Good morning, and welcome to the EastGroup Properties second quarter 2016 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 is being recorded. It is now my pleasure to introduce Marshall Loeb, President and CEO.
Good morning, thanks for calling in for our second quarter 2016 conference call. As always, we appreciate your interest in EastGroup. Keith McKey, our CFO, and Brent Wood, Senior Vice President, are also joining me on today's call. Since we will 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, subject to the safe harbor statement included in the news release, is accurate only as of the date of this call. The company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which can be found on the company's website at www.eastgroup.net.
Thanks, Keena. Second quarter saw a continuation of EastGroup's positive trends. Funds from operations exceeded our guidance, achieving a 7.6% increase compared to second quarter last year. This marks 13 consecutive quarters of higher FFO per share as compared to prior year's quarter. The strength of the industrial market can be seen through another solid quarter of occupancy, leasing volumes, re-leasing spreads, and positive same-store NOI for both cash and GAAP. The depth of private market capital looking to invest in quality industrial assets was demonstrated by the pricing and volume we have seen in our dispositions, which we will elaborate on later. At quarter end, we were 97.2% leased and 95.7% occupancy. Occupancy has exceeded 95% each quarter for the past three years, a trend we project maintaining through year-end.
This basically represents full occupancy for a multi-tenant portfolio, as we've said before in market commentary, we've never achieved this level of occupancy for this long. Drilling down into specific markets at June 30, our major markets of Dallas, Orlando, Charlotte, San Francisco, and Los Angeles were each 98% leased or better. Houston, our largest market with over 5.9 million sq ft, which is down from 6.5 million sq ft last quarter, was 94.4% leased. Supply remains largely in check in our markets. In sifting through the figures, you'd see supply is largely comprised of big box deliveries being 250,000 sq ft and above. By design, we simply aren't competing for the same prospects. In fact, the figures we've read state that 75%-85% of the new deliveries are big box markets.
In our markets where the fear of overbuilding is the greatest, such as Dallas and Houston, we're seeing declines in construction with deliveries being absorbed. To date, market discipline has been institutionally controlled and remains strong. Rent spreads continued their positive trend for the 13th consecutive quarter on a GAAP basis. While we experienced negative quarterly cash re-leasing spreads, it was driven primarily by three leases, the largest being an 82,000 sq ft R&D tenant renewal in Santa Barbara, rather than a reflection on the industrial market. In other words, with a portfolio of our size, we may experience quarterly anomalies. Overall, with 95% occupancy, strengthening markets, and disciplined new supply, we continue to see upward pressure on rents. Second quarter same-property NOI rose on a cash and GAAP basis.
This quarter was unusual as the growth was due to rising rents as average quarterly occupancy fell 50 basis points as compared to second quarter 2015 to 95.7%. We expect same-property results to remain 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 industrial real estate market remains a major topic of discussion. We thought it appropriate for Brent to again join today's call. Brent is one of our three regional senior vice presidents and is based in our Houston office with responsibility for EastGroup's Texas operations. Brent?
Good morning. Our Texas markets finished the second quarter at a combined 96.4% leased, while our Houston operating portfolio finished the quarter at 94.4% leased, down from 96% last quarter. The Houston industrial market continues to exhibit solid fundamentals. Despite the overall decrease in prospect volume, deals continue to be made across the market in a broad range of sizes. The market vacancy rate finished the quarter at 5%, which is just 30 basis points above its record low mark of 4.7% set third quarter last year. However, we have seen an increase in subleased space this year. For numerous reasons, this often does not compete with existing vacancies, but it could lead to a gradual increase in the vacancy rate over time. During the quarter, we experienced our first tenant default of the year and only the second in two years.
Across the Houston market, there was 1.8 million sq ft of positive net absorption for the second quarter, which marked the 21st consecutive quarter of positive net absorption and raised the year-to-date total to 3.8 million sq ft. Meanwhile, developers continue to show restraint with the construction pipeline containing just 2.8 million sq ft of speculative space, which represents about a half percent of the total market. Looking ahead to the remainder of 2016, we have further reduced our Houston scheduled expirations from 15.8% a year ago to 5.8% of the operating portfolio. However, we have a number of known move-outs later in the year, primarily the result of tenants either downsizing or consolidating locations. As a result, we continue to be cautious with our Houston budget assumptions included in our guidance.
Our leasing assumptions produce an average occupancy of 93% for the year, unchanged from guidance last quarter, with the anticipated low point being third quarter at 90%. From a development perspective, we transferred our last two buildings that were in the development pipeline at a combined 87% leased. We remain pleased that the diversification of our development platform within Texas is replacing the volume we enjoyed during Houston's most recent growth cycle. Our projected 2016 development starts for the company include five buildings in Dallas and San Antonio for an estimated total investment of $33 million, two of which broke ground in the second quarter. The fundamentals remain strong for the Texas markets outside of Houston, and they remain unaffected by the impact of lower oil prices.
Marshall will discuss dispositions in more detail in a moment, I will mention that regarding Houston, we remain pleased with the quality and depth of the buyer pool and the cap rates we are achieving, which has ranged from a low five to a mid six, depending on asset age and characteristics. Our Houston portfolio now consists exclusively of 100% Class A properties, with 95% of the square footage contained in one of our five master-planned business parks spread across three submarkets. For the remainder of 2016, I anticipate that the core Texas markets of Dallas, San Antonio, and Austin will present growth opportunities while we continue to take a conservative approach to our Houston operations. Marshall?
Thanks, Brent. Given the intensely competitive and extensive 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 one of our business distribution buildings is below $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 June 30, the projected investment return of our development pipeline was 8%, whereas we estimate the market cap rate for completed properties to be in the low to mid fives. During second quarter, we began construction on three projects, two in San Antonio and one in Orlando. These developments contain three buildings totaling 265,000 sq ft for a projected combined investment of $18.6 million.
Meanwhile, we transferred two properties totaling 132,000 square feet at 87% leased into the portfolio. At June 30, our development pipeline consists of 14 projects containing 1.9 million square feet with projected costs of $133.6 million. Of that amount, we've already invested $81 million, or roughly 61% of projected total investment. For 2016, we project development starts of approximately $90 million. What's gratifying about these starts is we can reach this level with no Houston starts, whereas in 2012, for example, Houston accounted for almost 90% of our starts. This demonstrates the value of a diversified Sun Belt market strategy. As Brent discussed, with the industrial property sales market remaining strong, we're actively reducing the size of our Houston portfolio and raising capital through the disposition of non-strategic land parcels. Year to date, we sold eight properties totaling 1,164,000 square feet for proceeds of approximately $74 million.
Four of these sales were in Houston, which represented 906,000 square feet and $51.6 million in sales proceeds. Through June 30, we closed two land parcels generating $1.3 million. Since quarter end, we closed two more parcels for $2.6 million, and we have two additional sales, one with funds at risk in the pipeline. While these aren't material to our balance sheet, I love raising capital through the disposition of non-strategic, non-income producing land parcels. The second quarter dispositions outside of Houston were 140,000 square foot condemnation of Interstate Commons by the Arizona DOT, a user sale of our 30,000 square foot Constellium Center, an R&D project in Santa Barbara, and Simmons 2, an older 26,000 square foot Dallas distribution building. Our asset recycling is an ongoing process. We're pleased with the year-to-date progress and are continually evaluating our options, especially further Houston sales.
As we recycle capital and diversify, the portion of our NOI from Houston will continue to decline while the quality of our Houston portfolio continues to rise. We view dispositions as an attractive capital source to help fund the development pipeline. Additionally, we are pleased with the match funding achieved within our 1031 tax gain deferrals. In fact, we successfully sheltered the gains generated by the $74-plus million in dispositions year to date. While most of our activity has been dispositions, we were pleased to acquire for $32 million the 446,000 square foot Park North development in Fort Worth. The four Park North buildings were completed earlier this year and are 37% leased. We're excited about the lease-up and long-term opportunities their asset presents. By acquiring at this stage, we're able to generate returns, which while below full development yields, are materially above core stabilized acquisition yields.
Keith will now review a variety of financial topics, including our updated 2016 guidance.
Good morning. FFO per share for the quarter was $0.99 compared to $0.92 for the same quarter last year, an increase of 7.6%. Operations have benefited from an increase in property net operating income related to same properties, developments, acquisitions, lower interest rates, and a reduction in G&A costs. FFO per share for the six months was $1.90 as compared to $1.79 for last year, an increase of 6.1%. Debt to total market capitalization was 30.0% at June 30, 2016. For the quarter, the interest and fixed charge coverage ratios rose to 4.5 times, and debt to EBITDA was 5.8. The adjusted debt to adjusted EBITDA ratio declined to 5.4 for the quarter. Floating rate bank debt amounted to only 1.1% of total market capitalization at quarter end.
During the second quarter, we took advantage of market conditions to provide for our capital needs and strengthen our balance sheet. We closed the previously announced $65 million unsecured term loan on April 1st, 2016. In June, we executed a commitment letter for a $40 million unsecured term loan. The five-year term has an effective fixed interest rate of 2.335%. Also, we sold $30 million of common stock under our continuous equity program. For the remainder of 2016, we are projecting no additional debt or sales of common stock. We do have two mortgages coming due in the second half of the year. We plan to pay off a $25 million mortgage on August 5th, 2016, and a $52 million mortgage on September 6th, 2016. In June, we paid our 146th consecutive quarterly cash distribution to common stockholders.
This dividend of $0.60 per share equates to an annualized dividend of $2.40 per share. Our FFO payout ratio was 61% for the quarter, rental income from properties announced almost all of our revenues, so our dividend is 100% covered by property net operating income. We believe this revenue stream gives stability to the dividend. Earnings per share for 2016 is estimated to be in the range of $2.90 to $2.98. FFO guidance for 2016 has been narrowed to a range of $3.96 to $4.04 per share, and the midpoint was increased from $3.99 to $4 per share. At the midpoint, we are projecting a 9% increase in FFO per share compared to last year. Marshall will make some final comments.
Thanks, Keith. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and diversifying our development pipeline. We remain committed to maintaining a strong, healthy balance sheet and have taken a number of recent steps towards improving it. Maintaining our balance sheet is important not only on a day-to-day basis, but as a critical resource coming out of the next recession when opportunities are more plentiful. Please note, we don't see signs of a downturn, but rather stay ready when there is one. In sum, we like where we are, where our industrial markets are, what we're doing, and the results it's created for our shareholders. We'll now open and 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. Once again, to ask a question, please press the star and one on your touchtone phone. We'll take our first question from Alexander Goldfarb from Sandler O'Neill. Your line is open.
Hey. Good morning down there. Marshall, just some quick questions first on the guidance. Can you just walk through the drivers of the reduction in the same-store? How much of that was impacted by dispositions? Also, on the lease term fees, how much of that was sort of unexpected changes in what you guys originally thought? Maybe it's tenants who decided to stay or not stay versus had an ability to pay versus no longer have an ability to pay the term fees.
Sure. Okay. Help me out. A couple of questions I'll reverse order. Maybe on the lease term fees, usually what happens is a tenant will tell us they'd like to leave, and we'll start marketing their space. We've had two main drivers this quarter. One happened in one of Brent's properties in Houston. The tenant terminated early. That was a payment and not unexpected. In Florida, we had a tenant who had approached us. We were able to locate a new tenant for the space. That one we don't budget for, until we really have the deal with the next tenant. We were able to negotiate a nice buyout with the tenant and immediately backfill the space at a higher rent in that case. That was really where the majority of the pickup was on that.
On the same-store NOI, there were a couple of drivers, as you said. We've got more dispositions. We raised our disposition guidance $20 million, and we've sold over 1.1 million sq ft year-to-date. Obviously the portfolio mix affects our same-store NOI. Another driver of that was simply we've tracked, thankfully, year-to-date, a little ahead kind of on a monthly basis, where we thought our occupancy was budgeted to be, and remind people, these are our projections. We're projecting a little more vacancy that we make up towards the end of the year. There's a little bit of a lag kind of in the next couple three months. As Brent mentioned, we've got a lot of leases rolling in Houston and some known move-outs there. Probably that combination were the biggest drivers of our same-store NOI on it.
We typically focus on a GAAP basis. On a GAAP, we're down 10 basis points. That's a lease here or there on our projections, and we hope trends hold up, and we do a little better than we're projecting right now, and that's our task between now and 12/31.
Okay. Then you guys increased the disposition goal to now $110 million. Does the revised same-store guidance reflect the planned $110 million, or are we going to see further adjustments to same-store as you guys achieve your goal of $110 million of sales this year?
Good question. The same-store guidance reflects $110 million of dispositions. Kind of as we talked, as the year has played out, we started at $85 million, we're up $25 million on our dispositions year to date. Guidance today reflects $110 million. We like where cap rates are holding in there. Our fear early in the year was always that the private market got as nervous about Houston as the public market was. It's probably 50/50. There's a chance we could break the $110 million, and if we do, that's not in our same-store numbers. We think we're taking the right steps to exit older assets in Houston, and cap rates are at historic highs, historic lows, high prices.
Okay, then just to be clear, the original same-store guidance that you provided, did that factor the old $90 million of dispositions, or it did not?
Originally, we were projecting $90 million in disposition. Obviously, as we bumped it to $110 million, we took other assets out of our same-store pool.
Okay. Then just the final question. Brent, in Houston, as things have calmed down a bit, or maybe they haven't, but it seems based on the stock's performance that they have. Are you thinking differently about development in Houston, or should we read your sort of retrenched comment that you're just going to focus on operating in those five parks, but not looking for any new investment?
Yeah, I would say that is the feeling that things seem to have flattened out or bottomed out and moving sideways, which is good. You don't feel like there's still overly downward movement in the market, or at least the sentiment's getting slightly more positive. Not nearly to the point, though, I don't think, for development for us. There is a little bit of spec development still occurring around the city. It's primarily, though, out on the east side with all the port-related, petrochemical-driven type properties, and then Southwest Houston has some new projects. A lot of our land inventory, for example, at North Houston's up north, and that is the one sub-market that did get the softest because it fell victim to its own desirability. It's where most of the development was happening. When the music slowed down, there's a little more vacancy there.
We keep an eye on it and looking at numbers. We're chasing build-to-suits and would certainly do a build-to-suit given the opportunity. On a spec basis, we're not projecting anything this year, and we'll just see when it comes to next year.
Okay. Thank you.
Thank you.
Thank you. We'll take our next question from Jamie Feldman with Bank of America. Your line is open.
Great. Thank you. Two questions on the guidance. I think you took up your bad debt expense and land sale gains. Can you maybe talk about the changes there and the impact on earnings? Then I guess for the bad debt, where is that and is that a sign of anything where we are in the cycle?
Sure. Hey, Jamie. Good morning. It's Marshall. On bad debt, we have budgeted $280,000 per quarter. We've maintained that for the balance of the year. No known bad debt. It was really in second quarter, we got ahead of what we budgeted. It's up $54,000 for the year, based really on what happened in second quarter. What happened there, we had our first bankruptcy for the year in Houston, and really only second, thankfully, since the downturn. Then we had some bad debt in Los Angeles. We had a tenant go bankrupt and one that's in arrears that we're still hopeful we'll catch up and collect there. Nothing systemic so much as three tenants affected that. Then the second part of your question in terms of guidance. Go ahead, Keith.
$280,000 each quarter.
The land sales, that was your other, I'm sorry, your other question?
Yeah, land sales were $0.02 a share that we'd projected.
the incremental $0.02 from the last guidance?
Yes.
Yes.
Roughly. Yeah, no, those are hard to project really until you get funds at risk. You never know what someone's planning to do. One has been a retail site in Orlando, we've had two smaller parcels up at World Houston, one closed, where it'll be a hotel development.
Okay. I guess going back to the bad debt, has your watch list changed? It sounds like Houston, it's just starting to happen, or maybe that was just a one-off event.
Yeah.
As you look forward, do you think you'll see more of this?
It's hard to predict. I don't think our watch list has changed. I mean, we really took it, the reserve early in the year to be conservative and hope, again, best case, we don't need it. So we've still got $560,000 in margin there. I would say particularly, or Houston or Brent chime in, there, as this kind of old drag lasts, you hope people's balance sheets are strong enough. So you always hear rumblings, and Houston's a market we're concerned about. I would also say if you'd said, to date to only have two bankruptcies in probably 20 months since the oil and gas downturn, I'm pleasantly surprised we've only had two bankruptcies.
Okay. Then thinking about your expirations, it looks like on your top tenants list, you've got a couple in the third quarter of 2016, then a big one with Kuehne + Nagel in 2017 in Houston. Any early thoughts there?
I'll jump in on the Kuehne + Nagel next year in Houston. They're a good customer of ours. They're in two different locations, and we're in discussions with them. As you might expect this far out, they're weighing what their business looks like and what they think their needs will be. We always have close communication with them, but at this point, nothing one way or the other.
The other two you kind of maybe are looking at, we've got Mattress Firm, which is interesting.
Yeah, Mattress Firm.
That's an interesting maybe trend. I'll take you slightly off topic. They were not a top tenant several years ago, but as their retail model shifts, we've seen that with other tenants, where smaller retail footprint that use our type buildings for, as people have like that last mile of distribution. We've got them in a number of markets. We really have renewal proposals. Jacksonville should have them renewed there. A proposal out in Fort Myers, where we're looking at breaking ground for another project in Fort Myers. They'll either renew or we're hopeful they may anchor our new project. They could use some expansion space in Fort Myers. We feel pretty good about both of the Mattress Firm renewals, that we'll hang on to those two spaces.
Okay, great. Thank you.
Sure.
Thank you. We'll go now to Emmanuel Korchman from Citi. Your line is open.
Hey, good morning, guys. Maybe given sort of the volatility we've seen in rent spreads or cash rent spreads at least, can you give us what you think the outlook is for the rest of the year for cash re-leasing spreads?
Sure, Manny. I guess I would back up and maybe overview say, we had, on a GAAP basis, five quarters in a row of double-digit growth. We dropped down this quarter. I think that trend is still there, although I'll say it, as we would say, as we mentioned in our March quarter in Santa Barbara, we can have a lease or two that will throw us off that trend line. This time it was really three main leases that drove it. If it's helpful, we had an R&D as is, meaning no TI renewal in Santa Barbara. 82,000 sq ft for us is a large tenant. Our average is 25,000 sq ft. On a net basis, we went from in the 20s down to the high teens.
That's a big swing on a cash basis for us on a tenant. Again, there we think we did the right thing not offering They didn't need the tenant improvements, and we didn't offer it. That was reflected on our cash renewal. There were two leases in Florida, one in Tampa, where it was a build to suit for a manufacturing tenant that moved out, and we had amortized some of the TI in and had rent bumps. When they vacated, it went from a manufacturing building to a more typical distribution building, and that was a roll-down on a new lease. Then had, I'm walking you through the granular, I apologize, a renewal and an expansion in South Florida, where we had done just a good job on our last lease.
With the bumps, when the lease expired, the renewal was a slight negative. On the expansion space, similar to Tampa, it was an aerospace manufacturing space they expanded into, but we got a new seven-year lease in place. Three leases really drove down our re-leasing spreads this quarter. I would say if it's helpful to the listeners, we don't think three trees make a forest. With a company our size, we can get anomalies in our reporting. I'll still feel comfortable that the double-digit type GAAP re-leasing spreads are the trend, although I'm aware of a lease or two that we've got in the pipeline between now and year-end, where Houston, I would say, is a market where cash and GAAP are down in the single digits. I hope we're planning to lease space in Houston. Those will have some negative effects.
There's one I'm thinking of. We have a large renewal that we've worked out within our portfolio. It's not signed, you never know until it's signed, that will be positive GAAP, negative cash. This isn't the only anomaly quarter, I'll stick by the trends, if that's helpful. We're not concerned about the market or the state of the market. It's really a case-by-case, in any quarter, we can get an odd mix, unfortunately, this was one of those quarters.
Great. If we think about the Park North acquisition, just what's your sort of expected stabilized yield there and also going-in yields?
This is Brent. Park North, we're excited about. We bought that project 37% leased, four buildings. As a sub-market that we've looked at for well over a year now, we kept driving around figuring out what we wanted to do, we kept saying we want to do this. We finally approached the merchant developer and bought it. Upon 100% stabilization, it's a mid-six. At 95%, it's a low six. In the open market, if it were stabilized, we think it would trade at a low five. We think it's a way to create value beyond just a straight-up acquisition where you're buying at a five cap. We're willing to take on the leasing risk, stabilize it, then we've got equity built in day one and a great asset where we want to be.
There's an adjacent 15 acres that we have under contract that we're in our inspection period. If everything checks out there, it also gives us the ability to add a couple of buildings in the future. Real excited about that acquisition.
If we look at sort of the brokerage reports there, it looks like the vacancy in the North Fort Worth market is pretty high compared to markets around it. How do you get comfortable with the leasing risk in this asset?
Brent, chime in. I think North Fort Worth, you've got Alliance, is really where they have their space. It's about 12 miles north of our project. What I like about this one, we're at the intersection of two freeways. We're the kind of southeast corner of I35 and the 820 loop. We have great visibility, great access. Where I was going with Hillwood, which is up north, probably their smallest building they develop is half a million sq ft. It is the big box, million sq ft, Amazon-type warehouses, and they may build a smaller building really for a supplier or related entity to that. There's vacancy there, and it will probably bounce around north just given the size of the buildings they build.
Yeah, I would just add to that North Fort Worth sub-market, 7.9%, the overall market 6.2%, which is a record low for Dallas metro area, by the way. That little bit of higher vacancy, as Marshall alluded to, is driven by major big box distribution centers primarily being built by Hines there. Our multi-tenant, like Park North, is a lot less percentage of that and is an underserved portion of that sub-market. We feel like we're going to fit in real well.
All right. Thanks, guys.
Sure.
Thank you. We'll take our next question from Eric Frankel with Green Street Advisors. Your line is open.
Thank you. A question on the dispositions. Can you comment on what the overall occupancy rate was for all your dispositions and then a rough cap rate, if that's relevant given the occupancy rate?
Sure. I'll take the first part. Good morning. They were all full. That's part, as we talk about what's impacted this year, as we've moved our disposition guidance out. We purposely picked 100% leased buildings to maximize the value as we exited those assets. In terms of cap rates, the range was probably from the low fives to the highest would maybe approaching about, I'm thinking Northwest, which was our first disposition this year, which included some service center buildings and a 30-year-old project on the northwest side of Houston, was about a six and a half cap.
That includes the Phoenix building with the condemnation?
Yes. The way we looked at it was, again, that was an atypical disposition and the state had started the condemnation process. The state pays rent until they close on the condemnation. Every tenant but one had vacated, and the way we started kind of underwriting it was if we aren't able to reach an agreement with the state and we were acquiring this building, the cost it would take to re-tenant, re-tenant improvement and re-lease that space. Plus, we had stopped putting money into the project. We thought the state was taking it. If you underwrote it that way, it was about a 5 cap or slightly below a 5 cap sale. I think if we went back to where it started, it still was a sub-6 cap rate.
Okay. That's helpful. Can you comment on the disposition guidance? One, where are the additional property you intend to sell? Did that already occur this quarter, or is it something you're just adding to your plate towards the end of the year?
It's not happened yet. We've added to our plate, we still like the ability to reduce our Houston exposure. We're still eyeing a couple of Houston assets between now and year-end.
Okay. I'll queue back in. Thank you.
Okay.
Thank you. We'll go now to John Guinee with Stifel. Your line is open.
Great. Thank you. Decent quarter, guys. One thing you mentioned is that you were able to achieve an eight yield on cost, and it was a
250, 275 basis points spread for value creation. Is that eight yield on cost attainable at fair market rents for the land or your basis for the land? Because eight's a pretty big number in this day and age.
Thanks. I guess I'll take it. I'll choose to take it as a compliment. We agree. Eight is, we've said, going forward, it's hard to maintain eight yields on our development pipeline. We have a good spread. It's underwritten using our costs. We don't mark land to fair market value. It's based on what we purchased it as we put it into production. It's historic cost and current construction costs and current rents to get to that eight.
Got you. Okay. Obviously, lease up for your development pipe plus under construction is maybe 35% or so. Can you kind of talk through how you decide to start a building? When you're deciding to start a building, are you pretty sure from talking to your tenant reps out there in the marketplace that there is someone who will be in the market to fill it at that time? Is this very much of a bottom-up, there's an existing tenant in your space or an existing tenant nearby who you're pretty sure is going to take it eventually?
Yes. Good. Really great question. It's really driven in the field, which I like, rather than out of corporate. Most of our developments are additional phases within a park, and we've used kind of the description to investors, think of us as a home builder, as a subdivision. As one or two homes are sold and one's under contract, we'll break ground on the next one. It really bubbles up, and based on the leasing velocity of the last building we built, and sometimes we have prospects in hand or proposals outstanding, as that building starts to fill, we'll go ahead and have permits, and we'll break ground on that next building.
That's really where we believe we're managing risk rather than building a large building on the outskirts of town. We like making smaller bets on infill sites. Really, we can deliver in five to six months, and if the last building worked well, we'll build another one. That has served us well in Houston and markets when we cut the spigot off, we can cut it off pretty quickly, and we can keep moving pretty quickly. Brent, you're living it day-to-day.
I would just say, John, as an anecdotal example of that, our Eisenhower Point one and two, you see it's still under construction, and we've moved up to 74% leased. We've had just really good activity there. We moved out very quickly with Eisenhower Point three and four. Eisenhower Point three is a front part rear load multi-tenant building. Eisenhower Point four is a front load building. Those two buildings cater to different tenant types. Just based on that direct feedback at one and two, we were comfortable moving forward. Another example is ParkView has moved up to 82% leased. Creekview, which is basically that same sub-market, we moved forward with that. Even before we had begun to scrape ground there, we signed a lease that moved us from zero to 18%. Yes, we go into these multiple phases of development.
You're looking at the macro, then we're drilling down ultimately to, what are the proposals we're putting out? When we move forward, we have obviously a high degree of confidence when we do that.
I'll add, if it helps people, kind of with that velocity or what we're feeling in the market is you see us, like this year, we bought additional land in San Antonio at Eisenhower. Brent was doing well. We'll start looking for contiguous land, we've done a nice job of that at World Houston, where it was multiple parcels. In Charlotte, John Coleman, it was eight different sellers to acquire 50 acres earlier this year that we were quickly running through our land at Steele Creek and thought, what's available that's contiguous and find ways to keep expanding the subdivision.
Great. Thank you.
Sure.
Thank you. We'll move now to Blaine Heck from Wells Fargo. Your line is open.
Thanks. Good morning. Just to follow up on Jamie's earlier question, maybe for Marshall or Brent. Despite the occupancy decline you saw in Houston, it looked like you guys might have had decent retention on your expirations during the quarter. Can you talk about whether that was expected this quarter? Obviously, you guys have some move-outs coming up, but what are your retention expectations for the remainder of 2016? Maybe how do you feel about 2017 retention, if you can comment on that?
Okay. See if I can get all that there. The second quarter, you're right, it was higher, and that went about the way we expected. We've known because of the advance notice that third quarter, we had two or three in particular known vacates that are coming. The retention rate, we only have 5.8% remaining for the year in terms of rollover. Over 4% of that is in third quarter. By the time we get to fourth quarter, I think we have just a little over 1% left. The rest of this is going to happen third quarter, and the retention's going to be low just because, again, driven by specifically two known vacates that will be forthcoming.
I just want to point out, we've had some vacancy coming our way, but we have continued to sign leases year to date, or as of today, we've signed 604,000 square feet of leases. Of that amount, it was 450,000 square feet of new leases, meaning it filled either a vacancy or a development space, meaning it Going to begin to produce income on a space that wasn't. We're getting space coming back to us. We're working our way through it. As we've been saying since the original guidance back in February, we knew all this was coming, and very pleased so far. I will say that in the third quarter with some of the transactions we're doing, and Marshall alluded to it, for various reasons, the rent comps will probably show some downward pressure.
Net-net, we're pushing to get the vacancy taken care of and get our occupancy back in that range. Plus, we're selling these 100% leased assets, that's pushing the occupancy a bit, too.
Okay. Any sense at this point on how you think retention might trend in 2017?
I really don't. There's one particular large tenant that we're talking to about a potential build-to-suit, but it's so early and you don't know what's going to happen with them. At 17%, it will be, you can see the years after that, it drops down quite a bit. From now through 2017, we're going to have some leasing to get done in Houston, but no early good or bad news on 2017.
Okay. There was a pretty significant decrease in the Houston expiration schedule for 2020. Was that related to the dispositions you guys had in the quarter, or were there any move-outs that might have changed those numbers?
There was no move-out that changed that number. I would look back. You'll notice our sales caused two of our top five on the Houston summary page. Our sales caused two tenants to drop off, and it was just because of the sale, not because they had left us. I'm just looking now. In one of those, that's what I thought, Palmer Logistics, which was 238,000 feet, they were a 2020 expiration. They were in Lockwood. That went down because we sold those tenants with that property.
Okay, that's helpful. Lastly, in addition to the building sales you're doing in Houston, it looks like you guys are also making a little bit of push to sell land. Can you give us any color on changes in land prices in that market, and maybe how you think current pricing compares to kind of your basis in the roughly 100 acres you own?
Sure. Land prices are I'll mention one of your peers earlier asked us about development yields. Land prices are maybe surprisingly sticky. With Houston disruption in oil and gas, land prices have not moved much. We think we've got good basis in our Houston land and would probably be hard to replace today. What we've sold has been really land we picked up in bigger acquisitions in terms of parcels and really trimming here and there. Probably what we did, it started earlier in the year. We didn't like where our stock price was. We wanted to help keep funding the development pipeline. We took a hard look at what non-earning assets can we shed from our balance sheet. I'm happy, proud of the team for the results we've gotten.
It hasn't been huge dollars, but say we get $6 million or $7 million by the end of the year. That's the equity for one of our developments in our pipeline. That's what it looked like. I'd say land prices probably are rising across our portfolio and are flat in Houston.
Yeah, I just want to point out, too, Terry, the two land sales in World Houston are smaller parcels that we bought as part of a larger land transaction many years ago, I think even over 10 years ago. We've increased our position there with the golf course expansion. Over time, we've just evaluated that these wouldn't, in the near term or even long term, be industrial sites, that they had a higher and better use. In both cases, with the World Houston land sites, we're selling to hotel developers. We're reporting great gains on very small land transactions, which we're very pleased with. We're not selling what I would say industrial sites. They're sites that are going to be used for something different.
The one site we sold in Flower Mound was just an offshoot from the main parcel we had bought where we built ParkView, and we sold that at about a break even, which reflected market. We had not held that tract of land very long. Again, we were just moving that, bring the cash in and put it somewhere else.
Okay. Interesting. Thanks, guys.
Thank you. We'll take a follow-up from Eric Frankel with Green Street Advisors. Your line is open.
Thank you. Brent, can you comment on the supply picture in Houston in a little bit more detail? I think we heard from Prologis last quarter there's a large amount of supply generally in the market. Obviously, some of that is build-to-suit or it's a combination of build-to-suits and all the inventory being built in the east side. How much of it is being built in close proximity to your portfolio?
I'm not sure. I would not agree with the sentiment that the market's overbuilt. When you've got a 5% vacancy factor and only 0.5% of spec space in the development pipeline, the two combined are 5.5%. That just doesn't strike me as overbuilt at all. The north sub-market has the softest vacancy rate, and again, as I mentioned earlier, that's where the last cycle, for all intents and purposes, spec development on any large scale has ceased. There's just, say, 2 million square feet of projects. It's more of a demand issue, just slow demand versus overzealous developers. The north probably has a little more heavy lifting to do than the other sub-markets, but it doesn't strike me as overbuilt at all. We'd like to see demand pick up a little more.
You'd like to see companies moving into the market that are new companies, which we were seeing before. Those things would be better drivers than even if you cut off the spigot on the 2 million feet that are going now, it's not very large in scale to the market.
Right. Where is that 2 million square feet of spec located is probably the question I was getting towards.
Spread out across several submarkets, which dilutes it even further. You've got Southwest, two or three developers over there. You've got some projects going out on the east side near the port. The only thing going up north, there's a developer that has a parcel. They're building a 500,000 square foot spec building, which is a very big bet. That pretty much represents the spec development in the north submarket right now in that one building, and it's certainly not anything we compete with.
Okay. Thanks for the additional color. Marshall, can you comment on just additional development projects in other markets? I think Brent commented pretty thoroughly about what they're hoping to do in Dallas and San Antonio and Austin. Maybe the prospect of doing more developments in other additional markets would be helpful to understand.
Sure. We're actively developing in Tampa, which is a market we've seen kind of pick up in the last 12 months probably. We're certainly active in Orlando. John Coleman and the team there would tell you Florida is stronger today than it's been at any point since the downturn. We're looking to break ground in Fort Myers, which would be the first spec development down there. We're full. We've seen rents rise from around $4 a foot to $7 a foot. I was in Fort Myers recently, the only development that's been there has been build- to- suits because there's been no spec developers. That's maybe an atypical case for us. It's within our park, but it would be starting back up again. We're optimistic about Fort Myers, doing well in Tampa, doing well in Charlotte, as well as another market with our Steele Creek.
We think we'll break ground there, knock on wood, between now and year-end. That's dialed in there. Have some good activity lead with a build- to- suit out in Arizona that we need to get the lease signed, that's hopefully something our goal would be if we could talk about that next quarter.
That's helpful. Two final questions. Apologies for the long list. Can you just talk about, I know I think we've discussed in the past several years, it's so hard to track how market rents have trended or grown. Do you have a sense of year to date whether market rents in your respective portfolio, your respective markets, have they grown more? Has the prospect of some new supply tempered that in any shape or form?
I think outside of Houston, I said painting with a roller brush, they are up this year. I hate to be specific, but it feels like rents are growing and demand is rising faster than supply for our type product. The exception, which is, again, what helps, what we like about reducing our footprint, because every market will cycle. Houston's cycling down, so that one's down single digits. Probably people expected worse than that a year ago or 18 months ago. Otherwise, they continue to rise. It is always a little bit space by space and where did that tenant roll, and that is what hit us this quarter, not really anything systemic.
It does feel like we think that trend of double-digit GAAP re-leasing spreads, I think our chart will look similar in the next year than to what it looked like over the past year, which is double digits.
Okay. Final question is actually for Keith. I was hoping you would comment on the debt capital markets. We certainly noticed with the equity issuance and the dispositions that your leverage, the balance sheet leverage has decreased. Can you talk about term of debt? Obviously, some of the debt you procured this quarter was five to seven years, and I was wondering, are 10-year terms doable, and can you tap the unsecured market to accomplish that?
We had good quotes on 10-year, seven-year, and five-year. The way we look at it is you get a 10-year quote and then get the five-year quote. After the five-year rate is up, what do you have to get the remaining five-year to equal that 10-year rate? It was still a pretty good gap between the five and the 10, where we thought that the five-year was the best rate.
Okay. That's all I got. Thank you very much.
Sure. Thank you.
Thank you. We'll move now to Brad Burke from Goldman Sachs. Your line is open.
Hey, guys. Just a couple questions on capital allocation. First, the thoughts on pulling back with incremental ATM issuance for the remainder of the year, considering where the shares are at. Then second, Keith, just appreciate the comments on the debt capital markets, but how are you thinking about total leverage? I know you'd indicated that you were going to get down below six times by the end of the year. I guess I didn't expect you to get there by the second quarter. It looks like you're going to be a net debt reducer for the balance of the year. Just once you get through that, how are you thinking about the appropriate level of leverage?
Well, on leverage, I guess we're down some of the best debt metrics that we've ever had. Things are looking good. We've got multiple ways we can increase capital through either issuing stock. As things get better, we will continue to look at opportunities and see where we are. We're in pretty good shape right now.
I guess, with the share prices where they're at and also having what looks like ample capacity to layer in some additional debt, can you help us think about how you would think about incremental capital between equity and debt?
Sure. I'll take a little bit of a stab. Keith chime in. We assume no new equity in our assumptions for the balance of the year. It really will be driven by acquisitions. It's awfully tough. We're mindful of what year in this cycle we are. We're mindful of, as the brokers would call it, the wall of capital. We've bid on a number of acquisitions and really have had a poor batting average. We like that we have a stock price that gives us the availability to issue equity and make acquisitions. It's easy to spend money. It's hard to find value. We're going to keep looking for value. If we find it, we might issue equity. We're thankful that the equity and the debt markets are available.
Based on what we see, the kind of the best news is we think we can keep funding our development pipeline at the pace it's running without needing to go for external sources of capital.
Okay. I appreciate the comments.
Sure.
Thank you. We'll go now to Craig Mailman with KeyBanc Capital. Your line is open.
Hey, guys. Most of my questions were answered here, just curious on your thoughts on how far you think you want to push Houston exposure down from current levels.
Sure. We're around 18.5. Probably, I'm thinking without a specific number. We've still earmarked another Houston asset or two that we would like to exit kind of the next six to nine months. That will push us further down. We've hesitated on saying a number. As Brent mentioned, if we've got land in Houston, land at World Houston, if we can find the right build-to-suit opportunity and the right yield, we would build, and they're credits, they're in term, we would build today. That's made us a little bit hesitant. The other thing, we really like our Houston team. They've done a nice job creating value over time. In backing down, we realize when Houston stabilizes, don't be surprised, or I hope you see us announce a land acquisition.
This is down the road, we've acquired 50 acres for the next part Brent and his team dream up for us to build. We like having that runway for when there's an inflection point in the market. At 18.5%, it feels like we're not quite there, we'll keep backing down a little bit in Houston and more importantly, growing elsewhere. We'd like to have that runway when the market allows us to create more value there.
That's helpful. I guess without trying to pin you down on exact numbers, you guys got caught a little overexposed in Houston on this down cycle. As you think about going forward and just risk mitigation and kind of asset allocation to different markets, how comfortable or what comfort level are you with having your top market be X% higher than the next biggest market in terms of just trying to spread things out a little bit more evenly?
Good question. We've kind of looked at not so much in relation to the number 2 market, it is a topic of conversation and something we discuss with our board, being how comfortable are you seeing any one market be? That's probably reflective of what you're seeing in Houston today. I would say 20% is really a lot in any one market because every market has its day type thing. If you could switch it from Houston to San Francisco to Orlando, 20% is a lot in any one market because they'll all roll. We do talk too, there's certain markets that kind of trend in pairs. San Francisco and Austin are both driven a lot by technology. Dallas and Charlotte are kind of Fortune 100, Fortune 1,000-type markets.
They're markets where we think there's a higher level of correlation, we think about that. We've really thought more about what's our ceiling, which is probably in the higher teens on our largest markets, something we talk about with our board, we kind of hit kind of the warning track, I would call, is what we'd like to do on a go-forward basis.
Great. Thank you.
Sure.
Thank you. We'll move next to Ki Bin Kim with SunTrust. Your line is open.
Thanks. Just one quick follow-up. When you look at the tenant roll in Houston for next year, any pockets of weakness that you can see already?
As I had mentioned earlier, Ki Bin, at this point, we're in dialogue with a couple of the larger rollovers, but nothing good, bad, or indifferent really to report. The 17% figure is certainly, that's not really above average, but it's a full number for any given year. We've got some leasing work to do, be it renewal or leasing vacant space. Our team's on it and focused, but really no specific news one way or the other to give you at this moment.
Okay. Thank you.
Thank you.
Thank you.
Thank you. We'll take our final question today from Casey Martin with CenterPoint Properties. Your line is open.
Hi, guys. Thanks for taking my call. Most of my questions have been answered, specifically on the San Antonio development pipeline. Just a follow-up question maybe on the acquisition piece. Maybe you said you guys have been kind of striking out a little or had a low batting average. Where are you guys looking? Maybe where do you see the last $15 million that you're projecting for 2016 coming from, and what markets?
Sure. We're looking within our existing markets for the most part, kind of Sun Belt markets. I think all of them have actually been in existing markets. Really just as what bubbles up through the, I call it the CBRE, Cushman & Wakefield. Typically, if someone's got a listing, we've called on assets that weren't actively being marketed to find them, and that's really, especially once an asset gets listed, I just talked to the CBRE, and I know Brent talks to them regularly with our dispositions, national guys. What they've seen this year is cap rates continuing to come down across the country and really even spread to, it was the top five markets where cap rates were falling. Now it's within the top 15 as capital is having a hard time being placed.
We've got $25 million, which we started the year with $50 million in acquisitions projected. We lowered it to $25 million. Again, mindful of where we are in the cycle and how competitive that world is. Our goal would be to place that between now and year-end, and most likely within one of our existing Sun Belt markets. Never say never, but it will probably be in a Texas, a Florida, a California market.
Okay. Thanks, guys. I appreciate it.
Sure.
We have no further questions at this time. I'd like to turn the call back to our presenters for any closing remarks today.
Appreciate your interest again in EastGroup. Thank you for your time, and please feel free to call any of us post-call if you have any questions. Thank you.
This does conclude today's program. Thank you for your participation.