EastGroup Properties - Earnings Call - Q1 2016
April 21, 2016
Transcript
Speaker 0
Good morning, and welcome to the EastGroup Properties First Quarter twenty sixteen Earnings Conference Call. All lines are currently in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. And please note, today's call is being recorded. It is now my pleasure to introduce Marshall Loeb, President and CEO.
Please go ahead, sir.
Speaker 1
Thank you. Good morning and thanks for calling in for our first quarter twenty sixteen conference call. As always, we appreciate your interest in EastGroup. Keith Mackey, our CFO and Brent Wood, Senior Vice President are also participating on the call. And since we'll make forward looking statements, we ask that you listen to the following disclaimer.
Speaker 2
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 describe certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time sensitive information that, subject to the Safe Harbor statement included in the news release, is accurate only as of the date of this call. The company has disclosed reconciliations of GAAP to non GAAP measures in its quarterly supplemental information, which can be found on the company's website at www.eastgroup.net.
Speaker 1
Thank you, Keenan. The first quarter saw a continuation of EastGroup's positive trends. Funds from operations met our guidance, achieving a 4.6% increase as compared to first quarter last year. This represents the twelfth consecutive quarter of higher FFO per share as compared to the prior year's quarter. The strength of the industrial market can be seen through another solid quarter of occupancy, leasing volumes which were our second highest in the past nine quarters and GAAP re leasing spreads rising to 16.5%.
Our same property cash net operating results have now been positive for nineteen consecutive quarters. The depth of private market capital looking to invest in quality industrial assets demonstrated by the quantity and volume we're seeing in our dispositions, which we'll elaborate on later. And finally, our increasing FFO and dividend are being driven by the success of all three prongs of our long term growth strategy. At quarter end, we were 96.7 leased and 95.7% occupied. Occupancy has exceeded 95% for eleven consecutive quarters, a trend we project maintaining through year end.
This basically represents full occupancy for a multi tenant portfolio. As commentary on the strength of the market, we've never achieved this level of occupancy for this longer time period. Drilling down into specific markets at March 31, our major markets of Dallas, Orlando, San Francisco and Jacksonville were each 98% leased or better. Houston, our largest market with over 6,400,000 square feet was 96 leased and occupied. Further supply remains largely in check-in our markets.
In sifting through the figures in a number of our markets, you'd see supply is largely comprised of big box deliveries being 250,000 square feet and above. So by design, we simply aren't competing for the same prospects. In fact, the figures we've read state that 75% to 80% of new deliveries are big box deliveries. In other markets such as Fort Myers, Jacksonville, New Orleans, Tucson and El Paso, there's been little to no spec development since the downturn and our markets where the fear of overbuilding is the greatest such as Dallas and Houston, we're seeing declines in construction while deliveries are being absorbed. To date, the market discipline has been institutionally controlled and remain strong.
Rent spreads continued their positive trend for the twelfth consecutive quarter on a GAAP basis. This also marks our fifth consecutive quarter for double digit re leasing spreads With 95% occupancy, strengthening markets and disciplined new supply, we remain comfortable with this trend. First quarter same property NOI rose on a cash and GAAP basis. This quarter was unusual as the growth was due more to rising rents as average quarterly occupancy fell 50 basis points as compared to first quarter twenty fifteen to 95.7%. We expect same property results to remain positive going forward though increases will continue to reflect predominantly rent growth as at 95 to 96% occupied, we view ourselves as fully occupied.
And while it's a testament to the quality of our portfolio to have reached full occupancy so early in the cycle compared to our peers, it's making quarterly same store NOI comparisons challenging as others are reaching full occupancy later in the cycle. As our occupancy demonstrates, leasing activity remains strong within our major markets. Within these markets, we're most encouraged by activity in Dallas, Charlotte, Orlando and San Francisco. Tampa, another market in particular is a market where activity picked up in late twenty fifteen. The price of oil and its impact on Houston's industrial real estate remains a major topic of discussion.
We thought it appropriate for Brent to again join today's call. Brent is one of our three Regional Senior Vice Presidents and is based in Houston with responsibility for EastGroup's Texas operations. Brent? Good morning. We continue to be pleased with the operating results for our Texas portfolio including Houston.
Our four core Texas markets of Houston, Dallas, San Antonio and Austin finished the first quarter at a combined 97.3% leased while our Houston operating portfolio finished the quarter at 96% leased down from 97.1% leased last quarter. The Houston industrial market continues to exhibit solid fundamentals. Despite the overall decrease in prospect volume, deals continue to be made across the market in a broad range of sizes. The vacancy rate finished the quarter unchanged at 4.9%, which is just 20 basis points above its record low mark of 4.7% set third quarter last year. However, we have seen an increase in sublease space this year.
For numerous reasons, this often does not compete with existing vacancies, but it could lead to a gradual increase in the vacancy rate over time. There was 2,000,000 square feet of positive net absorption for the first quarter, which marked the twentieth consecutive quarter of positive net absorption. Meanwhile, developers continue to show restraint with the construction pipeline containing 6,100,000 square feet, which represents about 1% of the total market. Two thirds of the construction activity is in the Southwest submarket where we have a limited presence and the Southeast submarket where we have no presence. For our Houston portfolio, rents for the quarter were up 15.6% on a GAAP basis and up 5.4% on a cash basis.
As for the same property operating results, we finished the quarter up 1.7% GAAP and 1.8% cash, which exceeded our first quarter projections. Looking ahead to the remainder of 2016, we have further reduced our Houston scheduled expirations from 15.8% in mid-twenty fifteen to 9.5% of the operating portfolio. However, we have a number of known move outs later in the year, primarily the result of tenants either downsizing or consolidating locations. As a result, we are intentionally being cautious with our Houston budget assumptions included in our guidance. Our portfolio leasing assumptions produce an average occupancy of 93% for the year unchanged from guidance last quarter with the anticipated low point being third quarter.
Same store projections for the year are lower than our prior guidance primarily due to the sale of fully occupied properties. We are now projecting down 2.5% on a GAAP basis and down 1.3% on a cash basis excluding termination fees. From a development perspective, there are only two buildings in the development pipeline that are currently 49% leased. Our twenty sixteen potential development starts for the company do not include any Houston starts. We remain pleased that the geographical diversification of our development platform within Texas is replacing the volume we enjoy during Houston's most recent growth cycle.
Our projected twenty sixteen development starts for the company include five buildings in Dallas and San Antonio for an estimated total investment of $33,000,000 three of which broke ground in the first quarter. The fundamentals remain strong for the Texas markets outside of Houston and they remain unaffected by the impact from lower oil prices. Marshall will discuss dispositions in more detail in a moment, but I will mention that regarding Houston, we were very pleased with the quality and depth of the buyer pool and the cap rates we're seeing, which has ranged from a low five to a mid six depending on asset age and characteristics. Once we complete the sale of the remaining building under contract, our Houston portfolio will consist of 100% Class A properties with 95% of the square footage contained in one of our five master plan business parks spread across three submarkets. In summary, for the remainder of 2016, I anticipate that the core Texas markets of Dallas, San Antonio and Austin will present growth opportunities while we continue to take conservative approach to our Houston operations.
Marshall? Thanks, Matt. Given the intensely competitive and extensive acquisition market, we view our development program as an attractive risk adjusted path to create value. We believe we effectively manage development risk through a diverse development program. The majority of our developments represent additional phases within an existing park.
The average investment for our business distribution buildings is below $10,000,000 We develop in numerous states, cities and submarkets. And finally, we target 150 basis point minimum projected investment return over market cap rates. At March 31, the projected investment return of our development pipeline was 8.1 whereas we estimate the market cap rate for completed properties to be in the low to mid-5s. During first quarter, we began construction on three projects located in Tampa, Dallas and San Antonio. These developments will contain five buildings with a total of 435,000 square feet for projected combined investment of $32,100,000 Meanwhile, we transferred four properties totaling 363,000 square feet with 68% leased into the portfolio.
As of today, our development pipeline consists of 13 projects containing 1,700,000 square feet with projected cost of $124,000,000 and of that amount, we've already invested $72,000,000 or almost 60% of the cost. For 2016, we project development starts of approximately $95,000,000 What's especially gratifying about these starts is we can reach this level with no Houston starts, whereas in 2012, for example, our starts were roughly half the volume with Houston accounting for almost 90%. This demonstrates the value of a diversified Sunbelt market strategy. As Brent discussed with the industrial property sales market remaining strong, we're actively reducing the size of our Houston portfolio and also raising some capital through the disposition of non strategic land parcels. Year to date, we've sold five properties totaling 871,000 square feet for proceeds of approximately $48,000,000 Three of the sales were in Houston, which represented 785,000 square feet and $43,400,000 in sales.
We've also closed two land sales generating $1,300,000 two additional property sales are in our pipeline, one in Santa Barbara with funds at risk and another in Houston which is in due diligence. Other core land sales are in our pipeline but not to the point that they're probable just yet. And in Phoenix, we're continuing our dialogue with the Arizona Department of Transportation related to the condemnation disposition. Our asset recycling is an ongoing process. We're pleased with the year to date progress and we're continually evaluating our options especially further Houston sales.
We view dispositions as an attractive source to help fund the development pipeline. Additionally, we're pleased with the match funding achieved within our 10/31 tax gain deferrals such that it's allowed us to reduce our projected twenty sixteen acquisitions. Finally, as we recycle capital and diversify our developments, the portion of our NOI coming from Houston will decline while the quality of the Houston portfolio continues rising. Keith will now review a variety of financial topics included in our updated 2016 guidance. Good morning.
Speaker 3
I would like to comment on the equity research reports that reported on our first quarter earnings release. We have about 15 analysts issuing quarterly reports on our earnings. Most review the company's guidance and make their own tweaks to our projections. For the first quarter, we guided FFO per share in a range of $0.90 to $0.92 with a midpoint of $0.91 We reported $0.91 per share. Most analysts' projections were in this range, but there was one report that projected $0.98 per share which increased consensus.
That analyst admitted that his number was high and will change it. Unfortunately, it did not get changed. So some of the headlines from the analyst reports that EGP misses are frustrating when we meet our guidance midpoint and raise the midpoint for the year. Now that I've gotten that off my chest, FFO per share for the quarter met our guidance at $0.91 compared to $0.87 for the first quarter last year, an increase of 4.6%. For the quarter, bad debt expense was $124,000 and lease termination fees were $183,000 Our debt metrics remain strong.
Debt to total market capitalization was 34.8% at March 3136. For the quarter, the interest and fixed charge coverage ratios were 4.3 times. The debt to EBITDA ratio was 6.7 times and the adjusted debt to adjusted EBITDA was 6.3 times. The debt to EBITDA ratio was higher than our run rate due to the extra G and A expense in the first quarter concerning accounting for stock grants. This is consistent with prior years and although we are budgeting no common stock sales on an annual basis, we are projecting year end interest coverage and debt to EBITDA to improve from last year's results.
Our bank debt was $166,000,000 at March 31 and we reduced this to approximately $100,000,000 on April 1 when we closed the term loan. The $65,000,000 seven year unsecured financing has an effective interest rate of 2.863. Also in March, Moody's affirmed EastGroup's issuer rating of Baa2 with a stable outlook. In March, we paid our one hundred
Speaker 1
and forty
Speaker 3
fifth consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.60 per share equates to an annualized rate of 2.4 per share. Our dividend to FFO payout ratio was 66% for the quarter. Rental income from properties amounts to almost all of our revenues and we believe this revenue stream gives stability to the dividend. We have increased the midpoint of our FFO guidance for 2016 from $3.98 to $3.99 per share.
This is an 8.7% increase compared to 2015 results. We are pleased to be able to raise full year guidance in spite of raising our disposition volume and significantly lowering acquisition targets. Earnings per share is estimated to be in the range of $1.96 to $2.06 Now Marshall will make some final comments.
Speaker 1
Thanks, Keith. Industrial property fundamentals are solid and further improving in the vast majority of our markets. Based on this strength, we continue investing in and diversifying our development pipeline. We remain committed to maintaining a strong healthy balance sheet and are pleased to see the projected improvement in our year end debt metrics even with no equity issuance. Helping us to maintain a strong balance sheet is asset recycling which we view as an attractive avenue to fund development.
We like where we are, where our industrial markets are, what we're doing and the results it creates in the long term for our shareholders. We'll now take your questions.
Speaker 0
Thank you. We'll take our first question from Juan Sanabria with Bank of America. Please go ahead.
Speaker 4
Hi, good morning. Question, I guess, for either Marshall or Keith. Just on the guidance front, you talked about raising the dispositions and lower acquisitions. But what drove the increase in the FFO per share guidance? What gives you confidence in the core operations to do so?
Speaker 3
The same store we've got is going up. So that's one area. We were able to also own our debt to lower the debt because we lowered our acquisition and then we got a better interest rate in the first quarter. And those are the two primary things.
Speaker 4
And what's driving the the implied acceleration in the same store numbers? Is that a a a back half pickup in occupancy or just the rental rate growth coming through on releasing?
Speaker 1
Our occupancy remains I mean, we're as we kind of commented on it, that we're 95% and kind of hovering in that 95% to 90 a little over 96% for the year. So it's really rent rate growth that's driving the same store. Some of it is lease up in a few of our markets. And then a lot of it is simply developments that we completed last year, finishing their lease up as well as some of the new developments that were kind of the mix within our pipeline leasing up as we finish those buildings.
So those again allowed us some of that to drop. We were happy to drop our acquisition targets and really as a comment on that especially in this environment where acquisitions are so pricey and it's hard to find value, especially in this point in the cycle, we're able to cut back on the acquisitions while raising our guidance. And it's really a lot of that internal leasing. Think feeding into that also gave us confidence just the sheer volume. It was one of our best.
It's an odd quarter and that we had a lower retention rate than the last couple of years at mid-60s. It's probably more a return to the norm. But we did a lot of new leasing and it was our second most leasing volume as I mentioned in the last a little over two years.
Speaker 4
Great. And just one last one
Speaker 5
for
Speaker 4
me. What's your you guys sense of the latest thoughts on Houston? Have have you seen a a dust deceleration in leasing demand? Any pickup in kind of the watch list tenants you're looking at? Kinda what's what's the latest feel you guys have?
Has it improved at all with the rebound in oil or is it kind of still people are cautious? Any thoughts?
Speaker 1
This is Brent. The rebound in oil is nice, but people have kind of mentally dialed in that oil is going to be down for some period of time. And it's nice to see it back in the 40s. But just as people weren't making immediate knee jerks when it hit upper 20s or in low 30s, they're likewise not running back out to ramp up their businesses at this point. As far as demand, it's choppy across the board.
What we are seeing is being led by consumer and retail type companies. Recent leases in the market include Lowe's, Amazon, Floor and Decor, Advanced Auto Parts, Simmons Mattress, CVS Pharmacy, again, some of those consumer retail related products. On the flip side, logistics companies, we're seeing either stay status quo or downsize. Presumably, they're losing some contract business with oil and gas related companies. The upstream and midstream related companies obviously remain sidelined.
Downstream companies, however, valve companies and those type groups, especially on the East Side are still in the market. So the market is behaving like you would expect in a slowing market. Choppy activity, but activity is still being out there. In terms of a watch list for us, I mean, we remain very pleased and fortunate that that has not yet still been a major concern. We had the one small default last year.
We've got no default this year. We've got one tenant that we're talking to and watching but and they're small in size as well. We have seen an increase not only in our portfolio but in the market and sublease space. And as I mentioned in my comments, we don't often compete head on with that. But it is a general precursor that as those leases come up that the vacancy rate could gradually rise, which at 4.9%, I've been expecting for a few quarters now.
But all in all, it's been like it's been. It's just decelerated. There's activity. But it's when you get a chance to make a deal, just want to go ahead and roll up your sleeves and try to figure out a way to get it done.
Speaker 4
Thank you.
Speaker 0
Thank you. We'll take our next question from Alexander Goldfarb with Analyst. Please go ahead.
Speaker 5
Hey, yes, it's Alexander Goldfarb, Sandler O'Neill. Morning down there. So just a few questions. First, on the stock price, obviously, you guys have had a good rebound here. And while it's still sort of on our numbers a 10% discount to NAV, does and you guys haven't modeled equity issuance in your numbers, but still just given the travails of the stock recently over the past sort of twelve months, in your view, does it have to get back to NAV before issuing equity is once again a possibility?
Or are there scenarios investment return where you would see equity issuance below NAV?
Speaker 1
Good morning, Alex. It's Marshall. It's hard to say hypothetically. Obviously, we we just put out our guidance and right now we're assuming no equity issuance for the year. What I do really like about where we are and Heath mentioned by the end of the year, our debt metrics improve and we virtually issued $6,000,000 last year and nothing this year.
So it's nice to at least be able to get within an NAV range. That's certainly one of the key factors that we would be cognizant of if we did pull the trigger and issue some equity. But we'll look at we believe we've got our uses of capital pretty well covered between the dispositions and the development pipeline. So it's not a need, but it's certainly something in the last few weeks as our stock prices crept up a little bit that we're cognizant of and we'll look hard at NAV and we're glad we're in a position where we don't have to do anything.
Speaker 5
Okay. And then, Brent, on Houston, I think you guys said you're 96 now, but you're expecting 93 overall in the year with a low point in the third quarter. Is it some of the dispositions that you're talking about that's going to drive it down? Or are there a bunch of known move outs that are really driving that number?
Speaker 1
It's both. Are selling everything we've sold and plan to sell as far as fully occupied. Third quarter, we have 58% of our remaining rollover for the year in that quarter. And it's just unfortunately, it's just stacked right there with the tenants that we do know that are going to vacate. Primarily, as I mentioned in the comments, primarily due to downsizing, there are a few things where like in FMC technology, their corporate campus is just being finished and they're going to relocate into that corporate campus.
One tenant that was bought out by a larger M and A parent group and then they're merging that into a larger facility. So it's not really tenants leaving the market or tenants defaulting or anything like that. It's just for one reason or another that's happening. So third quarter, we expect to be our low point. And we just have chosen not to aggressively put quick release assumptions in there just given the current state of the market and what we budgeted in necessarily our goal, that we plan to work through that.
But again, quarter being the low point.
Speaker 5
Okay. And then just final question. The first of all, obviously great to see the NOI pickup the occupant sorry, the portfolio performance improvement in the guidance. But just curious in the past two months from when you had the fourth quarter call till now, were you guys seeing the same NOI and leasing trend improvements, but you were nervous to sort of raise the bar just given the overall macro environment? Or have these been improvements in the past two months that are in the portfolio where tenants and the markets are showing strengthening in the past two months?
Speaker 1
A little more of the latter. I mean, I'll admit I was pleased or impressed with how much leasing volume we got done in first quarter. It was more than we expected and 16.5% GAAP releasing spreads is our record. I guess I'd have to go back. I'm looking at a chart back to pre recession before we got close to that number.
So the markets were you're right, they were strong in January. It's not that we were doubtful on the markets. The first quarter has been a strong quarter and kind of going through, we've been pleased how disconnected or decoupled the Texas markets are from Houston. To be as full as we are in Dallas and 100% in Austin and things where people we still get questions about the downturn of oil and gas and how is that affecting Texas. And it's really Houston that has the cloud over it, but the other markets in the Phoenix market seems to slowly be picking up and Brent's counterpart John Coleman would tell you Florida and the Carolinas are doing better than in any time since the recession.
So it was good and we feel like it's probably gotten better in first quarter and that's helped fuel a little bit of our optimism.
Speaker 5
Okay. Thank you very much.
Speaker 1
You're welcome.
Speaker 0
Thank you. We'll take our next question from Manny Korchman with Citi.
Speaker 1
Good morning, guys. If we think about your
Speaker 6
disposition program and we think about sort of the bookends with limiters on that, is the limiter how much of that capital you see good uses for? Or is it shrinking the portfolio? Or is it somewhere in between the two?
Speaker 1
It's not uses. It's really positioning. I mean, we've been pleased with it. Really, the cap rate is afraid of Houston, it feels to us, is the public markets are. The private markets, the quantity of bids we've gotten and Brent has been the closest to this and the quality of the institutional bidders on our Houston assets.
We've sold our oldest buildings that are not in industrial parks that we developed at attractive fives to low to mid six cap rates. So we'll keep evaluating it. It's really been we didn't want to fire sell assets. So if something was 50% leased, we weren't going to sell it just simply because it was. It was really where is that asset positioned and talking we would get brokers comments of value.
So we'll keep working our way through it. I think the trickier part is we get at some point we're down to all Class A within parts we developed and not that we wouldn't consider some of those, but we've really been selling from the bottom and we'll keep moving through that pipeline within Houston and elsewhere too. I mean, obviously, we're selling and it's an R and D building in Santa Barbara that's in a joint venture and there's to a user, there's nothing wrong with the building. It's just not our core business. So we think it's a good time to exit that asset to a user who will be the purchaser of it.
Speaker 6
Are there any portfolios that you're either actively marketing or thinking about marketing? Or is this all going to be sort of one off sales?
Speaker 1
It's probably one off. I mean, what we are hearing, again, we're trying to sell assets that five to ten years from now you don't wish you still had. And what we see at least what we're hearing on portfolios where you get the pricing premium, the only reason to I think to put together a portfolio would be if you put together a portfolio of true Class A and you put it together in such bulk, at least through CBRE and some of the brokers, then you can maybe get a pricing premium and we'd rather sell the things that we don't think are going to fuel our growth five to ten years from now. That, that we would get the pricing premium, you don't want to sell things you regret.
Speaker 0
We'll take our next question from Blaine Heck with Wells Fargo.
Speaker 7
Great. Good morning. Marshall and Brent, you guys talked a little bit about the developments, but can you guys just give a little more color on the starts that you had this quarter and just your comfort with starting all speculative projects as some of your peers have shifted to an arguably more conservative stance doing more build to suits?
Speaker 1
Wayne, this is Marshall. Good question. I'll let Brent jump in. What I really like about our development model is not driven from here at the corporate office. Someone in a meeting recently compared us to a residential subdivision developer and I thought that was a good analogy where you it will build building houses and you've got two that sold and two under contract, so you build two or three more.
So it's really as leasing goes that will dictate our overall to bubble up and develop our development pipeline. So our leasing activity has been strong. And as long as the guys in the field are leasing the buildings, we felt comfortable. And a lot of times, we'll finish a building. And recently, we did one in Orlando and we had two prospects for the last space.
So it gave us the comfort to build the next building. So in the ones where Brent, I'll let you comment on what we started mostly in your markets this quarter. Yes. I would just add to that. Blayne, as we always say, it's really just based on what we're seeing on the ground and the activity.
And our Creekview 1 And 2, we're really excited about. It's in that North Dallas high growth corridor near Frisco. At Parkview, we moved from 27% to 82% and feel good about getting that leased up. And so feel good about we've even talking to a prospect about a portion of Creek B-one And 2. We're just now getting ready to break ground.
In San Antonio, our Eisenhower Point project, we've raised now to 48% and we're still not shell complete there and we're still working with other prospects for space there. At our Alamo Ridge project, we signed the build to suit last quarter for 100%. And again, with our leasing activity, that Alamo Ridge 4 represents the final building of that little four building part. And so we're going into like the yields, like the activity volume. And so feel confident about it.
So it's a good way to put money out. We certainly consider a build to suit. I think with our peers, it's typically a larger usually larger buildings. But that said, we have completed a mattress firm in Tampa at the end of the year. So we wouldn't shy away from that.
And we certainly have proposals out of that can kick off a new building to get a large portion of it leased. But most of our tenants, it ends up being a spec building and it's based on the leasing of the prior building. The one start just to comment in Tampa, we built Madison 2 And 3 and I was just there, it was two weeks ago now. And those are 95% leased and we think there's our view is there's a window in the market that there's no Class A space. Our buildings are ready and under construction that we'll deliver before any of our peers can deliver similar products.
So the hope is the cycle lasts until we finish these buildings and then we'll be one of the few guys with Class A space in the Tampa market. So that's some of it, if it helps some of the thinking.
Speaker 7
Yes, that helps. And then just a follow-up in your development starts guidance, do you include any build to suit developments or if you got them, it would kind of increase the full year number?
Speaker 1
We're talking to a couple. Good questions. They would something could slip, but they would be incremental to our starts. Everything that's in our $95,000,000 is a spec development at this point.
Speaker 7
Okay. And then just one more. Phoenix seems to have been a bit of a drag on occupancy and same store NOI in the last couple of quarters. Does that have anything to do with the eminent domain issue you guys talked about? And then can you just talk a little bit more generally about that market and any prospective tenant activity you might have there?
Speaker 1
Frank, you're right. Phoenix has been interesting to us with Orlando bouncing back. I would have thought Phoenix is pretty much a tourism market too that it would have accelerated. It's been slow coming out of the downturn. And when you talk to brokers and the locals in Phoenix, it's such a homebuilding market and homebuilding has been slow.
So the market is okay. It's about 90% leased and that's where our portfolio has been. We picked up about 150 basis points in terms of leasing since the March. So it's this first part of the second quarter, we picked up some leasing, but it's been a little bit slower, but we feel like it's picking up there. And the slowness, it's not related to the condemnation.
It's an odd process there. That building is actually as we've moved the tenants out, the Arizona DOT steps in and assumes the rent until it's finalized. So we're collecting rent from the State of Arizona. So it's not hurting us economically during the quarter. It's just resolving the valuation with the state.
It's kind of where we are on it and it's a government entity, so it's a slower process.
Speaker 7
Okay, great. Thanks guys.
Speaker 6
Thank
Speaker 0
you. We'll take our next question from Brad Burke with Goldman Sachs.
Speaker 8
First, Keith, about that analyst with the $0.98 estimate. I think that model update inexplicably got caught in limbo somewhere. So apologies for causing you guys aggravation. Overall, thought it was a pretty good quarter. I guess, Keith, while I have you, the guidance, you're going to be buying less property.
You're going to be selling a little bit more. Developments are the same, same store guided up. You don't continue to not anticipate issuing equity. So just looking for an update on how you're thinking about leverage and how you're thinking about exiting the year with your leverage metrics and how maybe that's changed versus the fourth quarter?
Speaker 3
Well, they actually get better. We're projecting debt to EBITDA to be close to six at the year end. We've got the G and A hit in the first quarter was about $08 a share difference between first quarter and second quarter. So you immediately jump up $08 in the second quarter and then progress from there. So we're looking at better interest coverage.
We're looking at better debt to EBITDA and hopefully debt to total market cap will be great.
Speaker 8
Okay. And then just a question on rent growth because a lot of the same store growth at this point is just going to be attributable to rent growth. Can you tell us what you're expecting for growth across your markets for this year? And I know that you expect that your portfolio is going to outperform within your markets, but just what are you thinking about the magnitude of that outperformance?
Speaker 1
Brad, this is Marshall. In terms of magnitude versus our peers, I will say the last over the last five quarters, we've ranged on this is GAAP numbers from roughly 11 up to rounding to 17. And I think that I'd say the midpoint of that, I think we'll be certainly should stay again where supply is unless there's a recession or some national account hit to the economy. We're projecting and what we expect is kind of that 12% to 15%. We should be able to continue to raise on a GAAP basis.
Houston will be a little bit below that, but we're still thinking slightly positive to flat GAAP spreads in Houston. First quarter was a nice quarter for a GAAP number in Houston. But within the balance of our portfolio, the other as we can 80% plus that we the markets are still pretty strong and we're pushing rents pretty hard.
Speaker 8
David, what would that presume in terms of actual asking rent growth over the course of the year versus rent spreads?
Speaker 9
Are
Speaker 1
you thinking cash rents? Or I'm trying to follow your question.
Speaker 8
Sure. Just overall market rent growth, not not the the the releasing spreads that you're realizing.
Speaker 1
I guess it varies so much by market. I don't know that I could answer that. It's really too also such a case by case basis within each suite that it's hard to say. I mean, some of our markets are rising pretty nicely and some it just depends on when that last lease in that suite was done and what the next tenant needs in ways of tenant improvement. So it's a tougher one to answer.
Speaker 8
Okay. Thank you.
Speaker 0
Thank you. We'll take our next question from Eric Frankel with Green Street Advisors.
Speaker 6
Thank you. I don't want to beat a dead horse on Houston, but just a couple of follow-up questions. One, I know you stated your cap rate range on all of your Houston sales that have occurred or in the works, but on the two that actually sold, they look a little bit lower in quality, physical quality. Could you share what the rough cap rates were for those assets as well as maybe bidding process and who the buyers eventually were?
Speaker 1
Yes. This is Brent. We were in the low to mid six caps and these were I would describe B assets with age, with some obsolescence issues, well located, 100% occupied but maybe not what you consider institutional. And as we mentioned, we're very pleased with the depth and quality of the buyers. As you look at the property we have under contract now, it's a single building, our America Plaza building.
It's more what I would describe of a Class A building and that's going at a low five cap. It's not at risk yet. So you don't know until it's done. But again, we're very pleased and that got very active to garner that. And as you point out, that's around $8,000,000 or so in gross proceeds.
A handful of the buyers in the end were groups that that generally is below their threshold amount that they will purchase at because it's just not worth their time and effort. But given the difficulty that some of these groups have had placing their money, they pushed for it and pushed hard for it. So we're very pleased to see that. Once we're done with these as we spoke about, we're 95% of the portfolio within our core business parks in which we feel are premium assets there in the market. As Marshall said, we've increased the quality of what's remaining to the point where we're just Class A parks.
Speaker 6
That's very helpful color. Thanks. I know you said you're going to essentially have five master point business parks that are going to be basically your core portfolio after the sales are done. Is there any consideration if these buyers are so frustrated by not being able to find decent product that you let one of those go with? You know, let's call it a low five cap rate?
Speaker 1
We we consider it. I mean, they're certainly they're not all five equal. I mean, we we obviously have our favorites within those five. And, again, our barometer or compass has been what would you want to own five to ten years from now? And do we think there's we like where we are in a number of these in the fourth largest city in the country.
And so we hate to give up a position we couldn't replicate investing elsewhere, but there's some we'll consider given the strength of the market that we'll continue to recycle capital.
Speaker 6
Okay. That's helpful. The second question is related to acquisition and guidance. I guess you implied that you would lower that just based on your ability to shield the taxable gains. Can you talk about the process a little bit?
Because I understand that it's a little bit tougher for REITs to reallocate capital from disposition to develop it because of those gains and there's just some tax issues related to that.
Speaker 3
We had two acquisitions at the end of twenty fifteen in contemplation of selling assets. And we sheltered Northwest Point, Lockwood and Wesley in that. And there was concern that we would not be able to shelter Lockwood or Westwood that they would fall outside the the time period, but we were fortunate to get those in. So that put us in real good shape as far as sheltering the proceeds against ten thirty one for ten thirty one exchanges. And looking forward, we've got a few assets that we can we've got some development that we can take care of with some of the sales.
And we decided that we didn't need to sell 50,000,000 and $25,000,000 would probably cover the remaining assets that we have.
Speaker 10
That's helpful.
Speaker 6
Final question is just related to e commerce. Obviously, that's become such a much more prevalent topic in the sector over the last couple of years. And just want to understand what kind of impact you're seeing in your portfolio more recently?
Speaker 1
Sure. I think it's I'd say e commerce and then really just a shifting of retail models where what we like about our buildings is people talk about the last mile of e commerce by having smaller infill site locations. If Amazon Prime is going to deliver within two hours in Dallas, for example, you can't be on the perimeter of Dallas and make it, you know, to someone's neighborhood within two hours. So it's early, early stages of it, but we're seeing RFPs through brokers for Amazon and tenants like that within our spaces. And we think other retailers will follow the format.
The other, again, not as much e commerce but we've done a number of leases with Mattress Firm. Mattress Firm, for example, are other retailers where they have the retail showroom usually in a strip center, but they'll deliver from one of our warehouses later in the day. And so that was, as I mentioned, one we just finished in December in Tampa and that's the model we've got. Brenna has a couple of space in Houston as well, a number of those. And then, also in Orlando, it's been interesting on the retail model that Nike came in and took space in our Horizon Park or Southridge Park and it's continued to grow.
And there they're running van shuttles on the hour from our distribution building to the retail centers because it's cheaper to store the goods with us than in a retail center and most retailers would rather reserve that space and have more doors. So we think we're in a good space for as the retail model shift and retailers go to fewer stores that they'll have to deliver more quickly and they'll need to be infill sites. That the fulfillment center portion isn't mature, but certainly more mature than the last mile portion of it. The only thing I would this is Brent. Eric, I would add to that is what's good to see is that the change over the last few years, it's been more of a decentralization of that distribution.
Going back fifteen years ago, you had everybody's thinking you got to be Memphis or Louisville or something like that around the FedEx hub. And as our consumer inpatients, everybody wants something the same day. We're seeing with Amazon, of course, that trickles down to other companies with this sudden move to have smaller facilities in more locations which plays more toward us with our building sizes. And so I think that's a positive that over time will benefit us. And I really don't see that trend stopping because I think people want it sooner rather than later.
Speaker 0
We'll take our next question from Steve Sakwa with Evercore ISI.
Speaker 10
Maybe this is for Keith. If you take your first quarter and then look at the midpoint for the second quarter, you're at 1 point dollars 8 for the first half and using the midpoint of the year kind of implies a fairly steep ramp to $2.1 or about $1.05
Speaker 6
per quarter. Could you
Speaker 10
just kind of walk us through what the main drivers of that are? And what are the main differences maybe between the high and the low end of guidance?
Speaker 3
Sure. In the second quarter, we're projecting $0.98 at the midpoint. And if you add back the $08 in G and A that we've already discussed, you're at close to that. We're expecting a little down in NOIs in the second quarter. And so that would drop it from the 99,000,000 to 98,000,000 while we're projecting that.
Then in the third quarter, we're projecting NOI increases, primarily a little bit of G and A savings in the third quarter, but it's primarily driven by property NOI. And then in the fourth quarter, NOI projections increasing with development coming on same store. And those are the increases going from 91,000,000 up to the $399,000,000 We haven't put out the third and fourth numbers, fourth quarter numbers. I hate to throw those out and be held to those, but we do expect 98% midpoint second quarter.
Speaker 10
And just maybe the big swing factor, I guess, just between, say, the $394,000,000 and the $4.00 4,000,000 Is it timing of development? Is it the same store kind of that's a range or what's throwing the $10 range?
Speaker 3
$3.94 and $4.04 Oh, the in our range. We just give us some leeway on both sides. We we pick a mid we go through a process where we ask each person in the field tenant by tenant, space by space to project what they are going to do and what they think they can lease, the timing of it. And with 1,500 tenants, that varies a good bid each quarter. And so we get that information, put that in, see what our financing needs are, G and A costs, put that in and come up with a midpoint number and try to give us some leeway on both sides of that.
Speaker 10
Okay. And then just one last question for Marshall. Just in terms of the disposition market and the types of buyers and financing needs, are you seeing anything as it relates to any difficulties, fewer buyers coming to the table, more financing contingencies than maybe you saw six months ago?
Speaker 1
The broad answer is yes. I think on our dispositions, thankfully, we've had a pretty deep pool, kind of eight to call it 12 or 14 bidders and usually run through a second round process and things. And maybe again, what we've sold has been our lesser qualities. But thankful with lesser quality assets, we've seen a pretty deep bidding pool. What we're hearing through the brokers is really more the B minus and C assets with the difficulties in the CMBS markets that those assets are frozen and that there's not much transaction volume there.
But certainly within the A's, it is cap rates have stopped falling, but there's no movement in cap rates there and actually maybe even down a little bit. The Tampa community, for example, they just set some record lows in terms of cap rates on quality product there. And the B assets is maybe what we're selling. We're not feeling it, but we are hearing about it.
Speaker 10
And of those eight to 12 buyers that show up for your sales, are they pension fund advisors? Are they small individual, local, real estate businesses, entrepreneurs? I'm just trying to get a feel for the type of buyer.
Speaker 1
Yes. This is Brent. I'll jump in. It depends on the quality. When you get into the B type assets, it can be a little bit mixed and less institutional.
But for example, the building we have under contract now, which is again, I guess you would term a Class A type building well located, that kind of local buying pool gets pushed out very, very quickly because the institutional pension fund, life company, retirement plans, those type groups get very, very active and very quickly push the cap rates down. So anything in that B plus to A range drives right now is garnering very solid all cash buyers that are competing hard against one another to buy those assets. I'm just thinking about the outside, we're probably one of the smaller assets in Dallas and in Santa Barbara, it's users buying the buildings. We think we're getting good pricing, but it's users relocating into the buildings. And then more of a regional buyer with one of the ones Brent sold, was just seeing within Houston, our Lockwood asset.
It's the oldest asset in our entire portfolio, but it was a regional buyer that owned other product in the market. And we really didn't even go through a full marketing process with that. We approached him through a broker and we're able to move that one. Yes. I think just one quick comment to that.
One thing that shows the investment community desire to place money that Lockwood asset, we had one of the three buildings which represent about a third of the square footage that was rolling and we knew was going to vacate next month. So we were going to wait, stabilize, go to market. When people learned that we were willing to sell it, we basically had people competing to take the leasing risk on their own and to get what we felt like was basically a cap rate as though the leasing risk were taken care of. So but those people just wanted a chance to get in the door. So again, the activity is very good.
Speaker 10
Okay. Thanks for the color.
Speaker 1
Welcome.
Speaker 0
Thank you. We'll take our next question from John Guinee with Stifel. John, your line is open.
Speaker 1
Maybe we go to the next one, please.
Speaker 9
Hello?
Speaker 1
John?
Speaker 10
Yes, sir.
Speaker 1
Good morning.
Speaker 10
My question has been answered. Thank you very much.
Speaker 1
Okay. You're welcome. Thanks, John.
Speaker 0
Thank you. We'll go next to Eric Frankel with Green Street Advisors.
Speaker 6
Thank you. Just one quick follow-up question. We noticed certainly in one of your larger peers reported results a couple of days ago that the Southern California industrial market seems to be pretty strong. Just hoping you can comment on the drop in the the short the the drop in occupancy and the prospects for leasing that space. Thank you.
Speaker 1
Sure. And you mean in Los Angeles? Is that
Speaker 6
Los Angeles specifically. Yes.
Speaker 1
Yeah. There we it's it's one property in North Orange County. It's our Walnut property. So we had a tenant vacate. We've renovated the space.
I guess the bad news on our timing, they're also doing road work some major road work right near our property.
Speaker 3
So we'll get at least, it's two suites.
Speaker 1
And then the other good portion of that vacancy was a tenant that went bankrupt in early March. So one tenant move out and then we had a bankruptcy. So a strong market and we should get it released quickly and one was an bankruptcy, I guess, is unexpected, maybe redundant, but a bankruptcy within the last, call it, forty five days.
Speaker 6
Thank you very much. That's helpful.
Speaker 1
Sure. You're welcome.
Speaker 0
Thank you. We'll take our next question from Ki Bin Kim from SunTrust.
Speaker 8
Thank you and thanks for taking
Speaker 6
my question. Just a couple of
Speaker 8
quick follow ups. If I look at your same store NOI guidance increase, it seems like partially part of that was the bad debt expense assumptions. Could you just talk about what caused the decrease in that number?
Speaker 3
The decrease in bad debt?
Speaker 8
Yeah. Bad debt expectations for the year.
Speaker 3
We had 280,000, I think, each quarter, and the bad debt in
Speaker 1
the first quarter was a 124,000.
Speaker 3
So we just took the $1.56 and reduced how much we were going to do for the year.
Speaker 8
Okay. And in Houston, talking about the some of the occupancy losses, things for that clarity, but what type of tenants are the ones that are typically moving out first when you see that kind of downturn or trouble in Houston?
Speaker 1
This is Brent, Ki Bin. It's across the board. I mean, we've literally printed out and studied to see if there's a trend. I mean, it's not just oil and gas companies. It's some building trade companies that maybe are expecting their business to slow and to downsize.
As I mentioned, logistics companies looking to maybe downsize some. A lot of this is coming from corporate level. A lot of them you talk to local guys, they say we need the space. Corporate looks and says we can trim down. So it's not a particular sector.
Like I said, the consumer retail side of this equation has been in the growth mode. But like I the oil and gas, light manufacturing, those type companies have been more on the downsize, logistics on the downsize. One of the difficulties of leasing is you get the word from the tenant six, nine months ahead of time that they plan to vacate but you don't really have the true opportunity to re lease that space and try to capture your own downsizing tenant of someone else until you get closer to that expiration just simply because the space isn't available until that time. So I mean it's our hope as we get into some of these known vacates in the summer, third quarter, that with our multi tenant portfolio, we hope to capture some people downsizing from larger spaces. We just won't know that until we get there and have the space available.
Speaker 8
Okay. And just last question for Marshall. What are, if any, some of the incremental changes we can expect in EastGroup over the next few years? I know it's probably not gonna be anything massive just on the increment incrementally, whether it be balance sheet or just the philosophy on how much development this company should be doing or just overall size it should be in a few years?
Speaker 1
Sure. David Hoster is still actively involved in the company, of our Investment Committee. David and I speak frequently. And I think we'll evolve and I've worked with and for David forever. Feels like right out of school.
And so I think we'll evolve. But I love where our balance sheet is. I guess I'll tie back to the earlier question of where would you issue equity. It's nice when you don't need to issue equity. So I don't foresee any major changes.
I mean, we'll continue to evolve and we may exit a market or two or enter a market or two, but I don't think that would be any different than if David were still CEO. And it's certainly a team. It's not David or Marshall. It's Keith and Brent are stuck with me too. So it's all of us.
Speaker 6
Okay. Thank you, guys.
Speaker 1
You're welcome.
Speaker 0
Thank you. And we'll take our last question from Craig Mailman with KeyBanc Capital Markets.
Speaker 4
Hey, guys. Just want to
Speaker 9
hit on the development pipeline. The under construction yield came down 40 basis points relative to last quarter. And I appreciate your comments that you guys are still keeping the 150 basis point spread relative to acquisition cap rates. But just curious, I guess, partially this goes into your view of cap rates. But at this point in the cycle, would you be more comfortable raising that 150,000,000 closer to 2,000,000 and being more selective about projects just given the possibility that your kind of value creation could compress if if cap rate rise?
Speaker 1
I mean, we we would. I mean, I think we could
Speaker 3
switch it to two.
Speaker 1
I mean, for example, you don't have your your numbers, but if we sold and I'm just looking at just what's our inner under construction pipeline in those markets, we would be well below a six cap even there. So I mean, we target one fifty, but really in kind of looking through it in in Dallas and in Charlotte and Tampa, we're seeing a product sell at five or even in Dallas, a little below a five cap. So I think if you're right, it it it dropped in the quarter, but it's a, you know, it's a moving pool of assets. It is a pipeline. So as we pull those out, I know Creekview is a little, for example, a little below 8%.
But land prices in Dallas and as Brent said, we are optimistic about that, how that one will play out. Be It's fun to see how fast they release that one up. But if we're comfortable at eight given a five cap or, you know, five to 5.5 cap market. So we're still too long winded way of saying we're still two fifty basis points above 150 basis point guideline.
Speaker 9
Okay. That's helpful. And what was the lowest stabilized yield that you guys put into the pipeline? I'm just trying to reconcile the lease up pipeline didn't really change all that much. You had some higher kind of yielding projects come out and be delivered and then the construction pipeline came down by 40 basis points.
I'm just trying to get a sense of what which projects brought that down and what's the kind of the floor or the lower end of the yield range?
Speaker 1
Craig, this is Brent. I'll have to speak to it since West Row 3 is at 0%. I think we can safely say that's at the lower end of the range. But that billings we mentioned before as a single tenant, It's going be 0% or 100%. There's no in between.
And some of that was just site dictated with that five building part. That particular building on the site plan is single tenant building. And it's been most susceptible to that slowdown in that light manufacturing type tenant that would be the best use for it. Even that, we eventually will get at least and even there, we can garner a seven or low seven cap. We're still going to be well ahead of what we're still going to even have quite a bit of value creation there.
The other thing I would say driving, Craig, some of that drop in those percentages as we've been very pleased that as Houston has played basically that role has diminished quite a bit and other markets have picked it up, we had gotten quite spoiled with some of the returns we were getting especially with our Houston projects for our land basis was very, very low and we were even pushing some 9% yields on some of those which we were very pleased to have. It just wasn't sustainable at that level. And so as we brought in some other projects like the Dallas or something, it's being replaced with just slightly lower yields but still, again, very good value creators.
Speaker 0
And we have no further questions at this time. I'll turn the program back to you gentlemen for closing remarks.
Speaker 1
Thank you for everyone's time and interest in EastGroup again. We're certainly all available this afternoon and tomorrow if anyone has any follow-up questions. And we look forward to seeing you soon.