of the transactions was just a hair under a 5 cap, which that would show no increase really from the peak.

So there's still people that are investing in hard assets in Houston, have a long term view of the city, the fourth largest city in the country. And they're not looking at the next six to nine-month window. They're looking at their investment hold, and they're very comfortable with that.

Right. And just lastly, maybe reconcile the push here to bring Houston below 20%, and then adding a little bit more development capacity at World Houston.

Let me try that, and Brent can follow up. The property that we acquired at World Houston, the out parcel, northwest corner of the golf course complex that we bought a couple of years ago, and has been tremendously successful. We've had a right of first refusal to buy it. The seller decided it -- the owner decided it was time to sell. And we worked out price that we felt worked very well for our numbers. And reached the conclusion, if you are ever going to buy industrial land in Houston, right at the very entrance to intercontinental is the right place to be doing it, especially given our success at World Houston.

I should add on that, that I think we mentioned earlier in the year, we had tied up two other parcels for development in Houston. And with the drop in oil prices and the question over what was going to happen with the energy companies, we backed away from both of those. Because we saw those as sites that now would take three to five years of a hold before we could start development, and giving the pricing, that was longer than we wanted to wait to start.

We think, and I don't think we're being overly optimistic that if we don't start something at World Houston before the end of the year, we certainly would expect to do something next year there. Given how we've leased up our most recent developments.

The decision to reduce a bit in Houston, we actually started that a year ago. And in hindsight, we should have pushed it a little bit harder, I guess, but didn't anticipate doing so much successful development there. So the goal is just to get -- have our percent of NOI start with a [1%] instead of a [2%].

The yield that the land base is a little bit higher than what you paid for at the golf course in 2011, and given construction costs are higher and maybe development runs are softening. Is it more mid-7%s on that incremental land versus what you guys have traditionally had at World Houston?

No, two ways to answer that. We still would expect it to be a very high [7%] or a low [8%]. And secondly, the numbers on what we've done on World Houston were helped not just by what we paid for the land, but Brent did an excellent job of getting a reimbursement from city for most of the site improvements, utilities and roads. So that we ended up with a surprisingly low basis in the rest of the land. So it's not really comparable. I don't think anybody will do that again.

Great. Thanks, guys.

Thank you.

And we will go next to the site of Vance Edelson with Morgan Stanley. Your line is open.

Great, thanks. So it sounds like you're not losing much on a cap rate basis, trimming exposure in Houston now. But are we right in assuming that the plummeting price of oil has something to do with this decision?

Or is it just a coincidence that now you have this 20% goal in terms of diversification, which you say you started thinking about a year ago? Or asked another way, are you at all more negative on Houston now than you were a year ago? Or was the price of oil just a wake-up call on your overall concentration profile?

I think all of the above is the easy answer. We have not anticipated jumping over the 20% on NOI. The drop in energy prices required us to look a little more closely on it. But I think we would have been having the same discussion and the same ultimate decision just from a diversification standpoint and how we've operated EastGroup over the years.

The good news is that, as I mentioned, the cap rates have held for class A and maybe gone up a little bit for B. And probably what we'll be selling are B assets. The one we have under contract, it's four buildings, two of them are half dock, which is really service center. We bought the complex in 1994, it was our first acquisition there, so it's the longest hold we've had.

So it just makes sense to get a little more aggressive on recycling. And it seams that the investment community seems a whole lot more worried about Houston than real-estate investors are, because maybe we're looking at a little bit longer time horizon. As Brent pointed out, the fourth largest city in the US that certainly is based on energy but has a whole lot more diversified economy than it ever had before.

Okay. Makes sense. And then Houston having traditionally been a major market for you, can you help us think about the overall size of the development program in years to come? Does that also start to shrink as a result, assuming the economy continues along as it has? Or do you think new markets like Austin on balance things out, and keep the development pipeline strong next year and beyond?

A quick answer is that our development program is 100% based on the leasing that we do in our existing portfolio, and in the development assets that we have built and in parks. Just about every one of our spec developments is a subsequent phase in one of those parks.

So it's all based on leasing. In our own minds, we say this is how much we'd like to do in development next year, but we don't get carried away with how big we want to be doing that in two or three years. Because a lot of companies got in trouble trying to gear up to do something like that.

I would just add to that, Vance, we've already seen Houston become less, percentage-wise, of our overall development program within the Company. The first three years coming out of the recession, Houston represented about 80% of that total dollar amount. And over the past three years, that's been more on average about a third, and during that time we've still grown the development program.

But I'm really excited about and been trying to talk to people as they visit me about our development program in Dallas, which really over the past year, is new to us. Our Parkview project, we signed our first lease. We're now 18% leased and we're just shell complete there, excited about the activity there.

The land parcel we bought right at the end of last quarter, CreekView, we hope to start a new building or two there at the end of the year or first of next year. And then San Antonio, our Eisenhower Point property, maybe other than a few little pieces we picked up in our Arion business park, and we bought that many years ago, is by far the most excited I've been about a development project in San Antonio. It's a ground zero location right in the heart of the industrial main sub market in San Antonio.

So I think we can pick up the slack just within Texas in San Antonio and Dallas. Our other markets, Charlotte, other is doing well. As David said, Houston, we'll just see how it goes. Up north at World Houston, we have no development space available currently, so we might start something there. West Road, we only have one building, 58,000 square feet remaining. Then out at Ten West Crossing where out west it's been slowest, I wouldn't see probably a new development start there next year, so again, we'll see how it goes.

Okay. Very helpful. Thanks, guys.

Thank you.

And we will go next to the site of Jeremy Metz with UBS. Your line is open.

Good morning, guys. Not to keep on the Houston front, but I was wondering, Brent, if you can maybe just talk about leasing in Houston, what you're seeing on the ground there in terms of rents and concessions these days, how that's changed? And then just generally, do you see the amount of empty development space pressuring that further at all given the competitive landscape you talked about earlier?

Yes, the existing pipeline, as I mentioned, has come down. So it's only roughly 1% of the overall market. So the pressure there is more amongst that subset, people competing to fill one empty building versus a competitor's empty building.

I think, as I mentioned, we'll see the operating portfolios for everybody continue to operate pretty steadily. In a market where there's a little bit of uncertainty, tenants tend to renew, they tend to stay put. They tend to not react, maybe do shorter term leases. So I think the pressure will be more amongst the development. But we've seen that come down.

You really ideally, I think, need two factors to help move development space. And that's tenants expanding in the market into that new space, or companies coming from outside the market into the market. And we certainly have seen both of those factors slow down, so that's put pressure on it. But again, we'll just -- I think there will be that bifurcation between the two until there's more certainty in the market in the future.

And so is the amount of concessions going up a little bit for that -- for the space that you need to get filled?

Yes, sorry I didn't follow up on that. Yes, and within the development arena, you're seeing an uptick in free rent. It's still below the level at recession levels, but it's up over the past year certainly since the drop in oil price.

Renewals, and again operating metrics, it's not that pervasive. Again, if you get a good prospect and you've got an empty development space, you want to try to put your hooks into that prospect and lure them.

So we've seen it's easier to give free rent on an empty building or a new development building because you haven't had that NOI into your numbers yet. So to add another month or two of free rent and just to button up a project certainly people are willing to do at this point.

And that will affect the straight-line gap yields. But we have such a cushion in terms of what we could sell these buildings for leased up. And having very attractive pro forma yields to give up 10 or 20 or 30 basis points, it's still one heck of a value creator for EastGroup. And if we can put a tenant in three or six months earlier as a result of that, that's FFO that goes to the bottom line. And then if you don't put them in, you never get back.

So you might see some yields go down a bit in Houston or even in other markets. We've been predicting that for a couple of years. But we've got such a great spread, it's still incredibly NAV accretive to EastGroup's overall picture.

All right, appreciate the color. Then just shifting markets, can you give us an update on Phoenix? You had the big move-out in the quarter. Just what your prospects are there, and just more generally on the market and the leasing environment.

Sure. In Phoenix, it was -- it's one of our earlier acquisitions, too. It was 124,000-foot tenant. One tenant had grown with a manufacturer that got acquired, so that's why we lost the tenant there. We'll move it into -- and it will be a redevelopment into our development pipeline. And that we're going to end up spending over $1 million to really convert this manufacturing building on the west side of Phoenix into one of our business distributions, hopefully multi-tenant building. So that's where the vacancy came from.

The Phoenix market is okay. It's not as strong as our Florida markets or our Charlotte or even our Texas markets, with the uncertainty over Houston, but it is continuing to improve and showing positive net absorption. It's a market that's probably surprised us a little bit that it hasn't recovered as quickly as Florida has.

But again, it was one of those markets driven largely by home building. So we're watching Phoenix, it's continuing to improve. But it is not as strong as the eastern markets are right now.

Then just one cleanup one for Keith on the cash same-store guide, excluding the term fees, which have been a little volatile. It was unchanged, the guidance, despite the fact you're running over 4% year to date. Sorry if I missed this earlier, but I was just wondering, it seems to suggest a pretty big slowdown in 4Q. So this just some reverse of one-time items, or what's really driving that slowdown here in the fourth quarter?

In fourth quarter, we've got another big term fee that was last year which hit the Texas market. In the third quarter, it was a large term fee that happened in San Francisco. In fact, as Brent was talking about in Houston, without term fees, he's got a 2.2% increase in the fourth quarter.

Yes, I thought I was just looking at the 3.4%.

I hate to cut you off, but I think we have some other people in the queue.

All right.

If we're not answering all of your questions, please just give us a call after we're all done.

Next we will go to Ki Bin Kim with SunTrust. Your line is open.

Thank you. You guys mentioned the cap rates being pretty tight in Houston. But maybe you could put some color around how many bidders are actually showing up nowadays to buy these assets versus maybe a year ago?

On the Northwest Point, we were pleased with the number of bidders. We had a more than expected number go in the final and best round, and most of them were all recognizable names that clearly had the capability to close on a timely basis.

So we've not seen -- I'm sure there's some deterioration in the number of people bidding there. But as Brent pointed out, the private investors sure have a different view of Houston than the public investors do. That seems to be reproven every quarter.

I would add to that, Ki Bin, we had 12 offers on our project for the best and final, which was very pleasing. All cash buyers in the market. And the property that sold on the east side that's being purchased was very hotly contested. And the one deal I mentioned off market, that was off market because there's such a demand for acquisitions that the group that bought it doggedly pursued the owner. And cut that off market in that sub 5 cap I think reflects that. But that's a situation where somebody wasn't satisfied with having the opportunity to get their money out. So they went and created their own opportunity.

Okay. And just given the management transition that's occurring right now, just curious, the decision to pare down Houston and maybe the decision to sell shares. I know it's a small amount, at $60 a share. How did you guys come up with those choices? And was it more you, Dave, still making those choices, or was it a little bit of Marshall influencing it? Just curious now who has been championing what cause over there.

I would like to think I'm a dictator here. But our team that Marshall has joined, I think the rookie and the senior executives have worked together for something like 13 or 14 years now. And so we go for consensus on items, and I can't -- on decisions like that, and I can't remember when we had strong disagreements on anything like that.

So it was a management consensus on selling a few more Houston assets. Our list of dispositions is something we discuss regularly. We always go through Board meetings with it in our strategy sessions, and so I don't see that as anything that was dramatic.

Okay. And just a last quick one. Like you mentioned, like we talked about, selling shares at $60.

As I pointed out before, if you run the numbers, if you sell some shares at $60 or $60 and change, and do two-thirds equity, one-third debt. Invest that in development at an 8%, 8% plus yield, and turn around, and when that development is done, have created an asset that would be valued at a 5.5% or at worst a 6% cap rate, and you make that spread. The creation of value versus a very slight dilution of NAV for a small number is staggering.

And we'd be happy to later on run through those numbers with you. So selling lots of stock below NAV, no, that's not our strategy. But at a slight discount we you can make the kind of spreads that we can in our development program, that's something we will always be looking at.

Yes, I don't dispute the math on that. But my question was, when does buyback start making sense?

Well, you probably don't want me to get off on that lecture. Maybe you and I ought to talk later. We never rule out buybacks at some significant discount, but if you're borrowing money to do buybacks, it's a double negative whammy to your balance sheet.

If you're selling assets, especially older assets like this Northwest Point, we've generally got tremendous gains. If we close on this between $15 million and $16 million, our gain is greater than $10 million. So there's not as though there's a $15 million to reinvest in stock.

So that's where we're doing the 1031 exchanges. That not only defer the tax gain, but allow us to acquire properties that are newer in other markets which we believe have more upside.

So that's the short version. I can give you my lecture later if you would like.

I'll take that up later. Thank you.

Thank you.

Next we will go to Brendan Maiorana with Wells Fargo. Your line is open.

Thanks. David, if it's any consolation, I have always felt like you were a benevolent dictator.

Thank you.

So a question for Keith to start. So your $2.40 dividend, is it fair to think that is in line with your taxable income, excluding any disposition gains that you may have?

We do have some gains, but it's not that much. We're trying to defer where we can. I think this year, it included about $2 million of gains. But our NOI is increasing. We went through the numbers on the FFO per share increasing, and so taxable income is moving up, and I'm comfortable with the $0.60.

Yes, so I guess where I was kind of going with it is, it feels like probably selling assets to fund development. Given that most likely your asset sales carry taxable gains with them, you wouldn't have room with your current $2.40 dividend if you chose to sell assets to help fund the development. Is that a fair characterization?

Depends on which assets you sell, Brendan. We've run those data set. We've got a list, and in a number of those, we've looked at what our tax basis is. So you're right. The older ones will have pressure, but we can 1031 or reverse 1031, we learned a lot about the 1031 rules over the last few months into development land. And we've also -- so you can put it into the land in a new development, and not all of our sales will have large tax gains. So that's one of the priorities we're looking at, too.

And we like, and going back to an early question, in terms of Houston disposition, yes, a little bit of it is managing the size. A lot of it is where the market cap rates are. And if we can pare down older assets in a market where we're concentrated and roll them into new developments, I'm excited about the land we just picked up at World Houston. And developed to the kind of yields we're seeing, that's a great long-term NAV creator there.

Sure, I get that. Okay, so maybe you guys could -- maybe it makes sense to sell assets, and maybe you could use a portion of those proceeds to fund development. And then the other part of the capital equation, so this year you guys had done a really great job de-levering more than you needed to, right? So you're net investment growth -- .

Correct.

This year you could fund with increasing leverage a little bit, which is still pretty low. As you think about it where you get to at the end of this year without any ATM program then for Q4, are you able to move leverage up next year? Or do you get to a point where you probably to have match fund as you think about the net investment growth in 2016?

Brendan, we're doing all our 2016 budgeting property and Company right now. So a little early to come to any conclusions. But we certainly think that we have significant borrowing power going, if not all the way through next year, well into it.

But we will give you more detail on that when the fellows give you guidance early next February. So we're comfortable where we are, and hope by third quarter call next year, we're talking about something else.

Let's all hope that's not an issue and you guys can issue on the ATM at nice numbers. Thanks, guys.

Thank you.

Next we will go to Brad Burke with Goldman Sachs. Your line is open.

Good morning, guys. A follow up on the capital allocation questions.

Thinking about the current cost of capital as it sits today, can you give us directionally how we should be thinking about the magnitude of your development going forward? And is it fair to think that the comments being made about two-thirds equity, one-third debt, that's how we ought to think about the composition going forward?

Yes. I don't want to say that we would never change that, but yes, that's the targets that we're talking about today. So like I say, we feel we have a good bit of borrowing power. We don't have an exact number. If we do, we wouldn't put it out now anyway, because then would you remember it and ask us about it later. But we're comfortable with that conclusion.

But the total size of development, is there any reason to think that would decline materially from where you have been running over the last 12 months?

I would hope not. As we always say, the amount of development we do is just about 100% based on the amount of leasing that we do. We lease a building faster, we start the next one in the park faster. We lease it slower, there are delays in getting the next one going until we're comfortable with what's going on in that sub market. And that's why when you look at our development schedule, they just about all have numbers after the name. Because that's the -- sometimes we get out of sequence, but that's the number of the next building in the park.

Okay. That's helpful. And then a quick one on credit availability, Keith, since you were just out in the market with a private unsecured offering. I was hoping you could tell us what you were seeing in the credit markets. And whether you think the pricing for that type of issuance has changed much over the past few months.

As you know, the 10-year treasury has moved down quite a bit, but the spreads have moved up considerably. And it looks like our type deal, a 10-year interest-only deal, would be between 4% and 4.25% now. We're still looking at bank seven-year, five-year term loans, too, and then doing a swap with that on the fixed interest rate. And those are, I guess, seven years in the 3.5% to 3.75% range, and five-year below that. But rates are still good.

Okay. Thank you.

Thank you.

And next we will go to Alexander Goldfarb with Sandler O'Neill. Your line is open.

Sandler O'Neill. First, David, congrats on your farewell call. I'm assuming that you will be very happy to not have to talk any more publicly about Houston.

Yes, I'll bite my tongue at this point.

I'm sure the guys will give you grief for what you've left them to handle. But just a few questions here.

On the recycling -- I don't know if we should term it recycling as a Company-wide thing, or is this just Houston? So on the dispositions, should we think of you guys more broadly over the -- as long as the stock is where it is, of actively selling more assets portfolio-wide? Or most -- when you talk about dispositions, you're really specifically talking Houston?

No, we all -- we look at a priority in every one of our markets, and say which assets do we think have run their course in terms of growth and value creation. And we've got at least three assets that Marshall and I have talked about at length that could very easily be sold next year.

One of the things we do, which sometimes slows our sale, is we believe that with our size, squeezing an extra dollar out of each sale is important. So if there's a lease coming up for renewal, we want to complete it. If there's vacancy, we want to lease it. So things don't usually happen as quickly as you would like. But I would be very surprised if we don't have one or two, even three sales in other markets.

Okay. So as long as the stock remains as is, it sounds like you guys are going to use more dispositions rather than ATM for the equity component. Which then suggests that there's more lumpiness on a go-forward basis, because obviously timing dispositions is a lot harder than timing ATM issuance. So can you just give us some perspective on how much dispositions we should be thinking about? Because obviously it would seem to affect the timing and lumpiness on the quarters.

No, I don't think I can give that to you. Because we're just now, as I mentioned, putting together our numbers and our timing on things for 2016. And lots of times, as I mentioned, you hope to put a property on the market at a specific date, something happens, and there's a 30-, 60-, 90-day delay. Nothing happens as quickly as you would like. So that's not something that we're ready to do now. But a certain amount of that information will be in our guidance, which as I say, will be issued with our fourth quarter call in February.

Okay. Then the second question is, given your guys cost of capital and where the stock has been depressed for a period of time, how does this change the investment returns that you guys are looking at, or maybe it's not changed at all? If you can just give some perspective as far as, are you guys kick out more deals that get brought up to the investment committee. Or there really hasn't been a change because of what the underwriting has always been, the standards that have always been there?

I think the change has been that, as I mentioned earlier, that our acquisitions will be tied to reinvesting capital from specific sales rather than saying here is a nice asset to own, let's go buy it.

Okay. So the return thresholds haven't changed, it's just the timing of when you're putting money out has.

That's correct. We can do so much better, as we've said for years, in putting capital into development versus acquisitions. And previously, we were doing acquisitions because it filled some holes in markets and we thought had really good up side where we were unable to build. So our emphasis is going to be even I guess a little bit more on development going forward, as long as we're in the situation we're in today.

Okay. Great. Well, listen, best in your next life, and appreciate it. Thanks.

Thanks. Appreciate your thoughts.

Next we will go to Eric Frankel with Green Street Advisors. Your line is open.

Thank you. I would like to echo those comments, David. You've had a long, very successful career, and your shareholders appreciate your leadership and stewardship. So best of luck in your next endeavors. I'm sure you're going to be keeping a close eye on EastGroup's operations well into the future.

For sure, and thank you for putting up with some of my responses off-line to you.

It's required an increasing patience, but that's noted. I was hoping you could, Brent, maybe you could comment on the supply picture in Houston in a little bit more detail, specifically the north and northwest sub markets where World Houston and most of your portfolio is located.

Good question. Of the 5.3 million, it's still pretty well spread out. But the highest -- the market based rate right now is 4.7%, but the highest sub market vacancy rate, which is right around 8%, is up north. And that's a direct result of the new product that has come on-line. It's the most desired or was the most desired sub market, and was the most heavily built in. So there's a little more of the overhang of the development space, especially along that 45 corridor, which was a new pocket that people jumped into. I wouldn't really say other than that it's pretty well spread out across the city.

Some of the new starts have been in southwest sub markets, and then out east where a few people are -- the strength of the blue collar jobs and the port activity out there. So it's pretty diverse, but with the exception maybe a little bit of that overhang in that one northern corridor.

Okay. Thanks. Obviously, you have mentioned that your acquisitions are more or less driven by tax related issues. But isn't it somewhat difficult even in other markets to find well-valued properties or properties that you think are going to generate decent enough returns given where (inaudible) are today?

In every market where you own maybe at a 0.5 to 2.5 million square feet, they're assets that you bought at earlier years that in today's world have a little bit of physical obsolescence. Or you think you've run the value growth as far as you can go with them. And so it makes sense to always be trying to upgrade the quality of your portfolio.

We all used to use the expression recycling capital. I think you are going to hear more of that from us, and from other companies. There's always something that -- assets you would like to own and some that you have that you are ready to sell, and so we're like anybody else.

Right. So I guess you're saying that you think there is some sort of mispricing between older assets and newer assets? Is that generally what you are implying?

Well, the way we look at it as a long-term investor, or long-term holder of assets, that gets rewarded one of the three ways in growth from existing operations. That if they're assets that think are going to have less growth than the portfolio on average, then they're pulling down the rest of the portfolio.

So it probably makes sense, as a longer term investor, to recycle those assets into assets where you are going to have more growth on a quarter-by-quarter or year-by-year operation. And that's why, in a market like Austin, we think that the going in yields don't totally reflect the upside in the operations, and that is an attractive market for us to invest in.

Appreciate it. Well, I think there are probably other people in the queue, so I thank you very much for your answer our questions today. Take care.

Thank you, Eric.

Next we will go to John Guinee with Stifel. Your line is open.

Thank you. John Guinee here. First, David, I, in particular, am really going to miss you. So if you want to forward me your cell number, that would be great. We can keep in touch.

Good.

All my questions have been asked three times, and answered four times. So my question, David, is there a bunch of suburban office names out there that are selling at the 7% to an 8% implied cap and an FFO multiple around 10 or 11, what would you recommend to them?

I'll have to admit, I don't have enough experience in that area. I never have -- although we did earlier in our careers invest in office buildings, and that's why we evolved into a industrial REIT. Tough way to make a living. Industrial is a whole lot simpler, it requires less capital, and for us has proven to be a lot more fun. So they ought to hustle into industrial, I guess.

Great. We'll miss you.

Thank you very much.

Next we will go to Bill Crow with Raymond James. Your line is open.

Hey, guys, good morning. David, I'm going to echo everybody else's comments. And on behalf of Paul and myself, thanks for 20 or so years of relationship there.

I do have one question, and I'll apologize, because it is on Houston. But you can maybe expand it throughout the portfolio. And that is, if we go back to 2008, 2009, and into 2010, we were talking about watch lists and what the tenant conditions looked like. So has the watch list in Houston evolved over the past six or nine months? And I know you've only had one bankruptcy out of almost 200 tenants, but how do you assess the overall health of your tenant base there? Thanks.

Brent?

Yes, and you've hit it, Bill. So far, it's not been -- it's been the one tenant that we've had out of our portfolio, and it's not been an issue thus far, and it's not been an issue with bad debt.

Does that change going forward? We don't know. Obviously the longer the slump in oil prices is prolonged, does that stress tenants into next year? Again, no way of knowing right now. Knock on wood, the year, quite frankly, has probably gone better than we would have expected from that standpoint. So hopefully we're not jinxing it by talking about it today.

And I would add that, as you pointed out, the bad debt that we had in the third quarter was somewhat of an aberration to have two bigger tenants. And primarily, it was a straight-line write-off rather than a cash write-off. And they were both in different -- in Florida, but in different cities.

So we don't see that as any -- as any trend. And as we look through our whole portfolio, as companies that might be on a watch list, there doesn't seem to be any trend for whatever business they're in, which is the good news. Of always looking over your shoulder, like we did in 2008 and 2009.

Okay. See you in Vegas. Thanks.

Look forward to it. Thanks.

And we have a follow-up with Juan Sanabria with Bank of America. Please go ahead.

Hello. Thanks for giving me the quick opportunity for a follow-up. Just wondering if you can give us a sense of your 2016 expirations in Houston, where those are placed relative to market, as you see it today?

Let me jump in. First, that's not something that we look at or report when we say what rents we might be able to increase or have decreases there. The percentage of the Houston portfolio coming up next year is below our average as a Company, so that's a positive.

Yes, and I would agree with that. It's broad based, the tenant sizes are broad based.

It's a little early to have a good feel for how that will go next year, but I would just echo what David said. We're, as always, six to nine months out working on our renewals, and as you learn information, you deal with it.

Okay. And just one other quick follow-up. I think you mentioned, Marshall, maybe in your intro comments, of maybe a slowdown in demand or leasing in August, then picking up in September. Correct me if I'm wrong. I don't want to put words in your mouth. But any trends that you saw that drove that?

I know there's been some softening in the macro data. And I recognize your portfolio is very well leased and above 95%, but there was a slight dip sequentially. How should we be thinking about that slowdown you mentioned, and maybe the macro overlay?

I don't -- what we hear from the field and from brokers, and you hear it every year, is everyone says people are on vacation. When you get to late July and into August, and whether it's the decision maker, or our broker, or the broker on the other side. And usually, pick any time of year, the cynical side of me and people have a reason why bills are taking longer, but maybe this year it was actually true.

And then we got to Labor Day, and all of a sudden activity picked back up and deals got done, and the rates and the TIs came in at about where we expected. It was just a one-month hiatus, and then it was like someone turned the spigots back on again, and trains were running on time. So I don't think there's any macro trend or anything we can point to where people were nervous about the economy or felt better. It was the month of August was slow.

The old summer lull.

Great. Thank you, guys. I appreciate the time.

Thank you.

You're welcome.

There are no further questions in queue. At this time, I would like to turn the conference back over to Mr. Marshall Loeb.

Okay. Thankfully, I will thankfully get to echo some of the comments. I got to start as David's summer intern, and we want to wish David the best in his retirement. He will definitely be missed here, particularly here in about 90 days when we're back here all talking about EastGroup again. I'm happy for David. I am very appreciative and thankful for the opportunity to be here and to step into such large shoes, figuratively and literally. And with that, I will turn it over to Keith.

And I wanted to congratulate David on a great career. It has been a pleasure to work with him these past 30 plus years, and he has built a Company that has happy employees and happy investors.

Thank you to everybody. Thank you as always for your interest in EastGroup today, but for some of you, more than 20 years interest. Our success is just due to our people.

We have got an unbelievable team, and I will be looking over their shoulders. And as everybody said, this is my last call, unless, of course, brought back by popular demand, which I hope does not happen. But again, thank you, and I'm sure I will see a good many of you at NAREIT in a month.

And like I say, appreciate all of you, even some of the bad comments. Thanks.

This does conclude today's teleconference. You may disconnect at any time. Thank you and have a great day.