Eastgroup Properties Inc (EGP) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

Now it is my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead, sir.

Thank you. Good morning and thanks for calling in for our fourth-quarter 2015 conference call. As always we appreciate your interest in EastGroup.

Keith McKey, our CFO, and Brent Wood, Senior Vice President, are also participating on the call. Since we will make forward-looking statements, we ask that you listen to the following disclaimer.

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.

The fourth quarter saw a continuation of EastGroup's positive trend in operations. Funds from operations achieved a 3.3% increase as compared to fourth-quarter last year. This represents the 11th consecutive quarter of higher FFO per share as compared to prior-year's quarter. It also marks the 18th time in the past 19 quarters that we've exceeded the prior-year's quarterly results.

Per-share FFO was the highest in the Company's history in 2015, breaking the record we set in 2014. Further, our 2016 guidance would break this record. Our continued growth in FFO per share allowed us to increase the quarterly dividend for the fourth consecutive year 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 been now been positive for 18 consecutive quarters. And our increasing FFO in dividends are being driven by the success of all three prongs of our long-term growth strategy.

As to leasing, at quarter end we were 97.2% leased and 96.1% occupied. Occupancy has now exceeded 95% for 10 consecutive quarters, a trend we project continuing. This basically represents full occupancy for multi-tenant portfolio. As commentary on the market, we've never achieved this occupancy for this long a time period.

Drilling down into specific markets at December 31, our major markets of San Antonio, Orlando, Dallas, and Charlotte were each 99% leased or better. Houston, our largest market with over 6.6 million square feet, was 97.1% leased and 96.4% occupied. Supply remains largely in check in our markets. And looking further into these 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. While in a number of our other markets such as Fort Myers, Jacksonville, New Orleans, Tucson, El Paso, there's been little to no spec development since the downturn.

And the markets where the fear of overbuilding is the greatest, such as Dallas and Houston, we're seeing declines in construction while deliveries are being absorbed. To date the market discipline has been strong. Rent spreads continued their positive trend for the 11th consecutive quarter on a GAAP basis, and this marks our fourth consecutive quarter for double-digit re-leasing spreads, with 95% occupancy, strengthening markets, and disciplined new supply, we remain comfortable with this trend.

Fourth-quarter same property NOI rose on a cash and GAAP basis. In viewing fourth-quarter same-store NOI, please remember there was a large termination fee in fourth-quarter 2014, reducing GAAP results by 100 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 have reached 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 remains strong within our major markets. Within these markets, we're most encouraged by the activity in Orlando, Charlotte, San Antonio, and Tampa. In Tampa in particular is a market where activity picked up the second half of 2015.

The price of oil and its impact on Houston's industrial real estate market remain 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'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 Texas portfolio, including Houston. Our four core Texas markets of Houston, Dallas, San Antonio, and Austin finished the year with a combined 98.2% leased, while our Houston operating portfolio finished the year at 97.1% leased, unchanged from third quarter.

The major Texas markets outside of Houston remain unaffected by the slowdown in the oil and gas industry. The Houston industrial market continues to exhibit strong fundamentals. Despite the overall decrease in prospect volume in 2015, deals continue to be made across the market in a broad range of sizes.

The vacancy rate finished the year at 4.9%, up 20 basis points from its record low mark of 4.7% at third quarter. There was 1.4 million square feet of positive net absorption for the fourth quarter, which marked the 19th consecutive quarter of positive net absorption, and raised the total for the year to 6.3 million square feet.

Meanwhile developers continue to show restraint with the construction pipeline declining to just 4.6 million square feet at year end, which is less than half of the post recession feet, and down 13% from last quarter. This construction level represents less than 1% of the total market.

Rents for the quarter were up 3.3% on a GAAP basis, and down 2.2% on a cash basis. Same-property operating results exceeded our original 2015 projections, and finished the year down 0.3% for GAAP and down 1% for cash excluding termination fees. For the year, five development properties were converted into the operating portfolio that are currently 95% leased, with a total investment of $27.5 million at a weighted average yield of 8.3%. There are only three Houston buildings remaining in the development pipeline totaling 211,000 square feet. We are pleased with our current prospect activity, as we have proposals outstanding on most of the available space.

Looking ahead to 2016, we have already reduced our Houston scheduled expirations from 15.8% to 12.1% of the operating portfolio. Although the market continues to be resilient despite upstream oil woes, we are intentionally cautious with our Houston budget assumptions included in our guidance. Our portfolio leasing assumptions project a 30% renewal rate on expiring leases, which produces an average occupancy of 93% for the year. The renewal rate for 2015 was 57%. This equates to same-store projections for the year, down 1.1% on a GAAP basis and up 0.2% on a cash basis excluding termination fees.

Regarding dispositions, we have money at risk with a buyer for the sale of our Northwest Point Business Park for $15.5 million. Closing on this four-building park that was constructed in 1985, is scheduled to occur in mid February. We have also recently brought to market for sale our Westlake Distribution Center and America Plaza building that totaled 282,000 square feet, and would generate estimated proceeds of $19 million to $20 million. Assuming we successfully complete the transactions, we anticipate that these sales will close during the second quarter.

In summary, I anticipate 2016 will be similar to 2015, whereby the core Texas markets of Dallas, San Antonio, and Austin present growth opportunities, while we take a conservative approach to our Houston operations. Marshall?

Thanks, Brent. Given the intensely competitive and extensive 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 park. The average investment for our business-distribution buildings is below $10 million. We develop in numerous states, cities, and sub-markets. And finally we target 150 basis point minimum projected investment return over market-cap rates.

At December 31 the projected investment return on our development pipeline was 8.2%, whereas we estimate the market cap for completed properties to be in the mid-fives or slightly lower. During fourth quarter we began construction on 100% free-lease building in San Antonio, and a Phoenix redevelopment with a total of 259,000 square feet, for a projected combined investment return of $13 million. Meanwhile, we transferred nine properties totaling 671,000 square feet at 94% leased into the portfolio. For the year, 17 properties transferred, totaling 1,419,000 square feet which are 96% leased today.

As of today our development pipeline consists of 14 projects containing 1.7 million square feet, with projected costs of $114 million, and of that amount we've already invested $80 million or 70% of the total cost.

Looking ahead to 2016, we project development starts of approximately $100 million. What's especially gratifying about these starts is that we can reach this level with no Houston starts, whereas in 2012, for example, our starts were roughly half the volume with Houston accounting for almost 90%. This demonstrates the value of our diversified Sunbelt market strategy.

As Brent discussed, with the industrial-property sales market remaining strong, we are actively moving towards reducing the size of our Houston portfolio. Beyond the three properties Brett mentioned, we continue evaluating our portfolio and will market additional assets later in the year as facts and circumstances allow.

In Phoenix we are losing two of our four interstate commons buildings through eminent domain, as a result of freeway expansion. We expect to physically lose the buildings in the near term, and are contesting the proceeds with Arizona DOT, so proceeds will take a bit longer.

Our asset recycling isn't simply limited to Houston, as we have two additional assets, one in Dallas and one in Southern California under contract, with total forecast sales price of approximately $12 million. As we recycle capital and diversify our developments, the portion of our NOI coming from Houston will decline, while the quality of our Houston portfolio continues rising.

With the tax gains created in Houston and Phoenix, we acquired two assets in Austin, Texas in separate transactions during fourth quarter. The properties, which are both 100% leased, total 335,000 square feet, with a total purchase price of $31.6 million.

We entered the Austin market in late 2014 and are excited to expand our presence. What attracts us to Austin is the combination of a state capital, a major university, high job growth rate, the most stringent development requirements in Texas, and the topography challenges. Over a long investment horizon we believe this ensures rising demand with constrained supply.

Keith will now review a variety of financial topics, included our updated 2016 guidance.

Good morning. FFO per share for the quarter increased 3.3% as compared to the same quarter last year. Our growth in FFO continues to be from development, acquisitions, same-property results, and debt refinancing.

Bad debts net of lease termination fee income decreased FFO by $419,000 compared to the fourth quarter of 2015 to 2014. FFO per share for the year increased 5.8% compared to 2014. Bad debts net of lease termination fee income decreased FFO by $1,731,000 or $0.05 per share compared to 2014. Same-store NOI increase for the year was 2% for GAAP and 2.7% if you exclude termination fees.

Our outstanding bank debt was $151 million at year end, and with bank lines of $335 million we had $184 million of capacity at December 31. Debt to total market capitalization was 36.4% at December 31, 2015. For the year, our interest and fixed charge coverage ratios were 4.4 times, an improvement from 4.1 last year. The debt-to-EBITDA ratio was 6.7 for the year. Adjusted debt to adjusted EBITDA was 6.1 times, and page 12 in the supplemental package shows those adjustments.

We are in discussions to borrow $65 million with a closing expected later this month. We expect the effective interest rate to be below 3.5%. Non-secured loan would have a seven-year term and interest only until maturity.

In December we paid our 144th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.60 per share equates to an annualized dividend of $2.40 per share. This was the Company's 23rd consecutive year of increasing or maintaining cash distributions to its shareholders. Our dividend-to-FFO payout ratio was 64% for the year.

Rental income from properties amounts to almost all of our revenues. FFO for 2016 is projected to be in the range of $3.93 to $4.03 per share. The midpoint of $3.98 per share represents an increase of 8.5% compared to 2015. Earnings per share is estimated to be in the range of $1.62 to $1.72.

A few of the assumptions at the midpoint are the following. Occupancy rates are projected to average 95.6%, down from 96% in 2015. Same property NOI increase of 2.8% for GAAP and cash. Acquisitions of $50 million of operating properties in the second half of the year, and we plan to fund acquisitions with proceeds from dispositions. Dispositions of $85 million, $47 million in the first half and $38 million in the second half of the year. Development starts of $95 million, and we plan to fund development with proceeds from dispositions and debt.

Based on our 2016 projections we achieved this with ending interest coverage of 4.5 times, an increase from 4.4 times in 2015, and debt to EBITDA of 6.4 times, compared to 6.7 in 2015. And if you use consensus NAV of approximately $64 a share, debt-to-total Company value is 33.8% at year end.

Usually we budget no termination fees and no bad debts. Since we have known termination fees of $401,000 for 2016, we projected bad debts to offset the termination fees, and additional bad debts to be similar to 2015. We have no known bad debts at this time.

Total G&A of $12.8 million, with $5.1 million projected for the first quarter. The first quarter is lumpy because of the accounting for stock grants, which is consistent with the past years. G&A for the year is less than 2015 primarily due to the accelerated investing in 2015 for the retiring CEO.

In summary for 2016 guidance, we project strong results in FFO growth and same-property growth, occupancy above 95%, strong development starts, attractive debt financing, and lower G&A costs. Now Marshall will make some final comments.

Thanks Steve. Industrial property fundamentals are solid and continue in improving in the vast majority of our markets. Based on this strength, we continue investing in and diversifying our development pipeline.

We remain committed to maintaining a strong healthy balance sheet, and towards that end we view asset recycling as an attractive avenue to fund development in today's environment. We like where we are, where our industrial markets are, what we're doing, and the results it's creating for our shareholders long term.

Finally as EastGroup continues its transition, I want to take a moment and thank one of our directors, David Osnos, who after more than two decades is not standing for reelection. I personally learned a lot from Mr. Osnos, and we will all miss his leadership.

We will now take your questions.

(Operator Instructions)

Brad Burke from Goldman Sachs.

Good morning, guys, thanks for taking the question. Just to start, wanted to get your general thoughts on the current market cycle. We're seeing some of your peers indicate that they're going to pull back on development starts, they're going to focus on de-levering, and your guidance indicates a different approach.

Is it fair to assume that you're maybe more bullish on the market, or do you think there are some things specific to EastGroup that make you more comfortable to push on development and take on more debt?

Good question, thanks. A couple of thoughts on that. One difference, it's all relative, on most of our developments, as we mentioned, it's done by how is the existing building in that park leasing. So yes, we do remain bullish.

I'll use Charlotte, for example, we have a building under construction, we've got good activity on it, so it's really done at the micro level and not out of the corporate office in Jackson of how fast do we start that new development. So we feel comfortable about that.

I respect their thoughts. We're certainly mindful of leverage, and as Keith pointed out, we're projected at the end of the year to end up with better debt metrics, if you look at debt to EBITDA or times fixed coverage, times interest coverage.

And then the other thing that we like, if you look, it is -- it's very -- in page 15 of our supplement, anecdotally it's felt like we've done a lot of leasing year-to-date, but at the bottom of page 15 in the month of January, we were able to push through, our team did, 760,000 square feet of leasing.

That's the largest number we've had, so we feel pretty good about where things are going. That's a little below 40% of the amount of leasing we did all of last year, and it's not any one or two big leases that are driving that.

With that, and we've pushed our teams, again, if you're worried about the economy we've tried to get out ahead on renewals as best we could. We also, if you go back further in our supplement, our 2016 expirations are down about 180, 190 basis points, to about 11.5%. So we feel good about the start of the year.

We're certainly nervous about the economy and not less so about supply, and we're mindful of the balance sheet as well, but where we see the opportunity to develop to call in an 8%, where cap rates are holding in the low fives, we think that's the right long-term decision for our shareholders.

Okay, I appreciate the color. And just one of the comments that you made, Marshall, you had said an intensely competitive and expensive acquisition market in your opening comments, and it looks like you're guiding for $50 million or so of operating property acquisitions, which is a slight uptick versus last year. So just wanted to try to reconcile the increase in acquisition guidance versus that comment.

Sure. It's really driven -- I would say twofold. We are not in the acquisitions market, unless it's, as we dispose of assets, if we have some 1031 gains we need to deal with. Our first bucket we would fulfill would be towards development, maintaining the balance sheet.

But if we have some tax gains we need to deal with, and so that's a rough estimate at $50 million. If we miss that target this year, I would take that is a good sign. It means we're able to push out a little more in the way of developments, and do less in acquisitions and fund -- maintain the balance sheet and development. I think that would be a good outcome, but that's our first cut and we will keep you updated during the year.

Okay, I appreciate it, thank you.

Manny Korchman from Citi.

Morning, guys. Marshall, maybe going back to your comments on the cap rate differential between where assets would trade and what the stock is trading, or where you feel the value is being attributed. Have you looked at doing a larger portfolio sale or portfolio JV or something to move down the path faster than doing a one-off asset sales at whatever those values are, $10 million to $15 million a pop?

Yes. We've looked at it, it always gets a little tricky to manage through our system a larger disposition and then manage the proceeds in. But it is something we've discussed and I wouldn't rule it out that we would do it, but it's not assumed in our guidance, if that's fair.

And on the joint venture side, we've also had that discussion. But we also realized and value a lot of our shareholders' feedback, and a lot of I think what served us well is keeping a simple straightforward strategy. Most of the time, most of our environment last handful of years, we've struggled to find good places to place our own capital.

We'd consider a JV, but then you end up with a partner and it's just more complicated. In terms of just a purely financial partner rather than someone that owns land and we develop the building, that would have more appeal to us than bringing in an institution as a JV. So thanks.

Keith, maybe going back to your comments on the bad debt expense assumptions. I'm a little bit surprised that you wouldn't sort of put a little more weight on what's happening in Houston, especially given your commentary of sort of a lower renewal rate than this year.

So maybe you could walk us through exactly how you guys -- it sounded like you matched lease term fees, and then just threw on a 2015 number, but the environment certainly has changed, so if you could give us some comments on what you're thinking there.

Yes, we've got $1.1 million bad debt provision, and normally, as I said, the $400,000 of termination fee income, when we start out beginning of the year, we don't project any termination fee or any bad debts, and hope they offset each other. Well we jumped out at $400,000 so we said well we ought to provide $400,000 of bad debt to offset that.

And then as you said looking at Houston and various other markets, we are showing good increases in occupancy in some markets, and thought we ought to provide some bad debt similar to percentage of revenues that we had in 2015. That's how we came up with a number, but we want to be transparent and say that we do not have any known bad debts at this time. So hopefully we are off $1.1 million on bad debts.

I would just add to that in terms of Houston, we had just one small bankruptcy in 2015, thankfully, and we continue to have a clean AR, really not a watch list at this time. So even though we have assigned some bad debt, just in a lump figure [Houston], we don't -- we are not, that's not directly assigned to any tenant problem right now, thankfully, so our tenant base continues to be strong, resilient, and thankfully pay their rent on time.

Right, thanks, guys.

You're welcome.

Juan Sanabria from Bank of America.

Hi, good morning. I was just hoping you could give us a little sense of where you're seeing the cap rates for the couple of Houston assets that are being negotiated or have been negotiated, and what we should think about those same cap rates for the balance of the assets you may look to sell?

And just a last kind of ancillary point to that question, is why not sell more sooner? Why hold off putting assets to market for the balance, for the second half of the year?

I'll take the first part and maybe let Marshall [at] the pace of it. Our Northwest point sale of $15.6 million, we have money at risk. That's an upper-six cap, but that has about a third of that project is service center. It's performed very well for us, it's well located, but it does have the service center component, it has some obsolescence to it. So I don't mind talking about that cap rate.

The West Loop and America Plaza projects, I don't want to get too many specifics because we actually have those on the market now. We haven't quite called for offers. I would even surmise that there are people interested in buying those packages listening in on the call, so we hope that the market will be the market.

But we certainly think it will do better than Northwest Point because they are true distribution properties, well located. We mentioned that $19 million to $20 million in total proceeds, but we will talk about cap rates more once we have money at risk or close the transactions.

And I will comment, Juan, at least in terms of the timing, we believe we are moving as quickly as we can, or that's our goal.

Certainly we've got two that we brought -- one, as Brent mentioned, one with funds at risk, hopefully closing later this month; two that we've brought to market year-to-date; others that we are working on a couple of things that kind of complicate or take the process a little longer, is several of the assets are under secured mortgages, so we are working through now freeing up those assets, so that we can deliver them to the market.

And then on other assets, we want to be -- we've created a lot of value there. We want to be mindful in terms of proceeds and where we've got some leasing role or vacancies to fill. We are not -- certainly not a fire seller of our assets.

We'd like to get the renewal done, and Juan, when Brent and I were talking, we can't go to the tenant and say we're ready to bring your asset to market, can we renew your lease today, without giving away more than we should.

So some of it is we -- probably with a broad brush, when I use the phrase 'facts and circumstances' we're working through the lease role and the mortgage. And the other thing we learned on the asset that has funds at risk, a number of these are older assets, so kind of learning through that process, we've gone ahead and ordered the title, the survey, the environmental, because when you're getting into a 20- to 30-year-old asset, or even some that could be newer, all of that takes time to clear off, especially if our buyer is getting a mortgage and things like that.

So we are working through, and we hope to have more than just these three on the market later. But, long-winded answer, those are some of -- just a little mix and match to get these to the market and ready for the brokers to do their job.

Great, thank you, I appreciate that. And just I wanted to follow up on a point you guys raised about a Phoenix eminent domain issue. If you could just help us quantify how much NOI you're potentially losing and where the expected proceeds sit today and the timing.

Yes, I know for timing, two or three parts. It's two of the four buildings in our Interstate Commons project. And proceeds, I believe, we are kind of at $8.5 million to maybe $10 million. I think the state is about $8.5 million and depending on how you value it, those are our values for the assets are closer to $10 million, and we really thought it would happen before year end.

We're kind of at the mercy -- it's Interstate 202 that the city is widening, and finishing the loop around the city. So that's what we're waiting, any day now, to get notice from Arizona DOT. Keith?

NOI for 2015 was about $420,000 for those.

Okay, great. Thanks, guys.

Craig Mailman from KeyBanc Capital.

Thanks, guys. Keith, question on the bad debt follow-up there. How much -- is that all flowing through same-store, and if it is, how much of a drag is that relative to the [two six]?

We put $350,000 against same-store and the rest is just a general reserve.

So how -- what kind of swing would that give, if you back that out, say you guys have no bad debt?

Bruce will calculate it while we're talking, and I will say it would he gets the number.

Another thing I'll mention, Craig, this is Marshall. What's interesting is we were looking at our same-store numbers. We feel like -- maybe again, and everybody hasn't reported, we're actually budgeting lower average occupancy this year. And again, it's 95.6%, which we feel is full, but if some of our peers have higher budgeted occupancy, if we maintained our occupancy that would add another 50 basis points to our same-store NOI.

We were just kind of working through our ratios, and so that's one thing again, we hope it's hard to call 95.6% conservative occupancy, I don't feel that, but it's painful to go to budget going backwards in occupancy and see the impact on our same-store numbers.

Got you. Marshall, as you guys look to sell some of these assets, you're not starting any new developments in Houston this year. What does that footprint look like on an NOI basis by the end of the year, relative to where you guys ended 2015?

In terms of NOI, at least in a percentage, we will drop back to about that -- again 17% to 18% of our NOI, depending on the timing of when some of the new development comes in. We've not set a firm goal in terms of Houston as NOI, we want to get below 20%, this gets us into the high teens, and really as Brent and I and the team have talked, we think we've got some great land in Houston still.

If the stars aligned or we got a build to suit or a big pre-lease, we are not assuming any Houston starts, but again I don't want to shock you later in the year if we say we are building something, but it would be something where we've got a building pre-leased and were delivering it for someone on land we already own. So that's the hesitancy too, we could still move a little bit forward in Houston if we added World Houston 43 or 44 or something like that.

Okay, and then, Brent, the lower retention rate in Houston, is there anything that's known, I guess maybe that's tied to the $400,000 lease term fees, or is that you guys being conservative as you stand here and just haircut it in half of the retention rate you had in 2015?

Well it's a combination of that. The 30% one, that's just us being conservative. We do have some known vacates like you have any time going into a year. Tenants generally six to nine months out will give you a heads up that, hey we're not going to renew. Very rarely does a tenant come along and say, hey I want to rent your space nine months out into the future, so you tend to know the known vacates before the replacement tenant. So it's really just a combination of that.

If you take the 30% renewal assumed rate going forward and combine that with, we've already successfully reduced our rollover from 15.8% to 12.1%, that comes up closer to a 45% to 50% renewal rate. So part of that being that low is that we've already accomplished a good bit of it, and as Marshall said, just want to be very proactive in getting these done.

We remain, I would even say almost surprised at how strong the market has continued to hang in there. So again we just thought that would be a conservative approach, and quite frankly we thought if we had a very high number it would be met with skepticism anyway, so we thought we would just try to avoid that.

Okay, thanks, guys.

Brendan Maiorana from Wells Fargo.

Thanks. Good morning. Brent, the follow-up on Houston. The 93%, I think, did you say that was average occupancy, and if so, is the year-end target much different than that 93% average for the year?

It is average 93% and I would just point a couple things. One, that's being driven a little bit lower. We took, again, a conservative approach to our lease up of the buildings that are remaining in the development pipeline. So that takes into account those buildings rolling into the portfolio and not being fully leased. So if you carve that out, our same-store occupancy projections for 2016 is 94.3% so that's actually higher.

So it's just a combination of those. We show a range -- we basically project that our 96% to 97% right now is on the higher end, and then that would swing more towards midyear with some known vacates, and then come back up toward the end of the year.

But I'd also stress that our 93% average occupancy and our 30% retention rate, we're just putting those numbers to stipulate what we have in guidance, but that's our budget, but not our goal. So every day I drive into work, we are seeking to get everything leased and to make everything successful. You're not going to do it at 100% but these are just simply the assumptions we put in and they are the budget, not the goals. So our team certainly is looking to outperform that, ideally.

Sure, that makes a lot of sense. And given with that same-store occupancy amount, your NOI targets are higher than what the average occupancy change will be, or at least per guidance. I guess that assumes that your rent spreads are likely to move positive, or you've got those cash rent bumps in the leases that are going to drive your overall rental rates up?

One thing that we've been very successful with as far at post recession is getting annual rent bumps in Houston, and we have that in a significant portion of our leases. So quite a bit of that, Brendan, is just quite frankly, not necessarily marked to market, but just embedded annual rent bumps that is upticking across the entire portfolio, raising the NOIs even on projects that have no rollover and no rent comparison for rent increase or decrease. So that's a good portion of it.

I feel like rents are going to be similar to what you saw fourth quarter where maybe small single digit cash downward pressure, but small single digit positive gap on a GAAP basis, where we're still marking against some recession laden leases where there were some rent incentives. My gut is just that rents are going to kind of be flattish, and that's basically how we've dialled that in.

Thus far we've been trending a little better than that, when we reduced from 15.8% to 12.1% on reducing that rollover, we been slightly positive cash and even stronger than that on a GAAP basis. So we'll see.

Brendan, I would add to that, if it's helpful, just in meeting with investors, I would say there's a disconnect. We'll see who's right or wrong, it's hard to predict the future, impossible to, but most people expect Houston rents to be much worse than what we've seen year to date, like double-digit down.

Where Brent was saying, day to day we keep waiting for it, and it may hit us and hit us hard, and we're watching it and cautious about it, but so far Houston has been more resilient than my impression is most people have expected it to be.

Maybe just last one for either, on Houston, for Marshall or Brent. Is there been any sort of notable change in psychology of tenants or anything like that in the past couple months, since we've seen oil -- maybe that was in that -- sort of hovering in that $45 to $50 range, and then kind of mid or early November started dropping down and now around $30?

There has not been, really, everyone is pretty much resigned themselves to the fact that whether it even bounces up $30 briefly and bounces back, everybody is expecting it to be in that, say, $20 to $40 range. No one at this point -- no one knows where is going to be, and I think the volatility in it right now is just baked into the psyche.

At this point most companies are taking a conservative approach to their operations to what they are doing, which I think is leading to a lot of tenants in the market to sort of staying put in their existing spaces, but I think the psyche is what it is right now. I think people are thinking 2016 is going to be a sideways type year and hope for market demand to pick up in 2017 and 2018, and then hopefully things would uptick, but we will see.

We are seeing is Houston last year I believe the number is 23,000 positive jobs created, and what we are seeing, again this is a local economist predicting 20,000 to 30,000 jobs created this year, positive, so again net-net it's positive jobs, and where our portfolio is on a macro level, we usually need that local metro area GNP to continue growing. So we are glad to see or happy to see Houston. It was adding 100,000 jobs a year through the upturn, and now it's down to, call it 20,000 to 30,000 this year, if that's helpful.

Sure, great, I'll get back in queue. Thanks, guys.

Alexander Goldfarb from Sandler O'Neill.

Good morning. Just some follow up on the Houston. So, Brent, as you guys are doing the renewals, are you seeing when tenants are choosing to not renew with you guys, is it because they are being lured by deep price discounts from other landlords, or is it a change in the tenant's business model that the current space that they have with you guys doesn't make sense?

On the known vacates, it's been really more of actually tenants that plan to consolidate or downsize. I'm just looking at my summary here of those. We've got companies downsizing, some of it is consolidating. Like we have a large oil and gas oriented tenant at World Houston, they're building a large campus to the east of us along Beltway 8, and they are going to move in and consolidate into that master plan campus.

It's more so just downsizing. We've only had one or two tenants that have been quote leaving the market type scenario. But again, you know that information early, but you don't have to guy that comes along six or nine months ahead of time, and say, hey I'm going to be the guy that releases it.

So it's been and I would point out too, that those aren't all just oil and gas oriented companies, it's still pretty broad brush of the different industries that are represented there.

Okay. Bigger picture, now that we've had this market volatility for about six months or so, across the different regions, have you noticed the change in the tenant demand, or their desire to lease space? Has anything changed at the local level, or for the most part this previously -- David would say, oh what happens on the stock market, are -- your tenants don't even -- are aware of it. Just curious now that we've been six months of this, if it's resonating at all and if it's impacting any decision.

Are you speaking of Houston in particular there, Alex?

No, speaking across all the markets.

Okay. Brent, I can tag team it, even. I would say across markets we are -- January was maybe one of our best leasing months we've had ever. If we weren't public, we've said, looking at last year we -- we are, but we would, if you didn't watch your stock price, it's probably the best year the company's ever had.

So we are 97% leased and we've never been this full for this long, as we mentioned, north of 95%, and our guidance this year has remained 95%. So I think most of our tenants, maybe a couple thoughts, most of our tenants are still in their space.

Bankruptcies haven't been abnormal, knock on wood, Houston or any of our markets. So it feels pretty good, if anything, as we looked at our statistics, what's maybe a little interesting -- we've always assumed a 12 month lease up on a new development, and maybe there for a while when Houston was so red hot, we were -- we would finish a building and lease it well under that 12 months. We've reverted a little more back to the norm, where it taking us a year to lease our developments out. Not anything alarming, but back towards a norm.

The other interesting statistic we were looking is our percentage of renewals. If you went back a handful of years ago it was about 70%, and now we are up in the low 80s. So in times we thought, you read the headlines, there's enough in the world to scare you to death, to do a three-year renewal and just wait and see, whether it's China or North Korea or the presidential election or any other things, that our renewals have actually gone up pretty markedly over the last three to four years.

Okay, and then just final question on funding. So you guys spoke about the potential for $50 million of acquisitions, it sounds like it's all 1031 related to the $85 million of dispositions. You also spoke about $100 million of starts, not obviously all that gets spent this year, but it sounds like you got, call it net $35 million in proceeds from the disposition. Can you talk about the balance for funding the development starts?

A lot of that, you're right, some of it I guess, the tricky part would be timing. Most of our $100 million in starts, the vast majority of it we already own the land, so that's already been paid for. Or think of it this way -- a couple of the pieces where it was our dispositions minus our acquisitions plus development, and I would say what gets lost maybe in that calculation is a fair amount of our developments, we already own the land so we've spent those funds.

And then a number of those starts, or even later in the year, so a lot of that spend will hit 2017 or later, further as we do the lease up on those buildings. So it's not quite as apples to apples comparison, if that makes sense.

We also, we think there's room within the debt. At the end of the year, as Keith ran it, we do add a little bit of debt, but we like that our debt metrics actually improve. Some of that is moving away from secured debt to unsecured debt, and the rates we're able to get. But that's really the financing plan and we are certainly mindful of it and watch it, but that's why we looked at debt to Company value, using a consensus NAV fixed charge coverage, as well as debt to EBITDA.

Alex, to add to that, we're doing that at 7.5% to 8% call it returns, pick a market where it is, those properties would trade at a five to mid five cap rate range, so we're doing this in what we feel very lucrative or very value friendly situations. So we're not doing this on what we view as thin margins. We feel like we are creating real good value there.

Okay, appreciate it, Brent, thank you.

Eric Frankel from Green Street Advisors.

Thank you very much. Marshall, I was hoping you can comment on the Phoenix redevelopment project and how that -- it looks like a change in methodology in terms of how you market that. Does that affect same-store results at all?

Yes. I guess what happened, it's an older building, it's about 124,000 feet, it was, I guess I'll walk you through the history. It was a three tenant building when I was involved in the acquisition eons ago. Thankfully one of those tenants grew as a manufacturing tenant, grew to the point where they were using the entire building.

They got acquired and vacated the building this fall. And then really looking, it was an older building. We are doing pretty material work to turn it back from a single-tenant manufacturing building, so that it can be a multi tenant business distribution building again.

So given the amount of work, we felt it was really more, actually just more descriptive to call it a redevelopment than tenant improvement. That's why it got classified that way, and you are right, when it rolls into the redevelopment, we will pull it out of our same-store numbers and that's really -- I don't know -- I've only been back less than the year still, but I believe it's the first time we've done that. I think we did it on an acquisition and first time on an existing property. It happens infrequently but we felt given the amount of work, we needed a better label than just tenant improvements on it.

Understood, thank you. I was hoping you could also comment on development in general. It certainly seems like, yes, there's probably more discipline to [buying] general than task cycles, but it certainly seems like land values are pretty expensive, and it makes yields on new development projects pretty tough. I was hoping you could comment on that market in particular. Obviously (inaudible) not Houston, but certainly your other markets.

You are right. We are watching our land acquisitions carefully and there's no steals out there at this point the cycle on land values. We've been happy to maintain our development yields around 8%, but we will probably get some pressure on those over time to move towards into the 7%s.

We still think, what we're hearing from the brokers we work with, the CBREs and HFFs of the world, the cap rates have held firm in the vast majority of the markets, being in those, depending on the market about low fives and into the fours in California are lower.

The cap rates are holding firm, and our policy has been for about a year now, there's really no land that we are banking, that anything we are acquiring, because of those land prices and the carry we would have on it. And really where we are in the cycle, there's not land -- never say never, but we're acquiring with the thought that we will build on in two or three years.

So we are seeing a little bit of downward pressure, we will going forward on the yields, not so much in the current pipeline as what we're looked at forward given where land prices are, and we're trying to be mindful of any new land acquisitions. There's nothing we will carry, and we'll try to build on it as soon as possible.

Understood. Do you have any land acquisition budget this year?

Yes, we will end up within that $95 million. There will be one or two where we would have acquisitions on. Again that's the budget and we will go through our investment committee and keep working from there. We could potentially acquire land this year if we felt it was the right opportunity.

Understood. Just to shift the conversation back to Houston, I know it's a tired subject, but obviously you've seen the really big diversion between how the public market values Houston real estate and how the private market values it. So I'd like to get your perspective, is there, and perhaps this for the investors listening to the call, is there a godfather type offer you'd expect -- you'd accept for some of your Houston real estate, even your higher quality assets that you plan to retain?

Sure. There's always -- if someone, I don't know if they're listening in on the call, and they want to make us an offer we don't understand. We are public Company, we are for sale every day on the stock exchange, and we would certainly talk to our Board. But we're not -- I think World Houston is going to drive, has driven a lot of our growth and will continue to drive our growth going forward, but if someone wants to offer us some crazy number, we would be irresponsible to not consider it.

Let me ask, where do you think Class A Houston investor real estate is priced today?

This is Brent. We haven't seen a lot of recent anecdotal examples. You tend have packages that don't come on to the market till the beginning of the year because they don't want to be on the market during the holiday lull.

We saw an off market transaction, I think it was in third quarter where [Hines] sold a portfolio to [Teachers] that was hair under a sub-five cap. I know Liberty paid around $100 million for project on the east side.

It still feels like for the Class A stuff that's in that 5 to 5.5 range, as we sell through, if we successfully complete Northwest Point, West Loop, and America Plaza, 82% of our portfolio will be EastGroup development parks dialled properties, which again we feel like is the top of the market.

We are very comfortable, Eric, it'll be like we always are, very conservative, measured approach. We have a list of assets that we plan to make it through, and as Marshall said, a few of them have some leasing that we need to button up to maximize value on the sales. We will continue on that approach.

Sounds good. I'll jump back in the queue, thank you.

John Guinee from Stifel.

Great, thank you, couple questions. One is, seems like there's an absence of common equity issuance, and I get the whole discount to NAV, but we also that the world is moving around a lot and no one knows where REIT values will be in the next three to five years. So are you dead set against raising equity at this price?

And then the second question is, you've got a lot of low basis assets you're selling, and you'll probably tax some of them but not all of them. Is the asset sales offset by some acquisitions going to push the dividend in any way?

Couple of questions. I would say at our stock price today, or as we prepared the press release, we assume no new equity issuance. So I hesitate to ever use always or never, because as soon as I do, I contradict -- I'm a hypocrite. But I would read into that, and we all assume no new equity issuance this year, you're right, we're mindful of the balance sheet but we're not looking at any equity issuance at these levels or near these levels.

Your second question in terms of pressure on the dividend, yes, I would think we will manage that through the year, but as we dispose of, again, using just our assumption, the $85 million in dispositions, depending how we roll these through in the 1031s, but I hope given where our guidance is, I hope we have upward pressure on our dividend that we typically address in third quarter with our Board.

Great, thank you very much.

Ki Bin Kim from SunTrust.

Similar question. In the past couple years in your guidance you've had -- in the past two years, you've had new equity issuance in which your stock price trading at a roughly 7% implied cap rate. When does buyback start to make it into the equation?

We've talked about that with our Board. It's certainly on the menu. It's hard to say an exact number. I think the reasons we've talked about that we don't like a buyback, we're not going to profit our stock price up.

Whatever the market feels like it's worth, it's going to drift to that number and without cash on the balance sheet which most REITs don't have, the fastest way to damage our balance sheet would be a buyback. So there's merit to a buyback, but if you said what gives you pause about a buyback, those are a couple of the things.

And then we have any number of investor meetings where they wish our float were greater than it is. They like the story, they like the history, they like the strategy, and then the one thing we can't change is they say, we wish you were a bigger entity, or if we buy and want to come back to buy more, your float's not there.

So not saying we won't do a buyback, but those are some of the things that give us hesitation, and it's certainly something we will continue to talk quarterly about with our Board.

Okay. As a follow up on a previously asked question, on the major rehab deal, the 124,000 square foot building, I'm not sure if you answered it, but is that project being redeveloped? How much of that impact you're seeing (in like) guidance numbers? Did it help that number or hurt it?

Is out a same-store? The calculation.

It probably, it was full until fourth quarter. I'm trying to think of when Hunter Douglas moved out of that building, but I want to say it was October, end of November, so it's probably a push on our same-store numbers. If we had it in this year, it's vacant. Today we've got prospects, we just had an open house with brokers at the building a week ago.

Vacant it would be pulling us down, you're right, but it was a single-tenant that moved and probably would pull us down a little bit last year. But 124,000 square feet out of 35 million or 36 million square foot portfolio, it would be minimal. It's on the west side of Phoenix, so even the rents would be lower than our Phoenix average, just because it's not on the east side of town too, if that helps. Long-winded way of saying minimal.

Okay, thank you.

George Auerbach with Credit Suisse.

Marshall, sorry I missed it but what are the four buildings in Phoenix being condemned and taken over, and is there much NOI coming from those buildings?

I want to say the number is about $400,000 in NOI, and you said when is it being condemned?

Yes.

We thought it was going to be right at the end of the year. I guess there's a process within Arizona DOT that they give us notice and then they take the buildings, so we are waiting on that notice to come from Arizona DOT and have really thinking, it would be any day now.

And now we are on to February 2, so we're still -- waiting. We think any day, and it's beyond -- out of our control, and it's a twenty something mile new freeway they are building that will run through our two buildings, so we are part of a huge process within the state.

And you said you're going to be contesting the proceeds. How does the accounting work on that? Is it still an NOI today, and when -- eventually when the building is condemned and taken away from you, do you just put on the balance sheet some sort of asset value that they are going to pay you? I just want to make sure when the NOI leaves the top line, we don't just sort of lose the asset value as well.

Sure. Good question. I know we are counting the NOI today because we are still collecting the NOI today. We would get sales proceeds for our building from the state, and really our contesting is really working with the appraisers as to what -- it's basically a bid ask equation to resolve.

It may get drawn out a little bit, the state has made us an offer for the building and we are negotiating that value. So at some point when they take it, we are counting the NOI but we will lose the building, have the cash, we may get a second payment in cash, depending on how that -- my understanding how that resolution with the courts work or that process.

And until then we are collecting income, and it's a 1033 exchange was the other process because it's an eminent domain condemnation, if that helps, rather than a 1031.

That's great, thanks, guys.

Eric Frankel from Green Street Advisors.

Thank you, just one follow-up question for Keith. Do you have a long-term balance sheet leverage target?

We're trying to stay under 40% at these prices. You're looking at stock prices, we are trading at very low multiples that we've had -- haven't had in a while, so we are looking at that, but we also look at debt to EBITDA which is doing good and projected to get better for 2016.

Interest coverage ratios which have always been real strong and are getting stronger. So we'd look at all of those and the debt to total market cap is the one that kind of bounces around on us a little bit. And we look at, but we are looking at short-term debt versus long-term debt, and we think we are in good shape.

Okay, I think that's it for me. Thank you.

And it appears we have no further questions at this time. I will now turn the program back over to our presenters for any additional closing remarks.

Thank you for your time and your interest on the call as always. We are available for any follow up questions or comments anyone has, and I appreciate your time.

This does conclude the EastGroup Properties fourth quarter 2015 earnings call. You may disconnect at any time and have a wonderful day.