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Eastgroup Properties Inc
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Good morning, and welcome to the EastGroup Properties Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the call over to Marshall Loeb, President and CEO.
Good morning, and thanks for calling in for our third quarter 2018 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call this morning and since we'll make forward-looking statements, we ask that you listen first to the following disclaimer.
The discussion today involves forward-looking statements. Please refer to the Safe Harbor language included in the company's news release announcing results for this quarter that describes certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time-sensitive information that's subject to the Safe Harbor statement included in the news release, is accurate only as of the date of this call. The company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which can be found on the company's website at www.eastgroup.net.
Thanks, Tina [ph]. Our team performed well this quarter as a result it was a strong quarter where the continuation of EastGroup’s positive trends. Funds from operations came in ahead of guidance achieving an 8.3% increase compared to the third quarter last year. This marks 22 consecutive quarters of higher FFO per share as compared to the prior year quarter.
We are especially pleased with third quarter FFO given its equity raise year-to-date has far exceeded our original budget. The strength of the industrial market and our team is further demonstrated through a number of metrics such as another solid quarter of occupancy, same store NOI results and positive releasing spreads.
As the statistics bare out, the current operating environment is allowing us to steadily increase rents and create value through ground-up development and value-add acquisitions. At quarter end, we were 97.1% leased and 95.7% occupied. This marks 21 consecutive quarters since third quarter 2013 where occupancy has been 95% or better truly a long term trend.
Looking at our specific markets at quarter end, several of our major markets including Phoenix, Orlando, Los Angeles, San Francisco and Charlotte were each 98% leased or better and Houston our largest market was 97% leased.
While still our largest market Houston has fallen from roughly 21% of NOI to a projected 14% at year end. Supply and specifically shallow bay industrial supply remains in check, in this cycle supply is predominantly institutionally controlled and as a result deliveries remain disciplined and as a byproduct of the institution control, it's largely focused on big-box construction.
Our quarterly pool same-property NOI growth was strong at 6.2% cash and 5% GAAP. We were pleased with average quarterly occupancy at 95.7%, up 50 basis points from third quarter of 2017, while rent spreads continued their positive trend rising 5.6% cash and 16.6% GAAP respectively.
Further, our year-to-date GAAP releasing spreads are 15.6% and when omitting Santa Barbara R&D space, they’re 16.3%.
Given the intensely competitive and extensive acquisition market, we view our development program as an attractive, risk adjusted path to create value. We effectively managed development risk as the majority of our developments are additional phases within an existing park. The average investment for our shallow bay business distribution buildings is below $12 million, and while our threshold is 150 basis point projected investment return premium over the market cap rates, we’ve been averaging 200 to 300 basis point premiums.
At September 30, the development pipelines projected return was 7.6% whereas we estimate an upper 4 as market cap rate. During the third quarter, we began construction in four cities on properties totaling 670,000 square feet with a total projected investment of $53 million.
Coming out of the pipeline, we transferred two 100% lease buildings totaling 286,000 square feet. Demonstrating the strength we are seeing the market, our development pipeline and value add percent lease rose from 27% to 43% even with the five new additions and two 100% leased buildings transferring out.
As of September 30, our development pipeline and value add properties consisted of 20 projects in 11 cities containing 2.5 million square feet with a projected cost of $220 million and for 2018 we originally projected $120 million in starts. Today, that forecast is $145 million.
Additionally, we have several projects that pending weather and obtaining permits will either commence late 2018 or create a solid start for 2019. One of the things I’m excited about has been this greater number of development markets. This diversity reduces our risk and continues enhancing our ability to grow the pipeline.
During the quarter, we acquired Allen Station, a two building 227,000 square foot, 87% lease property and Allen Texas a Northeast Dallas suburb for $25 million. We also acquired the 115,000 square feet Siempre Viva Center in San Diego for $14 million. This property which became vacant post-closing, is now 100% leased. And on the disposition front, we closed the sale of the 50 plus year old 125,000 square feet 35th Avenue Distribution Center in Southwest Phoenix for roughly $8 million or slightly sub-6 cap rate.
Brent will now review a variety of financial topics including our updated guidance.
Good morning. We continue to see positive results due to the strong overall performance of our portfolio. FFO per share for the quarter exceeded the upper end of our guidance range at $1.17 compared to $1.08 for the same quarter last year, an increase of 8.3%. The outperformance was primarily driven by terrific leasing results in both the operating and development programs which pushed occupancy and net operating income above our budgeted range.
Notably, all seven projects listed in the lease up phase of the development and value added pipeline experienced additional leasing success with five becoming 100% leased. Other positive contributors for the quarter were lower interest in G&A expense.
Our balance sheet is strong and flexible and our financial ratios continue to trend in a positive direction. Our debt-to-total market capitalization was 24% at quarter end and our adjusted debt to proforma EBITDA ratio which normalizes the impacts of acquisitions and active development was 4.65 down from an already healthy 5.44 at December 31.
From a capital perspective, we issued 31 million of common stock under our continuous equity program at an average price of $96.56 per share. That increases our year-to-date gross equity raised to a record high of $114 million.
FFO guidance for the fourth quarter of 2018 is estimated to be in the range of $1.17 to $1.19 per share and $4.66 to $4.68 for the year. Those midpoints represent an increase of 3.5% and 8.9% compared to the prior year respectively excluding the involuntary conversion accounting gain recorded earlier in the year.
The increase in the guidance midpoint for the year of $0.06 is the result of a $0.30 outperformance in the third quarter driven by successful leasing results. This activity then reduced leasing risk for the remainder of the year increasing our budgeted average month end occupancy for the fourth quarter by 120 basis points to 96.3% and raised our estimated occupancy for the year about 40 basis points to 96.0%.
As a result, we increased the midpoint of our same property guidance from 3.2% to 3.9% on a GAAP basis and to 4.3% on a cash basis. You will also notice that we enhanced our same store presentation in both our guidance table and supplemental package to provide clarity among the various metrics. We hope you have found these changes informative and useful.
Other notable guidance assumptions revisions for 2018 include increasing our estimated common stock issuances by $34 million to $144 million and as a result we deferred our next budgeted debt closing to early first quarter of 2019.
In summary, our financial metrics and operating results continue to be some of the best we have experienced and we anticipate that momentum continuing into 2019. Now Marshall will make some final comments.
Thanks, Brent. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in, upgrading and geographically diversifying our portfolio. As we pursue these opportunities, we're also committed to maintaining a strong healthy balance sheet with improving metrics, as demonstrated by our year-to-date equity issuance. We view the combination of pursuing opportunities while continually improving our balance sheet as an effective strategy to manage risk while capitalizing on the strong current operating environment. The mix of our operating strategy, our team and our markets has us optimistic about the future, and now we’ll be happy to open up and take any questions you may have.
[Operator Instructions]. And we will take our first question from Jamie Feldman. Please go ahead. Your line is open.
Great. Thank you and good morning.
Good morning.
Hoping you guys can talk a little bit about just more about the types of tenants that are leasing space. I know you had mentioned you are little bit protected from the big-box construction but business sounds like it was better than you thought it would be, can you just talk about the specific markets and the specific types of tenants and uses that are driving this?
Good question and good morning. It’s what we liked about this quarter, what got us excited is it was very broad based. We kept hearing over the summer and probably mentioned even a little bit in the second quarter that what we were hearing from our guys and the brokers we worked with that everybody was having a busier than normal summer and thankfully that activity turned – sometimes you have that it won’t turn into a lease, but thankfully they turned into leases and it’s been pretty broad based if we and can put it into two different buckets.
What’s nice about this economy is our traditional businesses whether it’s home building or construction and plumbing all of those tenants we continue to see more and more expansions within our portfolio. That’s what helped us kick off one of the Houston developments that we have underway. For example, and then within that – those can be last mile, of last mile for the HVAC guy to get to homes in North Atlanta or Northeast Dallas that also last mile we’ve signed a few leases with wayfarer and have them as a prospect – kind of let’s say a material prospect within our development pipeline whether that happens or not time will tell.
We are talking to Amazon really as they continue to rollout their last mile. One, I hope not violating them. We’ve seen rolling out a program where you order your appliances online and you can either probably could pick it up or probably more likely deliver to your home. We have signed a lease with them which was one of their first locations as I understand that under this program and are hopefully close to a lease on a second location with Lowes.
So it’s been pretty broad based medical and cum pharmaceutical, Arizona nutritional supplements has jumped up on our top ten list as a tenant we’ve had for a while but they have expanded their private manufacturer distributor of supplements we’ve seen online pharmacy fulfillment grow, but those were -- mainly in Arizona and Florida.
So it’s been pretty broad based tenant lives and this quarter what we’d like as we rolled up the numbers and I was curious was it one or two markets say a Dallas or Orlando that really drove our beat, but it was every market was a little bit ahead and when we added those up, all of a sudden we were $0.03 ahead for the quarter and that momentum was carrying over into fourth quarters like where is what we’re seeing.
Okay, thanks its’ helpful. And then as you think about the development opportunities looking ahead to next year, do you think you could do more starts in 2019 than 2018?
My crystal ball has been known to be wrong as often at least as its right, but as I mentioned we could potentially beat our $145 million. There’s some starts that for example, the Houston, the pre lease that we have there, that’s not in our $145 million, but the lease is signed so we’re committed to this building which we’re excited about. $145 million could grow still in 2018 but if that doesn’t grow we will really have a good running start up.
If you look through for example, our development pipeline the Creek View project we are basically out of space in that park in Dallas and are hurrying to catch up with demand a little bit and the same thing was Steele Creek in Charlotte and then Gateway down in Miami where we leased space. We’ve got the balance of the building accounted for leases out, so all of those some could still fall into this year, but if not it makes me comfortable that we could meet or exceed $145 million in 2019 and my huge assumption and that is as this is operating environment the economy, it doesn’t need to improve but if it stays where it is today or doesn’t materially get worse we could meet or exceed it next year.
Okay, great. Thank you.
Thank you.
Thank you. And we will take our next question from Alexander Goldfarb with Sandler O’Neill. Please go ahead, your line is open.
Hello hey thank you, good morning to you. Two questions, first on mattress firm, if you could just give us an update on where you think your expectations for that tenant if you think they are staying or going and then if they are departing, what you think the downtime or the impact will be?
Yes, good morning this is Brent. I would say with Max Firm their current at all five of our locations and we were seeing no closure notice thus far and in fact we’ve had dialogue with them about their existing leases that’s still somewhat of a fluid situation. But, I would point out that Max Firm equates to 1% of our annual revenue and that’s actually declining overtime as we continue to bring properties into the operating portfolio and our top ten as a whole is only just slightly over 8% which I think is the best, but not the best one of the best in the industrial sector in terms of diversity.
So, the 1% we are keeping an eye on but for the most part. Their rents are less than market at each of those locations. They are in newer buildings; the average building age is 6.5 years in those five locations. So we are in contact with them and monitoring from what we are seeing and anticipating.
Again, we have just the distribution centers, they have announced I think it’s in the neighborhood of 400 retail closures so far and that may go as high as 700 we understand, but in our markets they haven’t closed more than just a few locations which leads us to believe they are going to continue to need the distributions. So the good news is they are moving quickly, I think they would like to have a forward plan in place for the end of the year and so we are going to stand on top of it, but right now we are cautiously optimistic about what the end result would be, but time will tell.
Okay, and then the second question is as we think about next year, clearly the momentum that you guys have in the third quarter and fourth quarter is pretty strong. But Brent as we think about the properties and lease up, how much are those properties on the lease up schedule are contributing in the third quarter versus those are yet to deliver meaning, yet to be in the pipeline, so the $0.03 this quarter, the $0.02 next quarter, these lease up ones will be added if to that, I’m just trying to break out what sort of the in – the run rate NOI versus what would be incremental to?
Yes, and its page nine of our supplemental where we list the development of value add properties. There is no leasing in the third quarter, certainly attributable to any of the properties and lease up. And they would be – I’m looking to anticipate a conversion date, there would be minor impact in the fourth quarter, most of the impact doesn’t occur until we look at page ten, those are the properties that have transferred into the portfolio. It isn’t to their end and churning that they actually contribute. So, none of the properties in current lease up contributed other than the two properties you see, we had two third quarter roll in carrying two or Steele Creek.
Those two might have had an phenomenal impact to discuss they roll in the third quarter, but as we point out we’ve got over 200 – somewhere 210, 220 million between lease up and under construction and none of that has come through to the bottom line from a learning standpoint.
Okay. I appreciate it.
Some of the things that helped them, is just last year we were 120 million in starts and so that’s what helped and then we called our value add kind of platform, our shadow pipeline and it’s got to about 150 million over the last call it 2.5 years and that’s, all that’s pretty much stabilized other than a project we acquired in Atlanta at the very end of last year. So all that is – the size of the market and the ability to simply raise rents I think that as we can, as we view our development pipeline, as we stamp out building after building that is what’s pushing our NAV and also helping our earnings.
Okay, Marshall I appreciate it. Thank you.
You’re welcome.
Thank you. And we will take our next question from John Guinee with Stifel. Please go ahead your line is open.
Great. Thank you, a couple of little clean up questions. First, what do you expect to happen to G&A in 2019 because of the lease accounting rules and capitalizing versus expensing your in-house leasing people?
Second, can you talk a little bit about your 12.5% dividend increase and the ability to maintain that? And then third, are your very attractive return on cost based on the fact that you’ve got your land at a really low basis or that’s just the market return on cost in your markets?
I’ll take the first two and let me remind Marshall what the third is when we get there. But on the [Indiscernible] G&A we do finally have what we feel is a solid run rate and remember last year we had conversion to the straight line, pipeline testing for compensation that caused last year to be heavier. But our $13.8 million that we are budgeting for this year or $13.6, we view that they were just the – typical increase year-over-year and nothing significant and we’re only considering about 175,000 based on the last year to of impact from the changes in having to expense some lease related cost.
As a reminder, we have no in-house leasing personnel, so we haven’t had a big internal overhead G&A allocation or capital offset for those services. For us it will primarily just be a third part attorney that were used that reviews the majority of our leases. So we think it will be a pretty minimal impact for us.
As far as the 12.5% increase in the dividend, our philosophy is that our chief is capital, as a capital we don’t have to extend. The good news there is that we are just simply driven by our significant steady growth – especially over the last year or two and last year we are fortunate to kind of scrub just bare live up the number and that, that led to the [Indiscernible] percent increase.
We certainly view that that dividend can be maintained into next year, but certainly not that dividend growth rate, we think that would moderate and certainly not be at the level of 12.5, but we certainly think that given the positive momentum into 2019 that we think that dividend is certainly been maintainable. I’ll let Marshall touch on the reason we have such good returns in the developed pipeline.
John, part of this also is – I can only speak factual for what we do and then a little bit since we don’t build big-box and this is kind of my question maybe a little more speculative, but I think our guys do a great job of finding land at reasonable price is really the cheap land we brought the last downturn, we’ve pretty much burned through.
So everything our goal is now as soon as we acquire land to put it into production and try to think as we build out a park and I think that we’ve got shared driveway, shared retention within our park so there’s maybe some economies or scale as compared to a standalone big-box building. Our office content, while not high at probably 10% to 20% is higher than our big-box that would be 95%, so that usually as we put our dollars in and also the tenants usually put their own dollars into that build out, that pushes the rents a little higher and probably helps on a return and then the third part, usually if you are doing a large say a 700,000 foot lease with us, a whirlpool target, Walmart they know the value, they’ve got their own real estate department. They’ve got a broker, or brokerage team and several people if you take say South Dallas or South Atlanta there is usually pretty intense competition for those types of tenants. They know the value they bring when they sign a lease, but those are, actually – I view those as awfully out and advance and heavily shopped and tough negotiations where a lot of time ours is someone looking and they need space fairly quickly. I think our tenants and the tenant broker certainly negotiate hard.
But I like -- what I usually say I like where we fit in the food chain. It’s not as intensely competitive, it’s less of a commodity and so our cost within their distribution system is pretty low and the spaces are a lower component, so I think it gives us the ability to price a little better versus an 800,000 foot building on the far west side of Phoenix for example.
So you like your business model better than the big-box model?
Yes, I like the guys at – and I’d say anything, they made money too, but I like where we are. I am glad we do what not everybody else is doing, maybe another or a better way to say it.
It’s a big tent, John.
All right. Thanks a lot guys. Nice job.
Nice job.
And our next question will come from Rich Anderson with Mizuho Securities. Please go ahead, your line is open.
Thanks good morning, team.
Good morning.
Good morning.
So Brent or whoever, can you have sort of guess the utilization of the ATM to do a lot of your funding, how much is that impacting what you could otherwise have achieved from an FFO standpoint, is there a number of dilution that you are willing to take on because you are going that way with your stock trading well above NAV?
Yes, it’s a good question Rich. When we look at it and actually a tricky competition, because as you move different parts and the way we look at it, at some point beyond this near term you are going to go need either equity or debt and so we just do with the premium to the stock that the value that we perceive is being north of an NAV, certainly north of an NAV consensus that we view that as attractive and so we’ve been – we’ve used that as a mechanism to raise equity over the last couple of years more so than normal.
But we’ve also seen periods of times where that equity is not available and we are certainly well positioned than to switch gears and go the debt route being only 24% debt to the market cap, they certainly weren’t there so we have these internal discussions probably once a week about what’s enough and what’s not too much and Marshall always reminds me he wasn’t a hoarder until he likes our stock price and then he becomes a hoarder.
So, but it’s not that we monitor and we feel like the good news is we have good uses for all those capital. We’re putting money to work at an average of 7.5% to 8% and that volume has picked up and the leasing has been terrific, so it’s a little bit of a dance between the two, but my guess is going into 2019 if the stock price maintains it’s healthy course so we’ll continue to certainly utilize the ATM as a method of proceeds.
But in terms of, is it almost the cost of debt versus the cost of equity almost on top of one another in the sense that it’s not creating a whole lot of dilution for you in whichever direction you go.
Yes, our internal calculations are – give or take it’s probably within 30 basis points which for us is that’s as historically tied as that’s been. Typically the debt is a good bip is less expensive than the equity, but yes, it’s in a small category and that’s certainly avails the ATM to use to because it’s not as expensive to do as it sometime can be.
I agree with Brent. And another comment a few years ago we had looked and kind of some of the attributes, so the – and not simply industrial REITs we admire where they have strong balance sheet. So we have said that of the blue chip REITs that was one common trade we could imitate, so we like having a strong balance sheet and then we’ve have internal debates, what we’re certainly not seeing it, but everybody says this real estate cycle has lasted so long.
As you near the end and the beginning and we could debate that the balance of the day but we’ve said I like the combination of a healthy development pipeline that as long as the market is supporting it, let’s kind of keep delivering and completing the next building but it makes me feel better that at the same time we’re – if the market allows us so that we can keep deleveraging the balance sheet I think those two risks offset themselves in my mind a little bit of our balance sheet stronger and as we grow our developed pipeline hopefully it’s giving us that much more safety and hopefully as our balance sheet gets stronger, I’d argue we should trade at a higher multiple versus if we were 45% leased with a large portion of that in floating rate debt for example.
Right. So you almost answered my next question, but I mean part of the risk I think here is, meeting expectation is the new miss in your space and maybe largely in your stock. And so the market is kind of pricing in these beat and raise type of quarters. How much are you perhaps planning for the inevitable point where performance perhaps fall short of expectations? Is this -- and what you're perhaps doing today is not so much a present tense consideration, but considering what could be happening down the road say two, three years from now, the market is chirping about a possible recession at some period in the next couple of years.
Are you – when you think about all of things that you’re doing whether it’s capital raising or investing or whatever it is, is there an eye, is there a very significant eye towards the next couple of years? Or are you thinking more, well, the markets giving me this now so I’m going to take it. I’m wondering how the longer term is influencing you?
Yes. We certainly think longer-term. I mean, as you say it, I was kind of thinking of Keith McKey, our prior CFO, I said, take equity when you can, be opportunistic. It won't always be there when you need it. And then right now we do need it with our development pipeline and value-add. So we like it from that perspective and I guess it always – you’re not the only person that’s mentioned to us. We have our guidance and the market expects us to beat it whatever we say and so I think of this and raise if that's expected of us, gosh, that’s the best compliment we could get as a company.
I hope that market things work. I’d like to be viewed more conservative than aggressive and if people think we’re going to outperform then I guess we’ll hate the quarter when we miss it, but I'm proud of the team and I’m happy with that reputation if we can earn it, that people expect you to be there and improve, and if we -- most people don’t regret. At some point it is a cyclical business, so it will slow down and I remember having a discussion with our board 2.5 years ago on our annual planning meeting that they felt the cycle was ending then. And thankfully the market will let us know when it's over. Thankfully we didn't pull our horns in then for example.
Okay.
So we’ll have better balance sheet and we think a couple of years down the road, but rather then worry about at, I don’t know much more we can do about it.
Yes, agreed. Thanks very much.
Sure. Thank you. Thanks Rich.
Thank you. And our next question will come from Bill Crow with Raymond James. Please go ahead. Your line is open.
Good morning. Question for you. We talked a lot in the past about the inflation and construction cost. And I'm just wondering for whatever reason, if construction costs were to turn around and fall 15% or 20%, how long would it take for the market to kind of get out of balance from a supply/demand perspective? And are there a lot of projects out there that might go ahead if it was cheaper to build that would throw us out of whack?
Good -- I guess good. I like the thinking on it. Interestingly, we struggle so hard – and this is Marshall to find land that we think even when construction prices were low, supply didn’t get out of balance. So if you said what, besides Rich’s question down the road at downturn what really keeps us up at night is finding the next land sites to kind of continue building our parks. So, on construction pricing I’d like your optimism. We don’t see you talking to outsiders, the shortage in workers and what we’re seeing in steel prices, the construction went up probably 10% to 20% fairly quickly and has been more moderate, but we’ve even heard stories in one of our markets for example that people are so short on workers that they were a concrete company was showing up at our job site trying to hire the workers away while they were pouring the slabs and things like that.
Same things that we watch where Amazon raised their minimum wage for employees, we've heard that FedEx is doing kind of several different things to kind of retain their employees as well. So we don't think unfortunately that the labor shortages, its here and may last for a while. But thankfully what we view as our market -- we're full and our markets are pretty full. And with rents, we are hoping rents keep pace with inflation basically is what would be my best guess.
So Marshall, do you think that the cost inflation has moderated from, you quoted, 10% to 20%. Are we running 5%, 6% a year, you think now?
Maybe a little bit, I guess just talking to guys in the field. Now they are for a while every pro forma – what Reid, who runs our Texas group, said the pro forma, I said, earlier in the week I had, I thought was conservative and three days later we got bids in and now I’m learning that it’s not. And they are saying prices are more moderate. So maybe that 3% to 5% and again pending on how trade talks go with China and everything else we’re are happy to see a trade agreement get resolved with Mexico. And again, the details with the autoworkers where we’re hearing auto components may need to contain more U.S. based product that that probably benefits us being there so many auto plants and things like that. But we’re happy to hear that construction prices although they spiked to kind of level out a little bit and I hope that holds.
Great. That’s it from me. Thank you.
Thanks Bill.
Thank you. And our next question will come from Manny Korchman with Citi. Please go ahead. Your line is open.
Hey, good morning everyone. Marshall, if we back to the conversations you’re having with tenants, how many of those conversations are leading you to think about markets you're not in or is it conversation more focused on the land or buildings you have and presenting it a batch of tenants?
Primarily the latter; when look at what opportunities can we find. We like the markets we’re in. Within our existing markets we do spend time looking at new markets even if we pass. We feel like we’re learning about that market. And we’ve also said kind of maybe touching earlier, there's a downturn. I’ll use one market. We’ve kicked tires in for a while and probably should have ended should have entered years ago Nashville, Tennessee. It's fits in our footprint, it’s been a great economy, it’s hard for us to think we can jump in there today and add a lot of value.
So we do look at markets that by and large -- maybe two-part, by and large, we think of how can we accommodate our tenants’ growth and the opportunities we’re seeing within Orlando where we’re running low on land today, or continue to find land in South Florida or Dallas or things like that. The other trend we’re seeing more and more, it probably will fit more of the big box tenants, but we are seeing it in our smaller shallow bay buildings is, we’re running into the same tenants and the same brokers over and over again in different markets, be it a Wayfarer or a Lowe's or Amazon where -- or even some HVAC contractors where we are working on having a conforming lease and accommodating them makes it easy for them to lease space in Orlando and go to San Antonio, and maybe to LA as well.
So we are seeing more tenant and broker overlap than we probably saw a few years ago. And that potentially could lead us to a new market, but we really at least like our footprint today and are hesitant to enter new markets especially probably later in the cycle than early.
Thanks. And then if we think about the transaction or acquisition environment, what would you need to change in order to increase those volumes? Is a matter of losing deals based on price, is it -- that the types of assets for your [Indiscernible] and like aren't available, where do -- where do things sort of sit?
Yes, good question. We see properties we like. Well, it’s we just can't afford them. I mean, that’s at least passed on -- how large number of deals in California and for example, and all of South Florida, we just will make it first, second, maybe the third round, which is really the buyer interview. And we -- we try to set a ceiling before we start bidding because once you start bidding everybody and me included, you get emotional about it. You get excited about the properties.
So they are -- they are out there. It is -- CBRE refers to it the wall of capital which really comes from all over the globe, there’s a lot of people that like U.S. ndustrial real estate right now. And I’m glad we built it and we are better off finding, for example, I’ll stick with our -- the property we just bought in San -- South San Diego. We bought it, we expanded two tenants, it’s fully leased now and we’re in the low sixes, we are in the same park buildings which we -- we looked at are going to trade sub 5 [ph]. So we could buy and we're just trying to -- we watch our cost of capital and the growth that we think we're going to have on those leases. And as usually – everybody’s got a checkbook and there's someone that’s willing to outbid us that usually lost the last deal or two, and we go to bat a lot and we don’t get many hits basically.
Thanks Marshall.
Sure. You’re welcome.
Thank you. And our next question will come from Craig Mailman with KeyBanc Capital. Please go ahead.
Hi, guys. Marshall, maybe just a follow-up on the land conversation you kind of threw up. Orlando is one where you guys are looking for more inventory and just looking at the list of markets you have, I mean, Atlanta is kind of running low here? Can you just give us a sense -- do you have anything in the tail-end in some of these markets? I mean is there even really any land on the market that fits kind of what you guys want to do in the locations you want to do? I'm just trying to get a sense of, we’re talking about development starts into next year just to be able to do it on a broad base, just wanted to know what the probability of that is given land inventory?
Sure. We feel, at least near term, pretty good that we can keep our development starts again. If the economy hangs in there, we can maintain the run rate. If you said what markets are you – in other way, a little bit like Orlando, as we mentioned, we’re our and John Coleman and Chris they have a few sites where we’re pursuing nothing where they are -- they are to close or announce. Tampa is another market that we’ve been in Tampa 20 plus years we really like, but where we don’t have developable land there, and it’s a balance. You don’'t want to get too much land and then you have to carry it and your yields go down.
Atlanta, given the value-add properties we bought there and as I mentioned, not everything -- we had a good quarter, proud of the team, there is always a place or two like Atlanta. We’ve chased a lot of deals and have landed [ph] them. So we'd like to finish our value-add project in Atlanta before reloading with the next batch of land. So it’s five in Atlanta, but we’ve seen a couple of sites we’ve looked down and that was maybe I’ll tie it to the prior question.
One of the things we liked about when we entered Atlanta, I was shocked -- this was a few years ago when we sat down with brokers, how little land they could find us within a market as big as Atlanta or how hard it is in Dallas. So that makes us feel good about supply, which is great, but it worries us about ability to grow going forward. We’ve -- those are probably the markets where we’re liked today, those three.
That’s helpful. Then as or later cycle now just curious on your thoughts internally about kind of caps on development. I know the company has gotten bigger, balance sheet in great shape. I’m just curious how much -- how big the pipeline you want to be carrying is at this point?
I guess it -- yes, good question. A lot of it depends where in the pipeline. That there is a -- looking at our pipeline now there’s a handful of deals that are all 100% leased. So again, that’s pretty a typical, but once we hit there, I worry less about those. I guess you still worry about all of your kids, but worry less about those. We typically target of about 6% of our assets as kind of an informal of what we want to have at least in terms of land on the balance sheet. And then we also track what -- between are value-add and construction and simply land of what is that as a percent of our balance sheet.
So obviously, that’s a higher number, but when they get closer to coming out of the pipeline -- and as they are leasing, or a pre-leased building like several of the starts we had this quarter hit the bottom of our development pipeline, all had a fair amount of pre-leasing we feel a little bit better, so it’s up, I'm not giving you a very exact number because maybe it’s not an exact science, balancing act, but we, I’m sure there is an absolute number, $220 million in our pipeline that’s about as big as it’s ever gotten but a several of these are going to roll out in the next 30 to 45 days too.
It's helpful. And then just lastly, you guys clearly had a great quarter on the leasing front. Just curious, the guidance you gave last quarter seemed like it assumes some move-outs. I mean, did those move-outs happen and you guys has back-filled way quicker than you thought, the tenants that you have a higher probability of leaving stay, can you kind of give us some context of was it more people just realized they couldn’t leave and so they stayed or is it just really quick back-fills on some of the things that did roll out?
Kind of a yes is the answer. It was little of all, some tenants that we -- again we usually don't project 90% retention rate, we typically average around 70% historically, so some of the tenants were nearly budgeted people to leave because we didn’t want to budget enough, 90% of our tenants staying. So some state that we had budgeted vacating; some held over longer. So there were some of those were the tenants -- few of those are still there, where it doesn’t mean they are there permanently but hey we’re few months beyond your lease expiration and they haven’t worked out a deal or stayed to either stay or leave and in those cases we'll collect a premium rent typically on those and then, in some markets something like in Tucson where we relocated, built a new building for Chamberlain, moved amount of 160,000 feet into a new building, Mike Sacco was able to back-fill that with one existing tenant, one new tenant way ahead of what we found in a small alike Tucson, but it's a smaller market and so now we're back to 100% leased in Tucson. So that was a nice budget pickup in that market for example. Brent anything you want to add.
Yes. Basically like Marshall said, it was well spread out and I’d also point out that our development pipeline that the leasing and getting permits in little faster than we had budgeted there also was part of the help. So it was broad based, leasing combined with a few tenants staying that we have budgeted to move out, but it was really across the Board.
If I could just sneak one last one I mean as you guys are budgeting people to move out, is it because they are outgrowing the space in your opinion or you don’t think that they want to pay the rents that you're going to roll them up to? I’m just curious kind of as you guys think about that space by space what's the biggest driver at this point of the cycle, kind of utilization or cost?
It’s typically more on cost, I mean sometimes you will hear a tenant bought their own building or they made a decision, sometimes it is simply -- those are the ones that make me feel better, it is an assumption, one of our asset managers Craig don't budget, you’re going to renew all 10 tenants, so even if you think that somebody is going to surprise you and decide to leave, but a lot of times we’ve just had a conversation about a tenant in California, for example there in sticker shock over their renewal rate, but the renewal rate we’re proposing in that market and most everybody we deal with as a tenant rep broker probably thankfully at this point, the cycles that educates them of they may be a little bit in shock on the rents but there's nowhere else for them to go and incur the moving costs that.
And so it’s typically that people have out grown our building which is one of the other things we really like about building the park settings, a lot of our new development comes as a way to accommodate and we’ve got existing tenants, they paid the rent for a while and thankfully their business is good like I mentioned, Arizona Nutritional supplements ANS earlier, there in a building and they filled up a new development we had thankfully. So if we can move people from building three to building eight for example, that;s one of the beauties of building a park.
Okay. Thanks guys.
Thank you.
Thank you. And our next question will come from Eric Frankel with Green Street Advisors. Please go ahead.
Thank you. First up, Brent, thanks for the clarified disclosure on same store reporting, I think that should be helpful to everybody. First question, I know you’ve diluted your exposure to Houston, but maybe you can just talk about leasing trends a little bit there, it seems that releasing spreads has been a little bit choppy you’ve had some good quarters and not so good quarters and this quarter seems to be pretty healthy?
Sure, I'll talk, Brent, and thanks for the comment on same-store and I remember our conversation from a quarter ago, as I'm glad that's helpful and Houston is certainly recovering, we said a couple of kind of big picture comment and then more detail on leasing. We started the year hoping or really expecting to start eight building in Houston and we did and that one is a 100% leased and then we had an existing tenant expand and extend their lease and that kicked off our second building at Ten West Crossing and now we've gotten the building, which we haven't broken ground on with the pre-lease. So all of a sudden the Houston economy has picked up with all and just the economy in general, they've added 110,000 new jobs in the past 12 months, which has to put it Number one or two probably them and Dallas in the country over the last year.
Our leasing spreads, the market is recovering there, the rents are not back to their peak in Houston, but they are certainly moving in that direction, it was a good quarter and really last quarter we stretched to, it was a large building at World Houston to make the deal a single-tenant building and so it was probably a little bit of an arbitrary kind of odd data point that pushed it down, that much probably shows a little bit worse than the market, but the market is still not back to its peak in Houston, but it’s 5.1% vacant and recovering pretty nicely.
So we’re happy with Houston and again we’re certainly cognizant of having been at 21% and then in the penalty box on Houston a few years ago and so we’re glad to see it roll down to 15%. As I mentioned the three starts I wouldn't want you or anyone on the call as we roll forward, if you took our portfolio, annualized it and really stabilize the development portfolio that actually gets and so you're getting a year down the road or little more, gets Houston down below 14% of our NOI.
So we like the market a lot, we're good historically Brent and Kevin and Reid and the team have created a lot of value in Houston over the years, but we'd like that we're able to play offense there and continue to shrink, it is a kind of -- as a portfolio allocation more than anything, indicative of the market.
Okay. Thank you. It's a small question, I know you obviously are going to introduce guides next quarter. Maybe you could talk, I was wondering, though, if you could talk about any plans given where asset prices are to maybe clean up the portfolio a little bit more and add some more non-core assets and maybe can also add in some commentary on how Santa Barbara is doing especially with the lease roll there next year?
Okay. Yes. Santa Barbara, we pretty much addressed the large vacancy we had a year ago that 51,000 feet, 44,000 feet of it has now been leased thankfully and so we’ve got one 7,000 foot space and are we’re talking to a couple of prospects have a prospect that we will see hopefully will fill in and we have a larger renewal there next year another lease that rolls at the end of this year.
So we’ll see how, it's a little bit early to know I hope we can renew the tenant, the market is reasonably healthy and you’re right in terms of non-core assets, we bought our partner out of two other buildings last year reworked a little bit of the partnership there, that is one over time given that it's two story R&D buildings and in the market they’ve good assets, but we'd like to reduce our exposure in Santa Barbara over time and in some other ones, we’ve got another asset or two lined up that we’d like to sell next year..
Okay. Thanks. Just final question regarding some of the last mile requirements that seemed to picking up steam, are you seeing any sort of automation or robotics in those buildings, in terms of their user or is it still fairly manual?
I’m sure more than we’ve seen certainly like the pharmaceutical kind of online pharmacy, there is a lot of technology and a lot of investment in that kind of in the medical, we’re seeing more HVAC warehouse, things like that and -- that’s part of our geography and I think it's coming, but we're not heavy -- heavy there yet and then probably last mile is certainly not the automation technology the big box has, but it’s with the labor shortages and all that it’s coming our way but you can overcome some, we don’t think any of buildings are obsolete But you can overcome obsolescence with location on a lot of those properties too.
Okay. Thank you. That’s it from me.
Thank you. And our next question will come from Jason Green with Evercore. Please go ahead.
Good morning. You guys have talked about kind of the scarcity of land assets out there and the amount of capital that’s chasing them. I’m curious kind of how competition for land assets has changed today versus about a year ago?
Yes. For land acquisitions, this is Brent telling you. We’ve seen really that -- what you have to have is a more in-depth guys on the ground that you can look. The days are just driving and this many year ago, you drive out where there's roads and infrastructure, you just buy land and build buildings. That’s in the major markets. That's gone. So you’ve got to really spend some time, as in our Point project in San Antonio, that was a two-year process to get that land zone changed, bought and it’s doing terrifically now. But -- so I would say what’s changed is and it’s part of what has kept supply down is not as easy to just go top piece of land and began to put up buildings and flip them and sell them especially for local developers.
You've got to really be willing to put in the time and in some cases, do a conversion, like the Gateway project Miami where we converted the horse stables to the Churchill Downs racetrack. We’ve converted old municipal golf courses. We've changed retail zoning to industrial zoning which is not easy to do. So I would just say as the opportunities get more difficult, you’ve got to think outside the box more and along with that comes out a little longer lead time. So I know John, in Florida, there’s – it takes quite a bit of time to get land ready there. So you want to be looking well advanced of when you actually think you may actually need to put the dirt into progress.
But I guess today versus a year ago or kind of year and a half ago there are far more bidders for land assets or that hasn’t really changed at all?
That probably has. Most of the land we acquire isn’t really -- maybe it’s listed but it’s not, maybe one comparison is like if it’s a building, a large brokerage group will come out where the bids are due on this day and if you make it through that round, they will have a second round of bids and it’s a pretty orchestrated process. Landfills like it’s out there on the market and there's bidders, but it is not -- all of you show up with your bid on Wednesday by 5 o'clock.
So there's -- probably they have to be given the returns and the profits being made there more, there's less land out there and there's more people kind of scouring through it to find land certainly, California, South Florida, those markets. But I don’t know that it's gotten much more intensely competitive for that. It has for the last few years, been very intensely competitive for just a core acquisition, that we were shocked in Atlanta. For instance, recently there were, we were one of -- on a package and there were good buildings, but probably 20 years old. We were one of 24 or 25 bidders in that first round. So that gives you a sense of what your odds and we weren't -- we did win it. So what the competition is like. Same thing in the San Diego package, I mentioned earlier, we bid on it, but it was a who's who list of institutional bidders that wanted to buy those. We'd like to own them, but we just got outbid and then I think we made the second round in that round of bidding.
Got it. Thanks very much.
You’re welcome.
Thank you.
Thank you. And we will take our last question from Jamie Feldman with Bank of America. Please go ahead.
Great, thank you. I just wanted to get some -- your thoughts on cap rates. I mean are you guys still seeing cap rate compression across your markets at this point or you think they've kind of stabilized?
Because it's interesting with interest rates going up, I’m not, they were compressing probably major markets have held flat and could be so for. We felt like there was a contagion that markets like Denver, Phoenix, Las Vegas cap rates came down. They’re not rising with interest rates. I had a conversation with one of the national kind of investment guys with one of our brokerage groups earlier in the week, and he said they’ve gone up on triple-net and certainly B and C industrial, but A quality industrial. I don't think they're coming down anymore, but they haven’t moved. Maybe a couple of bidders that used a lot of debt have dropped out, but for the most part, they've been flat, probably in the last 60 days, 90 days, but still a healthy number of people that want to acquire industrial.
And I guess are you talking specifically about your product type or just the industrial overall? I'm wondering about the overall [Indiscernible]?
And probably, Mike, I'm just kind of -- I'm assuming from my conversation and this was again was one of the national partners with the Group. He was probably lumping industrial and as a whole. I mean, he knows our product type. We've worked with him before. So certainly our product type, that I'm thinking big boxes, the same and we see those packages as they come out and kind of track, I’m just to see where the market is. So there's still fours and sub 4 in California, sub 4 South Florida, things like that, big box and shallow bay.
Okay. And were shallow bay later to compress this cycle? So I was wondering if you can kind of continue for longer, but maybe not?
Probably a little bit later. It seems like if you have a package, the more dollars you can put out, the more bidders it seems to attract, which seems to have -- so it can be a package cabinet and some groups like that and have been very good at buying wholesale and selling retail by putting things into our portfolio. And so that maybe is one disadvantage shallow bay has had a little bit, it's just you can't put as many dollars out unless like in Atlanta, it was almost a million square feet. So it was shallow bay, but it was enough buildings that attracted enough institutional bidders to get the dollars out. So that probably drives it a little more than product type.
Okay. All right. Thank you.
Sure, thanks Jamie.
And we have no further questions at this time.
Okay, thank you everyone for your time. Thank you for your interest in EastGroup. Have a good weekend and if we can answer any follow up questions, we will be around later today. Take care.
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