EastGroup Properties, Inc. (EGP) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the EastGroup Properties Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note that this call maybe recorded. I will be standing by, if you should need any assistance. Now it is my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead, sir.

Thank you. Good morning, and thanks for calling in for our fourth quarter 2015 conference call. As always, we appreciate your interest in EastGroup. Keith McKey, our CFO and Brent Wood, Senior Vice President are also participating on the call. Since we will make forward-looking statements today, we ask that you listen to the following disclaimer.

The discussion today involves forward-looking statements. Please refer to the Safe Harbor language included in the company's news release announcing results for this quarter that describe certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time-sensitive information that's 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.

Fourth quarter saw a continuation of EastGroup's positive trend in operations. Funds from operations achieved a 3.3% increase, as compared to fourth quarter last year. This represents the 11th consecutive quarter of higher FFO per share, as compared to the prior year's quarter. It also marks the 18th time in the past 19 quarters that we have exceeded the prior year's quarterly results. Per share FFO was the highest in the company's history in 2015 breaking the record, we set in 2014. Further our 2016 guidance would break this record. Our continued growth in FFO per share allowed us to increase the quarterly dividend for the fourth consecutive year by 5.3%. We've now maintained or increased our dividend for 23 consecutive years and in fact raised it in 20 of those 23 years. Our same property cash net operating results have now been positive for 18 consecutive quarters. And our increasing FFO and dividends are being driven by the success of all three prongs of our long-term growth strategy. As to leasing, at quarter end we were 97.2% leased and 96.1% occupied. Occupancy has now exceeded 95% for 10 consecutive quarters, a trend we project continuing. This basically represents full occupancy for multi-tenant portfolio. As commentary on the market, we've never achieved this occupancy for this long, a time period. Drilling down into specific markets at December, 31. Our major markets of San Antonio, Orlando, Dallas and Charlotte were each 99% leased or better. Houston, our largest market with over 6.6 million square feet was 97.1% leased and 96.4% occupied. Supply remains largely in check in our markets. And looking further into these figures and a number of our markets, you would see the supply is largely comprised of big box deliveries being 250,000 square feet and above. So by design, we simply don't compete for the same prospects. While in a number of our other markets such as Fort Myers, Jacksonville, New Orleans, Tucson, El Paso. There's been little no spec development since the downturn. And the market where the fear of overbuilding is the greatest such as Dallas and Houston. We're seeing declines in constructions, while deliveries are being absorbed. To-date the market disciple has been strong. We're in spreads continue to positive trend for the 11th consecutive quarter on a GAAP basis and this marks our fourth consecutive quarter for double-digit releasing spreads with 95% occupancy, strengthening markets and discipline new supply. We remain comfortable with this trend. Fourth quarter same property NOI rose on a cash and GAAP basis. And viewing fourth quarter same store NOI, please remember there was a large termination fee in fourth quarter 2014, reducing GAAP results by a 100 basis points. We expect same property results to remain positive going forward, though increases will reflect rent growth as at 95% to 96% occupied, we view ourselves as fully occupied. While it's a testament to the quality of our portfolio. They've reached full occupancy. So early in the cycle, compared to our peers. It's making quarterly same store NOI comparisons challenging as others are reaching full occupancy later in the cycle. As our occupancy demonstrates leasing activity remain strong within our major markets. Within these markets, we're most encouraged by the activity in Orlando, Charlotte, San Antonio and Tampa. And Tampa in particular, is a market where activity picked up the second half of 2015. The price of oil and its impact on Houston's industrial real estate market remain a major topic of discussion. We thought it appropriate for Brent to again join today's call. For anyone who doesn't know Brent, he's one of our three regional Senior Vice President's and is based in our Houston office with responsibility for EastGroup's Texas operations. Brent?

Good morning. We continue to be pleased with operating results from Texas portfolio including Houston. Our four core Texas market of Houston, Dallas, San Antonio and Austin finished the year that combined 98.2% leased, while our Houston operating portfolio finished the year at 97.1% leased, unchanged from third quarter. The major Texas markets outside of Houston remain unaffected by the slowdown in the oil and gas industry. These Houston industrial market continues to exhibit strong fundamentals. Despite the overall decrease in prospect volume in 2015. Deals [ph] continued to be made across the market in a broad range of sizes. Vacancy rate finished the year at 4.9% up 20 basis points from its record level mark of 4.7% at third quarter. There was 1.4 million square feet of positive net absorption for the fourth quarter, which marked to 19th consecutive quarter of positive net absorptions and raised the total for the year to 6.3 million square feet. Meanwhile, developers continue to show restraint with the construction pipeline declining to just 4.6 million square feet at year end, which is less than half of the post-recession feet, and down 13% from last quarter. This construction level represents less than 1% of the total market. Rents for the quarter were up 3.3% on a GAAP basis and down 2.2% on a cash basis. Same property operating results exceeded our original 2015 projections and finished the year down 0.3% for GAAP and down 1% for cash excluding termination fees. For the year, five developer properties were converted into the operating portfolio that are currently 95% leased with the total investment of $27.5 million at a weighted average yield of 8.3%. There are only three Houston buildings remaining in the development pipeline totalling 211,000 square feet. We are pleased with our current prospect activity as we have proposals outstanding in most of the available space. Looking ahead to 2016, we've already reduced our Houston scheduled expiration from 15.8% to 12.1% of the operating portfolio. Although, the market continues to be resilient despite upstream oil woes. We're intentionally cautious with our Houston budget assumptions included in our guidance. Our portfolio wasting assumptions project, a 30% renewal rate on expiring leases which produces an average occupancy of 93% for the year. The renewal rate for 2015 was 57%. This equates to same store projections for the year, down 1.1% on a GAAP basis and up 0.2% on a cash basis excluding termination fees. Regarding disposition, we have money at risk with a buyer for the sale of our Northwest Point Business part for $15.5 million. Closing on this four building part that was constructed in 1985, is scheduled to occur in mid-February. We have also recently brought to market for sale our Westlake Distribution Center and America Plaza building that totalled 282,000 square feet and will generate estimated proceeds of $19 million to $20 million. Assuming we successfully complete the transactions, we anticipate that these sales will close during the second quarter. In summary, I anticipate 2016 will be similar to 2015 whereby the core Texas markets of Dallas, San Antonio and Austin present growth opportunities, while we take a conservative approach to our Houston operations. Marshall?

Thanks, Brent. Given the intensively competitive and expensive acquisition market. We view our development program as an attractive risk adjusted path to create value. We believe, we effectively managed development risk through a diverse development program. The majority of our developments represent additional phases within existing park. The average investment for our business distribution buildings is below $10 million. We've developed a numerous states, cities and sub-markets and finally. We target 150 basis point minimum projected investment return over market cap rates. At December 31, the projected investment return on our development pipeline was 8.2%, whereas we estimate the market cap for completed properties to be in the mid-5s or slightly lower. During fourth quarter, we began construction on a 100% pre-lease building in San Antonio and Phoenix redevelopment with a total of 259,000 square feet for projected combined investment return of $13 million. Meanwhile, we transferred nine properties totalling 671,000 square feet at 94% lease into the portfolio. For the year, 17 properties transferred totalling 1,419,000 square feet which are 96% lease today. As of today, our development pipeline consist of 14 project containing 1.7 million square feet with a projected cost of $114 million and of that amount, we've already invested $80 million or 70% of the total cost. Looking ahead to 2016, we project development stocks of approximately $100 million. What's especially gratifying about these stocks, is we can reach these level with no Houston starts. Whereas in 2012 for example, our starts were roughly half the volume with Houston accounting for almost 90%. This demonstrates the value of our diversified Sunbelt market strategy. As Brent discussed with the industrial property sales market remaining strong. We're actively moving toward reducing the size of our Houston portfolio. Beyond the three properties, Brent mentioned we continue evaluating our portfolio and will market additional assets later in the year as facts and circumstances allow. In Phoenix, we're losing two of four Interstate COMMON's building through an imminent domain as a result of freeway expansion. We expect to physically lose the buildings in the near-term and are contesting the proceeds with Arizona DOT, so proceeds will take a bit longer. Our asset recycling isn't simply limited to Houston. As we have two additional assets, one in Dallas and one in Southern California under contract. With total forecast sales price of approximately $12 million. As we recycle capital and diversify our development. The portion of our NOI coming from Houston will decline, while the quality of our Houston portfolio continues rising. With the tax gains created in Houston and Phoenix, we acquired two assets in Austin, Texas in separate transaction during fourth quarter. The properties, which are both 100% leased totalled 335,000 square feet. With a total purchase price of $31.6 million. We entered the Austin market in late 2014, are excited to expand our presence. What attracts us to Austin is the combination of the state capital, a major university, high job growth rate, the most stringent development requirements in Texas and the topography challenges. Over a long investment horizon, we believe this ensures rising demand with constraint and supply. Keith will now review a variety of financial topics included our updated 2016 guidance.

Good morning, FFO per share for the quarter increased 3.3% as compared to the same quarter last year. Our growth in FFO continues to be from development, acquisitions, same property results and debt refinancing. Bad debts, net of lease, termination fee income decreased FFO by 419,000 compared to the fourth quarter, 2015 to 2014. FFO per share for the year increased 5.8% compared to 2014. Bad debts net of lease termination fee income decreased FFO by $1,731,000 or $0.05 per share compared to 2014. Same store NOI increase for the year was 2%, for GAAP and 2.7%, if you exclude termination fees. Our outstanding bank debt was $1.51 million at year end and with bank lines of $335 million, we had $184 million of capacity at December 31. Debt-to-total market capitalization was 36.4% at December 31, 2015. For the year, our interest in fixed charge coverage ratios were 4.4 times, an improvement from 4.1 last year. The debt-to-EBITDA ratio was 6.7 for the year. Adjusted debt to adjusted EBITDA was 6.1 times in Page 12 in the Supplemental Package shows, those adjustments. We are in discussions to borrow $65 million with a close and expected later this month. We expect to effective interest rate to be below 3.5%. Unsecured loan would have a 7-year term and interest only until maturity. In December, we paid 144th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.60 per share equates to an annualized dividend of $2.40 per share. This was the company's 23rd consecutive year of increasing or maintaining cash distributions to its shareholders. Our dividend to FFO payout ratio was 64% for the year. Rental income from properties amounts to almost all of our revenues. FFO for 2016 is projected to be in the range of $3.93 to $4.03 per share. The midpoint of $3.98 per share represents an increase of 8.5% compared to 2015. Earnings per share is estimated to be in the range of $1.62 to $1.72. A few of the assumptions at the midpoint are following. Occupancy rates are projected to average 95.6% down from 96% in 2015. Same property NOI increase of 2.8% for GAAP and cash. Acquisitions of $50 million of operating properties in the second half of the year. And we plan to fund acquisitions with proceeds from dispositions. Dispositions of $85 million, $47 million in the first half and $38 million in the second half of the year. Development starts at $95 million. Now we plan to fund development with proceeds from dispositions and debt. Based on our 2016 projections, we achieved this with ending interest coverage of 4.5 times. An increase to 4.4 times in 2015 and debt-to-EBITDA of 6.4 times compared to 6.7 times in 2015. And if you use consensus NAV of approximately $64 a share. Debt to total company value is 33.8% at year end. Usually, we budget no termination fees and no bad debts. Since, we have known termination fees of $401,000 for 2016. We projected bad debts to offset the termination fees. An additional bad debts to be similar to 2015. We have no known bad debts at this time. Total G&A of $12.8 million with $5.1 million projected for the first quarter. The first quarter is lumpy because of the accounting for stock grants, which is consistent with the past years. G&A for the year is less than 2015 primarily due to the accelerated investing in 2015 for the retiring CEO. In summary for 2016 guidance, we project strong results in FFO growth and same property growth. Occupancy above 95%, strong development starts, attractive debt financing and lower G&A cost. Now Marshall will make some final comments.

Thanks, Keith. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and diversifying our development pipeline. We remain committed to maintaining a strong healthy balance sheet and towards that end. We view asset recycling as an attractive avenue to fund development in today's environment. We like where we are, where our industrial markets are, what we are doing and the results, it's creating for our shareholders long-term. Finally, as these groups continues its transition. I want to take a moment and thank one of our directions. David Osnos, who after more than two decades is not standing for re-election. I've personally learned a lot from Mr. Osnos and we will all miss his leadership. We'll now take your questions.

[Operator Instructions] we'll take our first question from Brad Burke from Goldman Sachs. Please go ahead.

Just to start, I wanted to get your general thoughts on the current market cycle. We're seeing some of your peers indicate that they're going to pull back on development starts. They're going to focus on de-levering and in your guidance in case a different approach. So is it fair to assume that, you're maybe more bullish on the market or do you think there is something specific to EastGroup, that make you more comfortable to push on development and take on more debt?

Good questions, thanks. A couple of thoughts on that. I mean, - one difference I think it's all relative. Most of our developments as we mentioned, it's done by how is the existing building in that Park leasing. So yes, we do remain bullish in our view of Charlotte for example, have a building under construction, we got good activity on it. So we're - it's really done at the micro level and not at a, the corporate office in Jackson, of how fast do we start, that new development. So we feel comfortable about that. I respect their thoughts. We're certainly mindful of leverage and as Keith pointed out. We're projected at the end of the year end up with better debt metrics. If you look at debt-to-EBITDA or times fixed coverage times interest coverage. And then the other thing that we like, if you look it is Page, buried kind of Page 15 of our Supplemental. Anecdotally, it's felt like we've done a lot of leasing year-to-date, but at the bottom of Page 15 in the month of January. We were able to push through, like our team did 760,000 square feet of leasing. That's the largest number we've had. So we feel pretty good about where things are going, that's a little below 40% of the amount leasing, we did all of last year and it's not any one or two big leases that are driving that. So with that and we've pushed our teams. Again, if you're worried about the economy we've tried to get out ahead on renewals as best we could. We also, if you go back further in our supplement. Our 2016 expirations are down about 180, 190 basis points to about 11.5%. So we feel good about the start of the year. We're certainly nervous about the economy, but not less so about supply. And we're mindful of the balance sheet as well, but where we see the opportunity to develop to call in 8%, where cap rates are holding in the low 5's. We think that's the right long-term decision for our shareholders.

Okay, I appreciate the color and then, just one of the comments, that you made Marshall. You did said, an intensely competitive and expensive acquisition market, in your opening comment and it looks like you're guiding $50 million or so of operating property acquisitions, which is the slight uptick versus last year. So just wanted to try to reconcile the increase in acquisition guidance versus that comment.

Sure, it's really driven. We're - I would say, two-fold. We're not in the acquisitions markets unless it's, as we dispose of assets. If we have some 1031 gains we need to deal with. Our first kind of bucket we will fill would be towards development maintaining the balance sheet. But if we have some tax gains, we need to deal with and so that's a rough estimate $50 million. If we missed that target this year, I would take that as a good sign. It means, we're able to push out a little more in the way of developments and do less than the acquisitions and fund, maintain the balance sheet and development. I think, that would be a good outcome, but that's our first cut and we'll keep you updated during the year.

Okay, I appreciate it. Thank you.

And we'll take our next question from Manny Korchman from Citi. Please go ahead.

Marshall, maybe going back to your comments on sort of that cap rate differential between where assets are trade and where the stock is trading or where you feel the value is being attributed. Have you looked at doing a large portfolio sale or portfolio JV or something to sort of move down the path faster than doing, one off asset sales at whatever the size are $10 million to $15 million, a pop.

Yes, I think we've looked at it. It always gets a little tricky to manage through our system. A larger disposition and then manage the proceeds in. But it is something we've discussed and I wouldn't rule it out that we would do it, but it's not assumed in our guidance, if that's fair and on the joint venture side. We've also had that discussion, but we also realized and value a lot of our shareholders feedback and a lot of think, what served us well, is keeping a simple straightforward strategy. So most of the time, most of our environment last handful of years. We struggled to find good places to place our own capital and we'd consider a JV, but then you end up with a partner and it's just more complicated. In terms of just a purely financial partner rather than a someone that owns a land and we develop the building, that would have more appeal to, was than bringing an institution as a JV. So, thanks.

And Keith maybe, going back to your comments on the bad debt expense assumptions. I'm a little bit surprised that you wouldn't sort of put a little bit more weight on what's happening in Houston especially given your commentary of sort of a lower renewal rate than this year. So if you just walk us through exactly how you guys. It sounded like you sort of match lease term fees and then, sort of just throw in 2015 number, but that, the environment certainly has changed so. If you can just give us some comments on what you're thinking there.

Yes, we've got $1.1 million bad debt provision and normally, as I said the $400,000 termination fee income, when we start at beginning of the year, we don't project any termination fee or any bad debts and hope they offset each other. While we jumped at $400,000 so we said where we are to provide $400,000 of bad debt to offset that. And then we, as you said looking at Houston and various other markets we're showing good increases in occupancy in some markets and thought we ought to provide some bad debt similar to percentage of revenues that we had in 2015. And so that's how we came up with the number. But we want to be transparent and say that we don't, we do not have any known bad debts at this time. So hopefully, we're off $1.1 million on bad debts.

And I would just add to that in terms of Houston. We had just minor, we had one small bankruptcy in 2015, thankfully and we continue to have a clean AR, really not a watch list at this time. So even though, we have assigned some bad debt just on a lump figures it's Houston. I mean, we don't, we're not that's not directly assigned any tenant problem, right now. Thankfully so, our tenant base continues to be strong resilient and thankfully paid rent on time.

Great, thanks guys.

And we'll take our next question from Juan Sanabria from Bank of America. Please go ahead.

I was just hoping, you could give us a little sense of where you're seeing the cap rates for the couple of Houston assets that are being negotiated or have been negotiated and what we should think about the same cap rates for the balance of the assets you may look to sell and just to last kind of, answer your point to that question. Is why not sell more sooner, why hold off putting assets to market for the second half of the year?

I'll take the first part and maybe let Marshall, the pace of it. Our Northwest Point sale of $15.6 million, we have money at risk, that's an upper six cap but that has about a third of that project is service center. It's performed very well for us. It's well located, but it does have the service center component. It has some obsolescence to it, so don't mind talking about that cap rate. The Westlake and America Plaza projects don't want to get too many specifics because we actually have those on the market now, we have a quite call for offers. I would even surmise, there are people interesting in buying those packages, listening on the call. So we hope, the market will be the market but we certainly think it will do better than Northwest Point because they're true distribution properties well located. We mentioned that $19 million to $20 million in total proceeds, but we'll talk about cap rates more once we have money at risk or close the transactions.

And I'll come at Juan, at least in terms of the timing. I mean, we believe we're moving as quickly as we can or that's our goal. Certainly, we've got two that we brought. One as Brent mentioned, one with funds at risk hopefully closing later this month. Two, that we brought to market year-to-date, others that we're working on a couple of things that have kind of complicate or take the process a little longer, and several of the assets are under secured mortgages. So we're working through now freeing up those assets, so that we can deliver them to the market. And then on other assets, we want to be - was created a lot of value there. We want to be mindful in terms of proceeds and where we've got some leasing, role or vacancies to fill. We're not - certainly not a fire seller of our assets. We'd like to get the renewal done. One, where Brent outlined we can't go to the tenant and say, we're ready to bring your assets in market. Can we renew your lease today? Without giving away more than we should. So some of it is, as we kind of trouble there's a broad brush, when I use the phrase facts and circumstances. We're working through the lease role and the mortgage and the other thing we learned on the asset that has funds at risk. A number of these are older assets. So kind of learning through that process. We've gone ahead and ordered the title, the survey, the environmental because when you're getting into 20-year to 30-year old asset or even some that could be newer, all of that takes time to clear up with especially, if our buyer is getting on mortgage and things like that. So we're working through and we hope to have more than just these three on the market later, but long-winded answer. Those are some of just kind of the little nits and nats to get these to the market and ready for the brokers to do their job.

Great. Thank you and I appreciate that. And I just wanted to follow-up on, of what you guys raised about a Phoenix eminent domain issue. If you could just help us quantify, how much NOI are you potentially losing and kind of where the expected push you see today and the timing?

Yes and for timing, two or three parts. It's two of the four buildings in our Interstate COMMONS Project. And it's proceeds I believe, we were kind of that $8.5 million to maybe $10 million, I think the State is around $8.5 million and depending on how you value it. Those are our values for the assets or closer to $10 million. And we really thought it would happen before year-end. Where kind of its mercy, it's Interstate 202 that the city is Wyoming and finishing the loop around the city. So that's what we're waiting kind of any day now to get notice from Arizona DOT and Keith?

NOI for 2015 was about $420,000 for those.

Okay, great. Thanks guys.

And we'll take our next question from Craig Mailman from KeyBanc Capital. Please go ahead.

Keith, question on the bad debt follow-up there. How much is that all flowing through same-store and if it is, kind of how much of a drag is that relative to 26 [ph]?

We put $350,000 against same-store and the rest is just a general reserve.

So what kind of swing would that give you, if you back that out. So you guys have no bad debt.

We're also calculating, while we're talking it and I will, say it when he gets the number.

No, another thing I would mention Craig, this is Marshall. What's interesting as we were looking at our same-store numbers. Maybe again and everybody hasn't reported. We're actually budgeting lower average occupancy this year and again, it's 95.6, which we feel is full but if some of our peers have higher budgeted occupancy. If we maintained our occupancy that would add another 50 basis points to our same-store NOI. We were just kind of working through our ratios and so that's one thing again, we hope it's hard to call 95.6% conservative occupancy, I don't feel that but it's painfully to go to budget going backwards in occupancy and see the impact on our same-store numbers.

Marshall, do you guys look to sell some of these assets, you're not starting any new developments in Houston this year. What does that footprint look like from an NOI basis by the end of the year relative to where you guys onto 2015?

I think in terms of NOI losing a percentage, we'll drop back to about that again 17% to 18% of our NOI depending on, the timing of when some of the new development comes in. We've not set a firm goal in terms of Houston as NOI. We want to get below 20%, this gets us into high teens an really as Brent and I have and the team have talked. We think, we've got some great land in Houston still. And so if the stars aligned and we got build to suit or a big pre-lease, we're not assuming any Houston starts, but again I don't want to shock you right in your ear, if we're saying, we're building something, but it would be something where we got a building pre-leased and we're delivering it for someone on land, we already own. So that's the hesitancy to it. We could still move a little bit forward in Houston, if we add roll Houston 43 or 44 or something like that.

Okay, then. Brent the lower retention rate in Houston, is there anything that's known. I guess, maybe that's tied to the $400,000 lease term fees or is that just, you guys be conservative or you just [indiscernible] haircut, half of kind of retention rate yet in 2015.

Well, as the combination of that, the 30% well that's just being conservative. We do have some known vacates like you have anytime going into a year. I mean, tenants generally six to nine months out will give you a heads up. Hey, we're not going to renew very rarely does a tenant come on and say, I want to rent your space nine months out into the future, so you tend to know the known vacates before the replacement tenants. So it's really just a combination of that, if you take, the 30% renewal assumed rate going forward and combine that with, we've already successfully reduce well over from 15.8% to 12.1%, that comes up closer to 45% to 50% renewal rate. So part of that being that lowest, that we've already accomplished a good bit of it and we've - as Marshall said just want to be very proactive in getting these done. So I mean, we've remained, I would even say, I'm almost surprised at how strong the market is continue to hang in there. So again, we just thought that would be a conservative approach and quite frankly, we thought if we, had a very high number being met with scepticism anyway, so we thought we would just try to avoid that.

Okay, thanks guys.

And we'll take our next question from Brendan Maiorana from Wells Fargo. Please go ahead.

So Brent, just a follow-up on Houston. So the 93%, I think did you say that was, average occupancy and if so, is the year-over-yearend target much different than the 93% average for the year?

It is average 93% and I would just point out a couple of things. One that's been driven a little bit lower. We took again a conservative approach to our lease up of the buildings that are remaining in the development pipeline. So that, takes into account those buildings rolling into the portfolio and not being fully leased. So if you carve that out, our same store occupancy projections for 2016 is 94.3%, so that's actually higher. So it's just a combination of those, we show a range. We're basically projecting, 96% to 7% right now is on the higher end and then that would swim toward mid-year with some known vacates and then come back up toward the end of the year. But I'd also stress that our, 93% average occupancy and our 30% retention rate. We're just putting those numbers to stipulate what we have in guidance but that's our budget but not our goal. And so, every day I drive into work. We're seeking to get everything leased and to make everything successful. You're not going to, to do it at 100% but these are just simply the assumptions we put in and they're the budget not the goal. So our team certainly is looking to outperform that ideally.

Sure, that makes a lot of sense and given, I guess with that same-store occupancy amount of your NOI targets are higher than what the average occupancy change will be or at least per guidance. I guess that assumes that your rent spreads are likely to move positive or you've got this cash rent bumps and the leases that are going to drive kind of your overall rental rates up.

Well, one thing that we've been very successful with this far and post-recession is getting annual rent bumps in Houston and we have that in a significant portion of our leases. So quite a bit of that Brendan it's just quite frankly not necessarily mark-to-market but just embedded annual rent bumps that is up ticking across the entire portfolio raising the NOI's even on projects, that have no rollover and no rent comparison for rate increase or decrease, so that's a good portion of it. I feel like rents are going to be similar to what you saw fourth quarter, where maybe small single-digit cash downward pressure but small single-digit positive, a GAAP on a GAAP basis, where we're still marketing against some recession late in leases, where there were some rent incentives. So my gut is just that, rents are going to be kind of be flattish and that's basically kind of how we dial that in. Thus far, we've trending a little better than that on, when we reduced from 15.8% to 12.1% on reducing that rollover. We've been slightly positive cash and even stronger than that on a GAAP basis. So, we'll see.

Brendan, I would add to that, if it's helpful just in meeting with investors. I will say, there's a disconnect. I mean we'll see who's right - it's hard to predict the future, impossible to, but most people expect Houston rents to be much worse than what we're seeing year-to-date like double-digit down. Where Brent was saying day-to-day, we keep waiting for it and it may hit us and hit us hard and we're watching it and cautious about it. But so far Houston is been more resilient than, my impression is most people have expected it to be.

And maybe just last one for either on Houston for Marshall or Brent. Is there been, a real any sort of notable change in psychology of tenants or anything like that in the past couple of months, since we've seen oil, maybe that was in that sort of hovering in that $45 to $50 and then kind of probably mid-to-early November kind of started dropping down and now around $30.

Figure is not been really, I mean everyone is pretty much resided themselves to the fact that. Whether it even bounced up $30 and bounces back, everybody is expecting it to be in that say $20 to $40 range. No one at this point is, no one knows where it's going to be and I think the volatility and right now, it's just kind of baked into the psyche. So at this point, most companies are taking a conservative approach to their operations to what they're doing which I think is leading to lot of tenants in the market to sort of staying put in their existing spaces. But I think the psyche is what it is right now. I think people are thinking 2016 is going to be a sideways type year and hope for market demand to pick up in 2017 and 2018 and then hopefully things would uptick, we will see.

Seeing, is Houston last year I believe the number was 23,000 positive jobs created and what we're seeing again, was it a local economist predict 20,000 to 30,000 jobs created this year, positive. So again, net-net it's positive jobs and where our portfolio is on a macro level, we usually need that local metro area G&P to continue growing. So we're glad to see or happy to see Houston. It was adding 100,000 jobs a year, through the upturn and now it's down to call it 20,000 to 30,000 this year. If that's helpful.

Sure, great. I'll get back in queue. Thanks guys.

And we'll take our next question from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Just some follow-up on the Houston. So, Brent as you guys are doing the renewals, are you seeing when tenants are choosing to not renew with you guys. Is it because they're being lowered by de-priced discounts from other landlords or is it a change from the tenants business model that, the current space that they have with you guys doesn't make sense?

No, it's been on the known vacates. It's been, really more of actually tenants that plan to consolidate or downsize. I'm just looking at my summary here of those. Yes, we've got companies downsizing. Some of its consolidating, like we have a large oil and gas oriented tenant World Houston they're building a large campus to the east [indiscernible] and they're going to move in consolidate into that, master planned campus. So it's more so just downsize and we only have one or two tenants that have been "leading the market type scenario" but again you know that information early. But you don't have the guidance comes along six or nine months at a time say, I'm going to be the guy that releases it. So, it's been and I would point out too that those aren't just oil and gas oriented companies, it's still pretty broad brush of the different industries that are represented there.

All right and then bigger picture. Now that we had this market volatility for about six months or so. Across the different regions, have you guys notice the change in the kind of demand or their desire to lease space, has anything change at the local level or from the most part, this previously you know like David would you say, oh, what happens on the stock market, your tenants don't even are aware of that. Just curious now that we've been six months of this, if it's resonating it all or if it's impacting any of your decision?

Are you speaking of Houston in particular there, Alex?

No, speaking across all the market.

Okay, Brent and I can tag team it even. I would say, across markets. We're - January was maybe one of our best leasing months we've had, ever. If we weren't public, we'd say looking at last year. We probably again, that's a huge if and we are, we would. If you didn't watch your stock price, it's one of the best year the company has ever had. So I mean, we're 97% leased with and we've never been this full for this long, as we've mentioned north of 95% and our guidance this year is to remain 95%. So I think, most of our tenants. Maybe a couple of thoughts, most of our tenants are still in their space in a bankruptcies haven't been, normal knock on wood Houston or any of our market. So it feels pretty good. If anything, as we looked at our statistics what's maybe a little interesting and we've also assumed 12-month lease up on a new development and maybe therefore, a while when Houston was so red hot, we would finish a building and lease it well under that 12 months. We've reverted a little more back to the norm, where it's taking us a year to lease our developments up. Not anything alarming, but that towards a norm and the other interesting statistic we were looking is our percentage of renewals. If you went back a handful of years ago, it was about 70% and now we're up in the lower 80's. so in times, we thought, you read the headlines there is enough in the world to scare you to death to do a three year renewal and just wait and see, whether it's China or North Korea or the Presidential Election or any other things that our renewals have actually gone up pretty markedly over the last three years to four years.

Okay and then just final question on funding. So you guys spoke about, the potential for $50 million of acquisitions. But it sounds like it's all 1031 related to the $85 million of dispositions. You also spoke about $100 million of starts, that obviously all that get spent this year. But it sounds like you got call it net, $35 million in proceeds from the disposition. Can you talk about the balance for funding the development starts?

Lot of that, you're right. And some of it I guess, the tricky part will be timing. Most of our $100 million in starts, the vast majority of it. We already own the land, so that's already been paid for. Think of it this way and again I know, a couple of the pieces where you'd with our dispositions minus our acquisitions plus development and I would say, what gets lost maybe in that calculation is a fair amount of our developments, we already own the land. So we've spent those funds and they'll, and they want a number of those starts or even later in the year. So a lot of that spend will hit 2017 or later as further as we do the lease up on those building, so it's not quite as apples-to-apples comparison, if that makes sense. We also, we think there is room within the debt [indiscernible] I mean at the end of the year, as Keith ran it, we do add a little bit of a debt, but we like that our debt metrics actually improves. Some of that is, moving away from secured debt to unsecured debt and the rates we're able to get, but that's really the financing plan and we're certainly mindful of it and watch it, but that's why we looked at debt to company value using a consensus NAV. Fixed charge coverage as well as debt-to-EBITDA.

And to Alex, I'd just add to that, you're doing that 7.5% to 8% call it returns. Pick a market where it is, those properties we trade at a 5% to mid 5% cap rate range. So we're doing this in what we feel very lucrative or very value friendly situation. So we're not doing this, what we view is thin margins. I mean, we feel like we're creating real good value there.

Okay, appreciated Brent. Thank you.

And we'll take our next question from Eric Frankel from Green Street Advisors. Please go ahead.

Marshall, I was hoping you can comment on the Phoenix redevelopment project and how that. It looks like, change in methodology in terms of how you're marking that. Does that affect same store results at all?

Yes, I guess what happened it's an older building. I mean, it was, it's about 124,000 feet it was I guess I'll walk through the history. It was a three tenant building, and I was involved in the acquisition eons ago. Thankfully one of those tenants grew as a manufacturing tenant grew to the point where they were using the entire building. They got acquired and vacated the building this fall and in really looking it was an older building. We're doing pretty material work to turn it that from single tenant manufacturing building, so that it can be a multi-tenant business distribution building again. So given the amount of work, we felt it was really more actually just more descriptive to call it a redevelopment than tenant improvement. So that's why it got classified that way and you're right, when it rolls into the redevelopment. We'll pull it out of our same store numbers and that's really, it's the first, it's only been back up, less than a year still but I believe it's the first time we've done that. I think we did it on an acquisition and first time on an existing property. So it happens infrequently but we felt given the amount of work. We needed a better label than just tenant improvements on it.

Understood thank you. I was hoping you could also comment on developments in general. It certainly seems like yes there is probably more discipline in supply in general than past cycles. But it certainly seems like land values are pretty expansive and makes yields on new development projects pretty tough of what you can comment on that market in particular. And obviously, [indiscernible] not Houston but certainly your other markets.

You're right. I mean, we're watching our land acquisition carefully and there is no steels out there at this point with recycle on land values. We've been happy to maintain our development yields around eight, but we'll probably get some pressure on those overtime to move towards kind of end of the sevens. We still think, what we're hearing from the brokers we work with, the CBRE's and HSFF's of the world, the cap rates have helped firm and the vast majority of the market is being in those depending on the market, the low five's and into four's and California are lower. The cap rates are holding firm, and we've kind of our policy has been for about a year now. There is really no land that we're banking that anything we're acquiring because of those land prices and the carry we would have on it and really, really are in the cycle there is not land, never say never that we're acquiring with the thought that we'll build on it in two years or three years. So we are seeing a little bit of downward pressure, we'll going forward on the yield. Not so much in the current pipeline is what we'll look at forward, given where land prices are and we're trying to be mindful of any new land acquisitions. There is nothing we'll carry and we'll try to build on and as soon as possible.

Understood, do you have any land acquisition budget this year?

Yes, we'll end up within that $95 million. They'll be one or two, where we would have acquisitions on. But again, that's the budget and we'll go through our investment committee and kind of keep working from there. But we could potentially acquire land this year, if we felt it was the right opportunity.

Just show to, to shift the conversation back to Houston I know it's a tired subject. But obviously you've seen really big diversion between how the public market value in Houston real estate and how the private market value that's, [indiscernible] perspective. Is there and perhaps for these investors that are listening to this call. Is there a Godfather type offer that you would accept for some of your Houston real estate, even higher quality assets that you plan to retain?

Sure. There is always. If someone wants to, I don't know if they're listening on the call and they want to make us an offer, we don't understand. We're public company. We are for sale every day on the stock exchange and we would certainly talk to our board, but we're not. I think World Houston is going to drive our, has driven a lot of our growth and will continue to drive our growth going forward, but if someone wants to offer us some crazy number. We would responsible to not consider it.

Let me ask, where do you think Class A Houston industrial real estate is priced at?

We haven't seen, this is Brent. We haven't seen a lot of recent anecdotal examples you tend to have packages that don't come onto the market until beginning of the year because they don't want to be on the market during the holiday lull. We saw in off market transaction, I think it was in third quarter where Hines [ph] sold a portfolio to Teacher that was inherent or a Sub 5 Cap and a Liberty paid around $100 million for a project on the Eastside. It still feels like for the Class A stuff it's in that 5 to 5.5 range. As we sell through, if we successfully complete Northwest Point, Westlake and America Plaza 82% of our portfolio will be EastGroup Development Parks dialled properties which again we feel like is the top of the market. So we're very comfortable. Eric, I'll be like we always are very conservative measured approach. We have a list of assets that we plan to make it through and as Marshall said, if you really have some leasing that we need to button up to maximize value on the sales. So we'll just continue kind of own that approach.

Sounds good. I'll jump back in the queue. Thank you.

And we'll take our next question from John Guinee from Stifel. Please go ahead.

Couple questions. one is, seems like there's an absence of common equity issuance and I get the whole discount to NAV. But we also get that, the world is moving around a lot and no one knows, where values will be in the next three years to five years. so are you dead set against raising equity at this price. And then the second question is, you've got a lot of low basis assets you're selling and you'll probably tax some of them, but not all of them. Is the asset sales offset by some acquisitions going to push the dividend in anyway?

And it's a couple of questions. I would say, that our stock price today or as we prepared the press release, we assumed no new equity issuance. So I hesitate to ever use always or never because as soon as I do that, contract - I'm a hypocrite. But I would read into that. When we all assume no new equity issuance this year. You're right, we're mindful of balance sheet, but we're not looking at any equity issuance at these levels or near these levels. And then your second question in terms of pressure on the dividend. Yes, I would think we'll mange that through the year but as we dispose off again, say we're using just assumption $85 million in dispositions. Depending how we role these through into 1031's but I hope given where our guidance is, I hope we have upward pressure on our dividend. That we typically address in third quarter with our board.

Great, thank you very much.

And we'll take our next question from Ki Bin Kim from SunTrust. Please go ahead.

Similar question. In the past couple of years, in your guidance you've had - in the past two years, you've had new equity issuance and which at stock price trading at roughly at 7% implied cap rate. When does buybacks, sorry to make it into equation?

We talked about that with our board. It's certainly on the menu. It's hard to say in exact number. I mean, I think what the reasons we've talked about that we don't like buyback. We're not going to prop our stock price up. Whatever the market feels like it's worse it's going to drift at that number and without cash on the balance sheet. Which most REITs don't have, the fastest way to damage our balance sheet would be a buyback. So there's merit to a buyback, but if as you said, what gives you pause about a buyback those are a couple of things and then we have any number of investor meetings, where they wish our float were greater than it is, they like the story, they like the history, they like the strategy and then the one thing we can't change as they say, we wish you a bigger entity or if we buy and want to come back and buy more, your float is not there. So I'm not saying we won't do a buyback, but those are some of things that give us hesitation and it's certainly something we'll continue to talk quarterly about with our board.

Okay and as a follow-up on a previously asked question. On the major rehab deal, the 124,000 square foot building. I'm not sure, if you answered it but did the, is that project being redeveloped? How much of that impact you're [indiscernible] guidance numbers? Do they help that number or hurt it?

It's out of same store. My calculation.

It's not, probably it was full and so, fourth quarter. I'm trying to think of when [indiscernible] Douglas moved out of that building, but I want to say it was October and November. So it's probably a push on our same store number. If we had it in this year, it's vacant. Today we've got prospects, we just had an open house with brokers at the building. A week ago vacant it would be pulling us down. You're right, but it was a single tenant that moved and probably what pulled us down a little bit last year, but it's 124,000 square feet out of $35 million, $36 million square foot portfolio, it would be minimal. It's on the Westside of Phoenix, so even the rents will be lower than our Phoenix average just because it's not on the Eastside of town two, if that helps. So long winded way of saying, minimal.

Okay, thank you.

And we'll take our next question from George Auerbach with Credit Suisse. Please go ahead.

Thanks. Marshall, sorry I missed it. But one of the four buildings in Phoenix being condemned and taking over and is there, much NOI coming from those buildings?

Number is about 400,000 in NOI and you said, when is it being condemned?

Yes.

We thought it was going to be right at the end of the year. I mean, I guess there is a process within Arizona DOT that they give us notice and then they take the building. So we're waiting on that notice to come from Arizona DOT and have really been thinking it would be any day now and now we're on the February, 2. So we're still waiting. We think any day and it's kind of beyond out of our control and it's a 20 something miles new freeway to building that will run through our two building. So we're part of a huge process within the state.

And you said, you're contesting the proceeds. I guess how does the accounting work on that? is it, still in NOI today and when eventually the building is condemned and taken away from you. Do you just put on the balance sheet, some sort of asset value that they're willing to pay you? just, I just want to make sure when the NOI leaves the top line. We don't just sort of lose the asset value as well.

Sure, good question, I know we are counting the NOI today because we're still collecting the NOI today. I mean, we would give sales proceeds for our building from the state and really are contesting is really working with the appraisers as to what, it's basically a bid-ask equation to resolve. So we'll, it may get drawn out a little bit, but State's made us an offer for the building and we're negotiating that value. So at some point when they take it. We're counting the NOI, but we'll lose the building, have the cash. We may get a second payment in cash depending on how that my understanding how that resolution would, with the courts work of that process and until then we're collecting income and it's a 1033 exchange was the other process because it's an eminent domain condemnation if that helps that within 1031.

That's great. Thanks guys.

And we have a follow-up question from Eric Frankel from Green Street Advisors. Please go ahead.

Thank you. yes, it's one follow-up question and it is for Keith. Do you have a long-term balance sheet leverage target?

We're trying to stay under 40% with at these prices. You're looking at stock prices we're trading at very low multiples that we've had, haven't had in a while. So we're looking at that, but we also look at debt-to-EBITDA which is doing good and projected to get better, for 2016 interest coverage ratios, which have always been real strong and are getting stronger. And so we look at all of those. The debt to total market capital is the one that kind of bounces around almost a little bit. And we are looking at short-term debt versus long-term debt and we think we're in good shape.

Okay, I think that's it for me.

Thank you. And it appears, we have no further questions at this time. I'll now turn the program back over to our presenters for any additional closing remarks.

Thank you for your time and your interest on the call. As always, we're available for any follow-up questions or comments anyone has and appreciate your time.

And this does conclude the EastGroup Properties fourth quarter 2015 earnings call. You may disconnect at any time and have a wonderful day.