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Eastgroup Properties Inc. (NYSE:EGP)

Q2 2014 Results Earnings Conference Call

July 18, 2014, 11:00 AM ET

Executives

David Hoster - President & Chief Executive Officer

Keith McKey - Chief Financial Officer

Analysts

Ross Nussbaum - UBS Securities

Kevin Varin - Citigroup

Craig Mailman - KeyBanc Capital

Vance Edelson – Morgan Stanley

Alexander Goldfarb - Sandler O'Neill

Brendan Maiorana - Wells Fargo

Eric Frankel - Green Street

Brad Burke - Goldman Sachs

Gabriel Hilmoe - ISI Group

Operator

Good morning and welcome to the Eastgroup Properties Second Quarter 2014 Earnings Conference Call. (Operator Instructions) Now it's my pleasure to introduce, David Hoster, President and CEO.

David Hoster

Good morning and thanks for calling in for our second quarter 2014 conference call. We appreciate your interest in Eastgroup. As usual Keith McKey, our CFO, will be participating on the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

Operator

The discussion today involves forward-looking statements. Please refer to the safe harbor language included in the company's news release announcing results for this quarter that describes certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected.

Also the content of this conference call contains time-sensitive information that's subject to the safe harbor statement and included in the news release is accurate only as of the date of this call.

David Hoster

Thank you. Eastgroup continued its positive momentum during the second quarter. Funds from operations per share met the mid point of our guidance and represented a 5% increase over 2013 second quarter per share results. We've now achieved FFO per share growth as compared to the previous year's quarter in 12 of the last 13 quarters.

Quarter-end occupancy was at or above 95% for the fourth consecutive quarter. Same property cash operating results were positive for the 13th consecutive quarter. Rental rate spreads were positive for both cash and GAAP and we entered Austin, Texas, which is a new market for us.

At quarter end we were 95.0% occupied and 95.7% least, maintaining our trend of occupancy at 95% or above. We expect a slight different occupancy over the next two months and then an increase back above 95% for the balance of the year.

At June 30, our California markets continued to be out best at 97.6% leased followed by Texas at 97.0% leased. Houston, our largest market with over 5.8 million square feet was both 97.8% leased and occupied.

Leasing activity is good in all our markets from both organic growth of current customers and new prospects to the market and we believe this should continue for the foreseeable future.

In the second quarter we renewed 55% of the 999,000 square feet that expired in the quarter and signed new leases on another 19% of the expiring space for a total of 74%. We also leased 363,000 square feet that had either terminated early during the quarter or was vacant at the beginning of the quarter.

In addition, we've leased and renewed 176,000 square feet since June 30. Between now and the end of the year, we have only 1.1 million square feet, or 3.5% of the portfolio, scheduled to expire.

For the quarter GAAP and cash rent spreads were up 12.9% and 5.0% respectively. This is the first time that both have been positive since the third quarter of 2008. And although a single quarter's results do not indicate a trend, we believe rental rate spreads will continue to be positive going forward.

In addition GAAP rent spreads on renewal leases has now been positive for nine consecutive quarters. The weighted average lease length was 3.8 years, a slight decrease from the previous four quarters, but in line with our recent averages from the past several years.

Tenant improvements were $1.94 per square foot for the life of the lease, or $0.51 per square foot per year of the lease, which is above our recent average. The average amount of tenant concessions continuous to decline slowly but leasing commissions remain elevated in a number of our markets.

As a result of our continued strong occupancy, second quarter same property operating results increased 2.6% on a cash basis and 1.8% on a GAAP basis with straight-line rent adjustments.

At June 30, our development program consisted of 21 buildings with over 1.8 million square feet and a total projected investment of approximately $135 million.

These buildings were 46% leased at quarter end which is a good level given the two-thirds of the properties that are still under construction.

Yesterday afternoon we signed a 50,000 square foot lease at Kyrene 202 Building I which increased its total of 49% leased and that building is now 67% leased. Our developments were located in Houston, San Antonio, Phoenix, Orlando, Charlotte and Denver.

We did not start any new developments or transfer any properties from the development programs in the portfolio during the second quarter. However, we have started construction of two new developments since the beginning of July both of which are subsequent phases in existing successful Eastgroup products.

West Road Business Park III in Houston will be 78,000 square feet with the projected investment of $5 million. The Thousand Oaks Business Park IV in San Antonio will have 66,000 square feet and has an estimated cost of $5.1 million.

Also subsequent to quarter end we transferred Ten West Crossing II in Houston and Thousand Oaks III in San Antonio to the portfolio. They have a total of 112,000 square feet and are both 100% leased.

We continue to be on track to add at least another 20 million of construction starts to give us just under 100 million of new development starts for the full year.

The second quarter was an active one for acquisitions. In May we acquired Ridge Creek Distribution Center III in Charlotte for $14.5 million. Constructed in 2013, this bulk distribution property contains 270,000 square feet and this is between our Ridge Creek I and II buildings in Charlotte's southwest industrial submarket. It is currently 55% occupied by two customers.

In June, we entered the Austin market with the purchase of Colorado Crossing Distribution Center, with 265,000 square feet for a price of $27.2 million. Built in 2009, the four building multi-tenant business distribution complex is 100% leased to six customers.

We have been looking to potential investments in Austin for a number of years and Colorado Crossing gave us the opportunity to acquire a state-of-the-art asset in the airport submarket.

Subsequent to quarter end we sold our 9,000 square foot Tampa West VI Building, which was the last of six small Tampa Buildings we had acquired as part of a large portfolio several years ago.

We are currently marketing for sale of two older assets in Houston and two older buildings in Dallas. We do not presently have any operating properties under contract to purchase.

Keith will now cover a number of financial topics.

Keith McKey

Good morning. FFO per share for the quarter was $0.84 compared to $0.80 for the same quarter last year, an increase of 5%. Operations have benefited from lower interest rates on refinancing mortgage debt and an increase in property net operating income related to developments, acquisitions and same property results.

Acquisition cost reduced FFO by $160,000 for the second quarter. FFO per share for the six months was a $1.66 as compared to $1.56 last year, an increase of 6.4%.

Debt to total market capitalization was 31.5% at June 30, 2014. For the quarter, the interest and fixed charge coverage ratios were 3.95 times and debt to EBITDA was 6.61 and adjusted debt to adjusted EBITDA ratio was 5.87 for the quarter.

All of these metrics were improvements from June 30, 2013. Floating rate bank debt amounted to 4.8% on total market capitalization at quarter end. Bank debt was $142 million at June 30 and with bank loans of $250 million we had $108 million of capacity at quarter end.

On July 10th, we repaid with no penalty, a mortgage that was scheduled to mature on October 10, 2014. The outstanding balance was $26.6 million and the loan had an interest rate of 5.68%.

On July we entered into an unsecured $75 million term loan agreement which is expected to close on July 31, 2014. The loan will have a five year term and interest only payments. It will bear interests at the annual rate of LIBOR plus an applicable margin currently 1.15% based on the company's senior unsecured long term debt rate.

The company entered into an interest rate swap agreement to convert loans LIBOR rate component to a fixed interest rate for the entire term of the loan providing a total effective fixed interest rate of 2.846%.

The maturity fits well with our maturity scheduled which has only $55 million due in 2019. We continue to convert to unsecured debt as we plan both our development program and acquisitions with unsecured debt and also repay mortgage debt with unsecured debt.

In the second quarter we sold $20 million of common stock at an average price of $64 per share and year-to-date have sold $40 million through our ATM. We plan to sell an additional $35 million over the remainder of 2014.

In June we paid our $138 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 64% for the quarter. Rental income from properties amounts to almost all of our revenues so our dividend is 100% covered by property and net operating income. We believe this revenue stream gives stability to the dividend.

FFO guidance for 2014 has been narrowed to a range of $3.42 to $3.48 per share. And the midpoint was increased from $3.44 to $3.45 per share. The midpoint for the third quarter is $0.88 per share and $0.91 for the fourth quarter.

For those quarters we are projecting GAAP same property increases of 2.1% and 3.2%. Strong development leasing and contributions from our acquisitions already closed this year. With our cost of capital benefiting from lower interest rates and a good stock price, we are projecting a 6.8% increase in FFO per share from last year.

Now David will make some final comments.

David Hoster

As I've been saying for the last several quarters, this continues to be a good time to be in the industrial real estate business in Sunbelt. And we've seen our reason for this to change for the foreseeable future.

Given our strong flexible and conservative balance sheet, we believe that we are well positioned to take advantage of the opportunities in this positive environment.

Keith and I will now take your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Jamie Feldman from Bank of America. Your line is open.

Unidentified Analyst

Hi, this is actually [Steven] (ph) for Jamie. Congrats on the quarters guys. I have two questions, I guess the first one. Looking at your new guidance in cash and external NOI, just looking at the second half of the year that should imply a pretty large ramp over the third quarter and the fourth quarter.

Is there any way you could take us through both the third quarter and the fourth quarter to kind of see what your growth should be going into 2015 because just like looking at the numbers, it's setting you guys up for a great start for 2015?

David Hoster

We have not grown any numbers in any detail on 2015 obviously, still working on 2014, but to review what Keith had said, we have a number of big contributors. One is the development NOIs that we've signed leases with customers who are scheduled to move in, in August and September beginning of October that's some pretty big numbers from that standpoint.

Secondly with the two acquisitions and particularly the Austin one, again we have a nice addition to NOI being able to replace mortgage that Keith discussed that was paid off with significantly lower debt on the five year term loan with banks, will have a good savings there.

Occupancy will be probably -- the occupancy of the company will probably be about the same as it was last year, but to confuse us a little bit the occupancy of the company at the end of the quarter is different than the occupancy of the same property pool and that same property pool third and fourth quarters, particularly fourth quarter compared to the fourth quarter last year, the occupancy is higher. So, we will be picking up from there.

And then finally a bit of pickup from rate improvement for the fourth quarter this year as compared to the fourth quarter of last year. And it's pretty close to impossible to give you a very specific breakdown on each one of those contributions because other than occupancy and rent growth, all the others have somewhat offsetting associated cost with them based on cost to capital and all. So, it's a combination of all the things I just mentioned.

Keith McKey

And I would just add that in the 3.2% that we quoted for same property increase in the fourth quarter about 1% of that comes from the termination fees.

Bank of America

Okay. Okay, thanks. That kind of answers my second question on occupancy too and the differences between the two. But I guess in terms of markets and looking at cash leasing spreads, can you guys drill down I guess the markets that contributed to those positive cash spreads, do you have specifics around that at all?

David Hoster

Let me give you somewhat of a general answer to that and maybe this will answer some other people's pending questions also, is that over the last several years, we've had significant roll down in rents in Florida and Arizona and a slow pick up in roll up in rental rates in Texas and California and North Carolina.

What we are seeing at the midpoint of this year is that Florida and Arizona – it's about a net zero or very slight down in comparing risk while the pick up in the other markets is given us a gain, so that we are having very little offset from those two states where we are hit hardest from the recession.

Another factor that need to keep in mind is a lot what we call the recession leases are rolling now the ones where we bought occupancy by significantly lowering rent and I think that's a factor in us renewing less leases in the second quarter is that where some of the -- these tenants were looking at 50% to 100% rent increases, they are moving out and we were able to release the space in today's market, which is giving us a nice pop.

And looking into the third and fourth quarter there is obviously still some leases that are going to have negative spreads, but those spreads I'd say are significantly reduced and there are less of those leases and more positives in the other states.

So that's where we're pretty comfortable stating that we think that we're going to remain positive going forward. There could always be an exception with the big lease now and then. But it makes us more optimistic than we were 90 to 180 days ago.

Bank of America

Thank you.

David Hoster

Thank you.

Operator

Our next question is from Ross Nussbaum from UBS Securities. Your line is open.

Ross Nussbaum - UBS Securities

Good morning.

David Hoster

Good morning.

Ross Nussbaum - UBS Securities

David, can you talk a little bit about your decision to sell few of those older buildings in Dallas and Houston? What promoted that? Was it supply demand in those markets, was it specific to those buildings, just help us walk through that a little bit?

David Hoster

What has gotten our attention and we're not ready to report cap rates yet, but when you look at B minus -- hate to call them CapEx, maybe in Dallas they are C plus because older assets that we acquired and some mergers that cap rates on those assets have come down significantly really in the last 12 months I think.

The Class A industrial assets in both Dallas and Houston are in my mind historic lows and it's just taken a little bit of time for the investors who want to be in those markets to start looking at the B assets and so I think we're going to be selling those assets anywhere from 150 or 175 basis points lower cap rate other than we would have a couple of years ago.

Secondly, we are growing very quickly in Houston with new development and just saw this as an opportunity to lessen our concentration there by at least a little bit and the two assets that we are selling one is in a submarket where we were never able to buy additional assets and the other is somewhat the same.

So as we concentrated on specific submarkets, those two didn’t fit as much.

Ross Nussbaum - UBS Securities

Are you as worried as some may be about the supply numbers that you've been seeing in Dallas this year and where that might be trending?

David Hoster

Without quoting in all the wonderful statistics on Dallas and Houston in terms of job growth, population growth and absorption, always looking over your shoulder in development. But so far in both cities the development has been absorbed and their vacancy rates have not gone up. In fact, they are at historic lows.

Now to answer a little bit broader question I guess on that is, I don't think there is any question that there is going to be more competition for new development space and that it's going to get tougher to lease it.

I have said for a while that, the REITs and as in particular we've been spoiled. We were the first started building spec in our markets and we are able to get the pent-up demand and we have been leasing more space that we ever dreamed off, while these buildings were under construction.

And we’re getting spoiled with that, let's say. I think what's going to happen as when our competition comes on the market, we're going to fall back to way it was done 10 years ago which is, there is not going to be much leasing during construction and we'll have our normal 12 month lease up from the time the shell was complete 365 days later and we always build that spread of lease up time into our performance anyway.

And that's the way we did it just about our developments through the last decade and we did real well with it. So, say we spoiled its going to be a little bit tougher but we are not yet worried about loosing too much.

I think another poor thing when you look at these statistics, is to not look at the summary numbers for any market or even the summary numbers for some submarkets but to look at the size of the buildings.

In Dallas in particular we have a couple of statistics here. But, well as I said, warehouse vacancy is historic low. There continues to be strong absorption, 15th consecutive quarter of positive numbers we have, 20 million square feet of positive absorption over the last year and of the 15 million square feet is under construction which represents 2% to 3% of the market. 78% is buildings or 300,000 square feet or larger and six of them are million square feet or more.

So I think when you start worrying about overbuilding, I think you have to borrow down to look at those big building and that's what happened in Phoenix over the last six to nine months where as we came out of the recession, our leasing was done in the big buildings, there was a shortage as usual bunch of people jumped in to build the buildings, now there seems to be overbuilding and broker concessions in all of the big buildings on the West side, where the demand has moved to the smaller spaces that we have in that 25,000 to 50,000 square foot range.

So, we track our competition within individual submarkets rather than look at the bigger picture. Couple of quick comments on adding Houston, there is obviously a lot of construction but not much of it so far is directly competitive with us geographically or size.

Big building in Houston used to be 250,000 square feet. People are now throwing up 350,000 – even heard announced 600,000 square feet and that could kill the upper end of the market but again it should have little effect on multi-tenant business distribution buildings.

Ross Nussbaum - UBS Securities

Appreciate it. Thanks David.

David Hoster

Thanks.

Operator

Our next question is from Kevin Varin from Citi. Your line is open.

Kevin Varin - Citigroup

Hi, good morning. Just to start up, what characteristic attracted you to the Austin market and what gave you the confidence to have a market at this point?

David Hoster

We have done very well overtime in Dallas, Houston, San Antonio. El Paso we do fine, but not as well as in any other markets. So we like Texas. Austin is depending on whose statistics you look at one of the fastest, if not the fastest growing city in the country, it's always been somewhat of a tech area that seems to be growing with very much pro-business environment and the high education of the population and the attractiveness of the city overall.

Statistically over the last few quarters there has been negative absorption from an industrial standpoint but that's pretty much all based on Dell, or computer pulling out of a number of very large building to primarily manufacturing.

So, we see as really in some ways an extension of San Antonio operation which has been very successful to 70 miles up the road. And so we've been looking as I said for a number of years and either didn't like the high office build-out of what we were looking at or the age of the building or the quality of the buildings and Colorado Crossing, net all our criteria just about so this idea to jump on that one.

When we entered our market like that, our goal was to have - this is very rough goal, a 1 million square feet within three years. We've exceeded that when we moved into San Antonio and Charlotte and had more quite as well in Las Vegas although we still hope to grow there.

So, we have the same desire in Austin and at some point we'd like to develop there, by far the toughest city in Texas developing because of all the rules and guidelines unlike the other parts of Texas but what we've done in the past is buy in a market, start to grow through acquisitions and as we get very comfortable with that market and submarkets look to start a development.

Kevin Varin - Citigroup

Okay, thanks. Can you just provide us with an update for housing related tenants? And have you seen any improvement or slowdown in the recent months?

David Hoster

That seems to go in spurts and I can't give you, - we really didn't look at the last couple of quarters specifically at housing but we are continuing to see housing related activity Tampa, for one. And Houston and Dallas both because of the tremendous growth in population which is leading to both single and multi family construction.

So, it is not a dominant driver but it certainly is something that just adds to the demand for our type spaces and particulars. So it's, - we're glad to see it.

Kevin Varin - Citigroup

And just my last question, just based on - continue on the dispositions and based on what you're seeing, the cap rate compression that you discussed for the Class B assets, how many more assets are in the portfolio today that you would kind of consider non-core and maybe you could trend over the next - it doesn't have to be a series. I know that you guys have already issued guidance but there are kind of over and above that guidance range that you put for us.

David Hoster

Well, it depends how deep you want to go on different things. We really haven't quantified that. We don't expect to sell anything else other than what I've mentioned this year and hope we're able to sell the four buildings in Texas and if not we'll push them into next year.

We've really not started to plan on what we might put on the market next year. I think a lot of this is going to depend on occupancy of the buildings and what's happening to the Class B asset cap rate in those individual markets.

Kevin Varin - Citigroup

Thank you.

David Hoster

Thank you.

Operator

Our next question is from Craig Mailman from KeyBanc Capital. Your line is open.

Craig Mailman - KeyBanc Capital

Good morning guys. On same-store this quarter, was there anything on the expense side or at lease term side that drove the big acceleration relative to the last couple of quarters or is it namely better occupancy and rent spreads?

Keith McKey

We had increase in property taxes that increased the expense ratio up 29% and that was the main thing that we had.

David Hoster

On same-store it's a little higher occupancy than where we were last year and better rents.

Craig Mailman - KeyBanc Capital

The tax issue was a drag, right? You guys didn't get rebate or anything?

David Hoster

What happens is when the taxes go up, we pass through everything on space that's least and so the higher occupancy is more we pass through. What happens when you look at the expense ratio if you add increased taxes which were - particularly in Texas, real estate taxes to both the nominator and the denominator, the ratio goes up although it doesn't affect NOI.

Craig Mailman - KeyBanc Capital

Okay. And then on the rent spread side things, I know it's a little early to look in the 2015 but for the next couple of quarters is that zeroed off, is it 5% mark a good way to think of where rent spreads may come in or is - any thoughts on the magnitude of this year and also just your thoughts on asking rent growth in your different markets. Has there been any slowdown in Houston and Dallas or is that kind of kept pace as we have always seen in the last couple of quarters and obviously what's going on in Florida and in Phoenix?

David Hoster

There are lot of questions there, first of all we really haven't tried to quantify anything next year and that's not something that we spend a lot of time looking at anyway. We just try to have the best rent possible on every space when it comes out and we've never been very good at trying to determine embedded rent growth or anything like that, because you seldom ever right on that, makes for good discussion, but you seldom ever right.

We've not seen any slowdown in rent growth in Dallas and Houston yet. I suppose there could be some as more development comes online but the development rents are at the top of the market to begin with.

Second factor to keep in mind there, is that the cost – the cost of everything and development is going up. So that if developers want to maintain yield fertile, they're going to have to raise rents, because cost of land, if you go out and buy today there's a good bit higher than it was a few years ago and the cost of construction in Houston I've been told is up about 7% year-over-year.

So, unless the people start to accept lower yields, rents are going to have to go up and if high end rents go up for new space, that should be beneficial for second generation space.

I think the last question, all are markets are showing improved asking rents. Depending on whose statistics you look at, it's a wide range and I'm not sure how accurate anybody's statistics are but they're getting better and we obviously benefit from that.

Craig Mailman - KeyBanc Capital

And then just last quick on. I don't know if you guys have quantified this but the rents are improving this quarter. How much of that do you think is just from higher market asking rents versus just a mix of what's expiring and kind of what you guys have leased that was vacant.

David Hoster

We've not tried to break that down because you have to remember that when we - with poor rent spreads, we don't do it the way some others do because on leasing vacant space, a lot of times the rent spread is based on what the previous tenant was paying a number of years ago.

And so we think that average is out over time but we've not tried to break that down in anyway. But what we're looking at is what we've achieved in the second quarter and roughly what we think is going to happen over the balance of the year.

Craig Mailman - KeyBanc Capital

Great. Thank you.

Operator

Our next question is from Vance Edelson from Morgan Stanley.

Vance Edelson – Morgan Stanley

Hi, great job on the quarter. Just curios what your hearing on the occupancy rates of your competitors and whether that's still placing a regulator so to speak on your own ability to raise rents or even your smaller competitors starting to get to the point where they can be more selective with tenants?

David Hoster

That's the hard one to put your finger on. We historically have had higher occupancy and all REITs should have higher occupancies in the market as you can see given, - where we're coming from. And each submarket is different because when you're dealing with a prospect or an existing customer, you're always looking at what their alternatives are and I think all the REITs are working to push occupancies as hard as they can.

I think we're going to see more competition is - in the cities as I mentioned where there is new development, there sometimes particularly private developers get nervous and will cut rate to put somebody in the building to cover the gap but I think as there is more development space available, there is going to continue to be a split and the buildings that are higher quality and better location are going to outperform those that they are not as prospects have more and more choices and almost any submarket where we are building to point out where a building is not as attractive or doesn't have as good access, or whatever, has least poorly over compared to us, over almost any period of time.

Vance Edelson – Morgan Stanley

Okay. That's helpful. And then any interest from tenants that want to buy and lease back the buildings they're using, we've heard about that picking up some of the larger box space and maybe with some of your buildings being within parks that you own, is just not practical but any indications of interest from tenants could be a good barometers and own confidence going forward?

David Hoster

Well hopefully for example, the buildings we are trying to sell in Dallas, one of the tenants would like to buy them.

So, they are always the best prospect on sales but usually what happens is when somebody wants to build the suite and they determine they want you to build it for them, but they want to own it, and in certain circumstances will do that but as you mentioned, if it's in one of our parks, we like to control 100% of the park.

So we think that adds the value to the park and to the individual building. So we run off something else where we wouldn't have the tenant own their building in our Park.

Vance Edelson – Morgan Stanley

Okay. Makes sense. And then typically it's been the smaller companies that have lead the way out of recession and been more early cycle, this time it's been a big difference. Do you feel that's an accurate statement and do you feel like the smaller companies are starting to expand providing some way to cycle strength that we can look forward to?

David Hoster

Absolutely. And I think Phoenix is probably the clearest example of that as I mentioned before were the big boxes on the West side filled up very quickly generating a lot of new development and our type tenants, what happened to them and in the last six months, last three months, that leasing has picked up very much for us both in development properties and existing space.

I think we're seeing that, also in Dallas where we've executed pretty good leases in the 20,000 square foot range and I think in the last 45 or 60 days on spaces that had been vacant for a while and very little activity.

So it really is moving to those tenants – as far as tenants that have been our bread and butter historically so that gives us some optimism for a while anyway.

Vance Edelson – Morgan Stanley

Okay. That's great. Thanks David.

David Hoster

Thank you.

Operator

Our next question is from Alexander Goldfarb from Sandler O'Neill.

Alexander Goldfarb - Sandler O'Neill

Hi, good morning down there. At first, just a quick question for Keith and then David I'll get to you.

Keith on the debt deal that you guys are about to do the five year deal. Can you just give a sense for what the spread difference was between when you look originally, I guess the 475 was 10 year that you were thinking versus what you actually did five year.

So when you enterprise it, can you just give a sense of what the banks were quoting you for five year today versus 10 year. And then you said you filled in a five year hold but just curious if rates are very good right now, did you not have whole in 10 year, can you just give some color?

Keith McKey

We had plan to do 10 year and the earlier in the year the rates on current placement and our bond index were about the same. And then they started widening up. You saw some real good deals, I think Mid-America did a real nice 10-year public debt at around three and a quarter. So that started looking good.

But it did not - we could not get those kind of quotes or private placements and so the margin was widening there, but the five-year continued on down, I do not remember what the five-year was when we quoted before 75.

So we started looking more at the five year since our 10 year rates did not come down, we were still looking at about a 4.25%.

So we did calculations on five year. If we did a five year like the 285 number and then at the end of five years, what interest rate would have to be the breakeven with four in a quarter and the five year looked appealing to us and we did have that whole in the maturity schedule.

Alexander Goldfarb - Sandler O'Neill

Okay. So sounds like obviously banks have gotten a lot more aggressive. David, your comments earlier on the industrial side, I mean on the size, the development size that you cited a bunch of stats that showed a lot of the development is focused on the bigger boxes, over 500,000 square feet.

Can you just give a sense for how much of that is being driven by capital that needs to be put to work versus actual demand and then the opposite part of that question is, you talked about BMC cap rates really tightening up, would you say that typical of a normal industrial cycle or is a typical and more reflection of how the bid for yield is just continuing across because of where rates are?

David Hoster

I think a little bit everything on both your questions. On institutions seem to like the bigger boxes and a number of the REITs seem to be doing bigger boxes, you can put more money out at one time, it's easier to get [land] (ph) because there is bigger boxes tend to be on the fringe development.

And we're seeing institutions who are funding development as a way to acquire industrial because they can't buy enough of it by simply going into the market and trying to buy a quality buildings.

Now how much of that's – I would say the developers would tell you it's all driven by demand but only time will tell them that. An interesting sidelight to that Alex is last week earlier this week CBRE pointed out an interesting research piece that – and they do this every week on real estate, different topics but it's entitled small U.S. industrial properties play an important role in a complex supply chain and it talks about how generally you could probably do better with a smaller building that's in an infill location where users have to be which sounds like we wrote the article but I can send you a copy of that if you can't get it from CBRE but it's like verification of our strategy.

The second part of your question, the compression and cap raise and sometimes compression maybe isn't the right word, but in Dallas and Houston particularly the Class A cap rates have dropped so low compared to the low five in Dallas and even some sub five in Houston. And in some way that drags down the other cap rates to because of the large spread but there is clearly, there are group of funds that are out there that are more yield oriented than the names that you generally recognize.

And so, they want to be in the major markets and so – and just because of asset identified as a B doesn't mean it doesn't work real well in submarkets. So, we can sell a couple of these assets we've been talking about for a while at a lot higher prices than we thought a couple of years ago and that plus, it's time to do some other things that had us put them on the market and so far we've been very pleased with the offers that we've gotten.

Alexander Goldfarb - Sandler O'Neill

David, would you say that - this compression, the bid for the BMC is typical to real estate cycle like or do they surprise you and therefore you decided, hey, let's put some stop on the market?

David Hoster

No, I think it's somewhat typical and some property brokers would tell you that it's been slower in coming than I thought it would be.

Alexander Goldfarb - Sandler O'Neill

Okay. And then…

David Hoster

And again, what's really happened is in the markets where they A asset cap rates have gone way down. And so in comparison the yields look pretty good for those markets. Now the other markets where the BMC cap rates have not come down much.

Alexander Goldfarb - Sandler O'Neill

Okay. And the final question is on your Austin purchase, it had a higher level of office buildout than typical. Is Austin the only market where you're comfortable taking a higher level of office buildout or do you see opportunity given the yield differential to find those sorts of opportunities in other markets.

David Hoster

Austin historically has had a higher office buildout and it's dock high buildings because of the nature of high tech industry there where they want climate controlled space, where there can be more dropped ceilings.

So Austin purchase had about 24% office buildout. So the fact that that's more common in that market made us more comfortable than we might be in another market with that.

Secondly, the two other tenants with the highest office buildout have longer term leases. So that gives us some comfort also.

Alexander Goldfarb - Sandler O'Neill

So are there other markets that you do the same thing or Austin to one-off?

David Hoster

Well, we've looked in research triangle area in North Carolina viewing as an extension of what we're doing in Charlotte successfully. The buildings there are similar to Austin or even higher office buildout and we just haven't seen the mix assets there that we've wanted to try to acquire but we’ll continue to look there also.

But it's what is normal in a market or a submarket because you don't want to be the outlier and have problems releasing when the lease turns.

Alexander Goldfarb - Sandler O'Neill

Thank you.

David Hoster

Thank you.

Operator

And next question is from Brendan Maiorana from Wells Fargo. Your line is open.

Brendan Maiorana - Wells Fargo

Thanks. Couple of nitpick questions. Keith, if I'm looking at your guidance correctly, I guess it suggests there's about $500,000 of net term fees back half of the year. I think you said is all of that going to hit Q4 and I guess if so that's about maybe a little over penny of FFO and about 125 basis points or so to same-store in Q4, is that right?

Keith McKey

I think it was about $400,000 recalled in Q4.

Brendan Maiorana - Wells Fargo

$400,000? Okay. All right, great. Thanks. And then so the occupancy outlook David, it seemed like your month-to-month leases increased this quarter and I think you were expecting occupancy to get more in Q2 than it did, so and you mentioned in your prepared remarks that occupancy is going to dip a little bit in Q3, was there something that, was it just a delay in timing of when some of the move outs happened or what's causing the little drop in Q3 before you make it back and then sum in Q4?

David Hoster

No, that's something that we've been projecting since early on in the year. And there's no single event or couple of leases being pushed out that has caused that. We've had the benefit of couple of customers we thought we're going to move out are not going to. That a little more confidence in the third and fourth quarter but there's no unusual event.

We just historically, - which is nice, at least a little bit outperformed our occupancy projections.

Brendan Maiorana - Wells Fargo

Okay, now it's helpful. And then just in terms of the term just it moved down really pretty modestly but it was down a little bit relative to where you guys were in length of lease term in Q2 versus Q1. Did any of that - did any of the term or change in lease structure, did that drive any of the rents prices or anything or whether just the improvement as you talked about overall market that you kind of look at things apples-to-apples and you just feel better about your ability to push as you go forward.

David Hoster

The latter, it wasn't any of them again or series of things that we can point to because the length of lease is up a little bit. The high threes is historically where we've been over an extended period of time and three quarters of over four years was really the exception rather than the rule.

So, we'll see where it comes out next quarter, but I would guess it probably be the 3.8 years to four years.

Brendan Maiorana - Wells Fargo

Okay, great. Last one, so development, we've talked a lot about that on the call here. You picked up the parcel in Dallas, I would imagine that you guys would probably be comfortable kind of starting here product in Dallas at some point.

This year Tampa seems like the other market where you've got sizeable exposure and the ability to develop there. So those are kind of your two main markets where you are not developing right now. Would we expect to see starts maybe in those two markets as you go forward in the back half of the year?

David Hoster

We'd like to build in Tampa and that's actually in our projections but I could see that when slipping to early next year. But at the same time we do no have Dallas in our projections and I think our goal is to, little bit of luck to start that in 2014. So that would push us over 100 million of starts for 2014.

And we will take a close look at what we're doing in Chandler with Kyrene 202 having just signed at lease, the two-thirds of the larger of the two buildings there. Little more lease in activity and we will start a third building in that six building complex.

We harp on all our development starts are based on leasing, we lease more space we start more buildings, leasing slows down, we delay starts until the building in the park that's under construction or just finished leases up to a point that gives us comfort to start the next one.

Brendan Maiorana - Wells Fargo

Yeah, okay. But it's those three that seemed like the ones where it probably most up in the air as to whether or no it's 2014 or 2015 start?

David Hoster

This is based on what's going in those markets. You can always get a delay in a permit for silly reasons but it's going to be based on leasing and I'll be a little bit disappointed if we don't start over $100 million this year but then again whether we start in December, January really doesn't make a lot of difference other than how we talk about it.

Brendan Maiorana - Wells Fargo

Yeah, absolutely. All right, well thanks guys.

David Hoster

Thank you.

Operator

Our next question is from Eric Frankel from Green Street. Your line is open.

Eric Frankel - Green Street

Thank you. David, Keith just discussed regarding your leasing spreads, what's the average vacant or leases that will rolling over the time of period especially versus last quarter?

David Hoster

I don't have that statistic here. That's not something we look at and again as I try to explain the way we calculate it on leasing vacant space, it's - we could be leasing a space that was vacant the day before or two years before and so that affects the numbers on that.

What is encouraging to us is not that they were both just positive but they were positive by a good spread and what we've done is gone and looked where we think we're going to be in the third to fourth quarter and expect it to remain - those two statistics to remain positive through the balance of the year.

Eric Frankel - Green Street

Sure, I didn't think to make a pretty big difference as you know, 90% of your leases worked -- they were rolled on the numbers 2009 versus 50% call it, just makes the big difference in the stats and just I won't consider going forward?

David Hoster

I think something that's encouraging for us in those numbers is that we only renewed 55%, I should say, that's not encouraging, we renewed 55% of the leases with the fact that what we released and the vacancy that we leased -- you generally are probably going to get lower rents on those numbers and we still were very positive.

Eric Frankel - Green Street

That's a very fair point.

David Hoster

And the other thing is some of these statistics we don't bother to look at because it doesn't determine how we operate our business. They're nice statistics I guess but it doesn't help us decide what to lease and when or for how much.

Eric Frankel - Green Street

That makes sense. My next question is regarding the land acquisition if I, maybe you can touch upon whether -- how difficult it will become whether just a lot more bidders for a well located land that you're going look for?

David Hoster

There's no question that there is more people looking for industrial lands and looking at our markets where we're developing or would like to develop Dallas and Houston are both examples of lots of developers looking for land and land prices moving up.

I might have said on the last call broker in Dallas -- excuse me in Houston said that $5 square foot is the new $3 a square foot for industrial land. And so that's another reason that new developments are going to have push rents in order to get their yields and if you take an extra dollar or square foot and you get a third coverage you're talking about $3 a square foot under the building and so you're going to get an 8% yield on that. That's another $0.24 on an annual basis and rents you have to get to not have your yields go down.

So, there are going to be fits and starts on rent going up as development comes online but anybody starting today is going to have to have higher rents than anybody that started building a year or two ago.

Eric Frankel - Green Street

Thanks. Final questions regarding the unsecured debt market. Keith, can you just talk about your strategy of maybe when and how you'd like to tap the public of that market?

Keith McKey

I would like to as soon as we can, but we're just not building up to the $250 million without having to wait six to nine months and we did not want to miss the window on good interest rates.

Eric Frankel - Green Street

Great. Thank you.

David Hoster

Thank you.

Operator

Our next question is from Brad Burke from Goldman Sachs. Your line is open.

Brad Burke - Goldman Sachs

Hey guys, just a quick one from me. Looking at a couple of the developments in Houston it looks like there was an uptick in some of the stabilized yield expectations. So just wondering what's driving that increase and if there's any reason to think that we are to extrapolate that improvement across the rest of your Houston developments?

David Hoster

No, I don't think you can extrapolate that. In a number of cases our yield gone up a few basis points because of additional improvements that a tenant on a longer term lease is requiring. So it costs us a little more, so we get an additional yield for that.

For example, on our West Road II building, the tenant there manufactures heavy wire that's used in offshore drilling and we had to reinforce the parking lot and reinforce some of the slab in terms of their being able to use heavier equipment to deal with that and so we got an additional yield.

Also, you put in a pro forma yield and you always try to be as a little bit and sometimes you're better at it than others.

Brad Burke - Goldman Sachs

Okay. I appreciate. That's helpful.

David Hoster

Thank you.

Operator

Your next question is from Gabriel Hilmoe from ISI Group.

Gabriel Hilmoe - ISI Group

Thanks. Keith just a clarifying question on the cash same-store NOI guidance. Can you walk through how you see that ramping in the third and fourth quarter? I think you said 4Q was expected to be 3Q and that includes the term fees but is there anything in the way of term fees or anything impacting 3Q to the upside, I am just trying to clarify the parts that are driving the second half or cash same-store NOI?

Keith McKey

The numbers I quoted were for GAAP, 2.1 and 3.2 for third and fourth quarter and for cash we're projecting 4.6, 5.8 increases there with that fees of $82,000 coming into the third quarter and $600,000 coming into the fourth quarter.

Gabriel Hilmoe - ISI Group

Okay. Perfect. Thank you.

Operator

And we have no further questions at this time.

David Hoster

Thank you all again for your interest in Eastgroup and as always Keith and I are available for questions that we might not have been clear on in answering or didn't have a chance to cover. Again, thank you for your interest in Eastgroup and we'll talk to you next quarter.

Operator

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

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Source: Eastgroup Properties' (EGP) CEO David Hoster on Q2 2014 Results - Earnings Call Transcript

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