EastGroup Properties, Inc. (EGP) Q3 2012 Earnings Report, Transcript and Summary

Good morning and welcome to Eastgroup Properties Third Quarter 2012 Earnings Conference Call. [Operator Instructions] And please note today's call is being recorded. Now it is my pleasure to introduce David Hoster, President and CEO.

Thank you. Good morning and thanks for calling in for our third quarter 2012 conference call. We appreciate your interest in EastGroup. As usual, Keith McKey, our CFO will be participating in the call. In addition, this quarter, Brent Wood will also be part of the call. For those of you who do not know Brent, he is EastGroup’s Senior Vice-President, located in Houston and is responsible for all our Texas markets where most of our new investment activities are occurring. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

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 term-sensitive information that, subject to the Safe Harbor statement included in the news release, is accurate only as of the date of this call.

Thank you. The past 90 days have been productive for EastGroup. Funds from operations of $0.76 per share for the third quarter met the mid-point of our guidance and represented an increase of 1.3% as compared to the same period last year. This was the sixth consecutive quarter of FFO growth when compared to the previous year's quarter. Same property operating results were positive for also the sixth consecutive quarter. Occupancy increased to 94.3%, our highest level in 16 quarters. Our Houston development program continues to expand. We acquired a California property and additional buildings are under contract. And we have taken advantage of the attractive debt and equity markets. Looking at property operations, same property net operating income increased 0.1% with straight-line rent adjustments and 0.8% without. In the third quarter on a GAAP basis, our best major markets, after the elimination of termination fees, were Dallas, up 10%; Phoenix, up 8%; and Houston, up 7%. The trailing same property markets were South Florida, down 22%; Jacksonville, down 14%; and Charlotte, down 6%. The primary differences between the quarters were basically due to changes in property occupancies in the individual markets. As I said, occupancy at September 30th grew to 94.3%, a 120 basis point increase from the end of the second quarter and well ahead of our internal projections. We expect occupancy to remain in the 94% range, give or take a little, for the balance of the year. Our Texas markets continued to be our best, performing at 97.5% leased, and 97.2% occupied. Houston, our largest market with over 5 million square feet, was 98% leased and 97.7% occupied. In the third quarter, we renewed 66% of the 722,000 square feet that expired in the quarter and signed new leases on another 6% of the expiring space,…

Thanks, David. I'm glad to be participating on the call today, especially in light of our current activity in Texas. Texas has become our largest ownership state and currently contains most of our new activity. A combination of favorable economic and demographic tailwinds combined with our great locations on-the-ground presence throughout Texas has proven to be a very positive combination for us. This is most evident in Houston, EastGroup's largest market. Indicators across the board continue on a positive direction. 12-month trailing job growth is up 3.5% or 89,500 new jobs, which puts the overall job count well above pre-recession levels; continued population growth increasing at twice the national average since the 2010 census. Correspondingly, the housing market is healthy and stable, with inventory at its lowest level since February 2007 and Houston has led the nation in residential construction permits since January 2011, with Dallas coming in at #2. And the oil and gas industry continues to prosper and expand. New technologies and the discovery of vast energy resources across North America have further fuelled exploration, research, development, refining, manufacturing in all of the energy-related sectors. A great deal of this growth in spending occurs in Houston which have in many ways become the energy capital of the world. This growth has spelled opportunity for EastGroup. The strength of the Houston market and our locations have led to a very active development pipeline which currently includes 11 buildings totaling 827,000 square feet either in lease up or under construction including World Houston 37 and 38 that, as David mentioned earlier, have broken ground. At first glance, those figures may seem uncharacteristically high, but we are pleased that a number of these buildings represent build-to-suits and, as a result, this pipeline of activity is already 57% leased. Our World Houston…

Good morning. As discussed, FFO per share for the third quarter increased 1.3% compared to the same quarter last year. A non-cash expense of $269,000 or $0.01 per share related to an interest rate swap was recorded in the third quarter, which reduced FFO. Bad debt expense net of lease termination fee income was about the same as last year. FFO per share for the 9 months increased 5.5% compared to the same period last year. Bad debt expense in 2012 net of lease termination fee income for the 9 months reduced FFO by $343,000 when compared to last year. Debt to total market capitalization was 33.7% at September 30. For the quarter, the interest in fixed charge coverage ratio was 3.6x and debt to EBITDA was 6.4x. During the third quarter, we repaid a $4.1 million mortgage loan with an interest rate of 5.64%. Our floating rate bank debt amounted to 2% of total market capitalization at quarter end and we have no debt maturing for the remainder of 2012. Bank credit line debt was $46 million at September 30 and with credit lines of $225 million, we had a $179 million of capacity at quarter end. The bank credit facilities mature in January 2013 and we are currently in discussions with our banks on a new facility. We continued to sell shares under our continuous equity program to keep our debt ratios in line as we acquire and develop properties. We sold 98,375 shares for $5.3 million in the third quarter and subsequent to September 30, have sold 357,692 shares for $19.1 million for an average of $53.50 per share. Year-to-date we have sold 1,869,090 shares for $95 million at an average sales price of $50.83. We closed an $80 million unsecured term loan with a 6-year term, interest only payments and a fixed rate of 2.92%. In September, we increased our quarterly dividend by $0.01 per share and paid our 131st consecutive quarterly cash distribution to common stockholders. This dividend of $0.53 per share equates to an annualized dividend of $2.12 per share. Our FFO pay-out ratio was 70% for the quarter. Rental income from properties amassed almost all of our revenues, so our dividend is 100% covered by property net operating income and again, we believe this revenue stream gives stability to the dividend. FFO guidance for 2012 has been narrowed to a range of $3.07 to $3.09 per share and we maintained the midpoint at $3.08 per share. Earnings per share is estimated to be in the range of $0.95 to $0.97. Now David will make some final comments.

As stated earlier, the third quarter was a very productive one for EastGroup and we expect to maintain our positive momentum through the balance of this year and well in to 2013. We are especially encouraged by the growth of our development program and the potential for attractive acquisitions. We will now take your questions. Thank you.

[Operator Instructions] With that, we'll go first to the site of Gabriel Hilmoe with UBS.

David, can you talk a little bit about demand from the small local users and how that’s been trending relative to, say the larger bulk users that were a little stronger over the summer? Just trying to get a sense of what the smaller local tenants are saying in terms of space needs and how much that contributed maybe to the pick-up in activity that you saw in late August and September.

As I always say, each market is a little bit different but we are starting to see a little more activity from those smaller users but it still hasn’t gotten back to where it was before the recession or where we'd like it to be and I think part of that is from, as we’ve discussed many times, the housing industry. I think on the last call I said maybe we have seen one housing industry-related prospect in our various markets. That has changed. We are now starting to see a few more, particularly -- when you're looking at single family housing, particularly in Texas, with activity in Dallas and San Antonio. And we don’t see it in Houston. And I think that’s because just the location of our buildings. Possibly our Katy location will attract some of those type users. Even a little prospect activity in Las Vegas from housing. Florida, we're not seeing the single family housing activity but some from both commercial construction and multi-tenant residential. So it's picking up a little bit but not so much that we can get excited about it yet. Our increase in occupancy between the second and third quarter ends was really in all size spaces. So I can't point to any one and say we did better there.

And then just in terms of pricing and what you’re seeing in your markets, how have you seen pricing trending for a class D product relative to the As. I am just trying to get a sense of whether that gap between the As and Bs has tightened any further since, say, the summer, 60 days ago.

Well I like to not just talk about As and Bs, but sort of As through C or D. I would say there is some compression between As and Bs, not any from the Cs yet but there still have not been, I think, enough transactions closed that you can identify and have any real statistical significance on that compression of cap rates between As and Bs. I think if anything, that there is an even a little more of the lowering among the As or certainly they've stayed low compared what they were a year ago. We hope our asset in Tulsa will be a reflection of a compression for a B property.

I think Ross had a quick one, too as well.

Sure.

Hey, David, 2 quick questions for you. First, how much pressure are you feeling on real estate taxes in Florida and Texas specifically?

I have not heard people talk about any big jump in real estate taxes. And since almost 100% of our leases are net or triple net, those are passed through to our customers. They're certainly always looking at total cost to them for occupancy, but if there is pressure upward in industrial, it’s felt by all owners where you see more pressure is in California where -- when an asset changes hands, there is usually a very large jump because of the Proposition 13 that has held back the rates until a purchase and sale occur. But nothing yet, would answer your question.

All right, second question. On the occupancy side, you've obviously had a nice recovery. Do you feel as though there is any real upside in your portfolio at this point or do you really feel like you're maxing out here?

I always like to feel that there is a little bit of upside since most people talk about valuations and all at 95%. And before the last recession we operated a good many quarters at above 95 and maybe even 1 above 96. We see some upside there. I think from a same-property operating standpoint, there is a little more room in occupancy but the real change is going to come in rents and an awful lot of that’s going to be determined what happens to the overall economy.

We'll go next to the site of Jamie Feldman from Bank of America.

So David, I know you had commented you think leasing spreads turn positive back half of 2013. Can you give us a little bit more color on a quarterly basis, kind of what to expect here and whether you thought this quarter’s were better or worse than expected?

The third quarter was slightly worse than expected. As you recall in the second quarter, we were a little bit surprised on how good the rent spread calculations were and at that time, I recall I said, that it was, one quarter does not a trend make and we'll just have to wait and see whether that's an aberration. The overall numbers were – and then I went out to the people in the field, they thought it would -- the third and fourth quarters would be about the same as the second quarter. It turned out they were just a little optimistic and the combined numbers were down more like, I think between the first and second quarter numbers that we achieved in the third quarter but I think the positive was a plus number on renewals for gap rents. And we think that going forward that number is going to continue to be positive and probably improve. The real unknown is how we do on the vacant spaces. So it's not going to be positive by the end of the year, or if it isn’t, it’d be just breakeven. So we’ve really not looked at it on a quarter-to-quarter basis year because we're still in the process of doing our ‘13 budget projections.

So for the vacant space, are you comparing, even if it's empty, you're comparing new leases signed versus the last lease?

Absolutely. And that’s a good point, Jamie because not all industrial REITs or office, industrial companies do that. We're trying to give you every bit of information possible. So we compare whether the tenant moved out yesterday and a new one moved in today or whether that space has been vacant for 3 or more years and whatever that previous user was paying is compared to what the new lease is.

So basically if it was vacant, it's still incremental NOI regardless of the negative leasing spread.

Absolutely.

Do you know like, if you were to back those out, what your spread would have been, if it's just purely a…

No, that’s not something that we've ever calculated because I'm not sure what it would tell us and we've just always done it one way and want to keep it consistent.

Okay, and then looking forward to next year, can you talk a little bit about the expiration schedule? I think you’re like 20% of the portfolio rolling?

I don’t think it's that high, but it is higher than average next year and there is no question that, that presents a big challenge and we've had many discussions with our asset people in the field about pushing to do earlier than maybe average renewals which sometimes is hard to do in industrial but push for that and they are all aware of there is more turnover next year than we've had over the last couple years. So like I say, we recognize there is a challenge there.

Do you have a sense of like known move outs already?

Sure, you always have known move outs and known renewals that you're working on and some of the move outs where especially where people are going to buy their own building or build their own building never happen or the time horizon gets much greater than they think. So it's hard to pin those exact numbers down but you always know about some move outs, some renewals.

Just last question, back to Brent. What are your thoughts on the sensitivity of demand in Houston and to the price of oil? And then listening to the base this week, certainly a lot of discussion on alternative energy uses. What are your kind of longer term thoughts on the Houston market if we do become more energy independent and shift to different kinds of uses?

Well as a general statement, I would say obviously all of that’s positive. The oil and gas companies within Houston right now are a big part of what we're seeing activity-wise. But with oil prices above $100 a barrel and with natural gas rebounding from its low point of mid-1s now being at mid-3s, we're seeing all of these companies expand and grow. We're at the breakeven points with oil certainly being north of $70 as a general benchmark for them, so they are in good shape there. The natural gas drilling has slowed down with the lower pricing but the oil drilling has picked up most of that and the rig rate count is down just a little bit. So the long-term feel within the city is positive and what I can tell you is that, if you drive around the city, you see all of these companies with significant expansions right now. Exxon Mobile is zoning a very large campus up near where I live, north side of Houston just south of the Woodlands. It's going to house 10,000 employees and as you drive around town you’ve got Weatherford, Halliburton, GE Oil & Gas, Phillips 66, Mustang, Subsea 7, all of these companies are significantly expanding their facilities. A lot of these companies are putting lots of infrastructure in the Eagle Ford shale over in South West Texas. So it's certainly, Houston is still tied to the oil and gas, about 50% of the economy and right now there is still optimism in terms of the strength of the industry.

We'll go next to the site of Craig Mailman with KeyBanc Capital.

Just to go back to the rent spreads for a second, just given where you guys have occupancy now, it seemed like you had a little bit more pricing power. I know you just talked about the calculation methodology with -- on new leases versus the vacant space, but beyond that, is it just that the condition in some of your markets, you guys are just outperforming by so much that it’s hard for you to push rents or is something else going on?

It’s the former that you just said, that we are generally well ahead of the market occupancies and it's nice to talk about pushing rents. When it gets right down to it, you have to look at each space that’s vacant or renewals being discussed and determine how many good alternatives your prospect or tenant has. If they've got 8, 10, 12 good alternatives, you try to push rents and no matter how good your location or quality of your building is, you're not going to sign the lease. If they have 1 or 2 good alternatives, you have pricing power. As you point out, we're well ahead of the occupancies in our markets. So there's got to be a little bit of a catch-up there. It doesn’t have to get all the way up to our levels; it probably never will, but the closer it gets, the less alternatives that a prospect has and the more power we have to move those rents.

And then just – I’m going to dove-tail in that to same store NOI. I know you said the benefit from occupancy is obviously more marginal at this point. Could we see same store go negatives in early '13 before it kind of reaccelerates as spreads turn positive?

There is always that possibility. I think if it went negative, it would be a very small number, just like there it a small number up this past quarter, but I think that would be temporary and that’s one of the nice things that we have with our strategy is if internal operations, the growth there, as growth in same property slows, or is flat for a quarter or 2, the great growth we're having in our development program and our ability to buy good assets, we think pick up any slack that’s there and should allow us to continue to grow FFO or FAD, however you want to look at it in spite of, say ,a potentially flat same store number.

So we should probably still see same store positive for full year '13. I know you guys haven’t given guidance yet but that’s a fair assessment, you think?

We haven’t finished our numbers, is my #1 reason for not doing it and we have traditionally given our guidance in the February call covering the fourth quarter. It allows us to be more accurate by having some more operations under our belt before we tell the world where we think we're going to end up the year.

And then on the development ramp, I know you said you could start around 42 million in the first 4 or 5 months of next year. Brent was talking about some more activity in Houston, San Antonio, but then you guys bought some land in Charlotte. Is it fair that we may see a more geographically diverse development pipeline next year? Have conditions improved enough in other markets?

We think so. I mean a lot can happen between now and first quarter and end of first quarter next year. But yes, if everything works out with the land that we have under contract in Charlotte. We would hope to start development of buildings there. We have several sites in Chandler on the south side of Phoenix where we think the numbers will justify new construction. We bought a site earlier in the year in Denver where it would be a smaller building but it's next door to our Rampart III building which we developed a few years ago. So we see starting something there and depending on leasing in Florida, we have one remaining building in our South Ridge development that’s ready to go and we would hope that by maybe midyear next year that numbers would justify some construction in Tampa. We have 2 good development locations there where we could put multiple buildings in each.

Okay and then just one last one on the financing strategy, you guys have used the APM pretty well here to match fund on the development side. Just your thoughts with, it sounds like acquisition activity could improve here in 2013. Just your thoughts on instead of maybe doing so much in the APM waiting and maybe doing a marketed deal, is that something that may be in the outlook?

It all depends on the size of the capital that we need to fund our program. The APM as you point out has worked extremely well for us because we can match funds. The second factor is we like the cost of the APM at basically a 1% fee versus a larger deal where there is 3% or 4% investment banking fee, 3 or 4% discount and if there is any marketing involved with it then there is usually an additional discount that you end up with there. So we think that how we do it is extremely efficient. It fits our strategy.

We'll go next to the site of Brendan Maiorana with Wells Fargo.

So for David or maybe Keith, how much have you pre-funded, if you will, if you look at where your balance sheet metrics are today, how much you’ve raised and how much if you just do that Dallas acquisition you'd finish the development that you've got, that you're planning to do in the back half of this year in the fourth quarter and maybe if you start the 40 million of starts in the first half of next year. Is your balance sheet okay with what you've raised thus far on the APM?

There's a couple of ways to answer that. A lot of it will depend on what our stock price is, whether we issue different additional shares. We have a tremendous amount of borrowing power, as you could tell by looking at our ratios and our debt levels, but we, I think, in the last call talked about that we are at a lower debt to total market cap level than we historically have been and we like this level around 35% versus 40 to 45 and so again, a lot of it will depend on how many of these potential developments and acquisition transactions occur and we don’t have to match everything dollar-for-dollar but we've been conservative and we're going to stay conservative.

Is it fair to say that you think that a 35% debt to market cap and call it a 6.5x-ish debt to EBITDA is sort of the metrics that you guys are now comfortable with?

Yes.

Okay, the Dallas acquisition, I know going back maybe a year ago, maybe it was a little less than a year ago, there were a couple of portfolios that were out there. It’s a market that you guys clearly have stated that you want to grow in and I think a couple of those deals that came up, you -- I don’t want to say you stretched for it but maybe were lower going in yields than historically we might have expected from EastGroup. Is that the same with this transaction that’s under contract now?

I am not sure that you could say that we have some hurdle higher or low that we shoot at. Every market has a different market rate on yield, given varieties of quality. And in today's world, sophisticated world, you don’t steal things. So when we close the transaction, we will report the yields that we see generated by the investment and let you determine then whether we stretched or not.

All right, fair enough, but you also I think mentioned that you're seeing more investment opportunities in general. Without talking about Dallas, just in general, if you're looking at development yields are, let's call them with an 8 handle on them, where are you comfortable buying stabilized acquisitions today?

Every market is very, very different and we have different goals and strategies in each market on what we're going to do. We bought the Haywood asset at sub-6, obviously, but we think we've achieved some of the things we were trying to do there and I'll just throw out that I've mentioned to some people in that Haywood market, our average occupancy there is 400 basis points above the average occupancy over 10 years that the portfolio’s had. So it's obviously a market where you do better because of the strength of it year in and year out. So a lower yield has more upside, obviously. So each one's different and you'll see where we buy in different markets, there’s going to be 50 to 100 basis point spread in yields because that’s what the market is and some of those reflect the potential upside and others reflect where the institutions are buying. There've been a large number of packages that have been out in Dallas and we think they are going to be a large number going forward. Dallas is a market where lot of REITs are there; almost every major institutional investor is there, industrial, and so just a lot of trading of assets. So we see more opportunity to buy there. The numbers as we look at them today don’t justify us doing new development, so if we are going to grow acquisitions are the way to go. Somewhat very different in Houston where the numbers justify new development, but we're not a buyer of assets there even though there are a good many portfolios that are in the market and have changed hands. So you're going to see us with the emphasis on development there. Here's an example if we do think what we think makes sense in each individual city or market.

We'll next to the site of Chris Caton with Morgan Stanley.

David, maybe I could just follow up on Houston. Where do you see pricing in Houston in some of those packages that are being marketed?

I don’t know if Brent can add anything, too but it’s the A quality assets, AA minus for selling 95% occupancy about at about a 60. The B minus to C plus are selling probably in the low 8s.

Also in Houston and maybe Brent also can chip in on this, but you've been developing in the 8-plus range. Can you talk about the factors influencing that going forward? So how do you see land pricing trending? How do you see construction cost trending and obviously market rents, say over the next year?

We expect to get those similar yields going forward and a big part of that is that we have the best locations for industrial in the city and we can charge some rents higher than others do and still get the deal because they want to be in our location. I'll let Brent add to that.

Yes, there has been post-recession, as you might imagine a larger appetite for lands. We've seen land costs push up 50 to 75 maybe as much as a $1 a foot in land. Still mostly in Houston in the upper $3 range where maybe pre-recession it was low $3 range. Construction costs are up 3% to 5% over the past year so they've come up a little bit. We think the materials part of that is going to level out. I don’t see that escalating a lot. What we are experiencing in Houston is more of a labor and profit margin fee from contractors, all of the subcontractors and general contractors suddenly over the last 6 months have a lot of business to bid and quote and so they are more comfortable now putting a little more margin of their own in there and that’s a little harder to project going forward but that’s one cost component that I see over the course of the near term increasing. But all-in-all, I think costs are going to remain well within range of us to continue with what we're doing and we are very comfortable. We have a great basis in our Houston land, as talked about. So we feel that we're going to be competitive in the near term.

And just to clarify, was that a land foot on the pricing?

Yes.

And just to follow up on an earlier conversation on lease expirations next year. Looks like you have a little bit more rolling in Florida across Jacksonville, Orlando and Tampa. David, maybe you could just speak to the trends that you’ve seen there in terms of the pickup over the last 45 days or so or just a general velocity in that market. How do you feel about your Florida markets right now?

We feel very good about Tampa, pretty good about our Orlando and not very good about Jacksonville. South Florida, we're in Broward and Palm Beach Counties and Dade County-Miami is strong but the demand is not pushed very far north. We had hoped by now that demand would pick up there as people either couldn’t find space or wanted a lower-price space and would move north. That’s not happened yet. So only time would tell there. But the economy in Tampa has picked up very nicely and is getting better. Tourism is up; convention business is up; all – there’s actually home construction in Orlando now. So we're very comfortable with those 2. Jacksonville just seems to be a very flat today.

Go next to the site of Alex Goldfarb with Sandler O'Neill.

Just going back to your earlier comments on the housing tenants, you had mentioned that you weren’t really seeing them come back or especially not in Florida. Do you need them to come back to get up back on all 8 cylinders or are you seeing growth from other small-size tenants that as long as those other tenants grow, they'll pick up the slack and therefore you don’t need the housing tenants to be what they were a number of years ago to be firing on all cylinders again.

We view the housing coming back, again which we’ve signed 1 or 2 leases max and none in Florida related to them yet, as icing on the cake. It’s dessert. Because we’re over 94% occupied today without them, so as they come back, and we think we have the best locations for them which was proven out during the housing boom time, that it should really give us additional occupancy and particular pricing power when that comes. It’s one of the optimistic things to look forward to whereas you've heard us say many times what we’ve really filled up with over the last couple years has been the basic industries, the basic human needs, energy, health care, clothing, consumer-type products, food and beverage. So say housing comes back, it should just be a nice big plus for us.

Okay, so again just following up on the previous Florida question. As you look to next year, it's not as though you're banking on housing tenants rebounding to help get rents positive there. Your view is that rents will get positive there on their own. If the housing tenants come back, hey that’s great, but it's not needed for those rents to turn positive.

No, correct and in Florida, the way we look at our portfolio today will probably be the last set of markets to turn positive.

And then just the final question is, Vegas, you guys made an acquisition there a number of years ago. Just in the conversations over time it seems like it is a tough market to buy more in. Is there some point at some period of time where you say, just we're not seeming to get traction there and logistically to have someone monitor that market, it doesn’t make sense? Or is your view that, hey it’s a great market and even if it takes us 2 or 3 more years to build on that position, we're willing to stick it out and it does make logistic sense for us.

We think that at some point Las Vegas – I mean, it’s starting to come back a little bit, but will come back very strongly. There is never going to be another Las Vegas. There is never going to be the capital available to do something like that to compete with it. So we think it will come back and we believe we will have additional opportunities to build there. It's very easy to cover that little asset out of our Phoenix office and our fellow in Phoenix, mother lives in Las Vegas so it's real easy for him to get out, have a free place to stay when he goes there. So we don’t see any timetable that we need to exit.

We'll go next to the site of Paul Adornato with BMO Capital Markets.

Just one quick question. You may have noticed that Iron Mountain has decided to pursue a REIT status. Was wondering if they have talked to you about their intentions for their leased real estate.

We have not gotten any indication that in any of our various locations, and I forget, they must be in 6 or 8 buildings with us anyway, that they plan to leave. We have one maturity lease next year and we're in discussions for them to renew that lease. So if they are planning to pull out of industrial buildings, we've not heard of any of that yet. That can certainly happen into the future but my impression is they are not far enough along to announce anything along those lines.

Are any of the Iron Mountain leases in single tenant buildings?

My recollection is no. They have spaces in our multi-tenant facilities.

We go next to the site of John Stewart with Green Street.

Brent, since we've got you on the line, could we get you to speak to the broader supply picture in Houston? I know a lot of what you guys have under construction are build-to-suits but it seems that the fundamentals you're describing have not been lost on your competitors, both public and private. So can you help put the market supply picture in perspective for us?

Yes, that’s a good way to put it. It's not happened in a vacuum and it becoming a more crowded party, so to speak. We have seen – we were the first in Houston to come out post-recession with buildings and were quickly followed with the REITs. People had readily available cash, Liberty, DCT, to a lesser extent Prologis. We all began to get pretty active and what we've seen in the last 6 months and what's being talked about with projects going forward is we're finally seeing some of the regional and local developers having put their builds together with equity partners and those type things and so now groups like that are joining in. So it always bothers me a little bit that there’s – you’d just as soon do it with no competition but I think it’s still at a healthy level but as with any cycle as things continue to be strong and grow, there will be more space put on the market and more competition. But to date, it’s pretty diverse across the city. Most of that development’s happening in 3 or 4 different sub markets. We feel real good about our locations compared to those, but I think you will see certainly more supply over the course of the near term.

And we believe we outperformed with the competitors before the recession and we think we even proved our land position since then. So we're reasonably confident. Also, a lot of what's been announced is in bigger buildings, bigger from a Houston standpoint, not bigger from California standpoints and as a result, not competitive with our business distribution product.

When you say bigger from a Houston perspective, David, what size are you talking about?

Over 200,000 square feet across dock-type buildings or buildings with much higher office finish than what we do.

And then I think you had referenced low 8s for B-quality assets in Houston. Can you help us put some parameters around what Tulsa might look like?

We're assuming it could be anywhere from a high 7 to the high 8s. We've got a lot of interest in these 2 buildings. They are extremely well located. They are older, but they are extremely well located. They've got a great leasing history. They’re not too far from the airport, right tucked up in a major interstate interchange. So we've been pleased so far with the activity and we'll get the bids on them in another couple of weeks.

And lastly, could I ask Keith to comment on balance sheet strategy and timing? Last quarter, we talked more about the prospect of obtaining a second unsecured rating and how does that process look like? At what point might we see you tap the unsecured market?

We're still looking at unsecured. We probably plan to do unsecured financing, continue that and not do secured. We are talking with some credit rating agencies and hope to get another one on that soon and as David said, we hope to keep a lower leverage. We think all those things will add up for us and make it more attractive for us in the future on financing.

So do you think you might hear back from the rating agencies first half of next year?

I think so.

You have a couple more questions in queue. We can go to the site of Bill Crow with Raymond James.

David, a couple of questions for you. The first one is as you think about your rollover next year, rough terms, how many of those leases were signed post-market correction and how many were still at the higher rents from pre-correction?

We've done a lot of looking at that. I guess we still have about -- of which turning probably about 35% of post market. What’s hard to match up is you have vacancies that were pre-recession. They are pre-recession leases. You've got vacancies that are post-recession leases and until we get into each suite, each space, as part of our 2013 budget, it's very difficult for us to point a finger at what spaces are going to lease. Is it going to be the post-recession lease space vacancy or the pre-recession lease space vacancy and then come up with an accurate number on it and whatever number we give you will be off a little bit and then I'll hear about it next quarter. So I’m going to mumble on that one until we get our budgets done.

But if we used, say 65% was pre-correction for next year, just how does that change in '14?

No, I think the numbers would be reversed on that. The 35% would be pre-correction.

So it’s a big swing when we go from '13 to '14.

Ask me that again. I’m getting confused here.

You said that 65% of the leases that roll them next year may be…

Excuse me, I meant that 65% have rolled.

It’s only 35 go back to higher market rents but they are going to be more of a challenge and that drops down again further in 2014, right?

But there are so many different ways to look at that and when. I mean, we’ve got vacancy space today that we are going to lease and some of that is if you want to compare higher rent space versus lower rent space, and so it's how you project how that is leased and when it is leased is how we're going to end up reporting the numbers.

I got it. I think it became clear to more people that you include the vacant space in these…

And then to confuse your list a little bit more, you look at of the space that pre-recession leases that haven’t turned, a bunch of them are going to turn in '14, '15 and '16 because they were longer term development leases. So we're not going to see those turn in '13. So like I say, until we get down to what we think is going to happen in each individual space, it's hard to say what we think is going to happen to rents and some of it is scientific analysis that we've been doing and some of it’s just gut feel.

Fair enough. Let me go to an easier question here which is can you give us a feel for how much of the leasing in the third quarter was seasonal in nature and how much of a -- if we're at the 94-94.5 level through the fourth quarter, what sort of drop off you would expect in the first quarter?

We always have a lot of leases that generally are expiring 12/31 or into January. So again, I've not looked at our January numbers but I assume we will dip in January. I think we've done that in the last 4 out of 5 years compared to year-end. We have right now, if I recall correctly, just one good sized seasonal lease in New Orleans.

And next to the site of Mitch Germain with JMP Securities.

Maybe for Keith, have you seen any change in the way banks are approaching financing for development?

We can financed development through our bank line and so we'll borrow straight from it and then as it gets above 100 million or so then we go out and either issue equity or get fixed rate financing. So we don’t get construction loans on that so I am not very familiar with that.

Okay, I just thought maybe from your chatter with the banks, you'd gotten a sense that they were maybe more open or not.

They are open to – they like their term loans and they used to do back in previous year in '11 and maybe the first part of '12 they were doing term notes past 5 years, but now they've gone back to just 5 years and under on their term notes.

And then David, if looking at that acquisition pipeline you noted, would you refer to it as more core or possibly more value add?

I would say core. People are looking at properties like we are at what, knowing what 95% occupancy numbers are and sometimes it's hard to determine a cap rate or what a market cap rate is if there are in-place rents that are still above market. What we've looked at recently the in-place rents are on average about right at market which is the portfolio we bought in Tampa in December and the one in Dallas we hope to close before the end of the year. That’s where it makes it a whole lot harder to evaluate what really is the market yield or cap rate on this portfolio but as more time passes and more of the leases have turned, it's easier to do that.

We have a follow-up from the site of Jamie Feldman from Bank of America.

I was hoping you guys could just quickly comment on the Charlotte land acquisition and your thoughts on that market going forward for growth?

The Charlotte market had a dip but not as great as Florida or Arizona or Southern California markets did. And has strengthened a good bit recently and we think with this land acquisition which is just west-southwest of the airport, a stone's throw from a new intermodal facility that the city is building next to the airport. It’s right up in interstate interchange and the previous owner put in the roads and utilities. So we think that once we get the zoning, we should be able to do some construction and that existing rents in that sub market justify spec development. So we're very upbeat on that and see that development will probably be our way to grow in Charlotte rather than many big portfolio purchases unless just the exact right thing comes along. The office market in Charlotte is very different than the industrial market because of what's happened with the big banks and all but we're optimistic on industrial side.

We have no further questions in queue.

Okay. Thank you, everybody, for calling in. As many of you have heard me say, I am more optimistic today about where we're going to be going over the next 12 months than I was 12 months ago, with the one caveat that as long as the government doesn’t screw it up, and we have the cliff actually happening or some other things that killed the economy, we've got a lot of very positive things happening at EastGroup. As always, if we didn’t fully explain any of your questions or cover any issues, please don’t hesitate to call Keith or me and Brent’ll be in the office this afternoon, too. So and anything which you would direct to him, you can do that. Again, thank you.

This concludes today's program. Have a great day. You may disconnect at this time.