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Edited Transcript of EGP earnings conference call or presentation 21-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Eastgroup Properties Inc Earnings Call

Jackson Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Eastgroup Properties Inc earnings conference call or presentation Friday, April 21, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent W. Wood

EastGroup Properties, Inc. - SVP and Head of Houston Regional Office

* Marshall A. Loeb

EastGroup Properties, Inc. - CEO, President and Director

* N. Keith McKey

EastGroup Properties, Inc. - CFO, EVP, Treasurer and Secretary

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Conference Call Participants

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* Alexander David Goldfarb

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

* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* 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 - Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* John W. Guinee

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

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Richard Charles Anderson

Mizuho Securities USA Inc., Research Division - MD

* Robert Matthew Simone

Evercore ISI, Research Division - Associate

* Sumit Sharma

Morgan Stanley, Research Division - Research Associate

* 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 First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this call may be recorded.

Now it is my pleasure to introduce Marshall Loeb, President and CEO.

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

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Thank you. Good morning, and thanks for calling in for our first quarter 2017 conference call. As always, we appreciate your interest. Keith McKey, our CFO; and Brent Wood, Senior Vice President and CFO-in-Waiting, are also participating on the call.

Since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

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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. - CEO, President and Director [4]

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Thanks, [ Kena ]. The first quarter saw a continuation of EastGroup's positive trends. Funds from operations exceeded our guidance, achieving an 8.8% increase compared to first quarter last year. This marks 16 consecutive quarters of higher FFO per share as compared to the prior year's quarter. The strength of the industrial market is demonstrated through a number of our metrics, such as another solid quarter of occupancy, leasing volumes setting a quarterly record, positive same-store NOI results and record positive GAAP releasing spreads. In summary, our increasing FFO and dividend proved the success we're seeing in all 3 prongs of our long-term growth strategy.

At quarter end, we were 97% leased and 95.6% occupied. Occupancy has exceeded 95% for 15 consecutive quarters. And as market commentary, we've never achieved this level of occupancy for this long a time.

Drilling into specific markets at March 31, a number of our major markets, including Orlando, Jacksonville, Charlotte, San Francisco and L.A. were each 98% leased or better. Houston, our largest market with over 5.9 million square feet, which is down from over 6.8 million square feet in first quarter 2016, was 95.5% leased.

Supply, and specifically shallow bay industrial supply, remains in check in our markets. In this cycle, supply has predominantly institutionally controlled and, as a result, deliveries remained disciplined. And also, as a by-product of the institutional control, it's largely focused on big-box construction. In fact, a recent CBRE study showed shallow bay delivery still below prerecession levels.

Rent spreads continued their positive trend for the 16th consecutive quarter on a GAAP basis, rising over 17%. Overall, with 95% occupancy, strengthening markets and disciplined new supply, we continue seeing upward pressure on rents.

First quarter same-property NOI rose on a cash and GAAP basis by 5.9% and 3.7%, respectively. Average quarterly occupancy was 95.6%, down 10 basis points from first quarter. We expect same-property results to remain largely positive going forward, though increases will continue to reflect rent growth as at 95% to 96% we view ourselves as fully occupied.

The price of oil and its impact on Houston's industrial real estate market remains a topic of discussion. We thought it appropriate for Brent to again join today's call. Brent is our Houston-based Senior Vice President with responsibility for EastGroup's Texas operations. Brent?

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [5]

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Good morning. Our Texas markets finished the first quarter at combined 95.1% leased, while our Houston portfolio finished the quarter at 95.5% leased, up from 93% last quarter and ahead of our projections. The Houston industrial market exhibits solid fundamentals at quarter end. The market vacancy rate was 5.2%, which remains near-record low. There was 3.1 million square feet of positive net absorption in the first quarter, which marked the 24th consecutive quarter of positive absorption.

Meanwhile, developers continue to show restraint with the construction pipeline containing only 2.9 million square feet of speculative space, which is down to a level not seen since 2011. Even though the overall Houston industrial market remains stable, there is an undercurrent of tenants downsizing upon their lease expiration, which is producing a lot of movement within the market. We have not been immune to this trend. I mentioned last call that we signed a total of 30 leases during 2016: 20 were new tenants and only 10 were renewals. A more typical year would be the inverse of those results: 2 renewals to 1 new lease. That trend has continued as we signed 15 leases in the first quarter: 10 more new tenants and 5 were renewals. The leases totaled 470,000 square feet, which represents our most activity in a quarter, excluding build-to-suits, since first quarter 2013. The good news is that there continues to be prospects in the market to backfill vacant space.

Our leasing efforts have reduced our scheduled explorations for 2017 from its peak of 17.7% down to 10.8% as of March 31. With several known move-outs throughout the remainder of the year, we will continue our focus on maintaining occupancy. As a result, we have been cautious with our Houston budget assumptions included in our guidance. Our leasing assumptions for the remainder of 2017 reflect occupancy reaching a low of 87% in the third quarter before gradually rising to end the year. Looking into 2018, only 7% of our Houston portfolio is scheduled to expire, which is less than half of the square footage we faced in 2016 or 2017.

The diversification of our development platform within Texas continues to produce results. Our 2017 potential development starts include additional phases to existing parts in Dallas and San Antonio, and we made our first land acquisition in Austin where we plan to start a couple of multi-tenant buildings before year end.

In summary, the fundamentals remain strong for the Texas markets outside of Houston. Marshall?

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

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Thanks, Brent. Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk-adjusted path to create value. We believe we effectively manage development risk as the majority of our developments are additional phases within an existing park; the average investment for our business distribution buildings is around $10 million; we develop in numerous states, cities and submarkets; and finally, we target 150 basis point minimum projected investment return premium over market cap rates. At March 31, the projected return on our development pipeline was 7.6%, whereas we estimate the market cap rate for completed properties to be in the low- to mid-5s.

During first quarter, we began construction on 3 buildings totaling 376,000 square feet with a total investment of $27 million. These starts were in Orlando, Tampa and Charlotte. We transferred 5 properties totaling 1,050,000 square feet into the portfolio at 71% leased. The lease percentage is slightly lower than typical, and one anomaly within these results is Parc North and Dallas-Fort Worth. Parc North, as you may recall, is a 4-building, 446,000 square foot development we acquired last July, roughly midway through the developer's 12-month lease of time line. It's up to 54% leased as of March 31. We love the location long term, and it's also reinforced our strategy to develop 1 to 2 buildings at a time.

At March 31, our development pipeline consisted of 15 projects containing 2.2 million square feet with a projected cost of $187 million, which is 53% leased.

Looking ahead to new developments. Earlier this month, we acquired 30 acres in Round Rock, Texas, as Brent mentioned, that's north -- just north of Austin, with plans to develop 4 buildings totaling approximately 340,000 square feet. For 2017, we project development starts of approximately $100 million. And what's gratifying about these starts is we can again reach this level in 2017 with no Houston starts demonstrating the value of our diversified Sunbelt market strategy.

Our asset recycling is an ongoing process. In the past year, we've recycled capital -- as we've recycled capital, the portion of our NOI coming from Houston declined, while the quality of the Houston portfolio rose. Specifically, at the beginning of 2016, Houston represented over 20% of our NOI with 3 additional properties under development. Today, Houston represents approximately 15% of our 2017 projections.

Meanwhile, the average age of our Houston portfolio is now 8 years versus an average disposition age of 38 years. We're currently projecting $36 million in dispositions. We're making progress on a few fronts, and we'll update you as each of these reaches fruition.

After an active fourth quarter, our only operating property acquisition during first quarter was Shiloh 400, which was our entry into the Atlanta market. Shiloh is a 3-building, 238,000 square foot, 100% leased property along Georgia 400 and North Atlanta's technology corridor.

Keith will now review a variety of financial topics, including our 2017 guidance.

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N. Keith McKey, EastGroup Properties, Inc. - CFO, EVP, Treasurer and Secretary [7]

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Good morning. FFO per share for the quarter was $0.99 compared to $0.91 for the first quarter last year, an increase of 8.8%. FFO per share was $0.02 better than the midpoint projection due to strong leasing.

Our debt metrics remain strong. We planned to sell $10 million of stock and issue $30 million of debt in the first quarter. Instead, we sold $40 million of stock due to strong demand and an increase in the stock price.

With the 10-year treasury rate down and the stock price up, we like our options for obtaining capital. Debt to total market capitalization was 30.8% at March 31, 2017.

For the quarter, the interest in fixed charge coverage ratios were 4.8x. The debt-to-adjusted EBITDA ratio was 6.6x, and the adjusted debt-to-pro-forma EBITDA was 5.8x. All of these metrics were improvements from the same period last year. The debt-to-adjusted debt EBITDA ratio was higher than our run rate due to the extra G&A expense in the first quarter concerning accounting for stock grants, which is consistent with prior years and executive transition costs.

In March, we paid our 149th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.62 per share equates to an annualized rate of $2.48 per share.

Our dividend-to-FFO payout ratio was 63% for the quarter, and rental income from properties amounts to almost all of our revenues.

Earnings per share for the year is estimated to be in the range of $1.79 to $1.89. We have increased the midpoint of our FFO guidance for 2017 from $4.20 to $4.23 per share. This is a 5.2% increase compared to 2016 results. The $0.03 per share increase is primarily due to approximately $0.05 per share increase in NOIs and approximately $0.02 per share reduction due to an increase in equity sales.

On March 6, 2017, we announced an update on G&A costs for 2017, which included an anticipated change in the structure of the company's equity compensation plan for its executive officers. As disclosed in that press release, we estimate a onetime overlap of G&A expenses of approximately $0.03 per share.

Now Marshall will make some final comments.

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [8]

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Thank you. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and geographically diversifying our portfolio. We're also committed to maintaining a strong, healthy balance sheet with improving metrics as evidenced by our equity issuance last month.

Overall, we're excited about our 2017 opportunities. From a holistic standpoint, our expectations are for another solid year. I use "holistically" as I mean it in 2 ways. First, I like the current industrial market. I like where we fit within the food chain and the consistent steady value per share we're creating each quarter. Secondly, I'm using it in terms of people. We have Keith around for 1 more quarter, so I won't say my teary thank you and goodbyes just yet. Keith has been a friend for over 25 years, and I'm excited to follow his next chapter. I've also known Brent for a couple of decades, and I'm enthusiastic about what he'll achieve in our new role -- in his new role as our CFO.

And finally, we're getting closer to finalizing our 2 new regional heads. We're excited about the internal and external candidates who have expressed interest. We're pleased with the process to date, and we'll update you as soon as we can.

We'll now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Rich Anderson with Mizuho Securities.

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Richard Charles Anderson, Mizuho Securities USA Inc., Research Division - MD [2]

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So just the obligatory Houston question, I guess. So same store went up by 100 basis points in terms of your guidance. But backing into it, it looks like Houston was not a part of that elevated perspective. Is that, first, correct? And second, where did it -- geographically, did you see a need to raise your expectations for same store?

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

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I'll take a first stab and let Brent chime in. It's Marshall, Rich. Really, what was pleasant this quarter is really, it was across the board. I mean, we were up in our same-store pull in terms of occupancy. We're seeing activity. Our Florida markets did well. We've seen a pickup in activity in Phoenix, really, in the last 30 days; some of those 45 days, turning those into leases. And then Houston, actually, was ahead of where we expected it to be this year. So it was a good solid small beat across a number of markets that added up. Brent, a color on Houston. That's what raised our NOI. And any color -- anything I've missed?

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [4]

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Yes. I mean, Rich, we exceeded expectations first quarter in Houston, which is good. We like the activity. I mean, as I mentioned in the prepared comments, we're still dealing with the [ known ] vacate issue, which will reach its peak really in the second and third quarter. We have practically almost no space rolling fourth quarter, so it's going to be over the next 6 months. So if the market stays the way it is, we hope that we prove to be conservative on our current assumptions. From a same-store standpoint, we're marking against, for example, last year first quarter, we were still 96% occupied. So even in a good market, that's a tough metric to go against. So yes, for same store this year, Houston will be a pull on the remainder of the company. But as Marshall said, the other 85% is doing very well. So with our minimal rollover in '18, we're hoping we will get through the rough spots here in the next couple of quarters.

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Richard Charles Anderson, Mizuho Securities USA Inc., Research Division - MD [5]

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So -- but just to clarify, you did better than you expected in the first quarter, but your expectation for Houston for the rest of the year remains pretty much the same with the exception of that outperformance?

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [6]

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Yes. We did not -- if anything, we may have even softened our leasing assumptions a bit. Really, just because, quite frankly, we could. The other 85% is performing well, and we just didn't want much dependence upon the releasing in Houston to drive the train, which it's not. So anything we do, do would be positive to the upside. So we feel good about the direction we're headed.

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

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And we talk in terms of -- we kind of have our budgets and our goals. So our budget is at -- we raised to the $4.23, and that's what we're budgeting for Houston. And we hope, if some things fall in our favor, we can -- we hit our goals and beat our budget. So that's really the logic.

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Operator [8]

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And we will take our next question from Eric Frankel with Green Street.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [9]

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A quick accounting question. Can you explain the difference between your GAAP same-store NOI growth and cash same-store NOI growth for this quarter? It's a pretty big wide. Is that related to the composition of the same-store pool?

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N. Keith McKey, EastGroup Properties, Inc. - CFO, EVP, Treasurer and Secretary [10]

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Well, it's just the cash is taking the last monthly rental income and comparing it to your first rental income on the new lease or the expiring lease.

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [11]

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Just on the NOI. I mean, we're raising, but yes.

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N. Keith McKey, EastGroup Properties, Inc. - CFO, EVP, Treasurer and Secretary [12]

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Oh, okay, on the...

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [13]

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Yes, NOI growth out of releasing spreads, right.

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N. Keith McKey, EastGroup Properties, Inc. - CFO, EVP, Treasurer and Secretary [14]

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And just on cash same store, it would be the similar thing to that. It would be your rental increases, right, that's your straight-line rent.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [15]

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Right. But I think there might be some issues in the way -- the methodology of how same-store pools are comprised and that development projects when you contribute to a same-store pool, especially those that are full lease, they may have to free rent upfront, and so that might be boosting cash same-store NOI growth relative to the net effect of -- relative to GAAP or a net effect of rents. So I just want to understand whether that -- if that's in play here, too.

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N. Keith McKey, EastGroup Properties, Inc. - CFO, EVP, Treasurer and Secretary [16]

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We would just have to go lease by lease of -- to look at that. I don't remember anything.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [17]

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Okay. I'll circle back with you on that one. Brent, can you comment on what I've seen released -- obviously, Houston leasing activity seems to be a little bit better than you budgeted, than you initially planned in the year, but rental down a good bit on what you were able to renew or sign for and add a new lease. What are your releasing spread assumptions for the rest of the year?

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [18]

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It's going to be similar, Eric, to what we've experienced. I think it'll be high single digits, maybe around to right around that 10% mark, give or take. And again, for us, in a given quarter, with -- if it's light transactions, that can be influenced by individual transactions; but on the whole, from a market perspective. That's why I would anticipate the GAAP numbers maybe being a little bit less than the cash numbers because we're marking against higher rates as they roll. So anytime you have vacancy, you are subject to rental rate market fluctuations, so that will be a bit of a challenge. But I think it will be on that high single-digit range.

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Operator [19]

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And we'll take our next question 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 [20]

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Marshall, I know you touched on -- that you guys are close on kind of backfilling for Brent and Bill here. Just curious when you think timing is on that. And then more for the West Coast, you guys have been quiet in California here for a number of years. Maybe tell us, are you hiring someone who's got more experience in the California market versus Arizona? And really, as you guys see where your cost of capital is, more cap rates are in the West Coast, how much bigger of a piece of the portfolio that could become?

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [21]

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Good question. We're kind of a little bit on both. We were (inaudible) included -- several people are including Brent and John, who you met. We were in Texas last week, talking to some of our -- kind of as we narrow down our final candidates, and we'll be back next week meeting a couple more. So we expect to be able to give you names and locations and bios second quarter, if all goes well for both positions. And you're right, in California, it's -- the major markets, we like those markets a lot. Half about 4 million square feet in California. Realized it's a highly competitive market. We'll probably look more at development or redevelopment, at least in this market versus pure acquisitions, to be -- to find opportunities in California. But we think they're there. And the people we're talking to were -- will be a California-based office. And ideally, our finalists are all people who are there working in that market today. So we'll open likely a Southern California office, have someone based out there, and their primary position, we've got 2 good vice presidents who'll be more of the asset manager, keeping up with our Western assets that we feel pretty good about our presence and how we're operating in Arizona. It's really helping long term in California to really source new opportunities for us, and that's what kind of led us to put someone with the phrased boots on the ground in California.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [22]

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And then, Brent, on Houston, you kind of gave us the ratio of new versus renewal. I would assume the guys kind of contracting on the space here are probably oil services. But could you give us a sense of what industry verticals are really behind the new leasing?

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [23]

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Yes. Actually, Craig, the more we're seeing right now in the contraction is actually on the logistics companies, especially up at World Houston, which is near the airport. Obviously, it's a heavy logistics tenant base there. And those companies are 2- to 3-year contract-driven. And so as those -- their oilfield services logistics requirements have diminished, then their need for space has shrunk. So all those companies are doing fine, but we're seeing that they're decreasing in space. So that's been the biggest driver. Really, consumer goods in those type companies are what's driving the activity in the market. We've signed a couple of e-commerce-related fulfillment-type leases in our portfolio in the first quarter: a group fulfilling Costco furniture fulfillment online, a vitamin protein-type company doing Internet fulfillment, IKEA, Lowes, Kroger, Amazon, CVS Pharmacy. Again, those type companies, consumer, retail-related, have been the biggest groups absorbing space in the market.

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Operator [24]

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And we will take our next question from Jamie Feldman with Bank of America.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [25]

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Congrats, first of all, Keith and Brent, very exciting.

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N. Keith McKey, EastGroup Properties, Inc. - CFO, EVP, Treasurer and Secretary [26]

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Thank you.

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [27]

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Thank you.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [28]

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So can we -- ProLogis talked about maybe supply starting to outpace demand in 2018 in a couple of markets as they're looking ahead. What are your guys' thoughts on that potential risk to the market at this point across your markets?

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [29]

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Yes. Good question, and it's interesting. We are both industrial REITs and they are -- but we're in different kind of segments, so we are just different segments of the industrial market that we struggle to find good land sites as we plan ahead. Infill land sites that are priced and zoned for industrial are few and far between. We're not seeing that same industrial supply. And I was just in one of our markets last week, and we were touring around and we even commented to the broker everything we saw around our property, they were several new developments, but they were all 200,000, 300,000 square foot developments. So on the edge of town, the big-box deliveries have picked up, and the charts we've seen nationally show that. But we're not feeling an oversupply. Our competition is usually local or regional players with an institutional capital, an AEW, Clarion, someone like that. Heitman is their financial partner, and we're not -- thankfully not seeing that oversupply.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [30]

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And then as you think about the Texas markets, any change in tenant behavior, given potential trade risks with NAFTA or the relationship with Mexico?

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [31]

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We've not seen anything related to that, Jamie. And really, there hasn't even been as much chatter amongst -- as I thought there might be. We've only got 1 million square feet in El Paso. That would probably be the most susceptible market. I think, again, you could price bid at either way you want to. The people in El Paso tend to think that, that might even drive more business for them if things lined up on that side of the border versus the other. But no, that's -- again, the new administration is -- has been viewed pretty favorably in Texas as the Texas connections with Rick Perry and Rex Tillerson and those kind of guys, they're very comfortable. We've seen more of a positive business attitude than vice versa.

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Operator [32]

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And we will take our next question from Emmanuel Korchman with Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [33]

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You've made a couple of entries into the new markets for each group or spoke about them over the last few months. What goes into the decision to go into a new market versus sort of intensifying your focus on your current markets? And sort of a follow-up to that same question, if Houston were doing better, would you still be exploring other new markets?

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [34]

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Thanks for asking. I guess, I'd say we're -- we do like the markets we're in. And maybe a couple of part answer, that's why we're hiring someone or working towards hiring someone in California is I'd love to see us smartly be able to grow in L.A., San Diego, San Francisco. In terms of new markets, I mean -- and maybe I'm coming from your perspective, Miami, although we really view it as an extension of South Florida, we've been in Broward County for a couple of decades and really found the land that's -- literally we're on the other side of county line road between Broward and Dade County. Atlanta is clearly a new market for us. Any number of thoughts as we toured the market and looked at assets and met for -- with brokers for a couple of years, it was a high-growth Sunbelt market. I was literally and (inaudible) as well, was first back to EastGroup was surprised how little land was available. We would be in the broker's office on Google Earth and finding land sites is hard to do in Atlanta, and I expected that in California, but I didn't expect it in Atlanta. And so that was a pleasant surprise. And then maybe as we touched on earlier with one of your peers, what we did see in terms of development in Atlanta was mostly big-box development in Clay County or further on the edge of town that there weren't many people building shallow bay industrial. So we bid on some assets and lost out and passed on a few but found one that fit that we liked, a Sunbelt high-growth land-constrained market. And it's also a big-enough market where we thought we're not going to go there and buy a building or 2 over time and really get stuck. But there's enough activity in Atlanta that we could reach 1 million square feet and hopefully, be self managed and have someone in an Atlanta office maybe a year or change from now. We'll see how our growth there goes. We'll be patiently optimistic, has kind of been our label for that market. And I don't think -- I mean, never say never. But in terms of any new markets, I'd be surprised where there's really -- we're always studying markets and thinking about it and kind of looking ahead, but I'd be surprised if we went to a new market in the near-term future.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [35]

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And then in terms of the -- you mentioned a couple of development projects that you acquired that have never been put into the in-service pool that were sort of at lower occupancies than the rest of your portfolio. How have those been performing versus your performance when you acquired the properties?

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [36]

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Probably walking through, there's really probably 2.5 that fit that category. I'd say Parc North is one that rolled in, in February of this year and Fort Worth, and it was -- probably its merchant developer built 4 good buildings at the intersection of 2 freeways there in Fort Worth. Like the project long term. It's 446,000 feet. It's more than we would build at one time, but we're up in the mid-50s, and it's leasing about as we -- pretty much as we expected. It's only -- it's leased 240,000 square feet in the first year. So if it were a typical development, we'd be breaking ground on our next building. It's such a large bucket to fill, and the accounting rules are we pull it into our portfolio when the original developer got their certificate of occupancy. So our occupancy will deal with that. And then the other one that fits that category is Jones in Las Vegas. There, it was 2 buildings, 416,000 square feet. It's 50% leased. We acquired it in November, so it was probably heading into the holidays, maybe a little bit slower than we had hoped the first, call it, 90 days. But at least, as we sit today, we were hoping to get a lease back maybe in time for the call that would get us closer to 60%. And then we're -- we've got another handful of prospects that would more than fill the building that were somewhere between the initial proposal out and the third round of proposal. So we like both projects. Jones probably will take out, call it, 90, 120 days longer to fill than we had originally hoped. Parc North is probably on track, and then the third one was Weston and Southwest Broward County. It's not a new development, but it's a good building, and it's really still a construction project, and it does not have entryways to office or really front-door sidewalks, any of those things. And we will finish those up late this quarter. And I think once we finish the construction on it and the prospects can really see how they would come into the building, see their office, see how they would operate there. We like that project. And that's probably going about as expecting, other than maybe the permitting has taken 30 to 60 days. What we like about Weston is it's a higher-end neighborhood. It's got more hotels. The Cleveland Clinic is there. It's just taken a bit to get industrial permitting done there, but we'll finish that this quarter, and then we think we're -- we feel comfortable about our pro forma there. So we like that -- kind of that niche within the market. If we'll buy buildings and we'll build buildings from scratch, if we can find quality real estate and be more value-add like each of these 3 fit that it kind of falls within the spectrum of what we do already, and it may be an opportunity for us in the market to find opportunities. And yes, specifically as we think about places like California, I think we're going to have to do value-add-type projects out there to make our numbers work.

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Operator [37]

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And our next question comes from Blaine Heck with Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Associate Analyst [38]

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Can you guys talk a little bit about the dispositions included in guidance? Does that include any sales in Houston? And if not, can you give us any color on where you're expecting to sell and expected cap rates on the sales?

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [39]

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Let's see. Without funds at risk, happy to answer. It gets a little tricky because we're working on a couple of things, and it's, I guess, I wouldn't call it probable because we're not to the point where funds would be at risk. There's -- at least within Houston, there's probably 2 projects left. We've got one, it's a building that vacated, and we've got it on the market for sale or lease. It's about 80-something thousand feet, so that one could be in our pipeline this year. We've had prospects for it before and didn't come to fruition. And then it's really more we'll talk with our guys of -- I think it's kind of, at least of our philosophy, what assets would you not want to own heading into the next downturn, and those are the ones we look at based on where we are in terms of leasing and where the market cap rates are. And so we continue, one, is one of our oldest assets in the portfolio where it's under contract today at an attractive cap rate to sell and will -- may or may not close, a couple in Houston that could close this year and then some other assets. We've looked at some of our service center product that's probably 30 years old in Central Florida that we'd like to sell at pending. We don't want to be a desperate seller. We want to get good value for our shareholders. But if we get the opportunity where cap rates are today to exit those and then really manage through the 1031 process, too, the good news is we'll have gains on just about all of these, if not all of these. So we'll -- we can't take them all on an any 1 quarter, but we'll manage them through the process. And I hope our $36 million in guidance that we just gave you proves to be conservative. We'd love to beat that by the end of the year. We sold, the number was, $76 million last year, and I don't know that we'll get that high of a number this year. But I hope it's north of $36 million, depending on how cap rates hold up and how much of our older products we can really push out the door.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Associate Analyst [40]

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And then, Brent, I think last quarter, you mentioned Houston was expected to drop to 88% in the third quarter and then back up to 92% at the end of the year. I think you changed that to 87% in the third quarter. I'm assuming that's always included the post office in [ Seva ], but can you comment at all on what's causing the little bit of a decrease in Q3? And then, I guess, more importantly, do you still expect to climb back up to 92% by year end?

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [41]

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Yes. I -- we talked about that internally. I did mention those low 90% numbers last time, and I did not specifically say that this time. And as I mentioned earlier, it's basically just we feel positive about the market, but we just softened our assumptions a bit in terms of our releasing. As you get toward the end of the year, if you have a space go vacant in third quarter, even in a strong market, it's hard to say you're going to release it, say, in a 3- or 4-month period of time. So again, we think the low point of the third quarter, we certainly hope that we'll get into that low 90s by year end. Our assumptions have softened up slightly from where I mentioned last time it being that 92%. So our current guidance has us finishing the year a little bit lower than that. But as Marshall mentioned, a budget and a goal are 2 different things. Our goal is to stabilize it much quicker than that. But again, we're just being cautious with what we've put in, in terms of our dependency on it. So still feel good about it. If the market stayed the way it is, we -- the 15 leases we did first quarter was half of what we did all of last year. So again, there's activity in the market. We just -- that activity will hold in there for us the next few quarters. We'll work our way through this and feel much better about next year, a combination of the market improving and our rollover being way more tolerable and way more manageable at 7% next year.

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Operator [42]

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And our next question comes 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 and Senior REIT Analyst [43]

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Just 2 questions. First, Marshall, just going back, I had an earlier question on backfilling the 2 regional spots. Just curious, you guys have a very much of a team-oriented culture, and certainly, yes, there's a lot of -- there's a healthy competitiveness, which came from the top down, but there's also a lot of collaboration. How easy is it, as you've been looking at backfilling both Brent and Bill, to find people that can fit into the EastGroup culture? I'm assuming it's easy to find industrial development guys, but it's probably harder to find folks who fit in with the culture. So can you just give us some perspective on that, and if that makes you lean more towards internal or if you think there is sufficient external candidates?

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [44]

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Maybe 2-part answer. One, thanks for -- we agree. We like our culture, and we like our team a lot. And so thanks for you spending enough time with us. I'm glad you've gotten a chance to see it, and you agree. And -- we like our internal candidates, and then I've been impressed with the people we've met. There's -- I wish we had a lock on good industrial people, but there's some -- we like the people we've met. I think they could fit in. I think I'm highly biased, but here, I like that we're a smaller REIT without a Chief Investment Officer and a Chief Operating Officer that really, if you're the regional head, you get to drive your own ship. And as we've talked to good people, that has a lot of appeal, and we just want to make sure. That's why we -- it's maybe slowed us down a little bit rather than it's -- I didn't want it to be me go out to a city and just hire the -- what I thought was the best person, but we've involved several people here and interviewing and gone through a couple different rounds because we are -- it is a key hire, and we are careful about our culture to make sure they fit in. And in their defense, I wanted them to hear from Brent and John what they do day-to-day. It's one thing for me to describe the job, but it's another to hear it from the people that are doing the job day-to-day of exactly what it is, so that we can try to minimize hiring the wrong person. That -- most of them are all gainfully employed, and we don't want to promote someone into a position that they're in over their head either. So we're being careful and methodical about it, but -- and we're finding good candidates. And I'm glad we're near the end of the process than the beginning at this point.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [45]

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Okay. And then the second question is you obviously -- you addressed Texas and how the tenants there are pretty excited or upbeat. Can you just talk broader picture? Last quarter, you guys were -- your tenants were extremely bullish across the portfolio. Now that we've been sort of 6 months into the new administration, people have seen what pace of legislation is like. Are the tenants still as excited as they were earlier in the year? Or have you noticed a shift across your portfolio from tenant -- from the mood of the tenants?

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

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We're -- I mean, I guess I'll answer it. I'm an optimist, so maybe take it with that filter. But our first quarter -- first quarter is always a good quarter for us, but we signed about 2.8 million -- statistically 2.8 million square feet of leasing first quarter, which is a record for us. So that's a huge sign of optimism. The other thing I'm seeing and hearing in the field, a number of the spaces we've filled have been expansions. Our 2 buildings in Tampa that rolled in the portfolio were both existing tenants that we were going to lose, but thankfully, we had new buildings, and so we backfilled those. So we're talking to our guys, and we've seen a pickup in activity in Arizona in the last 45 days, at least in terms of proposals out, and have gotten a couple of those leases back already. So I'm still -- we're still seeing it's a solid market without a lot of new supply. So we're excited about where we are. You just hope that it continues to last.

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Operator [47]

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And our next question comes from John Guinee with Stifel.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [48]

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Marshall, you were very helpful recently talking about yield on development cost. Can you just sort of walk through your development portfolio page and talk about where you have good land basis, which would allow you to develop at a yield, say, north of 7%? And where you had to buy at current market pricing, which may end up driving that yield down below 7%? And specifically, I think you've got -- at one time, you had a pretty low basis in your Houston land. Do you still feel that's a low basis?

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [49]

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I think -- I guess, I kind of walked into that. But say I have used 7% as a barometer, we could probably hit that. By an exception, which is a big piece of our landholdings being the gateway and Miami that we acquired fourth quarter last year, thankfully, their market cap rates are in the 4%. So we -- I hope we hit 7% when it's all said and done, but our pro forma is not a 7% yield on the 61 acres that we have at gateway. Other than that, I -- we are still delivering in the 7s, and I don't see that within our holdings. We're working our way through our landholdings pretty rapidly in Charlotte and in Orlando with our Horizon Park, Eisenhauer that Brent is doing in San Antonio, and David Hicks is going rapidly. CreekView, we -- I love that we add additional phases of land. CreekView is doing well and Northeast Dallas and Louisville. So we're working our way through our land pretty well. A market that actually has us a little concerned in terms of inventory is Tampa. We're light there. We just broke ground on a new building. We're looking for land sites in Tampa. Now all -- you're right, all of the cheap land has already gone. I mean, that would be the one of the upsides to a downturn. When it does come is that we'll hopefully be able to find land a little less expensively. But in terms of a 7%, we should be there in that land. We have at World Houston we like. We won't break ground today, but I'd love to be that we're in a position to turn the corner and start growing again in Houston when the market allows. Brent, any...

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [50]

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Yes. And we feel good, John, about the -- our bases that land prices are very slow even in a slowing market to decrease those. They're not -- land is not very expensive for people to hold, so they would generally hold it rather than drop their price. We haven't really seen land prices drop. If anything, even over Northwest, they've gone up. And also, since we're not actively developing, we're no -- we're in a period where we're not capitalizing any of our costs in our Houston landholdings at this point either. So we like the land positions when the market does get better. We feel very good about being able to come out again and be in that mid-7% range for Houston once the market allows it.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [51]

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And then a second question. We noticed that you -- in San Antonio, Texas, you delivered 2 buildings in the first quarter, mostly full, you have a lease-up building, and then you have 2 under construction. What's the secret in San Antonio that has 5 different buildings, probably close to 500,000 square feet in various stages on your development page?

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

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Really, the driver of that predominantly is our Eisenhauer Point project. And as you may recall, when we bought that land site, we spent literally 2 years in getting that site rezoned for industrial. It's right in the heart and core of the main industrial area of San Antonio, but it wasn't developed for anything. But it wasn't industrial because it wasn't zone (inaudible). So once we turned the corner on that and purchased that, we had a pretty good inkling that it was going to be a very successful project because of the location. And thankfully, it's proven to be that. And thankfully, we still have all of our San Antonio landholdings that's remaining now, the 45 acres shown on the summary page or at Eisenhauer Point, and we're really excited to have that, to finish that park out. It's just a great location.

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Operator [53]

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And we will take our next question from Rob Simone with Evercore ISI.

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Robert Matthew Simone, Evercore ISI, Research Division - Associate [54]

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Just stepping away from Texas and California, I was wondering if you could kind of just elaborate on what's going on in Phoenix. I know you delivered 1 completed asset into the pool, but it looks like you had some pretty substantial same-store cash NOI growth there, so I just wanted to kind of dig in there a bit.

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

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We've been able to push rents on some of our renewals in Phoenix. And then it's been a slower market. It's one we have kind of had mentioned after Houston that has been sluggish and I always, in my mind. A good question. I expected -- kind of our thoughts were Phoenix will act a little bit like some of the Florida markets. And during this cycle, the Florida markets seem to recover more quickly than Phoenix has. It's been a little bit slower, and our occupancies still are in the lower 90s. So we've seen it pick up here in the last, call it, 45 days or so, and we'll pick up there. Our 35th Avenue that we delivered, we're building up. It's 67% leased. The specs, [ we own it ]. Ten Sky Harbor will roll in, and it's not where we want it to be, leasing-wise. So we've had our challenges there, but we feel like we're turning the corner. And hopefully, by the time we get to the second and third quarter, we'll have a better hand to play there. And we had -- also, looking back at Phoenix, what's slowed it down, we have some land there, but we've stopped development in Phoenix, really, first quarter of '16, a year ago or a little more than that because we weren't filling our buildings as quickly as we wanted. But hopefully, we'll -- we feel like with what we've got in the pipeline, we can turn the corner and are chasing a prelease opportunity there that may or may not come our way, that we can turn the development machine back on in Phoenix here towards the end of the year.

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Operator [56]

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And our next question comes from Sumit Sharma with Morgan Stanley.

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Sumit Sharma, Morgan Stanley, Research Division - Research Associate [57]

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I guess, we get asked this question a lot, so I just wanted to get your sense. But given where Tier B and C shopping centers and malls are pricing in terms of cap rates and price per square foot and that sort of discussion, I guess -- and their proximity and your focus on light industrial, do you see -- have you seen more opportunities for conversions into that sort of thing? Are there just stricter zoning rules that may preclude the sort of deal? Or are you actually seeing a lot more of this?

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [58]

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It's a good thought and something we've discussed internally. We've not really seen the opportunities, maybe it's a different -- it probably is a different marketing e-mail [ blast ]. Going back to my pre-EastGroup days, I remember we had a joint venture partner that described one of our properties. It was a great piece of land encumbered by a mall. And so there's a number of those that we think are failing or will fail. And as hard as it is for us to find land, the tricky part about a mall is, a lot of times, the anchors own their site. And there's one in Atlanta that's being redeveloped now. A local developer is doing it. So you may have to go to Macy's, Sears (inaudible) acquire their site as well as the mall and work your way through a reciprocal easement agreement. So it could take a bit, but that's -- we'd love that opportunity down the road. We are not -- we've probably thought about it more than we've seen. And I have spoken to one of the loan servicers to see how we start to look at what they get back from some of the failed mall projects and a couple of different of the shopping mall REIT General Counsels, just trying to think how do we sift through portfolios of dead malls, basically. So I think it's a great idea and hard to implement. And then physically, we probably end up -- you'd need to demo the mall is the other thing because just the configuration wouldn't work, but there's some great sites with good freeway access that already have the utilities if the mall weren't there today. And so it's coming. It's just not there yet or we haven't found it yet.

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Sumit Sharma, Morgan Stanley, Research Division - Research Associate [59]

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Well, that's very good color. Nonrelated to this but related to one of your larger tenants, 3PLs. What we've heard from various brokers is these guys are some of the hardest negotiators on -- at the table, particularly. I know it's a favorable market for landlords, but I'm still inquisitive in understanding how do you view your negotiations with, let's say, Kuehne and Nagel kind of 3PL or any other 3PLs that you deal with? And what's the sort of asking rent premium that you typically command or a discount if there is that?

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [60]

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Yes, I'll take that. It really strictly depends on market conditions. If I were negotiating with the same tenant, say, in the Dallas today near DFW versus negotiating with a tenant that were in Houston and it could be the exact same company, they would probably have the leverage over me in Houston, and they would have the upper hand in negotiations, and I would be in a backpedaling position. But in Dallas, I would have the upper hand, and I would have the leverage. So you really can't pinpoint it to a specific company. The 3PLs and logistics guys are cost-conscious. Their business tends to be pretty thin margins. They're just moving something from point a to point b, to people and then if somebody else is trying to do it just at that little bit cheaper way. So they are conscious about it. But in a strong market, they can only do what they can do. They can't -- if the market is tight, they have to pay the rent to occupy the space where they need be. So it's really just dependent upon market conditions.

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Operator [61]

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And our next question comes from Bill Crow with Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [62]

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Marshall, I'll start with you, and then I've got a Houston question as well. The 2 biggest leasing challenges you highlighted, the Fort Worth and Vegas, were both on facilities were, call it, 2 extra typical size. I'm just wondering if that makes you rethink that strategy, which is different than what the company has done for a lot of years as far as the size goes. Is there any second-guessing of that? And whether you're kind of that's in your sweet spot or not?

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

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No. I mean, you're right. There are -- really, maybe answering them separately. Good way to think about it. Fort Worth, it were -- it's our building. So they just built 4 of them. There was a merchant builder with a institutional partner. And again, that works for their strategy, kind of what I was trying to allude to a little bit in my script. We wouldn't have built all 4 buildings to fill. It just takes -- it's a lot of square footage to fill in a 12-month kind of lease-up window before it rolls into your portfolio. And then in this case, we didn't own it but roughly half of that 12 months. So long term, we really like the location and like the buildings. And if we could find that opportunity, it is -- it's a big bite for us, but we didn't -- we just didn't have the chance, the opportunity to buy 2 of the 4 buildings or something like that. Las Vegas, we like the location. Rents are higher there. It -- those buildings were a little bit deeper, but they had -- they're state-of-the-art buildings with the bells and whistles and kind of an infill. It's a Southwest submarket, so tenants that want to be near McCarran Airport or near the strip, it works well. So we like it, and I think kind of the way it worked, it just happened to be both be bigger projects. And then in Las Vegas, some of it was timing, and some of it is just -- I think we've got the right momentum now to get it leased. So we'll -- may miss it again by 3 to 4 months. But I think it -- if we were on this call 5 years from now, I think -- or less, hopefully, much less, we'll be very happy with both of those assets. It's just taken us a little bit longer to de-value-add, but I like that approach a lot better than waiting for them to have gotten to be 95% or 100% leased and trying to win a bidding war. So we still will be good 7,500 basis points ahead of market cap rates. It's not as much as if we'd fully developed them themselves. But taking on the value-added approach, I wish they'd all leased up in the first month, but I don't sense that they're taking anything right now abnormally long, but we haven't finished the value-add component yet.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [64]

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Right. Okay. And the other question on Houston is just, as we think about oil eventually recovering, at the same time, we may experience a slowdown in construction, which is kind of the one thing booming in Houston. And I'm just wondering how much exposure you have to residential and commercial construction-related companies.

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [65]

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Yes. That's a good question, Bill. We -- the construction boom really hasn't been as big a boom in the last couple of years. Obviously, at one point, office was driving a lot of that. And obviously, that's completely stopped. But residential has continued to be strong. Retail has continued to be strong. Multi-family is slowing down some. But first of all, we don't have a lot of exposure in [ or an ] exposure to that, but we continue to see, interestingly in Houston, we've got a 12-month trailing 120,000 new residents. And so people continue to move in even though the jobs have been tougher to find, but the city continues to grow. So those type tenants so far have been doing well at the residential market. They're doing very strong. 2016 was record sales, 3.7 months of inventory. And since I'm about to put a home on the market, I hope that holds up for another 60 or 90 days, Bill.

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Operator [66]

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And we'll take a follow-up question from Rich Anderson with Mizuho Securities.

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Richard Charles Anderson, Mizuho Securities USA Inc., Research Division - MD [67]

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And my question was answered on class B malls, so thank you.

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

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Thanks.

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Operator [69]

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Okay. We will take our next follow-up question from Eric Frankel with Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [70]

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2 quick follow-ups. So one, Keith, you referenced, obviously, cost to capital seems to have come down a little bit the last 3 months. Is that changing your view of what your balance sheet should look like this year?

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N. Keith McKey, EastGroup Properties, Inc. - CFO, EVP, Treasurer and Secretary [71]

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As -- sometimes you get equity when you can, and stock prices are doing good. We are multiple still at the lower end compared to other industrial REITs. So we still think it's got some room to grow in the stock price, but it's awfully tempting to get equity when you can. So -- but the board makes those final decisions, thankfully, and we'll present our cases to them. It's good on both sides.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [72]

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Okay. And a question, I guess, for Brent on the follow-up. You were referencing -- there's more e-commerce fulfillment requirements coming through your portfolio amongst some of the markets you're in. Can you clarify? You mentioned a lot of different retailers there. Are they all your portfolio? Or is that just -- or those -- that's just activity in your market? And I was a little -- I just want to make that...

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [73]

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That's just activity as a market. If they were on our portfolio, I wouldn't have that downward draft in occupancy. But it's good to see them all out there. And the interesting trend -- a couple of years ago, it felt like there was more smoke than fire related to e-commerce. The good thing for us is, as times pass by, we are beginning to see more and more direct examples of that into our own portfolio. And as that fulfillment chain evolves, thankfully, that's coming to a situation where they're looking for smaller centers and more locations for quicker delivery versus the mass bulk regional out on the -- outside of town-type aspects. So that seems to be a continuing trend. I don't see why that would change, and that's continued to be a positive driver for us.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [74]

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That's interesting. What's the average size, roughly, of these new requirements that are in the market? Is it 100,000 square feet, 25,000, 50,000? Something -- is it something more in your wheelhouse?

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [75]

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The 2 we've actually signed in Houston this year are in the 35,000 square foot range, but we're even seeing groups, say, like in Amazon, where you routinely see them with 1 million square footers, and they are doing that, but they've also done some 60,000 square footers. And I was reading an article the other day where even in markets where they have those big million square foot boxes, they likely will add smaller boxes in other parts of the city. And their goal is to get things to people within hours of ordering it. So again, that's a positive trend for us.

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [76]

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I'm trying to think, the last 2 Amazon leases -- well, I think one isn't signed yet. One, they had signed 100,000 feet kind of for a last mile in one of our markets. And then one as of right now, at least it's around 150,000 feet that we're one of the candidates for.

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Operator [77]

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And we have a follow-up question from John Guinee with Stifel.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [78]

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I think my question has been answered.

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Operator [79]

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And we will take our final question from Ki Bin Kim with SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [80]

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Just one last quick one. What's your philosophy on how much capital you want to commit to development? Your GAV is about $3.5 billion at $100 million of starts. It's about 3% of GAV. Isn't that conservative? Just curious what you think about that going forward.

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [81]

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We -- good question. We kind of think about how much land we hold, and we kind of informally try to target at around 6% of assets. And then anything we're acquiring now, land-wise and I'll use Austin, the Round Rock site is a good example. We just acquired it, and we hope we have it in production by the end of the year. So there's really no land -- since there's no cheap land left, really, we haven't been able to find it. But in land we acquired, we want to be in production as quickly as possible. And I like that our development starts kind of -- I said when we fit in the food chain with the shallow bay business park development, our starts are really dictated by the field rather than by corporate. So is -- I'll use Horizon in Orlando. Right now, John Coleman seems to be leasing them about as quickly as he can build them. So he's really setting that pace. That said, there's always a limit where we would, say, let's finish what we started. And maybe going back to an earlier question, fourth quarter, we acquired some of the developed buildings that weren't completed. I'm glad we slowed up this year, given our transition with people and some things like that. And then we hope we had our West Coast will actually grow the number a little bit. If we have the right person in California, those will be more expensive land, more expensive development. So our $100 million in starts will -- if the market allows, should rise in the next year or 2. And so we kind of -- I like that it started in the field, and I like that we have a land limit rather than as long as we're leasing them up wherein we're typically 200 basis points above our market cap rate, that's a lot of NAV each quarter per share that we're creating, is how we think about it.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [82]

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Yes. And that's part of the reason why I asked is it does seem like a very significant spread. All right. And congrats, Keith and Brent.

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N. Keith McKey, EastGroup Properties, Inc. - CFO, EVP, Treasurer and Secretary [83]

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Thank you.

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Brent W. Wood, EastGroup Properties, Inc. - SVP and Head of Houston Regional Office [84]

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Thank you.

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Operator [85]

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And at this time, we have no further questions.

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Marshall A. Loeb, EastGroup Properties, Inc. - CEO, President and Director [86]

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Thank you so much. Thanks, everyone, for your time and your interest in EastGroup. Should you have any follow-up questions, we will be available, and look forward to seeing you at the REIT Conference soon.

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Operator [87]

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This does conclude today's conference. Thank you for your participation. You may disconnect at any time.