Eastgroup Properties Inc (EGP) 2016 Q1 法說會逐字稿

Good morning, and welcome to the EastGroup Properties first-quarter 2016 earnings conference call.

(Operator Instructions)

Please note that todays call is being recorded. It is now my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead, sir.

Thank you. Good morning, and thanks for calling in for our first-quarter 2016 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. And since we'll 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 describe certain risk factors and uncertainties that may impact the Company's future results and may cause the actual results to differ materially from those projected.

Also, the content of this conference call contains time-sensitive information that is subject to the Safe Harbor Statement included in the 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, Keena. The first-quarter saw a continuation of EastGroup's positive trends. Funds from operations met our guidance, achieving a 4.6% increase as compared to first-quarter last year. This represents the 12th consecutive quarter of higher FFO per share, as compared to the prior year's quarter.

The strength of the industrial market can be seen through another solid quarter of occupancy, leasing volumes, which were our second highest in the past nine quarters, and GAAP releasing spreads rising to 16.5%. Our same-property cash net operating results have now been positive for 19 consecutive quarters.

The depth of private market capital looking to invest in quality industrial assets demonstrated by the quantity and volume we're seeing in our dispositions, which we'll elaborate on later, and finally, our increasing FFO and dividend are being driven by the success of all three prongs of our long-term growth strategy. At quarter end, we were 96.7% leased and 95.7% occupied.

Occupancy has exceeded 95% for 11 consecutive quarters, a trend we project maintaining through year-end. This basically represents full occupancy for a multi-tenant portfolio. As commentary on strength of the market, we've never achieved this level of occupancy for this long a time period.

Drilling down into specific markets at March 31, our major markets of Dallas, Orlando, San Francisco, and Jacksonville were each 98% leased or better. Houston, our largest market, with over 6.4 million square feet, was 96% leased and occupied. Further supply remains largely in check in our markets.

In sifting through the figures in our number of our markets you would see supply is largely comprised of big-box deliveries, being 250,000 square feet and above, so by design, we simply aren't competing for the same prospects. In fact, the figures we've read state that 75% to 80% of new deliveries are big-box deliveries.

Another market, such as Fort Myers, Jacksonville, New Orleans, Tucson and 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 construction while deliveries are being absorbed. To date, the market discipline has been institutionally controlled and remains strong.

Rent-spreads continued their positive trend for the 12th consecutive quarter on a GAAP basis. This also marks our fifth consecutive quarter for double-digit releasing spreads, with 95% occupancy, strengthening markets and disciplined new supply, we remain comfortable with this trend. First-quarter same-property NOI rose on a cash and GAAP basis.

This quarter was unusual, as the growth was due more to rising rents, as average quarterly occupancy fell 50 basis points, as compared to first-quarter 2015 to 95.7%. We expect same-property results to remain positive going forward, though increases will continue to reflect predominantly rent growth at a 95% to 96% occupied we view ourselves as fully occupied.

And 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 activity in Dallas, Charlotte, Orlando and San Francisco. Tampa, another market in particular, is a market where activity picked up in late 2015. The price of oil and its impact on Houston's industrial real estate remains a major topic of discussion. We thought it appropriate for Brent to again join today's call.

Brent is one of our three regional senior vice presidents and is based in Houston, 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 first-quarter at a combined 97.3% leased, while our Houston operating portfolio finished the quarter at 96% leased, down from 97.1% leased last quarter.

The Houston industrial market continues to exhibit solid fundamentals. Despite the overall decrease in prospect volume, deals continue to be made across the market in a broad range of sizes. The vacancy rate finished the quarter unchanged at 4.9%, which is just 20 basis points above its record low mark of 4.7% set third-quarter last year.

However, we have seen an increase in sublease space this year. For numerous reasons, this often does not compete with existing vacancies, but could lead to a gradual increase in the vacancy rate over time.

There was a two million square feet of positive net absorption for the first-quarter, which marked the 20th consecutive quarter of positive net absorption. Meanwhile, developers continue to show restraint, with the construction pipeline containing 6.1 million square feet, which represents about 1% of the total market.

Two-thirds of the construction activity is in the Southwest submarket, where we have a limited presence, and the southeast submarket, where we have no presence. For our Houston portfolio, rents for the quarter were up 15.6% on a GAAP basis, and up 5.4% on a cash basis.

As for the same-property operating results, we finished the quarter up 1.7% GAAP and 1.8% cash, which exceeded our first-quarter projections. Looking ahead to the remainder of 2016, we have further reduced our Houston scheduled expirations from 15.8% in mid-2015 to 9.5% of the operating portfolio.

However, we have a number of known move-outs later in the year, primarily the result of tenants either downsizing or consolidating locations. As a result, we are intentionally being cautious with our Houston budget assumptions included in our guidance.

Our portfolio leasing assumptions produce an average occupancy of 93% for the year, unchanged from guidance last quarter, with the anticipated low point being third-quarter. Same-store projections for the year are lower than our prior guidance, primarily due to the sale of fully occupied properties.

We are now projecting down 2.5% on a GAAP basis, and down 1.3% on a cash basis, excluding termination fees. From a development perspective, there are only two buildings in the development pipeline that are currently 49% leased. Our 2016 potential development starts for the company do not include any Houston starts.

We remain pleased at the geographical diversification of our development platform within Texas is replacing the volume we enjoyed during Houston's most recent growth cycle. Our projected 2016 development starts for the company include five buildings in Dallas and San Antonio, for an estimated total investment of $33 million, three of which broke ground in the first-quarter.

The fundamentals remain strong for the Texas markets outside of Houston and they remain unaffected by the impact from lower oil prices. Marshall will discuss dispositions in more detail in a moment, but I will mention that regarding Houston, we were very pleased with the quality and depth of the buyer pool and the cap rates we're seeing, which has ranged from a low 5% to a mid 6% depending on asset, age and characteristics.

Once we complete the sale of the remaining building under contract, our Houston portfolio will consist of 100% Class A properties, with 95% of the square footage contained in one of our five master plan business parks spread across three submarkets. In summary, for the remainder of 2016, I anticipate that the core Texas markets of Dallas, San Antonio and Austin will present growth opportunities while we continue to 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 manage development risk 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 submarkets, and finally, we target 150-basis point minimum projected investment return over market cap rates.

At March 31, 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 low to mid 5s. During first-quarter, we began construction on three projects located in Tampa, Dallas, and San Antonio.

These developments will contain five buildings with a total of 435,000 square feet for projected combined investment of $32.1 million. Meanwhile, we transferred four properties totalling 363,000 square feet at 68% leased into the portfolio.

As of today, our development pipeline consists of 13 projects containing 1.7 million square feet, with projected cost of $124 million and of that amount, we've already invested $72 million, or almost 60% of the costs. For 2016, we project development starts of approximately $95 million.

What's especially gratifying about these starts is 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 a diversified Sunbelt market strategy.

As Brent discussed with the industrial property sales market remaining strong, we're actively reducing the size of our Houston portfolio and also raising some capital through the disposition of nonstrategic land parcels. Year-to-date, we've sold five properties totalling 871,000 square feet, for proceeds of approximately $48 million.

Three of the sales were in Houston, which represented 785,000 square feet and $43.4 million in sales. We've also closed two landfills, generating $1.3 million, two additional property sales are in our pipeline, one in Santa Barbara with funds at risk, and another in Houston, which is in due diligence.

Other core land sales are in our pipeline, but not to the point that they are probable just yet. And in Phoenix, we're continuing our dialogue with the Arizona Department of Transportation related to the condemnation disposition.

Our asset recycling is an ongoing process. We're pleased with the year-to-date progress and we're continually evaluating our options, especially for their Houston sales. We view dispositions as an attractive source to help fund the development pipeline. Additionally, we are pleased with the match funding achieved within our 10/31 tax gain deferral's such that it's allowed us to reduce our projected 2016 acquisitions.

Finally, as we recycle capital and diversify our developments, the portion of our NOI coming from Houston will decline, while the quality of the Houston portfolio continues rising. Keith will now review a variety of financial topics including our updated 2016 guidance.

Good morning. I would like to comment on the equity research reports that reported on our first-quarter earnings release. We have about 15 analysts issuing quarterly reports on our earnings.

Most review the Company's guidance and make their own tweaks to our projections. For the first-quarter, we guided FFO per share in a range of $0.90 to $0.92, with a midpoint of $0.91. We reported $0.91 per share.

Most analysts projections were in this range, but there was one report that projected $0.98 per share, which increased consensus. That analyst admitted his number was high and would change it. Unfortunately, it did not get changed.

So some of the headlines from the analyst reports that EGP misses are frustrating when we meet our guidance midpoint and raise the midpoint for the year. Now that I've gotten that off my chest, FFO per share for the quarter met our guidance at $0.91 compared to $0.87 for the first-quarter last year, an increase of 4.6%.

For the quarter, bad debt expense was $124,000 and lease termination fees were $183,000. Our debt metrics remain strong. Debt to total market capitalization was 34.8% at March 31, 2016.

For the quarter, the interest and fixed charge coverage ratios were 4.3 times. The debt to EBITDA ratio was 6.7 times and the adjusted debt to adjusted EBITDA was 6.3 times. The debt to EBITDA ratio was higher than our run rate due to the extra G&A expense in the first-quarter concerning accounting for stock grants.

This is consistent with prior years and although we are budgeting no common stock sales on an annual basis, we are projecting year-end interest coverage and debt to EBITDA to improve from last year's results. Our bank debt was $166 million at March 31, and we reduced this to approximately $100 million on April 1, when we closed a term loan.

The $65 million seven-year unsecured financing has an effective interest rate of 2.863%. Also in March, Moody's affirmed EastGroup's issuer rating of Baa2 with a stable outlook. In March, we paid our 145th consecutive quarterly cash distribution to common stockholders.

This quarterly dividend of $0.60 per share equates to an annualized rate of $2.40 per share. Our dividend to FFO payout ratio was 66% for the quarter.

Rental income from properties amounts to almost all of our revenues, and we believe this revenue stream gives stability to the dividend. We have increased the midpoint of our FFO guidance for 2016 from $3.98 to $3.99 per share. This is an 8.7% increase compared to 2015 results.

We are pleased to be able to raise full-year guidance in spite of raising our disposition volume and significantly lowering acquisition targets. Earnings per share is estimated to be in the range of $1.96 to $2.06.

Now, Marshall will make some final comments.

Thanks, Keith. Industrial property fundamentals are solid and further 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 are pleased to see the projected improvement in our year-end debt metrics, even with no equity issuance. Helping us to maintain a strong balance sheet is asset recycling, which we view as an attractive avenue to fund development.

We like where we are, where our industrial markets are, what we're doing, and the results it creates in the long-term for our shareholders. We'll now take your questions.

Thank you.

(Operator Instructions)

We'll take our first question from Juan Sanabria with Bank of America. Please go ahead.

Hi, good morning -- question I guess for either Marshall or Keith. Just on the guidance front, you talked about raising the dispositions and lower acquisitions. But what drove the increase in the FFO per share guidance? What gives you confidence in the core operations to do so?

The same store we've got is going up. So that's one area.

We were able to also, on our debt, to lower the debt because we lowered our acquisition, and then we've got a better interest rate in the first quarter. And those are the two primary things.

And what's driving the implied acceleration in the same-store numbers? Is that a back-half pickup in occupancy or just the rental rate growth coming through on releasing?

Our occupancy remains pretty flat. I mean, we're -- as we kind of commented, Juan -- it's Marshall -- that we're 95% and kind of hovering in that 95% to -- a little over 96% for the year.

So it's really rent-rate growth that's driving the same-store. Some of it is lease-up in a few of our markets.

And then a lot of it is simply developments that we completed last year, finishing their lease-up, as well as some of the new developments that we're -- kind of the mix within our pipeline, leasing up as we finish those buildings.

So those, again, allowed us some of that to drop. We were happy to drop our acquisition target, and really as a comment on that, especially in this environment, where acquisitions are so pricey and it's hard to find value, especially in this point in the cycle, we were able to cut back on the acquisitions while raising our guidance. And it's really a lot of that internal leasing.

I think feeding into that also gave us confidence just the sheer volume. It was one of our best -- it was an odd quarter in that we had a lower retention rate than the last couple of years, at mid-60%s. It's probably more a return to the norm, but we did a lot of new leasing and it was our second most leasing volume, as I mentioned in the last, a little over two years.

Great. And just one last one for me -- what's your sense of the latest thoughts on Houston? Have you seen a deceleration in leasing demand? Any pickup in kind of the watch list tenants you're looking at?

What's the latest feel that you guys have? Has it improved at all with the rebound in oil, or is it still -- people are cautious -- any thoughts?

This is Brent. The rebound in oil is nice, but people have kind of mentally dialed in that oil's going to be, quote, down for some period of time, and it's nice to see it back in the $40s. But just as people weren't making immediate knee-jerks when it hit upper $20s or low $30s, they are likewise not running back out to ramp up their businesses at this point.

As far as demand, it's choppy across the board. What we are seeing, it's being led by consumer- and retail-type companies. Recent leases in the market include Lowe's, Amazon, Floor & Decor, Advanced Auto Parts, Simmons Mattress, CVS Pharmacy, again, some of those consumer, retail-related products.

On the flipside, logistics companies we're seeing either stay status quo or downsize. Presumably they are losing some contract business with oil and gas-related companies.

The upstream- and midstream-related companies obviously remain sidelined. Downstream companies, however, valve companies and those type groups, especially on the east side, are still in the market. The market's behaving like you would expect in a slowing market -- choppy activity, but activity still being out there.

In terms of a watch list for us, I mean, we remain very pleased and fortunate that, that has not yet still been a major concern. We had the one small default last year. We've got no defaults this year. We've got one tenant that we're talking to and watching, but -- and they are small in size as well.

We have seen an increase not only in our portfolio, but in the market, in sublease space. And as I mentioned in my comments, we don't often compete head-on with that. But it is a general precursor that as those leases come up, that the vacancy rate could gradually rise, which, at 4.9%, I've been expecting for a few quarters now.

But all in all, it's been like it's been; it's just decelerated. There's activity, but it's -- when you get a chance to make a deal, you just want to go ahead and roll up your sleeves and try to figure out a way to get it done.

Thank you.

Thank you. We'll take our next question from Alexander Goldfarb with [AMLS]. Please go ahead.

Hi. It's Alex Goldfarb, Sandler O'Neill. Good morning down there.

So just a few questions -- first, on the stock price, obviously you guys have had a good rebound here. And while it's still on our numbers a 10% discount to NAV, does -- and you guys haven't modeled equity issuance in your numbers, but still just given the travails of the stock recently over the past 12 months, in your view, does it have to get back to NAV before issuing equity is once again a possibility? Or are there scenarios in investment return where you would see equity issuance below NAV?

Good morning, Alex. It's Marshall. I mean, we're -- it's hard to say hypothetically. Obviously, we just put out our guidance. And right now we're assuming no equity issuance for the year.

What I really like about where we are, and Keith mentioned, by the end of the year, our debt metrics improve and we virtually issued no -- $6 million last year and nothing this year. So it's nice to at least be able to get within an NAV range; that's certainly one of the key factors we would be cognizant of, if we did pull the trigger and issue some equity.

But we'll look at -- we believe we've got our uses of capital pretty well covered between the dispositions and the development pipeline. So it's not a need, but it's certainly something in the last few weeks, as our stock price has crept up a little bit that we're cognizant of, and we'll look hard at NAV and we're glad we're in a position where we don't have to do anything.

Okay. And then, Brent, on Houston, I think you guys said you're 96% now, but you're expecting 93% overall in the year with a low point in the third quarter. Is it some of the dispositions that you're talking about that's going to drive it down, or are there a bunch of known moveouts that are really driving that number?

It's both. We are selling -- everything we've sold and plan to sell thus far is fully occupied. Third quarter -- we have 58% of our remaining rollover for the year in that quarter.

And it's just -- unfortunately, it's just stacked right there with the tenants that we do know that are going to vacate. Primarily, as I mentioned in the comments, primarily due to downsizing, there are a few things where like an FMC Technologies, their corporate campus is just being finished and they are going to relocate into that corporate campus. One tenant that was bought out by a larger M&A parent group, and then they are merging that into a larger facility.

So it's not really tenants leaving the market or tenants defaulting or anything like that. It's just for one reason or another, that's happening.

So third quarter we expect to be our low point. And we just have chosen not to aggressively put quick release assumptions in there, just given the current state of the market. And what we've budgeted isn't necessarily our goal, but we plan to work through that. But again, third quarter being the low point.

Okay, and then just final question -- first of all, obviously great to see the NOI pick up, the occupancy -- sorry, the portfolio performance improvement in the guidance. But just curious, in the past two months from when you had the fourth-quarter call till now, were you guys seeing these same NOI and leasing trend improvements, but you were nervous to sort of raise the bar, just given the overall macro environment? Or have these been improvements in the past two months that are in the portfolio where tenants and the markets are showing strengthening in the past two months?

A little more of the latter. I mean, I'll admit, I was pleased or impressed with how much leasing volume we got done in first quarter. It was more than we expected and 16.5% GAAP releasing spreads is our record. I guess I would have to go back. I'm looking at a chart -- back to pre-recession before we got close to that number.

So the markets were -- you're right, they were strong in January. It's not that we were doubtful on the markets, but first quarter's been a strong quarter, and kind of going through we've been pleased how disconnected or decoupled the Texas markets are from Houston. To be as full as we are in Dallas and 100% in Austin and things where people -- we still get questions about the downturn of oil and gas, and how is that affecting Texas? And it's really Houston that has the cloud over it.

But the other markets, and Phoenix market seems to slowly be picking up, and Brent's counterpart, John Coleman, would tell you Florida and the Carolinas are doing better than at any time since the recession. So it was good, and we feel like it's probably gotten better in first quarter, and that's helped fuel a little bit of our optimism.

Okay. Thank you very much.

Thank you. We'll take our next question from Manny Korchman with Citi.

Good morning, guys. If we think about your disposition program and we think about the book ends or limiters on that, is the limiter how much of that capital you see good uses for, or is it shrinking the portfolio, or is it somewhere in between the two?

It's not uses. It's really positioning. I mean, we've been pleased with -- really the cap rate is as afraid of Houston, it feels to us, as the public markets are.

The private markets, the quantity of bids we've gotten, and Brent's been the closest to this, and the quality of the institutional bidders on our Houston assets. We've sold our oldest buildings that are not in industrial parks that we developed at attractive 5%s to low- to mid-6% cap rates. So we'll keep evaluating it.

It's really been -- we didn't want to fire sell assets. So if something was 50% leased, we weren't going to sell it simply because it was. It was really where is that asset positioned and talking -- we would get brokers comments of value. So we'll keep working our way through it.

I think the trickier part is, we get -- at some point we're down to all Class A within parts we developed, and not that we wouldn't consider some of those, but we've really been selling from the bottom and we'll keep moving through that pipeline within Houston, and elsewhere, too. Obviously we're selling, and it's an R&D building in Santa Barbara that's in a joint venture. To a user, there's nothing wrong with the building. It's just not our core business, so we think it's a good time to exit that asset to -- it's a user who will be the purchaser of it.

Are there any portfolios that you're either actively marketing or thinking about marketing, or is this going to be sort of one-off sales?

It's probably one-off. What we are hearing -- again, we're trying to sell assets that 5 to 10 years from now you don't wish you still had.

What we're hearing on portfolios, where you get the pricing premium, the only reason to, I think, to put together a portfolio would be if you put together a portfolio of true Class A and you put it together in such bulk, at least through CBRE and some of the brokers, then you can maybe get a pricing premium. And we would rather sell the things that we don't think are going to fuel our growth 5 to 10 years from now. And that, that we would get the pricing premium, you don't want to sell things you regret.

Got it. Thanks.

Thank you. We'll take our next question from Blaine Heck with Wells Fargo.

Great. Good morning. Marshall and Brent, you guys talked a little bit about the developments, but can you just give a little more color on the starts that you have this quarter, and just your comfort with starting off speculative projects, as some of your peers have shifted to an arguably more conservative stance doing more build-to-suits.

Sure. Blaine, this is Marshall. Good question. I'll let Brent jump in.

What I really like about our development model, it's not driven from here at the corporate office. Someone in a meeting recently compared us to a residential subdivision developer. And I thought that was a good analogy where it will build, building houses, and you've got two under two sold and two under contract, so you build two or three more. It's really, as leasing goes, that will dictate our overall to bubble up and develop our development pipeline.

So our leasing activity has been strong. As long as the guys in the field are leasing the buildings, we felt comfortable. And a lot of times we'll finish a building, and recently we did one in Orlando, and we had two prospects for the last space, so it gave us the comfort to build the next building.

So in the ones where, Brent, I'll let you comment on what's -- we start -- it's mostly in your markets this quarter.

Yes, I would just add to that, Blaine, as we always say, it's really just based on what we're seeing on the ground and the activity. And our CreekView 1 and 2, we're really excited about. It's in that north Dallas high-growth corridor near Frisco.

At ParkView, we moved from 27% to 82%, and feel good about getting that leased up. And so feel good about -- we've been talking to a prospect about a portion of CreekView 1 and 2. We're just now getting ready to break ground.

In San Antonio, our Eisenhower Point project, we've raised now to 48%. And we're still not shell complete there, and we're still working with other prospects for space there.

At our Alamo Ridge project, we signed the build-to-suit last quarter for 100%. And again with our leasing activity, that Alamo Ridge 4 represents the final building of that little four-building park. And so, we're going in, like the yields, like the activity volume, and so feel confident about it and feel it's a good way to put money out.

We would certainly consider a build-to-suit. I think with our peers it's typically a larger, usually larger buildings. But that said, we completed Mattress Firm in Tampa at the end of the year, so we wouldn't shy away from that and we certainly have proposals out that can kick off a new building to get a large portion of it leased.

Most of our tenants, it ends up being a spec building and it's based on the leasing of the prior building. The one start, just to comment, in Tampa, we built Madison II and III, and I was just there -- it was two weeks ago now, and those are 95% leased.

And we think there's -- our view is there's a window in the market that there's no Class A space. Our buildings are ready and under construction -- that we'll deliver before any of our peers can deliver similar products. So the hope is the cycle lasts until we finish these buildings, and then we'll be one of the few guys with Class A space in the Tampa market.

So that's some -- if it helps, some of the thinking.

Yes, that helps. Then just a follow-up, in your development starts guidance, do you include any build-to-suit developments, or if you got them, it would kind of increase the full-year number?

If we -- we are talking to a couple -- good question -- they would -- something could slip, but they would be incremental to our starts. Everything that's in our $95 million is a spec development at this point.

Okay. And then just one more, Phoenix seems to have been a bit of a drag on occupancy and same-store NOI in the last couple of quarters. Does that have anything to do with the eminent domain issue you talked about, and can you talk a little bit more generally about that market and any prospective tenant activity you might have there?

Thanks. It's -- you're right. Phoenix -- it's been interesting to us, with Orlando bouncing back, I would have thought Phoenix is pretty much a tourism market, too, that it would have accelerated. It's been slow coming out of the downturn.

And when you talk to the brokers and the locals in Phoenix, it's such a home-building market and home building has been slow. So the market is okay.

It's about 90% leased, and that's where our portfolio has been. We've picked up about 150 basis points in terms of leasing since the end of March. So it's -- this first part of the second quarter we've picked up some leasing. But it's been a little bit slower, but we feel like it's picking up there.

And the slowness, it's not related to the condemnation. It's an odd process there. That building is, actually as we've moved the tenants out, the Arizona DOT steps in and assumes the rent until it's finalized.

So we're collecting rent from the State of Arizona, so it's not hurting us economically during the quarter. It's just resolving the valuation with the State is kind of where we are on it. And it's a government entity, so it's a slower process.

Okay, great. Thanks, guys.

Thank you. We'll take our next question from Brad Burke with Goldman Sachs.

Good morning, guys. First, Keith, about that analyst with the $0.98 estimate, I think that model update inexplicably got caught in limbo somewhere, so apologies for causing you aggravation. Overall I thought it was a pretty good quarter.

I guess, Keith, while I have you, the guidance, you're going to be buying less property, you're going to be selling a little bit more. Developments are the same; same-store guided up. You don't continue to not anticipate issuing equity. So just looking for an update on how you're thinking about leverage and how you're thinking about exiting the year with your leverage metrics, and how maybe that's changed versus the fourth quarter.

Well, they actually get better. We're projecting debt to EBITDA to be close to 6 at the year end. We've got the G&A hit in the first quarter was about $0.08 a share difference between first quarter and second quarter.

So you immediately jump up $0.08 in the second quarter. And then progress from there. So we're looking at better interest coverage. We're looking at better debt to EBITDA, and hopefully debt to total market cap will be great.

Okay. And then just question on rent growth, because a lot of the same-store growth to this point is just going to be attributable to rent growth. Can you tell us what you're expecting for growth across your markets for this year? And I know that you expect that your portfolio is going to outperform within your markets, but just what are you thinking about the magnitude of that outperformance?

It's -- Brad, this is Marshall. In terms of magnitude versus our peers, I will say the last, over the last five quarters, we've ranged on -- this is GAAP numbers -- from roughly 11% up to rounding to 17%.

And I think that -- I would say the mid-point of that I think will be -- certainly should stake -- again, where supply is, unless there's a recession or some national hit to the economy, we are projecting and what we expect is kind of that 12% to 15% we should be able to continue to raise on a GAAP basis.

Houston will be a little bit below that, but we're still thinking slightly positive to flat GAAP spreads in Houston. First quarter was a nice quarter for a GAAP number in Houston. But within the balance of our portfolio, the other -- as we get 80% plus, that the markets are still pretty strong and we're pushing rents pretty hard.

Okay, but what would that presume in terms of actual asking rent growth over the course of the year versus rent spreads?

Are you thinking cash rents or -- I'm trying to follow your question.

Sure. Just overall market rent growth, not the releasing spreads they're realizing.

I guess it varies so much by market, I don't know that I could answer that. I mean, it's really, too, also such a case-by-case basis within each suite that it's hard to say.

Some of our markets are rising pretty nicely. And some, it just depends on when that last lease in that suite was done, and what the next tenant needs in ways of tenant improvement. So it's a tougher one to answer.

Okay. Thank you.

Thank you. We'll take our next question from Eric Frankel with Green Street Advisors.

Thank you. I don't want to beat a dead horse on Houston, but just a couple follow-up questions. One, I know you say your cap rate range on all of your Houston sales that have occurred are in the works. But on the two that actually sold, they look a little bit lower in quality -- physical quality. Could you share what the rough cap rates were for those assets, as well as maybe the bidding process and who the buyers of entry were?

This is Brent. We were in the low- to mid-6% caps. And these were what I would describe B assets with age, with some obsolescence issues. Well located, 100% occupied, but maybe not what you would consider, quote, institutional. And as we mentioned, we are very pleased with the depth and quality of the buyers.

As you look at the property we have under contract now, it's a single building. Our America Plaza Building -- it's more of what I would describe of a Class A building, and that's going at a low 5% cap. It's not at risk yet, so you don't know until it's done. But again, we're very pleased. And that got very active to garner that.

And it's interesting to point out that's around $8 million or so in gross proceeds. A handful of the buyers in the end were groups that, that generally is below their threshold amount that they will purchase at because it's just not worth their time and effort. But given the difficulty that some of these groups have had placing their money, they pushed for it and pushed hard for it. So we are very pleased to see that.

Once we're done with these, as we spoke about, we're 95% of the portfolio within our core business parks in which we feel are premium assets there in the market. So as Marshall said, we have increased the quality of what's remaining to the point where we're just Class A parks.

That's very helpful color. Thanks.

I know you said you're going to essentially have five master planned business parks that are going to be basically your core portfolio after the sales are done. Is there any consideration if these buyers are so frustrated by not being able to find decent product that you let one of those go at let's call it a low 5% cap rate?

We would consider it. I mean, there's certainly -- they are not all five equal. I mean, we obviously have our favorites within those five.

Again, our barometer or compass has been -- what would you want to own 5 to 10 years from now? And do -- we like where we are in a number of these in the fourth largest city in the country, and so we hate to give up a position we couldn't replicate investing elsewhere. But there's some we'll consider, given the strength of the market, that we'll continue to recycle capital.

Okay. That's helpful.

The second question is related to acquisition and guidance. I guess you implied you would lower it just based on your ability to shield the taxable gains. Can you talk about that prospect a little bit? I understand it's a little bit tougher for REITs to reallocate capital from dispositions because of those gains and there's just some tax issues related to that.

We had two acquisitions at the end of 2015 in contemplation of selling assets, and we sheltered Northwest Point, Lockwood, and West Loop in that. And there was concern that we would not be able to shelter Lockwood or West Loop -- that they would fall outside the time period. But we were fortunate to get those in.

So that put us in real good shape as far as sheltering the proceeds against 1031 -- for 1031 exchanges. And looking forward, we've got a few assets that we can -- we've got some development that we can take care of with some of the sales. And we've decided that we didn't need to sell $50 million, and $25 million would probably cover the remaining assets that we have.

Okay. Thank you. That's helpful.

Final question is just related to eCommerce -- obviously that's become such a much more prevalent topic in the sector the last couple of years, and just want to understand what kind of impact you're seeing in your portfolio more recently?

Sure. I think it's -- I would say eCommerce and then really just a shifting of retail models, we are -- what we like about our buildings, as people talk about the last mile of eCommerce. By having smaller infill site locations -- if Amazon Prime is going to deliver within two hours in Dallas, for example, you can't be on the perimeter of Dallas and make it to someone's neighborhood within two hours. So it's early, early stages of it, but we're seeing RFPs through brokers for Amazon and tenants like that within our spaces, and we think other retailers will follow the format.

The other, again, and not as much eCommerce, but we've done a number of leases with Mattress Firm, for example, or other retailers where they have the retail showroom usually in a strip center, but they will deliver from one of our warehouses later in the day. And so that was, as I mentioned, one we just finished in December in Tampa. And that's the model we've got.

Brent has a space in Houston as well -- a number of those. And then also in Orlando, it's been interesting on the retail model, that Nike came in and took space in our Horizon Park, our Southridge Park and has continued to grow. And they are running van shuttles on the hour from our distribution building to the retail centers because it's cheaper to store the goods with us than in a retail center, and most retailers would rather reserve that space and have more doors.

So we think we're in a good space for -- is the retail model shift and retailers go to fewer stores, that they will have to deliver more quickly, and they will need to be infill sites, that the fulfillment center portion isn't mature, but certainly more mature than the last mile portion of it.

This is Brent, Eric. The only thing I would add to that is, what's good to see is that the change over the last few years, it's been more of a decentralization of that distribution. Going back 15 years ago, everybody's saying you got to be in Memphis or Louisville or something like that around a FedEx hub.

And as our consumer impatience, everybody wants something the same day, we're seeing with Amazon, of course, that trickles down to the other companies, with this sudden move to have smaller facilities in more locations, which plays more toward us with our building sizes. And so I -- I think that's a positive, that over time will benefit us, and I really don't see that trend stopping because I think people want it sooner rather than later.

That's helpful commentary. Thank you very much.

Thank you. We'll take our next question from Steve Sakwa with Evercore ISI.

Thanks. Good morning. Maybe this is for Keith -- if you take your first quarter and then look at the mid-point for the second quarter, you're at $1.89 for the first half and using the mid-point of the year kind of implies a fairly steep ramp to $2.10 or about $1.05 per quarter. Could you walk us through what the main drivers of that are, and what are the main differences maybe between the high and the low end of guidance?

Sure. In the second quarter, we're projecting $0.98 at the mid-point, and if you add back the $0.08 in G&A that we've already discussed, you're at close to that.

We are expecting a little down in NOIs in the second quarter, and so that would drop it from the $0.99 to $0.98, while we're projecting that. Then in the third quarter, we're projecting NOI increases, primarily a little bit of G&A savings in the third quarter, but it's primarily driven by property NOI. And then in the fourth quarter, NOI projections increasing with development coming on same-store, and those are the increases going from $0.91 up to the $3.99.

We haven't put out the third- and fourth-quarter numbers. I would hate to throw those out and be held to those. But we do expect $0.98 mid-point second quarter.

And just maybe the big swing factor I guess is between, say, the $3.94 and the $4.04 -- is it timing of development? Is it the same-store, kind of that's a range, or what's throwing the $0.10 range?

$3.94 to $4.04. Oh, the -- in our range. We just give us some leeway on both sides.

We pick a mid-point -- we go through a process where we ask each person in the field, tenant by tenant, space by space, to project what they are going to do, and what they think they can lease, the timing of it. And with 1,500 tenants, that varies a good bit each quarter. So we get that information, put that in, see what our financing needs are, G&A costs, put that in, and come up with a mid-point number, and try to give us some leeway on both sides of that.

Okay. And then just one last question for Marshall -- just in terms of the disposition market, and the types of buyers and financing needs, are you seeing anything as it relates to any difficulties -- fewer buyers coming to the table, more financing contingencies than maybe you saw six months ago?

I think the broad answer is yes. I think on our dispositions, thankfully we've had a pretty deep pool, kind of 8 to call it 12 or 14 bidders, and usually run through a second-round process and things.

Maybe again, what we've sold has been our lesser qualities, but thankfully -- lesser quality assets. We've seen a pretty deep bidding pool. What we're hearing through the brokers is really more of the B-minus and C assets with the difficulties in the CMBS markets -- that those assets are frozen and that there's not much transaction volume there.

But certainly within the A's, it is -- cap rates have stopped falling, but there's no movement in cap rates there, and actually maybe even down a little bit. The Tampa community, for example, they just set some record lows in terms of cap rates on quality product there. And the B assets is maybe what we're selling -- we're not feeling it, but we are hearing about it.

And of those 8 to 12 buyers that show up for your sales, are they pension fund advisors? Are they small, individual, local real estate businesses, entrepreneurs? Just trying to get a feel for the type of buyer.

This is Brent. I will jump in. It depends on the quality. When you get into the B-type assets, it can be a little bit mixed and less institutional.

But, for example, the building we have under contract now, which is, again, I guess you would term a Class-A type building, well located -- that kind of local buying pool gets pushed out very, very quickly because the institutional pension fund, life company, retirement plans, those type groups can get very, very active and very quickly push the cap rates down. So anything in that B-plus to A range drives -- right now is garnering very solid, all-cash buyers that are competing hard against one another to buy those assets.

And I'm just -- the outside, probably one of the smaller assets in Dallas and in Santa Barbara, it's users buying the buildings. We think we're getting good pricing, but it's users relocating into the buildings.

And then more of a regional buyer -- one of the ones, Brent, sold, within Houston, our Lockwood asset, it's the oldest asset in our entire portfolio, but it was a regional buyer that owned other product in the market and we really didn't even go through a full marketing process with it. We approached them through a broker and were able to move that one.

Yes, I think one quick comment to that, one thing that shows the investment community's desire to place money, that Lockwood asset, we had one of the three buildings, which represented about a third of the square footage that was rolling, and we knew was going to vacate next month, so we were going to wait, stabilize it, go to market. When people learned we were willing to sell it, we basically had people competing to take the leasing risk on their own and to get what we felt like was basically a cap rate as though the leasing risk were taken care of. But those people just wanted a chance to get in the door. So again, the activity is very good.

Okay. Thanks for the color.

Thank you. We'll take our next question from John Guinee with Stifel.

My question's been answered. Thank you very much.

Thank you. We'll go next to Eric Frankel with Green Street Advisors.

Thank you. Just one quick follow-up question. We noticed certainly in one of your larger peers reported results a couple days ago that the sub-California industrial market seems to be pretty strong. Just hoping you could comment on the drop in the short -- the drop in occupancy and the prospects for leasing in that space? Thank you.

Sure. You mean in Los Angeles? Is that -- ?

Los Angeles specifically, yes.

Yes, they are -- it's one property in North Orange County. It's our Walnut property. So we had a tenant vacate.

We've renovated the space. I guess the bad news on our timing, they are also doing road work -- some major road work right near our property. So we'll get it leased. It's two suites.

And then the other good portion of that vacancy was a tenant that went bankrupt in early March. So one tenant move-out, then we had a bankruptcy. So a strong market, and we should get it released quickly. And one was an unexpected -- any bankruptcy I guess is unexpected, maybe redundant -- but a bankruptcy within the last call it 30, 45 days.

Thank you very much. That's helpful.

Thank you. We'll take our next question from Ki Bin Kim from SunTrust.

Thank you. And thanks for taking my question. Just a couple quick follow-ups -- if I look at your same-store NOI guidance increase, seems like partially -- part of that was the bad debt expense assumptions. Could you just talk about what caused the decrease in that number?

The decrease in bad debt?

Yes, bad debt expectations for the year.

We had $280,000 I think each quarter, and the bad debt in the first quarter was $124,000. So we just took the $156,000 and reduced how much we were going to do for the year.

Okay. And in Houston, talking about some of the occupancy losses, some sort of clarity, but what type of tenants are the ones that are typically moving out first when you see that kind of downturn or trouble in Houston?

This is Brent, Ki Bin. It's across the board. We literally print it out and study it and see if there is a trend.

It's not just oil and gas companies. It's some building trade companies that maybe are expecting their business to slow and to downsize. As I mentioned, logistics companies looking to maybe downsize some.

A lot of this is coming from corporate level -- a lot of -- you talk to local guys, they say we need the space. Corporate looks and says we can trim down.

So it's not a particular sector. Like I said, the consumer retail side of the equation has been in the growth mode. But like I said, the oil and gas, light manufacturing, those type companies have been more on the downsize, logistics on the downsize.

One of the difficulties of leasing is you get the word from the tenant six, nine months ahead of time that they plan to vacate, but you don't really have the true opportunity to re-lease that space and try to capture your own downsizing tenant of someone else until you get closer to that expiration just simply because the space isn't available until that time.

It's our hope, as we get into some of these known vacates in the summer or third quarter that with our multi-tenant portfolio we hope to capture some people downsizing from larger spaces. We just won't know that until we get there and have the space available.

Okay, and just last question, for Marshall -- what are, if any, some of the incremental changes we can expect in EastGroup over the next few years? I know it's probably not going to be anything massive just on the incrementally, whether it be balance sheet or just a philosophy on how much development this Company should be doing or just overall size it should be in a few years?

Sure -- David Hoster is still actively involved in the Company, Chairman of our Investment Committee. David and I speak frequently. And I think we'll evolve. And I've worked with and for David forever, it feels like, right out of school, and so I think we'll evolve.

I love where our balance sheet is. I guess I'll tie back to the earlier question of where would you issue equity. It's nice when you don't need to issue equity.

I don't foresee any major changes. We'll continue to evolve. And we may exit a market or two, or enter a market or two.

But I don't think that would be any different than if David were still CEO. And it's certainly a team. It's not David or Marshall. It's -- Keith and Brent are stuck with me, too -- so it's all of us.

Okay. Thank you, guys.

Thank you. And we'll take our last question from Craig Mailman with KeyBanc Capital Markets.

Just wanted to hit on the development pipeline -- the under-construction yield came down 40 basis points relative to last quarter. And I appreciate your comments that you guys are still keeping the 150-basis-point spread relative to acquisition cap rates, but just curious, I guess partially this goes into your view of cap rates. But at this point in the cycle, would you be more comfortable raising that 150 closer to 2, and be more selective about projects, just given the possibility that your value creation could compress if cap rates rise?

I mean, we would. I think we could switch it to 2. If, for example, going with your numbers, but if we sold, and I'm just looking at just what's in our under-construction pipeline in those markets, we would be well below a 6% cap, even there. So I mean, we target 150, but really in kind of looking through it, in Dallas and in Charlotte and Tampa, we're seeing A products sell at 5% or even in Dallas, a little below a 5% cap.

So I think you're right. It dropped in the quarter, but it's a moving pool of assets. It is a pipeline. So as we pulled those out, I know CreekView, for example, is a little below 8%.

But land prices in Dallas and, as Brent said, we're optimistic about that, how that one will play out, that it's -- it will be fun to see how fast they lease that one up. But if we're comfortable at 8%, given a 5% cap or 5% to 5.5% cap market. So we're still -- long winded way of saying we're still 250 basis points above a 150-basis-point guideline.

Okay. That's helpful.

And what was the lowest stabilized yield that you guys put into the pipeline? I'm just trying to reconcile -- the lease-up pipeline didn't really change all that much.

You had some higher yielding projects come out and be delivered, and the under-construction pipeline came down by 40 basis points. Just trying to get a sense of what -- which projects brought that down and what's the floor or the lower end of the yield range?

Craig, this is Brent. I'll have to speak to it since West Road III is at 0%; I think we can safely say that's at the lower end of the range. But that building, as we mentioned before, is a single tenant. It's going to be 0% or 100%. There's no in-between.

Some of that was site-dictated with that five building park. That particular building on the site plan is a single-tenant building and it's been most susceptible to that slowdown and that light manufacturing type tenant that would be the best use for it. Even that, as we eventually will get it leased, and even there, if we can garner a 7% or low 7% cap, we're still going to be well ahead of what -- we're still going to even have quite a bit of value creation there.

The other thing I would say driving, Craig, some of that drop in those percentages, as we've been very pleased that as Houston has played basically -- that role has diminished quite a bit, and other markets have picked it up. We had gotten quite spoiled with some of the returns we were getting, especially with our Houston projects, where our land basis was very, very low and we were even pushing some 9% yields on some of those, which we were very pleased to have, but just wasn't sustainable at that level.

So as we've brought in some other projects like a Dallas or something, it's being replaced with just slightly lower yields. Still, again, very good value creators.

All right, great. Thanks, guys.

And we have no further questions at this time. I'll turn the program back to you, gentlemen, for closing remarks.

Thank you for everyone's time and interest in EastGroup. Again, we're certainly all available this afternoon and tomorrow, if anyone has any follow-up questions. And we look forward to seeing you soon. Thank you.

This does conclude today's program. You may now disconnect your lines, and have a wonderful day.