EastGroup Properties, Inc. (EGP) Q2 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the EastGroup Properties Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions [Operator Instructions]. Please note this call is being recorded. It is now my pleasure to introduce Marshall Loeb, President and CEO.

Good morning and thanks for calling in for our second quarter 2016 conference call. As always, we appreciate your interest in EastGroup. Keith McKey, our CFO and Brent Wood, Senior Vice President are also joining me on today's call. Since we'll make forward-looking statements, 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 is subject to the Safe Harbor Statement included in the news release, is accurate only as of the date of this call. The Company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information which can be found on the Company's website at www.eastgroup.net.

Thank you, Keena. Second quarter saw a continuation of EastGroup's positive trends. Funds from operations exceeded our guidance, achieving a 7.6% increase compared to second quarter last year. This marks 13th consecutive quarter of higher FFO per share, as compared to the prior year's quarter. The strength of the industrial market can be seen through another solid quarter of occupancy, leasing volumes, releasing spreads and positive same store NOI for both cash and GAAP. The depth for private market capital looking to invest in quality industrial assets which demonstrate by the pricing and volume, we’ve seen in our disposition which we’ll elaborate on later. At quarter end we were 97.2% leased and 95.7% occupancy. Occupancy has exceeded 95% each quarter from the past three years, a trend we project maintaining through yearend. This basically represents full occupancy from multi-tenant portfolio and as we’ve said before and as market commentary, we have never achieved this level of occupancies for this long. Drilling down into specific markets at June 30, our major markets of Dallas, Orlando, Charlotte, San Francisco and Los Angeles were each 98% leased or better. Houston, our largest market, with over 5.9 million square feet, which is down from 6.5 million square feet last quarter was 94.4% leased. Supply remains largely in check in our markets and shifting through the figures you would see that supply is largely comprised of big-box deliveries, being 250,000 square feet and above. So by design, we simply aren't competing for the same prospects. In fact, the figures we've read state that 75% to 80% of new deliveries are big-box markets. And our markets where the fear of overbuilding is the greatest, such as Dallas and Houston we’re seeing declines in construction with deliveries being absorbed. To date, the market discipline has been institutionally controlled and remains strong. Rent-spreads continued their positive trend for the 13th consecutive quarter on a GAAP basis. And while we experienced negatively quarterly cash release in spreads it was driven primarily by three leases, the largest being in 82,000 square foot R&D tenant renewal in Santa Barbara, rather than a reflection on the industrial market. In other words for the portfolio of our size we may experience quarterly anomalies. Overall with 95% occupancies strengthening markets and disappoint new supply we continue to see upward pressure on rents. Second quarter same-property NOI rose on a cash and GAAP basis. This quarter was unusual, as the growth was due to rising rents, as average quarterly occupancy fell 50 basis points, as compared to second quarter 2015 to 95.7%. We expect same-property results to remain positive going forward, though increases will continue to reflect rent growth at 95% to 96%, we view ourselves as fully occupied. The price of oil and its impact on Houston's industrial real estate remains a major topic of discussion. We thought it appropriate for Brent to again join today's call. Brent is one of our three regional senior vice presidents and is based in our Houston's office, with responsibility for EastGroup's Texas operations. Brent?

Good morning. Our Texas market finished the second quarter at a combined 96.4% lease, while our Houston operating portfolio finished the quarter at 94.4% leased, down from 96% last quarter. The Houston industrial market continue to exhibits solid fundamentals. Despite the overall decrease in prospect volume, deals continue to be made across the market in a broad range of sizes. The market vacancy rate finished the quarter at 5% which is just 30 basis points above its record low mark of 4.7% set third quarter last year. However, we have seen an increase in sublease space this year. For numerous reasons, this often does not compete with existing vacancies, but it could lead to a gradual increase in the vacancy rate over time. During the quarter, we experienced our first tenant default of the year and only the second in two years. Across the Houston market, there was 1.8 million square feet of positive net absorption for the second quarter which marked the 21th consecutive quarter of positive net absorption and rate the year-to-date total to 3.8 million square feet. Meanwhile, developers continue to show restraint with the construction pipeline containing just 2.8 million square feet of speculative space which represents about 0.5% of the total market. Looking ahead to the remainder of the 2016, we have further reduced our Houston scheduled exploration from 15.8% a year ago to 5.8% of the operating portfolio. However, we have a number of known move-outs later in the year, primarily the result of tenants either downsizing or consolidating locations. As a result, we continue to be cautious with our Houston budget assumptions included in our guidance. Our leasing assumptions produced an average occupancy of 93% for the year, unchanged from guidance last quarter, with the anticipated low point being third quarter at 90%. From a development perspective we transferred our last two buildings that were in the development pipeline at a combined 87% lease. We remain pleased that the diversification of our development platform within Texas is replacing the volume we enjoyed during Houston's most recent growth cycle. Our projected 2016 development starts for the Company include five buildings in Dallas and San Antonio, for an estimated total investment of 33 million, two of which broke ground in the second quarter. The fundamentals remain strong for the Texas markets outside of Houston and they remain unaffected by the impact from lower oil prices. Marshall will discuss dispositions in more detail in a moment, but I will mention that regarding Houston, we were very pleased with the quality and depth of the buyer pool and the cap rates we're achieving which has ranged from a low 5% to a mid-6% depending on asset, age and characteristics. Our Houston portfolio now consist exclusively a 100% Class A properties, with 95% of the square footage contained in one of our five master plan business parks spread across three submarkets. For the remainder of 2016, I anticipate that the core Texas markets of Dallas, San Antonio and Austin will present growth opportunities while we continue to take a conservative approach to our Houston operations. Marshall?

Thanks, Brent. Given the intensely competitive and extensive acquisition market, we view our development program as an attractive risk-adjusted path to create value. We believe we effectively manage development risk as the majority of our developments are additional phases within an existing park. The average investment for one of our business distribution buildings is below 10 million. We develop in numerous states, cities and submarkets and finally, we target a 150-basis point minimum projected investment return premium over market cap rates. At June 30, the projected investment return of our development pipeline was 8%, whereas we estimate the market cap rate for completed properties to be in the low to mid 5s. During second quarter, we began construction on three projects two in San Antonio and one in Orlando. These developments contain three buildings totaling 265,000 square feet for projected combined investment of 18.6 million. Meanwhile we transferred two properties totaling a 132,000 square feet at 87% leased into the portfolio. At June 30, our development pipeline consisted of 14 projects containing 1.9 million square feet, with projected cost of $133.6 million and of that amount we've already invested $81 million or almost 61% of projected total investment. For 2016, we project development starts of approximately $90 million. What's gratifying about these starts is we can reach this level with no Houston starts, whereas in 2012, for example, Houston accounted for almost 90% of our starts. This demonstrates the value of a diversified Sunbelt market strategy. As Brent discussed with the industrial property sales market remaining strong, we're actively reducing the size of our Houston portfolio and raising capital through the disposition of nonstrategic land parcels. Year-to-date, we've sold eight properties totaling 1,164,000 million square feet for proceeds of approximately $74 million. Four of these sales were in Houston which represented 906,000 square feet and 51.6 million in sales proceeds. Through June 30 we closed two land parcels generating $1.3 million. Since quarter end we closed two more parcels for 2.6 million and we have two additional sales, one with funds at risk in the pipeline. While these aren't material to our balance sheet, I love raising capital through the disposition of nonstrategic, non-income producing land parcels. Second quarter dispositions outside of Houston were a 140,000 square feet condemnation of interstate comments by the Arizona DOT, our user sale of a 30,000 square feet Castilian Center and R&D project in Santa Barbara and Stemmons II, an over 26,000 square feet Dallas distribution building. Our asset recycling is an ongoing process. We're pleased with the year-to-date progress and are continually evaluating our options especially further Houston sales. As we recycle capital and diversify the portion of our NOI from Houston will continue to decline while the quality of our Houston portfolio continues to rise. We view dispositions as an attractive capital source to help fund the development pipeline. Additionally, we're pleased with the match funding achieved within our 10/31 tax gain deferral's. In fact we successfully sheltered the gains generated by the 74 million plus dispositions year-to-date. And while most of our activity has been dispositions we're pleased to acquire for 32 million the 446,000 square foot Parc North development in Fort Worth. The four Parc North buildings were completed earlier this year and are 37% leased. We're excited about the leased up and long term opportunities that asset presents. By acquiring at this stage we're able to generate returns which while below full develop yields are materially above four stabilized acquisition yields. Keith will now review a variety of financial topics including our updated 2016 guidance.

Good morning. FFO per share for the quarter was $0.99 compared to $0.92 for the same quarter last year, an increase of 7.6%. Operations have benefitted from an increase in property net operating income related to same properties, developments, acquisitions, lower interest rates and a reduction in G&A cost. FFO per share for the six months was a $1.90 as compared to a $1.79 from last year, an increase of 6.1%. Debt to total market capitalization was 30.0% at June 30, 2016. For the quarter, the interest and fixed charge coverage ratios rose to 4.5 times and debt to EBITDA was 5.8, the adjusted debt to adjusted EBITDA ratio declined to 5.4 for the quarter. Floating-rate bank debt amounted to only 1.1% of total market capitalization at quarter end. During the second quarter, we took advantage of market conditions to provide for our capital needs and strengthened our balance sheet. We closed the previously announced $65 million unsecured term loan on April 1, 2016. In June, we executed a commitment letter for our 40 million unsecured term loan. The five year term has an effected fixed interest rate of 2.335%. Also we sold $30 million of common stock under our continuous equity program. For the remainder of 2016, we are projecting no additional debt or sales of commons stock. We do have two mortgages coming due in the second half of the year. We plan to pay off a $25 million mortgage on August 5, 2016, and a $52 million mortgage on September 6, 2016. In June, we paid a 146th consecutive quarterly cash distribution of the common stockholders. This dividend was $0.60 per share equates to an annualized dividend of $2.40 per share. Our FFO payout ratio was 61% for the quarter and rental income from properties amounts to almost all of our revenues, so our dividend is a 100% covered by property net operating income. We believe this revenue stream gives stability to the dividend. Earnings per share for 2016 is estimated to be in the range of $2.90 to $2.98, FFO guidance for 2016 has been narrowed to a range of $3.96 to $4.04 per share, and the midpoint was increased from $3.99 to $4 per share. At the midpoint, we're projecting a 9% increase in FFO per share compared to last year. 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 have taken a number of recent steps towards improving it. Maintaining our balance sheet is important not only on a day-to-day basis, but as a critical resource coming out of the next recession when opportunities are more plentiful. Please note, we don't see signs of a downturn, but rather stay ready when there is one. In some we like where we are, where our industrial markets are, what we're doing and the results that’s created for our shareholders. We will now open it and take you questions.

[Operator Instructions] And we'll take our first question from Alexander Goldfarb from Sandler O'Neill. Your line is open.

Marshall, just some quick questions first on the guidance, can you just walk through the drivers of the reduction in the same store, how of that was impacted by dispositions? And then also on the lease term fee, how much of that was sort of unexpected changes and what you guys originally thought maybe tenants who decided to stay or not stay versus had an ability to pay versus no longer have an ability to pay, the term fee?

Sure, okay couple questions of reversal we made on the lease term fees, usually what happen is tenant tells us they’d like to leave and we will start marketing their space. So one of the once we had two main drivers this quarter, one, happening on one of Brent's property in Houston, the tenant terminated early. That was a payment and not unexpected. And then in Florida, we had a tenant who had approached us, we were able to locate another a new tenant for this space, that one we didn’t budget for, but eventually we will to have the deal with an next tenants, but we were able to negotiate a nice buyout for the tenant and immediately backfill the space at a higher rent in that case. So that was really where the majority of the pickup was on that. On the same store NOI there were couple of drivers as you said, we’ve got more dispositions, we raised our disposition guidance 20 million and we sold 1.1 million -- over 1.1 million square feet year-to-date. So obviously the portfolio mix affects our same store NOI. And then another driver of that was simply we tracked thankfully year-to-date a little ahead kind of on a monthly basis where we thought our occupancy was budgeted to bay and these are our -- to remind people these are our projection, we’re projecting a little more vacancy that we make up towards the end of the year. So there is a little bit of a lag, in the next couple of three months as Brent mentioned we got a lot of leases rolling in Houston and some known move-outs there. And so those, probably that combination were the biggest drivers of our same store NOI. We are typically focused on a GAAP basis, so on a GAAP we are down 10 basis points. So that’s at least here or there on our projections and we hope trends hold up and we do a little better than we are projecting right now. And that’s our task between now and 12/31 [ph].

And then you guys increased the disposition goals to now 110 million, is the revised same store guidance reflect the planned 110 million or we going to see further adjustment to same store as you guys achieved your goal of 110 million of sales this year?

The 110 -- good question, the 110 million reflects -- the same store guidance reflect 110 million of dispositions and kind of as we talked as the year is played out we started at 85 million. So we are up 25 million on our disposition year-to-date. Guidance today reflects 110 million, we like where cap rates are holding in there. Our fear earlier in the year was always that the top private market got as nervous about Houston as the public market was, so it’s probably 50-50, there is a chance we could break the 110 million and if we do that’s not in our same store numbers. But we think we are taking the right steps to exit older assets in Houston and GAAP rates are historic high [technical difficulty] pricing.

Okay and then just to be clear, so the original same store guidance that you provided didn’t -- did that factor the old 90 million of distribution or it did not?

I mean originally we were projecting 90 million in disposition, so obviously as we bumped it to -- well maybe not obviously as we bump it to a 110 million we took other assets out of our same-store pool.

And then just a final question, Brent in Houston, and things have calmed down a bit or maybe they haven’t, but it seems based on the stock's performance that they have, are you thinking indifferently about development in East Houston or should we read your sort of retrenched comments that you are just going to focus on operating in those five parks but not looking for any new investment?

I would say yes, that is the feeling that things seemed to have flattened out or bottomed out and moving sideways, which is good. You don't feel like there is still overly downward movement in the market or at least the sentiment’s getting slightly more positive. Not nearly to the point though, I don't think for development for us. There is a little bit of spec development still occurring around the city, it's primarily though on the east side with all the port related and petrochemical driven type properties. As in southwest you seem [technical difficulty] new projects. A lot of our land inventory for example at Houston is up north and that is the one submarket that did get softest because it was -- fell victim to its own desirability, it's where most of the development was happening. So when the music slowed down, there is a little more vacancy there. So, we keep an eye on it and looking at numbers we're chasing build-to-suit and we'll certainly do a build-to-suit given the opportunity, but on the spec basis we're not projecting anything this year and we'll just see when it comes to next year.

Thank you. We'll take our next question from Jamie Feldman with Bank of America. Your line is open.

Two questions on the guidance I think you took up your bad debt expense and land sale gains, so can you maybe talk about the changes there and the impact on earnings and then I guess for the bad debt, where is that and what -- is that a sign of anything, where we are in the cycle?

On bad debt we have budgeted 280,000 per quarter. So we've maintained that for the balance of the year. No known bad debt and it was really in second quarter we got ahead of what we budgeted, it's up 54,000 for the year based really on what happened in second quarter and what happened there we had our first bankruptcy for the year in Houston and really only second thankfully since the downturn and then we had some bad debt in Los Angeles, we had a tenant go bankrupt and one that's in our rears that we are still hopeful we’ll catch up and collect theirs. So nothing systematic so much as three tenants affected that. So, and then the second part of your question, in terms of guidance, go ahead Keith.

We got the 280,000 each quarter and that all I think.

And then the land sales that was your other, I'm sorry, your other question.

Yes, land sales were $0.02 a share that we projected.

So the incremental two cents from the last guidance?

Yes, roughly, those are hard to project really and so you get funds at risk you never know what's someone's planning to do, but one it’s been on resale side in Orlando and then we've had two smaller parcels up at World Houston, when closed it will be a hotel development.

And then I guess coming back to the bad debt, so, I mean has your watch list changed. Do you guys -- it sounds like Houston is just starting to happen or maybe that was just a one-off event, but as you look forward do think you'll see more of this?

Hard to predict, I don’t think our watch list has changed. We really took it -- the reserve earlier in the year to be conservative and hope, best case we don't need it and so we still got 560,000 in margin there. I would say particularly Houston or Brent chime in there -- as this kind of all drag last, you hope people's balance sheets are strong enough and so you always hear rumbling and Houston is a market we’re concerned about, but I would also say as you said, to date to only have two bankruptcies and obviously 20 months and see oil and gas downturns. I am pleasantly surprised we’ve only had two bankruptcies.

And then thinking about your explorations, looks like on your top tenants list you've got a couple of in the third quarter and 60 in the third quarter of ’16 and then a big one with Kuehne and Nagel in ’17 in Houston, any early thoughts there?

I will jump in on the Kuehne and Nagel next year in Houston, they’re a good customer of ours, they're in two different locations, and we're in discussions with them as you might expect this far out, they’re weighing what their business looks like and what they think their needs will be. So we always have close communications with them but at this point nothing one way or the other.

And other two kind of maybe you're looking at, we've got mattress firm which --.

Yes, mattress firm.

They were not -- that's an interesting maybe trend, I'll take you slightly off topic and if they were not a top tenant several years ago, but as their retail model shifts and we've seen that with other tenants where smaller retailer footprint that use our type buildings for people of that last mile of distribution and so we got them in a number of markets. We really have renewal proposals Jacksonville should have them renewed there and a proposal out in Fort Myers where we're looking at breaking ground for another project in Fort Myers. So they'll either renew or we're hopeful they may anchor our new project they could use on expansion base in Fort Myers. So we feel pretty good about the both of the mattress firm renewals that we’ll hang on those two spaces.

Thank you. We'll go now to Manny Korchman from Citi. Your line is open.

Maybe given sort of the volatility that’s seen in rent spreads or cash rent spreads at least, can you give us what you think the outlook is for the rest of the year for cash or leasing spreads?

Sure Manny, I guess I would kind of backup and maybe overview say, we have on a GAAP basis five quarters in a row of double digit growth. We dropped down this quarter. I think that trend is still there although I'll say it kind of as we would say [technical difficulty] in Santa Barbara, we can have a lease or two that will through us off that trend line and this time it was really three main leases that drove that. That's helpfully had a R&D kind of as is, I mean no TI renewal in Santa Barbara. So 82,000 square feet for us is a large tenant. Our average is 25,000 square feet and on a net basis we went from 20s down to high teens. So that's a big swing on a cash basis for us on a tenant. Again there we, we think we get the right thing not offering. They didn't need the tenant improvements and we didn't offer it and so that was reflected on our cash renewal. And then there were two leases in Florida, one in Tampa where it was a build to suit for a manufacturing tenant that moves out and we had amortized some of the TI in and had a rent bumps and so when they vacate it, it went from a manufacturing building to a more typical distribution building and that was a roll down on a new lease and then had and I am walking through the granular and I apologize, but then a renewal and an expansion in South Florida where we had done just a good job on our last lease and when with the bumps, when the lease expired the renewal was a slight negative and on the expansion space similar to Tampa. It was an aerospace manufacturing space they expanded into. But we got a new seven year lease in place. So three leases really drove down, releasing spreads this quarter. I would say if it’s helpful to the listeners, we don’t think three trees make a forest and with a company our size we can get anomalies in our reporting. I will still feel confident that the double digit type GAAP releasing spreads are the trend, although I am aware of a lease or two that we’ve got in a pipeline between now and yearend, where Houston I would say is a market where cash and GAAP are down in the single digits, so we are planning the lease space with Houston. So those who have some negative effects. And then there is one I am thinking we have a large renewal that we worked out within our portfolio, it's not signed so it may not -- you never know until it's signed, but that that will be positive GAAP, negative cash. So this isn’t the only anomaly quarter but I’ll stick by the trends if that’s helpful. We are not concerned about the market or the state of the market, it's really a case by case and in any quarter we can get an odd mix and unfortunately this is one of those quarters.

Great. If we think about the Parc North acquisition, just what's your sort of expected stabilized yield there and also coming-in yields?

Yes, this is Brent. Parc North we’re excite about, we bought that projects 37% lease, four buildings, they were as a submarket that we’ve looked at for well over a year now. We kept driving around figuring out what we wanted to do and we kept saying we want to do this and so we finally approached the merchant developer and bought it. Upon 100% stabilization at the mid-six, so at 95% it's a low six. In the open market if it were stabilized we think it would trade in the low five and so we think it's a way to create value beyond just straight up acquisition where you are buying a five cap. So we are willing to take on the leasing risk, stabilize it then we’ve got equity built in day one and a great asset where we want to be. There is an adjacent 15 acres that we have under contract that we are in our inspection period, so if everything checks out there it also gives us the ability to add a couple buildings in the future. So we are really excited about that acquisition.

If we look at sort of the broker's report there it looks like vacancies in the North Fort Worth market seems pretty high compared to markets around it. How do you get comfortable with the leasing risk in this asset?

Brent can chime in. I think lowest Fort Worth you’ve got Alliance is really where they have their space. It about 12 miles north of our project, we are really -- what I like about this and we’re at the intersection of two freeways, we are at the southeast corner of I-35 and the H1 Loop [ph], so we have great visibility, great access and where I was going with [indiscernible] which is up north probably their smallest building they develop is 0.5 million square feet. I mean it is the big-box million square foot Amazon type warehouses and they may build a smaller building really for supply or related entity to that. So there is vacancy there and it will probably bounce around north just given the size of the building they build.

I would just add to that the north Fort Worth submarket 7.9%, the overall market 6.2% which is a record low for Dallas Metro area by the way, but that little bit higher vacancy as Marshall alluded to is driven by major big-box distribution centers primarily being built by Heinz there. Our multi-tenant that this like -- Parc North is a lot less percentage of that and is an underserved portion of that submarket. So, we feel like we're going to fit in real well.

Thank you. We'll take our next question from Eric Frankel with Green Street Advisors. Your line is open.

Just a question on the disposition, can you comment what the overall occupancy rate was for your dispositions and a rough cap rate is that relevant given the occupancy rate?

Sure, I'll take the first part, good morning. They were all full. So I mean that part as we talk about what's impacted this year is we've moved our disposition guidance out, they were all -- we purposely ticked 100% leased buildings to maximize the value as we exited those assets. In terms of cap rates the range was probably from the low fives to the highest would maybe approaching about something in north-west which was our first disposition this year which included some service center buildings in a 30 year old project on the northwest side of Houston was about 6.5 cap.

And that includes the Phoenix building of the condemnation?

Yes, I mean the way we looked at it, that was atypical disposition and that the state has started the condemnation process so we all were -- the state pays rent until they close on the condemnation. So, every tenant but one had vacated and the way we started kind of underwriting it was if we aren't able to reach an agreement with the state and we were acquiring this building, the cost it would take re-tenant improvement and release that space, plus we had stopped putting money end of the project. So if you -- because we thought the state was taking, if you underwrote that way, it was about a five cap or slightly below a five cap sale. And I think if we look -- went back where to it started it's still was a sub six cap rate.

Can you comment on the disposition guidance where one -- where the additional property you intend to sale, does that occur, already occurred this quarter or is it something you're just adding to your plate towards the end of the year?

It's not happened yet, we've added to our plate and we still like the ability to reduce our Houston exposure. So, still eying a couple of Houston assets between now and year end.

Thank you. We'll go now to John Guinee with Stifel. Your line is open.

One thing you mentioned is that you were able to achieve an 8% yield on cost and that was a 250 basis points, 275 basis points spread on for value creation. Is that 8% yield on cost attainable at fair market rent for the land or your basis for the land? Because 8% is a pretty big number in this day and age.

Thanks, I guess I'll take it -- I'll choose to take it as a compliment. And we agree, 8%as you said, going forward it's hard to maintain 8%yields on our development pipeline and we have a good spread. It’s underwritten using our cost, not -- we don't mark land to fair market value, it’s based on what we purchased it as we put it into production, so its historic cost and current construction cost and current rents to get to that, that 8%.

And then obviously lease up for your development pipe was under construction is maybe 35% or so, can you kind of talk through how you decide to start a building? When you are deciding to start a building are you pretty sure from talking to your tenant reps out there in the market place but there is someone who will be in the market to fill it at that time and is this very much of a bottom up, there is an existing tenant in your space or an existing tenant nearby that you are pretty sure is going to take it eventually?

Yes, really great question and its really driven in the field which I like rather than out of corporate. Most of our developments are additional phases within a park and we view kind of the description to investors we’re -- think of this is homebuilder or subdivision as one or two homes are sold and one is under contract, we’ll break ground on the next one. So it really bubbles up and based on the leasing velocity of the last building we built and sometime we have prospects in hand or proposals outstanding as that building starts to fill we’ll go ahead and have permits and we’ll break ground on that next building. So that's really where we believe we're managing risks rather than building a -- again a lot of different ways to do it, but building a large building on the outskirts of town. We like making smaller bets on infill sites and really we can deliver in 5 months to 6 months and if the last building worked well, we'll build another one and that has served us well in Houston and markets when we cut the spigot off, we can cut it off pretty quickly and we can keep moving pretty quickly. Brent, you're leaving it day today.

Yes, I would say John as an anecdotal example of that, our Eisenhauer point one and two you see it's still under construction and we've moved up to 74% lease. We've had just really good activity there, so we move out very quickly with Eisenhauer point three and four, Eisenhauer point three as a front part reload multitenant building. Eisenhauer point four as a front load building, so those two buildings cater to different tenant types. But just based on that direct feedback at one and two, we were comfortable moving forward. Another example as Parkview has moved up to 82% leased, Creekview which is basically that same submarket, we moved for with it. Even before we had begun to scrape ground there we signed the lease that moved us from 0% to 18%. So as we go into these multiple phases of development, you're looking at the macro but they were drilling down ultimately to what are the proposals we're putting out. And when we move forward we have obviously a high degree of confidence there when we do that.

I'll add if it helps people kind of with that philosophy of what we're hearing in the market as you see us like this year, we've bought additional land in San Antonio, at Eisenhower Brent was doing well. We'll start looking for contiguous land and we've done a nice job of that at World Houston where it was multiple parcels and then Charlotte, John Coleman, it was eight different sellers to acquire 50 acres earlier this year that we were quickly running through our land at Stillcreek and thought what's available that's contiguous and find ways to keep expanding the subdivisions.

Thank you. We will move now to Blaine Hecht from Wells Fargo. Your line is open.

Just a follow-up on Jamie’s earlier question, maybe for Marshall and Brent, despite the occupancy decline you saw in Houston, it looks like you guys might have had descent retention on your explorations during the quarter. Can you talk about whether that was expected this quarter? And then obviously you guys had some move outs coming out, but what are your retention expectations for the remainder of 2016? And maybe how do you feel about 2017 retention, if you can comment on that?

Okay, I’ll see if I can get on that there. The second quarter, you are right, it was high and that went about the way we expected. We’ve known because of the advance notice that third quarter we had two or three in particular known vacates that are coming. And so the retention rate we only have 5.8% remaining for the year in terms of rollover. Over 4% of that is in third quarter by the time we get to fourth quarter, I think we have just a little over 1% left. So the rest of this is going to happen in third quarter and the retention is going to low just because again driven by specifically two known vacates that will be forth coming. I just want to point out we have had some vacancies coming our way, but we have continue to sign leases year-to-date or as of like today we have sign 604,000 square feet of leases and of that amount it was 450,000 square feet of new leases. Meaning it filled either a vacancy or a development space, so meaning it’s going to begin to produce income on a space that wasn’t. So we are getting space coming back towards, we are working our way through it, as we have been saying since the regional guidance back in February. We knew all this was coming and I’m very pleased so far. I will say that in the third quarter with some of the transactions we’re doing and Marshall alluded to it, for various reason the rent comps will probably show some downward pressure, but net-net we are pushing to get the vacancy taken care of and get our occupancy back in that range plus we are selling this 100% leased assets, so that’s pushing the occupancy a bit too.

Okay and any sense at this point on how long you think the retention might trend in 2017?

I really don’t, I mean there is that one particular large tenant that we are talking to about a potential build to suit, but it is so early and you don’t know what's going to happen with them. At 17%, I mean it will be and you can see the years after that it drops down quite a bit. So we are going to have from now through 2017 we are going to have some leasing to get done in Houston, but no early good or bad news on '17.

Okay. And there is a pretty significant decrease in the Houston exploration schedule for 2020, was that related to the disposition you guys had in the quarter, where there any move outs that might change those numbers?

There is no move out that changed that number. I would look back I think, you will notice our sales caused two of our top five on the Houston summary page, our sales caused two tenants to drop off and it was just because of the sale, not because they had left this. And I am just looking now, in one of those that’s what I thought, Palmer Logistics which was 238,000 feet, they were at 2020 expiration, they were in Lockwood so they -- that went down because we sold those tenants with that property.

Okay that’s helpful. And then lastly, in addition to the building sales you are doing in Houston it looks like you guys are off making a little bit of push to sale land. Can you give us any color on changes in land prices in that market? And maybe how you think current pricing compares to some of your bases in the roughly 100 acres you own?

Sure land prices are -- I’ll mention one of your peers earlier asked us about the development yields, land prices are surprisingly sticky. With Houston disruption in oil and gas land prices have not moved much. So, we think we've got good basis in our Houston land and would probably hard to replace today. What we've sold has been really land we picked up in bigger acquisitions in terms of parcels and really trending here and there. It started earlier in the year, we didn't like where our stock price was, we wanted to help keep funding the development pipeline, so we took a hard look at what non-earning assets can be shed from our balance sheet and I'm happy, proud of the team for the results we've got and then huge dollars that say we hit $6 million or $7 million by the end of the year, that's the equity for one of our developments in our pipeline. So, that's what it looked like. I think land prices probably are rising across our portfolio and are flat in Houston.

And I just want to point out too, [indiscernible] the two land sales in World Houston are smaller parcels that we bought as part of a larger land transaction many years ago, I think even over 10 years ago and we've increased our position there with the Golf Course expansion and over time we've just evaluated that this wouldn’t in the near term or even long term be industrial sites, that they had a higher and better use. So, in both cases with the World Houston land sites were selling to hotel developers. So, we're reporting great gains on very small land transactions which we're very pleased with. So we're not selling what I would say industrial sites they are sites that are going to be used for something different and then the one site we sold in Flower Mound was just an off-shoot from the main parcel we had bought that -- where we build Parkview and we sold that at about a breakeven which reflected market, we did not have that track of land very long, so again we were just moving that to bring the cash in and put it somewhere else.

Thank you. We'll take a follow-up from Eric Frankel with Green Street Advisors. Your line is open.

Brent can you comment on the supply picture in Houston, little bit more detail I think we’ve heard from prolaw [ph] just last quarter, there's a large amount of supply juggling the market, Obviously some of that is built to suit, or it's a combination of build to suit and all the inventory being built in Eastside. But how much of it is been built in close proximity to your portfolio?

I'm not sure, I would not agree with -- assume that the market that was build and you've got 5% vacancy factor and only a 0.5% of spec space in the development pipeline, the two combined are 5.5% and that just doesn’t strike me as it were built it all. The north submarket has the softest vacancy rate and again as I mentioned earlier. That's where the last cycle for all intents and purposes, spec development on any large scale has seized, I mean there is just like say 2 million square feet of projects. And it's more of a demand issue, just slow demand versus overzealous developers. So, the north probably has a little more heavy lifting to do than the other submarkets. But it doesn’t strike me as overbuilt at all. It just -- you know we would like to see demand pick up a little more, we’d like to see companies moving into the market that are new companies which we were seeing before. Those things would be better drivers than even if you cut off and stick it on the 2 million feet that are going now, it's not very large in scale to the market.

Right, but where is that 2 million square feet of spec located, that’s part of the question [indiscernible]?

It’s spread out across several submarkets which dilute to even further, you've got southwest two or three developers over there, you've got some projects going out on in the east side near the port. The only thing going at north and there is a developer that has a parcel, they’re building a 500,000 square foot spec building, which is a very big bet. So, that pretty much represents the spec development in the north submarket right now in that one building and it's certainly not anything we complete with.

Marshall, can you comment on just additional development project in other markets, I think Brent commented briefly earlier about what you’re hoping to do in Dallas and San Antonio and Austin, but maybe the prospects of doing more developments in our additional markets would be helpful to understand.

I mean we're actively developing in Tampa which is a market we've seen kind of pick up in the last 12 months probably. We're certainly active in Orlando, John Coleman and the team there will tell you, Florida is stronger today than it's been at any point since the downturn. We're looking to break ground in Fort Myers which would be the first spec development down there where full leasing rents rise from around $4 a foot to $7 a foot. I was in Fort Myers recently and the only development that's been there has been built to suit because there has been no spec developers. So that's maybe an atypical case for us, it's within our park, but it would be starting back up again. So we're optimistic Fort Myers doing well and Tampa doing well and Charlotte as well as another mark. Within our Stillcreek, we think it will break ground there, knock on wood between now and yearend that's dialed in there, and has some good activity lead with a build to suit and out in Arizona, that we need to get the lease signed, but that's hopefully something we could -- our goal would be if we can talk about that next quarter.

Two final questions, apologies for the long list, but can you talk about -- I know it's -- I think we -- in the past several year it's still hard to track how market runs as, trends that are grown, but do you have a sense of year-to-date whether market rents in your portfolio respective market, have they grown more have the profit of some new supply tempered that in any shape or form?

I think outside of Houston, so I said painting with our roller brush, they are off this year. I hate to be specific, but it feels like rents are growing and demand is rising faster than supply for our type product and the exception which is again what helps that we like about reducing our footprint because every market will have full cycle. Houston cycling down, so that one is down single digits, probably people expected worse than that a year ago or 18 months ago, and otherwise they continue to rise. It’s always a little bit space by space and where did that tenant roll and that's what hit us this quarter, not anything really systemic. But it does feel like we think that trend of double digit GAAP releasing spreads I think our chart will look similar in the next year than to what it look like over the past year which is double digits.

Okay. Final question is actually for Keith. I was hoping you would comment on the debt capital markets. We certainly noticed with the equity issues and the dispositions that you leverage, the balance sheet leverage has decreased, but can you talk about term of debt? Obviously some of the debt you procured this quarter was five to seven years and I was wondering, are tenure terms doable, and can you tap the unsecured market to accomplish that?

We have good quotes on 10 years, 7 years and 5 years and the way we look at it is, get a 10-year quote and then get the 5-year quote and actually the 5 year rate is up, but you have to get the remaining five year to equal that 10-year rate and it was still a pretty good GAAP between the 5 and 10, where we thought that the 5 year was the best rate.

Okay. That’s all I got thank you very much.

Thank you. We will move now to Brad Burke from Goldman Sachs. Your line is open.

Just a couple of questions on capital allocation. First, the thoughts on pulling back with incremental ATM issuance for the remainder of the year, considering where the shares are at. Then second, Keith, I appreciate the comments on the debt capital markets but how you're thinking about total leverage. I know you indicated that you were going to get down below 6 times by the end of the year. I guess I didn't expect you to get there by the second quarter, and it looks like you are going to be a net debt reducer for the balance of the year. So just once you get through that, how you are thinking about the appropriate level of leverage?

On leverage, I guess we are down some of best debt metrics that we have ever had and so things are looking good and then we have got multiple ways we can increase capital for either issuing stock and as things get better we will continue to look at opportunities and see where we are, but we are in pretty good shape right now.

I guess with the share prices where they are at, and also having what looks like ample capacity to layer in some of the additional debt, can you help us think about how you would think about incremental capital between equity and debt?

Sure, I’ll take a little bit of a stab and Keith chime in. We assumed no new equity in our assumptions between -- for the balance of the year and it really will be driven by acquisition, it's awfully tough, we are mindful of what year in this cycle we are and we are mindful of as the brokers would call it the wall of capital. So we bid on a number of acquisition and really have had a poor batting average. So we like that we have a stock price that gives us the availability to issue equity and make acquisitions, but we -- it's easy to spend money, it's hard to find value. So we are going to keep looking value and if we find it, we might issue equity and we are thankful that the equity and the debt markets are available but based on what we see and kind of the best news is we think we can keep funding our developing pipeline at the pace it's running without needing to go for external sources of capital.

Okay, appreciate the comments.

Thank you. We will go now to Craig Millman with KeyBanc Capital. Your line is open.

Most of my questions have been answered here, but just curious on your thoughts on how far you think you want to push Houston exposure down from current levels?

Sure, we are around 18.5, we -- probably our thinking without a specific number. We’ve still ear marked another Houston asset or two that we would like to exit in kind of the next six to nine months. So that will push us further down. We’ve hesitated on saying a numbers as Brent mentioned if we got land in Houston, land at World Houston if we can find the right build to suit opportunity in the right yield we would build in -- and there are credits there in term, we would build today. So that’s made us a little bit hesitant. The other thing we really like our Houston team they’ve done a nice job creating value overtime, so in backing down we realize when Houston stabilizes, don’t be surprised and I hope you see us announce a land acquisition. Again this is down the road where we’ve acquired 50 acres for the next Park, Brent and his team dream up for us to build. So we like having that runway for when there is an inflection point in the market. So, at 18.5% it feels like we're not quite there and so we'll keep backing down a little bit in Houston and more importantly growing elsewhere but we'd like to have that run way when the market allows us to create more value there.

That's helpful. I guess without trying to pin you down exact numbers, as you guys got caught a little over-exposed in Houston on this down cycle. As you think about going forward and just risk mitigation and asset allocation to different markets, how comfortable or what comfort level are you with having your top market be X percent higher than the next biggest market in terms of just trying to spread things out a little bit more evenly?

I don't -- we kind of looked at not so much in relation to the number two market, but it is a topic of conversation and something we discuss with our Board being how large, how comfortable are you seeing any one market be and that's probably reflective of what you're seeing in Houston today, I would say 20% is really a lot in any one market because every market has it's day type thing if you could switch it from Houston to San Francisco to Orlando and 20% is a lot in any one market because they’ll all roll. So, and then we do talk to there're certain markets that kind of trend in pairs. San Francisco and Austin are those driven a lot by technology. Dallas and Charlotte are kind of Fortune 100, Fortune 1000 type markets, so, they're markets where you think there's a higher level of correlation and we think about that but we really thought more about what's our ceiling which is probably in the higher teens on our largest markets and something we talk about with our Board and we kind of hit kind of the warning track I would call is what we like to do on a go forward basis.

Thank you. We'll move next to Ki Bin Kim with SunTrust. Your line is open.

Just one quick follow-up. When you look at the tenant roll in Houston for the next year, any pockets of weakness that you can see already?

As I mentioned earlier Ki Bin at this point we're in dialogue with couple of larger rollovers but nothing good, bad or indifferent really to report. The 17% figure is certainly, that's not really above average but it's a full number for any given year, so, we've got some leasing work to do be it renewal or leasing vacant space. So, our team is on it and focused, but really no specific news one way or the other to give you at this moment.

Thank you. And we'll take our final question today from Casey Martin with CenterPoint Properties. Your line is open.

Most of my questions have been answered, specifically on the San Antonio development pipeline. Just a follow-up question maybe on the acquisition piece. Maybe, you said you guys have been striking out a little, or have low batting average. Where are you guys looking and then maybe where do you see the last $15 million that you're projecting for 2016 coming from? And what markets?

Sure, we're looking within our existing markets for the most part, kind of Sunbelt market, I think all of them have been in existing market. Really just is what bubbles up through the, I call the CBRE, Cushman & Wakefield, typically if someone's got a listing we called on assets that weren’t actively being marketed to find them and that's really especially once an asset gets listed I just talked with the CBRE and I know Brent talks with them regularly with our disposition national guys and what they've seen this year is cap rates continuing to come down across the country and really even spread to it was the top 5 markets where cap rates were following now that’s within the top 15 is capital as having a hard time in place. So where we've got 25 million which we started the year with 50 million and acquisition projectively lower it to lower 25 million, again mindful of where we're in the cycle and how competitive that World is, but -- and our goal would be to place that between now and yearend and most likely within one of our existing Sunbelt markets, never say never, but it will probably be in a Texas, Florida, California market.

And we have no further questions at this time. I'd like to turn the call back to our presenters for any closing remarks today.

Appreciate your interest again in EastGroup, thank you for your time and please feel free to call any of us for post call, if you have any questions. Thank you.

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