Good morning, and welcome to the EastGroup Properties first quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your touchtone phone. Please note, this call may be recorded. Now, it is my pleasure to introduce Marshall Loeb, President and CEO.
Thank you. Good morning, and thanks for calling in for our first quarter 2017 conference call. As always, we appreciate your interest. Keith McKey, our CFO, and Brent Wood, Senior Vice President and CFO in waiting, are also participating on the call. Since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
The discussion today involves forward-looking statements. Please refer to the safe harbor language included in the company's news release announcing results for this quarter that describes certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time-sensitive information that'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.
Thanks, Gina. The first quarter saw a continuation of EastGroup's positive trends. Funds From Operations exceeded our guidance, achieving an 8.8% increase compared to first quarter last year. This marks 16 consecutive quarters of higher FFO per share as compared to the prior year's quarter. The strength of the industrial market is demonstrated through a number of our metrics, such as another solid quarter of occupancy, leasing volume setting a quarterly record, positive same-store NOI results, and record positive GAAP 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% leased and 95.6% occupied. Occupancy has exceeded 95% for 15 consecutive quarters. As market commentary, we've never achieved this level of occupancy for this long a time.
Drilling into specific markets at March 31, a number of our major markets, including Orlando, Jacksonville, Charlotte, San Francisco, and L.A., were each 98% leased or better. Houston, our largest market with over 5.9 million square feet, which is down from over 6.8 million square feet in first quarter of 2016, was 95.5% leased. Supply and specifically shallow bay industrial supply remains in check in our markets. In this cycle, supply is predominantly institutionally controlled, and as a result, deliveries remain disciplined, and also as a byproduct of the institutional control, it is largely focused on big box construction. In fact, a recent CBRE study showed shallow bay deliveries still below pre-recession levels. Rent spreads continued their positive trend for the 16th consecutive quarter on a GAAP basis, rising over 17%. Overall, with 95% occupancy, strengthening markets, and disciplined new supply, we continue seeing upward pressure on rents.
First quarter same-property NOI rose on a cash and GAAP basis by 5.9% and 3.7% respectively. Average quarterly occupancy was 95.6%, down 10 basis points from first quarter. We expect same-property results to remain largely positive going forward, though increases will continue to reflect rent growth, as at 95%-96%, we view ourselves as fully occupied. The price of oil and its impact on Houston's industrial real estate market remains a topic of discussion. We thought it appropriate for Brent to again join today's call. Brent is our Houston-based Senior Vice President with responsibility for EastGroup's Texas operations. Brent?
Good morning. Our Texas markets finished the first quarter at a combined 95.1% leased, while our Houston portfolio finished the quarter at 95.5% leased, up from 93% last quarter and ahead of our projections. The Houston industrial market exhibited solid fundamentals at quarter end. The market vacancy rate was 5.2%, which remains near a record low. There was 3.1 million square feet of positive net absorption in the first quarter, which marked the 24th consecutive quarter of positive absorption. Meanwhile, developers continue to show restraint with the construction pipeline containing only 2.9 million square feet of speculative space, which is down to a level not seen since 2011. Even though the overall Houston industrial market remains stable, there is an undercurrent of tenants downsizing upon their lease expiration, which is producing a lot of movement within the market. We have not been immune to this trend.
I mentioned last call that we signed a total of 30 leases during 2016. 20 were new tenants and only 10 were renewals. A more typical year would be the inverse of those results, two renewals to one new lease. That trend has continued as we signed 15 leases in the first quarter. 10 were new tenants and five were renewals. The leases totaled 470,000 square feet, which represents our most activity in a quarter, excluding build-to-suits, since first quarter of 2013. The good news is that there continues to be prospects in the market to backfill vacant space. Our leasing efforts have reduced our scheduled expirations for 2017 from its peak of 17.7% down to 10.8% as of March 31st. With several known move-outs throughout the remainder of the year, we will continue our focus on maintaining occupancy.
As a result, we have been cautious with our Houston budget assumptions included in our guidance. Our leasing assumptions for the remainder of 2017 reflect occupancy reaching a low of 87% in the third quarter before gradually rising to end the year. Looking into 2018, only 7% of our Houston portfolio is scheduled to expire, which is less than half of the square footage we faced in 2016 or 2017. The diversification of our development platform within Texas continues to produce results. Our 2017 potential development starts include additional phases to existing parks in Dallas and San Antonio. We made our first land acquisition in Austin, where we plan to start a couple of multi-tenant buildings before year-end. In summary, the fundamentals remain strong for the Texas markets outside of Houston. Marshall?
Thanks, Brent. Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk-adjusted path to create value. We believe we effectively manage development risk, as the majority of our developments are additional phases within an existing park. The average investment for our business distribution buildings is 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 March 31, the projected return on our development pipeline was 7.6%, whereas we estimate the market cap rate for completed properties to be in the low to mid 5s. During the first quarter, we began construction on three buildings totaling 376,000 square feet, with a total investment of $27 million. These starts were in Orlando, Tampa, and Charlotte.
We transferred five properties totaling 1,050,000 square feet into the portfolio at 71% leased. The lease percentage is slightly lower than typical. One anomaly within these results is Park North in Dallas-Fort Worth. Park North, as you may recall, is a four-building, 446,000 square foot development we acquired last July, roughly midway through the developer's 12-month lease-up timeline. It's up to 54% leased as of March 31. We love the location long-term. It's also reinforced our strategy to develop one to two buildings at a time. At March 31, our development pipeline consisted of 15 projects containing 2.2 million square feet with a projected cost of $187 million, which is 53% leased. Looking ahead to new developments, earlier this month, we acquired 30 acres in Round Rock, Texas, as Brent mentioned, that's just north of Austin, with plans to develop four buildings totaling approximately 340,000 square feet.
For 2017, we project development starts of approximately $100 million. What's gratifying about these starts is we can again reach this level in 2017 with no Houston starts, demonstrating the value of our diversified Sun Belt market strategy. Our asset recycling is an ongoing process. In the past year, as we've recycled capital, the portion of our NOI coming from Houston declined, while the quality of the Houston portfolio rose. Specifically, at the beginning of 2016, Houston represented over 20% of our NOI, with three additional properties under development. Today, Houston represents approximately 15% of our 2017 projections. Meanwhile, the average age of our Houston portfolio is now eight years versus an average disposition age of 38 years. We're currently projecting $36 million in dispositions. We're making progress on a few fronts. We'll update you as each of these reaches fruition.
After an active fourth quarter, our only operating property acquisition during the first quarter was Shiloh 400, which was our entry into the Atlanta market. Shiloh is a three-building, 238,000 sq ft, 100% leased property along Georgia 400 and North Atlanta's technology corridor. Keith will now review a variety of financial topics, including our 2017 guidance.
Good morning. FFO per share for the quarter was $0.99 compared to $0.91 for the first quarter last year, an increase of 8.8%. FFO per share was $0.02 better than the midpoint projection due to strong leasing. Our debt metrics remain strong. We planned to sell $10 million of stock and issue $30 million of debt in the first quarter. Instead, we sold $40 million of stock due to strong demand and an increase in the stock price. With the 10-year treasury rate down and the stock price up, we like our options for obtaining capital. The total market capitalization was 30.8% at March 31st, 2017. For the quarter, the interest and fixed charge coverage ratios were 4.8 times. The debt to adjusted EBITDA ratio was 6.6 times, and the adjusted debt to pro forma EBITDA was 5.8 times.
All of these metrics were improvements from the same period last year.
The debt to adjusted EBITDA ratio was higher than our run rate due to the extra G&A expense in the first quarter concerning accounting for stock grants, which is consistent with prior years and executive transition costs. In March, we paid our 149th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.62 per share equates to an annualized rate of $2.48 per share. Rental income from properties amounts to almost all of our revenues. Earnings per share for the year is estimated to be in the range of $1.79-$1.89. We have increased the midpoint of our FFO guidance for 2017 from $4.20-$4.23 per share. This is a 5.2% increase compared to 2016 results.
The $0.03 per share increase is primarily due to approximately $0.05 per share increase in the NOIs and approximately $0.02 per share reduction due to an increase in equity sales. On March 6, 2017, we announced an update on G&A costs for 2017, which included an anticipated change in the structure of the company's equity compensation plan for its executive officers. As disclosed in that press release, we estimate a one-time overlap of G&A expenses of approximately $0.03 per share. Now to Marshall, who will make some final comments.
Thanks. Thank you. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and geographically diversifying our portfolio. We are also committed to maintaining a strong, healthy balance sheet with improving metrics, as evidenced by our equity issuance last month. Overall, we are excited about our 2017 opportunities. From a holistic standpoint, our expectations are for another solid year. I use holistically, as I mean it, in two ways. First, I like the current industrial market. I like where we fit within the food chain and the consistent, steady value per share we are creating each quarter. Secondly, I am using it in terms of people. We have Keith around for one more quarter, so I will not say my teary thank you and goodbyes just yet.
Keith has been a friend for over 25 years, and I am excited to follow his next chapter. I have also known Brent for a couple of decades, and I am enthusiastic about what he will achieve in his new role as our CFO. Finally, we are getting closer to finalizing our two new regional heads. We are excited about the internal and external candidates who have expressed interest, are pleased with the process to date, and will update you as soon as we can. We will now take your questions.
At this time, if you would like to ask a question, please press the star and one on your touchtone telephone. You may withdraw your question at any time by pressing the pound key. We ask that you please limit yourself to two questions so that we may address all questions in the time allotted. Once again, to ask a question, please press the star and one on your touchtone phone. We will pause for a moment to allow questions to queue. We will take our first question from Richard Anderson with Mizuho Securities. Please go ahead. Your line is open.
Hey, thanks. Good morning and good quarter. Just the obligatory Houston question, I guess. Same-store went up by 100 basis points in terms of your guidance. Backing into it looks like Houston was not a part of that elevated perspective. Is that, first, correct? Second, where geographically did you see a need to raise your expectations for same-store?
I'll take a first stab and let Brent chime in. It's Marshall. Good morning, Rich. What was pleasant this quarter is really it was across the board. We were up in our same-store pool in terms of occupancy. We're seeing activity. Our Florida markets did well. We've seen a pickup in activity in Phoenix, really in the last 30 days, some of those 45 days, turning those into leases. Houston actually was ahead of where we expected it to be this year. It was a good, solid, small beat across a number of markets that added up. Brent, any color on Houston that's what raised our NOI? Any color anything I've missed?
Rich, we exceeded expectations first quarter in Houston, which is good. We like the activity. As I mentioned in the prepared comments, we're still dealing with the non-vacate issue, which will reach its peak really in the second and third quarter. We have practically almost no space rolling fourth quarter. It's going to be over the next six months. If the market stays the way it is, we hope that we prove to be conservative on our current assumptions. From a same-store standpoint, we're marking against, for example, last year, first quarter, we were still 96% occupied. Even in a good market, that's a tough metric to go against. For same-store this year, Houston will be a pull on the remainder of the company. As Marshall said, the other 85% is doing very well.
With our minimal rollover in 2018, we're hoping we will get through the rough spots here in the next couple quarters.
Just to clarify, you did better than you expected in the first quarter, your expectation for Houston for the rest of the year remains pretty much the same, with the exception of that outperformance?
Yes. If anything, we may have even softened our leasing assumptions a bit.
Okay.
Just because, quite frankly, we could. The other 85% performing well, and we just didn't want much dependence upon the re-leasing in Houston to drive the train, which it's not. Anything we do would be a positive to the upside. We feel good about the direction we're headed.
We talk in terms of, we kind of have our budgets and our goals. Our budget is that we raised to the 423, and that's what we're budgeting for Houston, and we hope some things fall in our favor, we hit our goals and beat our budget. That's really the logic.
We will take our next question from Eric Frankel with Green Street. Please go ahead.
Thank you. A quick accounting question. Can you explain the difference between your GAAP same-store NOI growth and cash same-store NOI growth for this quarter? It's a pretty big wide. Is that related to the composition of the same-store pool?
Well, that is just the cash is taking the last monthly rental income and comparing it to your first rental income on the new lease or the expiring lease.
It's the NOI.
Okay.
Not re-leasing, yeah.
Oh, okay. On the NOI growth, our re-leasing spreads. Right.
Just on cash same-store, it would be the similar thing to that. It would be your rental increases versus your straight-line rent.
Right. I think there might be some issues in the way the methodology of how same-store pools are comprised, in that development projects, when they contribute to a same-store pool, especially those that are fully leased, they may have free rent up front, and that might be boosting cash same-store NOI growth relative to GAAP or net effective rents. I just want to understand if that's in play here, too.
We would just have to go lease by lease to look at that. I don't remember anything.
Okay. I'll circle back with you on that one. Brent, can you comment on what obviously, Houston re-leasing activity seems to be a little bit better than you initially planned in the year. Rents were down a good bit on what you were able to renew or sign for a new lease. What are your re-leasing spread assumptions for the rest of the year?
It's going to be similar, Eric, to what we've experienced. I think it'll be high single digits, maybe right around that 10% mark, give or take. Again, for us, any given quarter, if it's light transaction, that can be influenced by individual transactions. On the whole, from a market perspective, that's why I would anticipate the GAAP numbers maybe being a little bit less than the cash numbers because we're marking against higher rates as they roll. Anytime you have vacancy, you're subject to rental rate market fluctuations. That will be a bit of a challenge. I think it'll be in that high single-digit range.
Okay. We'll take our next question from Craig Mailman with KeyBank Capital Markets. Please go ahead. Your line is open.
Hey, guys. Marshall, I know you touched on that you guys are close on kind of backfilling for Brent and Bill here. Curious what you think timing is on that. More for the West Coast, you guys have been quiet in California here for a number of years. Maybe tell us, are you hiring someone who's got more experience in the California market versus Arizona? As you guys see where your cost of capital is and where cap rates are in the West Coast, how much bigger of a piece of the portfolio that could become?
Good question. We're kind of a little bit on both. We've included several people, including Brent and John, who you met. We were in Texas last week talking to some of our candidates. We narrowed down our final candidates, we'll be back next week meeting a couple more. We expect to be able to give you names and locations and bios second quarter, if all goes well, for both positions. You're right, in California, the major markets, we like those markets a lot. Have about 4 million sq ft in California. Realize it's a highly competitive market. We'll probably look more at development or redevelopment, at least in this market, versus pure acquisitions to find opportunities in California.
We think they're there, and the people we're talking to, it will be a California-based office, and ideally, our finalists are all people who are there working in that market today. We'll open likely a Southern California office, have someone based out there. Their primary position, and we've got two good vice presidents who will be more the asset manager, keeping up with our Western assets, that we feel pretty good about our presence and how we're operating in Arizona. It's really helping long-term in California to really source new opportunities for us, and that's what kind of led us to put someone with, I guess the phrase, boots on the ground in California.
Great. Thanks for the color. Brent, on Houston, you kind of gave us the ratio of new versus renewal. I would assume the
The guys kind of contracting on space here are probably oil services. Could you give us a sense of what industry verticals are really behind the new leasing?
Actually, Craig, the more we're seeing right now in the contraction is actually in the logistics companies, especially up at North Houston, which is near the airport. Obviously, it's a heavy logistics tenant base there. Those companies are 2- to 3-year contract driven. As their oil field services logistics requirements have diminished, their need for space has shrunk. A lot of those companies are doing fine, but we're seeing that they're decreasing in space. That's been the biggest driver. Really consumer goods and those type companies are what's driving the activity in the market. We've signed a couple of e-commerce related fulfillment type leases in our portfolio in the first quarter, a group fulfilling Costco furniture fulfillment online, a vitamin protein type company doing internet fulfillment, IKEA, Lowe's, Kroger, Amazon, CVS Pharmacy.
Again, those type companies, consumer retail related, have been the biggest groups absorbing space in the market.
Great. Thanks.
Welcome.
We will take our next question from Jamie Feldman with Bank of America. Please go ahead, your line is open.
Great. Thank you. Congrats, first of all, Keith and Brent. Very exciting.
Thank you.
Thank you.
Can we Prologis talked about maybe supply starting to outpace demand in 2018 in a couple markets as they're looking ahead. What are your guys' thoughts on that potential risk to the market at this point across your markets?
Good question. It's interesting. We are both industrial REITs, but we're in different kind of segments, or we are just different segments of the industrial market, that we struggle to find good land sites as we plan ahead. Infill land sites that are priced and zoned for industrial are few and far between. We're not seeing that same industrial supply. I was just in one of our markets last week, and we were touring around, and we even commented to the broker of everything we saw around our property. There were several new developments, but they were all 200,000, 300,000 square foot developments. On the edge of town, the big box deliveries have picked up, and the charts we've seen nationally show that, but we're not feeling an oversupply. Our competition is usually local regional players with an institutional capital, an AEW, Clarion, someone like that.
Heitman is their financial partner. We're thankfully not seeing that oversupply.
As you think about the Texas markets, any change in tenant behavior given potential trade risks with NAFTA or the relationship with Mexico?
We've not seen anything related to that, Jamie, really there hasn't even been as much chatter amongst tenants as I thought there might be. We've only got 1 million square feet in El Paso. That would probably be the most susceptible market. Again, you could probably spin it either way you want to. The people in El Paso tend to think that that might even drive more business for them if things wind up on that side of the border versus the other. No, again, the new administration has been viewed pretty favorably in Texas as the Texas connections with Rick Perry and Rex Tillerson and those kind of guys, they're very comfortable. We've seen more of a positive business attitude than vice versa.
All right. Thank you.
Welcome.
We will take our next question from Emmanuel Korchman with Citi. Please go ahead, your line is open.
Hey, guys. Good morning. You've made a couple entries into new markets for EastGroup or spoken about them over the last few months. What goes into the decision to go into a new market versus sort of intensifying your focus on your current markets? Sort of a follow-up to that same question, if Houston were doing better, would you still be exploring other new markets?
Thanks for asking. I guess I'd say we do like the markets we're in, and maybe a couple of part answer. That's why we're hiring someone or working towards hiring someone in California, as I'd love to see us smartly be able to grow in L.A., San Diego, San Francisco. In terms of new markets, maybe, and I'm coming from your perspective, Miami, although we really view it as an extension of South Florida. We've been in Broward County for a couple of decades and really found the land that's literally we're on the other side of County Line Road between Broward and Dade County. Atlanta is clearly a new market for us. Any number of thoughts as we toured the market and looked at assets and met with brokers for a couple of years. It was a high-growth Sun Belt market.
I was literally, and maybe this was when I was first back to EastGroup, was surprised how little land was available. We would be in a broker's office on Google Earth, and finding land sites is hard to do in Atlanta, and I expected that in California, but I didn't expect it in Atlanta. That was a pleasant surprise. Maybe as we touched on earlier with one of your peers, what we did see in terms of development in Atlanta was mostly big box development in Clayton County or further on the edge of town, that there weren't many people building shallow bay industrial. We bid on some assets and lost out and passed on a few, but found one that fit that we liked a Yeah. Sunbelt, high growth, land-constrained market.
It's also a big enough market where we thought we're not going to go there and buy a building or two over time and really get stuck, that there's enough activity in Atlanta that we could reach 1 million sq ft and hopefully be self-managed and have someone in an Atlanta office maybe a year or change from now. We'll see how our growth there goes. We'll be patiently optimistic, has kind of been our label for that market. I don't think, never say never, but in terms of any new markets, I'd be surprised. We're always studying markets and thinking about it and kind of looking ahead, but I'd be surprised if we went to a new market in the near-term future.
In terms of the-- You mentioned a couple of development projects that you acquired, that have now been put into the in-service pool that were sort of at lower occupancies than the rest of your portfolio. How have those been performing versus your pro formas when you acquired the properties?
Probably walking through, there's really probably two and a half that fit that category. I'd say Park North is one that rolled in in February of this year in Fort Worth, and it was described as merchant builder, built four good buildings at the intersection of two freeways there in Fort Worth. Like the project long term. It's 446,000 sq ft. It's more than we would build at one time, but we're up in the mid-50s, and it's leasing about as we pretty much as we expected it to. It's leased 240,000 sq ft in the first year, so if it were a typical development, we'd be breaking ground on our next building. It's such a large bucket to fill, and the accounting rules are we pull it into our portfolio when the original developer got their certificate of occupancy, so our occupancy will dip with that.
The other one that fits that category is Jones in Las Vegas. There it was two buildings, 416,000 sq ft. It's 50% leased. We acquired it in November, so it was probably heading into the holidays maybe a little bit slower than we had hoped, the first, call it 90 days. But at least as we sit today, we were hoping to get a lease back maybe in time for the call. That would get us closer to 60%. And then we've got another handful of prospects that would more than fill the building that we're somewhere between the initial proposal out and the third round of proposals. We like both projects. Jones probably will take, call it 90, 120 days longer to fill than we had originally hoped. Park North is probably on track. And then the third one was Weston in southwest Broward County.
It's not a new development, but it's a good building, and it's really still a construction project in that it does not have entryway to the office or really front door, sidewalks, any of those things. We will finish those up late this quarter, and I think once we finish the construction on it and the prospects can really see how they would come into the building, see their office, see how they would operate there. We like that project, and that's probably going about as expecting, other than maybe the permitting has taken 30 to 60 days. What we like about Weston is it's a higher end neighborhood. It's got more hotels. The Cleveland Clinic is there. It's just taken a bit to get industrial permitting done there. But we'll finish that this quarter, and then we think we feel comfortable about our pro forma there.
We like that kind of that niche within the market. If we'll buy buildings and we'll build buildings from scratch, if we can find quality real estate and be more value-add, like each of these three fit, that it kind of falls within the spectrum of what we do already. It may be an opportunity for us in the market to find opportunities. Specifically, as we think about places like California, I think we're going to have to do value-add type projects out there to make our numbers work.
Got it. Thanks, Marshall.
Sure. You're welcome.
Our next question comes from Blaine Heck with Wells Fargo. Please go ahead. Your line is open.
Thanks. Can you guys talk a little bit about the dispositions included in guidance? Does that include any sales in Houston? If not, can you give us any color on where you're expecting to sell and expected cap rates on the sales?
Let's see. Without funds at risk, happy to answer. It gets a little tricky because we're working on a couple of things. I guess I wouldn't call it probable because we're not to the point where funds would be at risk. At least within Houston, there's probably two projects left. We've got one that's a building that vacated. We've got it on the market for sale or lease. It's about 80,000 feet. That one could be in our pipeline this year. We've had prospects for it before and didn't come to fruition. It's really more we'll talk with our guys of, I think it's kind of at least of our philosophy, what assets would you not want to own heading into the next downturn?
Those are the ones we look at based on where we are in terms of leasing and where the market cap rates are. We continue. One is one of our oldest assets in the portfolio, is under contract today at an attractive cap rate to sell and may or may not close. A couple in Houston that could close this year. Some other assets. We've looked at some of our service center product that's probably 30 years old in Central Florida that we'd like to sell that pending. We don't want to be a desperate seller. We want to get good value for our shareholders. If we get the opportunity where cap rates are today to exit those, we really manage through the 1031 process too.
The good news is we'll have gains on just about all of these, if not all of these. We can't take them all on any one quarter. We'll manage them through the process. I hope our $36 million in guidance that we just gave you proves to be conservative. We'd love to beat that by the end of the year. We sold, number was $76 million last year. I don't know that we'll get that high of a number this year. I hope it's north of $36 million, pending on how cap rates hold up and how much of our older product we can really push out the door.
Great. That's helpful. Brent, I think last quarter you mentioned Houston was expected to drop to 88% in the third quarter and then back up to 92% at the end of the year. I think you changed that to 87% in the third quarter. I'm assuming that's always included the post office in SEVA. Can you comment at all on what's causing the little bit of a decrease in Q3? I guess more importantly, do you still expect to climb back up to 92% by year-end?
Yeah. We talked about that internally. I did mention those low 90 numbers last time. I did not specifically say that this time. As I mentioned earlier, it's basically just we feel positive about the market, but we just softened our assumptions a bit, in terms of our re-leasing. As you get toward the end of the year, if you have a space go vacant in third quarter, even in a strong market, it's hard to say you're going to re-lease it, say, in a three or four-month period of time. Again, we think the low point will be third quarter. We certainly hope that we'll get into that low 90s by year-end. Our assumptions have softened up slightly from where I had mentioned last time it being that 92. Our current guidance has us finishing the year a little bit lower than that.
As Marshall mentioned, a budget and a goal are two different things. Our goal is to stabilize it much quicker than that. Again, we're just being cautious with what we put in terms of our dependency on it. Still feel good about it. If the market stays the way it is, the 15 leases we did first quarter was half of what we did all of last year. Again, there's activity in the market. If that activity will hold in there for us the next few quarters, we'll work our way through this and feel much better about next year, a combination of the market improving and our rollover being way more tolerable and way more manageable at 7% next year.
All right. Thanks.
Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Good morning. Just two questions. First, Marshall, just going back. You had an earlier question on backfilling, the two regional spots. Just curious, you guys have very much of a team-oriented culture. Certainly, there's a healthy competitiveness which came from the top down, but there's also a lot of collaboration. How easy is it, as you've been looking at backfilling both Brent and Bill, to find people that can fit into the EastGroup culture? I'm assuming it's easy to find industrial development guys, but it's probably harder to find folks who fit in with the culture. Can you just give us some perspective on that, and if that makes you lean more towards internal or if you think there's sufficient external candidates?
Maybe it's a two-part answer. One, we agree. We like our culture, and we like our team a lot. Thanks. You've spent enough time with us, so I'm glad you've gotten a chance to see it, and you agree. We like our internal candidates, I've been impressed with the people we've met. I wish we had a lock on good industrial people, but we like the people we've met. I think they could fit in. I'm highly biased, but here, I like that we're a smaller REIT without a Chief Investment Officer and a Chief Operating Officer that really, if you're the regional head, you get to drive your own ship.
As we've talked to good people, that has a lot of appeal, and we just want to make sure That's why it's maybe slowed us down a little bit rather than it's I didn't want it to be me go out to a city and just hire what I thought was the best person. We've involved several people here in interviewing and gone through a couple of different rounds because it is a key hire, and we are careful about our culture to make sure they fit in. In their defense, I wanted them to hear from Brent and John what they do day-to-day. It's one thing for me to describe the job, but it's another to hear it from the people that are doing the job day-to-day of exactly what it is so that we can try to minimize hiring the wrong person.
Most of them are all gainfully employed, and we don't want to promote someone into a position that they're in over their head either. We're being careful and methodical about it, and we're finding good candidates, and I'm glad we're nearer the end of the process than the beginning at this point.
Okay. The second question is, obviously you addressed Texas and how the tenants there are pretty excited or upbeat. Can you just talk broader picture? Last quarter, the tenants were extremely bullish across the portfolio. Now that we've been sort of 6 months into the new administration, people can see what pace of legislation is like. Are the tenants still as excited as they were earlier in the year, or have you noticed a shift across your portfolio from the mood of the tenants?
I guess I'll answer it. I'm an optimist, so maybe take it with that filter. Our first quarter is always a good quarter for us, but we signed about, statistically, 2.8 million square feet of leasing first quarter, which is a record for us. That's a huge sign of optimism. The other thing I'm seeing and hearing in the field, a number of the spaces we filled have been expansions. Our two buildings in Tampa that rolled in the portfolio were both existing tenants that we were going to lose, but thankfully, we had new buildings, and so we backfilled those. We're talking to our guys, and we've seen a pickup in activity in Arizona in the last 45 days, at least in terms of proposals out, and have gotten a couple of those leases back already.
We're still seeing it's a solid market without a lot of new supply. We're excited about where we are, and you just hope it continues to last.
Okay. Thank you.
Sure.
Our next question comes from John Guinee with Stifel.
John Guinee here. Hey, Marshall, you were very helpful recently talking about yield on development costs. Can you sort of walk through your development portfolio page and talk about where you have good land basis, which would allow you to develop at a yield, say, north of seven, and where you've had to buy at current market pricing, which may end up driving that yield down below seven? Specifically, I think at one time you had a pretty low basis in your Houston land. Do you still feel that's a low basis?
Just kind of walking through, I would say, if you used a seven as a barometer, we could probably hit that. An exception, which is a big piece of our land holdings being The Gateway in Miami that we acquired fourth quarter last year. Thankfully, their market cap rates are in the fours. I hope we hit seven when it's all said and done, but our pro forma is not a 7% yield on the 61 acres that we have at Gateway. Other than that, we are still delivering in the sevens, and I don't see that within our holdings. We're working our way through our land holdings pretty rapidly in Charlotte and in Orlando at our Horizon Park. Eisenhower, that Brent's doing in San Antonio, and David Hicks is going rapidly. I love that we add additional phases of land.
CreekView is doing well in Northeast Dallas and Lewisville. We're working our way through our land pretty well. A market that actually has us a little concerned in terms of inventory is Tampa. We're light there. We just broke ground on a new building. We're looking for land sites in Tampa. You're right, all the cheap land is already gone. That would be one of the upsides to a downturn when it does come, is that we'll hopefully be able to find land a little less extensively. In terms of a seven, we should be there. The land we have at World Houston, we like. We won't break ground today, but I'd love to be that we're in a position to turn the corner and start growing again in Houston when the market allows. Brent, any-
Yeah, we feel good, John, about our basis. Land prices are very slow, even in a slowing market, to decrease. Land's not very expensive for people to hold, so they'll generally hold it rather than drop their price. We haven't really seen land prices drop. If anything, even over in Northwest, they've gone up. Also, since we're not actively developing, we're in a period where we're not capitalizing any of our costs on our Houston land holdings at this point either. We like the land positions. When the market does get better, we feel very good about being able to come out again and be in that mid-seven range for Houston once the market allows it.
A second question. We noticed that in San Antonio, Texas, you delivered two buildings in the first quarter, mostly full. You have a lease-up building, and you have two under construction. What's the secret in San Antonio that has five different buildings, probably close to 500,000 sq ft, in various stages on your development page?
Really, the driver of that predominantly is our Eisenhower Point project. As you may recall, when we bought that land site, we spent literally two years in getting that site rezoned for industrial. It's right in the heart and core of the main industrial area of San Antonio, but it wasn't developed for anything, but it wasn't industrial because it wasn't zoned that. Once we turned the corner on that and purchased that, we had a pretty good inkling that it was going to be a very successful project because of the location. Thankfully, it's proven to be that. Thankfully, we still have all of our San Antonio land holdings that's remaining now. The 45 acres shown on the summary page are at Eisenhower Point, and we're real excited to have that, to finish that park out. It's just a great location.
Great. Thank you, and congratulations.
Thank you.
We will take our next question from Rob Simone with Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking the question. Just stepping away from Texas and California, I was wondering if you could kind of just elaborate on what's going on in Phoenix. I know you delivered one completed asset into the pool, but it looks like you had some pretty substantial same-store cash NOI growth there. Just wanted to kind of dig in there a bit.
We've been able to push rents on some of our renewals in Phoenix, and it's been a slower market. It's one we had mentioned after Houston that has been sluggish, and at least in my mind. A good question. Our thoughts were Phoenix will act a little bit like some of the Florida markets. During this cycle, the Florida market seemed to recover more quickly than Phoenix has. It's been a little bit slower, and our occupancy still are in the lower 90s. We've seen it pick up here in the last, call it 45 days or so, and we'll pick up there. Our 35th Avenue that we delivered, we're building up. It's 67% leased, a spec suite on it. Ten Sky Harbor will roll in, and it's not where we want it to be leasing-wise.
We've had our challenges there, we feel like we're turning the corner, and hopefully by the time we get to the second and third quarter, we'll have a better hand to play there. Also looking back at Phoenix, what's slowed it down, we have some land there, we stopped development in Phoenix really first quarter of 2016, a year ago or a little more than that, because we weren't filling our buildings as quickly as we wanted. Hopefully, we feel like with what we've got in the pipeline, we could turn the corner and are chasing a pre-lease opportunity there that may or may not come our way, that we can turn the development machine back on in Phoenix here towards the end of the year.
Thanks, guys. Really helpful.
Sure. You're welcome.
Our next question comes from Sumit Sharma with Morgan Stanley. Please go ahead.
Thank you for taking the question. I guess we get asked this question a lot, so I just wanted to get a sense. Given where tier B and C shopping centers and malls are pricing in terms of cap rates and price per square foot and that sort of discussion, and their proximity and your focus on light industrial, have you seen more opportunities for conversions into that sort of thing? Are there just stricter zoning rules that may preclude this sort of deal, or are you actually seeing a lot more of this?
Good thought, and something we've discussed internally. We've not really seen the opportunities. It probably is a different marketing email blast. Going back to my pre-EastGroup days, I remember we had a joint venture partner that described one of our properties. It was a great piece of land encumbered by a mall. There's a number of those that we think are failing or will fail. As hard as it is for us to find land, the tricky part about a mall is a lot of times the anchors own their site. There's one in Atlanta that's being redeveloped now. A local developer's doing it. You may have to go to Macy's, Sears, and JCPenney and acquire their site as well as the mall and work your way through a reciprocal easement agreement.
It could take a bit, but we'd love that opportunity down the road. We've probably thought about it more than we've seen and have spoken to one of the loan servicers to see how we start to look at what they get back from some of the failed mall projects and a couple of different shopping mall REIT general counsels. Just trying to think of how do we sift through portfolios of dead malls, basically. I think it's a great idea and hard to implement. Physically, we'd probably end up, you'd need to demo the mall is the other thing, because just the configuration wouldn't work. There's some great sites with good freeway access that already have the utilities if the mall weren't there today. It's coming. It's just not there yet, or we haven't found it yet.
Well, that's really good color. Thank you so much. Not related to this, but related to one of your larger tenants, 3PLs. What we've heard from various brokers is these guys are some of the hardest negotiators at the table. Particularly, I know it's a favorable market for landlords, but I'm still inquisitive to understand, how do you view your negotiations with, let's say, a Kuehne+Nagel kind of 3PL or any other 3PLs that you deal with? What's the sort of asking rent premium that you typically command or a discount if there is that?
Yeah, I'll take that. It really strictly depends on market conditions. If I were negotiating with the same tenant, say, in a Dallas today near DFW versus negotiating with a tenant at World Houston, and it could be the exact same company, they would probably have the leverage over me in Houston, and they would have the upper hand in negotiations, and I would be in a backpedaling position. In Dallas, I would have the upper hand, and I would have the leverage. You really can't pinpoint it to a specific company. The 3PLs and logistics guys are cost-conscious. Their business tends to be pretty thin margins. They're just moving something from point A to point B to people, and then if somebody else is trying to do it just at that little bit cheaper way. They are conscious about it.
In a strong market, they can only do what they can do. If the market's tight, they have to pay the rent to occupy the space to where they need to be. It's really just dependent upon market conditions.
Thank you so much.
You're welcome.
Our next question comes from Bill Crow with Raymond James. Please go ahead.
Good morning, guys. Marshall, I'll start with you, then I've got one question as well. The two biggest leasing challenges you highlighted at Fort Worth and Vegas were both on facilities that were, call it, 2x your typical size. I'm just wondering if that makes you rethink that strategy, which is different than what the company has done for a lot of years, as far as the size goes. Is there any second-guessing of that and whether that's in your sweet spot or not?
No. You're right. There are two, really, maybe answering them separately. Good way to think about it. Fort Worth, it's our buildings, they just built four of them. It was a merchant builder with an institutional partner, again, that works for their strategy. Kind of what I was trying to allude to a little bit in my script, we wouldn't have built all four buildings to fill. It's a lot of square footage to fill, the 12-month kind of lease-up window before it rolls into your portfolio. Then in this case, we didn't own it, but roughly half of that 12 months. Long-term, we really like the location and like the buildings, if we could find that opportunity, it's a big bite for us. We just didn't have the chance, the opportunity to buy two of the four buildings or something like that.
Las Vegas, we like the location. Rents are higher there. Those buildings were a little bit deeper, they had their state-of-the-art buildings with the bells and whistles and kind of an infill. It's a Southwest sub-market, tenants that want to be near McCarran Airport or near the Strip, it works well, we like it. I think kind of the way it worked, they just happened to both be bigger projects. Then in Las Vegas, some of it was timing, and some of it is just, I think we've got the right momentum now to get it leased. We may miss it again by three to four months. I think if we were on this call five years from now, I think, or less, hopefully much less, we'll be very happy with both of those assets.
It's just taken us a little bit longer to be value-add. I like that approach a lot better than waiting for them to have gotten to be 95% or 100% leased and trying to win a bidding war. We still will be a good 7,500 basis points ahead of market cap rates. It's not as much as if we'd fully developed them themselves. Taking on the value-added approach, I wish they'd all leased up in the first month, but I don't sense that they're taking anything right now abnormally long, but we haven't finished the value-add component yet.
Right. Okay. The other question on Houston is just, as we think about oil eventually recovering, at the same time, we may experience a slowdown in construction, which is kind of the one thing booming in Houston.
Right.
I'm just wondering how much exposure you have to residential and commercial construction-related companies.
That's a good question, Bill. The construction boom really hasn't been as big a boom in the last couple of years. Obviously, at one point, office was driving a lot of that, and obviously, that's completely stopped. Residential has continued to be strong. Retail has continued to be strong. Multifamily is slowing down some. First part of that, we don't have a lot of exposure, inordinate exposure to that. We continue to see, interestingly, in Houston, we've got a 12-month trailing 120,000 new residents. People continue to move in, even though the jobs have been tougher to find. The city continues to grow. Those type tenants so far seem to be doing well. The residential market is doing very strong. 2016 was record sales, 3.7 months of inventory.
Since I'm about to put a home on the market, I hope that holds up for another 60 or 90 days, Bill.
Well, good luck with that, I appreciate the color. Thanks, guys.
Thank you.
We'll take a follow-up question from Richard Anderson with Mizuho Securities. Please go ahead.
My question was answered on Class D malls. Thank you.
Thanks.
We'll take our next follow-up question from Eric Frankel with Green Street Advisors. Please go ahead.
Thank you. Two quick follow-ups. One, Keith, you referenced obviously the cost of capital seems to have come down a little bit the last three months. Is that changing your view of what your balance sheet should look like this year?
You get equity when you can stock prices are doing good. Our multiple is still at the lower end compared to other industrial REITs, we still think it's got some room to grow on the stock price. It's awfully tempting to get equity when you can. The board makes those final decisions, thankfully, we'll present our cases to them. It's good on both sides.
Okay. A question, I guess, for Brent on the follow-up. You were referencing there's more e-commerce fulfillment requirements coming through your portfolio amongst some of the markets you're in. Can you clarify, you mentioned a lot of different retailers there. Are they all in your portfolio, or is that just activity in your markets? I just wanted to make that clear.
That's just activity in the market. If they were all in our portfolio, I wouldn't have that downward draft in occupancy. It's good to see them all out there, the interesting trend, a couple of years ago, there felt like there was more smoke than fire related to e-commerce. The good thing for us is as times pass by, we are beginning to see more and more direct examples of that into our own portfolio. As that
Fulfillment chain evolves. Thankfully, that's coming to a situation where they're looking for smaller centers and more locations for quicker delivery versus the mass bulk regional, out on the outside of town type aspect. That seems to be a continuing trend. I don't see why that would change, that's continued to be a positive driver for us.
That's interesting. What's the average size, roughly, of these new requirements that are in the market? Is it 100,000 sq ft, 25, 50? Is it something more in your warehouse?
The two we've actually signed in Houston this year are in the 35,000 square foot range. We're even seeing groups, say like an Amazon, where you routinely see them with the million square footers, and they are doing that, but they've also done some 60,000 square footers. I was reading an article the other day where even in markets where they have those big million square foot boxes, they likely will add smaller boxes in other parts of the city. Their goal is to get things to people within hours of ordering it. Again, that's a positive trend for us.
I'm trying to think. The last two Amazon leases, well, I think one isn't signed yet. One, they had signed 100,000 feet kind of for a last mile in one of our markets, and then one that right now, at least, it's around 150,000 feet, that we're one of the candidates for.
Interesting. Okay. Thank you.
Sure.
We have a follow-up question from John Guinee with Stifel. Please go ahead.
Hey, good afternoon. I think our question's been answered.
Okay. Thanks, John.
Thank you.
Okay, great. We will take our final question from Ki Bin Kim with SunTrust. Please go ahead.
Thanks. Just one last quick one. What is your philosophy on how much capital you want to commit to development? Your GAV is about $3.5 billion. At $100 million of starts, it is about 3% of GAV. It is conservative. Just curious what you think about that going forward.
Good question. We kind of think about how much land we hold, and we kind of informally try to target at around 6% of assets. Anything we are acquiring now land-wise, and I will use Austin, the Round Rock site is a good example of, we just acquired it, and we hope we have it in production by the end of the year. There is really no land, since there is no cheap land left, really, or we have not been able to find it, that any land we acquire, we want to be in production as quickly as possible. I like that our development starts kind of, I said, well, we fit in the food chain with the shallow bay business park development. Our starts are really dictated by the field rather than by corporate. I will use Horizon in Orlando.
Right now, John Coleman seems to be leasing them about as quickly as he can build them. He is really setting that pace. That said, there is always a limit where we would say, "Let us finish what we started." Maybe going back to an earlier question, fourth quarter, we acquired some of the developed buildings that were not completed. I am glad we slowed up this year given our transition with people and some things like that. We hope we add our West Coast. We will actually grow the number a little bit. If we have the right person in California, those will be more expensive land, more expensive developments. Our $100 million in starts, if the market allows, should rise in the next year or two.
I like that it started in the field, and I like that we have a land limit rather than as long as we are leasing them up when we are typically 200 basis points above a market cap rate. That is a lot of NAV each quarter per share that we are creating, is how we think about it.
Yeah. That's part of the reason why I asked it. It does seem like a very significant spread. All right. Congrats, Keith and Brent.
Thank you.
Thank you.
Thank you.
At this time, we have no further questions.
Thank you so much. Thanks, everyone, for your time and your interest in EastGroup. Should you have any follow-up questions, we'll be available and look forward to seeing you at the REIT conference soon.
This does conclude today's conference. Thank you for your participation. You may disconnect at any time.