Good morning, welcome to the EastGroup Properties third quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. We do ask that you keep your questions to a maximum of two, please, for today's conference. Now it is my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead.
Thank you. Good morning. Thanks for calling in for our third quarter 2017 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. Since we'll be making forward-looking statements, we ask that you listen to the following disclaimer.
The discussion today involves forward-looking statements. Please refer to the safe harbor language included in the company's news release announcing results for this quarter that describes certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected. The content of this conference call contains time-sensitive information that's subject to the safe harbor statement included in the news release is accurate only as of the date of this call. The company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which can be found on the company's website at www.eastgroup.net.
Okay. Thanks, Tina. The third quarter saw a continuation of EastGroup's positive trends. Funds From Operations was at the high end of our guidance, achieving a 3.8% increase compared to third quarter last year, actually up 5.9% when excluding land sales. This marks 18 consecutive quarters of higher FFO per share as compared to prior year quarter. The strength of the industrial market is further demonstrated through a number of our metrics, such as another solid quarter of occupancy, reaching a record quarter-end percent leased, positive same-store NOI results, and quarterly high records for re-leasing spreads. In summary, our increasing FFO and dividend prove the success we're seeing in all three prongs of our long-term growth strategy. At quarter end, we were 97.4% leased and 95.6% occupied.
This is our highest percent leased in over a decade. As market commentary, we've never maintained this high level of occupancy for this long. Drilling into specific markets at September 30, a number of our major markets, including Orlando, Jacksonville, Charlotte, Phoenix, San Francisco, and Los Angeles, were each 98% leased or better. Houston, our largest market with over 5.5 million square feet, down from over 6.8 million square feet in first quarter of 2016, was 94.1% leased. Supply, specifically shallow bay industrial supply, remains in check in our markets. In this cycle, the supply has been predominantly institutionally controlled. As a result, deliveries remain disciplined. As a byproduct of institutional control, it's largely focused on big box construction. In fact, a CBRE study showed shallow bay deliveries remain below pre-recession levels.
Rent spreads continued their positive trend for the 18th consecutive quarter on a GAAP basis, rising approximately 21%, which represents a quarterly high record. Overall, with roughly 95% occupancy, strengthening markets, and disciplined new supply, we continue seeing upward pressure on rents. third quarter same property NOI rose on a GAAP basis by 3.1%. Average quarterly occupancy was 95.2%, which was down 60 basis points from third quarter 2016. Also, similar to last quarter, there was 180 basis point margin between percent leased to occupied. This is an atypically large margin. It's driven by several lease signings where build-out and permitting are underway. While quarterly occupancy rose 70 basis points sequentially, we're still turning a number of signed leases into occupying tenants. It will take a few months to begin seeing the full impact of these results.
We expect same-property results to remain positive going forward, though increases will continue to reflect rent growth. As with mid-'90s occupancy, we view ourselves as fully occupied. Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk-adjusted path to create value. We believe we effectively manage development risk as the majority of our developments are additional phases within an existing park. The average investment for our business distribution buildings is around $10 million. We develop in numerous states, cities, and submarkets. Finally, we target 150 basis point minimum projected investment return premium over market cap rates. At September 30, the projected return on our development pipeline was 8%, whereas we estimate the market cap rate for completed properties to be in the low to mid-fives. Further, we're continuing to see cap rate compression in the majority of our markets.
During third quarter in our development pipeline, we began construction in Orlando on the 104,000 square foot Horizon 10 building. On the other end of the pipeline, we transferred two properties totaling 278,000 square feet into the portfolio, each 100% leased. As of September 30, our development pipeline consisted of 13 projects in nine cities, containing 1.7 million square feet, with a projected cost of $138 million, which is 43% leased. Finally, during the quarter, we acquired a 40-acre development site in San Antonio, with plans to ultimately develop five buildings totaling approximately 620,000 square feet. For 2017, we project development starts of over $100 million and 1.3 million square feet. What's gratifying is our ability to reach this level again in 2017 with no Houston starts.
Looking ahead to 2018, I'm optimistic that, market permitting, you'll see us continuing development within our successful parks and markets like Charlotte, Dallas, Orlando, and San Antonio. In addition, we restarted Phoenix development mid-year this year, and we're hoping to be able to restart Houston development. The final and third leg of this development stool is we'll have active developments in new markets such as Miami, Austin, and Atlanta next year. Our asset recycling is an ongoing process. Year-to-date, we've sold $39 million in assets with a couple of other opportunities we're evaluating in pricing. Over the past few quarters, as we've recycled capital, the portion of our NOI coming from Houston declined while the quality of our Houston portfolio rose. Specifically, in early 2016, Houston represented over 20% of our NOI, with three properties still under development.
Today, Houston represents 15% of 2017's projected NOI and will continue declining as we move into 2018. Brent will now review a variety of financial topics, including our updated guidance.
Good morning. We continue to see positive results due to the strong performance of our operating portfolio. FFO per share for the quarter exceeded the midpoint of our guidance at $1.08 compared to $1.04 the same quarter last year, an increase of 3.8%, and as Marshall mentioned, represents a 5.9% increase excluding gain on land sales. FFO per share for the nine months ended September 30 was $3.12 per share as compared to $2.94 last year, an increase of 6.1%. Operations have benefited from the continual conversion of well-leased development properties into the operating portfolio, an increase in the same-property net operating income, and acquisitions. Debt to total market capitalization was 26.2% at September 30. For the quarter, the interest and fixed charge coverage ratios rose to 5.3 times, and debt to adjusted EBITDA was 5.9. The adjusted debt to pro forma EBITDA ratio was 5.4 for the quarter.
Floating-rate bank debt amounted to only 3.3% of total market capitalization at quarter end. From a capital perspective, in the third quarter, we issued $10 million of common stock under our continuous equity program at an average price of $85.82 per share. In August, we retired a $45 million mortgage loan with an interest rate of 5.6%. Over the past five years, our secured debt, collateralized by specific properties, has decreased by 67%. In September, we executed a commitment letter for $60 million of unsecured private placement debt with a seven-year term and a fixed rate of 3.46%. We anticipate closing this transaction in mid-December. In September, we paid our 151st consecutive quarterly cash distribution to common stockholders. The dividend of $0.64 per share represented a 3.2% increase and equates to an annualized dividend of $2.56 per share. Our FFO payout ratio was 59% for the quarter.
Rental income from properties amounts to almost all our revenues, our dividend continues to be 100% covered by property net operating income. FFO guidance for the fourth quarter is estimated to be in the range of $1.10 to $1.12 per share and $4.22 to $4.24 for the year. Those midpoints represent an increase of 2.8% and 5.2% compared to the prior year respectively. Guidance changes from previous estimates include an increase in same property NOI, offset by reducing potential acquisitions by $15 million and projecting an additional $20 million of common stock issuances, $10 million of which we executed in the third quarter. In summary, our financial metrics and results continue to be some of the best we have experienced. Marshall will make some final comments.
Thanks, Brent. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and geographically diversifying our portfolio. We're also committed to maintaining a strong, healthy balance sheet with improving metrics, as evidenced by our equity issuance year-to-date. Overall, we're excited about 2017 and the pathway it's creating into 2018. From a holistic standpoint, our expectations are for another solid year. I use holistically as I mean it in two ways. First, I like the current industrial market, I like where we fit in the food chain, and the consistent steady value we're creating each quarter. Secondly, I use it in terms of people. We made a number of people moves earlier in the year. We're happy with our team and how everyone has settled into their new role.
This is playing positively into our results, we'll now take your questions. Thank you.
At this time, if you would like to ask a question, please press star and one on your touchtone phone. You may withdraw your question at any time by pressing the pound key. We would also like to ask that you keep it to two questions per queue, please. Once again, to ask a question, please press star and one on your touchtone phone. Our first question comes from Jamie Feldman from Bank of America. Please go ahead.
Great. Thank you, and good morning.
Morning.
Marshall, you gave some color into 2018, and your comment on $100 million of development starts in 2017, ex Houston. Do you think you're on track to actually have more starts in 2018 at this point than in 2017?
Good question, and thanks. Market permitting, which we like the market better today than we probably did 90 days ago, in fact. With Miami coming online and just a little bit higher cost per square foot, higher land costs, I think we could. We'll certainly roll out next quarter our detailed starts for 2018. I'm optimistic based on early indications that we'll beat our usual $100 million kind of run rate. We've picked up Phoenix kind of the back half of this year in terms of restarting development, and we're actually looking at Houston again, which is the first time in a few years of being able to have a start there. We'll be more detailed next call, but I'm hopeful we'll be $100 million, and that assumes the market hangs in there over the next year.
Okay. Sticking with Houston and kind of the outlook for next year. If you think about the drag you had this year from Houston, how does that drag look next year? Can you talk about, I mean, you still had a pretty negative print this quarter for Houston. Can you talk about what drove that and how you're getting towards the end of that pain, or if you're getting towards the end of that pain?
Sure. I'll start, and then Brent, chime in, if you would. We had expected move-outs this year. We actually thought our occupancy would drop into the high 80s. Last call, we bumped that up to about 90%. Early third quarter, kind of maybe internally, I'll speak internally and externally. We knew our occupancy was going down and that happened. Thankfully, we stopped at about 90%, which is where we ended third quarter. Thankfully, if you look at the percent leased, it's back over 94%. We're ahead of where we expected to be as a percent leased, and then maybe not quite a month later since quarter end, we're over 95% leased. We've seen a pickup in Houston activity. We think we're still early in on the impacts from Harvey. We've seen home builders. We signed a lease with Lumber Liquidators.
We've seen The Home Depot and Lowe's be active in the market. That in, I guess, as we've thought about it, the numbers we've seen, 100,000 homes were damaged, about 16,000 multifamily units. Where Camden Property Trust and Mid-America Apartment Communities and some of the multifamily and mini storage REITs or self-storage REITs saw an immediate impact will be once the rebuilding starts, once the adjusters and the insurance is settled. We're seeing a little bit of that activity, but we're optimistic more on Houston than we've been in several years. The other thing we like on the internal perspective of Houston, for the last couple of years, I think 2016 and 2017, when you think about it, our expirations, I'll use round numbers, have been, call it 18%, and our retention ratio has flipped, where we've lost two-thirds of our tenants and kept about a third.
That's 12% rolling each year or vacating each of the last couple of years in Houston. Looking from third quarter to the end of 2018, that number drops to about 7.5%, down from 18%. We believe that ratio may normalize post-Harvey, and Houston was improving pre-Harvey as well. That would only be 5% versus 12% over the last couple of years. Our exposure to pure just vacates upon lease expiration is way down in Houston over the next 15 months. We think the market has been improving and may pick up post-Harvey, post-insurance.
Yeah. The only thing I would add to that, I think Marshall well said. We're pleased looking back at the first quarter, we had projected Houston lease percentage for third quarter, and we had been signaling we thought this would be the low point. We started at 88%, then we were 87%, then we adjusted to 90%, and then we've actually come in at 94%. Kevin and the team there has done a great job. I'd point out we've signed 39 leases for almost 1 million sq ft year to date in Houston. That was compared to the 25 leases this time last year. Then we've signed an additional 370,000 sq ft of short-term leases. The activity's there.
The indicators are still there, as Marshall said, with just over 7% roll over the next 15 months, we feel at least good Houston not being a headwind for us. If nothing, even if it were just stabilized to even, it would be a positive for us. As Marshall said, we feel as good about the market there as we have in a while.
Okay. Great, guys. That's very helpful. Thanks.
You're welcome.
Our next question comes from Blaine Heck from Wells Fargo. Please go ahead.
Hey, good morning. Marshall, can you just comment on development yields a little bit more? I think we've been hearing a lot about increasing costs on the construction side, which have generally brought down yields recently. When I look at your development pipeline, your yield increased a little bit this quarter to 8.2% on projects under construction, and that's actually quite a bit higher than the 7.5% yield on the properties you've delivered thus far this year and the properties in lease-up. Maybe you can give a little bit of color on what's driving the higher yields. Is it just market mix, or is there something else going on?
Good analysis, probably market mix. I think you hit on it. A little bit. At least in my mental kind of framework, I've been thinking 7.5% to 8%, is where we typically, most of our projects seem to settle in that range. We have been saying, thankfully the guys that are delivering these buildings have hung on to those yields longer than I probably would've expected, and that we've chewed through the inexpensive land that we acquired early in the cycle. When we buy land now, we typically try it. Our goal is to put it into production immediately because it's more expensive than it was several years ago. You're right, we were talking just the other day, we've seen construction costs rise.
We were nervous in Texas, as I mentioned Hurricane Harvey earlier with the rebuilding there, but we're also seeing that in the eastern region as well, talking to John Coleman. Florida and Charlotte, where we're getting bids in on kind of that next round of developments that will be going there. There's a labor shortage, and that's driving up construction costs. Ultimately, it's frustrating for us on the development side. It'll push our yields down a little bit, but it's also got to push up everybody else's rents in time that for people to continue developing, that construction costs are rising. We had been saying at the pace of inflation, but they're probably up into mid to higher single digits. That's pretty real time what we've seen on our last few shell bids that we've seen out there. Our absolute yield will probably come down.
Our 150 basis point margin that we target, we've been beating that handily. We've also seen, really in the last 90 days, cap rate compression, not so much in the major markets, but cap rate compression even in kind of those markets number 10 to 25. As we've chased acquisitions, we were a slower quarter transactionally than we intended to be, and we even pulled the $15 million. That was one of the things that actually hurt us on our earnings forecast, as we were hoping to be able to place a little more capital, but we came in second or third on any number of bids kind of over the summer, that cap rates continued to compress, and the pricing actually exceeded where the broker guidance was in a good handful of transactions.
Great. That's helpful. Can you talk a little bit about the San Antonio market? It's about 8% of your rental revenue at this point, but you've got four projects underway there, and a land bank that I think is second only to Houston. What's giving you confidence in that market, and how big do you think we could see it grow to as a percentage of the overall portfolio?
We like San Antonio, obviously, as the numbers show, a lot. Typically, we've been building like Alamo Ridge is northwest side of the city, and Eisenhower is an infill site in the northeast kind of quadrant of the city. They've been two non-competing sub-markets, we bought the land as in that northeast, maybe a little bit further out, far northeast, as they call it. It's kind of quietly the seventh largest city in the country. I'll kid our vice president that handles San Antonio, usually when we have the conferences will send me an email or when we're talking on the phone, don't mention it because it's not as competitive as say in Atlanta or Dallas, where everybody in the world is there.
We feel like we've been quietly able to create a lot of value there over time, and it's a good solid market. Tourism, military, insurance, USAA is based there. It's a really stable economy and growing economy. Maybe within Texas, at least in my mind, I've always thought you read, certainly with us, that we get so much focus on Houston, a lot on Dallas, Austin, that San Antonio, it's a large city that gets overlooked, a little bit like Charlotte, by most people in other parts in the country. Size-wise, we would probably stop at, coming up with absolute numbers, 10%-11% is probably about as much as you want to be in about any market. We have a traffic light that we've internally created for each market based on the size of the population, the size of the industrial market. Good catch.
We've capitalized on the opportunities we've seen there in San Antonio, don't want to get too much larger. We'll be mindful. Every market has its day. At some point, if San Antonio has a hiccup, we don't want to be overexposed within our portfolio.
Very helpful. Thanks, guys.
You're welcome.
Our next question comes from Manny Korchman with Citi. Please go ahead.
Hey, good morning, everyone. Marshall, just to sort of think about any new leasing or new developments you're doing, especially in sort of Houston with the rebuilding efforts, has there been any desire from the tenants to change sort of lease terms or desires from you to change the lease terms, especially to make them shorter, sort of looking at how long that recovery might last or the rebuilding efforts might last, sort of matching the term to how long they expect to be there?
Yeah. Maybe we're early enough. I would say kind of on the recovery. It's been, what? Maybe 6 weeks post-Hurricane Harvey, around Labor Day. Early in, we have signed a couple of shorter-term leases. One with the post office came and took a big block of space up by the George Bush Intercontinental Airport. That's happened before, and that's measured in months. We've signed a couple of shorter terms, but by and large, I don't see the market having shifted to shorter-term leases or anything like that. Lumber Liquidators was another lease, but that was a normal-term lease that came in, and that's probably a lot from just rebuilding post-Hurricane Harvey. It's hard to know which ones are exactly a reaction of Hurricane Harvey and which ones may have happened anyway.
We have signed a couple of short-term leases, but I don't believe those are Hurricane Harvey-related, or it's hard to really parse it apart that much. We certainly think about that. Oh, go ahead.
No, please.
I would say we certainly think about that as we kind of evaluate new development opportunities. If we had a lot of month-to-month or 6-month leases in there, that would make us, if it helps kind of your thinking about us, we'd be a little more hesitant to step on the gas with a new development if a lot of our occupants. That's kind of one of the things we've thought about. How much of the pickup is that 1-year lease or 6-month lease versus, hey, we're going to break ground, we're 100%, if a lot of it is still on short-term leases.
Are you seeing a lot of others sort of try to target that same type of activity, whether by trying to grab land or trying to get buildings out of the ground in the near term to do sort of the same as what you're thinking about?
Not just yet. Maybe everything that's been planned, about half of the development in Houston is on that southeast side, kind of port-related, I guess, as we look at things. Occupancy tightened up. It's 5.4% in the market and the north sub-market, where World Houston is, it's come down three quarters in a row. We've seen a little bit of pickup in supply, but it's about 1% of the overall market in terms of new supply. It's still not that much there. I think certainly in the northwest, which is about half the market vacancy, people have focused a little more supply there. By and large, it's been port-related and institutionally controlled. Thankfully for us, so much of what people build are 300,000-foot buildings and up, that it really doesn't compete with the same tenants.
We see some, but for the most part, most of the new development isn't what we're building.
I would just add that, yeah, we're seeing a little bit of spec development pick up northwest Houston, but that's generally with a long-term view. You don't really get into that just thinking, "Hey, let's sign a few tenants that might need a short-term type requirement related to a rebuilding or something." I think that may have spurred some of it to move along a little quicker, but I think there's a general cautious optimism within the market that things are trending in the right direction. It was good, I would point out, to see 1.2 million square feet of positive net absorption in the north sub-market, which is where World Houston's located, and which has been one of the softer sub-markets. It's good to see that take a step forward.
Brent, maybe a quick one for you, just as we think about funding for the development next year, especially if you maintain levels or even ramp them. Is the ATM still sort of the right way to think about that?
Yeah. Certainly at the current pricing, that's certainly available to us. Really both avenues for capital are there. Yeah, at the pricing right now, it's certainly something that we would look at to continue to keep our debt metrics low by doing that. Really our bottleneck right now is more finding those opportunities, because obviously we feel pretty comfortable about the access to capital right now currently, thankfully.
Great. Thanks, guys.
You're welcome.
Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Good morning. Just the first question on Houston. You guys mentioned there was some short-term leasing that you guys did. It sounded like that was subsequent to Harvey. As far as just getting expectations of the street versus what you're seeing for demand, should we expect, like, when you guys report fourth quarter, we're gonna see material pickup in Houston as far as your commentary and some of the stats in the supplement? Or your view, Marshall, is that by the time the insurance proceeds take a while, that we're probably really not gonna see any incremental movement in the Houston stats or the commentary until later next year?
Maybe my answer is yes. As I explain it, in my mind, there's certain property types, being like the multifamily, where your home was damaged, your apartment unit was damaged, and you've got to go find somewhere to live, and that almost happens literally overnight or within a week. We've seen Camden and some of the other multifamily operators pick up. We've picked up, and if you look at the end of September, we were 90% occupied. We were 400 basis point difference, which is a large one in any one of our markets between leased and occupied. Now we're north of 95% leased in Houston. That income is rolling in. I think fourth quarter, I'm an optimist and it's a crystal ball. I think fourth quarter will be ahead of where third quarter was.
I think rather than one large spike and we're full, I think it will play out sequentially over the next several quarters. I think Houston will be better in fourth quarter and then hopefully better in first and second quarter of next year as well, assuming the market doesn't have some kind of global shock or things like that. That's what has us kind of tinkering with the idea of, is next year a good opportunity or does the window open for us to develop again in Houston, just like Phoenix did earlier this year?
Okay. The next question is sort of, can you just talk a little bit about the latest in Atlanta? You guys made an entry there. What are you seeing for more opportunities? It sounds like, obviously, outright acquisitions sound pricey. Maybe there's some stuff that you find that fits your underwriting. Can you just talk about it, if it's going to be more acquisition or development? Are there other markets that you guys are looking at, or Atlanta was sort of the last missing piece that you wanted to enter?
Okay. Good question. We like Atlanta. We are spending more time kind of turning stones over, looking at things. A couple of stats we like about Atlanta, for the last four years, they've absorbed over 17 million square feet. This year, it was 17 million square feet by the end of third quarter. Atlanta has been a strong distribution market. Rents were up, and these are kind of the CBRE stats, 9% year-to-year. We're happy with what we bought there earlier in the year. We do have the site that came with our Broadmoor acquisition, we'll go with the plan being to break ground in first quarter next year. We'll have our first Atlanta development. Our plans are to grow there. We like the market. Continue to look for opportunities.
I mentioned one of the ones that we lost out on a good handful of assets, one of them being, really, I guess it was last week. We were in the second round of an acquisition, in a sub-market that we're already in, pricing is going to come in below. It hasn't closed, our expectations as we underwrote it, well below a 5% yield. Something that's leased, it is just hard. Everybody has a checkbook, those are hard bids to win. We like the approach where either we develop it or some value-add creation. If you remember last year, we kind of called them the triplets, that Brent bought the Fort Worth project, Mike Sacco got the one in Las Vegas, where they were newer projects, we bought one more in Weston, in South Florida, that were partially leased but not complete.
We like those assets long-term, we're earning yields that are above core assets. Somewhere in Atlanta. Probably our best avenue in almost all of our markets are either to develop or buy an asset we like and finish leasing it up, because just to buy a core asset, not that we wouldn't, it's just awfully competitive. When we talk to brokers, the phrases we hear, there's a wall of capital out there that likes industrial. Everybody, thankfully, it shows up in our stock price as well, people like industrial product these days, people are underwriting higher rent growth on their ARGUS models. With that, they're willing to accept lower initial cap rates. We don't disagree, we're trying to be a disciplined buyer in a tough market to win as a disciplined buyer, it feels like.
Okay. Any other markets?
Oh, sorry. Yeah. Nothing in the near term. There's some. We're turning over stones and looking, but my personal preference, I'd rather us be larger in the major markets in California, if we can find those opportunities. In Denver, that we've been in. There's any number of markets. Atlanta is a good market. We don't feel compelled to go to a new market for growth. We see pretty good opportunities within our existing markets, and there's certainly less risk as we learn that we know those markets well.
Thank you.
You're welcome.
Our next question comes from Craig Mailman with KeyBank. Please go ahead.
Hey, guys. Maybe just want to hit on the lease roll here, kind of two questions. I guess first, Tampa looks like it's about 25% of the roll for next year, and you have some larger tenants there. Just curious what your viewpoint is there on retention and maybe what you think the mark to market on that aspect of the lease is. Then just more broadly, what do you think the mark to market on the 2018 roll is close to on a cash basis?
Oh, okay. Maybe a two-part answer. You added cash in at the end, I'll channel my inner Keith McKey and say we like the GAAP numbers because you capture the, we think, free rent matters and things like that. Year to date, Tampa, which is probably a better way to measure year to date than quarterly, but we've been happy with Tampa. We're 9.5% cash and north of 25% on a GAAP basis in Tampa. We do have a fair amount of roll there. No one that has us abnormally worried. With the kind of rent growth we've seen in Tampa, we're thankful for the rent rolls that we have there, that it gives us the opportunity to push rent there. It's hard to estimate very specifically what those numbers will be, mainly because we kidded and said we're just not very good at it.
I think we should be able to push rents in Tampa, thankfully, we've been able to for the first nine months of the year in Tampa, as well as within the portfolio. Florida has been another overall just strong market for us. We're optimistic as we think about 2018. The 17% GAAP increases through the first nine months of the year. We'll get the full year impact of those next year, as well as, kind of as you pointed out, Tampa being one of those markets where rents are going to roll up. It's just how much, assuming the market stays where it is today.
I guess more specifically, the Iron Mountain and Mattress Firm leases. It's a little more than a third of that. Have you had any indications kind of when do those roll?
Nothing specific. Again, Iron Mountain usually historically as a company has Because they put so much capital in. A lot of times they'll have in-rack sprinkler systems and things. That Iron Mountain usually is a pretty sticky tenant. And Mattress Firm, we have them in a number of locations, but I'm not aware. That was a building that they took the full building as John Coleman finished it. Feel pretty comfortable that that fits their needs. I know they were acquired within the last year. Early to say, but not aware of anything that has us abnormally concerned about either one of those two tenants.
That's helpful. I guess just second question, big picture. As you guys, the lease percentage is in good shape. You're kind of getting through the Houston drag. I'm just trying to put the components together with escalators, where you are on a rent spread basis. High level, I know you guys aren't giving 2018 guidance, but it looks like, 3.5%-4% wouldn't be out of the question for cash same store next year. I'm just curious, what would be the headwinds that would limit, a decent acceleration relative to 2017?
Brent, chime in. I like your optimism, I share it. If you said, just answering your question, what would be the headwinds would be some economic shock that would turn us backwards. I'm trying to think of where within same store, one of our, kind of stickier vacancies, we have 50,000 sq ft in Santa Barbara that's been vacant since April, and that's in an R&D building. That's been a little bit harder to lease. It makes me appreciate, single story industrial buildings having a two-story R&D building in Santa Barbara. That's been a more persistent vacancy. We worry less about oversupply just because we struggle so much to find good sites, we see construction prices rising as we mentioned earlier. Brent, what am I missing in terms of headwinds?
We feel good about what I said if Houston could even just moderate going into next year, that would be less of a drag overall. We've seen improvement in Phoenix, although some of that is shown here toward the end of the year. Our California rent pushes have been great. In the same store pool next year, you'll see some of those value-add assets that Marshall referred to, Park North, Jones, some of those. They've rolled into the portfolio, because we had bought them well after they had been developed, they entered the portfolio a little quicker than a typical development would, you'll see those add to the bottom line. We feel good about the building blocks that are there. You look at the rents in the other markets. The headwind, when you really get down to it, would be leasing.
We feel good about it now, if any particular market stumbled or had an issue, that would certainly be cause for concern. Apart from that, we feel fairly optimistic going into next year about maintaining the momentum and hopefully having maybe a little less drag.
Maybe the good news is I feel like I didn't answer your question very well as I thought about it. Maybe we're optimists too. I'm hopeful I'm as excited in 90 days, we think next year should be another positive year for us, maybe that's why I did such a bad job answering your question as to what our headwinds will be.
No, it wasn't a bad answer. I guess I'm just thinking kind of bigger picture. The stock's done very well this year, I think part of that is an expectation acceleration. I just want to make sure I'm kind of thinking about it the right way. The building blocks up there, that 3.5%-4%, I'm just kind of threw out there. Without giving guidance, is that kind of at least a lower bound of that, rational way to think given kind of the burn-off of some of the headwinds?
We'll tell you in about six months how that looks, Craig. How's that?
Yeah.
Just because we're rolling up our original budget now, I honestly have not gotten that granular to see it. I think you're right that the pieces are all there, that it should be a good year. Until we roll it up and get our arms around it, I hate to mistake and be wrong.
Fair enough. Thanks, guys.
Sure. You're welcome.
Our next question comes from Robert Simone with Evercore ISI. Please go ahead.
Hey, guys. Morning. Thanks for taking the question. Just a quick one on the land bank. You guys have about, it looks like about a million and a half of potential density in Houston. I was just wondering if Harvey and the flooding had any implications for your land holdings, given that you're talking about kind of restarting development there. Just in general with your land bank, how do you feel about it? What are you kind of seeing on the ground in terms of your ability to procure land? Just trying to get your feelings as it relates to shallow bay industrial. Thanks.
Okay. Houston is the first one. We went in, are in the process now post-Harvey, kind of not knowing exactly, and still, I think it'll be fascinating to watch the impact of Harvey kind of play out over the next couple of quarters and what that means to us and kind of means within Houston. We went in and are pulling permits for four buildings in three of our different parks, really with the thought being with all the rebuilding, there's going to be a long line for permits in Harris County, and let's try to beat the rush into the city and have those ready to go, because we think timing and delivery and having your contractors and everything lined up as much as you can will be very valuable if and when that kind of spike or as the demand kind of flows in.
We have a good chance, we're hopeful to kind of work our way through our Houston land bank. I like that it's separated into several different parks. Most of it is at World Houston out by the airport. We also have land at 10 West Crossing, our West Road. It's spread out, kind of within Katy. That's good. As I think about our land bank of, we wish we had some more in Atlanta today. Tampa's been a good development market. That's one where we've got Oak Creek seven, but we'd love a little more land in Tampa at this point in the cycle, if we could find the right piece of land. We also, as we think about our land bank, we have kind of an internal target of no more than 6% of our assets. We're below that today.
As I mentioned earlier, since everybody's kind of paying full retail for land at this point in the cycle, try to, whatever we buy, put it into production as quickly as possible. Another statistic to throw at you on our land bank, about a quarter of it is in Miami in terms of value and the gateway, which we're excited about Dade County, where we're right there on the Turnpike and County Line Road. John Coleman and the team have done a good job of getting that land teed up to start development on it really first quarter early next year. As we work our way through that will take down the value of our land bank fairly quickly. If you said, "What's one of our biggest challenges long-term?" It's, as we mentioned, finding land and keeping a good land bank.
Great, guys. Thanks. Appreciate it.
You're welcome.
Our next question comes from Richard Anderson with Mizuho Securities. Please go ahead.
Thanks, and good morning. Your same-store guidance, if you back into Houston, still implies a negative 10%-type number, despite the fact that you've gotten better readings on the lease percentage and everything that's been said on this call. Does that mean that come fourth quarter, there'll be a true-up type of situation, or does the occupancy and lease percentage statistics still imply that type of downside, despite it being better than originally expected at the start of the year?
I think, Rich, what might moderate that some is, thankfully, we had performed very well in Houston. As we continued to deal with the rollover and the vacates this year, 2016 was still a pretty high bar to measure against for 2017. Going into 2018, that bar will have been lowered a little bit as you compare 2018 to 2017. A combination of what we're comparing to, combined with, we feel like we'll perform better giving our lower exposure, 7.5% for the next 15 months. Hopefully, those two factors together add up to a better year next year. I would be disappointed if we had similar numbers next year. I think, given the way it's set up, we're counting on that being better next year.
Right. If your implied same store in Houston to start the year was down 10 or 12%, and that assumed 87% kind of trough occupancy, you never got there, but the bottom line same-store number didn't change. I'm all for it being conservative. I just want to make sure I'm doing my math right. Mainly, you're saying it's just a year-over-year comp discussion. Is that correct?
It may be a two-part answer, Rich. Each quarter and kind of for the year, they're different pools. We don't have a pool for year, if that makes sense. I know everybody calculates it, or not everybody, but people often calculate it differently. Our quarterly pool will be different than our annual pool. As Brent was talking, it gave me a chance to look at Houston just for fourth quarter. Again, our projections are that it does roll positive. I know some of these leases we've got signed. There's one that started already. There's one that's targeted to start, Central Green, in November. That's a long-term lease that we've gotten signed that hasn't moved in since third quarter. Our Houston numbers, again, for just a quarter. I'm with Brent.
I think next year will be more positive. For fourth quarter, it actually looks better in Houston compared to 4Q 2016.
The last thing I would add to that, Rich, looking at the Houston supplemental page. In third quarter, we've already moderated some. Excluding termination fees, we're just down 4.5%. On a cash basis, that's on straight line. On a cash basis, just down 5%. Third quarter, those numbers are a good bit lower than what we experienced earlier in the year.
Okay. The second question is just kind of looking at your pre-lease percentage and your development pipeline of 43%. Just looking back a year ago, that number was closer to 25%. I know the way you run your development pipeline is you kind of piggyback off of previous deals. Is there anything about the higher lease percentage in your development pipeline that is just a protection mechanism? I know everything's going great. Bad things can sneak up on you. Do you have any sort of elevated lease percentage that you're sort of targeting now versus a year ago?
I'm glad of it. Probably part of what drives that, it's a big asset for us, as I look at it, is Chamberlain in Tucson, where it's been a 20-year tenant that outgrew the building. We're in the process. We'll deliver first quarter next year, a 300,000-foot pre-lease building to them. That overall helps our percentage. I like our mechanism in the sense of, maybe it's easier for me to say it, if I call myself a relative newcomer, how it worked well in Houston, where we stopped development when we got nervous about the market. I liked how we stopped and have started Phoenix. Looking back at Phoenix, for example, our two-year average occupancy through June of this year was just below 90%. We moved.
We're a little over 95% leased into third quarter, that allowed us really to kind of say, "Hey, the market's responding." It's not done at corporate, but as our leasing dictates, we can step on the gas and started building on our last Phoenix land site. That's another market where we'd like some more land. We're under development but are out of land in Phoenix now. I think our internal mechanism, where it's really market driven based on vacancy, if I'm answering your question right, I think it's worked pretty well looking at Houston and Phoenix, where we've had to tap the brakes in a couple markets. Stepped on the gas in Houston, but certainly considering it as we turn the corner into next year.
Okay. Good enough. Thanks very much.
Thanks, Rich.
Our next question comes from Eric Frankel with Green Street Advisors. Please go ahead.
Hi. Good morning, guys. This is Chris Darling, I'm filling in for Eric today. I was just hoping you could discuss the recent leasing activity in San Diego a little bit, and what drove that triple-digit rent comp this quarter. Are there any other opportunities where you can drive rents like that, kind of maybe scattered throughout the portfolio anywhere?
Yeah. We're thrilled with San Diego, some of those are, depending on when it was done, at kind of the low point in the cycle. We're south of town, kind of that Otay Mesa, Chula Vista, are our sub-markets. It was an older lease that rolled, John Travis did a great job, who's our vice president over San Diego, of really pushing rents. San Diego's good, when I look at California year-to-date at 47%, basically the California markets, that's why we like them. Unfortunately, everybody likes them a lot. Florida markets, all of those, especially South Florida. We're excited about developing in Miami, where it's that land-constrained, and with construction costs rising, we think rents will continue to bump up. We've got more leases rolling in those markets.
Usually you hate to see leases expire, at this point in the cycle with the rent growth we've seen, that's where our upside is on our FFO, where you kind of prove out that you had good assets that you acquired or built when the leases roll in time.
Gotcha. Thanks a lot.
Sure. You're welcome.
Our next question comes from Jamie Feldman with Bank of America. Please go ahead.
Great. Thank you. Just a quick follow-up. We're hearing from some of your industrial peers about just a higher appetite for build to suits. Can you talk about, do you think we'll start to see more of that in your portfolio as these markets tighten even more and tenants want just very specific properties? Also, what is your appetite for kind of a style creep to get into more of the big box, especially if it was to be more of a build to suit?
Probably by market. Good question. Serving the Dallas market certainly is a bigger square footage than serving the Jacksonville market. We've said a little bit of our tenants could be larger. Our tenants typically serve their larger markets. The larger the market, maybe the larger the tenant, if that makes sense. We've had some style creep that way. We try to react more to market than really target that. We have a couple of build to suits or pre-leases. We've got Chamberlain underway. We delivered a building for Universal Studios earlier this year.
What's been interesting, we just kind of had our internal leasing call within the last week, hearing that echoed in Tampa, was just in Charlotte last week. The number of tenant expansions, that talking to some of our asset managers, vice president level, they were comparing, it's like a Rubik's Cube. If I can move this tenant here, I can get that expansion, that tenant accommodated, and another. We're certainly seeing, which I think is the best form of growth in our markets. It's not a zero-sum game where we're moving someone into our building and out of another, is expansions. We've seen more and more of those, and I think ultimately, that leads to more build-to-suits. We've talked about our developments went up this quarter for the year.
We added another building in Charlotte. We're 3 million sq ft. We're 100% leased. Our asset manager, our best prospects are a couple of existing tenants. Probably it'll be a byproduct. We'll end up with a pre-lease or a build-to-suit. We typically tend towards, it may be a subtle difference, but a build-to-suit sounds more tailored for that tenant. We like pre-leased, we want to make sure it's a building we like, and think a lot about what's the building going to be like when that tenant vacates. We try to pre-lease a building rather than customize one. You end up with a needle in a haystack as you're trying to re-lease it. Some of that, Jamie, I would just add that, we will go bigger for a build-to-suit.
Obviously, that takes some of the leasing risk out. Again, like Marsh said, assuming the building works long-term for us. World of Houston's a good example, where over the past year or two, we've pursued some very large build-to-suits, and we haven't won any of them yet. Part of that plays into land inventory. We have quite a bit of land inventory in the size and the ability to do a big box like that there. In order to work through that inventory, it's something we'd entertain. In some of the other markets where we're buying for our multi-tenant type buildings, they just aren't configured to fit a 600,000 sq ft box. It takes quite a large tract of land. If the markets stay tight, we're hopeful that that avenue shows itself to us going into next year, would be great.
If you think about the, I think you said $100 million or so for next year, how much of that do you think would be greater than 300,000 sq ft, 400,000 sq ft? How many projects-
If you said what's on our diagram or kind of initial back of the envelope, none.
Okay.
Just a specific answer. Not to say we wouldn't do it. Right now it's none. Yeah.
Okay. That makes sense. All right. Thanks again.
All right. Thanks, Jamie.
We have no more questions at this time.
Thanks everyone for your time. Appreciate your interest in EastGroup. Brent and I are certainly around and available for any follow-up questions people may have. We look forward to seeing you here, it'll feel like tomorrow probably at NAREIT in Dallas. Take care.
Thank you.
This does conclude today's program. Thank you for your participation. You may disconnect at any time.