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EastGroup Properties Inc. (NYSE:EGP)

Q3 2013 Earnings Call

October 18, 2013 11:00 am ET

Executives

David Hoster – President & Chief Executive Officer

N. Keith McKey – Chief Financial Officer

Staci Tyler – Vice President & Assistant Controller

Analysts

Kevin [Behrn] - Citi

Michael Bilerman – Citi

Brandon Cheatham – SunTrust Robinson Humphrey

Jamie Feldman – Bank of America

Craig Mailman – KeyBanc

Alex Goldfarb – Sandler O’Neill

Brendan Maiorana – Wells Fargo

John Guinee – Stifel Nicolaus

Vance Edelson – Morgan Stanley

Eric Frankel – Green Street Advisors

Bill Crow – Raymond James

Operator

Good morning and welcome to the EastGroup Properties Q3 2013 Earnings Conference Call. (Operator instructions.) Now it is my pleasure to introduce David Hoster, President and CEO.

David Hoster

Good morning and thanks for calling in for our Q3 2013 conference call. We appreciate your interest in EastGroup. As usual, Keith McKey our CFO will be participating in the call. Since we will be making forward-looking statements today we ask that you listen to the following disclaimer covering these statements.

Staci Tyler

The discussion today involves forward-looking statements. Please refer to the Safe Harbor language including 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 that is accurate only as of the date of this call.

David Hoster

Thank you. Q3 was another productive one for EastGroup. Funds from operations of $0.83 per share again exceeded the upper end of our guidance range and represented an increase of 9.2% as compared to the same period last year. We have achieved FFO per share growth as compared to the previous year’s quarter in nine of the last ten quarters.

Strong leasing activity increased occupancy to 95.7%, the highest level since Q3 2007. Same property net operating results were positive for the tenth consecutive quarter. We continued to expand our development program with development leasing exceeding our internal projections, and we increased the midpoint of our guidance by $0.03 per share to $3.23 per share for 2013 – the second increase this year.

As of September 30 we were 95.7% occupied and 96.3% leased. Both figures represent increases over the end of Q2 and were well ahead of our internal expectations. These results reflect both the improving industrial leasing fundamentals in every one of our markets and the quality of our assets.

Prospects were becoming more decisive and moving to lease more quickly. We’ve moved past the stage of just a flight to quality and are now experiencing a real increase in both customer expansions and new users to the marketplace.

As might be expected, our Texas markets were the best at 98.2% leased followed by our California markets at 97.9% leased. Houston, our largest market with 5.6 million square feet was 98.7% leased and 98.5% occupied. For the first time in a long time all of our core markets were above 91.0% leased and occupied.

In all of our major markets rents for the higher-quality assets were increasing and should continue to improve as market vacancies continue to decline. It is too early to say that we are in a landlord’s market or that we have real pricing power but we’re certainly heading in that direction. Looking forward, we expect occupancies to remain in the 95.0% range for the balance of this year.

In Q3 we renewed 62% of the 1.5 million square feet that expired in the quarter and signed new leases on another 24% of the expiring space for a total of 86%. We also leased 562,000 square feet that had either terminated early during the quarter or was vacant at the beginning of the quarter. In addition we have leased and renewed 279,000 square feet since September 30th.

For the quarter, GAAP rent spreads on renewal leases were up 3.5% and up 0.3% on new leases. [Tight] rent spreads were negative 2.4% on renewals and negative 6.3% on new leases. Average lease length was five years which was well above our averages for the past several years and probably reflects prospects’ growing confidence within the community.

Tenant improvements were $1.98 per square foot for the life of the lease, or $0.40 per square foot per year of the lease which is slightly below our recent average. The average amount of concessions continues to slowly decline. As a result of our strong leasing, Q3 same property operating results increased 1.7% on a cash basis and 2.2% with straight-line rent adjustments.

As previously reported we purchased Interchange Park II in Charlotte in July for $2.4 million. This business distribution building which was constructed in 2000 contains 49,000 square feet and is 100% occupied by a single user. It is located adjacent to our Interchange Park I in the city’s north sub-market. We currently do not have any properties under contract to acquire.

Looking to dispositions we sold a 2.2 acre parcel in our new Horizon Commerce Park development in Orlando in July for $1.4 million and recorded a small gain. In Tampa we currently have two small buildings under contract to sell and hope to sell two additional small buildings before year-end. We are also working on the potential sales of several older properties in Dallas.

Our development program has a long and successful record of creating and accumulating value for our shareholders over the last seventeen years. We have added 11.5 million square feet of quality, state-of-the-art assets and as a result have now built over one third of our current portfolio through our development efforts.

During Q3 we continued to grow our development pipeline, ending the quarter with five buildings in lease-up and nine under construction. They contain over 1.3 million square feet with a combined projected investment of $91.4 million. These are currently 55% leased.

During the quarter we began construction of five buildings with 574,000 square feet and a total projected cost of $37.0 million. Two of these are 100% pre-leased. Also during the quarter we transferred four buildings with 233,000 square feet into the portfolio – Southridge X and World Houston 34, 35, and 36 – all of which are 100% leased.

Since the end of the quarter we have started Rampart IV Denver with 84,000 square feet and a projected cost of $8.3 million. Year-to-date we have started thirteen developments with 1.2 million square feet and an expected investment of over $84 million. Our 2013 guidance assumes additional development starts of approximately $10 million for a total of $94 million for the full year.

Keith will now review a number of financial highlights.

N. Keith McKey

Good morning. FFO per share for Q3 increased 9.2% compared to the same quarter last year. Acquisitions, development and same property net operating income were all contributors to the increase. FFO per share for the quarter was also $0.02 higher than our projected midpoint primarily due to such strong same property NOI results.

Debt to total market capitalization was 33.1% on September 30th. For the quarter the interest and fixed charge coverage ratios were 3.9x and debt to EBITDA was 6.5x. Adjusted debt to EBITDA was 6.2x.

During Q3 we repaid a $33.5 million maturing mortgage loan with an interest rate of 4.75% and closed a private placement of $100 million of unsecured notes. The $100 million of notes have a fixed interest rate of 3.8% with principal payments of $30 million at seven years, $50 million in ten years and $20 million in twelve years. We plan to prepay a $50.2 million mortgage on December 5, 2013, with no penalty. The mortgage note is due on January 5, 2014, and has an interest rate of 5.75%.

In September we entered into an unsecured term loan for $75 million with a seven-year term and interest only payments. The loan has an interest rate of LIBOR plus 1.4% subject to a pricing grid for changes in the company’s credit rating. We also entered into two interest rate swaps to convert LIBOR to a fixed rate providing an effective fixed interest rate of 3.765% on $60 million and 3.700% on $15 million. The loan is scheduled to close on December 20, 2013.

We continued to sell shares under our continuous equity program to keep our debt ratios in line as we acquire and develop properties. In Q3 we sold 296,435 shares for $17.9 million or $60.34 per share, and have sold 579,198 shares for $34 million or an average of $58.70 per share for the year. Our guidance for Q4 assumes an issuance of an additional 17.5 million of shares through the ATM before the end of the year.

In September we increased our quarterly dividend by $0.01 per share and paid our 135th consecutive quarterly cash distribution to common stockholders. This dividend of $0.54 per share equates to an annualized dividend of $2.16 per share. Our FFO payout ratio was 65% for the quarter. We have maintained or increased our dividend for 21 years and have increased it for 18 of those years. Rental income from properties amounts to almost all of our revenues so our dividend is 100% covered by property and operating income. And again, we believe this revenue stream gives stability to the dividend.

FFO guidance for 2013 has been increased and narrowed to a range of $3.22 to $3.24 per share, and the midpoint was increased from $3.20 to $3.23 per share. This is the second time we have increased the midpoint of our guidance for 2013. Earnings per share is estimated to be in the range of $1.04 to $1.06 per share.

Now David will make some final comments.

David Hoster

We had a strong Q3 following a strong Q2, both of which were led by good leasing ahead of our expectations in both our portfolio and our development program. Our balance sheet is as strong and flexible as it has ever been, and we believe is well-structured to take advantage of future opportunities for the remainder of this year and well into 2014.

Keith and I will now take your questions.

Question-and-Answer Session

Operator

(Operator instructions.) We’ll take our first question from Mr. Michael Bilerman from Citi. Your line is open.

Kevin [Behrn] - Citi

Good morning, this is Kevin [Behrn] with Michael. The 95.0% occupancy guidance for Q4 seems a bit light to us given a 95.7% occupancy in Q3 and a higher lease rate. Can you help us bridge the gap on that?

David Hoster

Well simply to stay above 95% or get above 96% is still not easy to do in our various markets given what’s going on there with the market occupancies well below where we are. So we just think it’s conservative and is aligned with our current budget for the balance of the year.

Michael Bilerman – Citi

David, it’s Michael speaking. Are you expecting, is there a certain amount of fallout? To average 95.0%, if you start the quarter at 95.7% one would imagine you were expecting a fair amount of fallout to get down to an average level and you don’t have that much rolling.

David Hoster

No, we have a tenant that’s in several buildings in Houston that is moving. They were bought out, I think it was by [Formajay] and they’re moving to a new campus out in Katy. So we’re going to lose some there. And again, part of it is just what our internal projections are. So do I hope to beat 95% on average? Yes, but there’s not a lot of room on the upside to beat it by a lot.

Michael Bilerman – Citi

Okay, thanks. And then can you break down the tenant demand? Has there been any incremental change in housing-related tenants and so on?

David Hoster

Absolutely. We have not this quarter actually quantified in every market the growth in housing-related tenants but we are seeing a steady increase in both prospects and signed leases, and I guess also I should add in expansions internally. And sometimes it’s a little hard to say what’s related to housing. We just announced a while ago a 202,000 square foot build-to-suit which is going to be World Houston 40 in that development with Mattress Firm. So I guess that’s related to housing because that’s where mattresses usually end up.

We’re seeing out in Katy two prospects that are both related to housing that we’ve not signed either yet but are dealing with them, and a pickup really in all the other markets. Maybe on the next conference call we’ll actually quantify the amount of square footage that we’ve executed for the year with housing tenants, but it’s a clear pickup.

Michael Bilerman – Citi

Are there any other tenants that you see a lot of, because you saw so many occupancy gains in the quarter so is there any other strong tenants out there?

David Hoster

We’re seeing continued in medical with pharmaceutical fulfillment that filled our second-to-last building in Orlando. The newest building was just filled by a group expanding related to the convention center which I guess you could refer to as tourism. We signed a 300,000 square foot lease in Charlotte with Kahn’s, the electronics retailer – again, consumer-oriented. In Houston there’s still a lot of energy and the backup to energy because of the growth in population in jobs. There’s a lot of new construction so some of that’s related to commercial construction, or probably at least in the short term more than residential construction.

Again, it’s still the basics but as I mentioned in my prepared remarks the good thing is we’re seeing our existing customers starting to expand and we’re starting to see new prospects entering the market. And both of those facts are really what drive up occupancy and eventually allow you to really move rental rates.

Michael Bilerman – Citi

Okay, thank you.

Operator

And we’ll take our next question from Brandon Cheatham from SunTrust Robinson Humphrey. Your line is open.

Brandon Cheatham – SunTrust Robinson Humphrey

Thank you, good morning. Just real quick you mentioned the concessions have continued to decline and we saw that in this quarter as well. Would you say that’s a result of a shift in leverage somewhat from the tenant to the landlord, and what are your expectations for that going forward?

David Hoster

To continue to decline but do it fairly slowly. There’s less free rent being given and when you look at how many months it is per the year of the lease, and in particular in our development leasing somehow it seems easier to give free rent there because you’ve built in a lease-up period and we’ve significantly reduced the free rent. Also in the concessions is there a lot less of broker incentives, bonus commissions, an extra percent or two to the preparing broker – that sort of thing.

So it comes from all sides on that. But that comes down slowly and it’s part of the shift of the mentality or the psychology from a prospect or tenant market to a little bit more of a landlord market as prospects realize there’s less choices out there and if they don’t keep moving and make a decision somebody else is going to lease that space out from under them. And that takes a while for that to shift. But as I said it’s happening.

Brandon Cheatham – SunTrust Robinson Humphrey

Okay. And then can you just talk about some of the proposals for new space compared to the slide that’s coming online in your markets, and if there’s any concerns about supply outpacing demand in any particular market?

David Hoster

Well, the only market where we operate in where we see a significant increase or almost any development of industrial space is Houston, and so far that’s been absorbed fairly readily. Depending on whose statistics you look at there, one brokerage firm, if you add spec and build-to-suit together it’s about 9.9 million square feet of new construction; if you look just at spec it’s 6.2 million square feet and that’s in a base of 500 million to 550 million square feet. And year-to-date absorption is about 4 million square feet.

It would probably about even out I think but I think we’re going to need to address that question again in six to twelve months as some of that newer space doesn’t lease as quickly as the developers would like; and we’ll see if that has any damper on rents on new space which eventually could reduce the yields that developers are expecting by at least a little bit. But so far Houston’s been able to absorb it. There’s little or no development in the rest of our markets, and remember, we’re the only one building spec at this time in San Antonio, Charlotte. There is a little bit of additional spec development in Orlando now but a lot of these markets just aren’t strong enough for people, the merchant building types to jump back in.

Brandon Cheatham – SunTrust Robinson Humphrey

Okay. And just one last question: on the $75 million unsecured at 3.75%, that was a private market deal. Do you have a sense for what that would be in the public market and how does that compare to the 4.5% that you guys quoted in Q2?

N. Keith McKey

Well the 4.5% was on a ten-year note and we were looking at ten and seven. We had a nice hole in our maturities schedule where we could put a seven-year in, and when we were looking at ten versus seven the ten-year was almost one percentage point above – so it was actually above the 4.5% when we were looking several weeks ago at about 4.7%. We decided to go with the 3.7%.

Brandon Cheatham – SunTrust Robinson Humphrey

Okay. Okay, alright. Thanks a lot guys.

David Hoster

Thank you.

Operator

We’ll take our next question from Jamie Feldman from Bank of America. Your line is open.

Jamie Feldman – Bank of America

Thank you. I was hoping you can talk a little bit about some of your weaker markets, or if you look at the same store pays the ones that have been the biggest drag on your same store growth and just how the recovery is coming along there – mostly the Florida market and California?

David Hoster

The Florida markets are all, it’s a little bit fits and starts improvement. In Q3 and really the end of Q2 we saw some very positive movement in both Jacksonville and Tampa. Tampa had been slow in Q1 – nobody had a good explanation for that other than just timing and it has picked up a good bit for us in Q3. But on a comparative basis last year was very strong. Jacksonville, we had hoped to by the end of Q3 be over 90.0% and we had got up to 91.9% occupied there, so that was a positive. We had a lot of leases turning but there’s been good activity and as a result we’re able to improve that. So we’ve been pleased with the improvement in Florida although the averages are still below the company totals.

In California there’s really not been that much change as we just haven’t had that much turning, so I don’t think right there that’s been really statistically significant. We have a vacancy of one of the two buildings in our Yosemite development, our property in northern California and with only 1 million square feet there that’s really affected the same store.

Jamie Feldman – Bank of America

Okay, and then along those lines what are your latest thoughts on leasing spreads and maybe your outlook on when they can turn positive? And if you look at your leases rolling in ’14 what your sense is of the marked to market?

David Hoster

Again, you’ve heard me say many times it’s what numbers do you compare to which numbers. I’ve been preaching we probably give too much information because I’m not sure if any of our office/industrial or industrial peers give the information on renting vacant space where that space has been vacant for more than a year, which is what we do. So after some thought we decided that really the most important numbers from the trend standpoint to look at are renewal rates, and if you look at our renewals on a GAAP basis we’ve been positive now for six quarters. And I think GAAP is an important number to look at in today’s environment given that 92.5% of our leases have bumps in them, and those bumps average from a little over 2% to 3%.

And so that in many cases what we’re doing is with a renewal or leasing a vacant space is making the first year’s rent not go up or make it attractive – it’s not really a teaser rate but to keep somebody and then have annual bumps thereafter that don’t get included in the statistics that we report. So if you look at ’14 and which we have and say “Okay, how many leases were signed in 2008 and earlier that are turning in ’14?” it’s 1.0%. 1.0% of our portfolio of 33 million square feet turning next year are leases signed ’08 and before. So I think that that should be a good indicator that the leasing spreads no matter how you look at them are going to appear a lot more positive during ’14 than they have in ’13.

Jamie Feldman – Bank of America

Okay, great. And then finally just thinking about where you think the path of development goes here and comparing it to your land bank do you feel pretty well positioned? Do you think you need to buy land in specific markets based on where this recovery seems to be heading?

David Hoster

We are actively looking for land in southeastern Florida, not really Dade County but Broward and Palm Beach because we’d very much like to grow down there and that market continues to improve. There’s a lot of new building in Dade County but not in the other two yet. We have a couple little pieces of land in Dallas but we’d like to have a bigger piece there to do a series of buildings so we’ve been looking in that market. There’s a lot of competition trying to do the same thing.

We like what we have in Charlotte. That has been a surprisingly good market Q3 and for the whole nine months of this year and we are hoping to tie up some additional land there before the end of the year. We’re pretty much set in Houston right now and we’ll have development going in three different locations, but the success of our Katy location has us looking for additional land out on the far west side. And the completion of the Grand Parkway for about a third of its distance in the next two years we think is really going to open up that area for industrial development.

Phoenix, as you can see in our statistics we just re-leased a spec building that we started earlier, Chandler Freeways – we leased it about a month before it was to be completed to a single tenant and hope to start on some other land we have in Chandler that we can put I think it’s five buildings, but are looking for land there for our business distribution product but not any big bulk buildings which is most of what the development is on the west side of town.

Jamie Feldman – Bank of America

Okay, great. Thank you.

David Hoster

Thank you.

Operator

We’ll take our next question from Craig Mailman from KeyBanc. Your line is open.

Craig Mailman – KeyBanc

Good morning, guys. David, on that 6 million square feet of spec in Houston, how much of that is comparable to your product at World Houston and some of your other parks in Houston?

David Hoster

The direct competition right now to World Houston is Trammell Crow with a money partners building two of our type buildings on the east side of the airport; and then on the west side Verde and Liberty both have some buildings that for the larger tenants will be competitive with us. Some of the other buildings both on the west side and what Duke’s doing on the east side are bigger, more cross-dock, over 200,000 square foot facilities that we’re not going to have any direct competition with.

Out in Katy, Transwestern has a development almost across the street from us but we’ve been signing leases well ahead of what they’re doing I think because of the quality and the extra pizzazz we’ve put on our buildings out there. Then we hope to start development in, if not the end of the year Q1 on our West Road Development right off of Beltway 8 and it’s a little too early to tell who we might be directly competing with there. But an awful lot of what’s going on is the bigger cross dock. In Houston “bigger” is over 200,000 square feet.

So we haven’t put a set number of square feet to compete with us directly but when we had competition on all those locations before the recession we did pretty well, so we think we can continue to outperform but maybe not quite at the pace that we’ve seen at World Houston over the last year and a half which has been pretty amazing.

Craig Mailman – KeyBanc

So I know it’s too early for ’14 guidance here but you guys have done $94 million or expect to do $94 million in starts this year. Are you, it sounds like on the margin maybe at least a little more cautious heading into ’14 given the new development? I mean could that potentially slow or would it ramp from here?

David Hoster

It’s all based on leasing. We don’t set goals because if you give goals to developers they’ll go ahead and build it. So it’s all based off of what we’re doing with the existing spec buildings that we’re creating in our various parks. So I can see Houston slowing a little bit but I would hope that Orlando would pick up. We’ve got one building under construction there now that we could start one or two more there next year, maybe be able to do a build-to-suit. We have two attractive locations in Tampa that I hope we’d be building on, at least one of those early to mid-next year.

We have some good land on the west side of San Antonio where we would like to add buildings, and the early interest in our Steel Creek, Charlotte park has us encouraged that we’d be able to do a couple of buildings there next year. So in some of the other markets we’d like to see a pickup that would hopefully more than make up for any potential slowdown in Houston.

Craig Mailman – KeyBanc

That’s fair. Then just I noticed on the Chandler asset you guys leased post-quarter end you guys had underwritten or were expecting little bit higher yields last quarter. Is this still within your tolerance range for an 8% yield on the Arizona or is there any dynamic down that kind of brought it down the 40 bps?

David Hoster

I think it was, we might have brought it down 25 to 30 basis points – from an 8.3% to a little over an 8.0%. We jumped at that because we thought if we could remove the leasing risk, which is really what we see as the only risk. Construction risk has been pretty minimal for us; the leasing risk, if we could eliminate that before the building was actually brought to market we’ll jump at 8% yields all the time. And then that allows us to move into our Kyrene 202 Park that’s a couple of miles away from Chandler Freeways and hopefully start two buildings there Q1 next year.

One of our stated goals is to have a 150 basis point spread at the minimum on what our pro forma yields are compared to what we can sell a building for, and I think new quality buildings in Phoenix at this point would certainly be sub 6.0%, or a the worst a 6.0%. So we’ve got a very good spread on that. So we did that intentionally understanding where we were going with it.

Craig Mailman – KeyBanc

Great, thank you guys.

David Hoster

Thank you.

Operator

And we’ll take our next question from Alex Goldfarb from Sandler O’Neill. Your line is open.

Alex Goldfarb – Sandler O’Neill

Hi, good morning.

David Hoster

Good morning. Good to have you on.

Alex Goldfarb – Sandler O’Neill

Hey, how are you? The first question is just going to 2014, one, you’ve got Iron Mountain that’s expiring in January but more you’ve got a huge amount of expirations with the US Postal Service. So maybe if you could talk us through when tenants, how far out tenants typically renew; and then as far as the US Postal Service are those tenants that typically once they’re in a space they tend to renew or do they actively go out and seek… It would seem like they would just keep renewing in place but I didn’t know if budget cutbacks or anything, maybe they’re looking to close any locations.

David Hoster

So far with the Post Office we have no indication that they will not renew and we are in renewal discussions with a couple of those locations already. So there’s a certain level of, as you point out, if they’re there they’re a whole lot easier to renew. They don’t have to, like GSA – if they go to a new space they have to bid it out, it becomes a very complicated process. Renewals are very easy or relatively easy. So we’re optimistic on the Post Office and we’re optimistic on Iron Mountain. They tend not to pick up and move given how difficult and expensive that is so we’re optimistic that that will be a renewal also.

Alex Goldfarb – Sandler O’Neill

Okay. And my second question is, Keith, you have about $75 million in maturing mortgages next year. I think based on your prior comments it would sound I guess pretty safe to say that you guys will pay that off with new, unsecured issuance – correct?

N. Keith McKey

Correct.

Alex Goldfarb – Sandler O’Neill

Okay. And then just given what rates have done since you guys originally priced your unsecured this year how much do you think new unsecured term loans or private placement is up from where you originally did your deal earlier this year?

N. Keith McKey

Well we did a 3.8% ten-year and we struck that deal in I think March, and I would say that would be around 4.5% now.

Alex Goldfarb – Sandler O’Neill

Okay, okay. And then, okay, that’s perfect. Thank you.

N. Keith McKey

Thank you.

Operator

We’ll take our next question from Brendan Maiorana from Wells Fargo. Your line is open.

Brendan Maiorana – Wells Fargo

Thanks, good morning. David, listening to your occupancy comments I guess is it fair for us to sort of think about an average occupancy, even in a pretty strong market that it’s difficult for the portfolio to be above 95% for an average for a year if you just kind of think about some frictional vacancy and tenants moving around?

David Hoster

If we look back at peak, I guess you would really go back to ’06, ’07, early ’08 we were finishing quarter end, which is probably a reasonable number to average anywhere from… Well, you’ve got Q2 of ’06, 94%; we were over 96% one quarter and mid- to high-95% for about five or six quarters. I think one of the big factors is going to be how much new supply comes on the market, and so far other than Houston at least in our Sunbelt markets it’s nonexistent – so I think that gives us a better chance to stay in the 95% to 96% range. Certainly it’s difficult obviously to average 96% for any period of time but I would hope that we could average 95% give or take a little bit for the foreseeable future.

Brendan Maiorana – Wells Fargo

Sure, no, that’s helpful. And then that stat that you provided, the 2008 and pre rents that are expiring next year is helpful. Do you have a sense of what that number was this year?

David Hoster

It was a lot higher. Let me see if I can pull out one of my sheets here… It was about half again as high I guess.

Brendan Maiorana – Wells Fargo

So it was about 2% versus about 1% for ’14? Okay, yeah, that’s great.

David Hoster

But the other thing too is, as you hear me say many times, when we re-lease vacant space the statistics can be out of whack when we compare. It’s which vacant space and when did it become vacant, where it’s a very different comparison if the space has been vacant for one month versus whether it’s been vacant two or three years. So that’s where I come back and say to me the apples-to-apples comparison is renewals.

Brendan Maiorana – Wells Fargo

Yeah right, so we should sort of think about the renewal spreads – ’13 versus what may happen in ’14 given the drop in the rollover of the pre-2008 leases.

David Hoster

And hopefully an increase, a slow increase in market rents in our various markets.

Brendan Maiorana – Wells Fargo

Sure, yep. And well the good thing about your stats is that you don’t have a lot of vacancy to fill so that won’t be a burden on you next year. Just a last question: any sense of yield that you’re likely to get or cap rates on the dispositions that you mentioned?

David Hoster

There’s going to be, well, in Dallas we’re looking in the 7%s when you average the buildings together, which because Dallas is a strong market that’s better pricing for us than it certainly would have been a year or two ago. The little buildings in Tampa, it’s harder to put a cap rate on those because one of them is vacant, so if you put that in there it’s probably a mid-7% but a couple that are leased are going to be around 9%.

They’re older, smaller buildings, and these were buildings that when we bought that large Tampa portfolio in December of ’11 we announced that there were six small buildings that didn’t fit us and that we were going to sell those over time: two we had put in our TRS immediately and sold those and then the other four went into the portfolio because we thought we could improve the leases. And so we’re waiting for the two-year Safe Harbor on selling those assets.

Brendan Maiorana – Wells Fargo

Yep, great. Thanks for the color.

David Hoster

Thank you.

Operator

We’ll take our next question from Mr. John Guniee from Stifel. Your line is open.

John Guinee – Stifel Nicolaus

Just another great quarter, David! How are you doing?

David Hoster

Thank you!

John Guinee – Stifel Nicolaus

As we think about this over the long term it looks to us like over the last three years you’re getting one way or the other 20% to 24% annual lease rollover, or said another way leases signed equal about 20%, 24% of total inventory. And it looks like you’re bouncing around $3 a square feet for re-leasing costs when you blend new and renewal. And then basically the GAAP positive/cash negative has been around a while. What of those three major metrics do you see moving in the next couple of years and which way do they move?

David Hoster

I think you’re high. We can go through some more details later but I think you’re high on the roll, because we’re generally looking at about… You know, our average lease length when you put in the development properties is over five years. So and we’re now signing longer leases in what’s rolling on a regular basis. So we’re usually looking at about I think an 18%, 19% at most on the roll.

I think leasing commissions are going to come down a little bit because we’re still paying some higher commissions in some markets like Phoenix. And I think if you look back historically on our TIs per year leased, those are going to come down a little bit but they’re always affected by that 5% of space that we have that’s service center or R&D with a higher office finish. But certainly market rents are going up so that should I think be the biggest plus factor.

John Guinee – Stifel Nicolaus

Gotcha. Okay, just to clarify the way I was looking at this is over the last nine months your total in your four categories of lease signed is about 5.6 million square feet. If you annualize that, that’s about 7.4 million square feet off of a 32.0 million square foot base gives you roughly 23%. But we can talk about that a little more.

David Hoster

Yeah, I think Q2 historically has more leases signed. It’s not a pro rata 25% each quarter or anything like that but we’ll go over that later. Q2 is always way high for us.

John Guinee – Stifel Nicolaus

Great, okay. Hey, thank you very much.

David Hoster

Thank you.

Operator

And we’ll take our next question from Vance Edelson from Morgan Stanley.

Vance Edelson – Morgan Stanley

Great, thanks for taking the questions. So you’re active on the development front given the strong demand; you’re anticipating that beyond Houston the competitive development is “nonexistent” as I think you called it. Do you think your competitors are not as optimistic about the fundamentals or is it that they still have plenty of space as you mentioned earlier, or perhaps they’re just not as well funded or some combination of these factors?

David Hoster

I think a lot of our REIT peers have a strategy of building bigger buildings, so in some of our markets there’s not a demand for that yet because most of the Florida markets, they’re not big distribution centers like an Atlanta or a Chicago or the west side of Phoenix. So some of them have not jumped in for that reason.

Secondly, some of them don’t have the land positions that we do. And then to jump around on your question a little bit, we’re only seeing the merchant builders come back in in the strongest markets where they are attracting institutional money as a partner or a participant in one form or another, as we see in Houston where I think AW, Clarion and some others who want additional exposure to industrial real estate have found the best way to do it is to hook up with a developer.

What we’ve seen absolutely zero of is the smaller, local developer who traditionally would go to a bank or an insurance company and get a construction loan and a take out. We’ve not seen any of that yet. But we expect to see as markets improve some of our peers start to do some more development, but very few people build our business distribution type products which helps.

Vance Edelson – Morgan Stanley

Okay, makes sense. And then speaking of the land bank, you’ve been able to secure a pretty nice basis with some of the recent land deals like the municipal golf course in Houston but not a lot of properties currently under consideration for acquisitions. Is that a reflection of your discipline, that you really don’t want to consider anything unless it brings with it a special situation so to speak in terms of being usually attractive? Or are you really willing to go out and pay market price and just have a fair basis as opposed to an attractive one?

David Hoster

I think one of the reasons that we build at a higher yield than some of our peers is because of the way we’re able to buy land during recession periods and in many cases buy land from either distressed sellers or just sellers that made up their mind that it was time to sell at a time when there weren’t a lot of buyers. That’s worked well for us, and I won’t go through all our examples on that.

But another factor is we’ve been able to buy larger pieces of land that way where we can create parks and just go through one phase after another of new buildings, building on that land. Right now Houston is a tough place to buy industrial land because everybody’s looking for it, so some of the prices we’re hearing are 1.5xor 2.0x what we have in some of our land, again, which makes us more competitive when we start pitching on build-to-suits or building spec. But we’re always looking for additional demand because if you need it tomorrow is the point where you have to pay up for it.

Vance Edelson – Morgan Stanley

Got it. Okay, very helpful, thanks David.

David Hoster

Thank you.

Operator

And we’ll take our next question from Eric Frankel from Green Street Advisors. Your line is open.

Eric Frankel – Green Street Advisors

Thank you. David, can you just talk about the potential sales of your property in Dallas? I think the theory a couple months ago was that class B and C quality buildings would probably take the brunt of the interest rate increases but that doesn’t seem to be the case. Can you comment?

David Hoster

Well, one of the sales we’re talking about, our tenant had an option to buy the building and they’ve gone ahead and exercised that, and it’s a price that we both think is attractive. The other, I don’t want to go into too much detail because it’s not completed yet but Dallas and Houston have become very attractive markets for buyers and I would guess these older buildings are viewed as value-add, and when a market is strong is the time to sell some properties that you’ve been thinking about for a while. So we feel fortunate that that’s fit together.

Eric Frankel – Green Street Advisors

Thanks. Are you seeing that trend outside of Texas?

David Hoster

Not really because we haven’t tested the market. But in talking to the industrial sales brokers that with the higher interest rates pricing has really not changed much in the A markets. It’s the B or C product in the B or C markets where the interest rate has made a difference to the higher-leveraged buyers, and where they’ve been cash flow buyers. But the A markets still seem to have a lot of demand.

Eric Frankel – Green Street Advisors

Thanks for the color. And then I guess the final question is on land: do you believe, I guess what you’re talking about in terms of land price increases is just related to Houston and maybe Dallas. Can you say what’s the effect been on other markets?

David Hoster

There’s just not been enough land transactions to I think be able to generalize on what’s happening because in a lot of markets developers are not out actively seeking land. Prices are high in South Florida just because everything seems to be high-priced in South Florida, but in other markets there’s not been a lot of competition for land like there is in Dallas and Houston. You know, a lot of developers have looked at a city like Houston and said “Gee, I need to be there if I’m going to be developing industrial anywhere,” so they come in and then it gets very competitive for the better-located sites.

And the last factor is that basically no landowner wants to sell his land for industrial because we need a lower land cost than any other use. They’d rather sell it for office or retail or apartments, so that always becomes an issue even though in Houston there’s basically no zoning.

Eric Frankel – Green Street Advisors

Thanks, David, and your disclosure is great, please don’t change it.

David Hoster

Thank you.

Operator

And we’ll take our next question from Mr. Bill Crow from Raymond James. Your line is open.

Bill Crow – Raymond James

Thanks, good morning guys.

David Hoster

Good morning!

Bill Crow – Raymond James

David, are there any markets, any real core markets where you just say development for ’14 is off the table period?

David Hoster

Good question, I’d have to think about them for a point. I would say I don’t see development occurring in Jacksonville. Maybe in Ft. Meyers as we’ve got a few of the Florida markets – there’s really no dock-high space available there now and the market’s certainly recovering. El Paso I guess we’d call a core market because it’s Texas but I don’t see us doing any development there at this point; there’s still way too much vacancy and the rents haven’t moved enough.

Tucson we view as somewhat an extension of Phoenix, and that market is recovering but very, very slowly so I would not expect any development there. We’d like to look for some more land, have looked for more land in Denver – that seems to be an improving market for our type product. As I mentioned, we’d like to expand the development that we’re doing in Charlotte because of the strength of that market and a lot of the institutional-type developers have pulled out of that market, which makes it more appealing for us from a competitive standpoint. Did I miss any cities?

Bill Crow – Raymond James

I think you got them.

David Hoster

In California all the land’s too expensive so we’ve not been able to find any to build to our kind of cap rates.

Bill Crow – Raymond James

David, would you consider entering a new market through development or do you feel like you have to have existing properties to better understand the market?

David Hoster

I don’t want to ever say never but that’s historically not how we’ve done it. When you look at the two most recent markets I guess in the last eight or so, ten years – San Antonio and Charlotte, we went in, bought property; got comfortable with the market, comfortable with all the things that were going on there; the brokerage community got comfortable with us; and then started building. So that’s historically how we’ve done it and more than likely we’d continue to do it that way.

We did go into Ft. Meyers and started building because we couldn’t find anything to buy that fit our quality criteria, and the first three buildings worked real well and then we hit the recession. So we don’t see the opportunity to buy there, probably only to build in the future.

Bill Crow – Raymond James

Alright, and then finally from me, David, can you just give us your current thoughts on DC as a prospective market?

David Hoster

I’ve not studied it really enough yet. I’ve always liked that Northern Virginia Dulles Airport area from a growth standpoint but again, that seems to be a market if you’re buying quality the prices are high, cap rates are low due to the fact that a lot of investors were well, until recently were very comfortable with it being the nation’s capital. I don’t know how that’s going to be viewed going forward from a real estate standpoint as the government seems to have fits and starts and struggles with cutbacks. But that’s an area that we casually look at on a regular basis as we do in Austin and the Research Triangle.

Bill Crow – Raymond James

Great, thank you.

David Hoster

Thank you.

Operator

And we have no further questions at this time.

David Hoster

Well again thank you, everybody, for your interest in EastGroup and as always Keith and I will be available for a while to answer any questions that we might not have covered or if you’d like to talk to us directly. Thank you.

Operator

This concludes today’s program, you may now disconnect at any time.

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