Good morning, welcome to the EastGroup Properties first quarter 2016 earnings conference call. All lines are currently in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note today's call is being recorded. It is now my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead, sir.
Thank you. Good morning, thanks for calling in for our first quarter 2016 conference call. As always, we appreciate your interest in EastGroup. Keith McKey, our CFO, Brent Wood, Senior Vice President, 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, 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.
Thank you, Keena. The first quarter saw a continuation of EastGroup's positive trends. Funds from operations met our guidance, achieving a 4.6% increase as compared to first quarter last year. This represents the 12th consecutive quarter of higher FFO per share as compared to the prior year's quarter. The strength of the industrial market can be seen through another solid quarter of occupancy, leasing volumes, which were our second highest in the past nine quarters, and GAAP re-leasing spreads rising to 16.5%. Our same property cash net operating results have now been positive for 19 consecutive quarters. The depth of private market capital looking to invest in quality industrial assets demonstrated by the quantity and volume we're seeing in our dispositions, which we'll elaborate on later. Finally, our increasing FFO and dividend are being driven by the success of all three prongs of our long-term growth strategy.
At quarter end, we were 96.7% leased and 95.7% occupied. Occupancy has exceeded 95% for 11 consecutive quarters, a trend we project maintaining through year-end. This basically represents full occupancy for a multi-tenant portfolio. As commentary on the strength of the market, we've never achieved this level of occupancy for this long a time period. Drilling down into specific markets at March 31st, our major markets of Dallas, Orlando, San Francisco, and Jacksonville were each 98% leased or better. Houston, our largest market, with over 6.4 million square feet, was 96% leased and occupied. Further supply remains largely in check in our markets. Sifting through the figures in a number of our markets, you'd see supply is largely comprised of big box deliveries, seeing 250,000 square feet and above. By design, we simply aren't competing for the same prospects.
In fact, the figures we've read state that 75%-80% of new deliveries are big box deliveries. In other markets, such as Fort Myers, Jacksonville, New Orleans, Tucson, and El Paso, there's been little to no spec development since the downturn. Our markets where the fear of overbuilding is the greatest, such as Dallas and Houston, we're seeing declines in construction while deliveries are being absorbed. To date, the market discipline has been institutionally controlled and remains strong. Rent spreads continued their positive trend for the 12th consecutive quarter on a GAAP basis. This also marks our fifth consecutive quarter for double-digit re-leasing spreads. With 95% occupancy, strengthening markets, and disciplined new supply, we remain comfortable with this trend. First quarter same property NOI rose on a cash and GAAP basis.
This quarter was unusual as the growth was due more to rising rents, as average quarterly occupancy fell 50 basis points as compared to first quarter 2015 to 95.7%. We expect same property results to remain positive going forward, though increases will continue to reflect predominantly rent growth, as at 95%-96% occupied, we view ourselves as fully occupied. While it's a testament to the quality of our portfolio to have reached full occupancy so early in the cycle compared to our peers, it's making quarterly same-store NOI comparisons challenging as others are reaching full occupancy later in the cycle. As our occupancy demonstrates, leasing activity remains strong within our major markets. Within these markets, we're most encouraged by activity in Dallas, Charlotte, Orlando, and San Francisco. Tampa, another market in particular, is a market where activity picked up in late 2015.
The price of oil and its impact on Houston's industrial real estate 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 Houston with responsibility for EastGroup's Texas operations. Brent?
Good morning. We continue to be pleased with the operating results for our Texas portfolio, including Houston. Our four core Texas markets of Houston, Dallas, San Antonio, and Austin finished the first quarter at a combined 97.3% leased, while our Houston operating portfolio finished the quarter at 96% leased, down from 97.1% leased 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 vacancy rate finished the quarter unchanged at 4.9%, which is just 20 basis points above its record low mark of 4.7% set third quarter last year. However, we have seen an increase in sublease 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.
There was 2 million square feet of positive net absorption for the first quarter, which marked the 20th consecutive quarter of positive net absorption. Meanwhile, developers continue to show restraint with the construction pipeline containing 6.1 million square feet, which represents about 1% of the total market. Two-thirds of the construction activity is in the southwest sub-market, where we have a limited presence, and the southeast sub-market, where we have no presence. For our Houston portfolio, rents for the quarter were up 15.6% on a GAAP basis and up 12.4% on a cash basis. As for the same-property operating results, we finished the quarter up 1.7% GAAP and 1.8% cash, which exceeded our first quarter projections. Looking ahead to the remainder of 2016, we have further reduced our Houston scheduled expirations from 15.8% in mid-2015 to 9.5% of the operating portfolio.
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 are intentionally being cautious with our Houston budget assumptions included in our guidance. Our portfolio leasing assumptions produce an average occupancy of 93% for the year, unchanged from guidance last quarter, with the anticipated low point being third quarter. Same-store projections for the year are lower than our prior guidance, primarily due to the sale of fully occupied properties. We are now projecting down 2.5% on a GAAP basis and down 1.3% on a cash basis, excluding termination fees. From a development perspective, there are only two buildings in the development pipeline that are currently 49% leased. Our 2016 potential development starts for the company do not include any Houston starts.
We remain pleased that the geographical 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. Three of which broke ground in the first quarter. The fundamentals remain strong for the Texas markets outside of Houston, and they remain unaffected by the impact from lower oil prices. Marshall will discuss dispositions in more detail in a moment, but I will mention that regarding Houston, we were very pleased with the quality and depth of the buyer pool and the cap rates we're seeing, which has ranged from a low five to a mid-six, depending on asset age and characteristics.
Once we complete the sale of the remaining building under contract, our Houston portfolio will consist 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. In summary, 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 through a diverse development program. The majority of our developments represent additional phases within an existing park. The average investment for our business distribution buildings is below $10 million. Finally, we target 150-basis-point minimum projected investment return over market cap rates. At March 31st, the projected investment return of our development pipeline was 8.1%, whereas we estimate the market cap rate for completed properties to be in the low to mid-fives. During the first quarter, we began construction on three projects located in Tampa, Dallas, and San Antonio. These developments will contain five buildings with a total of 435,000 sq ft for a projected combined investment of $32.1 million.
Meanwhile, we transferred four properties totaling 363,000 sq ft at 68% leased into the portfolio. As of today, our development pipeline consists of 13 projects containing 1.7 million sq ft with a projected cost of $124 million, and of that amount, we've already invested $72 million or almost 60% of the cost. For 2016, we project development starts of approximately $95 million. What's especially gratifying about these starts is we can reach this level with no Houston starts, whereas in 2012, for example, our starts were roughly half the volume, with Houston accounting for almost 90%. 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 also raising some capital through the disposition of non-strategic land parcels.
Year-to-date, we've sold five properties totaling 871,000 sq ft for proceeds of approximately $48 million. Three of the sales were in Houston, which represented 785,000 sq ft and $43.4 million in sales. We've also closed two land sales generating $1.3 million. Two additional property sales are in our pipeline, one in Santa Barbara with funds at risk, and another in Houston, which is in due diligence. Other core land sales are in our pipeline, but not to the point that they're probable just yet. In Phoenix, we're continuing our dialogue with the Arizona Department of Transportation related to the condemnation disposition. Our asset recycling is an ongoing process. We're pleased with the year-to-date progress, and we're continually evaluating our options, especially further Houston sales. We view dispositions as an attractive source to help fund the development pipeline.
We are pleased with the match funding achieved within our 1031 tax gain deferrals, such that it has allowed us to reduce our projected 2016 acquisitions. As we recycle capital and diversify our developments, the portion of our NOI coming from Houston will decline, while the quality of the Houston portfolio continues rising. Keith will now review a variety of financial topics, including our updated 2016 guidance.
Good morning. I would like to comment on the equity research reports that reported on our first quarter earnings release. We have about 15 analysts issuing quarterly reports on our earnings. Most review the company's guidance and make their own tweaks to our projections. For the first quarter, we guided FFO per share in the range of $0.90-$0.92 with a midpoint of $0.91. We reported $0.91 per share. Most analyst projections were in this range, there was one report that projected $0.98 per share, which increased consensus. That analyst admitted that his number was high, would change it. It did not get changed. Some of the headlines from the analyst reports that EGP misses are frustrating when we meet our guidance midpoint and raise the midpoint for the year.
Now that I've gotten that off my chest, FFO per share for the quarter met our guidance at $0.91 compared to $0.87 for the first quarter last year, an increase of 4.6%. For the quarter, bad debt expense was $124,000, and lease termination fees were $183,000. Our debt metrics remain strong. Debt to total market capitalization was 34.8% at March 31st, 2016. For the quarter, the interest and fixed charge coverage ratios were 4.3 times. The debt to EBITDA ratio was 6.7 times, and the adjusted debt to adjusted EBITDA was 6.3 times. The debt to EBITDA ratio was higher than our run rate due to the extra G&A expense in the first quarter concerning accounting for stock grants.
This is consistent with prior years, although we are budgeting no common stock sales on an annual basis, we are projecting year-end interest coverage and debt to EBITDA to improve from last year's results. Our bank debt was $166 million at March 31st, we reduced this to approximately $100 million on April 1st when we closed the term loan. The $65 million seven-year unsecured financing has an effective interest rate of 2.863%. In March, Moody's affirmed EastGroup's issuer rating of Baa2 with a stable outlook. In March, we paid our 145th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.60 per share equates to an annualized rate of $2.40 per share. Our dividend-to-FFO payout ratio was 66% for the quarter. Rental income from properties amounts to almost all of our revenues, we believe this revenue stream gives stability to the dividend.
We have increased the midpoint of our FFO guidance for 2016 from $3.98-$3.99 per share. This is an 8.7% increase compared to 2015 results. We are pleased to be able to raise full-year guidance in spite of raising our disposition volume and significantly lowering acquisition targets. Earnings per share is estimated to be in the range of $1.96-$2.06. Marshall will make some final comments.
Thanks, Keith. Industrial property fundamentals are solid and further 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 are pleased to see the projected improvement in our year-end debt metrics, even with no equity issuance. Helping us to maintain a strong balance sheet is asset recycling, which we view as an attractive avenue to fund development. We like where we are, where our industrial markets are, what we're doing, and the results it creates in the long term for our shareholders. We'll now take your questions.
Thank you. At this time, if you would like to ask a question, you may do so by pressing star then one on your touch-tone phone. Again, that is star one to ask a question. We'll take our first question from Juan Sanabria with Bank of America. Please go ahead.
Hi, good morning. A question, I guess, for either Marshall or Keith. Just on the guidance front, you talked about raising the dispositions and lower acquisitions, what drove the increase in the FFO per share guidance? What gives you confidence in the core operations to do so?
The same store we've got is going up. That's one area. We were able to also, on our debt, to lower the debt because we lowered our acquisition, we got a better interest rate in the first quarter. Those are the two primary things.
What's driving the implied acceleration in the same store numbers? Is that a back-half pickup in occupancy or just the rental rate growth coming through on re-leasing?
Our occupancy remains pretty flat. As we kind of commented on, it's, Marshall, that we're 95% and kind of hovering in that 95% to a little over 96% for the year. It's really rent rate growth that's driving the same store. Some of it is lease up in a few of our markets, a lot of it is simply developments that we completed last year, finishing their lease up, as well as some of the new developments that were kind of the mix within our pipeline leasing up as we finish those buildings.
Those, again, allowed us some of that. We were happy to drop our acquisition target, really, as a comment on that, especially in this environment where acquisitions are so pricey and it's hard to find value, especially in this point in the cycle, we were able to cut back on the acquisitions while raising our guidance, it's really a lot of that internal leasing. I think feeding into that also gave us confidence, just the sheer volume. It was one of our best. It was an odd quarter in that we had a lower retention rate than the last couple of years at mid-60s. It's probably more a return to the norm. We did a lot of new leasing, it was our second-most leasing volume, as I mentioned, in the last a little over two years.
Great. Just one last one from me. What's your guys' sense of the latest thoughts on Houston? Have you seen a deceleration in leasing demand? Any pickup in kind of the watchlist tenants you're looking at? What's the latest feel you guys have? Has it improved at all with the rebound in oil, or is it kind of still people are cautious? Any thoughts?
This is Brent. The rebound in oil is nice, but people have kind of mentally dialed in that oil's going to be, quote, "down" for some period of time, and it's nice to see it back in the 40s. Just as people weren't making immediate knee jerks when it hit upper 20s or low 30s, they're likewise not running back out to ramp up their businesses at this point. As far as demand, it's choppy across the board. What we are seeing, it's being led by consumer and retail-type companies. Recent leases in the market include Lowe's, Amazon, Floor & Decor, Advance Auto Parts, Simmons Mattress, CVS Pharmacy. Again, some of those consumer retail-related products. On the flip side, logistics companies we're seeing either stay status quo or downsize. Presumably they're losing some contract business with oil and gas-related companies. The upstream and midstream-related companies obviously remain sidelined.
Downstream companies, however, valve companies and those type groups, especially on the east side, are still in the market. The market's behaving like you would expect in a slowing market. Choppy activity, but activity still being out there. In terms of a watchlist for us, we remain very pleased and fortunate that that has not yet still been a major concern. We had one small default last year. We've got no defaults this year. We've got one tenant that we're talking to and watching, and they're small in size as well. We have seen an increase not only in our portfolio, but in the market and sublease space.
As I mentioned in my comments, we don't often compete head-on with that, but it is a general precursor that as those leases come up, that the vacancy rate could gradually rise, which at 4.9%, I've been expecting for a few quarters now. All in all, it's been like it's been. It's just decelerated. There's activity, but when you get a chance to make a deal, you just want to go ahead and roll up your sleeves and try to figure out a way to get it done.
Thank you.
Thank you. We'll take our next question from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Oh, hey, yes, it's Alex Goldfarb, Sandler O'Neill. Morning down there. Just a few questions. First, on the stock price, obviously, you guys have had a good rebound here, and while it's still sort of on our numbers, a 10% discount to NAV does, and you guys haven't modeled equity issuance in your numbers, just given the travails of the stock recently over the past sort of 12 months, in your view, does it have to get back to NAV before issuing equity is once again a possibility, or are there scenarios in investment return where you would see equity issuance below NAV?
Good morning, Alex. It's Marshall. It's hard to say hypothetically. Obviously, we just put out our guidance, and right now we're assuming no equity issuance for the year. What I really like about where we are, and Keith mentioned, by the end of the year, our debt metrics improve, and we virtually issued $6 million last year and nothing this year. It's nice to at least be able to get within an NAV range. That's certainly one of the key factors that we would be cognizant of if we did pull the trigger and issue some equity. We believe we've got our uses of capital pretty well covered between the dispositions and the development pipeline.
It's not a need, but it's certainly something, in the last few weeks as our stock prices crept up a little bit, that we're cognizant of, and we'll look hard at NAV, and we're glad we're in a position where we don't have to do anything.
Brent, on Houston, I think you guys said you're 96 now, but you're expecting 93 overall in the year with a low point in the third quarter. Is it some of the dispositions that you're talking about that's going to drive it down, or are there a bunch of known move-outs that are really driving that number?
It's both. We are selling everything we've sold and plan to sell as far as is fully occupied. Third quarter, we have 58% of our remaining rollover for the year in that quarter, and unfortunately, it's just stacked right there with the tenants that we do know that are going to vacate. As I mentioned in the comments, primarily due to downsizing. There are a few things where, like in FMC Technologies, their corporate campus is just being finished, and they're going to relocate into that corporate campus. One tenant that was bought out by a larger M&A parent group, and then they're merging that into a larger facility. It's not really tenants leaving the market or tenants defaulting or anything like that, it's just for one reason or another, that's happening.
Third quarter, we expect to be our low point, and we just have chosen not to aggressively put quick release assumptions in there, just given the current state of the market and what we've budgeted isn't necessarily our goal, but that we plan to work through that. Again, third quarter being the low point.
Okay, just final question. First of all, obviously great to see the NOI pick up the portfolio performance improvement in the guidance. Just curious, in the past 2 months from when you had the fourth quarter call till now, were you guys seeing the same NOI and leasing trend improvements, but you were nervous to sort of raise the bar just given the overall macro environment? Have these been improvements in the past 2 months that are in the portfolio where tenants and the markets are showing strengthening in the past 2 months?
A little more of the latter. I'll admit, I was pleased or impressed with how much leasing volume we got done in first quarter. It was more than we expected. 16.5% GAAP re-leasing spreads is our record. I guess I'd have to go back, I'm looking at a chart back to pre-recession before we got close to that number. The markets were strong in January. It's not that we were doubtful on the markets. First quarter's been a strong quarter. Kind of going through, we've been pleased how disconnected or decoupled the Texas markets are from Houston.
To be as full as we are in Dallas and 100% in Austin and things where we still get questions about the downturn of oil and gas and how is that affecting Texas, and it's really Houston that has the cloud over it, but the other markets and the Phoenix market seems to slowly be picking up, and Brent's counterpart, John Coleman, would tell you Florida and the Carolinas are doing better than in any time since the recession. It was good. We feel like it's probably gotten better in first quarter. That's helped fuel a little bit of our optimism.
Okay. Thank you very much.
You're welcome.
Thank you. We'll take our next question from Emmanuel Korchman with Citi.
Morning, guys. If we think about your disposition program and we think about sort of the bookends or the limiters on that, is the limiter how much of that capital you see good uses for, or is it shrinking the portfolio, or is it somewhere in between the two?
It's not uses. It's really positioning. We've been pleased with the Really, the cap rate is afraid of Houston, it feels to us, as the public markets are. The private markets, the quantity of bids we've gotten, and Brent's been the closest to this, and the quality of the institutional bidders on our Houston assets. We've sold our oldest buildings that are not in industrial parks that we developed at attractive fives to low to mid-six cap rates. We'll keep evaluating it. It's really been we didn't want to fire sell assets, so if something was 50% leased, we weren't going to sell it, but just simply because it was. It was really where is that asset positioned and talking, we would get brokers' comments of value. We'll keep working our way through it.
I think the trickier part is we get at some point, we're down to all Class A within parts we developed, and not that we wouldn't consider some of those, but we've really been selling from the bottom, and we'll keep moving through that pipeline within Houston and elsewhere too. Obviously, we're selling an R&D building in Santa Barbara that's in a joint venture, and to a user, there's nothing wrong with the building. It's just not our core business. We think it's a good time to exit that asset to a user who will be the purchaser of it.
Are there any portfolios that you're either actively marketing or thinking about marketing, or is this all going to be sort of one-off sales?
It's probably one-off. What we are hearing, again, we're trying to sell assets that 5 to 10 years from now, you don't wish you still had. What we see, at least what we're hearing on portfolios, where you get the pricing premium, the only reason, I think, to put together a portfolio would be if you put together a portfolio of true Class A and you put it together in such bulk, at least through CBRE and some of the brokers, you can maybe get a pricing premium. We'd rather sell the things that we don't think are going to fuel our growth 5 to 10 years from now. That, that we would get the pricing premium, you don't want to sell things you regret.
I got it. Thanks.
Sure.
Thank you. We'll take our next question from Blaine Heck with Wells Fargo.
Great. Good morning. Marshall and Brent, you guys talked a little bit about the developments, can you guys just give a little more color on the starts that you had this quarter and just your comfort with starting all speculative projects as some of your peers have shifted to an arguably more conservative stance doing more build to suits?
Sure. Blaine, this is Marshall. Good question. I'll let Brent jump in. What I really like about our development model, it's not driven from here at the corporate office. Someone in a meeting recently compared us to a residential subdivision developer, I thought that was a good analogy, where it will build building houses, and you've got two that sold and two under contract, you build two or three more. It's really as leasing goes, that will dictate our overall, the bubble up and our development pipeline. Our leasing activity has been strong, as long as the guys in the field are leasing the buildings, we've felt comfortable. A lot of times we'll finish a building, recently we did one in Orlando, and we had two prospects for the last space, it gave us the comfort to build the next building.
The ones where, Brent, I'll let you comment on what we started. It's mostly in your markets this quarter.
Yeah, I always add to that. Blaine, as we always say, it's really just based on what we're seeing on the ground and the activity. Our Creekview 1 and 2, we're really excited about. It's in that North Dallas high-growth corridor near Frisco. At ParkView, we moved from 27% to 82% and feel good about getting that leased up, and feel good about we've even talking to a prospect about a portion of Creekview 1 and 2, and we're just now getting ready to break ground. In San Antonio, our Eisenhauer Point project, we've raised now to 48%, and we're still not shell complete there, and we're still working with other prospects for space there. At our Alamo Ridge project, we signed the build-to-suit last quarter for 100%. Again, with our leasing activity, that Alamo Ridge 4 represents the final building of that little four-building part.
We're going in, like the yields, like the activity volume, feel confident about it. Feel it's a good way to put money out.
We'd certainly consider a build to suit. I think with our peers, it's typically usually larger buildings. That said, we completed Mattress Firm in Tampa at the end of the year, so we wouldn't shy away from that, and we certainly have proposals out or that can kick off a new building to get a large portion of it leased. Most of our tenants, it ends up being a spec building, and it's based on the leasing of the prior building. The one start, just to comment, in Tampa, we built Madison II and III, and I was just there, this was 2 weeks ago now, and those are 95% leased, and our view is there's a window in the market, that there's no class A space. Our buildings are ready and under construction that will deliver before any of our peers can deliver similar products.
The hope is the cycle lasts until we finish these buildings, and then we'll be one of the few guys with class A space in the Tampa market. That's, if it helps, some of the thinking.
Yeah, that helps. Just a follow-up. In your development starts guidance, do you include any build-to-suit developments? Or if you got them, it would kind of increase the full-year number.
We're talking to a couple. Good question. Something could slip, but they would be incremental to our starts. Everything that's in our $95 million is a spec development at this point.
Okay. Just one more. Phoenix seems to have been a bit of a drag on occupancy, and same story in NOI in the last couple of quarters. Does that have anything to do with the eminent domain issue you guys talked about? Can you just talk a little bit more generally about that market and any prospective tenant activity you might have there?
Yes. Blaine, you're right. Phoenix has been interesting to us with Orlando bouncing back. I would have thought Phoenix is pretty much a tourism market, too, that it would have accelerated. It's been slow coming out of the downturn, when you talk to the brokers and the locals in Phoenix, it's such a home building market, and home building has been slow. The market is okay. It's about 90% leased, and that's where our portfolio has been. We've ticked up about 150 basis points in terms of leasing since the end of March. This first part of the second quarter, we've ticked up some leasing, but it's been a little bit slower, but we feel like it's ticking up there. The slowness, it's not related to the condemnation. It's an odd process there.
That building is actually, as we've moved the tenants out, the Arizona DOT steps in and assumes the rent until it's finalized. We're collecting rent from the state of Arizona, it's not hurting us economically during the quarter. It's just resolving the valuation with the state is kind of where we are on it's a government entity, it's a slower process.
Okay, great. Thanks, guys.
Thank you. We'll take our next question from Brad Burt with Goldman Sachs. Please go ahead.
Hey, good morning, guys. First, Keith, about that analyst with the $0.98 estimate. It got model updated, inexplicably got caught in limbo somewhere. Apologies for causing you guys aggravation. Overall, I thought it was a pretty good quarter. I guess, Keith, while I have you, the guidance, you're going to be buying less property, you're going to be selling a little bit more. Developments are the same-store guided up. You don't continue to not anticipate issuing equity. Just looking for an update on how you're thinking about leverage and how you're thinking about exiting the year with your leverage metrics and how maybe that's changed versus the fourth quarter.
Well, they actually get better. We're projecting debt to EBITDA to be close to 6 at the year-end. We've got the G&A hit in the first quarter was about $0.08 a share difference between first quarter and second quarter. You immediately jump up $0.08 in the second quarter and then progress from there. We're looking at better interest coverage. We're looking at better debt to EBITDA, and hopefully debt to total market cap will be great.
Okay. Just a question on rent growth, because a lot of the same-store growth at this point is just going to be attributable to rent growth. Can you tell us what you're expecting for growth across your markets for this year? I know that you expect that your portfolio is going to outperform within your markets, but just what are you thinking about the magnitude of that outperformance?
Brad, this is Marshall. On terms of magnitude versus our peers, I will say, over the last 5 quarters, we've ranged on, this is GAAP numbers, from roughly 11 up to rounding to 17. I think that, I'd say the midpoint of that, I think will be, certainly should stay, again, where supply is, unless there's a recession or some national hit to the economy, we're projecting and what we expect is kind of that 12%-15%, we should be able to continue to raise on a GAAP basis. Houston will be a little bit below that, but we're still thinking slightly positive to flat GAAP spreads in Houston. First quarter was a nice quarter for a GAAP number in Houston, but within the balance of our portfolio, as we carried 80+%, the markets are still pretty strong, and we're pushing rents pretty hard.
What would that presume in terms of actual asking rent growth over the course of the year versus rent spreads?
Are we thinking cash rents or I'm trying to follow your question.
Sure. Just overall market rent growth, not the re-leasing rents that you're leasing.
I guess it varies so much by market. I don't know that I could answer that. It's really too, also such a case-by-case basis within each suite that it's hard to say. Some of our markets are rising pretty nicely, and some, it just depends on when that last lease in that suite was done and what the next tenant needs in ways of tenant improvements. It's a tough one to answer.
Okay. Thank you.
Thank you. We'll take our next question from Eric Frankel with Green Street Advisors.
Thank you. I don't want to beat a dead horse on Houston, but just a couple of follow-up questions. One, I know you state your cap rate range on all of your Houston sales that have occurred or are in the works, but on the two that actually sold, they look a little bit lower in quality, physical quality. Could you share what the rough cap rates were for those assets as well as maybe the bidding process and who the buyers eventually were?
Yeah, this is Brent. We were in the low to mid six caps. These were what I would describe B assets with age, with some obsolescence issues, well located, 100% occupied, but maybe not what you'd consider "institutional." As we mentioned, we're very pleased with the depth and quality of the buyers. As you look at the property we have under contract now, it's a single building, our American Plaza building. That's more what I would describe of a Class A building, and that's going at a low five cap. It's not at risk yet, so you don't know until it's done. Again, we're very pleased, and that got very active to garner that. As Justin pointed out, that's around $8 million or so in gross proceeds.
A handful of the buyers in the end were groups that generally is below their threshold amount that they will purchase at because it's just not worth their time and effort. Given the difficulty that some of these groups have had placing their money, they pushed for it and pushed hard for it. We're very pleased to see that. Once we're done with these, as we spoke about, we're 95% of the portfolio within our core business parks in which we feel are premium assets there in the market. As Marshall said, we've increased the quality of what's remaining to the point where we're just Class A parks.
That's very helpful color. Thanks. I know you said you're going to essentially have 5 master core business parks that are going to be basically your core portfolio after the sales are done. Is there any consideration if these buyers are so frustrated by not being able to find decent product that you let one of those go at, let's call it a low 5 cap rate?
We'd consider it. They're not all 5 equal. We obviously have our favorites within those 5. Again, our barometer or compass has been, what would you want to own 5-10 years from now? We like where we are in a number of these, in the 4th largest city in the country, we hate to give up a position we couldn't replicate, investing elsewhere. There's some we'll consider, given the strength of the market, that we'll continue to recycle capital.
Okay, that's helpful. The 2nd question is related to acquisition and guidance. I guess you implied that you would lower it just based on your ability to shield the taxable gains. Can you talk about that process a little bit? I understand that it's a little bit tougher for REITs to reallocate capital from dispositions to developers because of those gains and there's just some tax issues related to that.
We had 2 acquisitions at the end of 2015 in contemplation of selling assets, we sheltered Northpoint, Lockwood, and Westley in that. There was concern that we would not be able to shelter Lockwood or Westley, that they would fall outside the time period, we were fortunate to get those in. That put us in real good shape as far as sheltering the proceeds against for 1031 exchanges. Looking forward, we've got a few assets that we've got some development that we can take care of with some of the sales, as we decided that we didn't need to sell $50 million, $25 million would probably cover the remaining assets that we have.
Okay. That's all right. Thank you. That's helpful. Final question is just related to e-commerce. Obviously, that's become such a much more prevalent topic in this sector over the last couple of years. Just want to understand what kind of impact you're seeing in your portfolio more recently.
Sure. Really just a shifting of retail models. What we like about our buildings, as people talk about the last mile of e-commerce, by having smaller infill site locations, if Amazon Prime is going to deliver within two hours in Dallas, for example, you can't be on the perimeter of Dallas and make it to someone's neighborhood within two hours. It's early stages of it, but we're seeing RFPs through brokers for Amazon and tenants like that within our spaces. We think other retailers will follow the format. The other, again, not as much e-commerce, but we've done a number of leases with Mattress Firm. Mattress Firm, for example, or other retailers, where they have the retail showroom, usually in a strip center, but they'll deliver from one of our warehouses later in the day.
That was, as I mentioned, one we just finished in December in Tampa. That's the model we've got. Brent has a couple space in Houston as well, a number of those. Also in Orlando, it's been interesting on the retail model that Nike came in and took space in our Horizon Park or South Ridge Park. It's continued to grow. There, they're running van shuttles on the hour from our distribution building to the retail centers because it's cheaper to store the goods with us than in a retail center. Most retailers would rather reserve that space and have more doors. We think we're in a good space for as the retail model shift and retailers go to fewer stores, that they'll have to deliver more quickly, and they'll need to be infill sites.
That the fulfillment center portion isn't mature. Certainly more mature than the last mile portion of it.
The only thing, this is Brent, Eric, I would add to that is, what's good to see is that the change over the last few years, it's been more of a decentralization of that distribution. Going back 15 years ago, everybody's saying you got to be Memphis or Louisville or something like that around a FedEx hub. As our consumer impatience, everybody wants something the same day, we're seeing with Amazon, of course, that trickles down to other companies, with this sudden move to have smaller facilities and more locations, which plays more toward us with our building sizes. So I think that's a positive that over time will benefit us, and I really don't see that trend stopping because I think people want it sooner rather than later.
That's helpful commentary. Thank you very much.
Sure.
Thank you. We'll take our next question from Steve Sakwa with Evercore ISI.
Thanks. Good morning. Maybe this is for Keith. If you take your first quarter and then look at the midpoint for the second quarter, you're at $1.89 for the first half, and using the midpoint of the year, kind of implies a fairly steep ramp to $2.10 or about $1.05 per quarter. Could you just kind of walk us through what the main drivers of that are, and what are the main differences maybe between the high and the low end of guidance?
Sure. In the second quarter, we're projecting $0.98 at the midpoint. If you add back the $0.08 in G&A that we already discussed, you're at close to that. We're expecting a little down in NOIs in the second quarter, that would drop it from the $0.99 to $0.98, why we're projecting that. In the third quarter, we're projecting NOI increases, primarily a little bit of G&A savings in the third quarter, but it's primarily driven by property NOI. In the fourth quarter, NOI projections increasing with development coming on the same store. Those are the increases going from
$0.91 up to the $3.99. We haven't put out the third and fourth quarter numbers. I hate to throw those out and be held to those, we do expect $0.98 midpoint second quarter.
Just maybe the big swing factor, I guess, just between, say, the $3.94 and the $4.04. Is it timing of development? Is it the same store kind of that's a range? What's throwing the $0.10 range?
$3.94 to $4.04. Oh, in our range.
Yes.
We just give us some leeway on both sides. We go through a process where we ask each person in the field, tenant by tenant, space by space, to project what they're going to do and what they think they can lease, the timing of it. With 1,500 tenants, that varies a good bit each quarter. We get that information, put that in, see what our financing needs are, G&A costs, put that in, and come up with a midpoint number, and try to give us some leeway on both sides of that.
Just one last question for Marshall. Just in terms of the disposition market and the types of buyers and financing needs, are you seeing anything as it relates to any difficulties, fewer buyers coming to the table, more financing contingencies than maybe you saw six months ago?
I think the broad answer is yes. I think on our dispositions, thankfully, we've had a pretty deep pool, kind of eight to call it 12 or 14 bidders, and usually run through a second-round process and things. Maybe, again, what we've sold has been our lesser qualities, but thankfully, with lesser quality assets, we've seen a pretty deep bidding pool. What we're hearing through the brokers is really more the B minus and C assets with the difficulties in the CMBS markets, that those assets are frozen and that there's not much transaction volume there. Certainly within the As, cap rates have stopped falling, but there's no movement in cap rates there, and actually maybe even down a little bit. The Tampa community, for example, they just set some record lows in terms of cap rates on quality product there.
The B assets is maybe what we're selling. We're not feeling it, but we are hearing about it.
Of those 8 to 12 buyers that show up for your sales, are they pension fund advisors? Are they small individual local real estate businesses, entrepreneurs? I'm just trying to get a feel for the type of buyer.
This is Brent. I'll jump in. It depends on the quality. When you get into the B-type assets, it can be a little bit mixed and less institutional. For example, the building we have under contract now, which is again, I guess you would term a Class A type building, well located, that kind of local buying pool gets pushed out very quickly because the institutional pension fund, life company, retirement plans, those type groups get very active and very quickly push the cap rates down. Anything in that B+ to A range drives right now is garnering very solid all-cash buyers that are competing hard against one another to buy those assets.
I'm just going to pipe in. The outside with probably one of the smaller assets in Dallas and in Santa Barbara, it's users buying the buildings. We think we're getting good pricing, but it's users relocating into the buildings. Then more of a regional buyer with one of the ones Brent sold, I was just thinking within Houston, our Lockwood asset, it's the oldest asset in our entire portfolio. It was a regional buyer that owned other product in the market. We really didn't even go through a full marketing process with it. We approached them through a broker, and were able to move that one.
I think just one quick comment to that. One thing that shows the investment community's desire to place money, that Lockwood asset, we had one of the three buildings, which represented about a third of the square footage that was rolling, and we knew it was going to vacate next month. We were going to wait, stabilize it, go to market. When people learned that we were willing to sell it, we basically had people competing to take the leasing risk on their own, and to get what we felt like was basically a cap rate as though the leasing risk were taken care of. Those people just wanted a chance to get in the door. Again, the activity is very good.
Okay, thanks for the color.
Welcome.
Thank you. We'll take our next question from John Guinee with Stifel.
John?
John, your line is open.
Maybe we go to the next one, please.
Hello?
John?
Yes, sir.
Good morning.
My question's been answered. Thank you very much.
Okay. You're welcome.
Thank you, John.
Thank you. We'll go next to Eric Frankel with Green Street Advisors.
Thank you. Just one quick follow-up question. We noticed certainly in one of your larger peers report results a couple of days ago that the Southern California industrial market seems to be pretty strong. Just hoping you can comment on the drop in occupancy and the prospects for leasing that space. Thank you.
Sure. You mean in Los Angeles? Is that?
Los Angeles specifically, yes.
There, it's one property in North Orange County. It's our Walnut property. We had a tenant vacate. We've renovated the space. I guess the bad news on our timing, they're also doing road work
Some major roadwork right near our property. We'll get at least It's two suites, the other good portion of that vacancy was a tenant that went bankrupt in early March. One tenant move out, we had a bankruptcy. A strong market, and we should get it re-leased quickly. One was any bankruptcy, I guess, is unexpected, maybe redundant, but a bankruptcy within the last, call it 30, 45 days.
Thank you very much. That's helpful.
Sure. You're welcome.
Thank you. We'll take our next question from Ki Bin Kim from SunTrust.
Thank you. Thanks for taking my question. Just a couple of quick follow-ups. If I look at your same-store-wide guidance increase, it seems like partially, part of that was the bad debt expense assumptions. Could you just talk about what caused the decrease in that number?
The decrease in bad debt?
Yeah, bad debt expectations for the year.
We had $280,000, I think, each quarter. The bad debt in the first quarter was $124,000. We just took the $156 and reduced how much we were going to do for the year.
Okay. In Houston, talking about some of the occupancy losses, thanks for that clarity. What type of tenants are the ones that are typically moving out first when you see that kind of downturn or trouble in Houston?
This is Brent. Ki Bin, it's across the board. We've literally printed out and studied to see if there's a trend. It's not just oil and gas companies. It's some building trade companies that maybe are expecting their business to slow and to downsize. As I mentioned, logistics companies looking to maybe downsize some. A lot of this is coming from corporate level. A lot of them, you talk to local guys, they say, "We need the space." The corporate looks and says, "We can trim down." It's not a particular sector. Like I said, the consumer retail side of the equation has been in the growth mode. Like I say, the oil and gas, light manufacturing, those type companies have been more on the downsize, logistics on the downsize.
One of the difficulties of leasing is you get the word from the tenant six, nine months ahead of time that they plan to vacate, but you don't really have the true opportunity to re-lease that space and try to capture your own downsizing tenant of someone else until you get closer to that expiration, just simply because the space isn't available until that time. It's our hope as we get in some of these known vacates in the summer, third quarter, that with our multi-tenant portfolio, we hope to capture some people downsizing from larger spaces. We just won't know that till we get there and have the space available.
Okay, just last question for Marshall. What are, if any, some of the incremental changes we can expect in EastGroup over the next few years? I know it's probably not going to be anything massive, just on the incrementally, whether it be balance sheet or just a philosophy on how much development this company should be doing, or just the overall size it should be in a few years.
Sure. Still, David Hoster's still actively involved in the company, Chairman of our investment committee. David and I speak frequently. I think we'll evolve, and I've worked with and for David forever, it feels like right out of school. I think we'll evolve, but I love where our balance sheet is. I guess I'll tie it back to the earlier question of where would you issue equity. It's nice when you don't need to issue equity. I don't foresee any major changes. We'll continue to evolve, and we may exit a market or two, or enter a market or two, but I don't think that would be any different than if David were still CEO. It's certainly a team. It's not David or Marshall. Keith and Brent are stuck with me, too, so it's all of us.
Okay. Thank you, guys.
You're welcome.
Thank you. We'll take our last question from Craig Mailman with KeyBanc Capital Markets.
Hey, guys. Just want to hit on the development pipeline. The under-construction yield came down 40 basis points relative to last quarter. I appreciate your comments that you guys are still keeping the 150 basis point spread relative to acquisition cap rates. Just curious, I guess partially this goes into your view of cap rates, but at this point in the cycle, would you be more comfortable raising that 150 closer to two and being more selective about projects, just given the possibility that your kind of value creation could compress if cap rate rises?
We would. I think we could switch it to two. You can go in with your numbers, but if we sold, I'm just looking at just what's in our under-construction pipeline in those markets, we would be well below a six cap even there. We target 150, but really in kind of looking through it in Dallas and in Charlotte and Tampa, we're seeing A product sell at five or even in Dallas, a little below a five cap. I think you're right. It dropped in the quarter, but it's a moving pool of assets. It is a pipeline. As we pull those out, I know Creekview, for example, is a little below 8%, but land prices in Dallas, and as Brent said, we're optimistic about that, how that one will play out.
It'd be fun to see how fast they lease that one up. We're comfortable at 8, given a 5 cap or 5.5 cap market. We're still too long-winded way of saying we're still at 250 basis points above 150 basis point guideline.
Okay, that's helpful. What was the lowest stabilized yield that you guys put into the pipeline? I'm just trying to reconcile, the lease-up pipeline didn't really change all that much. You had some higher kind of yielding projects come out and be delivered, and then the construction pipeline came down by 40 basis points. I'm just trying to get a sense of which projects brought that down and what's the kind of the floor or the lower end of the yield range.
Well, Craig, this is Brent. I'll have to speak to it since West Road 3 is at 0%, I think we can safely say that's at the lower end of the range. That building, as we mentioned before, is a single tenant. It's going to be 0% or 100%, there's no in between, and some of that was just site dictated with that 5-building part. That particular building on the site plan is a single-tenant building, and it's been most susceptible to that slowdown in that light manufacturing-type tenant that would be the best use for it. Even that, we eventually will get it leased, and even there, if we can garner a 7 or low 7 cap, we're still going to even have quite a bit of value creation there.
The other thing I would say, driving, Craig, some of that drop in those percentages, as we've been very pleased that as Houston has played basically that role has diminished quite a bit and other markets have picked it up. We had gotten quite spoiled with some of the returns we were getting, especially with our Houston projects, where our land basis was very low, and we were even pushing some 9% yields on some of those, which we were very pleased to have, but just wasn't sustainable at that level. As we've brought in some other projects like a Dallas or something, it's being replaced with just slightly lower yields, but still, again, very good value creators.
All right, great. Thanks, guys.
You're welcome.
We have no further questions at this time. I'll turn the program back to you, gentlemen, for closing remarks.
Thank you for everyone's time and interest in EastGroup again. We're certainly all available this afternoon and tomorrow if anyone has any follow-up questions, and we look forward to seeing you soon.