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Eastgroup Properties Inc
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Good morning, and welcome to the EastGroup Properties Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the call over to Marshall Loeb, President and CEO. Please go ahead.
Thank you. Good morning, and thanks for calling in for our fourth quarter 2018 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call and since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
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. Our team performed well this quarter, finishing what was in many ways, a record year for EastGroup. Some of the positive trends we saw were funds from operations came in at guidance, achieving a 3.5% increase compared to fourth quarter last year. This marks 23 consecutive quarters of higher FFO per share as compared to the prior year quarter.
For the full year, FFO was 9.6% and we're pleased with the fourth quarter and annual FFO growth, given that equity raised during 2018 far exceeded our original budget. The strength of the industrial market is further demonstrated through a number of metrics, such as another solid quarter of occupancy, same-store NOI results and positive re-leasing spreads.
As the statistics bear out, the current operating environment is allowing us to steadily increase rents and create value for ground up development and value add acquisitions. That said, we are mindful of the larger global turbulence and we realize we're not immune to an economic slowdown. We're not seeing that on the ground but government shutdowns, trade wars and the lack of economic confidence they create could eventually impact our tenants and our markets.
At year-end, we were 97.3% leased and 96.8% occupied. This marks 22 consecutive quarters or since third quarter 2013, where occupancy has been approximately 95% or better, truly a long-term trend. Several markets exceeded 98% and Houston, our largest market, was 96.6% leased. And while still our largest market, Houston has fallen from roughly 21% of NOI to slightly below 14% for 2019.
Supply and specifically, shallow bay industrial supply remains in check in our markets. In this cycle supply is predominantly institutionally controlled and as a result, deliveries have remained disciplined and as a byproduct of institutional control, it's largely focused on big box construction. Our quarterly pool same property NOI growth was 5.5% cash and 3.4% GAAP and we're also pleased with average quarterly occupancy at 96.5%, up 10 basis points from fourth quarter 2017.
Rent spreads continued their positive trend, rising 7.9% cash and 16.6% GAAP, respectively. GAAP re-leasing spreads for the year were 15.8% and when omitting the Santa Barbara R&D space were 16.3%. Given the intensely competitive and expensive acquisition market, we view our development program as an attractive, risk-adjusted path to create value. We effectively manage development risk as the majority of our developments are additional phases within an existing product.
The average investment for our shallow bay business distribution buildings is $12 million. And while our threshold is 150-basis-point projected investment return premium over market cap rates, we've been averaging 200 to 300 basis point premiums. At year-end the development pipelines projected return was 7.4%, whereas we estimate an upper 4% as market cap rate.
During the fourth quarter we began construction on two buildings, totaling 139,000 square feet and coming out of the pipeline we transferred four 100% leased buildings totaling 381,000 square feet.
For the year, we transferred 14 properties, totaling 1.7 million square feet in 10 different cities into the portfolio and all but one of these a value-add acquisition, transferred over to 100% leased. As of year-end, our development pipeline consisted of 17 projects in 11 cities, containing 2.3 million square feet with a projected cost of $206 million.
For 2019, we're projecting 140 million in starts. As color of commentary, the 140 million in starts for 2018 was a record level, so we're pleased to forecast maintaining that run rate. And while at a record run rate we are addressing heightened economic volatility in several ways.
First, roughly 40% of our 2019 starts will happen in the first quarter. Second quarter accounts for about a third of the annual volume and so that by mid-year, we will have started around three quarters of our projected annual volume. Hopefully, we're being conservative for the second half of the year and as we gain economic clarity, i.e. lease space, we'll revisit projected starts.
Next, over 80% of our starts are within an existing, successful mark. What that means is that the next start is being pulled by active prospects, rather than an economic forecast, pushing supply out into the market. And finally, we are active in a greater number of markets. This diversity reduces risk and enhances our ability to deliver the development pipeline.
Our fourth quarter acquisition was an out of market transaction to acquire Greenhill Distribution Center, a 45,000 square foot, 100% leased property in Round Rock Texas and North Austin suburb for $4 million. Greenhill is adjacent to our Settlers Crossing project development and overall, given the expensive competitive acquisition market, we are being patient, disciplined in chasing more off market acquisition and development starts.
Towards that end, we acquired two land parcels in the fourth quarter, a 29-acre site in San Antonio and a 24-acre parcel in Phoenix and we hope to begin construction on both of those sites in 2019. Brent will now review a variety of financial topics, including our 2019 guidance.
Good morning. We continue to see positive results due to the strong overall performance of our portfolio. FFO per share for the fourth quarter met the midpoint of our guidance at $1.18 per share compared to fourth quarter 2017 of $1.14, an increase of 3.5%. We continue to experience terrific leasing results in both the operating and development programs.
Average occupancy for 2018 was 96.1% and FFO per share for 2018 was $4.67 per share compared to $4.26 per share last year, an increase of 9.6%. Our balance sheet is strong and flexible and our financial ratios continue to trend in a positive direction. Our debt-to-total market capitalization was 25% at year-end and our adjusted debt-to-pro forma EBITDA ratio which normalizes the impacts of acquisitions and active development was $4.72 for 2018, down from an already healthy $5.44 for 2017.
From a capital perspective, we issued 45.5 million of common stock under our continuous equity program at an average price of $98.77 per share during the quarter. That increased our 2018 gross equity raise to a record high of $159 million. FFO guidance for the first quarter of 2019 is estimated to be in the range of $1.17 to $1.19 per share and $4.79 to $4.89 for the year.
Excluding the two non-operating gains in 2018, of a gain on sale of the partnership interest in the private aircraft and gain on casualties and involuntary conversion related to a roof insurance claim that combine for $0.04 of FFO in 2018. The FFO per share at midpoint for 2019, represents a 4.5% increase over 2018.
The leasing assumptions that comprise 2019 guidance produced an average occupancy of 96.2% for the year and a cash same property increase range of 3.5% to 4.5%. Other notable assumptions for 2019 guidance include $50 million in acquisitions and $47 million in dispositions, $60 million in common stock issuances; $140 million of unsecured debt, which will be offset by $130 million in debt repayment; and $450,000 of bad debt, net of termination fees. In summary, our financial metrics and operating results continue to be some of the best we have ever experienced and we anticipate that momentum continuing into 2019.
Now Marshall will make some final comments.
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 the record equity raise last year.
We view this combination of pursuing opportunities while continually improving our balance sheet as an effective strategy to manage risk while capitalizing on a strong current operating environment. This mix of our strategy, our team and our markets has us optimistic about the future.
And we'll now open up for questions.
[Operator Instructions] And our first question will come from Joshua Dennerlein with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, guys.
Good morning.
Could you walk us through the development pipeline, how much of the 141 million of starts this year is identified projects and then maybe what’s the timing of when you can get these under way?
Hey, Josh, it’s Marshall. Good morning. Good question, really probably first and second quarter, I would say, are really almost all identified and again, we'll start a little north of 40% first quarter and a little north of 30% second quarter. So by midyear and usually, delivery is five to six months, we'll have started three quarters of the $140 million. What I love about our model is I've compared it to retail, almost in my mind. When we run out of space which is, say where we are for the moment, it's Steele Creek in Charlotte and Creekview in Dallas, it's really active prospects and RFPs that pulls that next inventory end of the market.
Most of our peers, public and private, it would be – we think if we deliver a 700,000-foot building and a less infill on the edge of town, call it, the demand is there. Ours is really pull so that's where the second half of the year gets a little cloudier. It is we think we'll have some buildings leased up and then we'll be ready to restock inventory. But the first half of the year or three quarters of $140 million is identified. We have several more that we hope that we kind of – in our $140 million budget.
And then on top of that, we have a shadow development pipeline of another, call it, five to seven properties that we think with a little bit of luck, could get pulled into this year. We're in the running but chasing a couple of pre-lease opportunities in Texas, and so if those turn into leases and we win those, there's really only one of those in the $140 million. So I hope like last year, we didn't come out of the gate projecting $140 million but that's how the year ended up and we'll – and if the economy holds in, I'm hoping we could beat that number by year-end.
Okay, sounds pretty good on the development side. There's five to six projects, maybe excluding the one that's already in your starts assumption, how big are those? Like what kind of that shadow inventory of development starts? Like another say $17 million or?
Its probably half to two-thirds of annual volume. And those volumes – again, we're not expecting all those to happen, or they will be in $140 million. But if you just say things, they could fall your way, there’s probably half again to two-thirds of annual volume. And some of our annual volume too, they're always a nice placeholders, I'm hedging a little bit, as you can tell. There's one or two that may – that we’ve gotten $140 million may not happen just because we don't get the building that's there now, leased up. And so some of them may be replacements but it does make us still, net-net, better about $140 million.
In your high end – kind of what do you assume to get to the high end and low end? What's kind of the best case there?
I don’t know if I can get one – high end and low end of development? Or I'm not sure…
We lost you for a second, Josh. Can you repeat that?
Yes, sorry. To get to your high end or your low end of your same-store NOI growth guidance for 2019, what are you assuming in there?
This is Brent, good morning, Josh. If you basically look at the chart in the press release, it's also in the back of the supplemental. That basically reflects – individual assumptions, they basically reflect the midpoint. So in essence, to get to the mid-range of say, the cash basis, same-store pool of 4%, we're basically at that 96.2% and then all of the other assumptions you see there.
But so for that, it would be basically occupancy driven and then rental rate driven. Keep in mind on the cash side, that most of those leases are in place so that's driven by existing rent bumps and then to a much lesser extent, any new leasing you do, whatever that run rate, how it may compare. So basically, it's – if we have another solid occupancy year, we feel good about that range.
Okay. Okay, awesome. Thank you guys.
You’re welcome.
Thank you. [Operator Instructions] Our next question will come from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Hey, good morning, down there. So two questions, the first, Brent, if I read your guidance correctly, you guys are looking to issue more debt this year than you did last and less equity this year than last. And yet if I look at the cost, it looks like your debt cost is up and conversely, obviously, your stock is doing quite well. So can you just walk through why you're sort of reversing the sources of capital for this year versus last?
Yes, good morning, Alex. I wouldn't say we're reversing. We're basically showing a debt neutral year this year, pretty much identical to what we had last year. Our debt issuance versus repayments in 2017 were basically a breakeven. And we're basically projecting the same thing for 2019. We're saying we'll issue $140 million and we're repaying $130 million. So basically, we're saying debt's neutral. So we're funding growth via ATM. Via property sales, via our operating free cash flow.
So we agree with you, at our current price, we – last year, we budgeted, I think $50 million, we did $159 million. We've got $60 million down this year. If you'd asked me in late December, I would've told you I'm not sure if we could do $60 million, we were trading the upper 80s. So there's been some volatility in the price but certainly, where it is now, we like it.
The other thing is having good uses for the capital that we're already down to – I think on today's price, we're down into somewhere around 22% debt to total market cap. So at some point, you've got to check up just a little bit because it's not free to issue the ATM, it does. Part of our slower FFO growth this year compared to last year is being driven by heavy record ATM issuance, which we are happier to do and it keeps a very clean balance sheet but it's not free.
It has some impact. So we will be hitting the ATM and certainly, if the guys in the field can unearth more projects, will go more aggressively but we are forecasting debt neutral. We're not looking to issue ATM to pay debt down. But we certainly would use it to fund our operations, which is the way we've got budgeted.
Okay, and then second one, Marshall, on successive years of almost double-digit rent growth, how is this impacting the tenants? You mentioned market volatility, obviously, we have the shun [ph] at year-end. It seems like things have stabilized now. But are the tenant – are you sensing any pushback from tenants on the rent increases? Or it just doesn't factor into their equation? They're just taking space and committing to new projects at the same rate that they were the prior years?
I'm sure there's – and maybe overall, a little bit of sticker shock when your lease rolls. The good news probably with – in a rising rental rate market, really, like we've been in for a few double-digit – for the last four years on a GAAP basis, almost all of our tenants, new and renewal, had a broker tell me it's a red flag if someone doesn't have a tenant rep broker.
So usually, they've had the initial meeting with their own broker, probably gotten through the shock and our rents are pending how the tenant, the space they are in and things I mean, hopefully we're slightly above market on a renewal because the cost and headache of moving but we're not in – we're keeping pace with market and may be being a little ahead of it where the situation allows.
But they may be in shock about by the time to look at their other options, there has expensive and so our retention rate has been good the last couple of years, 70% and lower, I think we’re in the low 80s for the quarter. So I – and it's a low cost overall, compared to employees, labor and things like that, there's a little bit of shock over rent but thankfully from almost all of our tenants, we are a low cost of their overall structure. We are not – met with tenants, we were just with one out in California and he was complaining more about hiring then and this was when his rent basically double and his complaint to us was about finding good workers.
That’s helpful. Okay, thank you.
You’re welcome.
Thank you. And our next question will come from Bill Crow with Raymond James. Please go ahead.
Thanks, good morning. Marshall, if you were to separate your user base into what your tenant base into kind of old economy and new economy, and I know it's a blurred line, but any change in the proportion of demand, shifting one way or the other and you anticipate that the economy does slow down a little bit, that there's going to be increased pressure on kind of new economy to carry the day from a leasing perspective?
Good morning, Bill. Good question. We're still predominantly old economy. And those tenants have done well or doing well and continue expanding and then it felt to me, the past several years, every quarter, we'll see two or three new names that we hadn't dealt with, like a Wayfair or different divisions within Amazon or someone has an Amazon supplier, kind of show up – or Tesla is one, it wasn't a prospect a few years ago and now we're chasing a deal with them.
And then there's – I'm just trying to answer your question. You have tenants we’ve just recently signed a couple of leases with Lowe's, that I would call an old economy type tenant but no one leaves the store with an appliance in the trunk of your car or your backseat. So what they've done with us, and I'm not sure it's this exact, but they've announced several store closures and in the meantime, are opening up distribution facilities. So if you order – when you buy a refrigerator or an appliance, they can get it to your home in St. Pete that afternoon rather than having at a higher rent location. So I would think some of the new economy because they're building out their distribution network so rapidly.
If the economy bumps, it makes sense to me like they would slow down a little bit. But we're still seeing even old economy tenants figure out their omni-channel, retailing footprint and how that's going to work. The other one, we've seen of late, a pickup in and we never really – their tenant mix evolves so much as third-party logistics. We've seen a pickup even this year of 3PLs out leading space. So that's been an interesting one as well.
All right, and then you mentioned store closings, anybody been added to your watchlist? Is it getting more active from a tenant – were it new at all?
There's always a few – I think the nature of 1,600 tenants, there's always a few that worry us. We had – out for the year, our bad debt came in slightly below where our historical averages have been and that's how – for example that's how we budgeted this year, it's a multiyear average. At the end of the year, we reserved a furniture company. We've seen the printing business, it's just by its nature one that we've had some issues, including one there in Tampa.
And then a furniture retailer in Phoenix, where we are working with them but they had a straight-line balance and that was the majority of our bad debt hit in the fourth quarter last year, was related to furniture. So it almost seems to be – another one that was – headlines was Mattress Firm. It seems more industry-specific than any location or the economy slowing down in Houston or Jacksonville or anything like that.
All right, appreciate it. That’s it from me. Thanks.
Okay, thank you.
Our next question will come from Manny Korchman with Citi. Please go ahead.
Good morning, guys. Marshall, maybe staying on the topic of acquisitions, which you touched on earlier, given the frothiness in the market, what would it take for you to accelerate the acquisition program? Is it a change in the product type? Is it just a matter of use or paying a little bit more and then growing faster, especially where your cost of capital is? Help us think through that.
Good question. We’ve tried to, given where the market is and I was just looking at one of the brokers route piece of it, it was a couple of pages with logos and groups around – these are just international groups around the world that want to own U.S. industrial. So every package – we would pick what we want to own this. It's very competitive. I would think for us, so we try to do more value add. Where buildings not quite leased up or pushed us on development. The good news about everybody trying to buy at some point, we also create that product.
In terms of us acquiring more, we look at about everything and we get out bit in those cases. You will end up making the second or third round and it's trying to be disciplined and patient with our capital. I don't want to – I guess, I’ve a list in the back of my mind, I don't want to buy something just because we have cheap capital today. If it’s something we're not going to want to own or feel like we overpaid for in two to five years. So we're trying to be patient and probably, to really ramp it up, we would just need to offer more than where we've kind of drawn the line in the sand.
We typically, when we start bidding on the property, we try to say how much do we – what's our bottom line because once you get in the middle of it, you feel like you need to win it or I do. You get competitive and you want to outbid someone and that's not always best for our shareholders to get emotional that you wanted more. So good question and I hope we beat our acquisition goal for this year. It just seems like the cap rates are low and continued trending down and there's always somebody in every bidding package that's willing to pay a few hundred thousand more than we are, at least.
Thanks. And I thought we're sort of done talking about Houston for a little while, but it sounds we're back to that topic. So can you give us an update on what you're seeing there? And whether the sale you had in 4Q is emblematic of say bigger in Houston or just getting out of royalty, particularly royalty with an asset?
Thanks. You’re right, Houston seems to kind of come up a little bit more in the last month or so. We – I'm glad where we are, where we've drifted down from the low 20s to below 14% and actually, our lowest quarter for the year is projected to be fourth quarter in Houston, meaning, if we took out portfolio and everything that's scheduled to roll in, we sold an older building in World Houston last year. And then we closed one this year. We'll keep pruning in Houston here and there and like it kind of organically drifting down.
We've gotten concerns from Wall Street about Houston but I would say our guys in the field, we are seeing that's where a couple of the RFPs we're pre-leasing, we delivered or really started three buildings there. The West Road V was a spec building and it quickly got to 100% leased, not long after construction rolled into the portfolio. World Houston, 45 that we just broke ground this year as a preleased to a third-party logistics.
So it's 100% leased and in the third building, we started, it was on the West side of town, an expansion of an existing tenant. So they renewed and have taken about 40% of that building that's under construction. So long, long-winded way of saying, Houston on the ground feels good. It feels like a little bit like where we were a couple of years ago. The disconnect but the market's 5% vacant. I just saw, where Exxon announced a $10 billion liquefied, natural gas plant down by the port. We're not down by the port but that's going to help the economy.
So we'll be mindful of our size in Houston and we are certainly keeping an eye on it but we are seeing opportunities, still in Houston even with oil prices down a little bit. But it feels like the economy is doing pretty well, locally.
Thanks Marshall.
Sure, you’re welcome.
Thank you. And our next question will come from Brendan Finn with Wells Fargo. Please go ahead.
Hey guys, good morning. I want to just follow-up quickly on your development expectations. Is there a certain prelease percentage that you guys are looking to maintain for the development portfolio over the course of the year? And then I saw this quarter, it looked like the stabilized yield assumption for the pipeline came down little bit, quarter-over-quarter. Was that driven I guess, by geographic mix? Or more build-to-suits? Or is that something you guys are just bidding seeing throughout the course of the year?
Good question, we really don’t have a preleasing. Most of our buildings are spec. And Building 7 in the park leased up and it rapidly hit our pro forma so we'll deliver the next Building 8 on a spec basis. So every once in a while, we'll do a pre-lease opportunity but for the most part, it is we're running low on space and we're getting RFPs in the market.
So it will ebb and flow depending on what rolls in and out. In terms of the dropping this quarter a little bit, probably, kind of looking at our scheduled gateway in Miami. That land is a little more expensive. It's a little bit lower cap rate market too compared to the Texas markets or – different markets that we’re in. So that probably pulled it down to the 7.1, where we've been 7.25 to 7.5 so I think it would trend down, construction prices have gone up.
And then looking at the properties that we transferred out of the pipeline, they actually came in just north of an 8 cap. So we're thrilled with our – everything that rolled in last year, to be able to achieve that. And if we can develop to an 8, and the market is probably a little below 5 and how much can we push through that pipeline. So we're – I think if it helps, that's kind of how we think about it and I like again, that inventory gets pulled by the market rather than pushed out into it.
That’s helpful, guys. And then just real quick, I think, Marshall, in your prepared remarks, you talked about the four R&D leases at the Santa Barbara facility last year. Is there – or are there going to be leases at that facility that you anticipate signing again this year?
Yes, we just signed one this week. I don't think the CapEx – we don't expect the CapEx yet to kind of be an anomaly. But the building - the 7,000-foot lease which we're happy to hit, to get with that – got that building back to 100% leased. I don't think we'll have the leasing volume we don't anticipate in Santa Barbara, that it would have is big or ripple effects within the portfolio as last year, maybe better way of saying it.
Yes, exactly. Okay, thank a lot. That was helpful.
Sure, thanks Brendan.
Thank you. Our next question will come from Craig Mailman with KeyBanc Capital. Please go ahead.
Hi guys, Marshall. Just curious, you guys have a little bit of a lighter expiration schedule in 2019. I guess what I'm curious about is, kind of internally, the philosophy here, given what market rents have done. Trying to pull forward leases early from 2020, versus kind of bringing it out closer to expiration, to maybe grab a little bit more potential mark-to-market there.
A good question, I mentioned earlier, Craig. Most people have their own brokers. So a lot of times, especially on the renewal, they dictate the timing or we'll approach them and sometimes they will ask us to come back later. It gets a little bit closer to expiration but we've always wanted to renew tenants without betting on market rents increasing. That may speak more to me being a chicken than I guess on market. It's nice to put deals to bed and I have heard in California, some owners are waiting to the last minute to renew tenants because the market has gone up so quickly.
And they look smart so far, but when things turn, they could turn quickly. And usually when our tenant is ready to renew, we're not the only person they're talking to. So they'll dictate the timetable as much – or more so than we will. But we will go ahead and pull leases forward and put them to bed as – usually, as quickly as the tenants will allow us, kind of in a good or bad market.
Okay, that’s helpful. And then just you mentioned that your development yields have been kind of premium here, even though land costs and construction costs got higher. I guess, just drilling into the benefits of building out the park over time, I mean, how are you guys and how are tenants kind of viewing what that rent is on the new build in a market given versus existing availability? And are you, is part of the reason you've been able to get such good yields is, you're putting in, whatever premium over market rent for this new product because you just don't have anything left in the park. And if a tenant wants to be in your park, they're willing to pay that. Or you guys, again talking to your temperament, just more willing to take market and it's just worked out that, yields have kept pace better than what you thought they would?
I think it's a little bit of just – we'll push rents as hard as we can, whether it is an existing building or a new building, I do think you have an advantage when it's first generation space and a brand new park or especially once that part gets rolling and you can kind of what we love about, I've compared us to our residential developer where you're building that subdivision. Once you've created that a little bit, and we're buying a sense of place, it seems like the leasing momentum picks up on the back half of a park compared to the front half and you can push the rents on.
And the other thing with this economy where we've benefited and I'm sure that's helped us in rent, is how many existing tenants have wanted to expand. So taking someone from an existing building, with two or three years of term left. Again, if their rents aren't that much of their operating costs and they need more space, it's great to be able to build, move them from building two in a park to building nine in a park. And we've had a fair amount of that happen over the last 18 months. And we're still seeing that type activity.
So that helps us maintain the yields. And this is – I think about our yields too. We also have a carry cost built into our yields and with the 13 develop developments that rolled in the last year, all being 100% leased. Most of those ended up not using the full year of carry that we underwrite.
So where we can move it in five months rather than 12 that that sure helps the yield. So that's probably another factor driving our costs, our yield higher.
Yes, I would just add to that, Craig, this is Brent. And when you look at our product type, the multitenant with maybe a slightly higher office finish, you've got a higher per square foot cost, which you should in turn be getting a higher yield for that little more risk. I think that, our buildings are a little less of a commodity than say a bought building. So rental rates for a 20,000 or 30,000, 40,000 square foot guy it is a lot different than if we had a 500 or a million square foot building and we were trying to, with almost no office finish and there's very little that would differentiate your big million square foot building from the one next door.
So it's a little different, I think it exemplifies our different product type as part of that equation as well.
That's fair. Marshall what do you think those shorter carry times kind of, what do you think that juices yields by?
Brent?
I'd say probably 20 basis points or something. When you budget, we're budgeting for your say six, seven months construction period and then a 12 months lease ups. You're baking in 18 months or so of carry, it's interest carry, property taxes, that type thing. So obviously if you can short circuit that say by half, it's not the end all be all, but it's certainly a line item that when you run the job cost report it shows a positive variance and obviously the more of those you have at the end of the day, the better your yield.
But I would probably say it's been without scientifically looking at it, probably in the neighborhood of 10 to 20 basis points.
And it rolls into – obviously rolls into our FFO much earlier. So that helps you – whatever that next quarter is when it rolls in.
If I can just sneak one more in. Some of your peers for largers in particular kind of took a hatchet to their guidance given kind of the ever shifting winds here on the macro front, I know you guys have a very ground up process, but as you guys kind of gave initial guidance, was that in the back of your head to maybe haircut expectations of your regional guys a little bit just to temperate or is this kind of your best guess and you didn't kind of take any conservatism at all above and beyond what you normally would?
Probably more the latter. I mean I think it's really again, I kind of, maybe having Brent and I both having been in the field, I think our guys in the field know more than we do at corporate. So I'll trust their judgment. I mean we'll challenge them some – everybody wants to beat their budget and things like that and then we, but that said we're certainly mindful of every other month the governments either shutdown or threatening to shut down and trade wars and things like that.
So we did look at development starts and things. So it's, everything is always a mix, right? So I guess it's mostly from the field with a little bit of caution here that you know, we should be a little cautious. Otherwise you're, you just don't want to just be an ostrich and put your head in the sand. If we could hit the repeat button for last year, we absolutely would. And we hope we can, but there's certainly a lot of headlines that scare you to death out there.
Yes, I just would add to that, Craig, I would point out, time last year we had got it to a 95.2% occupancy for 2018 and the year went much better than we originally had forecasted. And we finished the year at 96.1 but we are guiding, entering 2019 or 96.2. So, our guidance this year does have a 100 basis point higher bake in than we started last year.
Now where will that be as the year goes? I don't know. I hope it's 97 point something we say we were under again, but I would just point that out and all of that spelled out in our charts and tables in our assumptions, but I would just put that out there, that one last comment. I would, I'm sure that the Prologis $0.05 cent cut on their guidance had nothing to do that, that's still put a $0.01 over the consensus amount. I'm sure they would have done that anyway, but good for them that they were in that position.
Great. Thanks guys.
Thank you. Our next question will come from Ki Bin Kim with SunTrust Bank. Please go ahead.
Hi out there. Going back to your development start guidance, if I can paraphrase what you said, it sounds like in the second half if things get better or you feel better about the macro conditions, you might increase that. Do you get a sense that that's the same way your tenants were thinking?
Probably I guess I'm, and I'm speaking out loud as I say it, which is always dangerous, but our is spaced leases, we’ll deliver the next building. So we did, and maybe I guess kind of going back to Craig's question, we did build in a ton of optimism and that it's only about a quarter of our starts. So some of that is just delayed calendar lines up really happening in the second half of the year.
So if we're able to lease buildings we’ll be rushing to deliver that next one or really get that inventory on the shelves. And then I would imagine our tenants to, they all probably got a little nervous in December and early January and right now people for the moment feel a little better, but the winds can change quickly. But I'm sure as they feel better about their business and things like that, I'm using a Wayfair for example, they'll probably start rolling out more distribution buildings or kind of working through their network because they feel better about the economy.
So it'll, we're partners with them on that. I'm hopeful if they feel good about the economy, it probably means we'll see more expansions and we'll have upside to our starts this year. And if everybody gets nervous, we hopefully there's not a ton of downside, knock on wood to our starts, given how early they are in this year and over 40% will hit this quarter.
We've already started a number of them, but we'll just see how the economy plays along like again, last year was much better than we forecast it to be. And I hope that happens again. But we'll see.
Currently, are you seeing any signs at all of tenants, less traffic or less wanting us for longer term or anything like that?
No. It is not really. I mean, you hate to always safe to speak in absolutes or hesitate to, but we're really not. It's it, it felt like the world was a little nervous, but now people are back and post holidays and engaged and we've got good activity talking to our guys in the field. There are things feel not that much different than they did in November for example.
Okay. And your development pipeline is roughly around $200 million, about half of it is leased. So if I think about the dollars at risk it is about a $100 million, compared to an asset base of 4.4 billion, does that come up at all in your internal management meetings or board meetings where you think about the dollars at risk in development representing maybe 2% or 2.5% of the total company size, that being the right size, long-term?
Interesting way to – I guess my short answer is yes, although we probably look at it a little bit differently. We do keep a chart kind of showing our low earning assets as a percent of assets. And that would include, kind of own that development schedule or inactive land or the active land and then what's under construction. And then we've got a couple of assets that we bought where you’re kind of thinking that they're low yielding , call it the value add but in time, but in time they're going to work to a stabilized deal.
So we do look at it, we'd probably throw in a few more items in that bucket when we look at as to what percentage of our assets are in low earning. And then we do look at our land holdings as also as a percentage of our assets and then to me, even within that, you can be low on land, but just picking a marked I wouldn't want it all to be in Atlanta.
Obviously, you want it to be a pretty mixed bag of where you have land for that next park. It's a little bit of a love hate relationship with land. I always want room for three or four more buildings and not 10 because the economy may stop by the time you get to the eighth, ninth building. Without rambling too much the other thing I'll like is with our development yields today are on that 200 million, projected a little north of seven and we think a blended average, I'm grabbing a number, call it a 4.7, 4.8 cap rate.
The worst case if things slow down and we need to drop rent and or give more free rent or more TI to get those lease we're still creating value. You're just not creating as much value as we expect today. But if things slow down, there's a lot of margin in there for us to come down on an asset and still create shareholder value.
Right. So with all that said it, I mean is there any kind of internal, I don't want to say pressure, but that's not the perfect word, but to increase capital at risk or development.
Not, I mean, we'll try to develop as much as the market allows, kind of like last year or this year, but that's really driven. Again, I don't think it's driven by the field, not management or the board. It is really how fast, there's a park in Eisenhower Point in San Antonio, we've probably run through it much faster than we ever and knock on wood anticipated, but that thankfully is not a corporate, which I think is good for our shareholders. It is every building we built is leased up and we've delivered the next one quickly, if that helps you.
Yes. Alright, thanks guys. Thank you.
Sure.
Our next question will come from John Guinee from Stifel. Please go ahead.
Hey, all good morning. This is Aaron Wolf on for John Guinee. Quick couple of questions, we were able to visit your Churchill downs development a few weeks ago. Can you provide any updates on the project and how it's different from your typical industrial park and build out?
Thanks for taking the time – good morning – to visit it. We're excited about the park. We love the location. The first building is as you all saw close to wrapping up and we've had good leasing activity on it. Happy that it's full as you can see in our fully leased, before we can finish it, we're just kicking off the second building there. We like the Miami market and that it is 3% vacant basically at the end of the year. Absorption last year was almost 5 million in new constructions, about 3 million. So we like the dynamics and wish we had more in Miami.
So we liked that park. It's probably not different. It's different in some ways since the building is 200,000 feet and a little bigger than our typical development. And the fact that it was horse stables is a little different. Although I would say maybe speaking to the scarcity of land, we struggle to find land. So everything we've looked at, we're talking to a church about some land today. We've looked at ground leases, obviously horse stables, golf courses. It fills like that. Just greenfield land is zoned and ready to go is getting awfully hard to find and in major cities and infill location.
So every – I’ve kind of kidded our board, I promise. We don't try to come up with difficult land acquisitions, but everything now it feels like it has a story. We're talking to a waterpark and a different market and things like that. So, and, and I've certainly talked to any number of retailers and or retail landlords thinking, my daydream is still a dying mall that we acquire one day. So that'd be, it's different and that it was horse stables, but that reuse is, you'll probably see us do more and more out of necessity.
Great. Thank you. Last question. Can you just talked about land acquisitions. If you look at your last four to five land positions that you acquired, how many are greenfield and how many are change of use?
Phoenix was greenfield. The Gilbert Bland, a flower mound, Greenfield [indiscernible], although it had some issues to work through on development. I'm trying to think of our last three or four. They're almost mostly Greenfield, but they also had some issues and that's why they hadn't been developed before and in Phoenix, they had to go through zoning. They're building multifamily adjacent to us and there's some roadwork or another parcel we have tied up, it's roadwork, it's in Texas where they have the municipal utilities district.
So all of them kind of have a story of something odd. They may not save price still Greenfield, but issues to work through before you can really get your arms around it. I guess it helps
Aaron one last comment just to add for color, anything we do acquire at this point in the cycle, kind of like the one in Phoenix and Dallas, I mentioned our goal is to get it into production as quickly as we can. So, the ability to buy cheap land and hold it we really have not done that in a few years and don't see that opportunity out there, if that helps.
It does. Very helpful. Thank you so much.
Sure. You're welcome.
Our next question will come from Eric Frankel was Green Street Advisors. Please go ahead.
Thank you. I'll try to just keep this short. I just wanted to clarify your overall earnings guidance, into how you calculate your same store numbers. So I guess for Brent, your occupancy in your same store pool, do you anticipate that increasing or decreasing, how's that embedded in your same store guidance?
It's pretty much dead on. Eric, were at the – for this guidance pool of those same store and GAAP numbers you see that is for the entire annual pool cause obviously for 2019 at this point, the properties owned at 1/1/18 compared to 1/1/19, that is the static annual pool. And right now we're showing that that same store would mirror our overall projected occupancy average of right around 96.1, 96.2.
And then releasing spreads, any significant change from last year in terms of what we should expect. A how's that embedded in your forecast?
I would and then let Brent chime in. I would build a model probably the same. Our last couple of years and we like GAAP because you capture the rent bumps and any free rent and they're more than, we'd like cash releasing spreads if I were picking one. But, last year was a little over 16, the year before was 17. If I were building a model, I would probably use those numbers. And that said, I've been thinking rents were going to spike up a little more because of the lack of land, a tight market and construction costs rising. So, I keep thinking rents are going to go up and I continue to be wrong. We haven't seen it, but I'll keep predicting it.
That sounds good. And then just a very quick follow up question. Either you Marshall or Brent or anyone from the room? Just regarding relative value I would say cap rates are all time lows and in some market they keep dipping little bit lower. Do you have any, a relative opinion on geographic markets where cap rates are more reasonable, I know in total returns you think would be able to better? Or are they kind of just say case by case basis?
No, actually I guess where you are, the Orange County, Southern California, feels incredibly expensive, but the rent growth has exceeded our expectations there too. So, I guess maybe going the other extreme, it's awfully hard and we're being patient to find value in the major California markets, but by the rent growth has also been there. We still like Florida and Texas. We had about 20% rent growth in Florida on a GAAP basis last year. And the economies are strong there, but that's a cap rates because capital can't all go to those major gateway cities.
It has spread out and we've seen cap rates come down in markets like Denver and Phoenix were at all caps go to California. And even markets like, Charlotte, other kind of tertiary markets or maybe that kind of number 10 to 30 markets where cap rates have really come down in prices per square foot have risen.
So I wish there was a great acquisition market out there, but sure we haven't found it yet, not within our footprint. And it continues to push us more towards development and value add opportunities or, and then we would thankfully got three buildings last year and hopeful we'll get one or two this year where it's driving around with a broker and they say if we make an offer they may sell.
And so we try a lot of off market offers and every once in a while you got a seller who is willing to listen. So we'll keep trying at that. But they've been smaller acquisitions by and large. Like we saw Greenhill and Allston was a $4 million acquisition adjacent to our development. But those are filling more the exception than the rule.
Okay. Thank you.
Our next question will come from [indiscernible]. Please go ahead.
Hey Marshal. In terms of the land availability, how far removed from the major cities can you go to a lesser locations to meet demand? Is there some kind of rule of thumb?
Hey Bruce, good morning. Probably fairly far, if we were building a big box, kind of logistics chain center and that's what we'll see. And South Dallas, south Atlanta, far eastern inland empire for what we do, which is what we want to be as near to the consumer as we can, given the traffic I'll pick Houston where you are. Given the traffic in Houston or Dallas, we've been successful in Fort Worth for example. We have some tenants that need an east and west location.
It's too hard to drive trucks and van service from Dallas out to Fort Worth. So our Fort Worth tenancy has his moved further west. We see that in Phoenix, in eastern West Valley tenant. So there's, it's hard to say, that it probably depends on traffic and a lot of times where we are at it is someone that's trying to get either a delivery or to their customer in a hurry HVAC contractors, we've seen that, that area be active of late and if your HVC is out in your building and Houston in the summer, you need to be able to get there fairly quickly and so – we liked that it makes our buildings less of a commodity and they probably need to be a little bit less state-of-the-art. So they age better than up what state of the art now and inland Empire East won't be state of the art in just a few years.
Right. Are there any geographic areas, not withstanding the issues in California, but for example in Florida or up the Atlantic seaboard, are there, is this land availability an issue everywhere or is it more acute in some areas versus others?
Hi coming back to EastGroup, I expected it. I remembered it in LA and I expected in the Bay area and I've been surprised all of our major markets, are there. It is awfully hard to find land on much, much harder than I anticipated. It's been a few years now, but coming back to EastGroup, even markets like Jacksonville and places to find good sites and part of it as you think about it, we would need to be near a freeway entrance. We need the zoning to work. We only build one story unlike our peers.
And we were about the first guys to get priced out of land. So when you kind of work through that chain, if it gets awfully hard to find good science. And probably one of the things that helped us get comfortable when we entered Atlanta was meeting with several brokers asking them about sites and we were always in a conference room looking at Google maps and how far outside the outer belt they were pushing us before they could find an available side.
So the bad news as a developer for us is it's awfully hard to find sites are guys are doing a good job and they keep coming up with things. The good news is I like how close we are to the consumer and in cities like Dallas and Houston and Phoenix and Orlando, Tampa keep throwing so long-term. I like our ability to push rents and the ability to keep supply down.
Okay, well, hey, thanks a lot Marshall. See you soon.
There are no questions at this time, so I'll turn it back to the speakers for closing remarks.
Thank you for your interest in EastGroup, everybody thank you for your time this morning. We are certainly available for any follow-up questions and hopefully we'll see you soon. Take care. Thank you
This does conclude today's program. Thank you for your participation. You may now disconnect.