EastGroup Properties' (EGP) CEO Marshall Loeb on Q3 2016 Results - Earnings Call Transcript

| About: EastGroup Properties (EGP)
This article is now exclusive for PRO subscribers.

EastGroup Properties Inc. (NYSE:EGP) Q3 2016 Earnings Conference Call October 20, 2016 11:00 AM ET

Executives

Marshall Loeb - Chief Executive Officer

Keith McKey - Chief Financial Officer

Brent Wood - Senior Vice President

Keena Frazier - Director of Leasing Statistics

Analysts

Jamie Feldman - Bank of America Merrill Lynch

Blaine Hecht - Wells Fargo

Manny Korchman - Citigroup

Brad Burke - Goldman Sachs

Craig Mailman - KeyBanc Capital Markets

Alexander Goldfarb - Sandler O’Neill + Partners, L.P.

Richard Anderson - Mizuho Securities

Eric Frankel - Green Street Advisors

Barry Oxford - D.A. Davidson & Co.

Operator

Good morning and welcome to the EastGroup Properties’ Third Quarter 2016 Earnings Conference Call. Currently all phone lines are in a listen-only mode. Later, there will be an opportunity to ask questions during a question-and-answer session. [Operator Instructions]. Please be advised today’s program may be being recorded.

It is now my pleasure to turn the program over to Mr. Marshall Loeb, President and CEO. You may begin.

Marshall Loeb

Thank you. Good morning and thanks for calling in for our third quarter 2016 conference call. As always, we appreciate your interest in EastGroup. Keith McKey, our CFO and Brent Wood, Senior Vice President are also participating on this morning’s call. Since we’ll make forward-looking statements, we ask that you listen to the following disclaimer.

Keena Frazier

The discussion today involve forward-looking statements. Please refer to the Safe Harbor language included in the Company s news release announcing results for this quarter that describe certain risk factors and uncertainties that may impact the Company’s future results and may cause the actual results to differ materially from those projected.

Also, the content of this conference call contains time-sensitive information that is subject to the Safe Harbor Statement included in the news release, is accurate only as of the date of this call. The Company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information which can be found on the Company’s website at www.eastgroup.net.

Marshall Loeb

Thanks Keena. Third quarter saw a continuation of EastGroup’s positive trends. Funds from operations met our guidance, achieving a 7.6% increase compared to third quarter last year. This marks 14 consecutive quarter of higher FFO per share, as compared to the prior year’s quarter.

The strength of the industrial market as demonstrated through a number of our mattress such as another solid quarter of occupancy leasing volume positive same-store N.O.I. results and continued positive releasing spreads. The depth for private market capital looking to invest in quality industrial assets was demonstrated by the pricing and volume, we’ve seen in our disposition this year as well as the difficulty we face in sourcing sound acquisitions.

At quarter end we were 97.3% leased and 96.3% occupied. Occupancies exceeded 95% for 13 consecutive quarters, a trend we project maintaining through year-end. This basically represents full occupancy for a multi-tenant portfolio. As we’ve said before and as market commentary, we’ve never achieved this level of occupancies for this long a time.

Drilling down into specific markets at September 30, a number of our major markets including Dallas, Orlando, Tampa, Jacksonville, Charlotte, San Francisco and L.A. were each 98% leased or better. Houston our largest market with over 5.9 million square feet which is down from 6.8 million square feet in January 2016 was 93.1% leased.

Supply remains largely in check in our markets and shifting through the figures you would see that supply is largely comprised of big-box deliveries, being 250,000 square feet and above for building. So by design, we simply aren’t competing for the same prospects.

In fact, the figures we’ve read state that 75% to 80% of new deliveries are big-box buildings. And our markets where the fear of overbuilding is the greatest, such as Dallas and Houston we’re seeing declines in construction with deliveries being absorbed.

To date, the market discipline has been institutionally controlled and remains strong. Rent-spreads continued their positive trend for the 14th consecutive quarter on a GAAP basis. Overall with 95% occupancy strengthening markets and discipline new supply we continue to see upward pressure on rents.

Third quarter same-property NOI rose on a cash and GAAP basis. This quarter was unusual, as the growth was due more to rising rents as average quarterly occupancy fell 20 basis points, compared to third quarter 2015 to 95.8%. We expect same-property results to remain positive going forward, though increases will continue to reflect rent growth at 95% to 96%, we view ourselves as fully occupied.

The price of oil and its impact on Houston’s industrial real estate market remains a topic of discussion. We thought it appropriate for Brent to again join today’s call. Brent is one of our three regional Senior Vice President’s and is based in our Houston’s office, with responsibility for EastGroup’s Texas operations. Brent?

Brent Wood

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

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

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

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

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

While the leasing spread on the long-term vacancy was negative, we chose to seize the opportunity to remove the leasing risk and grow our net operating income. As we often say a quarter does not make a trend and our results will be influenced each quarter by individual transactions.

For the remainder of 2016 we have reduced our scheduled explorations to just 2% of the Houston portfolio while maintaining occupancy ahead of projections. The diversification of our development platform within Texas continues to produce results. Our 2016 development starts include five buildings located in Dallas and San Antonio, for an estimated total investment of 33 million, and all of the Texas buildings in lease up experienced an increase in percentage of leased from the prior quarter.

The fundamentals remain strong for the Texas markets outside of Houston and they remain unaffected by the impact of lower oil prices. Marshall.

Marshall Loeb

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

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

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

As Brent discussed the industrial property sales market remaining strong, we’re actively reducing the size of our Houston portfolio and raising capital through the disposition of non-strategic land parcels. Year-to-date, we’ve sold eight properties totaling 1,173,000 million square feet for proceeds of approximately $74 million.

Four of these sales were in Houston which represented 906,000 square feet and 52 million in sales. Through September 30 we closed six land sales generating $5.4 million. While not material to our balance sheet, I love raising capital through the disposition of non-strategic, non-income producing land and reinvesting in our core assets.

Our asset recycling is an ongoing process. We’re pleased with the year-to-date just position progress and we’re continually evaluating our options especially further Houston sales. As we recycle capital and diversify the portion of our NOI coming for Houston will decline while the quality of the Houston portfolio continues to rising.

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

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

Keith McKey

Good morning. FFO per share for the quarter was above $1 share for the first time in history at a $1.4 per share, an increase of 10.6% compared to the same period last year. The increase was due to same-store increases attractive yields on acquisitions and development compared to our cost of capital, gain on land sales lower G&A costs and a favorable interest rate environment. Debt to total market cap was 29.7% for the quarter interest coverage was 4.9 times and debt-to-EBITDA was 5.9 times. Adjusted debt-to-EBITDA was only 5.2 times. In September we increased the quarterly divided by 3.3%.

So in summary FFO per share is increasing from many sources. We increased the dividend and the balance sheet remains strong. Earnings per share for 2016 is estimated to be in the range of $2.93 to $2.95. FFO guidance for the midpoint increase $0.01 a share to $4.01 for the year. We estimate fourth quarter FFO per share of $1.7, 13.8% increase from fourth quarter 2015. And the year at $4.1, 9.3% increase from the prior year.

Now, Marshall will make some final comments.

Marshall Loeb

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

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

We will now take you questions.

Question-and-Answer Session

Operator

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

Jamie Feldman

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

Marshall Loeb

Sure, Jamie. good morning. It’s Marshall. What I would say where you know I guess year-to-date. We’re happy with ourselves where we’re up slightly below 80 million we did bring our guidance down. Within the market, we think we can get the right prices, we should execute some of our sales. We’re pleased to see Houston come down from rounding 21% to 18% we’d like to see that number continue trending down.

We’ve seen probably in the last 90 to 120 days in Houston for example it’s maybe a more selective buyer pool in terms of earlier in the year Lockwood for example was our oldest asset in the portfolio and had a pretty large impending vacancy and Brent was able to sell that in the low 6s.

Now if we brought Lockwood to market I don’t know that we could achieve that. So we’re we were committed to reducing the size of our Houston in terms of within EastGroup. But for shareholders we’re not going to buy or sell assets, so as we’ve moved through and picked and chose Houston assets to sell, we probably think one that was a little bit larger that we had earmarked had some rent roll and things next year and it’s probably not a great time to bring it to market and so we’ve substituted a couple of assets as we as we go through as the opportunities present.

We’ll continue selling in Houston and we’re committed to that where it makes sense assets that we won’t regret selling several years down the road and I’m pleased just as commentary what we’ve sold this year in Houston, we really started not in terms of size reducing the square footage but it was really our worst assets. It’s a good portfolio but we ranked, ordered them and sold what were our worst assets in Houston.

Jamie Feldman

Okay. That’s helpful. And then you would also commented before that that deliveries you’re seeing in your market are really not competitive with your pipeline or your portfolio. But I think that the deliveries are serving where demand is growing the most. So can you kind of help square those comments just in terms of – I think people are excited about warehouse it’s got a lot of e-commerce demand. And clearly people are developing for that demand. And then your comment that your portfolio isn’t exactly competing with that supply. How do we think about those comments?

Marshall Loeb

Sure. Here’s how. And Brent, chime in, if what I miss or leave out. But I would maybe bifurcate the industrial deliveries an awful lot of what we’re seeing the majority of our supply. I would describe is being on the edge of town, maybe a little more special use state-of-the-art fulfillment centers and that is where an awful lot of demand is and where an awful lot of our peers or at least the industrial developers are going.

It’s a 600,000 million square foot box on the edge of town that’s built for a Fortune 1000 company and their fulfillment center where we’ve chosen to play or kind of our role in the industrial market is an infill site, smaller building, 80,000 to 130,000 square feet typically and it’s someone that serves that local market.

So we’re not building special used buildings and where we fill in within the e-commerce world would be that last mile delivery which we think we’re very early in and kind of the top of the first inning of watching that play out and/or where we’re seeing that is the post office and FedEx and tenants like that.

So that helps I think both segments of the industrial market are growing but where our portion of the food chain are really about long-term that Orlando for example is going to have half a million more people and 10 years and it does today and so our infill sites well located flexible buildings that rents will grow there over time is our strategy.

Brent Wood

And I would just add to that Jamie that you know really come about two different product types multi-tenant which of course what we do and then bulk so when we say we don’t compete with it. It doesn’t mean we’re not necessarily in the same market with it. But for example in Dallas there is 19 million square feet under construction. But over half that’s in buildings greater than 400,000 square feet. So we’re in the same sub markets in some cases with those buildings.

But a lot of our competitors have buildings for example where they won’t do a smaller than say 70,000 or 80,000 square foot lease and in some cases our buildings are you know that size, where we can do 15,000, 20,000, 30,000, 40,000 square feet. So I agree with what Marshall said but also I think there’s the product differentiation as well.

Jamie Feldman

Okay. And then thank you. And then finally for Brent. So it is, it sounds like you beat your own Houston occupancy outlook for the quarter. Can you just talk about some of the leasing that was done and maybe set’s any kind of indication of what is to come.

Brent Wood

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

Looking at next year 16.5% rollover, it’s going to be similar to this year I think as we go into that. But we’ll just continue as we’ve been doing this operating, pushing lease bases as we can. Obviously we renew as many tenants as we can, but when you get the space back or know you can get it back, clean it up, take it to market, and just out execute in this type of environment.

Jamie Feldman

So that’s 16.5% how much you know is vacating.

Marshall Loeb

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

Jamie Feldman

Okay. All right, thanks everyone.

Operator

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

Blaine Hecht

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

Brent Wood

Yes. That’s correct. It’s through January, it’s not month-to-month, I mean it’s a straight short-term through January. They needed space for the holiday season and – so we had space available, so we decided to take the income here within the year and then we’ll continue to market it in that interim period, in a perfect world we find somebody to occupy while they’re there and they move in afterward, but yes, that is that lease.

Blaine Hecht

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

Marshall Loeb

Sure. Blaine, it’s Marshall. When we give you – as I’m in my mind’s eye picturing our 2017 guidance, we will have a disposition kind of dollar value and target. Next week, we have our officers meeting and really Brent and his two counterparts, we’ve kind of ask everyone the earmark. If you are going to sell five of your assets what would those be, so we’ll work through those. And I guess maybe backing up. I think we should always be pruning our portfolio each year and kind of what we’ve think we’ve wrong or created most of the value story out off, we should exit it.

So we’ll have a disposition guidance target next year and certainly we’ve got a few more assets in Houston to sell, but at this point 95% of our Houston income comes from parts we develop, so we certainly are left with the best of our Houston assets not that we wouldn’t sell a park if the right opportunity came along. But if that helps you will have a specific target number for next year and I think we should for our shareholders.

Blaine Hecht

Okay. We look forward to that. And then, I hope I didn’t miss this, but can you talk about the additional development stage acquisition you guys are looking at in the fourth quarter. Is that also part of Parc North or are these types of deals something that you’re finding in multiple markets?

Marshall Loeb

It’s more of the latter and that it’s a specific asset what we – I guess as we work through the acquisition environment, if it’s a core asset cap rates, the number of bidders and the cap rates are surprisingly low or depressingly low, it is just hard to go buy a core asset. And where we’ve had better luck, you sell it in Parc North which was a brand acquisition was a state-of-the-art newly finished building that hadn’t leased off that we were able to buy and we won’t earn the same yield as if we developed it, but we’re in a lot better yield than if we had waited for it to be a core asset.

And this is the other kind of 14 million that we have earmarked, we’re in due diligence, haven’t finished it, happy to tell you more about it when we reach that point, but it would be a similar value add type opportunity. So we’ve had more luck in terms of meeting our pricing kind of guidelines within that where we can go in and take some of the leasing risk, but the building is already built.

Blaine Hecht

Great. Thanks, guys.

Operator

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

Manny Korchman

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

Marshall Loeb

Yes, things could get worse. But we’re certainly it and if I’m answer your question correctly at 97% plus least 96% occupied we’re happy with the market. I would think fires sale and I guess maybe a different definitions for each person I would hope we never for our shareholder never need to do that that to me would be our balance sheet is in crisis kind of coming out of the last downturn I think a number of the REITs almost had a fire sale assets to stay alive.

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

Manny Korchman

And maybe if we can focus on the lease up of the asset especially the vacant asset was that a new to market tenant that took that maybe you can just explain to us the type of tenancy and why after being vacant so long if you think you’re able to sell it?

Marshall Loeb

The 21-month sorry I was think in Parc North. Yes the 21-month lease it’s a single tenant building. So you didn’t have flexibility to chop it up and you know leased it up parsley over time. And so we - that’s where the rent spread gets to be tricky that space been vacant 21 months the prior tenant with a tenant we had in their short-term that we had captive because we were doing a build to suit for them. So we had them in an above market rate at a peak market time.

So we’re marking that against that so I’m you know honestly I’m not sure what that really tells you and from a practical standpoint, but that’s just the result it was we’re pleased to have gotten it buttoned up. The other lease that we did that immediately filled a space. It was probably done at a little bit below market but that tenant didn’t need any TI it was as is and you look at it and say okay we don’t want this space to turn into a 21-month vacant space.

So we did a short-term deal couple of year deal no TI take the income and you live to fight another day and I hope in two years we can push the rents very solidly against them at that time. But you just make these decisions on individual basis and that’s what we will continue to do.

Manny Korchman

Brent maybe just to get really into the REITs the build to suit you did what was the rental rate like there versus this above market lease that you can really slower.

Brent Wood

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

Manny Korchman

Great. Thanks very much guys.

Marshall Loeb

Welcome.

Operator

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

Brad Burke

Hi, Good morning, guys, nice quarter. I was hoping to ask better picture and ask you to comment broadly on demand which is still very strong across the portfolio. First are you surprised with the strength of the demand that you’re still seeing in your markets and if you could comment on what’s driving that demand you’re saying you know what types of tenants and how much of that do you think is being driven specifically by e-commerce that appreciate it.

Marshall Loeb

It’s Marshall, take a stab at I am pleased as I mentioned I think the numbers it’s going to be one of the 13 quarters where we’ve been over 95%. So anytime you set up historical record like in sports. It’s got to be a little bit pleasantly surprising we don’t see any drop-off in that and it would be a national demand event not a oversupply that would change that as we would see but we’re pleased to see it and it’s across the Board.

I mean some is - some markets homebuilding has come back Florida - with gas prices lower tourism has come back. I know they’ve set visitor records in Orlando and it’s really become kind of the e-commerce hub or the state of Florida there and in Orlando. So it’s been a broad-based recovery in terms of e-commerce in our portfolio we are seeing and feeling whispers of that one of our longest standing vacancies in the portfolio was leased to an Amazon supplier this past quarter.

So that was pleased to see we’ve seen Amazon kind of their grocery delivery and prospects and seeing them elsewhere with [RSVs] out there it’s not certainly overwhelming our portfolio today and we view Amazon is kind of an early market leader. So if they’re doing that we’re guessing or we expect other tenants to follow suit.

So with the new source of demand that we weren’t seem 24 months ago it’s early and I would expect that we’ll have other people playing in that space 24 months from now, but we’re and actually I’m glad that it is such a broad-based tenant supply and not just e-commerce or good same as we certainly got you know burned we said in markets where it was just homebuilding heading into the last downturn.

Brad Burke

Okay. I appreciate that. And then just a follow-up on your ability to put capital work with the share price where it’s at right now. Is there anything that prevents you from increasing the pace of development and starting to tap the continuous equity program again?

Brent Wood

I guess what would hold a stock would be demand. I mean we’re really I mean that’s which thankfully is probably the right [indiscernible] on it. But we’re certainly happier with our stock price than we were earlier in the year. It’s a tool in the tool kit that we didn’t have for funding.

And as we see demands, we’ve stepped up our starts. Brent has had some good starts in San Antonio where we build up quickly on the Northeast side of town and we love kind of additional phases of another of an existing park is a great risk adjusted way. So I hope our development pipeline can pick up pace but we also have to match that with demand and have to deliver on it.

Brad Burke

Okay. Thank you very much.

Operator

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

Craig Mailman

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

Brent Wood

Yes. Hi, Craig good morning. I think that’s a fair question because there’s really two things. There’s any given quarter what we might report based on individual transactions. But just stepping back and looking at market rents for Houston in general I would say that you know we’re still in that single-digit down from most of the submarkets in Houston, maybe even Eastside the strongest is maybe flat but we’re seeing the softest and the most rent sensitivity and the most incentive is up north which of course our Houston portfolio, which is a little over half of our square footage falls within that.

That’s where it was priced slightly over bill combined with less demand compared to some other sub markets. So in that pocket I would say maybe you’re looking at 10% to 15% from a market perspective you know of downward pressure. You know the other thing I would add any time you want to make as many renewals you can for obvious reasons but once you do have the vacancy that’s what puts you at risk to have to compete. So I would say the market as a whole has been what we thought it would be with the exception being the north being a little softer people, a little more and to try to get deals done.

Craig Mailman

How much of your role next year in World Houston?

Brent Wood

I don’t have the breakdown by park. We could shoot that to…

Craig Mailman

In that north submarket versus some other areas you guys have space.

Brent Wood

Well, I like to say were Houston is lower half of our portfolio right there. So I mean is to say that at least half of that is up there are up north really the only parks out West are Ten West Crossing and then our Techway park. So we’re going to have to just [indiscernible] got vacancy we’re going to have to deal with it and that’s certainly will be part of it.

Craig Mailman

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

Marshall Loeb

Okay. Just in Houston itself. I would say globally there is still – or nationally drifting down a little bit not dramatically and competitive. Houston what we’re hearing is it’s and again why I would say is contrasting a year ago the public market was highly concerned about Houston and it was a Tale of Two Cities and really even into this spring, the private market was you know status quo in Houston where now I think the private market there’s a little more - there is more nervousness about Houston.

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

Brent Wood

Yes, I would agree. I would just say, there’s probably just more of an aversion to risk now as we’ve gone through the years compared to earlier in the year and there’s more demand for quality. So you have to be more right in the center of the fairway, which one of these projects Marshall referenced that it looks like it’s going to close at a low five cap does fit that bill.

But if you get outside of that that window, the cap rates have bumped up, some people are looking for a little more return for what they’re viewing is potential risk in the short-term. So we’re glad to have executed what we did, we sold our non-core assets if you will, a 100% Class A now and as Marshall referenced 95% of our assets are within one of our core parks. So we are thankful to have gotten most of our heavy lifting that we really wanted to get done executed.

Craig Mailman

That’s helpful. Then maybe just one for Keith on the same-store guidance. The 4Q ramp just rolled back compared to what you guys have done year-to-date and kind of our full-year guidance is coming in, just remind me, do you guys have – do you guys change your quarterly pools and keep the annual static and that’s kind of why they don’t necessarily foot?

Marshall Loeb

Correct. As each same-store each quarter as it’s as whatever same-store it is for that quarter and which will change for the year in each quarter.

Craig Mailman

Okay, great. Thank you, guys.

Brent Wood

Welcome.

Operator

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

Alexander Goldfarb

Hey, good morning. Just a few quick questions here. Brent, we’ll go to you and if this was addressed earlier then apologies, but on the post office lease, if my math is right, you guys were I think targeting 90% leased for the third quarter and you outperformed at 93%. It sounds like that post office was a little over 1% of that outperformance. So with the remainder would you characterize the other parts of the Houston outperformance as sort of I don’t want to say as like temporary or was that outperformance like full term tenants signing real deals et cetera?

Brent Wood

Yes. That was the one short-term lease that we did with the post office, rest of it is for term or in the case I mentioned the other lease, it’s short-term nature like two years, but I mean it’s in there for the short-term nature. But it was just a few things going positive our way, some of it is we’re tend to be a little conservative in our approach when we look at these things and when you’re in an environment that is slowing you, there’s just even more uncertainty in trying to make those assumptions and projections. And so we’re pleased to abate it, but it was pretty solid other than the one post office lease, the rest of it was good stuff, good to get it done.

Alexander Goldfarb

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

Brent Wood

Sub-lease space in general is just very difficult to compete because it’s not divisible; they have to reach an arrangement with the existing tenant on occupying it in the liability risk and everything associated with it. The tenant that may consider a sub-lease space then they’ve got to gauge what is the term left on that particular sub-lease.

When there’s space available in the market particularly if you have landlords that are willing to do a short-term nature deal with you. That’s just much easier and cleaner than dealing with a landlord and a third-party other tenants. So we very rarely compete with the sub-lease space. I look at it more as – the more obvious thing is that it could be a precursor to an increase in the vacancy rate. I think that’s the bigger signal of it versus immediate competition.

Alexander Goldfarb

Okay. But overall, I mean it sounds like and I know you guys aren’t given 2017 yet, but overall, it sounds like why you guys may continue to outperform in the least rate whether there’s more of that 21 months vacant lease type thing that pressures rent. But the point that we should expect, we should not be surprised to see continued pressure on the rent side, but it sounds like you guys maybe able to outperform on a leasing side. Is that fair? Or we should be braced that we’re going to see a material drop in the Houston occupancy?

Brent Wood

The reality is we just don’t know Alex I mean you know we’ve got 16.5% roll. We know some of it a lot of that particular first quarter next year. So we just don’t know at this stage. We’ll just continue to try to out execute. We’re in contact with all these different tenants that do think the former part of what he said about rents that you know again depending on our volume individual transactions by quarter.

Yes, we could have some quarters where for whatever reason there’s a couple of transactions that we’re willing to you know lease vacant space. We’re going to air inside of occupancy versus probably over negotiating we’re don’t want to overplay our hand. But it’s too early to tell, but we’re working on it like say we’re working on 2017 already.

Alexander Goldfarb

Okay. And then just finally, on the development deal that you guys bought that you’re leasing up. Is it an indication that maybe the de-risk you know maybe Marshall your earlier point about de-risk in the balance sheet. This is to de-risk and get the company away from developing on its own to maybe buying out developers who may have financial issues or what have you or with just more of a one off deal?

Marshall Loeb

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

Alexander Goldfarb

Okay. Thanks a lot.

Marshall Loeb

Sure.

Operator

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

Richard Anderson

Hey, thanks. Good morning. So Brent you mentioned a lot of the [984 K] in Houston that’s expiring next year as in the first quarter and you said you’re getting too early. To what degree can we really see a meaningful reduction in that number when you report, fourth quarter results?

Brent Wood

I don’t expect Rich for fourth quarter to look a lot different that third quarter we’ve just got 2% roll remaining this year.

Richard Anderson

No, I mean 2017 expiration is to what degree will you do that early and maybe the number will look smaller significantly smaller when you report that same schedule on Page 18 again next year.

Marshall Loeb

I think we are saying yes. Yes, that’s our goal certainly and again we’re in dialogue with several of these tenants and trying to work on it. We certainly hope to lower that between now and then and you’re right we’ve got you know three or four months to do that make that happen. So that’s in the works is you know as you might expect this type environment you get slower decision making tenants don’t feel the pressure the urge to make early decisions.

Again when you do when the pendulum swings to hit market versus the landlord market. We can try and or trying as much as we can but you know some point you’re at the mercy of the other side to tango with you and so we’ve got long-term relationships a lot of these groups and trust me where we can make the renewals we will.

Richard Anderson

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

Marshall Loeb

Yes, I mean clearly when you in a negotiation to get the tenant wants to renew. There has to be less negotiating there tends to be more leverage from our side because you know you realize they don’t want to move in incur the capital moving in all those towards staying. So a tenant may joust for something but it’s a lot more minimal than if you’re out on the open market. So absolutely renewal to plan A and but plan B if they get vacant is to get space ready and to move as quickly as we can.

Richard Anderson

Okay and so you don’t have an idea what your tenant retention rate will be at this point, absolutely no idea or do you have at least maybe 50-year, 30% you know is staying at this juncture do you not even have that level of visibility?

Brent Wood

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

Richard Anderson

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

Brent Wood

Let me be clear Rich, when I say captive what I meant by that is the tenant was there, we put him in that space and we had him there on a short-term basis until we completed their build-to-suit. So we had a lot of leverage [indiscernible] the run rate there. So they were in the space. There is leases in the portfolio that have termination rights, they’ve - most of those require at least six to nine months notice with fee, but it’s not anything that.

Marshall Loeb

It’s typical, customary.

Brent Wood

Yes. Customary stuff.

Richard Anderson

I didn’t think so. I was just checking. The two kind of holds in the recently delivered development projects one Houston, West Road III and then recently in Phoenix kind of very low without zero on a percentage lease perspective. Can you talk about the pace of activity the traffic looking at those two and in particular?

Marshall Loeb

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

But we also stopped our Houston development pipeline a year earlier than that. So really first quarter 2015 at the park is well leased and this was a single tenant building. So it’s one when we get it full it will either jump to 100% or stay at zero. And so again we had prospects but we’ve not been able to land that tenant that needs to be in that submarket that needs that exact square footage.

And maybe that as we talk about different types of buildings why we like building multi- tenant buildings typically in the vast majority of our portfolio is that is the flexibility I remember somebody telling me early you want it to be a salami, and you can cut it up as many different ways as you need to, and probably West Road III is a good even though we’ve known that learning curve where it’s the size it is for a building and the market turned right about the time we were delivering it.

Richard Anderson

So I probably would use a different type of meat in that analogy, and then the last question is you keep saying that you know in 2012 90% of your starts were in Houston. To what degree or is there lessons learned from that that you know it’s a spread out more. Is that a fair statement that you can look back and say yes we should have been a little bit more forward thinking about how we are spreading our development investments?

Marshall Loeb

I don’t think especially since our Chairman will listen to this reply probably at some point, I won’t throw David Hoster under the bus. I don’t know I think I mean I think we made good decisions and created a lot of value in Houston. I guess as I say that I mean it more in the sense, and especially 12 coming out of the downturn Houston really led the country out of the downturn.

So we had the right sites in the demand and took advantage of it. Maybe at the flip side of that I am thankful now that Houston is a little rocky that the other 82% of our portfolio is creating some good opportunities for us and it wasn’t that a year ago I would say and maybe not use so much but a number of people thought Houston is in trouble. EastGroup is just going to grind to a halt and the other 80 plus percent has created opportunities for us to kind of report record FFO this quarter.

Brent Wood

Yes, I would extend that that we just went with the opportunity was in just you know we’ve had a combination of spec buildings leasing up quickly combined with build-to-suit. I think any time we can push development whatever market we would, looking back at it I think we probably slowed to sell some of the older asset and I think that something that Marshall has done this year and done well is to look at that as a means of recycling to our capital.

Richard Anderson

Okay. Good enough. Thanks very much.

Marshall Loeb

Thank you.

Operator

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

Eric Frankel

Thank you. I think the Houston horse has been beaten to death, but one final question. Just on Houston supply, roughly where is that 5 million square feet of new development located, what’s sub-market breakdown?

Brent Wood

It’s primarily southeast and southwest, neither of which we’re in. So it’s confined. There’s a few big larger buildings that or make up a good bit of that over on the east port side, which is still showing some strength. So it’s primarily in those two sub-markets.

Eric Frankel

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

Brent Wood

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

Eric Frankel

Yes, okay. That’s helpful color. Thank you. Just a question on the balance sheet for Keith I suppose. Just noticed with some of your refinancing activities last quarter, your debt maturities – the duration is a little bit shorter than usual. Do you have a strategy going forward of how – of which you want to do in terms of long-term debt or other ways to finance your business?

Keith McKey

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

Eric Frankel

Any hesitation going a little bit longer than maturity, I don’t think you have anything mature, you know how many debt maturing in 10-year or any you haven’t done any recent issuances that matures in 10 years, so I just want to get your thought if you think the yield curve is not attractive enough from between five to 10 years?

Brent Wood

We look at 10-year also, what we do is take a 10-year and get that right there and then a five-year or seven-year with the rates on it. And assume that at the end of the five-year or the seven-year, we need to get another five or three-year to finish out that 10-year to compare to the 10-year and say, well what interest rate would we have to get on that next five years or what interest rate that we have to get on the next three years. And see if that’s our reasonable assumption that we’ll be able to get that in the five years and most often time it is very reasonable that we could get that rate.

Eric Frankel

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

Keith McKey

I don’t know better than expectations, maybe some markets, like – which we had more in the bay area, for example in southern California is strong in terms of rent growth and then if that helps and then maybe a good question. One of the items I wanted to mention this quarter, actually our releasing spreads would be a little better. One of our largest tenants in the portfolio [indiscernible] formally united stationers went up 400,000 foot, frankly seven-year renewal. And so our net numbers are about 100 points understated because of that. It was a 10-year lease and when it rolled it was below average.

So it pulled the overall average, but that was about almost a quarter of our leasing this time. But all-in-all we’re happy with it. Demand can hang in there where it is, we’ve said it to audit committee earlier this week, it is a Goldilocks environment and that it’s not over heated and it’s not too cold. If we can hang in there, we can hopefully keep executing. We like gap releasing spreads, we think it’s a much better measurement that we should be able to continue to produce double-digit gap releasing spreads. Maybe a little rockiness in Houston as you said the other 83.

Eric Frankel

Right. Right. Okay. Thanks for the color. Much appreciate it.

Marshall Loeb

Sure. You’re welcome.

Operator

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

Barry Oxford

Great. Thanks guys. Real quick on the sale on the land sales in the third quarter. Given that the market seems to have weak end as you guys have indicated in that price for riskier assets are non-core assets when he sold the land in third quarter was that at a lower price than what you initially had expected that you have to cut your price in order to get those deals done?

Marshall Loeb

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

Barry Oxford

Great. Thanks guys. That’s all I have.

Marshall Loeb

Sure. Thanks Barry.

Barry Oxford

Yep.

End of Q&A

Operator

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

Marshall Loeb

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!