Eastgroup Properties Inc (EGP) 2016 Q3 法說會逐字稿

Good morning and welcome to the Eastgroup Properties Inc. third-quarter 2016 earnings conference call.

(Operator Instructions)

Please be advised today's program may be recorded. It is now my pleasure to turn the program over to Mr. Marshall Loeb, President and CEO. You may begin.

Thank you. Good morning and thanks for calling in for our third-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 this morning's 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 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 including the news release accurate only as of the date of this call. The Company has disclosed reconciliation of GAAP to non-GAAP measures in its quarterly supplemental information which can be found on the Company's web site at www.eastgroup.net.

Thanks.

Third quarter saw a continuation of EastGroup's positive trends. Funds from operations met our guidance, achieving a 10.6% increase compared to third quarter last year. This marks 14 consecutive quarters of higher FFO per share as compared to prior year's quarter. The strength of the industrial market, as demonstrated through a number of metrics, such as another solid quarter of occupancy, leasing volume, positive same-store NOI results, and continued positive releasing spread.

The depth of private market capital looking to invest in quality industrial assets was demonstrated by the pricing and volume we have seen in our dispositions this year, as well as the difficulty we faced in sourcing sound acquisitions. At quarter end we were 97.3% leased and 96.3% occupied. Occupancy has exceeded 95% for 13 consecutive quarters, a trend we project maintaining through year end.

This basically represents full occupancy for multi tenant portfolio. As we have said before and as market commentary, we have never achieved this level of occupancy for this long a time.

Drilling down into specific markets, at September 30, a number of our major markets including Dallas, Orlando, Tampa, Jacksonville, Charlotte, San Francisco, and L.A. were each 98% leased or better. Houston, our largest market, with over 5.9 million square feet, which is down from 6.8 million square feet in January 2016, was 93.1% leased. Supply remains largely in check in our markets. In sifting through the figures, you'll see supply is largely comprised of big box deliveries, being 250,000 square feet and above per building.

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 buildings. In our markets where the fear of over building is the greatest, such as Dallas and Houston, we're seeing declines in construction with deliveries being absorbed. To date, the market discipline has been institutionally controlled and remains strong.

Rent spreads continued their positive trend for the 14th consecutive quarter on a (inaudible) basis. Overall with 95% occupancy strengthening markets and disciplined new supply we continue to see upward pressure on rents. Third quarter, same property NOI rose cash, and GAAP basis. This quarter was unusual as the growth was due more to rising rents as average quarterly occupancy fell 20 basis points, compared to third quarter 2015 to a 95.8%.

We expect same property results to remain positive going forward though increases will continue to reflect rent growth as at 95% to 96% we view ourselves as fully occupied. The price of oil and its impact on Houston's industrial real-estate market remains a 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 our Houston office with responsibility for EastGroup's Texas operations.

Brent.

Good morning.

Our Texas markets finished the third quarter at a gained 95.7% leased, while our Houston operating portfolio finished the quarter at 93.1% leased, down from 94.4% last quarter, but ahead of our 90% projected last call. Our actual leasing results year to date and assumptions for the fourth quarter produce an average occupancy of 94% for the year, up from prior guidance of 93%.

The Houston industrial market continues to exhibit solid fundamentals. Despite the overall decrease in prospect volume, deals continue to be made across the markets in a broad range of sizes. The market vacancy rate finished the quarter at 5.3%, which is an increase of 30 basis points over last quarter's near record level.

We have seen an increase in sublease space this year. For numerous reasons this often does not compete with existing vacancies, but it could lead to a gradual increase in the vacancy rate over time. Another recent trend has been tenants downsizing or consolidating locations in response to the prolonged downturn in the oil and gas sector.

Across the Houston market, there was 830,000 square feet of positive net absorption for the third quarter, which marked the 22nd consecutive quarter of positive net absorption and raised the year to date total up to 4.6 million square feet. Meanwhile developers continue to show restraint with the construction pipeline containing about 5 million square feet of speculative space, which represents less than 1% of the total market.

Our Houston signed leases for the third quarter included two that represented a majority of the square footage total. Both of these leases were for non divisible, single tenant buildings. One immediately backfilled a new vacancy, while the other leased our longest standing Houston vacancy. The positive impact of filling this vacancy is roughly $140,000 this year compared to 2015 with an additional $380,000 positive impact for 2017 compared to 2016.

While the leasing spread on this long-term vacancy was negative, we chose to seize the opportunity to remove the leasing risk and grow our net operating income. As we often say, a quarter does not make a trend, and our results will be influenced each quarter by individual transactions. For the remainder of 2016, we have reduced our scheduled expirations to just 2% of the Houston portfolio, while maintaining occupancy ahead of projections.

The diversification of our development platform within Texas continues to produce results. Our 2016 development starts include five buildings located in Dallas and San Antonio, for an estimated total investment of $33 million, and all of the Texas buildings in lease-up experienced an increase in percentage leased from the prior quarter. The fundamentals remain strong for the Texas markets outside of Houston, and they remain unaffected by the impact of lower oil prices.

Marshall.

Thanks, Brent.

Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk adjusted path to create value. We believe we effectively manage development risk as the majority of our developments are additional phases within an existing park. The average investment for our business distribution buildings is below 10 million. We develop in numerous states, city, and sub markets, and finally we target 150-basis-point projected investment return premium over market cap rates.

At September 30, we project investment return of our development pipeline was 7.7%, where as we estimate the market cap rate for completed properties to be in the low to mid 5%s. During third quarter we began construction on a 93,000 square foot property in Fort Myers, Florida. The first new spec development in this market since the downturn. Meanwhile we transferred two properties totaling 232,000 square feet at 59% leased into the portfolio.

At September 30 our development pipeline consisted of 14 projects, containing 2.2 million square feet, with a projected total cost of 162 million. For 2016, we project development starts of approximately 90 million, and what's gratifying about these starts is we can reach this level with no Houston starts, where as in 2012, for example, Houston accounted for almost 90% of our starts. This demonstrates the value of our diversified sun belt market strategy.

As Brent discussed, the industrial property sales market remains strong. We are actively reducing the size of our Houston portfolio, and raising capital through the disposition of non strategic land parcels. Year to date, we sold eight properties totaling 1,173,000 square feet for proceeds of approximately $74 million. Four of the sales were in Houston, which represented 906,000 square feet, and $52 million in sales. Through September 30, we've closed six land sales, generating $5.4 million.

While not material to our balance sheet, I love raising capital through the dispositions of nonstrategic nonincome-producing land and reinvesting in our core assets. Our asset recycling is an ongoing process. We're pleased with the year to date disposition progress, and we are continually evaluating our options, especially for the Houston sale. As we recycle capital and diversify the portion of our NOI coming from Houston will decline, while the quality of the Houston portfolio continues rising.

Where most of our activity has been dispositions, we're pleased to acquire Flagler Center on the south side of Jacksonville for $24 million. This three-building, 358,000-square-feet property was constructed in 1997 through 2005 and is 100% leased with a year one yield in the mid 6%s. While the vast majority of our capital is focused on development and value add opportunities, we are excited to grow our footprint in this sub market.

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

Good morning.

FFO per share for the quarter was above $1.00 per share for the first time in history at $1.04 per share, an increase of 10.6% compared to the same period last year. The increase was due to same-store increases, attractive yields on acquisition and development compared to our cost of capital, gain on land sales, lower G&A costs, and a favorable interest rate environment.

Debt to total market cap was 29.7%, with a quarter interest coverage was 4.9 times and debt to EBITDA was 5.9 times. Adjusted debt to EBITDA was only 5.2 times.

In September we increased the quarterly dividend by 3.3%. So in summary, FFO per share is increasing from many sources. We increased the dividend, and the balance sheet remains strong.

Earnings per share for 2016 is estimated to be in the range of $2.93 to $2.95. FFO guidance for the midpoint increased $0.01 a share to $4.01 for the year. We estimate fourth quarter FFO per share of $1.07, 13.8% increase from fourth quarter 2015, and the year at $4.01, 9.3% increase from the prior year.

Now Marshall will make some final comments.

Thanks, Keith.

Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength we continue investing in and diversifying our development pipeline. We're also committed to maintaining a strong healthy balance sheet with improving metrics throughout this year. Maintaining our balance sheet is important, not only on a day to day basis, but as a critical resource whenever the next recession occurs.

Please note that we don't see signs of a downturn but rather stay ready when there is one. In sum, we like where we are, where the industrial marks are, what we're doing, and the results it creates long term for our shareholders.

We will now take your questions.

(Operator Instructions)

And we can take our first question from Jamie Feldman with Bank of America Merrill Lynch. Your line is now open.

Great, thank you.

You had commented early in the call about a hefty pipeline for asset sales. But it looks like you took your guidance down for sales in the year. Can you just talk about the assets you decided not to sell, maybe timing of those sales, and then bigger picture about what kind of demand you are seeing for assets?

Sure, Jamie. Good morning. It is Marshall.

What I would say, year to date we're happy with our sales. We're slightly below $80 million. We did bring our guidance down. We've eyed still, within the market we think if we can get the right prices we should execute some of our sales.

We're pleased the see Houston come down from rounding 21% to 18%. We would like to see that number continue trending down. What we've seen probably in the last 90 to 120 days in Houston, for example, it's maybe a more selective buyer pool, in terms of earlier in the year Lockwood, for example, was our oldest asset in the portfolio, it had a pretty large impending vacancy, and Brent was able to sell that in the low 6%s. Now if we brought Lockwood to market I don't know that we could achieve that.

So we're committed to reducing the size of our Houston in terms of within EastGroup, but for shareholders, we're not going to fire-sale assets. So as we've moved through and picked and chose Houston assets to sale, we probably think one that was a little bit larger, that we had earmarked had some rent roll and things next year, and it's probably not a great time to bring it to market, and so we've substituted a couple of assets as we go through. As the opportunities present, we will continue selling in Houston, or we're committed to that, where it makes sense, assets that we won't regret selling several years down the road. Please, just as commentary what we've sold this year in Houston, we really started not in terms of size reducing the square footage, but was really our worst assets. It's a good portfolio, but we ranked ordered them and sold what were our worst assets in Houston.

Okay. That's helpful.

And then you had also commented before that the deliveries you are seeing in your market are really not competitive with your portfolio. But I would think that the deliveries are serving where demand is growing the most. So can you help square those comments just in terms of, I think people are excited about warehouse. It's got a lot of e-commerce demand. Clearly people are developing for that demand. And then your comment that your portfolio isn't exactly competing with that supply. How do we think about those comments?

Sure. Here's how. And Brent, chime in what I miss or leave out.

But I would maybe bifurcate the industrial deliveries. The majority of our supply I would describe as being on the edge of town, maybe a little more special use, state-of-the-art, fulfillment centers. That is where an awful lot of demand is, and where an awful lot of our peers or at least the industrial developers are going. It's a 600,000 million square foot box that's built for a Fortune 1000 company and their fulfillment center. Where we have chosen to play, or our role in the industrial market is an infill site, smaller building, 80,000 to 130,000 square feet typically, and it's someone that serves that local market.

So we're not building special use buildings, and we fill in within the e-commerce world would be that last mile delivery, which we think we're very early in and top of the first inning of watching that play out, and/or where we're seeing that is the post office and FedEx and tenants like that. So if that helps, I think both segments of the industrial market are growing, but where our portion of the food chain are really a bet long term that Orlando, for example, is going to have half a million more people in 10 years than it does today. So our infill sites, well located, flexible buildings, the rents will grow there over time, is our strategy.

And I would just add to that, Jamie, that it's really almost two different product types. Multi-tenant, which is, of course, what we do, and then bulk. So, when we say we don't compete with it, it doesn't mean we're not necessarily in the same market with it. But for example, in Dallas, there's 19 million square feet under construction, but over half that is in buildings greater than 400,000 square feet, so we're in the same submarkets, in some cases, with those buildings, but a lot of our competitors have buildings, for example, where they won't do a smaller than 70,000 or 80,000 square foot lease, and in some cases our buildings are that size, where we can do 15,000, 20,000, 30,000, 40,000 square feet. I agree with what Marshall said but also I think there's the product type differentiation as well.

Okay. And then, thank you.

Finally for Brent, so it does, it sounds like you beat your own Houston occupancy outlook for the quarter. Can you just talk about some of the leasing that was done and maybe if that's any kind of indication of what is to come?

Yes. We were pleased in the quarter the way we did, the 93%; we had guided to 90%. We did do one lease with the post office that was year-end oriented that will go through January, which helped. As you saw from the description of our net lease rolldown, we did a couple of leases that filled single-tenant buildings. One had been vacant for 21 months. We were pleased to get those buttoned up.

Looking at next year, 16.5% roll over, it is going to be similar to this year I think as we go into that. But we'll just continue, as we've been doing, just operating, pushing these spaces as we can. Obviously renew as many tenants as we can. But when you get the space back, or know you are going to get it back, clean it up, take it to market, and just out-execute in this type of environment.

So that 16.5%, how much do you know is vacating?

I don't, I wish I knew. Jamie, it's similar, as we again came into this year there's a few tenants that we expect not to renew, but as we came to this year we had a few that way, and then they changed their minds. So we're in a slowing, slow environment there, particularly up north where Houston is, where we're probably most susceptible to the slowness. So it's got our full attention, and we'll just execute as best we can, and obviously next time around we'll have more specific 2017 guidance, but we're already working on it as we sit here today.

Okay. Thanks, everyone.

And we can take our next question from Blaine Heck with Wells Fargo. Your line is now open.

Thanks, good morning.

Just to clarify, Brent, is that lease you mentioned with the post office the 78,000 square foot month-to-month lease that showed up on the expiration schedule this quarter? And we should, I guess, look for that to come out in January?

Yes, that's correct. It's through January. It's not month to month. It's a straight short-term through January. They needed space for the holiday season, and so we have the space available so we decided to take the income here at the end of the year, and then we'll continue to market it in that interim period. In a perfect world, we find somebody to occupy it while they're there, and they move in afterward. But, yes that is that lease.

Okay, that's helpful.

And then follow-up on dispositions. So assuming you're able to get the targeted dispositions you guys have slated for this year, how much more would you say there is in your portfolio that you might label non-core or maybe earmarked for disposition when the time is right?

Sure, Blaine. It's Marshall.

When we give you -- I'm in my mind's eye picturing our 2017 guidance. We'll have a disposition dollar volume in target. Next week we have our officers' meeting and really Brent and his two counterparts. We ask everyone to earmark, if you were going to sell five of your assets, what would those be? So we'll work through those.

Backing up, I think we should always be pruning our portfolio each year, and what we think we've wronged or created the most of the value story out of, we should exit it. So we'll have a disposition guidance target next year. Certainly we've got a few more assets in Houston to sell, but at this point, 95% of our Houston income comes from parks we develop. So we certainly are left with the best of our Houston assets. Not that we wouldn't sell a park if the right opportunity came along, but if that helps you, we will have a specific target number for next year, and I think we should for our shareholders.

Okay, I'll look forward to that.

I hope I didn't miss this, but can you talk about the additional development stage acquisition you guys are looking at in the fourth quarter? Is that also part of Parc North? Or are these types of deals something that you're finding in multiple markets?

It's more the latter, and that it's a specific asset, what we, as we work through the acquisition environment, if it's a core asset, cap rates, the number of bidders and the cap rates are not surprisingly low or depressingly low. It is just hard to go buy a core asset. And where we've had better luck, you saw it in Parc North, which was a Brent acquisition, was a state-of-the-art newly finished building that hadn't leased off, that we were able to buy. And we won't earn the same yield as if we developed it, but we'll earn a lot better yield than if we had waited for it to be a core asset. And this is the other $14 million that we have earmarked. We, in due diligence, haven't finished it; I'm happy to tell you more about it when we reach that point, but it would be a similar value-add type opportunity. So we've had more luck in terms of meeting our pricing guidelines within that, where we can go in and take some of the leasing risk but the building is already built.

Great. Thanks, guys.

Sure.

And we can take our next question from Manny Korchman with Citi. Your line is now open.

Good morning, everyone.

Marshall, you keep bringing up this idea, or the concept of not fire-saling assets. What do you think gets the market to situations where that would be necessary? It sounds like things have been maybe healthier for longer than some have expected, if that's the right way to characterize it. Is there more weakness on the come, that you see coming now? Or are you just saying that things could get worse but you're not expecting them?

I think things could get worse, but we're certainly, if I'm answering your question correctly, at 97%-plus leased, 96% occupied. We're happy with the market. I would think fire sale, and I guess maybe a different definition for each person, I would hope we never, for our shareholders, never need to do that. That to me would be our balance sheet is in crisis. Coming out of the last downturn I think a number of the REITs almost had to fire-sale assets to stay alive. So I hope we can always avoid that.

But I think we should be mindful of how much Houston is of our portfolio; we certainly were earlier in the year, and try to work that just as a portfolio allocation to a more reasonable perspective. Because every market is going to run in and out of favor.

And maybe if we can focus on the lease-up of the asset, especially the vacant assets, was that a new-to-market tenant that took that? Maybe you can explain to us the type of tenancy and why, after being vacant so long, you think you're able to fill it.

Oh, the 21-month. Sorry, I was thinking Parc North. The 21-month lease, it's single tenant building, so it didn't have flexibility to just chop it up and lease it up partially over time. That's where the rent spread gets to be tricky. That space had been vacant 21 months. The prior tenant was a tenant we had in there short term that we had captive because we were doing a build-to-suit for them. So we had them at an above market rate at a peak market time. So we're marking that against that. Honestly I'm not sure what that really tells you, and from a practical standpoint, but that's just the result it was. We're pleased to have gotten it buttoned up.

The other lease that we did that immediately filled a space, it was probably done at a little bit below market but that tenant didn't need any TI. It was as is. You look at it and say, okay, we don't want this space to turn into a 21-month vacant space, so we did a short-term deal, a couple year deal, no TI, take the income, and live to fight another day, and I hope in two years we can push the rents very solidly against them at that time. But you just make these decisions on an individual basis, and that's what we will continue to do.

Maybe to get really into the weeds, the build-to-suit you did, what was the rental rate like there versus this above market lease that you then re-leased lower?

I would be guessing if I gave you that. It was a healthy market rent at the time, which would have been a couple of years ago. So it would have probably been similar to what they were paying when they moved out of that building, maybe a little bit less. But that's a couple of years ago.

Thanks very much, guys.

And we can take our next question from Brad Burke with Goldman Sachs. Your line is now open.

Good morning, guys. Nice quarter.

I was hoping to ask a bigger picture and ask you to comment broadly on demand, which is still very strong across the portfolio. First, are you surprised with the strength of the demand that you are still seeing in your markets? And if you could comment on what's driving that demand that you are seeing. What types of tenants, and how much of that do you think is being driven specifically by e-commerce? I would appreciate it.

Sure is. It's Marshall. I will take a stab at it.

I'm pleased, as I mentioned, the numbers, it's13 quarters where we've been over 95%. Any time you set a historical record, like in sports, it's got to be a little bit pleasantly surprising. We don't see any drop-off in that. It would be a national demand event, not an oversupply that would change that as we would see. But we're pleased to see it, and it's across the board. Some markets, home building has come back. Florida, with gas prices lower, tourism has come back. I know they've set visitor records in Orlando, and it's really become the e-commerce hub for the state of Florida there in Orlando.

So it's been a broad based recovery. In terms of e-commerce, in our portfolio, we're seeing and feeling whispers of that. One of our longest-standing vacancies in the portfolio was leased to an Amazon supplier this past quarter, so that one was pleased to see. We've seen Amazon, their grocery delivery and prospects, and seen them elsewhere with RFCs out there. It's not certainly overwhelming our portfolio today, and we view Amazon as an early market leader. So if they're doing that, we're guessing, or we expect other tenants to follow suit.

So it's a new source of demand that we weren't seeing 24 months ago. It's early, and I would expect that we will have other people playing in that space 24 months from now. But we're -- and actually I'm glad that it is such a broad-based tenant supply and not just e-commerce. The same as we certainly got burned, we said, in markets, when it was just home building heading into the last downturn.

I appreciate that.

Just a follow-up on your ability to put capital work with the share price where it is at right now, is there anything to prevent from you increasing the pace of development and starting to tap the continuous equity program again?

I guess what would hold us back would be demand. I mean, we really, which thankfully is probably the right governor on it, but we're certainly happier with our stock price than we were earlier in the year. It's a tool in the tool kit that we didn't have for funding, and as we see demand we've stepped up our starts. Brent has had some good starts in San Antonio where we filled up quickly on the northeast side of town, and we love additional phases of an existing park, as a great risk-adjusted way. So I hope our development pipeline can pick up pace, but we also to have match that with demand and have to deliver on it.

Okay. Thank you very much.

Sure.

And we can take our next question from Craig Mailman with KeyBanc Capital Markets. Craig, your line is open.

Good morning, guys.

Brent, maybe just to follow up on Houston a little bit. I know you had some unique items with some of these shorter-term leases that affected the rent spreads this quarter, but I'm just curious. You look out to the almost million square feet that you guys have expiring next year in Houston, and given what you are seeing in sublease space and all the dynamics going on, what do you think the mark to market is on that million square foot roll next year?

Hey, Craig, good morning.

I think that's a fair question because there's really two things. There's any given quarter what we might report based on just, again, individual transactions. But just stepping back and looking at market rents for Houston in general, I would say that we're still in that single-digit down for most of the submarkets in Houston; maybe even east side, the strongest, is maybe flat. But where we're seeing softest, and the most rent sensitivity and the most incentive is up north, which, of course for our Houston portfolio, a little over half our square footage, falls within that. That's where, it was probably slightly overbuilt, combined with less demand compared to some other submarkets. So in that pocket I would say maybe you are looking at 10% to 15% from a market perspective of downward pressure.

The other thing I would add, any time you want to make as many renewals as you can for obvious reasons, but once you do have the vacancy that's what puts you at risk, to have to compete. I would say the market as a whole has been what we thought it would be, with the exception being the north being a little softer, people a little more antsy to try to get deals done.

How much of your roll next year is in [rural] Houston?

I don't have the breakdown by park. We could shoot that to you off-line.

I guess I'm wondering in that north submarket versus some other areas you guys have space.

Like I say, rural Houston is a little over half of our portfolio right there, so I think it's safe to say that at least half of that is up there, or up north. Really the only parts out west are Ten West Crossing and then our Tech Way Park. Any time you've got vacancy we're going to have to deal with it, and that certainly will be part of it.

Okay. And then, just curious, Marshall, your comment that maybe you wouldn't be able to get the sale today that you got earlier in the year. I mean, what do you guys think are happening to cap rates? Is there enough data to even know where cap rates are moving these days in Houston?

Okay, just in Houston itself. I would say globally there's still, or nationally, they're still drifting down a little bit. Not dramatically, and competitive. Houston, what we're hearing, is it's, and again I would say, contrasting at a year ago the public market was highly concerned about Houston, and it was a tale of two cities. And really even into the spring, the private market was status quo in Houston, where now I think the private market, there's a little more, there is more nervousness about Houston.

Cap rates are still hanging in there at a low number. I think it needs to be a core asset without rent roll and things like that. There's a couple of comps out there we've heard of that have not closed. It will be in the low 5%s. So I think that would be no different than what it was. I think what we were hearing through our broker conversation, if you've got, like in the case of the Lockwood asset I mentioned, maybe 30% of the lease is rolling, and a fair degree of risk of vacancy with one of those tenants. That, we probably couldn't execute on today. But we were able to in April or May when that closed.

Yes, I would agree. I would just say there's probably more of an aversion to risk now as we've gone through the years compared to earlier in the year. And there's more demand for quality. You have in to be more, right in the center of the fairway, which one of these projects Marshall referenced, it looks like it's going to close at a low 5% cap, does fit that bill. But if you get outside of that, that window, the cap rates have bumped up. Some people are looking for a little more return for what they're viewing as potential risk in the short term.

So we're glad to have executed what we did. We sold our non-core assets, if you will, 100% class A now, and as Marshall referenced, 95% of our asserts within one of our core parks. So we are thankful to have gotten most of our heavy lifting that we really wanted to get done executed.

That's helpful.

Maybe one for Keith. On the same-store guidance. The 4Q ramp, just that compared to what you guys have done year to date? And where full-year guidance is coming in, just remind me, do you guys have, do you guys change your quarterly pools and keep the annual static, and that's kind of why they don't necessarily foot?

Correct. Each same store, each quarter has, it's whatever same store it is for that quarter, which will change for the year and each quarter.

Okay, great. Thank you guys.

You're welcome.

And we can take our next question from Alexander Goldfarb with Sandler O'Neill. Your line is now open.

Hey, good morning. Just a few quick questions here.

Brent, we'll go to you. If this was addressed earlier, then apologies, but on the post office lease, if my math is right, you guys were I think targeting 90% leased for the third quarter, and you outperformed at 93%. It sounds like that post office was a little over a percent of that outperformance. With the remainder, would you characterize the other parts of the Houston outperformance as, I don't want to say, like, temporary? Or was that outperformance like, full-term tenants signing real deals, et cetera?

No, that was the one short-term lease that we did with the post office. The rest of it is for term, or in the case I mentioned the other lease, it's short-term nature, like two years, but it's in there for the short-term nature. But it was just a few things going positive our way. Some of it is, we're tend to be a little conservative in the our approach when we look at these things, and when you're in an environment that is slowing, there's just even more uncertainty in trying to make those assumptions and projections. So we're pleased to have beat it. But it was pretty solid. Other than the one post office lease the rest of it was good stuff, good to get it done.

And then when you're talking about rise in sublease space, and at the same time you're talking about whether it's the two-year deal or the post office lease, which sound pretty short term, would all of those deals be competitive with sublease space? Or is the sublease space either the way it's configured, or where it's located in the market, maybe it's the size box that it's in, it really isn't competitive with what you guys offer?

Subleased space in general is very difficult to compete because it's not divisible, they have to reach an arrangement with existing tenant, on occupying it, and the liability risk and everything associated with it. The tenant that may consider a sublease space, then they've got to gauge what is the term left on that particular sublease. When there's space available in the market, particularly if you have landlords that are willing to do a short-term nature deal with you, that's just much easier and cleaner than dealing with a landlord and a third-party other tenant. So we very rarely compete with a subleased space. I look at it more as the obvious thing is that it could be a precursor to an increase in the vacancy rate. I think that's the bigger signal of it versus immediate competition.

Okay. But overall, it sounds lake, I know you guys aren't giving 2017 yet, but overall, it sounds like, while you guys may continue to outperform on the lease rate, whether there's more of the 21-month vacant lease-type thing that pressures rent. But the point that we should expect, we should not be surprised to see continued pressure on the rent side. But it sounds like you guys may be able to outperform on the leasing side. Is that fair? Or we should be braced that we are going to see a material drop in the Houston occupancy?

The reality is, we just don't know Alex. We've got a 16.5% roll. We know some of it, a lot of that, particularly first quarter next year. So we just don't know at this stage. We will just continue to try to out-execute. We're in contact with all these different tenants.

I do think the former part of what you said about rents, that, again, depending on our volume, individual transactions by quarter, yes, we could have some quarters where, for whatever reason there's a couple of transactions that we're willing to lease vacant space. We're going to err on the side of occupancy versus probably over-negotiating. We don't want to overplay our hand. But it's too early to tell. But we're working on it. Like I say, we're working on 2017 already.

And then just finally, on the development deal that you guys bought that you are leasing up, is this an indication that maybe to derisk -- Marshall, to your earlier point about derisking the balance sheet -- is this to derisk and get the Company away from developing on its own to maybe buying out developers who may have financial issues or what have you? Or was this more of a one-off deal?

I wouldn't, maybe neither. We still like development, and where we can find the right lands, we'll pursue that. It was more, as we source acquisitions we know core assets are easy to find but hard to find value on. And here it was a submarket we wanted to be in, and we liked these buildings. We kept saying to brokers, can you find us something like that, and we eventually spoke with this developer, and they were ready to move on to the next deal. It was, we felt, like a niche in the market to find a value-add opportunity, and now we've found a second. So we think it's another tool in the tool kit.

Okay. Thanks a lot.

Sure.

And we can take our next question from Rich Anderson with Mizuho Securities. Your line is now open.

Thanks. Good morning.

So Brent, you mentioned a lot of the 984,000 in Houston that's expiring next year is in the first quarter, and you said you're getting to it early. To what degree could we really see a meaningful reduction in that number when you report fourth quarter results?

I don't expect, Rich, for fourth quarter to look a lot different than third quarter. We've just got 2% roll remaining this year.

No, I mean 2017 expirations. To what degree will you do that early and maybe the number will look smaller, significantly smaller when you report that same schedule on page 18 again next year?

I see what you're saying, yes. Yes, that's our goal, certainly. And again we're in dialogue with several of these tenants and trying to work on it. We certainly hope to lower that between now and then. You're right, we've got three or four months to do that, make that happen. So that's in the works.

As you might expect in this type of environment, you've got slower decision making, tenants don't feel the pressure, the urge to make early decisions. Again, when the pendulum swings to a tenant market versus a landlord market, we can try and are trying as much as we can but at some point you're at the mercy of the other side to tango with you. But we've got long-term relationship with a lot of these groups. Trust me, where we can make the renewals, we will.

So when it comes to tenant retention, and just staying with Houston, to what degree, obviously when you have a vacancy that puts you on the hook to a degree to the market, but when a tenant renews, to what degree are they willing to maybe not go all the way down to market? Or, is there more of a nominal impact when you renew a tenant versus when you have to find a new tenant?

Yes, clearly, when you, in a negotiation if you get the sense the tenant wants to renew, there tends to be less negotiating, there tends to be more leverage from our side because you realize they don't want to move and incur the capital of moving and all those sorts of things. So a tenant may joust for something, but it's a lot more minimal than if you're out on the open market. So absolutely renewals is plan A. But plan B, if it becomes vacant, is to get the space ready and to move as quickly as we can.

So you don't have any idea what your tenant retention rate will be, absolutely no idea? Or do you have at least maybe 50% or 30% you know is staying at this juncture? Do you not even have that level of visibility?

It's too early to tell for 2017. We have some ideas. No one is going to come to us this early and say I'm going to renew. You may know who's leaving, but no one will say. And then sometimes this far out they change their minds. Especially, 3PL could get a new contract, or a contract renewed even, and things. So it wouldn't be a very accurate guess at this point I'm afraid.

Okay. One of the things that occurred to me, you called the tenant captive in that 21-month vacancy, so presumably that tenant not there but paying you rent nonetheless. I'm curious, what degree, what percentage, and maybe I should know this, but I don't, did your tenant, what percentage of your tenants have termination rights where there is there some sort of termination math dialed into the lease negotiation? And to what degree is there no such thing, so the ball is in your court when something happens?

Let me be clear. When I said captive, what I meant by that is the tenant was there. We put them in that space and we had them there on a short-term basis until we completed their build-to-suit. So we had a lot of leverage. They were in the space. There's leases in the portfolio that have termination rights. Most of those require at least six- to nine-month notice with fee. But it's not anything that --

It's typical, customary.

customary stuff.

I didn't think so. So I was just checking.

The two holes in the recently delivered development projects, one in Houston, West Road III, and then recently in Phoenix, very low, if not zero, on the percentage lease perspective, can you talk about the pace of activity, the traffic, looking at those two in particular?

Sure. In Phoenix we've had prospects. We're disappointed where we are, and, in fact, we've actually again, maybe as we grow and shrink our development pipeline, we stopped our development in Phoenix. We've got a couple of other land parcels earlier this year in first quarter until we can work our way through these vacancies. So we've had prospects. We just need to button one up and get it done.

And then West Road III, Brent can comment later, but we also stopped our Houston development pipeline a year earlier than that. So really first quarter 2015, the park is well leased. This was a single tenant building so it's one when we get it full it will either jump to 100% or stay at zero. Again we've had prospects but we've not been able to land the tenant that needs to be in that submarket that needs that exact square footage. And maybe that, as we talk about different types of buildings, why we like building multi-tenant buildings, because typically, in the vast majority of our portfolio, is that just the flexibility. I remember somebody telling me early, you want it to be a salami, and you can cut it up as many different ways as you need to. And probably West Road III is a good, even though we've known that learning curve, of where the size it is of a building, the market turned right about the time we were delivering it.

So I probably would have used a different type of meat in that analogy. And then the last question is, you keep saying that in 2012, 90% of your starts were in Houston. To what degree is there lessons learned from that? That you need to spread out more? Is that a fair statement, that you can lack back and say, yes, we should have been a little bit more forward thinking about how we're spreading our development investments?

I don't think, especially since our chairman will listen to this replay probably at some point, I won't throw David Hoster under the bus. I think we made good decisions and created a lot of value in Houston. I guess as I say that, I mean it more in the sense, and especially 2012, coming out of the downturn, Houston really led the country out of the downturn. So we had the right sites and the demand and took advantage of it. Maybe on the flip side of that, I am thankful now that Houston is a little rocky, that the other 82% of our portfolio is creating some good opportunities for us, and it wasn't that, a year ago I would say, maybe not you so much, but a number of people thought Houston is in trouble, EastGroup is just going to grind to a halt, and the other 80%-plus has created opportunities for us to report record FFO this quarter.

I would just add to that, we just went where the opportunity was and just, we had a combination of spec buildings leasing up quickly, combined with build-to-suits. I think any time we can push development, whatever market we would, looking back at it I think we were probably slow to sell some of the older assets and I think that's something that Marshall has done this year and done well is to look at that as a means of recycling through our capital.

Okay. Good enough. Thanks very much.

Thank you.

And we can take our next question from Eric Frankel with Green Street Advisors. Your line is now open.

Thank you.

I think the Houston horse has been beaten to death, but one final question, just on Houston supply. Roughly, where is that 5 million square feet of new development located? What's the submarket breakdown?

It's primarily southeast and southwest, neither of which we are in. So it's compliant to those There's a few big larger buildings that make up a good bit of that over on the east port side which is still showing some strength. So it's primarily in those two submarkets.

All right. And do you know what proportion of it is build-to suit-or pre-leased?

I don't know the exact percent but I do know there's some significant pre-leasing in it. Not being in the submarkets, I don't know the exact number. I know, for example, up north, we were mentioning softness where we are, there's no spec construction, just by way of comparison. So the market's reacted to the slowness, which is good.

Okay. That's helpful color. Thank you.

Just a question on the balance sheet for Keith, I suppose. Just noticed some of your refinancing activities last quarter, your debt maturity is, that duration is a bit shorter than usual. Do you have a strategy going forward of what you want to do in terms of long-term debt or other ways to finance your business?

We look at debt maturity schedule and try to get manageable amounts each year, so in case something happens during the year. So we'll look, say it's a five-year term, look out five years and see how much maturity is in that period, and if a five-year will fit in there, then we will do that. Same as the seven-year, and so on. So it definitely matters how much we have maturing, and we tailor our maturities to that.

Any hesitation going a little bit longer than maturities? I don't think you have anything mature, you don't have any debt maturing, or you haven't done any recent issuances work that matures in 10 years, so I just wanted to get your thoughts, if you think the yield curve is unattractive enough from between 5 to 10 years, or --

No, we look at 10-year also. What we do is take a 10-year and get the rate there, and then a 5-year or a 7-year with the rates on it, and assume that at the end of the 5-year or the7-year, we need to get another 5- or 3-year to finish out that 10-year, to compare to the 10 year and say, well, what interest rate would we have to get on that next five years? Or what interest rate do we have to get on the next three years? And see if that's a reasonable assumption that we will be able to get that at the end of five years, and most oftentimes it is very reasonable that we could get that rate.

Okay. I don't have much else other than just maybe one side comment on the remaining 83% of your portfolio. Have market rents trended better than you've expected this year? Your cash release (inaudible) were quite good in the other markets. I'm not sure if that was just other, like you said, one-time occurrences, or if there's really been some rent movements.

I don't know; better than expectations. Maybe some markets, like I sure wish we had more in the Bay Area, for example. And Southern California is strong in terms of rent growth, and then if it helps, a good question, one of the items I wanted to mention this quarter, actually our releasing spreads would be a little better. One of our largest tenants in the portfolio, Essendant, formerly United Stationers, we had a 400,000 foot, thankfully 7-year renewal, so our rent numbers are about 100 points understated because of that. It was a 10-year lease, with bumps, and when it rolled it was below average, so it pulled the overall average, but that was about almost a quarter of our leasing this time.

But all in all we're happy if demand can hang in there where it is, we said to our audit committee earlier this week, it's a Goldilocks environment, in that it's not overheated and it's not too cold. If we can hang there we can hopefully keep executing. We like GAAP releasing spreads, we think is a much better measurement, that we should be able to continue to produce double-digit GAAP releasing spreads, absent maybe a little rockiness in Houston, the other 83%.

Right. Thanks for the color. Much appreciated.

you're welcome.

And we can take our next question from John Guinee with Stifel. Your line is now open.

John?

Hello?

Your line is open.

Once again, John Guinee from Stifel, if you would like to ask a question, please check your mute function. Your line is open.

Thank you. We'll call John post call.

(Operator Instructions)

And we will take our next question from Barry Oxford with D.A. Davidson. Your line is open.

Great. Thanks, guys.

Real quick, on the sale, on the land sales in the third quarter, given that the market seems to have weakened as you guys have indicated, in that the price for riskier assets or non-core assets, when you sold the land in the third quarter, was that at a lower price than what you initially had expected? And did you have to cut your price in order to get those deals done?

No, good question. We really didn't on the land. It was users, it was a couple, two of the bigger ones, and Brent sold them. They were small parcels within the rural Houston that came as part of a larger acquisition. It was hotel developers that came along. So we were pleased with the pricing, and we really thought these were parcels we couldn't deliver our type product on. So if you can't do that we were better off exiting them at a fair price and taking that capital into the next development.

Great. Thanks, guys. That's all I have.

Sure, thanks, Barry.

Yes.

And this does conclude the question-and-answer session. I would like to turn the program back to our presenters for any closing comments.

Thank you for your time and your interest in EastGroup. We're certainly available post call for any questions we didn't cover today. Thank you.

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