EastGroup Properties - Earnings Call - Q3 2016
October 20, 2016
Transcript
Speaker 0
Good morning, and welcome to the EastGroup Properties Third Quarter twenty sixteen Earnings Conference Call. Currently, phone lines are in a listen only mode. Later, there'll be an opportunity to ask questions during a question and answer session. Please be advised today's program may be recorded. It is now my pleasure to turn the program over to Mr.
Marshall Loeb, President and CEO. You may begin.
Speaker 1
Thank you.
Speaker 2
Good morning, and thanks for calling in for our third quarter twenty sixteen conference call. As always, we appreciate your interest in Eats Group. Keith Mackey, our CFO and Brent Wood, Senior Vice President, are also participating on this morning's call. Since we'll make forward looking statements, we ask that you listen to the following disclaimer.
Speaker 3
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 these 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 2
Thanks, Keene. Third quarter saw a continuation of EastGroup's positive trends. Funds from operations met our guidance, achieving a 10.6% increase compared to third quarter last year. This marks 14 consecutive quarters of higher FFO per share as compared to 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 volume, positive same store NOI results and continued positive re leasing spreads.
The depth of private market capital looking to invest in quality industrial assets was demonstrated by the pricing and volume we've seen in our dispositions this year as well as the difficulty we faced in sourcing sound acquisitions. At quarter end, we were 97.3% leased and 96.3% occupied. Occupancies exceeded 95% for thirteen consecutive quarters, a trend we project maintaining through year end. This basically represents full occupancy for a multi tenant portfolio. As we've said before in his market commentary, we've never achieved this level of occupancy for this longer time.
Drilling down into specific markets at September 30, a number of our major markets, including Dallas, Orlando, Tampa, Jacksonville, Charlotte, San Francisco and L. A, were each 98 percent leased or better. Houston, our largest market, was over 5,900,000 square feet, which is down from 6,800,000 square feet in January 2016, was 93.1% leased. Supply remains largely in check-in our markets. And sifting through the figures, you'd see supply is largely comprised of big box deliveries being 250,000 square feet and above per building.
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 buildings. In our markets where the fear of overbuilding is the greatest, such as Dallas and Houston, we're seeing declines in construction with deliveries being absorbed. To date, the market discipline has been institutionally controlled and remained strong. Rent spreads continued their positive trend for the fourteenth consecutive quarter on a GAAP basis.
Overall, with 95% occupancy, strengthening markets and disciplined new supply, we continue to see upward pressure on rents. Third 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 20 basis points compared to third quarter 15 to 95.8%. We expect same property results to remain 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 one of our three Regional Senior Vice Presidents and is based in our Houston office with responsibility for EastGroup's Texas operations. Brent? Good morning. Our Texas markets finished the third quarter at a combined 95.7% leased, while our Houston operating portfolio finished the quarter at 93.1% leased, down from 94.4% last quarter, but ahead of our 90% projected last call.
Our actual leasing results year to date and assumptions for the fourth quarter produced an average occupancy of 94% for the year, up from prior guidance of 93%. The Houston industrial market continues to exhibit solid fundamentals. Despite the overall decrease in prospect volume, deals continue to be made across the market in a broad range of sizes. The market vacancy rate finished the quarter at 5.3%, which is an increase of 30 basis points over last quarter's near record low. 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. Another recent trend has been tenants downsizing or consolidating locations in response to the prolonged downturn in the oil and gas sector. Across the Houston market, there was 830,000 square feet of positive net absorption for the third quarter, which marked the twenty second consecutive quarter of positive net absorption and raised the year to date total to 4,600,000 square feet. Meanwhile, developers continue to show restraint with the construction pipeline containing about 5,000,000 square feet of speculative space, which represents less than 1% of the total market. Our Houston signed leases for the third quarter included two that represented a majority of the square footage total.
Both of these leases were for nondivisible single tenant buildings. One immediately backfilled a new vacancy, while the other leased our longest standing Houston vacancy. The positive impact of filling this vacancy is roughly $140,000 this year compared to 2015, with an additional $380,000 positive impact for 2017 compared to 2016. While the leasing spread on this long term vacancy was negative, we chose to seize the opportunity to remove the leasing risk and grow our net operating income. As we often say, a quarter does not make a trend, and our results will be influenced each quarter by individual transactions.
For the remainder of 2016, we have reduced our scheduled expirations to just 2% of the Houston portfolio while maintaining occupancy ahead of projections. The diversification of our development platform within Texas continues to produce results. Our 2016 development starts include five buildings located in Dallas and San Antonio for an estimated total investment of $33,000,000 and all of the Texas buildings in lease up experienced an increase in percentage of leased from the prior quarter. The fundamentals remain strong for the Texas markets outside of Houston, and they remain unaffected by the impact of lower oil prices. Marshall?
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 below $10,000,000 We develop in numerous states, cities and submarkets. And finally, we target 150 basis point projected investment return premium over market cap rates.
At September 30, we project investment return of our development pipeline was 7.7%, whereas we estimate the market cap rate for completed properties to be in the low to mid-5s. During third quarter, we began construction on a 93,000 square foot property in Fort Myers, Florida, the first new spec development in this market since the downturn. Meanwhile, we transferred two properties totaling 232,000 square feet, a 59% leased, into the portfolio. At September 30, our development pipeline consisted of 14 projects containing 2,200,000 square feet with a projected total cost of 162,000,000 For 2016, we project development starts of approximately $90,000,000 And what's gratifying about these starts is we can reach this level with no Houston starts, whereas in 2012, for example, Houston accounted for almost 90% of our starts. This demonstrates the value of our diversified Sunbelt market strategy.
As Brent discussed, the industrial property sales market remained strong. We were actively reducing the size of our Houston portfolio and raising capital through the disposition of non strategic land parcels. Year to date, we sold eight properties totaling 1,173,000 square feet for proceeds of approximately 74,000,000 Four of the sales were in Houston, which represented 906,000 square feet and $52,000,000 in sales. Through September 30, we've closed six land sales generating 5,400,000.0 While not material to our balance sheet, I love raising capital through the dispositions of nonstrategic, non income producing land and reinvesting in our core assets. Our asset recycling is an ongoing process.
We're pleased with the year to date disposition progress and we're continually evaluating our options, especially further Houston sale. As we recycle capital and diversify, the portion of our NOI coming from Houston will decline while the quality of the Houston portfolio continues rising. While most of our activity has been dispositions, we're pleased to acquire Flagler Center on the South Side Of Jacksonville for $24,000,000 This three building, 358,000 square foot property was constructed in 1997 through 2005 and is 100% leased with a year one yield in the mid-6s. While the vast majority of our capital is focused on development and value add opportunities, we're excited to grow our footprint in this submarket. Keith will now review a variety of financial topics, including our updated 2016 guidance.
Speaker 4
Good morning. FFO per share for the quarter was above $1 a share for the first time in history at $1.04 per share, an increase of 10.6% compared to the same period last year. The increase was due to same store increases, attractive yields on acquisitions and development compared to our cost of capital, gain on land sales, lower G and A costs and a favorable interest rate environment. Debt to total market cap was 29.7%. For the quarter, interest coverage was 4.9x and debt to EBITDA was 5.9 times.
Adjusted debt to EBITDA was only 5.2 times. In September, we increased the quarterly dividend by 3.3%. So in summary, FFO per share is increasing from many sources. We increased the dividend and the balance sheet remains strong. Earnings per share for 2016 is estimated to be in the range of $2.93 to $2.95 FFO guidance for the midpoint increased $01 a share to $4.1 for the year.
We estimate fourth quarter FFO per share of 1.07130.8% increase from fourth quarter twenty fifteen and the year at $4.1 9.3% increase from the prior year. Now Marshall will make some final comments.
Speaker 2
Thanks, Keith. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and diversifying our development pipeline. We're also committed to maintaining a strong healthy balance sheet with improving metrics throughout this year. Maintaining our balance sheet is important not only on a day to day basis, but as a critical resource whenever the next recession occurs.
Please note that we don't see signs of a downturn, but rather stay ready when there is one. In sum, we like where we are, where the industrial markets are, what we're doing and the results it creates long term for our shareholders. We'll now take your questions.
Speaker 0
And we can take our first question from Jamie Feldman with Bank of America Merrill Lynch. Your line is now open.
Speaker 5
Great. Thank you. You had commented earlier in the call about a hefty pipeline for asset sales, but it looks like you took your guidance down for sales in the year. Can you just talk about the assets you decided not to sell, maybe timing of those sales? And then just kind of bigger picture about what kind of demand you are seeing for assets?
Speaker 2
Sure, Jamie. It's Marshall. What I would say, we're I guess, to date, we're happy with our sales. We're up slightly below $80,000,000 We did bring our guidance down. We've eyed still within the market.
We think if we can get the right prices, we should execute some of our sales. We're pleased to see Houston come down from rounding 21% to 18%. We'd like to see that number continue trending down. What we've seen probably in the last ninety to one hundred and twenty days in Houston, for example, it's maybe a more selective buyer pool in terms of earlier in the year, Lockwood, for example, was our oldest asset in the portfolio. It had a pretty large impending vacancy and Brent was able to sell that in the low 6s.
Now if we brought Lockwood to market, I don't know that we could achieve that. So we're committed to reducing the size of our Houston in terms of within EastGroup. But for shareholders, we're not going to fire sale assets. So as we've moved through and picked and chose Houston assets to sell, we probably think one that was a little bit larger that we had earmarked has some rent roll and things next year, and it's probably not a great time to bring it to market. And so we've substituted a couple of assets as we go through.
As the opportunities present, we'll continue selling in Houston, and we're committed to that where it makes sense, assets that we won't regret selling several years down the road. And I'm pleased just as commentary, what we've sold this year in Houston, we really started not in terms of size reducing the square footage, but was really our worst assets. It's a good portfolio, but we ranked ordered them and sold what were our worst assets in Houston.
Speaker 5
Okay. That's helpful. And then you had also commented before that the deliveries you're seeing in your market are really not competitive with your pipeline or your portfolio. But I would think that the deliveries are serving where demand is growing the most. So can you kind of help square those comments just in terms of I think people are excited about warehouse.
It's got a lot of e commerce demand. And clearly, are developing for that demand. And then your comment that your portfolio isn't exactly competing with that supply. Like how do we think about those comments?
Speaker 2
Sure. Here's how and Brent, chime in if I what I miss or leave out. But I would maybe bifurcate the industrial deliveries. An awful lot of what we're seeing the majority of our supply, I would describe as being on the edge of town, maybe a little more special use state of the art fulfillment centers. And that is where an awful lot of demand is and where an awful lot of our peers or at least the industrial developers are going.
It's a 600,000 square foot box on the edge of town that's built for a Fortune 1,000 company in their fulfillment center. Where we've chosen to play kind of our role in the industrial market is an infill site, smaller building, 80,000 to 130,000 square feet typically, and it's someone that serves that local market. So we're not building special use buildings. And where we fill in within the e commerce world would be that last mile delivery, which we think we're very early in and kind of top of the first inning of watching that play out. And or where we're seeing that is the post office and FedEx and tenants like that.
So if that helps, I think both segments of the industrial market are growing, but where our portion of the food chain are really about long term that Orlando, for example, is going to have 5,000,000 more people in ten years than it does today. And so our infill sites, well located flexible buildings, the rents will grow there over time is our strategy. And I would just add to that, Jamie, that really it's about two different product types: multi tenant, which is, of course, what we do and then bulk. So when we say we don't compete with it, it doesn't mean we're not necessarily in the same market with it. But for example, in Dallas, there's 19,000,000 square feet under construction, but over half that's in buildings greater than 400,000 square feet.
So we're in the same submarkets in some cases with those buildings. But a lot of our competitors have buildings, for example, where they won't do a smaller than, say, 70,000 or 80,000 square foot lease. And in some cases, our buildings are that size, where we can do 15,000, 20,000, 30,000, 40,000 square feet. So I agree with what Marshall said, but also I think there's the product type differentiation as well.
Speaker 5
Okay. And then finally for Brent. So it sounds like you beat your own Houston occupancy outlook for the quarter. Can you just talk about some of the leasing that was done and maybe if that's any kind of indication of what's to come?
Speaker 2
Yes. We were pleased in the quarter the way we did, the 93%. We got it to 90%. We did do one lease with the post office that was year end oriented that will go through January, which helped. As you saw from the description of our net lease roll down, we did a couple of leases that filled some single tenant buildings.
One had been vacant for twenty one months. We were pleased to get those buttoned up. Looking at next year, 16.5% rollover, it's going to be similar to this year, I think, as we go into that. But we'll continue as we've been doing, just operating, pushing these spaces as we can. Obviously, renew as many tenants as we can.
But when you get the space back or know you're going to get it back, clean it up, take it to market and just out execute in this type of environment.
Speaker 5
So that 16.5 how much do you know is vacating?
Speaker 2
I don't. I wish I knew, Jamie. It's similar as we, again, came into this year. There's a few tenants that we expect not to renew. But as we came to this year, we had a few that way and then they changed their mind.
So we're in a slowing slow environment there, particularly up north where Houston is, where we're probably most susceptible to the slowness. So it's got our full attention, and we'll just execute as best we can. And obviously, next time around, we'll have more specific 2017 guidance, but we're already working on it as we sit here today.
Speaker 5
And
Speaker 0
we can take our next question from Blaine Heck with Wells Fargo.
Speaker 6
Just to clarify, Brent, is that lease you mentioned with the post office, the 78,000 square foot kind of month to month lease that showed up on the expiration schedule this quarter? And we should, I guess, look for that to come out in January?
Speaker 2
Yes. That's correct. It's through January. It's not month to month. I mean, it's a straight short term through January.
They needed space for the holiday season. And so we had the space available, we decided to take the income here at the end of the year. And then we'll continue to market it in that interim period. In a perfect world, we find somebody to occupy it while they're there and they move in afterwards. But yes, that is that lease.
Speaker 6
Okay. That's helpful. And then a follow-up on dispositions. So assuming you're able to get the targeted dispositions you guys have slated for this year, how much more would you say there is in your portfolio that you might label noncore or maybe earmarked for disposition when the time is right?
Speaker 2
Sure, Blaine. It's Marshall. We'll when we give you as I'm mind's eye picturing our 2017 guidance, we'll have a disposition kind of dollar volume and target. Next week, we have our officers meeting and really Brent and his two counterparts. We've kind of asked everyone to earmark, if you were going to sell five of your assets, what would those be?
So we'll work through those. And I guess maybe backing up, I think we should always be pruning our portfolio each year and kind of what we think we've run or created most of the value story out of, we should exit it. So we'll have a disposition guidance target next year. And certainly, we've got a few more assets in Houston to sell. But at this point, 95% of our Houston income comes from parks we develop.
So we're we certainly are left with the best of our Houston assets, not that we wouldn't sell a park if the right opportunity came along. But if that helps you, we'll have a specific target number for next year. And I think we should as for our shareholders.
Speaker 6
Okay. I'll look forward to that. And then I hope I didn't miss this, but can you talk about the additional Development Sage acquisition you guys are looking at in the fourth quarter? Is that also part of Park North? Or are these types of deals something that you're finding in multiple markets?
Speaker 2
It's more of the latter and that it's a specific asset. What we I guess, we work through the acquisition environment, if it's a core asset cap rates, the number of bidders and the cap rates are surprisingly low or depressingly low. It is just hard to go buy a core asset. And where we've had better luck, saw it in Park North, which was a Brent acquisition, was a state of the art newly finished building that hasn't leased up that we were able to buy. And we won't earn the same yield as if we develop it, but we'll earn a lot better yield than if we had waited for it to be a core asset.
And this is the other kind of $14,000,000 that we've earmarked. We're in due diligence, haven't finished it, happy to tell you more about it when we reach that point, but it would be a similar value add type opportunity. So we've had more luck in terms of meeting our pricing kind of guidelines within that where we can go in and take some of the leasing risk, but the building is already built.
Speaker 6
And
Speaker 0
we can take our next question from Manny Korchman with Citi. Marshall,
Speaker 7
you keep bringing up this idea of or the concept of not fire sailing assets. What do you think gets the market to a situation where that would be necessary? It sounds like things have been maybe healthier for longer than some have expected, if that's the right way to characterize it. And maybe is there more weakness on the come that you see coming now? Or are you just saying that things could get worse, but you're not expecting them?
Speaker 1
Yes. I think things
Speaker 2
could get worse, but we're certainly at and if I'm answering your question correctly, at 97 plus percent leased, 96% occupied, we're happy with the market. I would think Firecell and I guess maybe a different definition for each person, I would hope we never, for our shareholders, need to do that. That to me would be our balance sheet is in crisis. Kind of coming out of the last downturn, I think a number of the REITs almost had to fire sale assets to stay alive. So I hope we can always avoid that, but I think we should be mindful of how much Houston is of our portfolio.
We certainly were earlier in the year and try to work that just as a portfolio allocation to a more reasonable perspective because every market is going to run-in and out of favor.
Speaker 7
And maybe if we can focus on the lease up of the asset, especially the vacant asset. Was that a new to market tenant that took that? Maybe if you can just explain to us the type of tenancy and why after being vacant so long you think you're able to fill it?
Speaker 2
The twenty one month. Sorry, was thinking Park Yes, the twenty one month lease, it's a single tenant building, so it didn't have flexibility to chop it up and lease it up partially over time. And that's where the rent spread gets to be tricky. That space has been vacant twenty one months. The prior tenant was a tenant we had in their short term that we had captive because we were doing a build to suit for them.
So we had them at an above market rate at a peak market time. So we're marking that against that. So honestly, I'm not sure what that really tells you from a practical standpoint, but that's just the result it was. We're pleased to have gotten it buttoned up. The other lease that we did that immediately filled a space, it was probably done at a little bit below market, but that tenant need any TI.
It was as is. And you look at it and say, okay. We don't want this space to turn into a twenty one month vacant space. So we did a short term deal, a couple of year deal, no TI, take the income and live to fight another day. And I hope in two years, we can push the rents very solidly against them at that time.
But you just make these decisions on an individual basis, and that's what we will continue to do.
Speaker 7
Fred, maybe to get really into the weeds, the build to suit you did, what was the rental rate like there versus this above market lease that you've then released lower?
Speaker 2
I I would be guessing if I gave you that when I mean, it was a healthy market rent at the time, which would have been a couple of years ago. So it would have probably been similar to what they were paying when they moved out of that building, maybe a little bit less. But that was a couple of years ago.
Speaker 7
And
Speaker 0
we can take our next question from Brad Burke with Goldman Sachs.
Speaker 8
Hey, good morning guys. Nice quarter. I was hoping to ask bigger picture and ask you to comment broadly on demand, which is still very strong across the portfolio. First, are you surprised with the strength of the demand that you're still seeing in your markets? And if you could comment on what's driving that demand that you're seeing, what types of tenants?
And how much of that do you think is being driven specifically by e commerce? I'd appreciate it.
Speaker 1
Sure. I'll
Speaker 2
take a it's Marshall. Take a stab at it. I'm pleased, as I mentioned, I think the numbers, it's 13 quarters where we've been over 95%. So anytime you set a historical record, like in sports, it's got to be a little bit pleasantly surprising. We don't see any drop off in that, and it would be a national demand event, not an oversupply that would change that as we would see.
But we're pleased to see it, and it's across the board. I mean some markets home building has come back, Florida with gas prices lower, tourism has come back. I know they've set visitor records in Orlando and it's really become kind of the e commerce hub for the state of Florida there in Orlando. So it's been a broad based recovery. In terms of e commerce in our portfolio, we're seeing and feeling whispers
One of our longest standing vacancies in the portfolio was leased to an Amazon supplier this past quarter. So that one was pleased to see. We've seen Amazon kind of their grocery delivery and prospects and seeing them elsewhere with RFPs out there. It's not certainly overwhelming our portfolio today, and we view Amazon as kind of an early market leader. So if they're doing that, we're guessing or we expect other tenants to follow suit.
So it's a new source of demand that we weren't seeing twenty four months ago. It's early, and I would expect that we'll have other people playing in that space twenty four months from now. But we're and actually, I'm glad that it is such a broad based tenant supply and not just e commerce or just because same as we certainly got burned, we said, in markets where it was just homebuilding heading into the last downturn.
Speaker 8
Okay. No, I appreciate that. Then just a follow-up on your ability to book capital work. With the share price where it's at right now, is there anything that prevents you from increasing the pace of development and starting to tap the continuous equity program again?
Speaker 2
I guess what would hold us back would be demand. I mean, we're really I mean, that's which thankfully is probably the right governor on it, but we're certainly happier with our stock price than we were earlier in the year. It's a tool in the toolkit that we didn't have for funding. And as we see demand, we've stepped up our starts. Brent has had some good starts in San Antonio where we build up quickly on the Northeast side of town and we love kind of additional phases of another of an existing park is a great risk adjusted way.
So I hope our development pipeline can pick up pace, but we also have to match that with demand and have to deliver on it.
Speaker 0
And we can take our next question from Craig Mailman with KeyBanc Capital Markets.
Speaker 1
Brett, maybe just to follow-up on Houston a little bit. I know you had some unique items with some of these shorter term leases that affected the rent spreads this quarter. But I'm just curious, you look out to the almost 1,000,000 square feet that you guys have expiring next year in Houston and given what you're seeing in sublease space and all the dynamics going on, kind of what do you think the mark to market is on that 1,000,000 square foot roll next year?
Speaker 2
Craig, I think that's a fair question because there's really two things. There's any given quarter what we might report based on just, again, individual transactions. But just stepping back and looking at market rents for Houston in general, I would say that we're still in that single digit down from most of the submarkets in Houston, maybe even Eastside, the strongest, is maybe flat. But where we're seeing the softest and the most rent sensitivity and the most incentive is up north, which, of course, our Houston portfolio, which is a little over half of our square footage, falls within that. That's where it was probably slightly overbuilt combined with less demand compared to some other submarkets.
So in that pocket, I would say maybe you're looking at 10% to 15% from a market perspective of downward pressure. The other thing I would add, any time you want to make as many renewals as you can for obvious reasons, but once you do have the vacancy, that's what puts you at risk to have to compete. So I would say the market as a whole has been what we thought it would be, with the exception being the North being a little softer, people a little more antsy to try to get deals done.
Speaker 1
How much of your role next year is in World Houston?
Speaker 2
I don't have the breakdown by park. Could shoot that to the other
Speaker 1
in that North submarket versus some other areas you guys have of space?
Speaker 2
Well, I'd say, Houston is little over half of our portfolio right there. So I think it's safe to say that at least half of that is up there or up North. Really, the only parks out West are 10 West Crossing and then our Techway Park. We're going to have to just any time you got vacancy, we're going to have to deal with it, that certainly will be part of it.
Speaker 1
Okay. And then just curious, Marshall, comment that maybe you wouldn't be able to get the sale today that you got earlier in the year. I mean, what do you guys think are happening to cap rates? Is there enough data to even know where cap rates are moving these days in Houston?
Speaker 2
Okay. In Houston itself. I think globally, they're still or nationally drifting down a little bit, not dramatically and competitive. Houston, what we're hearing is it's and again, what I would say contrasting it, a year ago, the public market was highly concerned about Houston and it was a tale of two cities. And really even into the spring, the private market was status quo in Houston, where now I think the private market, there's a little more there is more nervousness about Houston.
Cap rates are still hanging in there at a low number. I think it needs to be a core asset without rent roll and things like that. There's a couple of comps out there we've heard of that have not closed that will be in the low 5s. So I think that is no different than what it was. I think what we were hearing through our broker conversations, if you've got, like in the case of our the Lockwood asset I mentioned, maybe 30% of the leases rolling and a fair degree of risk of vacancy with one of those tenants.
That, we probably couldn't execute on today, but we were able to in April or May when that closed. Yes, I would agree. I would just say there's probably just more of an aversion to risk now as we've gone through the year as compared to earlier in the year, and there's more demand for quality. So you have to be more right in the center of the fairway, which one of these projects Marshall referenced that looks like it's going to close at a low 5% cap does fit that bill. But if you get outside of that, that window, the cap rates have bumped up.
Some people are looking for a little more return for what they're viewing as potential risk in the short term. So we're glad to have executed what we did. We sold our noncore assets, if you will, 100% Class A now. And as Marshall referenced, 95% of our assets are within one of our core parks. So we are thankful to have gotten most of our heavy lifting that we really wanted to get done executed.
Speaker 1
That's helpful. Then maybe just one for Keith on the same store guidance. The 4Q ramp, just relative that compared to what you guys have done year to date and kind of where full year guidance is coming in. Just remind me, do you guys have do you guys change your quarterly pools and keep the annual static and that's the kind of why they don't necessarily foot?
Speaker 4
Correct. It's each same store, each quarter has its whatever same store it is for that quarter and which will change for the year and each quarter.
Speaker 0
And we can take our next question from Alexander Goldfarb with Sandler O'Neill. Just
Speaker 9
a few quick questions here. Brent, we'll go to you. And if this was addressed earlier, apologies. But on the post office leases, if my math is right, you guys were, I think, targeting 90% leased for the third quarter and you outperformed at 93%. It sounds like that post office was a little over a percent of that outperformance.
So with the remainder, would you characterize the other parts of the Houston outperformance as sort of, I don't want to say as like temporary or was that outperformance like full term tenants signing real deals, etcetera?
Speaker 2
Yes. No, that was one short term lease that we did with the post office. The rest of it is for term or in the case I mentioned the other lease, it's short term nature, like two years. But no, it's in there for the short term nature. But it was just a few things going positive our way.
Some of it is we tend to be a little conservative in our approach when we look at these things. And when you're in an environment that is slowing, there's just even more uncertainty in trying to make those assumptions and projections. So we're pleased to have beat it, but it was pretty solid other than the one post office lease. The rest of it was good stuff, good to get it done.
Speaker 9
And then when you're talking about rise in sublease space and then at the same time, you're talking about whether it's the two year deal or the post office lease, which sound pretty short term. Would all of those deals be competitive with sublease space or is the sublease space either the way it's configured or where it's located in the market, maybe it's the size box that it's in, it really isn't competitive with what you guys offer.
Speaker 2
Yes. Sublease space in general is just very difficult to compete because it's it's not divisible. They have to reach an arrangement with the existing tenant on occupying it and the liability risk and everything associated with it. The tenant that may consider a sublease space, then they've got to gauge what is the term left on that particular sublease. When there's space available in the market, particularly if you have landlords that are willing to do a short term nature deal with you, that's just much easier and cleaner than dealing with a landlord and a third party other tenant.
So we very rarely compete with the sublease space. I look at it more as the more obvious thing is that it could be a precursor to an increase in the vacancy rate. I think that's the bigger signal of it versus immediate competition.
Speaker 9
Okay. But overall, I mean, it sounds like and I know you guys aren't giving 17 yet. But overall, you know, it sounds like, you know, while you guys may continue to outperform on the lease rate, you know, whether there's more of the twenty one month vacant lease type thing that pressures rent. But the point is we should expect we should not be surprised to see continued pressure on the rent side, but it sounds like you guys may be able to outperform on the leasing side. Is that fair?
Or we should be braced that we're going to see a material drop in the Houston occupancy?
Speaker 2
The reality is we just don't know, Alex. I mean, we've got a 16.5% role. We know some of it, a lot of that, particularly first quarter next year. So we just don't know at this stage. We'll just continue to try to out execute.
We're in contact with all these different tenants. I do think the former part of what you said about rents that again, depending on our volume, individual transactions by quarter, yes, we could have some quarters where, for whatever reason, there's a couple of transactions that we're willing to lease vacant space. We're going to in the side of occupancy versus probably over negotiating where we don't want to overplay our hand. But it's too early to tell. But we're working on it.
Like I say, we're working on 17 already.
Speaker 9
Okay. And then just finally, on the development deal that you guys bought that you're leasing up, is this an indication that maybe to derisk maybe, Marshall, to your earlier point about derisking the balance sheet, is this to derisk and get the company away from, you know, developing on its own to maybe buying out developers who may have financial issues or what have you? Or was this more of a one off deal?
Speaker 2
I wouldn't maybe neither. Mean, I'd say, yes, we were not we still like development. And where we can find the right land, we'll pursue it. It was more as we source acquisitions. We know core assets are hard to find easy to find, but hard to find value on.
And here, it was a submarket we wanted to be in, and we like these buildings. We kept saying to brokers, can you find us something like that? And we eventually spoke with this developer, and they were ready to move on to the next deal. So we kind of it was a we felt like a niche in the market to find a value add opportunity, and now we've found a second. So we think it's another tool in the toolkit.
Speaker 9
Okay. Thanks a lot.
Speaker 2
Sure.
Speaker 0
And we can take our next question from Rich Anderson with Mizuho Securities. Your line is now open.
Speaker 10
Hey, thanks. Good morning. So Brent, you mentioned a lot of this, the $9.84 ks in Houston that's expiring next year as in the first quarter, and you said you're getting to it early. To what degree could we really see a meaningful reduction in that number when you report fourth quarter results?
Speaker 2
I don't expect, Rich, for fourth quarter to look a lot different than third quarter. We've just got 2% roll remaining this year.
Speaker 10
No. Mean 2017 expirations, to what degree will you do that early and maybe the number will look smaller, significantly smaller when you report that same schedule on Page 18 again next year?
Speaker 2
See what you're saying. Yes. Yes, that's our goal, certainly. And again, we're in dialogue with several of these tenants and trying to work on it. We certainly hope to lower that between now and then.
And you're right, we've got three or four months to do that and make that happen. So that's in the works. As you might expect in this type of environment, you've got slower decision making, tenants don't feel the pressure, the urge to make early decisions. Again, when the pendulum swings to a tenant market versus a landlord market, we can try and are trying as much as we can. But at some point, you're at the mercy of the other side to tango with you.
And so but we've got long term relationships with a lot of these groups. And trust me, where we can make the renewals, we will.
Speaker 10
So when it comes to tenant retention and just staying with Houston, to what degree obviously, when you have a vacancy that kind of puts you on the hook to a degree to the market. But when a tenant renews, to what degree are they willing to maybe not go all the way down to market? Or is there more of a nominal impact when you renew a tenant versus when you have to find a new tenant?
Speaker 2
Yes. Clearly, when you're in a negotiation, if you get the sense the tenant wants to renew, there tends to be less negotiating. There tends to be more leverage from our side because you realize they don't want to move and incur the capital moving and all those sorts of things. So a tenant may joust for something, but it's a lot more minimal than if you're out on the open market. So absolutely, renewals is Plan A.
But Plan B, if it gets vacant, is to get the space ready and to move as quickly as we can.
Speaker 10
Okay. And so you don't have an idea what your tenant retention rate will be at this point? Absolutely no idea. Or do you have at least maybe 50% or 30% you know is staying at this juncture? Do you not even have that level of visibility?
Speaker 2
It's too early to tell for 2017. I mean we have some ideas. No one is going to come to us this early and say, I'm going to renew. You may know who's leaving, but no one will say. And then sometimes this far out, they change their minds, especially like a 3PL could get a new contract or contract renew even and things.
So it wouldn't be a very accurate guess at this point, I'm afraid.
Speaker 10
Okay. One of the things that occurred to me, you called the tenant captive in that twenty one month vacancy. So presumably, that tenant is not there, but paying you rent nonetheless. I'm curious what degree what percentage and maybe I should know this, but I don't. But do your tenant what percentage of your tenants have termination rights where there is some sort of termination math dialed into the lease negotiation?
And to what degree is there no such thing? And so it's really the ball is on your court when something happens.
Speaker 2
Well, let me be clear, Rich. When I said captive, what I meant by that is the tenant was there. We put them in that space, and we had them there on a short term basis until we completed their build to suit. So we had a lot of leverage in dictating the rental rate there. They were in the space.
There's leases in the portfolio that have termination rights. Most of those require at least six to nine months notice with fee. But it's not anything that's typical customary Okay.
Speaker 10
I didn't think so. Just checking. The two kind of holes in the recently delivered development projects, one in Houston, West Road 3 and then recently in Phoenix, kind of very low, if not zero on a percentage lease perspective. Can you talk about the pace of activity, the traffic looking at those two in particular?
Speaker 2
Sure. In Phoenix, we've had prospects. We're disappointed where we are. In fact, we've actually kind of again, maybe as we grow and shrink our development pipeline, we stopped our development in Phoenix. We've got a couple of other land parcels earlier this year in first quarter until we can kind of work our way through these vacancies.
So we've had prospects. We just need to button one up and get it done. And then West Road 3, Brent can comment later, but we also stopped our Houston development pipeline a year earlier than that. So really first quarter twenty fifteen, the park is well leased, and this was a single tenant building. So it's one when we get it full, it will either jump to 100% or stay at zero.
And so again, we've had prospects, but we've not been able to land the tenant that needs to be in that submarket that needs that exact square footage. And maybe that is we talk about different types of buildings, why we like building multi tenant buildings because typically in the vast majority of our portfolio is that it's the flexibility. I remember somebody telling me earlier, you want it to be salami, and you can cut it up as many different ways as you need to. And probably West Road 3 is a good, even though we've known that learning curve of what's the size it is for a building, and the market turned right about the time we were delivering it.
Speaker 10
So I probably would have used a different type of meat in that analogy, but none of that. And then the last question is, you keep saying that in 2012, 90% of your starts were in Houston. To what degree are there lessons learned from that, that it's spread out more? Is that a fair statement that you can look back and say, Yeah, we should have been a little bit more forward thinking about how we are spreading our development investments?
Speaker 1
I don't think especially since
Speaker 2
our Chairman will listen to this replay probably at some point. Won't throw David Oster under the bus. I don't know I don't think I mean, I think we made good decisions and created a lot of value in Houston. I guess as I say that, I mean it more in the sense, especially 12 coming out of the downturn, Houston really led the country out of the downturn. So we had the right sites and the demand and took advantage of it.
Maybe the flip side of that, I am thankful now that Houston is a little rocky that the other 82% of our portfolio is creating some good opportunities for us. And it wasn't that a year ago, I would say, and maybe not you so much, but a number of people thought Houston is in trouble. Each group is just going to grind to a halt. And the other 80 plus percent has created opportunities for us to kind of report record FFO this quarter. Would just add to that.
Just went with the opportunity was and just we've had a combination of spec buildings leasing up quickly combined with build to suits. I think anytime we can push development, whatever market we would, looking back at it, I think we're probably slow to sell some of the older assets. I think that's something that Marshall has done this year and done well is to look at that as a means of recycling through our capital.
Speaker 10
Okay. Good enough. Thanks very much.
Speaker 1
Thank you.
Speaker 0
And we can take our next question from Eric Frankel with Green Street Advisors. Your line is now open.
Speaker 11
Thank you. I think the Houston horse has been beaten to death, but one final question. Just on Houston supply, roughly where is that 5,000,000 square feet of new development located? What's the submarket breakdown?
Speaker 2
It's primarily Southeast and Southwest, neither of which we're in. So it's compliant, though. There's a few big larger buildings that make up a good bit of that over on the East Port side, which is still showing some strength. So it's primarily in those two submarkets.
Speaker 11
Alright. And do do you know what proportion of it is is built to suit or pre leased?
Speaker 2
There I don't know the exact percent, but I do know there's some significant pre leasing in it. Not being in the submarkets, I don't know the exact number. I know, for example, up north, where I'm mentioning softness and where we are, there's no spec construction, just by way of comparison. So the market's reacted to the slowness, which is good.
Speaker 11
Yes. Okay. That's helpful color. Thank you. Just a question on the balance sheet for Keith, I suppose.
Just noticed with some of your refinancing activities last quarter, your debt maturities, the duration is a little bit shorter than usual. Do you have a strategy going forward of how of what you want to do in terms of long term debt or other ways to finance your business?
Speaker 4
Yes. We look at our debt maturity schedule and try to get manageable amounts each year. So in case something happens during a year. So we'll look, say it's a five year term, look at five years and see how much maturity is in that period. And if a five year will fit in there, then we will do that same as a seven year and so on.
So it definitely matters how much we have maturing, and we tailor our maturities to that.
Speaker 11
Any hesitation going a little
Speaker 1
bit longer than maturity? I don't I don't
Speaker 11
think you have anything, you know, mature you don't have any debt you don't have any debt maturing ten year or you haven't done any recent issuances where debt matures in ten years. So I just want to get your thoughts if you think the yield curve is not attractive enough from between five to ten years or No,
Speaker 4
we look at ten year also. What we do is take a ten year and get the rate there and then a five year or a seven year with the rates on it and assume that at the end of the five year or the seven year, we need to get another five or three year to finish out that ten year to compare to the ten year and say, well, what interest rate would we have to get on that next five years? Or what interest rate do we have to get on the next three years? And see if that's a reasonable assumption that we'll be able to get that at the end of five years and most often time, it's reasonable that we could get that rate.
Speaker 11
Okay. I don't have much else other than just maybe one side comment on the remaining 83% of your portfolio. Have market rents trended better than you'd expected this year? Your cash flow spreads are quite good in the other markets. I'm not sure if that was just other, like you said, kind of onetime occurrences or if there's really been some rent movements?
Speaker 2
I don't know, better than expectations. Maybe some markets like I sure wish we had more in the Bay Area, for example. In Southern California, it's strong in terms of rent growth. And then if it helps, mean, maybe a good question. One of the items I wanted to mention this quarter, actually our releasing spreads would be a little better.
One of our largest tenants in the portfolio, Ascendant, which was formerly United Stationers, we had a 400,000 foot, thankfully seven year renewal. And so our rent numbers are about 100 points understated because of that. It was a ten year lease with ops. And when it rolled, it was below average. So it pulled the overall average, but that was about almost a quarter of our leasing this time.
But all in all, we're happy with if demand can hang in there where it is, I believe I said to our audit committee earlier this week, it's a Goldilocks environment and that it's not overheated and it's not too cold. If we can hang in there, we can hopefully keep executing. We like GAAP releasing spreads, we think, a much better measurement that we should be able to continue to produce double digit GAAP releasing spreads. Absent maybe a little rockiness in Houston, as you said, the other 83.
Speaker 11
Right, right. Okay. Thanks for the color. Much appreciated.
Speaker 2
Sure. You're welcome.
Speaker 0
And we can take our next question from John Guinee with Stifel. Your line is now open. John?
Speaker 11
Hello?
Speaker 0
Once again, John Guinee from Stifel. You'd like to ask a question, please check your mute function. Your line is open.
Speaker 2
Okay. Well, thank you. We'll call John post call.
Speaker 0
And we will take our next question from Barry Oxford with D. A. Davidson. Real
Speaker 1
quick on the sale on the land sales in the third quarter. Given that the market seems to have weakened as you guys have indicated in that price for riskier assets or noncore assets. When you sold the land in the third quarter, was that at a lower price than what you initially had expected? And did you have to cut your price in order to get those deals done?
Speaker 2
No, we really good question. And we really didn't on the land. It was users. It was a couple of two of the bigger ones, and Brent sold them. They were small parcels within the world Houston that came as part of a larger acquisition, and it was hotel developers that came along.
So we were pleased with the pricing, and we really thought these were parcels we couldn't deliver our type product on. So if you can't do that, we were better off exiting them at a fair price and taking that capital into the next development.
Speaker 0
And this does conclude the question and answer session. I'd like to turn the program back to our presenters for any closing comments.
Speaker 2
Thank you for your time and your interest in EastGroup. We're certainly available post call for any questions we didn't cover today. Thank you.
Speaker 0
Thank you for your participation. This does conclude today's program. You may disconnect at any time.