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Edited Transcript of EGP earnings conference call or presentation 7-Feb-19 4:00pm GMT

Q4 2018 Eastgroup Properties Inc Earnings Call

Jackson Feb 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Eastgroup Properties Inc earnings conference call or presentation Thursday, February 7, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent W. Wood

EastGroup Properties, Inc. - Executive VP, CFO & Treasurer

* Marshall A. Loeb

EastGroup Properties, Inc. - President, CEO & Director

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Conference Call Participants

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* Aaron Brett Wolf

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Brendan Patrick Finn

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Bruce G. Garrison

Chilton Capital Management LLC - Senior MD of REIT Strategy & Senior Portfolio Manager

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* Eric Joel Frankel

Green Street Advisors, LLC, Research Division - Senior Analyst

* Joshua Dennerlein

BofA Merrill Lynch, Research Division - Research Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the EastGroup Properties Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn the call over to Marshall Loeb, President and CEO. Please go ahead.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [2]

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Thank you. Good morning, and thanks for calling in for our fourth quarter 2018 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call and since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

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Unidentified Company Representative [3]

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The discussion today involves forward-looking statements. Please refer to the safe harbor language included in the company's news release announcing results for this quarter that describes certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected.

Also, the content of this conference call contains time-sensitive information that's subject to the safe harbor statement included in the news release is accurate only as of the date of this call. The company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which can be found on the company's website at www.eastgroup.net.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [4]

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Thanks, Tina. Our team performed well this quarter, finishing what was in many ways, a record year for EastGroup. Some of the positive trends we saw were funds from operations came in at guidance, achieving a 3.5% increase compared to fourth quarter last year. This marks 23 consecutive quarters of higher FFO per share as compared to the prior year quarter. For the full year, FFO rose 9.6% and we're pleased with the fourth quarter and annual FFO growth, given that equity raised during 2018 far exceeded our original budget.

The strength of the industrial market is further demonstrated through a number of metrics, such as another solid quarter of occupancy, same-store NOI results and positive re-leasing spreads. As the statistics bear out, the current operating environment is allowing us to steadily increase rents and create value for ground-up development and value-add acquisitions.

That said, we're mindful of the larger global turbulence and we realize we're not immune to an economic slowdown. We're not seeing that on the ground but government shutdowns, trade wars and the lack of economic confidence they create could eventually impact our tenants and our markets. At year-end, we were 97.3% leased and 96.8% occupied. This marks 22 consecutive quarters or since third quarter 2013, where occupancy has been approximately 95% or better, truly a long-term trend.

Several markets exceeded 98% and Houston, our largest market, was 96.6% leased. And while still our largest market, Houston has fallen from roughly 21% of NOI to slightly below 14% for 2019. Supply and specifically, shallow bay industrial supply remains in check in our markets. And this cycle of supply is predominantly institutionally controlled and as a result, deliveries have remained disciplined and as a byproduct of institutional control, it's largely focused on big-box construction.

Our quarterly pool same-property NOI growth was 5.5% cash and 3.4% GAAP. We're also pleased with average quarterly occupancy at 96.5%, up 10 basis points from fourth quarter of 2017. Rent spreads continued their positive trend, rising 7.9% cash and 16.6% GAAP, respectively. GAAP re-leasing spreads for the year were 15.8%, and when omitting the Santa Barbara R&D space, were 16.3%.

Given the intensely competitive and extensive acquisition market, we view our development program as an attractive, risk-adjusted path to create value. We effectively manage development risk as the majority of our developments are additional phases within an existing park. The average investment for our shallow bay business distribution buildings is $12 million. And while our threshold is 150-basis-point projected investment return premium over market cap rates, we've been averaging 200 to 300 basis point premiums. At year-end, the development pipeline's projected return was 7.4%, whereas we estimate an upper 4%s market cap rate.

During fourth quarter, we began construction on 2 buildings, totaling 139,000 square feet and coming out of the pipeline, we transferred 4, 100% leased buildings, totaling 381,000 square feet. For the year, we transferred 14 properties, totaling 1.7 million square feet in 10 different cities into the portfolio and all but one of these, a value-add acquisition, transferred over at 100% leased.

As of year-end, our development pipeline consisted of 17 projects in 11 cities, containing 2. million 3 -- 2.3 million square feet, with a projected cost of $206 million. For 2019, we're projecting $140 million in starts. As color commentary, the $140 million in starts for 2018 was a record level, so we're pleased to forecast maintaining that run rate. And while at a record run rate, we're addressing heightened economic volatility in several ways.

First, roughly 40% of our 2019 starts will happen in the first quarter. Second quarter accounts for about 1/3 of the annual volume and so that by mid-year, we will have started around 3/4 of our projected annual volume. Hopefully, we're being conservative for the second half of the year and as we gain economic clarity, i.e., lease space, we'll revisit projected starts.

Next, over 80% of our starts are within an existing, successful arc. What that means is that the next start is being pulled by active prospects, rather than an economic forecast, pushing supply out into the market.

And finally, we are active in a greater number of markets. This diversity reduces risk and enhances our ability to deliver the development pipeline.

Our fourth quarter acquisition was an off-market transaction to acquire Greenhill Distribution Center, a 45,000 square foot, 100% leased property in Round Rock, Texas, a North Austin suburb, for $4 million. Greenhill is adjacent to our Settlers Crossing Park development. And overall, given the expensive competitive acquisition market, we're being patient, disciplined and chasing more off-market acquisition and development sites. Towards that end, we acquired 2 land parcels in the fourth quarter, a 29-acre site in San Antonio and a 24-acre parcel in Phoenix, and we hope to begin construction on both of those sites in 2019.

Brent will now review a variety of financial topics, including our 2019 guidance.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [5]

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Good morning. We continue to see positive results due to the strong overall performance of our portfolio. FFO per share for the fourth quarter met the mid-point of our guidance at $1.18 per share compared to fourth quarter 2017 of $1.14, an increase of 3.5%. We continue to experience terrific leasing results in both the operating and development programs.

Average occupancy for 2018 was 96.1% and FFO per share for 2018 was $4.67 per share compared to $4.26 per share last year, an increase of 9.6%. Our balance sheet is strong and flexible, and our financial ratios continue to trend in a positive direction. Our debt-to-total market capitalization was 25% at year-end and our adjusted debt-to-pro-forma-EBITDA ratio, which normalizes the impacts of acquisitions and active development, was 4.72 for 2018, down from an already healthy 5.44 for 2017.

From a capital perspective, we issued 45.5 million of common stock under our continuous equity program at an average price of $98.77 per share during the quarter. That increased our 2018 gross equity raise to a record high, $159 million.

FFO guidance for the first quarter of 2019 is estimated to be in the range of $1.17 to $1.19 per share and $4.79 to $4.89 for the year. Excluding the 2 nonoperating gains in 2018, of a gain on sale of a partnership interest in a private aircraft and gain on casualties and involuntary conversion related to a roof insurance claim that combined for $0.04 of FFO in 2018, the FFO per share midpoint for 2019 represents a 4.5% increase over 2018.

The leasing assumptions that comprise 2019 guidance produce an average occupancy of 96.2% for the year and a cash same property increase range of 3.5% to 4.5%. Other notable assumptions for 2019 guidance include: $50 million in acquisitions and $47 million in dispositions; $60 million in common stock issuances; $140 million of unsecured debt, which will be offset by $130 million in debt repayment; and $450,000 of bad debt, net of termination fees.

In summary, our financial metrics and operating results continue to be some of the best we have ever experienced and we anticipate that momentum continuing into 2019. Now Marshall will make some final comments.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [6]

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Thanks, Brent. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in, upgrading and geographically diversifying our portfolio. And as we pursue these opportunities, we're also committed to maintaining a strong, healthy balance sheet, with improving metrics as demonstrated by the record equity raise last year.

We view this combination of pursuing opportunities while continually improving our balance sheet as an effective strategy to manage risk while capitalizing on the strong current operating environment. This mix of our strategy, our team and our markets has us optimistic about the future.

And we'll now open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Joshua Dennerlein with Bank of America Merrill Lynch.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [2]

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Could you walk us through the development pipeline? How much of the $141 million of starts this year is identified projects? And then maybe what's the timing of when you can get these underway?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [3]

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Josh, it's Marshall. Good question. Really probably first and second quarter, I would say, are really almost all identified and again, we'll start a little north of 40% first quarter and a little north of 30% second quarter. So by mid-year -- and usually, delivery is 5 to 6 months, we'll have started 3/4 of the $140 million. What I love about our model is I've compared it to retail, almost in my mind, when we run out of space which is, say where we are for the moment, at Steele Creek in Charlotte and Creekview in Dallas, it's really active prospects and RFPs that pulls that next inventory into the market. Most of our peers, public and private, it would be, "Hey, we think if we deliver a 700,000-foot building on a less infill on the edge of town, call it, the demand is there," while ours is really pulled. So that's where the second half of the year gets a little cloudier. It is we think we'll have some buildings leased up and that we'll be ready to restock inventory. But the first half of the year or 3/4 of the $140 million is identified.

We have several more that we hope that we kind of -- in our $140 million budget. And then on top of that, we have a shadow development pipeline of another, call it, 5 to 7 properties that we think with a little bit of luck, could get pulled into this year. And we're in the running but chasing a couple of pre-lease opportunities in Texas, and so if those turn into leases and we win those that there's really only one of those in the $140 million. So I hope like last year, we didn't come out of the gate projecting $140 million but that's how the year ended up and we'll -- and if the economy holds in, I'm hoping we can beat that number by year-end.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [4]

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Okay. Sounds pretty good on the development side. Those 5 to 6 projects, maybe excluding the 1 that's already in your starts assumption, how big are those? Like what kind of a shadow inventory of development starts? Like another say $70 million or...

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [5]

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It's probably a 1/2 to 2/3 of annual volume. And those won't -- again, we're not expecting all those to happen, or they'd be in our $140 million. But if you just said things that could fall your way, there's probably 1/2 again to 2/3 of the annual volume. And some of our annual volume too, they're always nice placeholders, I'm hedging a little bit, as you can tell. There's 1 or 2 that may -- that we've gotten $140 million may not happen just because we don't get the building that's there now, leased up. And so some of them may be replacements but it does make us feel, net-net, better about the $140 million.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [6]

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And your high end -- kind of what do you assume to get to the high and low end? What's kind of the base case there?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [7]

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I'm sorry. I don't know -- I'm not following you on -- high end and low end of development? Or -- I'm not sure I...

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [8]

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We lost you for a second, Josh. Could you repeat that?

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [9]

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Yes, sorry. To get to your high end or your low end of your same-store NOI growth guidance for '19, what are you assuming in there?

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [10]

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This is Brent, good morning, Josh. If you basically look at the chart in the press release, it's also in the back of the supplemental, that basically reflects -- the individual assumptions there basically reflect the midpoint. So in essence, to get to the mid-range of say, the cash basis, same-store pool of 4%, we're basically at that 96.2% and then all the other assumptions you see there. But -- so for that, it would be basically occupancy driven and then rental-rate driven. Keep in mind on the cash side, that most of those leases are in place, so that's driven by existing rent bumps and then to a much lesser extent, any new leasing you do, whatever that run rate, how it may compare. So basically, it's -- if we have another solid occupancy year, we feel good about that range.

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Operator [11]

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(Operator Instructions) Our next question will come from Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [12]

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So 2 questions. The first, Brent, if I read your guidance correctly, you guys are looking to issue more debt this year than you did last and less equity this year than last. And yet if I look at the cost, it looks like your debt cost is up and conversely, obviously, your stock is doing quite well. So can you just walk through why you're sort of reversing the sources of capital for this year versus last?

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [13]

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Yes, good morning. I wouldn't say we're reversing. We're basically showing a debt-neutral year this year, pretty much identical to what we had last year. Our debt issuance versus repayments in '17 were basically a breakeven. And we're basically projecting the same thing for '19. We're saying we'll issue $140 million and we're repaying $130 million. So basically, we're saying debt's neutral. So we're funding growth via ATM, via property sales, via our operating free cash flow. So we agree with you, at our current price, we -- last year, we budgeted, I think $50 million, we did $159 million. We've got $60 million dialed-in this year. If you'd asked me in late December, I would've told you I'm not sure if we could do $60 million, we were trading the upper 80s. And -- so there's been some volatility in the price but certainly, where it is now, we like it.

The other thing is having good uses for the capital that we're already down to -- I think on today's price, we're down into somewhere around 22% debt to total market cap. So at some point, you've got to check it just a little bit because it's not free to issue the ATM, it does -- part of our slower FFO growth this year compared to last year is being driven by heavy record ATM issuance, which we're happy to do and it keeps a very clean balance sheet but it's not free. It has some impact.

So we will be hitting the ATM and certainly, if the guys in the field can unearth more projects, we'll go more aggressively but we're forecasting debt neutral. We're not looking to issue ATM to pay debt down. But we certainly would use it to fund our operations, which is the way we've got it budgeted.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [14]

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Okay, and then second one, Marshall, on successive years of almost double-digit rent growth, how is this impacting the tenants? You mentioned market volatility, obviously, we have the swoon at year-end. It seems like things have stabilized now. But are the tenant -- are you sensing any pushback from tenants on the rent increases? Or it just doesn't factor into their equation? They're just taking space and committing to new projects at the same rate that they were the prior years?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [15]

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I'm sure there's -- and maybe overall, a little bit of sticker shock when your lease rolls. The good news probably with -- in a rising rental rate market, what really, like we've been in for a few -- double-digit for the last 4 years on a GAAP basis, almost all of our tenants, new and renewal -- I had a broker tell me it's a red flag if someone doesn't have the tenant-rep broker. So usually, they've had the initial meeting with their own broker, probably gotten through the shock and our rents are -- pending how the tenant, the space they're in and things like that, hopefully, we're slightly above market on a renewal -- because the cost and headache of moving -- but we're not in -- we're keeping pace with market and maybe being a little ahead of it where the situation allows. But they may be in shock, but by the time they look around at their other options, they're as expensive and so our retention rate has been good the last couple of years, 70% and over, I think we're in the low 80%s for the quarter.

So I -- and it's a low cost overall, compared to employees, labor and things like that, there's a little bit of shock over rent but thankfully, from almost all of our tenants, we're a low cost of their overall structure. When I met with tenants, we were just with one out in California and he was complaining more about hiring then, and this was one where his rent basically doubled and his complaint to us was about finding good workers.

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Operator [16]

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And our next question will come from Bill Crow with Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [17]

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Marshall, if you were to separate your user base into -- what your tenant base into kind of old economy and new economy, and I know it's a blurred line, but any change in the proportion of demand, shifting one way or the other and do you anticipate that if the economy does slow down a little bit that there's going to be increased pressure on kind of new economy to carry the day from a leasing perspective?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [18]

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Bill, good question. It's -- we're still predominantly old economy. And those tenants have done well, are doing well and continue expanding and then it felt to me, for the past several years, every quarter, we'll see 2 or 3 new names that we hadn't dealt with, like a Wayfair or different divisions within Amazon or someone as an Amazon supplier, kind of show up -- or Tesla is one, that wasn't a prospect a few years ago and now we're chasing a deal with them. And then there's -- I guess I'm trying to answer your question. You have tenants -- we've just recently signed a couple leases with Lowe's, that I would call an old economy type tenant but no one leaves the store with an appliance in the trunk of your car or your backseat. So what they've done with us, and I'm not sure it's this exact, but they've announced several store closures and in the meantime, are opening up distribution facilities. So if you order -- when you buy a refrigerator or appliance, they can get it to your home in St. Pete that afternoon rather than -- having it at a higher rent location. So I would think some of the new economy because they're building out their distribution network so rapidly, if the economy bumps, it makes sense to me like they would slow down a little bit. But we're still seeing even old economy tenants figure out their omnichannel retailing footprint and how that's going to work.

The other one we've seen of late, a pickup in and we never really -- their tenant mix evolved so much -- is third-party logistics. We've seen a pick-up even this year of 3 PLs out needing space. So that's been an interesting one as well.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [19]

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All right. And then you mentioned store closings, anybody been added to your watch list? Is it getting more active from a tenant that's worrying you at all?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [20]

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You know, there's always a few -- I think just the nature of 1,600 tenants, there's always a few that worry us. We had a -- out for the year, our bad debt came in slightly below where our historical averages have been, and that's how we -- for example, that's how we budgeted this year, is a multi-year average. At the end of the year, we reserved a furniture company. We've seen printing -- the printing business, is just by its nature one that we've had some issues, including 1 there in Tampa. And then a furniture retailer in Phoenix, where we're working with them, but they had a straight-line balance. And that was the majority of our bad debt hit in the fourth quarter last year, was related to furniture.

So it almost seems to be or -- another one that was -- headlines was Mattress Firm. It seems more industry-specific than any location or the economy slowing down in Houston or Jacksonville or anything like that.

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Operator [21]

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Our next question will come from Manny Korchman with Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [22]

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Marshall, maybe staying on the topic of acquisitions, which we -- you touched on earlier. Given the frothiness in the market, what would it take for you to accelerate the acquisition program? Is it a change in the product type? Is it just a matter of use or paying a little bit more and then growing faster, especially where your cost of capital is? Help us think through that.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [23]

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Good question. We tried to, given where the market is -- and I was just looking at one of the brokerage group's pieces of it, it was a couple pages of logos of groups around -- these were just international groups around the world that want to own U.S. industrial. So every package -- we would pick that we want to own. It's very competitive. I would think for us -- so we try to do more value-add where the building is not quite leased up or pushed just on development. The good news about everybody trying to buy is I'm glad we also create that product.

In terms of us acquiring more, we look at about everything and we get outbid in those cases. You will end up making the second or third round and it's trying to be disciplined and patient with our capital. I don't want to -- I guess, at least in the back of my mind -- I don't want to buy something just because we have cheap capital today. If it's something we're not going to want to own or feel like we overpaid for in 2 to 5 years, so we're trying to be patient and probably, to really ramp it up, we would just need to offer more than where we've kind of drawn a line in the sand. We typically, when we start bidding on a property, try to say how much do we -- what's our bottom line because once you get in the middle of it, you feel like you need to win it, or I do. You get competitive and you want to outbid someone, and that's not always best for our shareholders to get emotional that you want it more.

So good question and I hope we beat our acquisition goal for this year. It just seems like the cap rates are low and continue trending down and there's always somebody in every bidding package that's willing to pay a few hundred thousand more than we are, at least.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [24]

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And I thought we're sort of done talking about Houston for a little while, but it sounds we're back to that topic. So can you give us an update on what you're seeing there? And whether the sale you had in 4Q is emblematic of something bigger in Houston or just getting out of that particular [royalty] as an asset.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [25]

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Thanks. Yes, you're right, Houston seemed to kind of come up a little bit more in the last month or so. We -- I'm glad where we are, where we've drifted down from the low 20%s to below 14% and actually, our lowest quarter for the year is projected to be fourth quarter in Houston, meaning if we took our portfolio and everything is scheduled to roll in. We sold an older building in World Houston last year. And then we closed 1 this year. We'll keep pruning in Houston here and there and like it kind of organically drifting down. We've gotten concerns from Wall Street about Houston but I would say our guys in the field -- we're seeing -- that's where a couple of the RFPs for pre-leasing, we've delivered or really started 3 buildings there. The West Road V was a spec building and it quickly got to 100% leased, not long after construction rolled into the portfolio. World Houston 45 that we just broke ground this year as a pre-lease to a third-party logistic. So it's 100% leased. And then the third building, we started, was in -- it's on the West side of town, an expansion of an existing tenant. So they renewed and have taken about 40% of that building that's under construction.

So long, long-winded way of saying, Houston on the ground feels good. It feels a little bit like where we were a couple of years ago of a disconnect, but the market's 5% vacant. I just saw where Exxon announced a $10 billion liquefied natural gas plant down by the port. We're not down by the port but that's got to help the economy. So we'll be mindful of our size in Houston and we're certainly keeping an eye on it but we're seeing opportunities, still in Houston even with oil prices down a little bit. But it feels like the economy is doing pretty well, locally.

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Operator [26]

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And our next question will come from Brendan Finn with Wells Fargo.

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Brendan Patrick Finn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [27]

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I wanted to just follow up quickly on your development expectations. Is there a certain pre-lease percentage that you guys are looking to maintain for the development portfolio over the course of the year? And then I saw this quarter, it looked like the stabilized yield assumption for the pipeline came down a little bit, quarter-over-quarter. Was that driven I guess, by geographic mix or more build-to-suits? Or is that something you guys are anticipating seeing throughout the course of the year?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [28]

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Good question. We really don't have a pre-leasing. In fact, most of our buildings are spec. And it's -- building 7 in the park leased up and hit -- rapidly and hit our pro forma. So we'll deliver the next, building 8 on a spec basis. So every once in a while, we'll do a pre-lease opportunity. But for the most part, it is we're running low on space and we're still getting RFPs in the market. So -- and it will ebb and flow depending on what rolls in and out.

In terms of it dropping this quarter a little bit, probably -- I'm kind of looking at our schedule of gateway in Miami -- that land is a little more expensive. It's a little bit lower cap-rate market too compared to the Texas markets or different markets that we're in. So that probably pulled it down to the 7.1 where we've been, 7.25 to 7.5. So I think it would trend down, construction prices have gone up.

And then looking at the properties that we transferred out of the pipeline, they actually came in just north of an 8 cap. So we're thrilled with how -- everything that rolled in last year, to be able to achieve that. And if we can develop to an 8, and the market is probably a little below a 5 and how much can we push through that pipeline. So we're -- I think if it helps, that's kind of how we think about it and I like again, that our inventory gets pulled by the market rather than pushed out into it.

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Brendan Patrick Finn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [29]

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Cool, that's helpful. And then just real quick, I think Marshall, in your prepared remarks, you talked about the 4 R&D leases at the Santa Barbara facility last year. Is there -- or are there going to be leases at that facility that you anticipate signing again this year?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [30]

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Yes, we just signed one this week. I don't think the CapEx -- we don't expect the CapEx hit to kind of be an anomaly. But the building -- the 7,000-foot lease which we're happy to hit, to get with that -- got that building back to 100% leased. I don't think we'll have the leasing volume, we don't anticipate, in Santa Barbara, that it would have as big a ripple effects within the portfolio as last year, may be a better way to say it.

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Operator [31]

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Our next question will come from Craig Mailman with KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [32]

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Marshall, just curious, you guys have a little bit of a lighter expiration schedule in '19. I guess what I'm curious about is, kind of internally, the philosophy here, given what market rents have done. Trying to pull forward leases early from 2020, versus kind of bringing it out closer to expiration, to maybe grab a little bit more potential mark-to-market there.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [33]

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We always, again -- good question. I mentioned earlier, Craig, most people have their own brokers. So a lot of times, especially on a renewal, they dictate the timing or we'll approach them and sometimes they will ask us to come back later as it gets a little bit closer to expiration, but we've always wanted to renew tenants without kind of betting on market rents increasing. That may speak more to me being a chicken than I guess on market. It's nice to put deals to bed. And I have heard in California, some owners are waiting to the last minute to renew tenants because the market's gone up so quickly. And that -- they've looked smart so far, but when things turn, they could turn quickly. And usually, when a tenant is ready to renew, we're not the only person they're talking to. So they'll dictate the timetable as much or more so than we will. But we'll go ahead and pull leases forward and put them to bed as -- usually, as quickly as the tenants will allow us, kind of in a good or bad market.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [34]

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Okay, that's helpful. And then just, you mentioned that your development yields have been kind of premium here, even though land costs and construction costs have gone higher. I guess, just drilling into the benefits of building out the park over time, I mean, how are you guys and how are tenants kind of viewing what that rent is on the new build in a market, given, versus existing availability? And are you -- is part of the reason you've been able to get such good yields is you're putting in whatever premium over market rent for this new product because you just don't have anything left in the park, and if a tenant wants to be in your park, they're willing to pay that? Or are you guys, again, talking to your temperament, just more willing to take market, it's just worked out that yields have kept pace better than what you thought they would?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [35]

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I think it's a little bit of just -- we'll push rents as hard as we can, whether it's an existing building or a new building. I do think you have an advantage when it's first generation space and a brand-new park or especially once that park gets rolling and you can kind of -- what we love about -- I've compared us to a residential developer where you're building that subdivision. Once you've created that a little bit, we're going to buy a sense of place it seems like the leasing momentum picks up on the back half of a park, compared to the front half and you can push the rents.

And then the other thing with this economy, where we've benefited, and I'm sure that's helped us in rent, is how many existing tenants have wanted to expand. So taking someone from an existing building, with 2 or 3 years of term left, again, if their rents aren't that much of their operating costs and they need more space, it's great to be able to build -- move them from building 2 in a park to building 9 in a park. And we've had a fair amount of that happen over the last 18 months and we're still seeing that type of activity. So that helps us maintain the yields. And as -- this is I think about our yields too, we also have a carry-cost built into our yields. And with the 13 developments -- our developments -- that rolled in last year, all being 100% leased, most of those ended up not using the full year of carry that we underwrite. So where we can move it in, in 5 months rather than 12, that sure helps the yield. So that's probably another factor driving our cost -- our yields higher.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [36]

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I would just add to that, Craig, this is Brent. When you look at our product type, the multi-tenant with maybe a slightly higher office finish, you've got a higher per square foot cost, which you should in turn, be getting a higher yield for that little more risk. I think that our buildings are a little less of a commodity than say, a bulk building. So rental rates for a 20,000 or 30,000, 40,000 square-foot guy is a lot different than if we had a 500 or 1 million-square-foot building and we were trying to -- with almost no office finish and there's very little that would differentiate your big 1-million-square-foot building from the one next door. So it's a little different. I think it exemplifies our different product type as part of that equation as well.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [37]

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That's fair. Marshall, what do you think the shorter carry times kind of -- what do you think that juices yields by?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [38]

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Brent?

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [39]

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I'd say probably 20 basis points or something. When you budget -- we're budgeting for say 6, 7-month construction period and then a 12-month lease-up, so you're baking in 18 months or so of carry, it's interest carry, property taxes, that type thing. So obviously, if you can short-circuit that say by half, it's not the end-all-be-all but it's certainly a line item that when you run the job cost report, it shows a positive variance. And obviously, the more of those you have at the end of the day, the better your yield, but I would probably say it's been, without scientifically looking at it, probably in the neighborhood of 10 to 20 basis points.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [40]

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And it rolls in -- it obviously rolls into our FFO much earlier. So that's -- it helps whatever that next quarter is when it rolls in.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [41]

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And if I can just sneak one more in, some of your peers, ProLogis in particular, kind of took a hatchet to their guidance, given kind of the ever-shifting winds here on the macro front. I know you guys have a very ground-up process, but as you guys kind of gave initial guidance, was that in the back of your head to maybe haircut expectations of your regional guys a little bit, just to temper it? Or is this kind of your best guess and you didn't kind of, take any conservatism at all above and beyond what you normally would?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [42]

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Probably more the latter. I mean, I think it's really -- again I kind of -- and maybe having -- Brent and I both having been in the field, I think our guys in the field know more than we do at corporate. So I'll trust their judgment. I mean we'll challenge them. Some -- everybody wants to beat their budget and things like that. And then we -- but that said, we're certainly mindful of every other month, the government's either shut down or threatening to shut down and trade wars and things like that. So we did look at development starts and things. So it's -- everything's always a mix, right? So I guess it's mostly from the field with a little bit of caution here that we should be a little cautious, otherwise, your -- you just don't want to be an ostrich and put your head in the sand. If we could hit the repeat button for last year, we absolutely would. And we hope we can. But there's certainly a lot of headlines that scare you to death out there.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [43]

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I just would add to that, Craig, I would point out, this time last year, we had got it to a 95.2% occupancy for 2018. And the year went much better than we originally had forecasted. And we finished the year at 96.1%. But we are guiding, entering 2019 to a 96.2%, so our guidance this year does have 100 basis point higher bake-in than we started last year. Now where will that be as the year goes? I don't know. I hope it's 97-point-something, we say we were under again. But I would just point that out and all of that spelled out in our charts and tables and our assumptions, but I would just put that out there.

And one last comment, I'm sure that the ProLogis' $0.05 cut on their guidance had nothing to do that, that still put them $0.01 over the consensus amount. I'm sure they would've done that anyway. But good for them that they were in that position.

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Operator [44]

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Our next question will come from Ki Bin Kim with SunTrust Bank.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [45]

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Going back to your development start guidance, if I can paraphrase what you said, it sounds like in the second half, if things get better, or you feel better about the macro conditions, you might increase that. Do you get a sense that, that's the same way your tenants are thinking?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [46]

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Probably. I guess, thinking out loud as I say it, which is always dangerous, but ours is spaced leases, we'll deliver the next building. So we didn't -- and maybe just kind of going back to Craig's question -- we didn't build in a ton of optimism in that it's only about 1/4 of our starts. And some of that was just the way the calendar lines up, really happening in the second half of the year. So if we're able to lease buildings, we'll be rushing to deliver that next one, or really get that inventory on the shelves. And then I would imagine our tenants too, they all probably got a little nervous in December and early January. And right now people for the moment, feel a little better but the winds can change quickly but I'm sure as they feel better about their business, and things like that, I'm using a Wayfair, for example, they'll probably start rolling out more distribution buildings, or kind of working through their network as they feel better about the economy. So it'll -- we're partners with them on that. I am hopeful if they feel good about the economy, it probably means we'll see more expansions and we'll have upside to our starts this year. And if everybody gets nervous, we -- hopefully, there's not a ton of downside -- knock on wood -- to our starts, given how early they are in this year and over 40% will hit this quarter. We've already started a number of them, but we'll just see how the economy plays along. Again, last year was much better than we forecast it to be. And I hope that happens again. But we'll see.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [47]

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And currently, are you seeing any signs at all of tenants -- less traffic, or less willingness for a longer term, anything like that?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [48]

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No, not really. I mean, you always hate to speak in absolutes or hesitate to, but we're really not. It felt like the world was a little nervous. But now people are back and post-holidays and engaged and we've got good activity talking to our guys in the field. Things feel not that much different than they did in November, for example.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [49]

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Okay, and your development pipeline is roughly around $200 million, about half of it is leased. So if I think about the dollars at risk, it's about $100 million, compared to an asset base of $4.4 billion. Does that come up at all in your internal management meetings or board meetings, where you think about the dollars at risk in development, representing maybe 2%, 2.5% of the total company size, that being the right size, long term?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [50]

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Interesting way to -- I guess my short answer is yes. Although we probably look at it a little bit differently. We do keep a chart kind of showing our low-earning assets as a percent of assets. And that would include -- kind of on that development schedule our inactive land, our active land and then what's under construction. And then we've got a couple of assets that we bought where you're kind thinking that they are low yielding, call it the value add, but in time, they're going to work to a stabilized yield.

So we do look at it. We probably throw in a few more items in that bucket when we look as to what percentage of our assets are in lower earning. And then we do look at our landholdings also as a percentage of our assets. And then to me, even within that, you can be low on land but just picking a market, I wouldn't want it all to be in Atlanta, obviously, you want it to be a pretty mixed bag of where you have land for that next park. We -- it's a little bit of a love-hate relationship with land. Obviously, I always want room for 3 or 4 more buildings and not 10 because the economy may stop by the time you get to the eighth, ninth building. Rambling too much.

The other thing I like is with our development yields, today, on that $200 million, project it a little north of 7. And we think -- a blended average, I'm grabbing a number, call it a 4.7, 4.8 cap rate. Worst case, if things slow down and we need to drop rent and/or give more free rent or more TI to get those leased, we're still creating value. You're just not creating as much value as we expect today. But if things slow down, there is a lot of margin in there for us to come down on an asset and still create shareholder value.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [51]

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Right. So with all that said, I mean, is there any internal -- I don't want to say pressure, that's not the perfect word, but to increase capital at risk or development?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [52]

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Not -- I mean we'll try to develop as much as the market allows. Kind of like last year or this year but that's really driven -- again, I don't think it's driven by the field, not management or the board. It is really how fast -- there's a park in Eisenhower Point in San Antonio, we've probably run through it much faster than we ever, knock on wood, anticipated. But that --- thankfully, it's not a corporate, which I think is good for our shareholders. It is -- every building we've built is leased up and we've delivered the next one quickly, if that helps you.

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Operator [53]

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Our next question will come from John Guinee from Stifel.

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Aaron Brett Wolf, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [54]

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This is Aaron Wolf on for John Guinee. Quick couple questions. We were able to visit your Churchill Downs development a few weeks ago. Can you provide any updates on the project? And how it's different from your typical industrial park and buildout?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [55]

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Thanks for taking the time to visit it, we're excited about the park. We love the location. The first building is, as you all saw, close to wrapping up. And we've had good leasing activity on it. Happy that it's full, as you can see, fully leased, before we can finish it. We're just kicking off the second building there. We like the Miami market and it is 3% vacant, basically, at the end of the year, absorption last year was almost 5 million and new construction's about 3 million. So we like the dynamics and wish we had more in Miami.

So we like that park. It's probably not different -- and it's different in some ways in that the building's 200,000 feet, a little bigger than our typical development. The fact that it was horse stables is a little different although I would say maybe speaking to the scarcity of land, we struggle to find land. So everything we've looked at -- we're talking to a church about some land, today, we've looked at ground leases, obviously, horse stables, golf courses. It feels like that just greenfield landed zoned and ready to go is getting awfully hard to find in major cities and infield locations.

So every -- I've kind of kidded our board, I promise, we don't try to come up with difficult land acquisitions. But everything now feels like it has a story. We are talking to a water park in a different market and things like that. And have certainly talked to any number of retailers and/or retail landlords thinking -- my daydream is still a dying mall that we acquire one day. So maybe -- it's different in that it was horse stables, but that reuse -- you'll probably see us do more and more out of necessity.

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Aaron Brett Wolf, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [56]

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Great. Last question. You just talked about land acquisitions. If you look at your last 4 to 5 land positions that you acquired, how many are greenfield? And how many are change-of-use?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [57]

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Phoenix was greenfield, the Gilbert land. Flower Mound, greenfield, although it had some issues to work through on development. I'm trying to think of our last 3 or 4. They are almost mostly greenfield, but they also had some issues and that's why they hadn't been developed before. In Phoenix, they had to go through zoning. They're building multi-family adjacent to us. And there's some road work, another parcel we had tied up -- it's road work, it's in Texas, where they have the municipal utilities district. So all of them kind of have a story of something odd. They may not be -- probably still greenfield, but issues to work through before you can really get your arms around it. [I think it helps].

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [58]

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And Aaron, one last comment just to add for color. Anything we do acquire at this point of the cycle, kind of like the one in Phoenix and Dallas, I mentioned our goal is to get it into production as quickly as we can. So the ability to buy cheap land and hold it, we really have not done that in a few years and don't see that opportunity out there, if that helps.

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Operator [59]

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Our next question will come from Eric Frankel with Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [60]

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I'll just try to keep this short. I just wanted to clarify your overall earnings guidance and to how you calculate your same-store numbers? So I guess for Brent, your occupancy in your same-store pool, do you state that increasing or decreasing? How is that embedded in your same-store guidance?

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [61]

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It's pretty much dead on, Eric. For this, the guidance pool, of those things to our GAAP number you see, that is for the entire annual pool because obviously, for '19 at this point, the property is owned at 1/1/18 compared to 1/1/19, that is the static annual pool. And right now we're showing that, that same-store pool will mirror our overall projected occupancy average of right around 96.1%, 96.2%.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [62]

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Okay. And then re-leasing spreads? Any significant change from last year in terms of what we should expect? How is that embedded in your forecast?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [63]

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I would -- Brent chime in. I would build a model probably the same. Last couple of years -- and we like GAAP because you capture the rent box and the -- and any free rent in there more than we like -- cash releasing spreads probably baked in one. But last year was a little over 16, the year before, it was 17. If I were building a model, I would probably use those numbers and that said, I have been thinking rents were going to spike up a little more because of the lack of land, tight market and construction cost arising. So I keep thinking rents are going to go up and I continue to be wrong. We haven't seen it but I'll keep predicting it.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [64]

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It sounds good. And then just a very quick follow-up question for probably you, Marshall or Brent or anyone from the room. Just regarding relative value, obviously, cap rates are all-time lows, in some markets they keep dipping a little bit lower. Do you have any relative opinion on geographic markets, where cap rates are more reasonable? And total returns, do you think it would be able to get better or is that kind of, say, a case-by-case basis?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [65]

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I guess, where you are, Orange County in Southern California, feels incredibly expensive but the rent growth has exceeded our expectations there too. So I guess maybe going the other extreme, it's awfully hard and we are being patient to find value in the major California markets. But the rent growth has also been there. We still like Florida and Texas, we had 20% rent growth in Florida on a GAAP basis last year and the economies are strong there. But that said, cap rates -- because capital can't all go to those major gateway cities, it has spread out and we've seen cap rates come down in markets like Denver and Phoenix, where it at all can't go to California. And even markets like Charlotte, other kind of tertiary markets or maybe that kind of number, 10 to 30 markets where cap rates have really come down and prices per square foot have risen. So that's -- I wish there was a great acquisition market out there but sure, we haven't found it yet, not within our footprint. It continues to push us more towards development and value-add opportunities. We thankfully got 3 buildings last year and hopefully, we'll get 1 or 2 this year, where it's you're driving around with a broker and they say if we make an offer, they may sell. And so we try a lot of off-market offers and every once in a while, you get a seller who's willing to listen. So we'll keep trying that. But they've been smaller acquisitions, by and large, like that we saw a Greenhill in Austin, it was a $4 million acquisition, adjacent to our development. But those are still more the exception than the rule.

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Operator [66]

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Our next question will come from Bruce Garrison with Chilton Capital.

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Bruce G. Garrison, Chilton Capital Management LLC - Senior MD of REIT Strategy & Senior Portfolio Manager [67]

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Marshall, in terms of land availability, how far removed from the major cities can you go to lesser locations to meet demand? Is there some kind of rule of thumb?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [68]

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Two-part answer. Probably fairly far if we were building a big box kind of logistics chain center. And that's what we'll see, South Dallas, South Atlanta, Far Eastern Inland Empire, for what we do, which is -- we want to be as near to the consumer as we can, given the traffic -- and I'll pick Houston where you are -- given the traffic in Houston or Dallas, we have been successful in Fort Worth for example. We have some tenants that need an east and west location, it's too hard to drive trucks and van service from Dallas out to Fort Worth. So our Fort Worth tenancy is moved further west. We see that in Phoenix in East and West Valley tenants. So there's -- it's hard to say, it probably depends on traffic and a lot of times, where we are, it is someone that's trying to get either a delivery or to their customer in a hurry and HVAC contractors, we've seen that, that area be active of late. And if your HVAC is out in your building in Houston in the summer, you need to be able to get there fairly quickly. And so we like that it makes our buildings less of a commodity and they probably need to be a little bit less state-of-the-art. So they age better than -- what's state-of-the-art now in Inland Empire East won't be state-of-the-art in just a few years.

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Bruce G. Garrison, Chilton Capital Management LLC - Senior MD of REIT Strategy & Senior Portfolio Manager [69]

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Right. Are there any geographic areas, notwithstanding the issues in California but for example, in Florida? Or up the Atlantic seaboard? Are there -- is this land availability an issue everywhere? Or is it more acute in some areas versus others?

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [70]

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I'm -- coming -- I mean, I'll go back, coming back to EastGroup, I expected it. I remember it in L.A., I expected it in the Bay Area. And I've been surprised -- all of our major markets, it is awfully hard to find land, much harder than I anticipated. It's been a few years now but coming back to EastGroup, even markets like Jacksonville and places to find good sites and part of it is you think about it, we need to be near a freeway entrance, we need the zoning to work. We only build 1-story, unlike our peers, and we are about the first guys to get priced out of land. So when you kind of work through that chain, it gets awfully hard to find good sites. And probably, one of the things that helped us get comfortable when we entered Atlanta was meeting with several brokers, asking them about sites. And we're always in a conference room looking at Google Maps and how far outside the outer belt they were pushing us before they could find an available site. So the bad news as a developer, for us is it's awfully hard to find sites. Our guys are doing a good job and they keep coming up with things. The good news is I like how close we are to the consumer and that cities like Dallas and Houston and Phoenix and Orlando, Tampa, keep growing. So long term, I like our ability to push rents and the ability to keep supply down.

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Operator [71]

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And there are no questions at this time. So I'll turn it back to the speakers for closing remarks.

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Marshall A. Loeb, EastGroup Properties, Inc. - President, CEO & Director [72]

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Thank you for your interest in EastGroup. Everybody, thank you for your time this morning. We're certainly available for any follow-up questions and hopefully, we'll see you soon. Take care.

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Brent W. Wood, EastGroup Properties, Inc. - Executive VP, CFO & Treasurer [73]

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Thank you.

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Operator [74]

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This does conclude today's program. Thank you, for your participation. You may now disconnect.