Good morning, and welcome to the EastGroup Properties Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, you have the opportunity to ask questions during a question and answer session. To accommodate as many questions as possible, we do ask that you limit yourself to 2 questions. Please note today's call may be recorded and I will be standing by if you should need any assistance.
It is now my pleasure to introduce Mr. Marshall Loeb, President and CEO. Please go ahead.
Thank you. Good morning, and thanks for calling in for our Q2 2019 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. And since we'll make forward looking statements, we ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as PNOI and FFO that are non GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward looking statements within the Private Securities Litigation Reform Act. Forward looking statements in the earnings press release, along with our remarks, are made as of today, and we undertake no duty to them as actual events unfold. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially.
We refer to certain of these risks in our SEC filings.
Thanks, Kima. We had a strong team performance this quarter, maintaining the pace set earlier in the year. Some of the positive trends we saw were funds from operations came in above guidance, achieving a 5.2% increase compared to Q2 last year. Normalizing for involuntary gains or FFO rose 7.1%, marking 25 consecutive quarters of higher FFO per share as compared to the prior year quarter. Based on the quarter and the strength we're seeing in the market, we're raising our annual FFO guidance, dollars 0.04 a share.
The vitality of the industrial market is further demonstrated through a number of metrics such as another solid quarter of occupancy, same store NOI results and positive re leasing spreads. As the statistics bear out, the current operating environment is allowing us to steadily increase rents and create value ground up development and value add acquisitions. At quarter end, we were 97.5% leased and 96.5% occupied, marking 24 consecutive quarters where occupancy has been roughly 95% or better, truly a long term trend. In short, demand continues growing for our infill location, small day last mile parks. Several markets exceeded 98% leased.
In Houston, our largest market was 97.6% leased. And while still our largest market, Houston is projected to fall from roughly 21% of NOI in 2016 to below 14% in 4th quarter. Supply and specifically shallow day industrial supply remains in check-in our markets. In this cycle, supply is predominantly institutionally controlled and as a result, deliveries remain disciplined. And as a byproduct of the institutional control, it's been largely focused on big box construction.
Our same property NOI growth was 4.9% cash and 3.5% GAAP. We were also pleased with average quarterly occupancy of 96.6%, up 60 basis points from Q2 of 2018. Rent spreads continued their positive trend, rising 8.2% cash and 17.2% GAAP, respectively. Given the intensely competitive and extensive acquisition market, we view our development program as an attractive risk adjusted path to create value. We effectively manage development risk as the majority of our developments are additional phases within an existing park.
The average investment for our shallow Bay business distribution buildings is $12,000,000 And while our threshold is 150 basis point projected investment return on premium over market cap rates, we've been averaging 200 to 300 basis point premiums. At quarter end, the development pipeline's projected return was 7.4%, whereas we estimate a market cap rate in the 4s. During the Q2, we began construction on 4 developments totaling 523,000 square feet. While coming out of the pipeline, we transferred 4 properties totaling 513,000 square feet at 92% leased into the portfolio with an average stabilized yield of 7.4%. As of quarter end, our development pipeline consists of 20 projects containing 2,600,000 square feet with a projected cost of approximately 250,000,000 dollars For 2019, we're raising our projected starts to $200,000,000 As color commentary, our $148,000,000 in starts last year was a record for us.
So we're excited to again raise the target and exceed last year's results. Finally, our activity is spread over 10 different cities. This geographic diversity reduces our risk while enhancing our ability to grow the development pipeline on an ongoing basis. We also had an active quarter in terms of acquisitions, value add opportunities and dispositions. Our acquisition was the 4 building, 382,000 square foot Airways Business Center in Denver for 48,000,000 dollars Within our value add component, we closed on the 2 building 142,000 square foot Logistics 6 and 7 in Dallas.
These buildings were 19% leased at closing in late April and are now up to 68% leased with good activity remaining. Next, we have funds at risk and are projecting a 3rd quarter close on the 196,000 Square Foot Southwest Commerce Center in Las Vegas. These three buildings are under construction and will close upon completion with an expected total investment of 130,000,000 As we plan for the future, we acquired 3 land parcels. We purchased a 7 acre site in the Miramar area of San Diego, which will accommodate 125,000 square foot building. While in Houston, we acquired a 20 acre site in the Northwest submarket and a 33 acre site in the West or Katy submarket.
Finally, from a dispositions perspective, we closed on sale of AltaMop Commerce Center, an 8 building, 186,000 square foot service center property in Orlando for $14,900,000 And finally, we have funds at risk towards the sale of our 80% interest in University Business Center 130, a 39,000 square foot R and D property in Santa Barbara with a projected 3rd quarter close. Brent will now review a variety of financial topics, including our 2019 guidance. Good morning. We continue to experience positive results due to superior execution by our team in the field and the strong overall performance of our portfolio. FFO per share for the Q2 exceeded the upper end of our guidance range at $1.22 per share compared to Q2 2018 of $1.16 an increase of 5.2%.
Funds from operations, excluding gains on casualties and involuntary conversions, represented an increase of 7.1% and 6.2% for the 3 months 6 months ended June 30, 2019, respectively. Our continued strong performance, both operationally and in share price, is allowing us to further strengthen our balance sheet. From a capital perspective, during the Q2, we issued common stock at an average price of $113.91 per share for gross proceeds of $90,000,000 During the 6 months ended June 30, we issued common stock at an average price of $112.49 per share, providing gross proceeds of $115,000,000 Just 6 months into the year, that represents the company's 2nd largest equity issuance, trailing only the $159,000,000 of gross proceeds raised last year. Also during the Q2, we executed interest rate loss agreements for 2 senior unsecured private placement notes, a 10 year note for $75,000,000 with a fixed interest rate of 3.47 percent and a 12 year note for 35,000,000 dollars with a fixed interest rate of 3.54%. We remain pleased to have access to capital via debt and equity at attractive pricing.
Looking forward, FFO guidance for the Q3 of 2019 is estimated to be in the range of 1.23 dollars to $1.27 per share and $4.89 to $4.97 for the year. Those midpoints represent an increase of 6.8% and 5.8% compared to the prior year we stated, respectively, and an increase of $0.04 per share in the midpoint of our prior guidance. Our 2nd quarter results, combined with the leasing assumptions that comprise updated guidance, produced an increase in both average occupancy for the year and an increase in cash and straight line same property range. Other notable assumption guidance provisions include increasing development starts by $40,000,000 increasing operating property acquisitions by $25,000,000 dollars increasing value add property acquisitions by $15,000,000 and increasing termination fee income by $285,000 due to known fees. With opportunities to invest capital ahead of expectations and an attractive stock price, we increased our estimated issuance of common stock by $120,000,000 and unsecured debt by $30,000,000 In summary, our financial metrics and operating results continue to be some of the best we have experienced and we anticipate that momentum continuing throughout 2019.
Now Marshall will make some final comments. Thanks, Sam. Industrial property fundamentals are solid and continuing improving across our markets. Following these fundamentals, we continue investing in, upgrading and geographically diversifying our portfolio. As we pursue opportunities, we're also committed to maintaining a strong healthy balance sheet with improving metrics as demonstrated by our equity raised year to date.
We view this combination of pursuing opportunities while continually improving our balance sheet as an effective strategy to manage risk while capitalizing on the strong current operating environment. The mix of our team, our operating strategy and our markets has us optimistic about the future. And we'll now open up the call for any questions.
Thank you. We'll go first to John Guinee with Stifel. Please go ahead.
Great. Thank you very much. A couple of questions.
When you're leasing up your development deals, what percent do you think you're leasing to existing tenants who are
just upgrading in your market? And then the second question is why Greenville, South Carolina? Okay. John, good morning. It's Marshall.
Good questions. The percent of existing tenants has increased over the last couple of years and especially as we've seen it in like in Orlando or where we have existing parks, it's great opportunity. Charlotte, where we had 11 expansions during the 12 month period. I'm estimating a little bit, it's probably somewhere between onethree 40% of our existing tenants and the ones that kind of take that next building, we may move them, which is what I like about is that we kind of create a business park or a neighborhood, someone moves from Building 2 to Building 9 within the park. So estimating maybe onethree and as high as 40% at any given time.
And then Greenville, good question. It's a market we've been looking at for a few years, a market where we bid and lost on a number of deals. And then I'll give John Coleman and Wes and the team in the Eastern region credit for finding this building. What we like about Greenville or what it's like is really the Greenville Spartanburg area. As you know, probably it's there along I-eighty five, basically halfway between Charlotte and Atlanta.
So it fits within our footprint. It's a market as that corridor from Atlanta to Charlotte continues to grow. Metro area, about 1,300,000 people. It's really transitioned. It was a textile textile driven economy back when and it's moved more auto related with the BMW plant.
Michelin is based there and then they do a lot of some of the suppliers with Volvo down in Charleston. But what also made it interesting and appealing, just the job growth, what's driving it, also technology, that's been a big driver of their economy of late with Clemson University, Furman, Wofford, some of those, a lot of tech jobs have really popped up and then retirement community. So it fits our footprint. And our property really, it's more it's towards the Greenville. The BMW plant is in Spartanburg.
It kind of fits our profile. We were chasing the property. It's a brand new property situated between 2 freeways up on the hill. So it has great visibility, good ingress, egress to 2 different freeways. And John was pursuing it.
It was onethree leased to train. And before we could tie it up, really, they had leased the balance of it. So we ended up buying 100% leased building where it started as a value add opportunity. So and we're already seeing some other opportunities to grow some things. We kind of had said to John and the team a little bit, let's walk before we run.
Let's get this building tied up under contract and closed. But I guess I was so the it's a market that we were pleasantly surprised, about 200,000,000 square feet, which makes it a larger industrial market than Orlando or Tampa or Austin, Texas, for example. And maybe the bad news is once we got there and that may go back to being between Atlanta and Charlotte, there's more institutional ownership in Greenville, Spartanburg. There's no undiscovered markets we're learning out there as we turn over stones and kick tires and look for opportunities.
Great. Thank you.
You're welcome.
Thank you. And we'll go next to the line of Alexander Pernodkas from Bank of America.
Great. Hey, guys. Good morning.
Congrats on
the line.
You had a great quarter. I was hoping you could give me some more detail on the newly acquired plant and some updated plans for development starts there.
Okay. Sure. Good question.
On the land, what we acquired really kind of 3 different parcels this quarter. I'll start with San Diego. Excited about it and that it's a 7 acre site. Miramar, we're just on the north side of Miramar Navy base in San Diego. So to the south of us, it's all federal land or the Navy base.
And we're just on the east side of the I-eighty five or the 805, as they would say, there. So that puts us right across the freeway from La Jolla. So a great last mile location to distribute to a fairly hot densehigh net worth area like that about it's a former auto dealership, so it's got great visibility and really good land for industrial land. The tricky part there that we designed 125,000 foot building that will go there. It's currently under a ground lease.
There's a user who runs a shuttle service to the nearby VA hospital at the nearmore Navy base. So we'll wait a little bit until that lease expires before we begin our construction, but we're getting an attractive yield until the ground lease burns up. And it's an area where there's literally no land and older product with less visibility is what we like there. I wish it were a bigger site. And then jumping to Houston, I would describe it as it's a market, obviously, we've been in for 20 plus years.
Brent was based there for years. And we basically kind of know Houston, kind of 9 o'clock to 12 o'clock on the map is where we've operated. And with these two properties, Katy is a market where we've developed before. We're building our last building in a park. So buying that site gives us growth opportunity in Katy.
The Northwest is really the oldest and probably the arguably the most preferred submarket, most land constrained. So we acquired the site in the northwest submarket and then we're active in our land at World Houston. So taking through the whole network, I would say within Houston, we're pretty full of land. We have land in all three of our desired submarkets. So we have opportunity to create value there going forward.
And then big picture in Houston, I like that we're developing in the 7% to 7.5% type range. Market cap rates are probably high 4s 5 for brand new products, especially in a park in Houston. And so there, we'll keep creating value and manage our size. We've also identified a couple of buildings, and we're a ways away from delivering what's under construction now. But what we've been building has been leasing up nicely.
We've been happy with that, but we'll also keep growing the company elsewhere, and you may see us sell some more Houston assets as we look into 2020 as we manage our size in Houston. So we love creating the value, have a good team there, don't want to stop that, but we're also mindful we don't want to get too big in Houston. So I think you'll continue seeing our 14% 4th quarter. It's actually projected to drop below 14%. And hopefully, next year, we'll keep delivering lease buildings that let that percent continue to drift down.
And we'll go next to Alexander Goldfar from Sandler O'Neill.
Just a question on the sustainability of the yields. Marshall, you had spoken initially that you guys always target 150, but in reality are more in the 200 to 300. If you guys look at like apartments, for example, which have a lot of development, no different than industrial sees a lot of development. Apartment development yields have really compressed to within probably less than 100 basis points, maybe 75 basis points have stabilized. Why do you think that you guys and that's even for some of the REITs.
Why do you think you guys have been able to sustain such incredibly wide development yields? And do you see that the same among your private developer peers? Or do you think that you guys stand out in sustaining these really wide yields?
Good question. Good morning, not there. I'll study also. No, I hope we can continue to maintain these yields. Construction prices are rising.
I think the benefit of that with a tight market, it will keep putting pressure on an upward pressure on rents. We've been able to maintain the yields even with construction prices rising and land prices are up pretty high. On the private side, thankfully, well, I said I like where we sit in the food chain. Most of our peers are building much larger buildings than what we build. So there's less people building a $12,000,000 Shallow Bay last mile site.
So I think that helps us maintain our yield. And you're right, we certainly see, especially in the larger markets, the premium or the spread over cost is getting tight, certainly Southern California, Atlanta, things like that. And thankfully, where we've seen that and we've chased some that are kind of on the margins of it's usually the big box pre lease type opportunities, that type thing where the yields really get tight. And if you stumble and something happens to the economy, your profit can disappear. So we've been careful to not chase those too hard and really haven't have only won 1 or 2, but have been able to maintain our yield where we've gotten pre leased.
So it's hard to predict the future. It's not shrinking, and I hope we can continue to maintain it. And I'll give the guys in the field credit. They continue to find good land sites as hard as it is to find them out there. So knock on wood, hopefully, we can stay 200 to 300 basis points.
The other thing that's helped us is, as you've seen kind of the recent platform or type larger transaction cap rates keep getting pushed down. They're both between GLP and IPT. What we were hearing is in the mid-four type cap rates. So cap rates continue to be compressed. And talking to one of the national brokers earlier in the week, their comment was that it's hard to believe, but there's probably more international capital chasing U.
S. Industrial than it was 12 months ago.
And we'll go next to the line of Craig Mailman from KeyBanc Capital. Please go ahead.
Hey, good morning, guys. Just another question on development. You guys are still active in markets like Dallas and Houston, which are 2 of the 5 most active markets in the country. I fully understand you're not playing in the same size ranges what's being built predominantly. But can you just kind of talk about if you've seen any changes in demand, rent growth potential, kind of any dynamic shifts in those markets given the higher levels of construction?
Fair. Good question. And maybe a couple. I'll start with Dallas and move to Houston. Looking at the numbers, and these are from CBRE, it's roughly 23,500,000 square feet under construction in Dallas.
It's 42% leased. So pretty good number there. Those are, that's a big number, but then when we look back last year, Dallas absorbed over 18,000,000 square feet and over 21,000,000 square feet 2017. And the number I saw that they put out over the last decade, it's been like 100 and 58,000,000 square feet absorbed in Dallas. So as one broker, it was interesting, we were in a car riding around with a broker in a different market, and they said, if you
haven't been in the industrial market in the last 5 years, it's just
a totally different industrial market in the last 5 years, it's just a totally different industry with where demand has been and the average size of tenants growing. So Dallas is always a market that makes us nervous when we look at the supply numbers, but then it keeps being absorbed. And typically, kind of rule of thumb, I would say, if this is helpful, we'll start digging into supply with our team. And by the time we sort out the big box buildings and the buildings that are on the edge of town, it's about 10% rule of thumb, it always seems to be about 10% to 15% of what's under construction in any market is truly competitive with what we're trying to do, where we're trying to do it. In Houston, there's more construction there.
It's up to $20,000,000 And absorption, again, kind of about 3,000,000 square feet year to date. The good news up north, the vacancy rate where our rural Houston is at 6.3%. The overall market is 5.5%, 6.3% in the north submarket, which is the lowest level since 2012. And then in looking at the numbers I saw in Houston, over 80% of the 2nd quarter deliveries were over 200,000 square feet. So again, that's where a big building process by Houston is by 140,000 feet.
So it's a little bit of a different type tenant. And even up north, there's 5,800,000 square feet under construction, which is a good sized number, but 40% of that is in 3 buildings that are each pre leased, that are kind of 700,000 to 1,000,000 square feet. So I would say we are seeing supply go up in our markets. The numbers go up, it's typically been and Brent, China, and it's typically been on the edge of town, bigger box buildings, less competitive. And then we've also seen a pickup as strong as demand has been.
It feels like it continues to evolve to quick deliveries, whether it's e commerce or non e commerce, quicker delivery that people need a regional distribution center, but they also need a neighborhood distribution center to have that quick delivery. And that quick delivery is really where we've seen the pickup in our demand over the last 12 months, I call it.
And are you seeing any impact on your ability to push rents or set rents on your product?
Just looking at the numbers, good question. We've been I don't like GAAP rent spreads because it captures the pre rent and the bonds. We were 17% in 2018, 16% last year and about that year to date. So looking at the numbers, I'll take those kind of rents, but I'm only in the mid- to high teens are great. I thinking there's going to be more upward pressure on rents, and I've been saying that for years.
So I'll keep saying it, and eventually, I may be laughing. But again, I keep thinking of what we're seeing in construction prices and this demand side that there'll be more that we'll get beyond that kind of high teens that we could see. They're not going to go off the charts. In some in any given quarter, I would caution you and say it's a mix of what did we have rolled in California versus Jackson or where things rolled. But I keep thinking we'll have more upward pressure on rents in spite of the new supply because the supply is only peripherally impacting us.
Yes, Craig, I would just add, this is Brent. You mentioned Dallas, Houston being among the 5 most active. Also, just mentioned they're 2 of the largest industrial markets in the country and certainly within our footprint. And as we've always talked about sort of at the micro level, we have the advantage in the multi phase developments of having firsthand knowledge of what our activity is on the existing or prior phase. And one thing that Marshall and I were looking back the other day and you kind of step back and say, wow, 28 of our last 29 projects that have rolled into our portfolio percent leased.
We broke that street with just one small building in the Phoenix area this time. So we're aware of all the factors and take a look at it. But so far, the markets are holding up quite nicely.
That's helpful. And then just a quick one maybe on the balance sheet. Given where the stock has been, you guys are fully taking advantage of it, but you're still issuing debt. And I'm just curious, I know rates are low, but the trade off of, let me call it, 50, 60 basis points on cost for permanent capital versus 10 ish year capital. Kind of how you guys think about that and maybe delevering further to get ahead of if there is any economic weakness or other slowdown that will allow you to be acquisitive even if the cost of capital moves slightly against you?
Yes. I've talked with Marshall, we've gone to about eighty-twenty net debt to market cap. We've gone to where do we want to go? And I promised we wouldn't go below 0%. So with that, it's something it's a good problem to have.
It's a high class problem. We like the cost of each. We certainly have been much more heavy handed with the equity. So we bumped it up to $265,000,000 which will be by a lot our largest single year. Of course, a lot of that's being capital driven with opportunities.
But when you look at the debt issuance this year, what I was encouraged to look at, Craig, is our net debt issuance. What I mean by that is we've had 2 repayments this year over $120,000,000 and what we're forecasting to do for the year is issue $190,000,000 So net net, we will have about $70,000,000 of additional new debt for the year, so not that much. So our tendency we agree with what you're saying. Our tendency, especially at our current price is to continue to be a little more heavy handed with the equity, but we won't ignore debt altogether and keep the line with plenty of room to cover all our obligations. So it's a dance, but it's a fun conversation to have because it's a good option either way, but you'll see us, I think, stay in that eightytwenty mix in the near term as long as the price holds in there.
Great. Thanks, guys.
You're welcome.
Thank you. And we'll take our next question from Bill Crow with Raymond James. Please go ahead.
Good morning, guys.
Marshall, you're probably starting to deal with tenants whose leases are expiring for the certainly the second time and maybe the third time during the cycle. I just at some point, there's got to be some sticker shock or some effort to fight back. And I know they have tenant reps and everything else, but are you starting to see a little bit more of a fight on their end? And any tenants moving out looking for cheaper space? Or is it just it's not yet?
Good morning, Bill, and good question. You're right. You grabbed my answer before I could speak. But thankfully, in this cycle, it probably helps us that as one broker said, if someone doesn't have a tenant rep broker, it's a red flag that they must have bad credit or maybe they're not really serious about looking for space. I guess this probably pertain more to new tenants than renewals.
And we're probably not there and we wouldn't be in that initial meeting, that sticker shop meeting. But once they go out and survey the market, it kind of we're ideally, if it's a renewal or something, we'll hopefully have the best park and the right space, and we can get a little above the market, but we're not going to be able to get too far about the market, and the market kind of is what it is. And thankfully, from their perspective, what we're hearing more and more of is that with the right location and they factor in transportation cost and things like that, that the rent is a smaller component of their cost. We've actually maybe 2 trends we're seeing as tenants and I've used Dallas Fort Worth as our example where we went to Fort Worth. But given how bad traffic can be in a growing market like Dallas or Phoenix or Atlanta or Tampa where you are, that people will need a couple of locations on different sides of town.
So we've actually had some of our Dallas tenants, HVAC contractors, things like that follow us to Fort Worth because their guys were spending so much time stuck in traffic. And so that offsets the rent increase. And really, probably the bigger tenants, this is more of a factor, although it's a factor for our tenants as well. They are struggling with hiring. Labor shortages is something we continue to hear.
I was having lunch with 2 brokers recently, and they said that conversations used to be rent, TI, lease term, things like that, but more and more people are worried on location of where can they find the labor pool. And one tenant we were with recently said, I'd like to expand. My business is that good. We were with them, but they were unable to find the labor. So I think that's getting to be a bigger and bigger driver and kind of is one that we are spending more time as we think about locations and making sure how does it impact our tenants.
Are the tenants pushing for longer leases to try and protect themselves in an expanded environment?
We haven't. I mean, we keep our annual kind of transit chart. We keep up with what our average lease term is. And every quarter, I think it's hard coded, I was kidding, keeps our staff that comes in about 4 to 4.5 years. So new developments will get a little more term because the TI, but in the downturn and here, it's still it averages that kind of 4.5 years is our average term.
So it makes sense what you're saying. But I think the other thing people are worried about outgrowing the space and things like that, which is what I love about our parks is our ability to, as we mentioned earlier, to kind of move them from Building 3 to Building 10.
I appreciate it. I thought it was Keith that had the hardcoded numbers in the spreadsheets. Thanks, guys. Appreciate it. You're welcome.
Thank you. And we'll go next to the line of Emmanuel
Corfman from Citi. Marshall, does the cost of capital advantage, the significant ramp in your stock price change the criteria or some acquisition plan that you've given your team to go out there and find properties?
And Ben, good question.
We said we're trying to mentally decouple. I guess what I don't want to do is use a good stock price as an excuse to buy something where we regret a few years from now. We want to maintain the quality of our portfolio. That said, where it really does come in, I mean, we will look at our cost of capital. And thankfully, as the tenure has come down and the spreads kind of the attractive debt Brent and the team have been able to place, we can certainly are more competitive for properties than we could have been maybe 18 months ago.
So whereas we probably would have gotten knocked out in the 1st round of some of these opportunities, we're making it into the 2nd or 3rd round. Although I would say, really, as we so it does make us more competitive. But if you dig through between our developments and our value adds and even our acquisitions this year, most of what we're acquiring has been either development or off market kind of value add that it's still incredibly competitive when something is leased and gets listed and goes to market. That's where we're even with a better cost of capital, not that competitive. But it does give us a green light to maybe chase some things, and I like the efforts the idea of kind of the mix of, okay, let's make hay while the sun is shining and the market is strong and continue to geographically diversify and create opportunities above our cost of capital.
But as Brent mentioned, too, leaning on the equity side, our balance sheet, our debt is down probably 40% or a little north of that in terms of debt to market cap within the last 3 years. So I like that mix. It feels like we're hedging, taking advantage of the opportunities while improving our balance sheet seems like a nice mix to us.
And just as we think about the good trends in your portfolio, how much do you attribute those to the markets you're in versus the product type that you operate in, the smaller infill, shallow bay? And maybe in that same vein, does that sort of open the door to go to other markets if it's less market driven and more asset type or tenant driven?
I'm not sure I have the understanding stuff. It's not positive, apologies. So really, the trends we're seeing within kind of our shallow bay, does that open up new markets for us?
I guess the question is, Marshall, like you've been focused on the Sunbelt markets. If you have widened that focus years ago and you have been in other markets, been in a similar asset type to the one you're in now,
Would the trends be just as good?
And if yes, would you consider going into sort of non Sunbelt markets today?
Okay. Good question. Hypotheticals, I'm guessing, but we could have gone to those markets. What we like about our Sunbelt markets is also the growth. I mean, I think we're seeing the opportunities, but a rising tide raises all shifts.
So just with our bet is there's going to be half a 1000000 more people in Dallas, Orlando, LA than there are today where the job growth, where the retirement is. So we probably would have done well in those markets, but not as well as we've done in Sunbelt markets. I guess, big picture, what we've been trying to do mainly rather than go to new markets, and again, maybe it's a process. First, we wanted to shrink Houston. I guess if you go back just 2 or 3 years, we felt like we needed to reduce this not that we don't like Houston, but it was just over allocated, reduce the size of Houston and then opening the office in L.
A. And doing some things. There were some existing markets we were in, like and I know they're hyper competitive, L. A, San Francisco, San Diego, Denver, Las Vegas, where we said we've been in those markets, let's be more active in those markets, have more boots on the ground. So we've been active there.
We entered Atlanta, Miami, for example, so to kind of push that geographic diversity without getting out of our footprint. And then maybe where you're heading would be the next leg of the stool. If we don't enter any new markets in 5 years, I'd rather be patient about it. I think that would be okay. But I'm sure there are opportunities.
And kind of like Greenville this quarter, we're always looking at 2 or 3 markets that may or may not make sense. And at some point, Denver is not exactly a Sunbelt market, but we've been there for 20 years and it's got good growth. It has the attributes of a Sunbelt market other than climate, I guess. So we'll get there. It'll just be over time, and we'll hopefully do it in a disciplined manner.
Thanks, Andrew.
Thank you. And we'll go next to the line of Vikram Malhotra from Morgan Stanley.
Thanks for taking the questions. Maybe just first one on just the guidance same churn OI guidance. Brent, if you could just talk about kind of how you look at the second half? If we look at the first half, it seems like you're in the high 4s on a cash basis, and the full year number would suggest sort of deceleration. But it seems just given where your occupancy is, rent spreads are and escalators, you should be trending to the high end.
Is this sort of just conservatism on your part?
Vikram, I hope so. As the year has gone, we've performed well. We've been able to raise the same store guidance as we've gone along. And you're right, for the 1st 6 months, we're toward the higher end. That does basically say that what we're budgeting for the back half of the year would be slightly lower than that.
But again, it's just our budget, not necessarily what we hope to accomplish. I would point out that our last 6 months of the year, we're still budgeting about a 96.5% occupancy. When you're playing in those mid-ninety six to mid-ninety seven numbers, it's just real challenging to get more aggressive to say, hey, we're going to be 90 7.2% occupied or at some point, you're squeezing in there tight. So the same store, I hope it proves conservative. So that's how it rolls up.
But bigger picture and as a lot of the conversation this morning is our development and value add program really is being driving a lot of our NAV growth. And we've got very solid same store growth, solid rent growth and certainly think that will continue to pull in the right direction. But want to see how it pans out. We lowered we increased the bottom end and kind of kept the top end the same, which raised the midpoint slightly.
Okay. That's helpful. And then just a bigger picture question on sort of new markets. You entered Greenville. Can you talk about how you see growth from here on in that submarket in terms of mix between acquisitions and development?
And if there is a near term wish list in terms of other submarkets, can you highlight any that we should sort of be watching for?
Certainly, within Greenville, we'll look at acquisitions, kind of Greenville Spartanburg. Probably what we've learned given kind of as the world sits today, we're more competitive and are comfortable creating value, whether it be development or value add, which basically it's not every case, but our value add is often that someone else's new building that we acquired before it was completely leased. So we like the state of the art buildings and if we take on the leasing risk, but not the construction risk. So we like in that submarket that we're near Greenville and nothing against Spartanburg, but we're kind of where the higher network population growth serving the metro area of the consumer really fits what our buildings do a little better than serving the BMW plant, for example. So I like how we fit there.
In terms of other markets that we've kind of looked around in and we're late to the game on these. And Nashville was another one that's within our footprint that we've looked around in. We passed on some opportunities in Nashville. And if we never get to Nashville, I'm okay with that. But that's one we toyed around with the idea or talked about places like Salt Lake, which again would be a little bit like Denver.
It's not a Sunbelt market, but it's on the periphery, and that one's further out there. If we never get to Salt Lake, that's okay. 2, but we're I always think at least we owe it to you to always be looking at a market or 2. And if we can find the right opportunity, we'll enter it. And in the meantime, let's be active in the markets as best we can find an opportunity, say, in the Bay Area where we're under allocated.
And it's awfully extensive, but it's a great market. And so let's keep we'll just be patient until we can find the right opportunity there or in Orange County, for example.
Okay, great. Thank you.
You're welcome.
Thank you. And we'll go next to the line of Jason Green with Evercore. Please go ahead.
Just a quick question on development starts. As this continues to tick up, if the business environment were to stay the same or even get a little bit better, could development starts for fiscal year 2019 increase? Or are you pretty much capped out for what you can do this year?
We could at some point, you just kind of run out of time. I mean, 3rd quarter has more starts. Of the balance of what's left. I was kind of looking at about 60% of the first half of the year, 30% 3rd quarter, 10% 4th quarter. So in a couple of our markets, not many, but like if you run into weather, you could as it gets later in the year ending in a we're not looking nothing right now in Denver, but Charlotte, we could also run into some weather issues.
So we could possibly go north of $200,000,000 and a lot of that too. But also, as you would imagine, every city permit department, whether it's industrial, multifamily, hotels, they are all busy. So it's taking longer and longer to get permits pulled and plans approved and things like that. So there's some upside for 2019. We certainly have the capacity to do it.
And what I really like about our model is compared to our peers and maybe one thing we don't articulate as well as we could is that we're really up on our development starts because the demand has been there and it's pulled that next building within a park. So if we do it, it will be based on demand versus corporate saying, hey, it's a good idea to go build that next building. So if you see us beating $200,000,000 it's a further sign of the market's even stronger. And then hopefully, what we don't get started next year this year, we'll roll right into 2020. And if the economy stays there and we can hopefully maintain the pace that we've set.
A few years ago, we would have told you $100,000,000 in starts. It's kind of our typical year, and I'm pleasantly surprised that we've gotten the $200,000,000 The $140,000,000 was our record last year. And so to get to $200,000,000 and maybe we'll beat it, and then hopefully, we'll have a good opportunity as we look to, say, look to 2020 now that we're all the way into July.
And we'll take our next question from John Peterson with Jefferies. Please go ahead.
Great. Thanks. I have a few questions for some details on some of the acquisitions. There's certainly some more value add type opportunities here. In Greenville, you mentioned it's 35% occupied, but that's going to 100% in early 2020 after some TIs.
So I guess on top of the $14,000,000 of acquisitions, how much additional TIs do you have to spend?
And what does that turn the return into on that acquisition? Good question. I guess, we're under a I guess, there's some confidentiality in our purchase and seller agreement. So I want to be sensitive to the seller, but I would say it's probably typical TI. It's one tenant, again, it's train air conditioning.
And then there's another tenant that's moving into 100 of the 150,000 square feet. So it's both of them, 7 year leases. And the second one got signed really as we were under an LOI and before we really or maybe even as we got on purchase and sell agreement. So it will take a little bit to get the TI done. The tenant is also getting some incentives, as I understand it, from the state of South Carolina, the city of Greenville.
So that's why I'll take a little bit of time to get their build out done, and they'll occupy probably late Q4 to 1st part of next year. And TI is probably, per year or over the time, at least in line with company averages.
Okay.
All right.
So it's not like some significant redevelopment type thing happening?
No, nothing. It's 100,000 foot tenant getting and it's a brand new building. They've got to add the office, the restrooms, the lighting, all the dock equipment, all of that. Okay.
All right. And then in Phoenix, it sounds like you got a transaction here that had a little bit of hair on it over the last few years with eminent domain and then coming out of it. So it looks like a total of about $21,000,000 of investment expected there. Just curious if you can walk through maybe the history of this project and then how the yield on something like this stacks up versus normal developments?
Good question. We've had Interstate Commons is the project, 4 buildings. We acquired 2 of them in the late '90s and then built 2 more buildings since then. It was late 2016, I believe. Arizona DOT was doing a freeway widening, took acquired 2 of our 4 buildings, and we had kind of stopped.
Naturally, it was coming. It didn't happen overnight, but we stopped our CapEx for a bit before ADOT took it back. And then now they finished the freeway widening, so the access is better and the visibility is better. And then they didn't tear our 2 buildings down. So the good news is we have an option to reacquire the buildings if they didn't get torn down.
We exercised our option. It's taken a little bit of time. We thought we would have closed by now, just working through the state process. It's we're buying them back for about a little over $9,000,000 which is a little bit less than we sold them for, thankfully. So we have a we're buying them back 2 years later for a little bit lower price, but then we'll take a couple more $1,000,000 to get them.
It needs a new roof parking lot. We'll rehab them and get to about a $12,000,000 investment. And it's just below a development type deal. We're performing and it's smaller tenants in this building, so it's the ones today that would be awfully hard to duplicate because the tenant improvement costs would kill your return. So we're optimistic, and I'm doing it from memory.
I think we end up in the high 6s is about where we pro form a there and probably completed it would be Southwest side of town, so not the most it's a good stable industrial market. It's not the East Valley that we like better, but Southwest Valley would probably be high for worst of 5 type return. So good yield over value once we can get the buildings back and get to work on them, which we think will be hopefully late Q3.
Okay. All right. One more kind of nitpicky question, if I could. In Atlanta, I noticed the rent changes on renewals were pretty significantly negative this quarter, I think about 20% there. Give me just some more color on what's going on, what was going on there.
Yes. Good eye and a busy chart, and it's really a small sample size. In Atlanta, most of what we it's not a big market force. We like the market, not a big market. And most of what we have there was brand new value add.
So in terms of releasing, it was a lease in Q1 and then a lease in the 2nd quarter that were 1 was a 12 year lease that expired above market and one was a short term lease that went to a long term lease. And so on both of those, we rolled backwards. So it's not let's say, it's not indicative of the market. It's just an odd uniquely small sample size for us. So hopefully, as we build up our square footage in Atlanta and get I'd love to have a handful of numbers in our stats rather than 1 or 2 leases, you can end up with odd looking numbers like what we've had.
So I guess maybe on that point of renewals, if we step back high level to your whole portfolio, where would you put the cash mark to market
today? We're bad at estimating that. We've tried it, and we just aren't very good at it because every state depends on TI and the side yard. I'm not intentionally mumbling other than we just aren't very good at estimating it. We do see rents continuing to grow 4% to 5% in most of our markets and probably even sometimes higher than that in the California markets.
Thank you. And we'll take our next question from the line of Eric Andersen with Green Street Advisors.
Thank you. That's a new one. Could you comment on some of the portfolio sales that have occurred over the past few months and whether that pricing that's reflective of deals are getting reflected in smaller transactions that you're looking at?
Good question, Eric Frankel. I apologize. I think so. What we which I think we should do, what we've been selling, I would describe them as they aren't bad assets, but they're not our future assets. They performed well for us.
We've had nice gains. I'm trying to say we're pruning from the bottom a little bit. But what we've also seen is cap rate compression even in weaker assets that I'm kind of bouncing on. We got attractive pricing on a 30 plus year old service center in Orlando this past quarter. I want to say that was like a low 7% type, doing it from memory, low 7% type cap rate.
We're seeing that on we've got funds at risk on a 30 year old R&Doffice building in Santa Barbara. Last year in Phoenix, we sold a 50 plus year old distribution on the Southwest side of town in the Thais, which is probably half the cap rate we bought it for 20 years earlier. So we if I'm answering your question correctly, yes, it feels like everybody would rather own the Class A product and the top 5 distribution markets. But given the amount of capital and there's even rent growth in these type assets, we've seen it as a it gets a little tricky. It's a good time to issue equity, it's an attractive time to issue equity, but it's also an attractive time to dispose and kind of keep trimming from the bottom of our portfolio, which is something I think we should always be doing.
Well, Seth, I appreciate that color. Could you actually just comment on the cap rates you're or the yield you expect to receive on the Denver portfolio acquisition?
I can go within a range without upsetting our seller. It would be it ends up I'm trying to get rough on memory like a 5.1 to 5.5 type yield. It's 11 tenants, 95% leased, well located airport submarket really between downtown and the airport, closer to the airport and in the low to mid-5s.
Okay. That's helpful. Final question. I just noticed in the way you guys disclosed your release and spreads by market, which is appreciated. Obviously, the California numbers were quite eye popping.
Could you comment on when those leases were originally signed that you rolled over this quarter? Were they signed like 3 years ago, 5 years ago, 7 years ago?
I need to honestly dig a little bit more. I'm guessing that most of them were probably that 3 to 5 year time period, and that's just that's the the good news is we see great re leasing spreads in California, almost hoping, I hate to hope leases expire, but there it's an exception. And they weren't abnormally long in the Bay Area and L. A, and that's why you see such those are the lowest cap rates we within our portfolio as we try to find opportunities are really where you are and in the Bay Area.
Okay. That's it. Thank you.
Sure. Welcome.
Thank you. And we'll take our next question from Rich Anderson with SMBC Legal.
Thanks. I had a feeling I was next. So just a question on sort of the performance and how am I phrased, like the ability to raise guidance and whatnot in the future. When you look at same store growth, if you believe guidance for this year, you're running sort of neck and neck with what you produced last year. So I'm wondering if the acceleration opportunity set is less on the same store pool and more on the non same store opportunities vis a vis the value add acquisitions occupying faster than expectations.
Is that the new path to future FFO growth in your mind now that you've kind of reached perhaps a quasi ceiling on the same store growth profile of the company?
I'll start with that, Rich. Good to hear from you. Yes, I would say on the same store that there's not as much opportunity there, I'm losing my train of thought here, in terms of pushing that going forward in terms of yes, I think we've probably run at the same rate for a few years now. I think you're right, development and value add will be a big contributor. I think it's one of the under evaluated aspects of our growth is that value add and development.
Marshall and I were looking at this earlier since 2017 through the current pipeline. We've added $655,000,000,000 in our cost at a high 7 yield. So if you put that at a mid-four to a 5, we've had somewhere in 60%, 65% return on those assets. So certainly, I think 2020 will be pushed by some internal growth, but I think you're spot on that there will be some value add development will be a big push in pushing that FFO growth up.
Okay, great. And then second question, lease termination income up over $1,000,000 for this year now. That will be the high watermark for you guys for at least going back this last 5 years or so. I imagine you'll say these are company specific events, but company specific, company specific, company specific suddenly becomes an industry. And I'm curious if you're having an eye on that at all as a perhaps foreshadow for things starting to sort of loosen up a little bit.
In our case, it's not really indicative of things loosening up. The good news there is Chris Sears and our team have fought a good job there on the East Coast. We had the rail represents 2 big termination fees this past quarter, a $525,000 in Tampa and a $225,000 in Charlotte. And in both those cases, we've relet the space. And one case in Charlotte, each tenant on each side moved in.
So those were negotiated terminations on our side just in that we viewed it was good upside for EastGroup, which it turned out that there really was. But that has caused the trend to be heavy this year. We're guiding to just north of $1,000,000 the last 2 years. That was closer to $300,000 $450,000 going back to 2017. So it's just more opportunity driven, not tenant workout type driven.
So good execution on the team to put some extra money in our pocket, re lease the space and actually do it at higher ends.
All right. Makes sense. Thanks very much. Appreciate it.
You're welcome.
Thank you. And we'll take our next question from Brendan Finn from Wells Fargo.
Hey, guys. Thanks for taking my question. I wanted to follow-up on your earlier commentary about expanding in the Denver market. It looks like you guys don't have any land there. So are you going to try and continue expanding there through acquisitions like you did in Q2?
Or are you also looking for land parcels there as well?
Good morning and good question. Yes, a little of both. I mean, I think I'm glad we got the acquisition we did in Denver. It's probably atypical for us to be competitive. And then it usually will make it into the rounds.
There's usually 3 rounds with the last one being a buyer interview and someone jumps their bid. So we're looking at a couple of opportunities now in Denver. One's on market, one's off market. We probably, I guess, probably look to value add and development would be our 2 where we built in Denver before, developed there before. We're probably where we grow.
And knock on wood, as soon as I say that, we'll end up acquiring something. But I would think given like where we are in other markets, value and development will probably be our path to grow in Denver and in most of our markets. And if we can find it off market, all the better.
And at this time, we have no further questions. I'd like to turn it back over to our speakers for any closing remarks.
Thanks, Erica. Thanks, everyone, for your time. I appreciate your interest in EastGroup, your time this morning. If you have any follow-up comments or questions, we are available this afternoon. Thanks.
Thank you.
We'd like to thank everybody for their participation on today's conference. Please feel free to disconnect your line at any time and have a wonderful day.