EastGroup Properties, Inc. (EGP) Q1 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the EastGroup Properties' First Quarter 2017 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 this call may be recorded. And it is now my pleasure to turn the conference over to Mr. Marshall Loeb, President and CEO. Please go ahead, sir.

Thank you. Good morning and thanks for calling in for our first quarter 2017 conference call. As always, we appreciate your interest. Keith McKey, our CFO and Brent Wood, Senior Vice President and CFO in waiting are also participating on the 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 describes certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time-sensitive information that 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.

Thanks, Keena. The first quarter saw a continuation of EastGroup's positive trends. Funds from operations exceeded our guidance, achieving 8.8% increase compared to first quarter of last year. This marks 16 consecutive quarters of higher FFO per share as compared to the prior year's quarter. The strength of the industrial market is demonstrated through a number of our metrics such as another solid quarter of occupancy, leasing volumes setting our quarterly record, positive same store NOI results and record positive GAAP re-leasing spreads. In summary, our increasing FFO and dividend proved the success we're seeing in all three prongs of our long term growth strategy. At quarter end, we were 97% leased and 95.6% occupied. Occupancy has exceeded 95% for 15 consecutive quarters and as market commentary, we've never achieved this level of occupancy for this longer time. Drilling into specific markets at March 31, a number of our major markets including Orlando, Jacksonville, Charlotte, San Francisco and LA were each 98% leased or better. Houston, our largest market with over 5.9 million square feet which is down from over 6.8 million square feet in first quarter of 2016 was 95.5% leased. Supply and specifically shallow bay industrial supply remains in check in our markets. In this cycle, supply is predominantly institutionally controlled. And as a result, deliveries remain disciplined and also as a byproduct of the institutional control, it's largely focused on big box construction. In fact a recent CBRE study showed shallow bay deliveries still below pre-recession levels. Rent spreads continued their positive trend for the 16th consecutive quarter on a GAAP basis, rising over 17%. Overall, with 95% occupancy, strengthening markets and disciplined new supply, we continue seeing outward pressure on rents. First quarter same property NOI rose on a cash and GAAP basis by 5.9% and 3.7% respectively, average quarterly occupancy was 95.6%, down 10 basis points from first quarter. We expect same property results to remain positive going forward though increases will continue to reflect rent growth as at 95% to 96%, we view ourselves as fully occupied. The price of oil and its impact on Houston's industrial real estate market remains a topic of discussion. We thought it appropriate for Brent to again join today's call. Brent is our Houston based Senior Vice President with responsibility for EastGroup's Texas operations. Brent?

Good morning. Our Texas markets finished the first quarter at a combined 95.1% leased, while our Houston portfolio finished the quarter at 95.5% leased, up from 93% last quarter and ahead of our projections. The Houston industrial market exhibited solid fundamentals at quarter end. The market vacancy rate was 5.2%, which remained to near record low. There was 3.1 million square feet of positive net absorption in the first quarter, which marked the 24th consecutive quarter of positive absorption. Meanwhile, developers continue to show restraint with the construction pipeline containing only 2.4 million square feet of speculative space, which is down to a level not seen since 2011. Even though the overall Houston industrial market remains stable, there is an undercurrent of tenants downsizing upon their lease expiration, which is producing a lot of movement within the market. We have not been immune to this trend. I mentioned in the last call that we signed a total of 30 leases during 2016, 20 were new tenets and only 10 were renewals. A more typical year would be the inverse of those results, two renewals to one new lease. That trend has continued as we signed 15 leases in the first quarter, 10 were new tenants and five were renewals. The lease totaled 470,000 square feet, which represents our most activity in a quarter excluding builder suits since first quarter of 2013. The good news is that there continues to be prospects in the market to backfill vacant space. Our leasing efforts have reduced our scheduled expirations for 2017 from its peak of 17.7% down to 10.8% as of March 31st. With several known move-outs throughout the remainder of the year, we will continue our focus on maintaining occupancy. As a result, we have been cautious with our Houston budget assumptions included in our guidance. Our leasing assumptions for the remainder of 2017 reflect occupancy reaching a low of 87% in the third quarter before gradually rising to end the year. Looking into 2018, only 7% of our Houston portfolio is scheduled to expire which is less than half of the square footage we faced in 2016 over 2017. The diversification of our development platform within Texas continues to produce results. Our 2017 potential development starts include additional phases to existing parks in Dallas and San Antonio and we made our first planned acquisition in Austin where we plan to start a couple of multi-tenant buildings before year end. In summary, the fundamentals remain strong for the Texas markets outside of Houston. Marshall?

Thanks, Brent. Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk adjusted path to create value. We believe we effectively manage development risk as the majority of our developments are additional phases within an existing park. The average investment for our business distribution buildings is below $10 million. We develop in numerous states, cities and sub markets and finally we target 150 basis point minimum projected investment return of our market cap rates. At March 31, the projected return on our development pipeline was 7.6% or as we estimate, the market cap rate for completed properties to be in the low to mid-5. During first quarter, we began construction on three buildings totaling 376,000 square feet with a total investment of 27 million. These starts were in Orlando, Tampa and Charlotte. We transferred five properties, totaling 1.5 million square feet into the portfolio at 71% leased. The leased percentage is slightly lower than typical and one anomaly within these results was Port North and Dallas, Fort Worth. Port North as you may recall is a four building 446,000 square feet development we acquired last July, roughly mid way through the developers 12 month lease up timeline. It's up to 54% leased as of March 31st. We love the location long term and it's also reinforced our strategy to develop one to two buildings at a time. At March 31 our development pipeline consisted of 15 projects, containing 2.2 million square feet with a projected cost of 187 million, which is 53% leased. Looking ahead to new developments, earlier this month we acquired 30 acres in Round Rock, Texas as Brent mentioned that's just north of Austin with plans to develop four buildings totaling approximately 340,000 square feet. For 2017, we project development starts of approximately 100 million and what's gratifying about these starts as we can again reach this level in 2017 with no Houston start demonstrating the value of our diversified fund build market strategy. Our asset recycling is an ongoing process and the past year we've recycled capital. As we've recycled capital, the portion of our NOI coming from Houston declined, while the quality of the Houston portfolio rose. Specifically at the beginning of 2016, Houston represented over 20% of our NOI with three additional properties under development. Today, Houston represents approximately 15% of our 2017 projections. Meanwhile, the average age of our Houston portfolio is now eight years versus an average disposition age of 38 years. We're currently projecting 36 million in dispositions. We're making progress on a few fronts and we'll update you as each of these reaches provision. After an active fourth quarter, our only operating property acquisition during first quarter was Shiloh 400, which was our entry into the Atlanta market. Shiloh was a three building, 238,000 square foot, 100% leased property along Georgia 400 in North Atlanta's technology corridor. Keith will now review a variety of financial topics, including our 2017 guidance.

Good morning. FFO per share for the quarter was $0.99 compared to $0.91 over the first quarter of last year, an increase of 8.8 %. FFO per share was $0.02 better than the midpoint projection due to strong leasing. Our debt metrics remain strong. We plan to sell $10 million of stock and issue 30 million of debt in the first quarter. Instead, we sold $40 million of stock due to strong demand and an increase in the stock price. With the ten year treasury rate down and the stock price up, we like our options for obtaining capital. Debt to total market capitalization was 30.8% at March 31, 2017. For the quarter the interest in fixed charge coverage ratios were 4.8 times. The debt to adjusted EBITDA ratio was 6.6 times and the adjusted debt to pro forma EBITDA was 5.8 times. All of these metrics were improvements from the same period last year. The debt to adjusted EBITDA ratio was higher than our run rate due to the extra G&A expense in the first quarter considering the accounting for stock grants, which is consistent with prior years and executive transition cost. In March we paid our 149th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.62 per share equates to an annualized rate of $2.48 per share. Our dividend to FFO payout ratio was 63% for the quarter and rental income from properties amounts to all most all of our revenues. Earnings per share for the year is estimated to be in the range of $1.79 to $1.89. We've increased the midpoint of our FFO guidance for 2017 from $4.20 to $4.23 per share. This is a 5.2% increase compared to 2016 results. The $0.03 per share increase is primarily due to approximately $0.05 per share increase in the NOIs and approximately $0.02 per share reduction due to an increase in equity sales. On March 6, 2017 we announced an update on G&A cost for 2017, which included an anticipated change in the structure of the company's equity compensation plan for its executive officers. As disclosed in that press release, we estimate a onetime overlap of G&A expenses of approximately $0.03 per share. Now, Marshall will make some final comments.

Thank you. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and geographically diversifying our portfolio. We're also committed to maintaining a strong healthy balance sheet with improving metrics as evidenced by our equity issuance last month. Overall, we're excited about our 2017 opportunities. From a holistic standpoint, our expectations are for another solid year. I use holistically as I mean it in two ways. First, I like the current industrial market. I like where we fit within the food chain and the consistent steady value per share we're creating each quarter. Secondly, I'm using it in terms of people. We have Keith around for one more quarter, so I want to say my teary thank you and good bye. Keith has been a friend for over 25 years and I'm excited to follow his next chapter. I've also known Brent for a couple of decades and I'm enthusiastic about what he'll achieve in his new role as our CFO. And finally we're getting closer to finalizing our two new regional heads. We're excited about the internal and external candidates who've expressed interest and are pleased with the process today and will update you as soon as we can. We'll now take your questions.

[Operator Instructions] And we'll take our first question from Rich Anderson with Mizuho Securities. Please go ahead. Your line is open.

Hey, thanks and good morning and good quarter. So just the obligatory Houston question I guess, so same store went up by 100 basis points in terms of your guidance, but backing into it looks like Houston was not a part of that elevated perspective. Is that first correct and second, where geographically did you see a need to raise your expectations for same store.

I'll take it first and let Brent join in. It's Marshall. Good morning, Rich. Really what was pleasant this quarter is really it was across the board. I mean, we were up in our same store pool in terms of occupancy. We're seeing activity. Our Florida markets did well. We've seen a pickup in activity in Phoenix really in the last 30 days. Some of those pools are already [ph] turning those into leases. And in Houston, actually was ahead of where we expected it to be this year. So it was a good solid small bead across a number of markets that added our brand at Houston and that's what raised our NOI and any color maybe I missed.

Yeah, I mean Rich we exceeded expectations first quarter in Houston, which is good. We like the activity, I mean as I mentioned in the prepared comments, we're still dealing with the issue, which we should speak really in the second and third quarter we had cracked the almost no space rolling fourth quarter. So it's going to be over the next six months, so if the market stays away it is, we hope that you know we proved to be conservative on our current assumptions from a same store standpoint, we're marking against for example last year first quarter, we were still 96% occupied, so even in a good that's a tough market metric to go against. So yes, for same store this year Houston will be pull on the remainder of the company, but most of the other 85% is doing very well, so with our minimal rollover in 2018 we're hoping we will get through the rough spots here in the next couple quarters.

So but just to clarify you did better than you expect in the first quarter, but your expectation for Houston for the rest of the year remains pretty much the same with the exception of that outperformance?

Yes we would not, if anything we may have even soften our leasing assumptions a bit.

Okay.

Really just because quite frankly we could another 85% is performing well and we just didn't want much dependent upon the releasing in Houston drive the train, which is not so anything we do would be positive to the to the upside. So we feel good about the direction we're headed.

We talk in terms of we kind of have our budgets and our goals, so our budget is that we raised the 423 and that's what we're budgeting for Houston, and we hope some things fall our favor, we can you know we hit our goals and beat our budgets, so that's really the logic.

And we will take our next question from Eric Frankel with Green Street. Please go ahead.

Thank you. Quick accounting question, can you explain the difference between your GAAP same store NOI growth in cash same store NOI growth for this quarter to pretty wide is that related to the composition of the same store core?

Well it's just the cash is taking the last monthly rental income and comparing it to your first rental income on the new lease or the expiring lease.

Yeah NOI growth releasing spreads, right.

And just on cash same store would be the similar thing to that there would be your rental increases right at your straight line rent [ph].

Well, you know I think there might be some issues in the width the methodology of how same store pull it our comprised and that the development projects when you're contribute to a same store poll especially those are at a full lease that may have free rent up front and so that might be boosting cash same store on average relative to the net effective relative to GAAP or net effective rate. So I just want to understand if that imply here too.

Maybe just have to go lease by lease so to look at that moment.

Okay I'll circle back with you on that one. Brent can you comment on what obviously release, obviously leasing activity be a little bit better than your budget than you essentially plan on the year of rental down a good data and what you were able to renew or sign for a net new lease, what are your releasing spread assumption sort of rest of the year?

It's going to be similar Eric, to what we've experienced, I think it will be high single digits maybe around to right around the 10% mark give or take and again for us any given quarter with slight transaction that can be influenced by individual transactions, but on the whole from a market perspective that's why I would anticipate. The GAAP numbers maybe being a little bit less than the cash numbers, because we're marking against higher rates as they roll, so any time you have vacancy, you're sent it to rental rate market fluctuations, so that will be a bit of a challenge. But I think that will be in that high single digit range.

Okay and we'll take our next question from Craig Millman with KeyBanc Capital Market. Please go ahead, your line is open.

Hey guys, Marshall I know you touched on that you guys are closed on kind of backfilling for Brent and Bill here, just curious when you think timing is on that and then you know more for the West Coast it has been quiet in California here for a number of years, maybe tells you hired someone who's got more experience in the California market versus Arizona and really as you guys see where your cost capital is more cap rates are in the West Coast, how much bigger of a piece of the portfolio that could be come?

Good question, we're kind of a little bit on both where you were serving and included several people including Brent and John who you met we were in Texas last week talking to some of our kind as we narrowed down our final candidates, and will be back next week meeting at a couple more. So we expect to be able to give you names and locations and bio's second quarter, if all goes well for both positions. And you're right in California it's you know the major markets we like those markets a lot and have about four million square feet in California realize it's a highly competitive market will probably look more at development or redevelopment at least in this market versus pure acquisitions to be to find opportunities in California, but we think they're people are talking to are with it will be a California based office and ideally our finalists are all people who are there working in that market today. So will open likely a Southern California office have someone based out there and their primary position and we've got two good Vice Presidents who will be more the asset manager of keeping up with our western assets that we feel pretty good about our presence and how we're operating in Arizona it's really helping long term in California to really source new opportunities for us and that's what kind of led us to put someone with those phrase boots on the ground in California.

Great, thanks for the color. And then Brent on our Houston you know you kind of gave us the ratio of new versus renewal, I would assume the guys kind of tracking on space here prior oil services, but could you give us a sense of what industry verticals are really behind the new leasing?

Yeah, actually Craig the more we're seeing right now in the contraction is actually in the logistics companies, especially at the world of Houston which is near the airport obviously they have a logistics tenant base there and you know those companies are two to three year contract driven and so those they're all feel services logistics requirements have diminished then their need for space has shrunk, so lot of those companies are doing fine, but they were seeing that they're decreasing in space, so that's been the biggest driver. Really consumer goods in those type companies are driving the activity in the market we've signed a couple of e-commerce related fulfillment type leases in our portfolio in the first quarter, a group for filling Costco furniture fulfillment online, a vitamin protein type company doing internet fulfillment. [Indiscernible], Kroger, Amazon, CVS Pharmacy again those type companies consumer retail related have been the biggest groups absorbing as space in the market.

Great thanks.

Welcome.

And we will take our next question from Jamie Feldman with Bank of America. Please go ahead, your line is open.

Great, thank you. Congrats first of all Keith and Brent, very exciting.

Thank you.

Thank you.

So can we provide as just talked about maybe surprise starting to outpace demand in 2018 in a couple of markets is there looking ahead, what you guys thoughts on that potential risk to the market at this point across your market?

Good question, and it's interesting we're both industrial rates and they're good, but we're in different kind of segments, so we are just different segments of the industrial market that we struggle to find good land sites as we plan ahead, in fill land sites that are priced in zone for industrial are few and far between we're not seeing that same industrial supply and I was just in one of our markets last week, and we were touring around and even commented to the broker of everything we saw around our property there were several new developments, but they were all 200,000, 300,000 square foot developments, so on the edge of town the big box deliveries have picked up in the charts we've seen nationally show that, but we're not feeling an oversupply our competition is usually local regional players with an institutional capital in AW clarity and someone like that Heitman is their financial partner and we're not thankfully not seeing that oversupply.

And then as you think about the Texas markets any change in tenant behavior given potential trade risk with NAFTA or the relationship with Mexico?

We've not seen anything related that Jamie and really there hasn't even been as much chatter amongst as thought there might be. We've only got a million square feet now Paso that would probably be the most susceptible market, now and again you could price been at either way you want to that people in El Paso tend to think that that might even drive more business for them if things wind up on that side of the border versus the other. But now that's again the new administration has been viewed pretty favorably in Texas as you know the Texas connections with Rick Perry, Rex Tillerson and those kind of guys they are very comfortable. We've seen more of a positive business attitude than vice versa.

All right thank you.

Welcome.

And we will take our next question from Emanuel Korchman with Citi. Please go ahead, your line is open.

Hey guys, good morning. You've made a couple entries into new markets for each group or spoken about over the last few months, what goes into the decision to go into new market versus sort of intensifying your focus on your current markets and sort of a follow up to that same question, if Houston working better would you still be exploring other new markets?

Thanks for asking, I guess I'd say we're - we do like the markets ran and maybe a couple part answer that why we're hiring someone or working towards hiring someone in California, as I would love to see us smartly be able to grow and L.A., San Diego, San Francisco and terms of new markets and maybe someone coming of your from your perspective Miami although we really viewed as an extension of South Florida, we've been Broward County for a couple of decades, and really found the land that really were on the other side of county line road between Broward and Dade County. Atlanta is clearly a new market for us any number of thoughts as we toured the market and looked at assets and met for with brokers for a couple of years, it was a high growth Sunbelt market, I was literally and I was rather first back to these group was surprised, how little land was available, we would be in a broker's office on Google Earth and finding land sites is hard to do in Atlanta, and I expected that in California, but I didn't expect it in Atlanta. And so that was a pleasant surprise, and then maybe as we touched on earlier with one of your peers what we did see in terms of development Atlanta was mostly big box development and Clay County or further on the edge of town that there were many people building shallow bay industrial, so we bid on some assets and last down and past that found one that fit that we liked up Sunbelt high growth land constrained market and it's also a big enough market will result we're not going to go there and buy a building or two over time and really get stuck, but there's enough activity in Atlanta that we could reach a million square feet and hopefully be self-managed and have someone in an Atlanta office maybe a year or change from now will see how our growth there goes will be patiently optimistic has kind of been our label for that market. And I don't think I mean never say never, but in terms of any new markets, I'd be surprised it is really where we're always studying markets and thinking about it and kind of looking ahead, but I'd be surprised if we went to new market in the near term future.

And then in terms of the you mentioned a couple of our development projects that you acquired better now putting in service pool that were sort of at lower occupancies and the rest of your portfolio, how those in performing versus your performance when you acquire the properties?

Probably talking through there's really probably two and a half that fit that category, I'd say Parc North in one that rolled in and February of this year, and Fort Worth and that was as merchant developer built four good buildings at the intersection of two freeways there and Fort Worth like the project long term it's 446,000 feet it's more than we would build at one time, but we're up in the mid-50s and it's a leasing about as we pretty much as we expected it to, it's least 240,000 square feet in the first year, so if it were a typical development we'd be breaking ground on our next building, it's such a large bucket to fill and the accounting rules or we pull into our portfolio when the original developer got their certificate of occupancy, so our occupancy will dealt with that. And then the other one that fits that category is Jones and Las Vegas there it was two buildings 416,000 square feet, it's 50% release, we acquired it in November, so it was probably heading into the holidays maybe a little bit slower than we had hoped you know the first call it 90 days, but leased as we sit today, we were hoping to get a lease back maybe in time for the call that would get us closer to 60%. And then we got another handful of prospects that would more than fill the building that were somewhere between the initial proposal out and the third round of proposals, so we like both projects, Jones probably will take out call it 90, 120 days longer to fill than we had originally hoped. Parc North is probably on track and then the third one was western and southwest Broward County, it's not a new development, but it's a good building, and it's really still like construction project, and it does not have entryways of the office or really front door sidewalks any of those things, and we will finish those up late this quarter. And I think once we finish the construction on it and the prospects can really see how they would come into the building, see their office, see how they would operate daily. We like that project and that's probably going about as expecting other than maybe the permitting has taken 30 to 60 days what we like about Weston is higher in neighborhood it's got more hotels, the Cleveland Clinic there it's just taken a bit to get industrial permitting done there, but we'll finish that this quarter and then we think where we feel comfortable are about our pro forma there. So we like that kind of that niche within the market if will buy buildings and we'll build buildings from scratch, if we can find quality real estate and be more value add like each of these three fit, it kind of falls within the spectrum of what we do already, and it may be an opportunity for us and the market to find opportunities and specifically as we think about places like California, I think we're going to have to do value add type projects out there to make our numbers.

Got it, thanks Marshall.

Sure, you're welcome.

And our next question comes from Blaine Heck with Wells Fargo. Please go ahead, your line is open.

Thanks. Can you guys talk a little bit about the dispositions included in guidance does that include any sales in Houston and if not can you give us any color on where you're expecting to sell and expect to cap rates on the sales?

Let's see without funds at risk, happy to answer, it gets a little tricky, because we're working on a couple of things, and I guess I wouldn't call it probable, because we're not to the point where funds would be at risk there's lease within Houston there's probably two projects left, we've got one it's a building that vacated and we've got it on the market for sale or lease, it's about eighty something thousand feet, so that one could be in our pipeline this year, we've had prospects for it before and didn't come to fruition. And then it's really more will talk with our guys of I think a kind of least of our philosophy what assets would you not want to own heading into next downturn and those are the ones we look at based on where we are in terms of leasing, and where the market cap rates are, and so we continue one is one of our oldest assets in the portfolio where is under contract today at an attractive cap rate or so and will may or may not close. A couple in Houston that could close this year and then some other assets we've looked at some of our service center product that's probably 30 years old and Central Florida that we'd like to sell at pending we don't want to be a desperate seller, we want to get good value for our shareholders, but if we get the opportunity were cap rates are today to exit those, and then really manage through the 1031 process to the good news is we'll have gains on just about all of these if not all of these, so we can't take them all on any one quarter, but we'll manage and build the process. And I hope our 36 million in guidance that we just gave you proves to be conservative, we'd love to beat that by the end of the year. We sold the number was 76 million last year, and I don't know that will get that high of a number this year, but I hope it's north of 36 million pending on how cap rates hold up and how much of our older product, we can really push out the door.

Great, that's helpful. And then Brent I think last quarter you mentioned Houston was expected to drive to 88% in the third quarter, and then back up to 92% at the end of the year, I think you change that to 87% in the third quarter, I'm assuming that's always included the post office and see, but can you comment at all on what's causing the little bit of a decrease in Q3. And then I guess more importantly do you still expect to climb back up to 92% by year end?

Yeah, we talked about that internally, I didn't mention those low 90 numbers last time, and I did not specifically say that this time. And as I mentioned earlier it's basically just we feel positive about the market, but we just softened our assumptions a bit in terms of our releasing, as you get toward the end of the year, if you have a space go vacant third quarter even in a strong market it's hard to say you're going to release it say in a three or four month period of time. So again we think the low point of the third quarter, we certainly hope that will get into that low 90's by year end, our assumptions have softened up slightly from where I'd mentioned last time it being that 92, so our current guidance has finishing the year little bit lower than that, but as Marshall mentioned a budget in a goal or two different things our goal is to stabilize it much quicker than that. But again we're just being cautious with what we put in terms of our dependency on it. So still feel good about it the market stays away it is the 15 leases we did first quarter was half of what we did all of last year, so again there's activity in the market, we did that activity to hold in there for next two quarters we'll work away through this, and feel much better about next year combination of the market improving and our rollover being way more tolerable and way more manageable it 7% next year.

All right, thanks.

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

Good morning. Just two questions, first Marshall just going back you had in your earlier question on back filling the two regional spot. Just curious you guys have a very much of a team oriented culture and certainly there's a lot of - there's a healthy competitiveness, which you know came from the top down, but there's also a lot of collaboration. How easy as you've been looking at backfilling both Brent and Bill to find people that can fit into the east group culture, I'm assuming it's easy to find you know industrial development guys, but it's probably harder to find folks who fit in with the culture. So can you just give us some perspective on that and if that makes you lean more towards internal or if you think there's sufficient external candidates?

Maybe it's two part answer, one thanks for we agree, we like our culture, and we like our team a lot, and so thanks for you spend enough time with us I'm glad you gotten a chance to see it and you agree, and that we know we like our internal candidates, and then I've been impressed with the people we've met, there's I wish we had a lock on good industrial people, but there's some you know we like the people we've met, I think they could fit in, I think I'm highly biased, but I hear I like that were smaller read without a Chief Investment Officer and Chief Operating Officer that really if you're the regional head you get to drive your own ship. And as we've talked to good people that has a lot of appeal, and we just want to make sure that's what so maybe slowed us down a little bit rather than it I didn't wanted to be me go out to a city and just hire the what I thought was the best person, but we've involved several people here and interviewing and gone through a couple different rounds, because we are it is a key hire and we are careful about our culture and make sure they fit in and their defense, I wanted them to hear from Brent and John what they do day to day, it's one thing for me to describe the job, but it's another to hear from the people that are doing their job day to day of exactly what it is, so that we can try to minimize hiring the wrong person. Most of them are all gainfully employed and we don't want to promote someone into a position that they're in over their heady or so we're being careful and methodical about it, but and we're finding good candidates and I'm glad we're near the end of the process from the beginning at this point.

Okay. And then the second question is, you obviously you address Texas and you have the tenant there are a pretty excited or upbeat, can you just talk broader picture last quarter you guys were tenants were extremely bullish across the portfolio, now that we've been sort of six months into the new administration, people and see what pace of legislation is like are the tenants still as excited as they were earlier in the year have you noticed a shift across your portfolio from tenant from the mood of the tenants?

We're - I mean I guess not answered, I'm an optimist, so maybe take it with that filter, but you know our first quarter, first quarter is always a good quarter for us, but we signed about 2.8 million you know statistically 2.8 million square feet of leasing first quarter, which is a record for us. So that's a huge sign of optimism, the other thing, I'm seeing and hearing and the field a number of the spaces we've filled have been expansions. Our two buildings and Tampa that rolled in the portfolio were both existing tenants that we were going to lose, but thankfully we had new buildings and so we backfill those, so we're talking to our guys, and we've seen a pickup and activity and Arizona in the last 45 days at least in terms of proposals out and have gotten a couple of those leases back already. So I'm still you know we're still seeing it's a solid market without a lot of new supplies, so we're excited about where we are you just hope that you know continues to last.

Okay, thank you.

And our next question comes from John Guinee with Stifel.

Hi John Guinee here. Hey Marshall you were very helpful recently talking about yield on development costs, can you sort of walk through your development portfolio page and talk about where you have good land basis, which would allow you to develop at a yield say north of seven, and where you had to buy at current market pricing, which man end up driving that yield down below seven. And specifically I think you've got a one time you had a pretty low basis in your Houston land, do you still feel that the low basis?

I think, I guess kind of walking through I would say, I've used the seven as a barometer, we could probably hit that but an exception, which is a big piece of our land holdings being the gateway and Miami that we acquired fourth quarter last year, thankfully their market cap rates are in the four, so we I hope we hit seven when it's all said and done, but our pro forma is not a 7% yield on the 61 acres that we have a gateway. Other than that we are still delivering in the sevens, and I don't see that within our holdings we're working our way through our land holdings pretty rapidly in Charlotte and in Orlando at our Horizon Park, Eisenhauer that Brent's doing in San Antonio and David Hicks is going rapidly creek view I love that we add additional phases of land creek view is doing well, and Northeast Dallas and Louisville, so we're working our way through our land pretty well. Our market that actually has a little concerned in terms of inventory is Tampa where light they are we just ground on a new building where we're looking for land sites in Tampa. And all here right all that cheap land has already gone, I mean that would be the one of the upsides to a downturn when it does come as that will hopefully be able to find land a little less extensively, but in terms of a seven we should be there in the land we have it world Houston, we like, we won't break ground today. But I'd love to be that we're in a position to turn the corner and start growing again in Houston when the market allows. Brent any?

Yeah, and we will good John about our basis, the land prices are very slow even in a slowing market to decrease those they're not lands not very expensive for people to hold to be generally hold it rather than drop their price. We haven't really seen land prices drop if anything even over northwest they've gone up. And also since we're not actively developing, we're no we're in a period where we're not capitalizing any of our costs in our Houston land holdings at this point either. So we like the land positions when the market does get better, we feel very good about being able to come out again and be in that mid-7 range for Houston once the market you know allows it.

And then the second question, we noticed that you in San Antonio, Texas you delivered two buildings in the first quarter mostly full you have a lease up building and then you have two under construction. What's the secret in San Antonio that's has a five different buildings probably close to 500,000 square eight in various stages on your development page?

Really the driver of that predominately is our Eisenhower Point project and as you may recall when we've bought that land site, we spent literally two years in getting that site rezone for industrial, it's right in the heart and core of the main industrial area of San Antonio, but it wasn't developed for anything, but it was an industrial because it was a zone. So once we turn more on that and purchase that we had a pretty good inkling that it was going to be a very successful project cost of the location and thankfully it's proven to be that, and thankfully we still have all of our San Antonio land holding this remaining now the 45 acres shown on the summary page are at Eisenhauer Point and we're really excited to have that finished that park out is just a great location.

Great thank you, and congratulations.

Thank you.

And we will take our next question from Rob Simone with Evercore ISI. Please go ahead.

Hi guys, thanks for taking a question. Just stepping away from Texas and California, I was wondering if you could kind of just elaborate on what's going on in Phoenix, I know you delivered one completed asset into the pool, but it looks like you had some pretty substantial same store cash NOI growth there, so just wanted to kind of dig in there a bit?

We've been able to push rents on some of our renewals in Phoenix, and it's been a slower market, it's one we had kind of had mentioned after Houston that has been sluggish and I believed in my mind a good question, I expected kind of thoughts were Phoenix act a little bit like some of the Florida markets and during this cycle the Florida market seemed to recover more quickly than Phoenix, as it's been a little bit slower and our occupancy still are in the lower 90's, so we've seen it pick up here in the last call it 45 days or so, and we'll pick up there our 35th Avenue that we delivered. We're building up its 67% leased to specs we own it, Ten Sky Harbor will roll in and it's not where we wanted to be leasing wise, so we've you know we've had our challenges there, but we feel like we're turning the corner and hopefully by the time we get to second and third quarter we will have a better hand to play there, and we had also looking back at Phoenix what's slowed it down we have some land there, but we stopped development Phoenix really first quarter of 2016 a year ago or a little more than that because we weren't filling our buildings as quickly as we wanted, but hopefully we feel like what we've got in the pipeline we could turn the corner and you know chasing a prelease opportunity there, that may or may not come our way that we can turn the development machine back on in Phoenix towards the end of the year.

Thanks guys, really helpful.

You're welcome.

And our next question comes from Sumit Sharma with Morgan Stanley. Please go ahead.

Thank you for taking the question. I guess we get asked this question a lot, so I just wanted to get a sense, but given where BNC shopping centers as mall our pricing in terms of cap rates and price per square foot and that sort of discussion. I guess and proximity and your focus in light industrial do you see - have you seen more opportunities for conversions into that sort of thing, are there just stricter zoning rules that may preclude the sort of deal or are you actually seeing a lot more of this?

It's a good start and something we've discussed internally, we've not really seen the opportunities maybe of the different - probably have the different marketing email blast. Going back to my pre East Group days and we had a joint venture partner that described one of our property that was a great piece of land encumbered by a mall, and so there's a number of those that we think are failing or will fail and as hard as it is for us to find land. The tricky part about a mall is a lot of times the anchors owned their site and there's one in Atlanta that's being redeveloped now a local developers doing it, so you may have to go to Macy's Sears and acquire their site as well as the mall and work your way through a typical easement agreements, so could take a bit, but that's we love that opportunity down the road, we're not was probably thought about it more than we've seen and have spoken to one of the loan servicers to see how we start to look at what they get back from some of the filled mall projects in a couple of different of the shopping mall REIT general counsels, just trying to think of how do we sift through portfolios of dead malls basically. So I think it's a great idea and hard to implement and then physically we probably end up you need to demo the malls as the other thing because just the configuration wouldn't work, but there are some great sites with good freeway access that already have the utilities if the mall weren't there today, and so it's coming it's just not there yet. We haven't found it yet.

That's really good color. Thank you so much. Non related to this, but related to one of your larger tenants 3POs what we've heard from various brokers is these guys are some of the hardest negotiators on at the table particularly I know it's a favorable land market for land, but I'm still inquisitive and understand how do you view, how do you view your negotiations will let's say could [indiscernible] kind of 3PO or any other 3POs that you that you deal with and what's the sort of asking rent premium that that you typically command or on a discount if there is that?

Yeah I'll take that. It really strictly depends on market conditions you know our negotiating with the same tenant say in a Dallas today near DFW versus negotiating with a tenant that was Houston and then could be the exact same company they were prior had the leverage over me in Houston, and they would have their branded negotiations and I would be in a back peddling position, but in Dallas, I would have the upper hand, and I would have the leverage. So you really can't pinpoint it to a specific company the 3POs and logistic guys are cost conscious their business tends to be pretty tend margins, they're just moving something from point A to Point B to people and then if somebody else is trying to do it, just at that little bit cheaper way, so they are conscious about it, but in the strong market they can only do what they can do they can't if the market's tight they have to pay the rent to occupy the space that where they need to be. So it really just depended upon market conditions.

Thank you so much.

You're welcome.

And next question comes from Bill Crow with Raymond James. Please go ahead.

Good morning guys. Marshall, start with you and then I have got Houston question as well. The two biggest leasing challenges you've highlighted at Fort Worth but I guess were both on facilities were call it two actual typical size, I'm just wondering if that makes you rethink that strategy were just different than what the company has done for a lot of years as a person size goes, is there any second guessing of that whether you're kind of that's in your sweet spot or not?

No, I mean you're right there, it's really maybe answering them separately good way to think about it, Fort Worth it were its our building maybe they just built four of them, that was merchant builder with institutional partner and again that works for their strategy kind of that, but I was trying to allude to a little bit my script, we wouldn't have built all four buildings to fill, it just takes a lot of square footage to fill and the 12 month kind of lease up window the Fort Worth into your portfolio, and then in this case we didn't own it, but roughly half of that 12 months. So long term we really like the location and like the buildings and if we could find that opportunity it is that it's a big bite for us, but we didn't you know we just didn't have the chance the opportunity to buy two of the four buildings or something like that. Las Vegas we like the location rents are higher there those buildings were a little bit deeper, but they have their state of the art buildings with the bells and whistles, and kind of an infill it's a Southwest submarket, so tenants that want to be near McCarran Airport or near the Strip it works well, so we like it, and I think kind of the way it worked I just happened to both the bigger projects. And then in Las Vegas some of it was timing and some of it is just I think we've got the right moment on now they get at least, so we'll miss it again by three to four months, but I think you know if we were on this call five years from now I think less hopefully much less will be very happy with those assets just taken into little bit longer to be value add, but I like that approach a lot better than waiting for them to have gotten to be 95% or 100% lease and trying to win a bidding more. So we still will be good 7500 basis points ahead of market cap rates is not as much as if we had fully developed in themselves, but taking on the value added approach I wish they'd all leased up in the first month, but I don't sense that they're taking anything right now abnormally long, but we haven't finished the value add component yet.

Right, okay. The other question on Houston is just you know as we think about well eventually recovering at the same time we may experience a slowdown in construction, which is kind of the one thing booming in Houston, and I'm just wondering how much exposure you have to residential and commercial construction related companies.

Yeah that's a good question Bill, the construction boom really hasn't been as big a boon the last couple of years obviously at one point office was driving a lot of that and obviously that's completely stopped. But residential has continued to be strong, retail has continued to be strong, multi-family is slowing down, but first of all that we don't have a lot of exposure to that, but we continue to see interestingly in Houston, we've got a 12 months trailing 120,000 new residents. And so people continue to move in, even though the jobs have been tougher to find, but the city continues to grow. So those type of tenants have been doing well, the residential market is doing very strong. 2016 was record sales, 3.7 months of inventory and since I'm about to put a home on the market, I hope that holds up for another 60 or 90 days Bill.

Good luck with that and I appreciate the color. Thanks guys.

And we'll take a follow up question from Rich Anderson with Mizuho Securities. Please go ahead.

And my question was answered, so thank you.

Okay, we'll take our next follow up question from Eric Frankel with Green Street Advisors. Please go ahead.

Thank you. Two quick follow ups, so one Keith you referenced obviously you took of the capital since it's come down a little bit last two or three months. Is that changing your view of what your balance sheet should look like this year.

Sometimes you get equity when you can and stock prices are doing good, we are multiple still at the lower end compared to other industrial rates. So we still think it's got some room to grow and the stock price would - it's awfully tempting to get equity when you can. But the board makes those sound decisions thankfully and we will present our cases them and it's good on both sides.

Okay and a question I guess for Brent on the follow up, you're referencing more ecommerce fulfillment requirements coming through your portfolio amongst some of the markets you're in. Can you clarify - you mentioned a lot of different retailers there, are they all in your portfolio or that's just activity in your markets?

That's just activity in the market. If they were all in our portfolio, I wouldn't have the downward draft in occupancy, but it's good to see them all out there. A couple of years ago that felt like there was more smoke than fire related to ecommerce, but the good thing for us is as time's passed by, we're beginning to see more and more direct examples of that into our own portfolio and as that fulfillment chain of evolves, thankfully that's coming to a situation where they're looking for smaller centers and more locations for quicker delivery versus the mass bulk regional outside of town type aspect. So that seems to be a continuing trend. I don't see why that would change and that's continued to be a part of the driver for us.

That's interesting. What's the average size roughly of these new requirements that are in the market, is it a 100,000 square feet, 25, 50, is that something more new?

The two we've actually signed in Houston this year in the 35,000 square foot range, but we're seeing groups say like in Amazon where you routinely see them with a million square footers and they are doing that, but they've also done some 60,000 square footers. I was reading an article the other day where even in markets where they have those big million square foot boxes, they likely will add smaller boxes in other parts of the city and their goal is to get things to people within hours of ordering it. So again that's a positive trend for us.

The last two Amazon leases, I think one isn't signed yet. One they'd signed a 100,000 feet accounted for a last mile in one of our markets and then one right now at least it's around 150,000 feet that we're one of the candidates for.

Interesting. Okay, thank you.

And we have a follow up question from John Guinee with Stifel. Please go ahead.

Hey, good afternoon. I think that question has been answered.

Thanks, John.

Thank you.

Okay, great. And we'll take our final question from Ki Bin Kim with SunTrust. Please go ahead.

Thanks, probably just one last quick one. What's your philosophy on how much capital you want to commit to development? Your GAP is about 3.5 billion and 100 million of stocks, it's about 3% of GAP. It's conservative, just curious what you think about that going forward.

Good question. We kind of think about how much land we hold and we kind of informally try to target it at around 6% of assets and then anything we're acquiring now land wise and I'll Austin, the Round Rock site is a good example. We just acquired it and we hope we have it in production by the end of the year. So there's really no land - since there is not cheap land left, really we haven't been able to find it, but any land we acquire, we want to be in production as quickly as possible and I will like that our development starts kind of asset will refit the food chain. With the shallow bay business park development, our stocks are really dictated by the field rather than by corporate. So I'll use Horizon in Orlando. Right now John Coleman seems to be leasing them about as quickly as he can build on, so he's really setting that pace. With that said, there's always a land up where we would say let's finish what we started and may be going back to an earlier question. Fourth quarter we acquired some of the developed buildings that weren't completed. I'm glad we slowed up this year, given our transition with people and some things like that. And then we hope we had our West Coast will actually grow the number a little bit. So we have the right person in California, those will be more expensive land, more expensive development, so 100 million and starts would - if the market allow, it should rise in the next year or two. So kind of - I'll like if it started in the field and I like that we have a land limit rather than as long as we're leasing them up then we're typically 200 basis points above our market cap rate, that's a lot NAV each quarter per share that we're creating. It's how we think about it.

Yeah and that's part of your assets. That seems like a very significant spread. Alright and congrats, Keith and Brent.

Thank you.

And at this time we have no further questions.

Thank you so much. Thanks everyone for your time and your interest in EastGroup. Should you have any follow up questions, we'll be available and look forward to seeing you at the REIT conference soon.