Good morning, welcome to the EastGroup Properties second quarter 2019 earnings conference call. At this time, all participants are in a listening 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 two 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 second quarter 2019 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call, 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 into 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 the 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 update 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, Tina. We had a strong team performance this quarter, maintaining the pace set earlier in the year. Some of the positive trends we saw where funds from operations came in above guidance, achieving a 5.2% increase compared to second quarter last year. Normalizing for involuntary gains, our 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 $0.40 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 through ground-up development and value-add acquisitions.
In 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, shallow- bay, last- mile parks. Several markets exceeded 98% leased. In Houston, our largest market, was 97.6% leased. While still our largest market, Houston is projected to fall from roughly 21% of NOI in 2016 to below 14% in fourth quarter. 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 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 second quarter 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 million. While our threshold is 150 basis point projected investment return premium over market cap rates, we've been averaging 2 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 fours. During second quarter, we began construction on four developments totaling 523,000 sq ft.
While coming out of the pipeline, we transferred four properties totaling 513,000 sq ft 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 2.6 million square feet with a projected cost of approximately $250 million. For 2019, we're raising our projected starts to $200 million. As color commentary, our $148 million 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 four-building, 382,000 sq ft Airways Business Center in Denver for $48 million. Within our value-add component, we closed on the two-building, 142,000 sq ft 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 third quarter close on the 196,000 sq ft Southwest Commerce Center in Las Vegas. These three buildings are under construction, and we will close upon completion with an expected total investment of $130 million. As we plan for the future, we acquired three land parcels. We purchased a 7-acre site in the Miramar area of San Diego, which will accommodate 125,000 sq ft 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 disposition's perspective, we closed on the sale of Altamonte Commerce Center, an eight-building, 186,000 sq ft service center property in Orlando for $14.9 million. Finally, we have funds at risk towards the sale of our 80% interest in University Business Center 130,000 sq ft, a 39,000 sq ft R&D property in Santa Barbara with a projected third 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 second quarter exceeded the upper end of our guidance range at $1.22 per share, compared to second quarter 2018 of $1.16, an increase of 5.2%. Funds from operations, excluding gains on casualties and involuntary conversions, represent an increase of 7.1% and 6.2% for the three months and six 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 second quarter, we issued common stock at an average price of $113.91 per share for gross proceeds of $90 million.
During the six months ended June 30, we issued common stock at an average price of $112.49 per share, providing gross proceeds of $115 million. Just six months into the year, that represents the company's second-largest equity issuance, trailing only the $159 million of gross proceeds raised last year. Also, during the second quarter, we executed interest rate lock agreements for two senior unsecured private placement notes, a ten-year note for $75 million with a fixed interest rate of 3.47%, and a 12-year note for $35 million 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 third quarter of 2019 is estimated to be in the range of $1.23-$1.27 per share and $4.89-$4.97 for the year.
Those midpoints represent an increase of 6.8% and 5.8% compared to the prior year restated respectively, and an increase of $0.04 per share in the midpoint of our prior guidance. Our second quarter results, combined with the leasing assumptions that comprise updated guidance, produce 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 million, increasing operating property acquisitions by $25 million, increasing value-add property acquisitions by $15 million, 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 million and unsecured debt by $30 million.
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, Brent. 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. As a reminder, if you would like to ask a question, it is the star and one on your touch-tone telephone. To accommodate as many questions as possible, we do ask that you limit yourself to two questions. We'll go first to John Guinee with Stifel. Please go ahead.
Great. Thank you very much. A couple 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? 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. Especially as we've seen it in Orlando or where we have existing parks, it's a great opportunity. Charlotte, where we had 11 expansions during the 12-month period. I'm estimating a little bit, it's probably somewhere between a third to 40% of our existing tenants are the ones that take that next building. We may move them, which is what I like about this, that we kind of create the business park or a neighborhood. Someone who moves from building two to building nine within the park. Estimating maybe a third and as high as 40% at any given time. 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 excites us really, the Greenville-Spartanburg area, as you know, probably it's very along I-85, basically halfway between Charlotte and Atlanta. It fits within our footprint. It's a market as that corridor from Atlanta to Charlotte continues to grow. Metro area, about 1.3 million people. It's really transitioned. It was a textile-driven economy back when, and it's moved more auto-related with the BMW plant. Michelin is based there, and then they do some of the suppliers for Volvo down in Charleston.
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 communities. It fits our footprint and our property, really, it's towards the Greenville. The BMW plant is in Spartanburg. It kind of fits our profile as we were chasing the property. It's a brand-new property situated between two freeways up on the hill. It has great visibility, good ingress, egress to two different freeways. When John was pursuing it was 1/3 leased to Trane, and before we could tie it up, really, they had leased the balance of it. We ended up buying a 100% leased building where it started as a value-add opportunity.
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." It's a market that we were pleasantly surprised, about 200 million square feet, which makes it a larger industrial market than Orlando or Tampa or Austin, Texas, for example. 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. We'll go next to the line of Alexander Pernokas from Bank of America.
Great. Hey, guys. Good morning. Congrats on another great quarter. I was hoping you could give me some more detail on the newly acquired land and some updated plans for development starts there.
Okay, sure. Good question. On the land, what we acquired, really kind of three different parcels this quarter. I'll start with San Diego. Excited about it, that it's a seven-acre site. Miramar, we're just on the north side of Miramar Navy base in San Diego. To the south of us, it's all federal land or the Navy base. We're just on the east side of the I-85, or the 805, as they would say. That puts us right across the freeway from La Jolla. A great last- mile location to distribute to a fairly hot, dense, high net worth area like that. 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 a 125,000 sq ft 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 Miramar Navy base. We'll wait a little bit till that lease expires before we begin our construction, but we're getting an attractive yield until the ground lease burns off. 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. Jumping to Houston, I would describe it as it's a market, obviously, we've been in for 20+ years. Brent was based there for years, and we basically kind of know Houston. Kind of nine o'clock to 12 o'clock on the map is where we've operated. With these two properties, Katy is a market where we've developed before. We're building our last building in a park. Buying that site gives us growth opportunity in Katy.
The Northwest is really the oldest and probably arguably the most preferred submarket, most land-constrained. We acquired the site in the Northwest submarket, and then we're active in our land at World Houston. When I take you 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. We have opportunity to create value there going forward. Big picture in Houston, I like that we're developing in the 7%-7.5% type range. Market cap rates are probably high fours to five for brand new product, especially in a park in Houston. There, we'll keep creating value and manage our size. We've also identified a couple 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 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. We love creating the value, have a good team there, don't want to stop that, but we're also mindful of we don't want to get too big in Houston. I think you'll continue seeing our 14% fourth quarter, it's actually projected to drop below 14%, and hopefully next year we'll keep delivering leased buildings that let that percent continue to drift down.
Great. Thanks, guys.
Sure. You're welcome. Thanks, Alex.
Thank you. We'll go next to Alexander Goldfarb from Sandler O'Neill. Please go ahead.
Hey, morning down there. A question on the sustainability of the yields. Marshall, you had spoken initially that you guys always target 150, in reality are more in the 200- 300. If you guys look at apartments, for example, which have a lot of development, no different than industrial, which 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. That's even for some of the REITs. Why do you think you guys have been able to sustain such incredibly wide development yields? 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 up there, I'll say also. 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 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, I said I like where we fit in the food chain. Most of our peers are building much larger buildings than what we build. There's less people building a $12 million shallow- bay, last-mile site. I think that helps us maintain our yield. 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.
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. We've been careful to not chase those too hard and really have only won one or two, but have been able to maintain our yield where we've gotten the pre-lease. It's hard to predict the future. It's not shrinking, and I hope we can continue to maintain it. 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. Knock on wood, hopefully we can stay 200 - 300 basis points.
The other thing that's helped us is, as you've seen kind of the recent platform or larger transaction, cap rates keep getting pushed down. They're both between GLP and IPT. What we were hearing is in the mid four cap rates. Cap rates continue to be compressed. 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 there was 12 months ago.
Okay. Thank you.
Sure. You're welcome.
Thank you. 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 two of the five most active markets in the country. I fully understand you're not playing in the same size range as 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?
Sure. 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 23.5 million square feet under construction in Dallas. It's 42% leased, so pretty good number there. That's a big number, but then when we look back last year, Dallas absorbed over 18 million square feet and over 21 million square feet in 2017. The number I saw that they put out over the last decade, it's been like 158 million square feet absorbed in Dallas.
There's 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 five years, it's just a totally different industry with where demand has been and the average size of tenants growing." Dallas is always a market that makes us nervous when we look at the supply numbers, but then it keeps being absorbed.
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, rule of thumb, it always seems to be about 10% - 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 million in absorption. Again, kind of up about 3 million square feet year-to-date. The good news up north, the vacancy rate where our World Houston is at 6.3%. The overall market's 5.5%, 6.3% in the North sub-market, which is the lowest level since 2012.
In looking at the numbers I saw in Houston, over 80% of the second quarter deliveries were over 200,000 sq ft. That's where a big building for us is by in Houston, by 140,000 sq ft. It's a little bit of a different type of tenant. Up north, there's 5.8 million square feet under construction, which is a good size number, but 40% of that is in three buildings that are each pre-leased, that are kind of 700,000 - 1 million square feet. I would say we are seeing supply go up in our markets. The numbers go up. It's typically been, and Brent chime in, it's typically been on the edge of town, bigger box buildings, less competitive. 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. That quick delivery is really where we've seen the pickup in our demand over the last 12 months, I'd call it.
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 doing this from memory. I like GAAP rent spreads because it captures the pre-rent and the box. We were 17% in 2018, 16% last year, and about that year to date. Looking at the numbers, I'll take those kinds of rent spreads. When you're in the mid to high teens are great. I keep 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 right. Again, I keep thinking of what we're seeing in construction prices and the 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 any given quarter, I would caution you and say it's a mix of what did we have roll in California versus Jackson or where things rolled. 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.
Yeah, Craig, I would just add, and this is Brent. You mentioned Dallas, Houston being among the five most active. I'll also just mention they're two of the largest industrial markets in the country and certainly within our footprint. As we've always talked about sort of the micro level, we have the advantage in the multi-phase developments of having first-hand knowledge of what our activity is on the existing or prior phase. One thing that Marshall and I were looking back on the other day, and you kind of step back and say, "Wow, 28 of our last 29 projects that have rolled into our portfolio have been at 100% leased." We broke that streak with just one small building in the Phoenix area this time.
We're aware of all the factors and take a look at it, but so far, the markets are holding up quite nicely.
No, that's helpful. 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. 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 de-levering further to get ahead of if there is any economic weakness or other slowdown that would allow you to be acquisitive even if the cost of capital moves slightly against you.
I've talked with Marshall. We've gone to about 80/20 now, debt to market cap, and we thought, "Well, where do we want to go?" I promised him we wouldn't go below 0%. With that, it's a good problem to have. It's a high-class problem. We like the cost of each. We've certainly been much more heavy-handed with the equity. You saw we bumped it up to $265 million, which will be by a lot our largest single year. Of course, a lot of that's being capital-driven with opportunities. When you look at the debt issuance this year, what I would encourage you to look at, Craig, is our net debt issuance. What I mean by that is we've had two repayments this year of $120 million, and what we're forecasting to do for the year is issue $190 million.
Net-net, we will have about $70 million of additional new debt for the year, so not that much. 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. We keep the line with plenty of room to cover all our obligations. 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, staying at 80-20 mix in the near term, as long as the price holds in there.
Great. Thanks, guys.
You're welcome.
Thank you. 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 certainly the second time and maybe the third time during this cycle. At some point, there's got to be some sticker shock or some effort to fight back. 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? Are any tenants moving out looking for cheaper space, or is it just, it's not yet?
Good morning, Bill. Good question. You're right. You grabbed my answer before I could speak. 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 is probably pertaining more to new tenants than renewals. We're probably not there in that we wouldn't be in that initial meeting, that sticker shock meeting. Once they go out and survey the market, 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 above market. The market kind of is what it is.
Thankfully, from their perspective, what we're hearing more and more of is that with the right location, and they factor in transportation costs and things like that the rent is a smaller component of their cost. Maybe two trends we're seeing is tenants, and I've used Dallas-Fort Worth as our example, where we went to Fort Worth. 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 locations on different sides of town. 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. That offsets the rent increase.
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 two brokers recently, and they said that conversations used to be rent, TI, lease term, things like that. More and more, people are worried on location of where can they find a labor pool. 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. I think that's getting to be a bigger and bigger driver and kind of is one that we're 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 expanding environment?
Really haven't. We keep our annual kind of trends, a chart. We keep up with what our average lease term is. Every quarter, I think it's hard-coded. I kid. It keeps our staff. It comes in about four to four and a half years. New developments will get a little more term because of the TI. In the downturn and here, it averages that kind of four and a half years is our average term. It makes sense what you're saying. 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.
No, I appreciate it. I thought it was Keith that had the hard-coded numbers and spreadsheets, but-
Maybe it is Brent, though.
Thanks, guys. Appreciate it.
You're welcome.
Thank you. We'll go next to the line of Emmanuel Korchman from Citi. Please go ahead.
Hey, good morning, guys. Marshall, does the cost of capital advantage, does the significant ramp in your stock price change the criteria or sort of acquisition plan that you've given your team to go out there and find properties?
Good morning. Again, good question. We say we try 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, 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 certainly are more competitive for properties than we could have been maybe 18 months ago. Whereas we probably would have gotten knocked out in the first round of some of these opportunities, we're making it into the second or third round.
I would say, really, it does make us more competitive. 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 adds, 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. It does give us a green light to maybe chase some things. I like the idea of the mix of, okay, let's make hay while the sun's shining and the market is strong, and continue to geographically diversify and create opportunities above our cost of capital.
As Brent mentioned too, leaning on the equity side, our balance sheet, our debt's down probably 40% or a little north of that in terms of debt to market cap within the last three years. 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.
Thanks. 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? 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'm understanding. Positive, I thought you said? 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 more so like, you've been focused on these Sunbelt markets.
Right.
If you had widened that focus years ago, and you had been in other markets but in a similar asset type to the one you're in now, would the trends be just as good? If yes, would you consider going into sort of non-Sunb elt markets today?
Okay. Yeah. Good question. Hypothetical, I'm guessing that we could have gone to those markets. What we like about our Sunbelt markets is also the growth. I think we're seeing the opportunities, but a rising tide raises all ships. Just with our data, there's going to be half a million more people in Dallas, Orlando, L.A. than there are today, where the job growth, where the retirement is. We probably would've 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. Again, they get the process. First, we wanted to shrink Houston. I guess if you go back just two or three years, we felt like we needed to reduce, 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 I know they're uber 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." We've been active there. We entered Atlanta, Miami, for example. To kind of push that geographic diversity without getting out of our footprint. Then maybe where you're heading would be the next leg of the stool. If we don't enter any new markets in five years, I'd rather be patient about it. I think that would be okay. I'm sure there are opportunities. Kind of like Greenville this quarter, we're always looking at two or three markets that may or may not make sense.
At some point, Denver's not exactly a Sun belt market, but we've been there for 20 years, and it's got good growth. It has the attributes of a Sunb elt market other than climate, I guess. We'll get there. It'll just be over time, and we'll hopefully do it in a disciplined manner.
Great. Thank you very much, Marshall.
Sure. Thanks, Emman .
Thank you. We'll go next to the line of Vikram Malhotra from Morgan Stanley.
Just first one on just the guidance, the internal FFO 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. 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?
Hi, Vikram. I hope so. As the year's gone, we've performed well. We've been able to raise the same store guidance as we've gone along. You're right, for the first six months, we're toward the higher end. That does basically says that what we're budgeting for the back half of the year would be slightly lower than that. Again, it's just our budget, not necessarily what we hope to accomplish. I would point out that our last six months of the year, we're still budgeting about a 96.5% occupancy. When you're playing in that mid-96 to mid-97 numbers, it's just really challenging to get more aggressive to say, "Hey, we're going to be 97.2% occupied." At some point, you're squeezing in there tight. The same store, I hope it proves conservative, so that's how it rolls up.
Bigger picture, and as a lot of the conversation this morning is our development and value add program really driving a lot of our NAV growth. We've got very solid same-store growth, solid rent growth, and certainly think that will continue to pull in the right direction. We'll see how it pans out. We increased the bottom end and kind of kept the top end the same, which raised the midpoint slightly.
Okay. That's helpful. 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 sub-market in terms of mix between acquisitions and development, and if there's a near-term wish list in terms of other sub-markets, 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 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 has often meant someone else's new building that we acquired before it was completely leased. We like the state-of-the-art buildings, and if we take on the leasing risk but not the construction risk. We like in that sub-market that we're near Greenville, and nothing against Spartanburg, but we're kind of where the higher net worth population growth serving the metro area, the consumer, really fits what our buildings do a little better than serving the BMW plant, for example. 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, Nashville is 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. That's one we've 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, too. I always think at least we owe it to you to always be looking at a market or two, and if we can find the right opportunity, we'll enter it. 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 expensive, but it's a great market. We'll just be patient till we can find the right opportunity there or in Orange County, for example.
Okay, great. Thank you.
You're welcome.
Thank you. 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?
At some point, you just kind of run out of time. Third 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% third quarter, 10% fourth quarter. A couple of our markets, not many, but like you run into weather. You could, as it gets later into the year, pending, we're not looking at nothing right now in Denver, but Charlotte, we could also run into some weather issues. We could possibly go north of $200 million. A lot of that, too, also as you would imagine, every city permit department, whether it's industrial, multi-family, or hotels, they are all busy. It's taking longer and longer to get permits pulled, and plans approved and things like that. There's some upside for 2019.
We certainly have the capacity to do it. What I really like about our model as 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. If we do it'll be based on demand versus corporate saying, "Hey, it's a good idea to go build that next building." If you see us beating $200 million, it's a further sign of the market's even stronger. Then hopefully what we don't get started this year will roll right into 2020. If the economy stays there, and we can hopefully maintain the pace that we've set.
A few years ago, we would've told you $100 million in starts was kind of our typical year, and I'm pleasantly surprised that we've gotten to $200 million. $140 million was our record last year. To get to $200 million, and maybe we'll beat it, and then hopefully we'll have a good opportunity as we say look to 2020 now that we're all the way into July.
Great. Thanks very much.
You're welcome.
Thank you. We'll take our next question from Jon Petersen with Jefferies. Please go ahead.
Oh, 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. I guess on top of the $14 million 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 there's some confidentiality in our purchase and sale agreement, so I want to be sensitive to the seller, but I would say it's kind of probably typical TI. It's one tenant is in, it's Trane air conditioning. Then there's another tenant that's moving into 100,000 of 150,000 sq ft. It's both of them, seven-year leases. The second one got signed really as we were under an LOI or maybe even as we got one purchase and sale agreement. It'll take a little bit to get the TI done. The tenant's also getting some incentives, as I understand it, from the State of South Carolina, the City of Greenville.
That's why it'll take a little bit of time to get their build-out done, and they'll occupy probably late fourth quarter, the first part of next year. TI is probably, per year over the term of the lease, in line with company averages.
Okay. All right. It's not like some significant redevelopment type thing happening.
No, nothing. It's 100,000 sq ft tenant. It's a brand-new building. They've got to add the office, the restrooms, the lighting, all the dock equipment, all that.
Okay. All right. 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. It's like a total of about $21 million of investment expected there. Just kind of 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.
Yeah. Good question. Interstate Commons is the project. Four buildings, we acquired two of them in the late 1990s and then built two more buildings since then. It was late 2016, I believe. Arizona DOT was doing a freeway widening, acquired two of our four buildings, and we had kind of stopped. Naturally, we knew it was coming. It didn't happen overnight, but we stopped our CapEx for a bit before ADOT took it back. Now they've finished the freeway widening, so the access is better and the visibility is better. They didn't tear our two buildings down. The good news is we had 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've closed by now, just working through the state process.
We're buying them back for about a little over $9 million, which is a little bit less than we sold them for, thankfully. We're buying them back two years later for a little bit lower price, but then we'll take a couple more million to get them. It needs a new roof, parking lot. We'll rehab them and get to about a $12 million investment. It's just below a development-type deal. What we're pro forming, 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 cost would kill your return. We're optimistic, and I'm doing it from memory. I think we end up in the high sixes, is about where we pro forma there, and then probably completed, it would be a five. Southwest side of town, so it's a good, stable industrial market.
It's not the East Valley that we like better, Southwest Valley would probably be high fours to five type return. Good yield over value once we can get the buildings back and get to work on them, which we think will be hopefully be late third quarter.
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 there.
It's really a small sample size in Atlanta. It's not a big market for us. We like the market, not a big market, and most of what we have there was brand new value add. In terms of re-leasing, it was a lease in first quarter and then a lease in the second quarter. One was a 12-year lease that expired above market, and one was, I believe, a short-term lease that went to a long-term lease. On both of those, we rolled backwards. I'd say it's not indicative of the market, it's just a uniquely small sample size for us. 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 one or two leases.
You can end up with some odd-looking numbers like what we had.
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, depending on the 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%-5% in most of our markets, and probably even sometimes higher than that in the California markets.
All right. Thank you.
Sure. You're welcome.
Thank you. We'll take our next question from the line of Eric Anderson 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 the pricing that you're reflecting those deals are getting reflected in smaller transactions that you're looking at?
Good question, Eric. Thank you. I apologize. I think so. 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've 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+ year old service center in Orlando this past quarter. I want to say that was like a low sevens. I'm doing it from memory. Low 7 type cap rate. We've got funds at risk on a 30-year-old R&D/office building in Santa Barbara.
Last year in Phoenix, we sold a 50+ year old distribution on the southwest side of town in the fives, which is probably half the cap rate we bought it for 20 years earlier. If I'm answering your question correctly.
Yes, it feels like everybody would rather own the class A product in the top five distribution markets. Given the amount of capital, and there's even rent growth in these types of assets, we've seen it gets a little tricky. It's an attractive time to issue equity, but it's also an attractive time to dispose and kind of keep cleaning from the bottom of our portfolio, which is something I think we should always be doing.
Well said. I appreciate that color. Could you actually just comment on the cap rate, or the yield you expect to receive on the Denver portfolio acquisition?
If I can go within a range without upsetting our seller, I'm trying to dig up my memory, like a 5.1- 5.5 type yield. It's 11 tenants, 95% leased, well-located, airport sub-market, really between downtown and the airport, closer to the airport, and in the low to mid fives.
That's helpful. The final question. I just noticed in the way you guys disclose your leasing 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 three years ago, five years ago, seven years ago?
I'd need to, honestly, dig a little bit more. I'm guessing that most of them were probably that three to five-year time period. The good news is we see great re-leasing spreads in California. You're almost hoping I hate to hope leases expire, but there it's an exception. They weren't abnormally long in the Bay Area and L.A. Those are the lowest cap rates we see 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. We'll take our next question from Rich Anderson with SMBC Nikko.
Thanks. I had a feeling I was next. Just a question on sort of the performance, how might I phrase it, 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. Yeah, 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, 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 million at our cost at a high 7% yield. If you put that at a mid 4% - 5%, we've had somewhere in a 60%-65% return on those assets.
Certainly, I think 2020 will be pushed by some internal growth, but I think you're spot on that value add and development will be a big push in pushing that FFO growth up.
Okay, great. Second question. Lease termination income up over $1 million for this year now. That will be the high watermark for you guys for at least going back this last five years or so. I imagine you'll say these are company-specific events, 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 Segrest and our team have brought a good job there on the East Coast. It really represents two big termination fees this past quarter of $525,000 in Tampa and a $225,000 in Charlotte. In both those cases, we re-let the space. In one case in Charlotte, each tenant on each side moved in. 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. That has caused the trend to be heavy this year. We're guiding to just north of $1 million. The last two years, that was closer to $300,000 and $450,000 going back to 2017. It's just more opportunity- driven, not tenant-workout-type-driven .
Good execution on the team to put some extra money in our pocket, re-lease the space, and actually do it at higher rents.
All right. Makes sense. Thanks very much. Appreciate it.
You're welcome.
Thank you. 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, good question. Yeah, a little of both. I think I'm glad we got the acquisition we did in Denver. It's probably atypical for us to be competitive, and usually we'll make it into the rounds. There's usually three rounds, with the last one being a buyer interview, and someone drops their bid. We're looking at a couple of opportunities now in Denver. One's on-market, one's off-market. I guess probably look to value add and development will be our two. Well, we've built in Denver before, developed there before, will probably be where we grow. Knock on wood, as soon as I say that, we'll end up acquiring something. I would think given like where we are in other markets, value add and development will probably be our path to grow in Denver and in most of our markets.
If we can find it off-market, all the better.
Sounds good. Thanks, guys.
Sure. You're welcome.
Thank you. 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. 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.