Good morning and welcome to the EastGroup Properties' Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call is being recorded.

And it’s my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead..

Thank you. Good morning and thanks for calling in for our second quarter 2017 conference call. As always, we appreciate your interest. Keith McKey, our CFO and Brent Wood, Senior Vice President and CFO in waiting are also participating on the call. Since we'll make forward-looking statements, we ask that you listen to the following disclaimer..

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 is 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, Keena. The second quarter saw a continuation of EastGroup's positive trends. Funds from operations came in at the high end our guidance achieving a 6.1% increase compared to second quarter last year, this mark 17 consecutive quarters of higher FFO per share as compared to the prior year's quarter.

The strength of the industrial market is demonstrated through a number of our metrics such as another solid quarter of occupancy, record leasing volumes for the first half of the year, positive same store NOI results and double digit positive re-leasing spreads.

In summary, our increasing FFO and dividend proved the success we're seeing in all three prongs of our long term growth strategy. At quarter end, we were 96.8% leased and 94.9% occupied. And as market commentary, we've never achieved this level of occupancy for this long.

Drilling into specific markets at June 30, a number of our major markets including Orlando, Jacksonville, Charlotte, Phoenix, San Francisco and Los Angeles were each 98% leased or better. Houston, our largest market with over 5.5 million square feet down from over 6.8 million square feet in first quarter of 2016 was 95.6% leased.

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 remain disciplined and also as a byproduct of that institutional control, it's largely focused on big box construction.

In fact, a recent CBRE study showed shallow bay deliveries still below pre-recession levels. Rent spreads continued their positive trend for the 17th consecutive quarter on a GAAP basis rising 14%. Overall, with 95% occupancy, strengthening markets and disciplined new supply, we continue seeing outward pressure on rents.

Second quarter same property NOI rose on a GAAP and cash basis by 2.4% and 2.4% respectively. Average quarterly occupancy was 94.9%, which is down 60 basis points from second quarter 2016. A material portion of our occupancy decline came via acquired vacancy and value-add acquisitions which impacted average occupancy a 110 basis points.

Also of note, in our June 30 results is the 190 basis point margin between percent leased occupied. This is an atypical large margin and it’s being driven by several larger second quarter lease signings or build out and permitting are underway.

It will take a couple of quarter to begin seeing the full impact in our results and the other benefit lies in lower risk shifting from projected leases to actual signed leases.

We expect same property results to remain positive going forward though increases were likely to continue reflect rent growth as with mid-90s occupancy, we view ourselves as fully occupied.

The price of oil and its impact on Houston's industrial real estate market remains a topic of discussion and we thought it appropriate for Brent to again join today's call. Brent until next Tuesday runs our Houston office with responsibility for EastGroup's Texas operations.

Brent?.

Good morning. Our Texas properties finished the second quarter at a combined 95% leased, while our Houston portfolio finished the quarter at 95.6% leased, up slightly from last quarter and ahead of projections. The Houston industrial market exhibited solid fundamentals at quarter end.

The market vacancy rate was 5.5%, extending the consecutive quarters that the rate has been below 6% coupled with positive net absorption to 24. Meanwhile, developers continue to show restraint with the construction pipeline containing only 2.2 million square feet of speculative space, which is down to a level not seen since 2011.

Even though the overall Houston industrial market remains stable, there is an undercurrent of tenants downsizing upon their lease expiration, which is producing a lot of movement within the market. We have not been immune to this trend and have incurred vacancy as a result. However, there continues to be prospect activity in the market.

In 2016 we signed 30 leases totaling 836,000 square feet. By comparison through the first six months of 2017, we’ve already signed out 30th lease for virtually same amount of square footage. Our leasing efforts have reduced our scheduled expirations for 2017 from its peak of 17.7% down to 5.1% as of June 30.

And we’ve also reduced our 2018 exposure to just 5.4%. This is a welcome up reef after the past two years which would in the 17% to 18% row of range. Although we still have some known move-outs throughout the remainder of the year, our leasing results today have been better than our projections.

Due to that activity and the sale of Techway Southwest, our leasing assumptions for the remainder of 2017 now reflect occupancy reaching a low of 90% in the third quarter versus the prior expectation of 87%.

Marsh will go into more detail regarding the Techway Southwest sale in a moment, but I’m pleased that over the past 18 months, we’ve sold over 1.3 million square feet of buildings and 12 acres of land for the gross proceeds of $88 million booked gains of $53 million.

This significantly reduced our Houston footprint and we’ve now successfully deferred all of the material gains via 1031 exchange transactions. Our development platform within Texas continues to produce positive results and further portfolio diversity.

Our 2017 development starts include additional phases to existing parks in Dallas and San Antonio and we our first Austin land acquisition where we plan to start construction before year end. In summary, the fundamentals remain strong for the Texas markets outside of Houston.

Marshall?.

Thanks, Brent. Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk adjusted path to create value. We believe we effectively manage the development risk as the majority of our developments are additional phases within an existing park.

The average investment for our business distribution buildings is below $10 million. We develop in numerous states, cities and sub markets and finally we target 150 basis point minimum projected investment return of our market cap rates.

As of June 30, the projected return on our development pipeline was 8% or as we estimate, the market cap rate for completed properties to be in the low to mid-5s. Further we’re continuing to see cap rate compression in the majority of our markets.

During second quarter in our development pipeline we began construction in three existing parks on seven buildings totaling 507,000 square feet with a total investment of $41 million.

Those starts where in Dallas, Phoenix and San Antonio and on the other end of the pipeline we transferred five properties totaling 867,000 square feet into the portfolio at 86% leased. As of June 30 our development pipeline consist 14 projects containing 1.9 million square feet with a projected cost of $150 million which is 47% leased.

And during the quarter we acquired two new development sites. The first being 30 acres in Round Rock Texas which is just North of Austin with plans to develop four buildings totaling approximately 340,000 square feet.

The second site came via part of our Broadmoor acquisition at Atlanta where we acquired adjacent land to develop the building slightly in excess of 100,000 square feet. Our goal is break ground on both late this year or first quarter 2018. And for 2017 we project development starts of approximately 100 million and 1.3 million square feet.

What's gratifying about these starts is we can reach this level again in 2017 with no Houston starts demonstrating the value of our diversified fund built market strategy. Our asset recycling is an ongoing process and year-to-date we have sold 39 million in assets with a couple of other opportunities we are evaluating tending pricing.

Including in this figure was the $33 million disposition at Techway, Southwest on four building 415,000 square foot each group development in Houston.

In addition to Techway we sold a 99,000 square foot Stemmons Circle in Dallas for $5.1 million and over the past 18 months as we have recycled capital the portion of our NOI coming from Houston declined while the quality of that portfolio has risen.

Specifically at the beginning of 2016 Houston represented over 20% of our NOI with three properties in underdevelopment. Today Houston represents 15% of our 2017 projections and following the Techway sale in fourth quarter 2017 Houston falls under 14% of our projected NOI.

Our second quarter acquisitions included a $5.8 million investment and the 84,000 square foot multi-tenant Broadmoor Commerce Park in Atlanta and the 99,000 square foot Southpark Buildings 5-7 in Austin, Texas for $10.3 million.

These buildings are immediately adjacent to our Southpark 3 and 4 properties and both the Atlanta and Austin properties are 100% leased. Keith will now review a variety of financial topics included in our updated 2017 guidance..

Good morning. FFO per share for the quarter was a $1 compared to $0.99 for the same quarter last year, an increase of 6.1 %. Operations that benefited from an increase in property net operating income related to same properties, developments and acquisitions and we had lower interest rates on replacing maturing debts.

FFO per share for the six months was $2.04 as compared to $1.90 for last year an increase of 7.4%. Debt to total market capitalization was 27.2% at June 30. For the quarter the interest in fixed charge coverage ratios rose to 5 times and a debt to adjusted EBITDA was 5.9. The adjusted debt of pro forma EBITDA ratio was 5.5 for the quarter.

Floating rate bank debt amounted to only 2.2% of total market capitalization at quarter end. These stats are some of the best we have had. In the second quarter we sold $30 million of common stock under our continuous equity program at an average price of $79.59 per share.

For the remainder of 2017 we are projecting new debt of $60 million and no sales of common stock. We do have one mortgage coming due in the second half of the year and we plan to pay off the $45 million mortgage on August 5, 2017, it has an interest rate of 5.57%.

In June we paid our 150th consecutive quarterly cash distribution to commons stockholders. The dividend of $0.62 per share equates to an annualized dividend of $2.48 per share. Our FFO payout ratio was 59% for the quarter. And rental income provides almost all of our revenues so our dividend is 100% covered by property net operating income.

Earnings per share for 2017, is estimated to be in the range of $2.41 to $2.49. FFO guidance for 2017 forecast for 2017 is estimated to be in the range of $4.19 to $4.27 per share. And the midpoints stayed the same as previous guidance of $4.23 per share.

Guidance changes from previous estimates included increase in same property NOI, effect of dispositions and increase in stock sale and the timing of leasing our new developments. At the midpoint we are projecting a 5.2% increase in FFO per share compared to last year. Now, Marshall will make some final comments..

Thanks. Thank you, Keith. Industry property fundamentals are solid and continue improving in the vast majority of their markets. Based on the strength we continue investing in and geographically diversifying our portfolio.

We're also committed to maintaining a strong healthy balance sheet with improving matrix as evidenced by our equity issuance year-to-date. Overall, we're excited about our 2017 opportunities. From a holistic standpoint, our expectations are for another solid year. I use "holistically" as I mean it in two ways.

First, I like the current industrial market, I like where we fit in the food chain and the consistent steady value per share we're creating each quarter. Secondly, I'm using it in terms of people. We're excited to have Reid Dunbar as Senior Vice President for Texas as well as Ryan Collins, our Senior Vice President for the Western Region.

They brought with them years of industrial real-estate experience, excellent reputations, and are solid additions to EastGroup's culture and team. Secondly, I'm excited to welcome Brent Wood who I have known for over 20 years as our new CFO. I've worked with Brent when he transitioned from accounting to our operations side.

So, it seems fitting to work with him on the transition back. And as excited as I am about these moves, it's truly bitter sweet to see Keith retire. Keith has been with us over 37 years and I've known him since my first day in the office.

We're in sound terms but we'll miss him and I'm simply not articulate enough to adequately thank him for all he's done for EastGroup and for me, personally. But with that said, I'm excited he's off to enjoy himself and he's agreed to our if will by launch consulting again arrangement. We'll now take your questions..

[Operator Instructions] We'll take our first question from Manny Korchman with Citi. Please go ahead, your line's open..

Hey guys, this is Jill Sawyer here with Manny..

[Indiscernible].

My question regarding, yes, the Techway Southwest disposition.

Who is the buyer -- and who is the buyer who look like over on in the market?.

Yes. I don’t think we're under any sort of non-disclosure with the sale but it was purchased by Cabot. And the buyer pool, we had entertained selling this property 12 to 18 months back when we began our disposition program. It did have some leasing risks, so we decided to hold it and just stabilize the and all move forward.

But there are so many people looking for investments and this they won't put the money. We were approached by different group's overtime but in this case the price was attractive, they were willing to price it and take on a leasing risk.

So, at that point we were willing to sell and so we're excited about the timing and the price and like say it was on our disposition list. It was a good property. We developed, I think it's first time we sold a property that we developed.

That said market we viewed as that we'd likely wouldn’t add to that cluster overtime, maybe even a declining set market in our view overtime. So, we were happy to sell..

Okay.

And then on the buyer for Houston, do you find that for in different or more active or less active now then say six months ago?.

It's probably been a little more active. I think where the majority of the way through our dispositions in Houston. I mean also maybe a few more. There is a property Central Green that we signed to lease on thankfully and second quarter we're doing the build out now. We may bring that to market once that tenets in.

We saw the buyer pool contract the second half of 2016 and it feels like there is still demand and it's picked back up and in fact someone was just recently telling us about barely north of a five cap sale transaction in Houston they traded.

I think if it's sell these or newer assets kind of middle of the fair way, there are certainly a buyer pool in it. It does feel like it may be opening up a little bit more in Houston. And as Brent said, this is an asset we had on our list.

We really did pulled it off and through a broker both entities knew we got approached and they were able to hit kind of within our target pricing range..

Okay, thanks guys. And congrats Keith on your retirement..

Thank you, very much..

And our next question from Blaine Heck with Wells Fargo. Please go ahead..

Thanks, good morning. So, reason commentary from some peers had suggested that merchant builders have come back and are increasing supply in some markets.

Are you guys seeing any increase on the supply side in your market for merchant builders and then I guess just more generally, can you talk a little bit more about your expectations for supply as we head into the end of this year and into 2018?.

Good question. Good morning. And we are seeing a little more, we're then selling more supply out there.

Overall, but I would bifurcate it and that what's where we like we have to mention what we like where we fit in the food chain recently seeing Atlanta and then I was in San Antonio looking at a project we're considering there, some land and so much of the new supply as all big box.

So, it's simply not design with our average tenet size of about 26,000 square feet, probably a little bit larger than that and our new developments. But the vast majority of the new supply is non-comparative.

If you and I were on the ground and we drove around Broad lore in Atlanta, you'd see new buildings but they be 250,000 square feet and up that are around us. So, supply has picked up a little bit maybe and in Orlando and things like that.

The merchant builders are typically not working with that but really with a wait for institutional capitals of to acquire industrial. They're really call it a fee developer but close to that, maybe a 10% partner with institutional capital as an investor.

And so, we're seeing a little bit of that but if you said what keeps us up at night, one of them, one of our main answers would be finding next land site. So, probably the biggest hurdle we got to new suppliers, we simply struggle to find new land sites as to our peers.

So, if keeps getting pushed further and further out of town, and then usually once you're there, they're building something that's not competitive to our design projects..

Yes. That's very helpful. And then, maybe for Keith or Brent. G&A came in lower than the original guidance for this quarter which was good.

But can you touch on what caused it to come in lower and whether there is any chance of that happening again?.

We've had learnt know as in G&A this year, we had we're changing our plans and we put out a press release first of the year, said that that was causing $0.03 share and then we've had some terminations over the time in my best and accelerating we do expect G&A to be down next year.

I have not come up with the final numbers but it should be less than this year..

Alright, great. Keith, thanks again for everything and good luck..

Thank you..

And our next question from Alexander Goldfarb with Sandler O'Neill. Please go ahead..

Good morning. And first, Keith, congrats, so hopefully we'll see that handicap continue to come down. So, two questions here. First one is now that you have some new folks in Texas and out West in the managerial roles, I realize it's only been a little bit but already we've seen some improvement out of Arizona.

So, can you talk a little bit about their coming into a firmly entrenched culture where you guys obviously have formulated the works but at the same time you went outside the company to get new blood? So, just trying to balance what new ideas the new folks will have coming in versus them just operating under the EastGroup MO and again, yes, I just point to the pick-up in lease rate in Arizona, so obviously it seems like somethings are changing..

Thanks, good morning and good question. Maybe a little bit, both are little bit different. In Texas we've got both places, we have good change here. Two seasoned Vice Presidents in Texas that are continuing to perform well and we had known Reid Dunbar really from when he came from Charlotte, when he was with Prologis and Charlotte.

Followed him, certainly has a lot of good ideas and a lot of good experience but stepped into an ongoing situation and is really continuing our development program in Dallas and San Antonio really with the next phases of buildings and it's thankfully been a nice English transaction.

Reid was just here in Jackson last week, so got to meet more of our team and he's kind of hit the ground running and had a set runway in front of him out West. We opened an office in Los Angeles for Ryan. So, it's really been a wide of a we if we use the phrase "Patiently optimistic," he's from Texas and moved to Los Angeles a few years ago.

With Clarion, has a great kind of roller decks of contacts and experiences in Southern California growing Clarion's portfolio. So, he's hit the ground running.

We've turned down any number of projects that just didn’t quite fit us but seeing such a large market being California turned down opportunities that are -- a couple that are on the radar that may come in, yes, they were still evaluating again. It's he's just finishing his second month there.

And then really, Mike Sacco has come into his own whereas you mentioned in Phoenix, where we were 90%, like 90.5% occupied at June 30 but 98% lease.

So, he had stepped in and done a ton of development leasing and been a big driver of that delta that I've mentioned a 190 basis points between percent leased and percent occupied of a lot of first generation space that he stepped in and he's really kind of with opening of California office has led the Arizona office more or less be his office to run and do as he wants to.

And I'm saying I'm happy for Mike and I'm pleasantly surprised that he got as much done as he did. He's quite pleased he has.

So, I guess the other side of that I'll just add what's nice as in aside as we had shut down our Phoenix development program because of the vacancy we had in first quarter of 2016, but now that we're 98% leased and Mike even got a nice pre-lease and some land that we have part of our pick up and really our timing of development has been stabilizing the Phoenix market.

It's let us really move from playing defense to playing offence this past quarter in that market..

Okay.

So, it sounds like you may wrap up some development there?.

Yes. He got some space pre-leased with 36% leased on our new building.

So, we're going to finish out our Kyrene Park and soon as our earnings call is over and settles down, I've promised him to come out to Phoenix, he's got another new land site that will drive around, well it's a 115 degrees still out there and see what we think of that side, if it's our next park or not..

Okay..

So, we're excited and yes he's doing a great job..

I mean, and the second question is just on the external side, the acquisition market sounds like it's still pretty tough. Disposition it almost sounds like you're fine with where Houston is like it's settling out. So, the big rush that you guys have had on the disposition side over the past year or so.

Is that we're coming to an end or do you think that even if you can't find acquisitions you will still continue to do dispositions to fund development?.

I think we would, even if we couldn’t find the acquisitions, we'll probably look in more towards value add acquisitions these days or likes. The two or three assets we bought at the end of last year, you're achieving yields that are higher than core markets then maybe a little bit below what if we had built it ourselves or coming in.

And I guess, answering your question, the pace will probably slow down a little bit but I think we should always be pruning our portfolio, we still have some service in our buildings in Florida and things like that, that I think for our shareholders you know what it's a good sale market to sell into.

So, we should continue to sell and move assets out. And I'm happy the teams done a great job managing through the 10 31 process these last year and a half and we'll probably keep that process going and match it as best we can..

Okay. Thanks, Marshall..

You're welcome..

We'll take our next question from Rich Anderson with Mizuho Securities..

Thanks. Good morning, and good luck to you Keith. I understand old miss needs a new football court, to say..

[Indiscernible].

So, just going through the math on the guidance. I understand same store up, dispositions up, stock up, so those kind of net out but Keith you mentioned timing of leasing of new development.

Has there been a slowdown there, is that the message you're sending?.

No. We are happy with where development outlet keep chiming. The other one we did bump our answers right, assumption a little bit this quarter. So, that was the other thing that was we debated and kind of went through internally an issue in Europe dating our guidance.

Happy with development leasing, it's moving ahead with our size, especially with development of it. If a space or two gets pushed off versus an assumption a month or two, it's zero or a 100,000, maybe within that space.

So, a couple of those and all of a sudden we’re 200,000 and that’s a difference showing raising guidance obtaining your holding at steady.

So we’re not saying that development markets slowed but versus assumptions and what we’re happy with is we will be able to shift some of those assumptions to actual signed leases and scrambling to get permits and subcontractors and things like to get the space build..

Okay. And you mentioned the 100 basis points spread between leased and occupied.

What should we think of this typical?.

We’ve averaged about, we went back to 14 maybe a 170 to a 100 basis points has been probably typical. First quarter it jumped up to 150 basis points and then in this quarter it’s all the way up to a 190.

So a lot of that is that development leasing where the buildup takes a little longer as Brent mentioned the Houston retention ratio is really inverted these past two years. So more new leasing in Houston so that’s some of what’s caused the delta between those two numbers to grow, but it’s about twice our normal run rate at the end of this quarter..

Okay and if you could just allow me, did you give a cap rate on the Houston sale..

We didn’t, probably if we were underwriting it to acquire it as Brent mentioned, it had some vacancy it’ll be a low 6 kind of cap rate..

Low 6 fully occupied?.

Yes, if we stabilized it at market ramps and some of the things that’s kind of how we underwrote it is what we’re selling and then if we were the buyer what we’d be looking at and that got us to the low 6..

And you feel that 6 or low 6 it was fully occupied but we had a tenant that was about 20% of the project that we knew was going to vacate July 1. So we knew that that was going to go down from there. So that the buyer was willing to price through that and take that lower yield for however longer it takes them to re-stabilize the property..

Okay, got it, thank you and thanks Keith. Good luck..

We’ll take our next question from Bill Crow with Raymond James..

Keith god bless, enjoy, look forward to seeing you on the golf course..

I agree..

My question for you, talking about one of your peers back in -- they suggested that Houston was perhaps the best industrial park in the country which you probably would agree with and only suggested it’s simply located in the wrong part of Houston.

And I was just wondering if you could address that part of it and how transitory that statement might be, in other words how big you get when we come up the other side?.

I’ll take a step in Brent, chime in, maybe between us and Brent really seeing where Houston grow up. We have not unexpectedly we agree with the first half of your statement. We think it’s the best industrial park arguably in the country.

What I love about it you’re really shoehorned in between Beltway 8 and George Bush Airport and a fast growing fourth largest city in the country. So I think our location and the access is really strong and it’s proven itself out over the years with the demand there.

I think the north submarket has had more available land so had more development heading into this kind of overpriced shop. The other thing that makes it may be over here, I’m taking up on your war bill transitory of what we have seen we’ve more because of its location near the airport and near the freeway.

There’s been more 3PLs and freight forwarders. So those guys may have 5 or 6 locations and my mental image is almost like an accordion. If they lose contracts it’s easy for them to contract organically versus if you and I owned a manufacturing business by the same.

So we felt that on the contraction by the same token and this maybe the optimus to me but as they pick up new contracts they will expand much faster than a typical say closely held or wholly owned 3PL would be.

So we probably do have more transitory freight forwarders because of the location adjacent to the airport but long-term I like, I love being next to George Bush Airport. Brent contradict me or –.

No, I would agree with that. We love the location, love the submarket.

The north became softer than the other submarkets just because of its desirability it became a victim of its own success when as Marshall mentioned there is more land opportunity there initially so as the market continues to grow and to be hot more developers entered into that submarket.

So when the music stopped everything begin to slow down again it had more space and it was softer but down the road where that’s a year or two years whatever when things pick back up and spec development picks back up, you’re absolutely going to see that occur in the north submarket. There’s no doubt about it..

Thank we’ll take our next question from Rob Simone with Evercore ISI..

Hey guys good morning. Thanks for taking the question on Houston could you guys just breakdown how much of that spread now on your same store guidance book with and without Houston is attributable to the sale.

Just trying to know that it’s some combination of sale plus improving market just trying to aggregate that a little bit?.

Yes, we looked at that.

It helped with two things that are helping us there that would, incrementally we are doing better on leasing and like the sale of Techway as I mentioned we have that large tenant radar on a 100,000 square foot tenant that was originally budget to vacate would have been empty the rest of the year had we continued to hold the project.

So hold the project so Houston specifically, the improvement there is the same store forecast I would say a lot of it was related to Techway and then some portion to the better leasing but it was probably with two quarters to go a little more related to the Techway disposition.

We think we’re very pleased with the timing, we were able to operate at 100% for six months and vacancies in pending and approaching we are able to sell an asset that we had already desired to sell for probably going on 24 months now..

The other nice driver in our same store results kind of for the balance of the year is that lease up in Phoenix as I mentioned we had projected leasing in the balance of the year but not get into 98% and a couple of cases within that – one definitely fall in the same store that was a development that it’s vacant for a while.

So that will roll into our same store pool later this year and that project is 100% now so that's kind of the other pick up of really just exceeding what our assumptions were 90 days ago..

Great. Thanks guys..

Our next question comes from Eric Frankel with Green Street Advisers. Pleased go ahead..

Thank you. Keith, I am going to miss our spirited discussion that we always have. So best of luck in retirement and hopefully I will see you at some point in my life in Mississippi. Maybe just quickly follow up on Houston kind of it seems like fundamentals are improving a little bit there, better investment sentiment.

Do you have a new target of where you want to get Houston to in terms of the percent of the portfolio on a squared footage or rent basis?.

We talked about that I think, we will be below 14% in fourth quarter really with no new developments planned. I mean, we might maybe pending the market at least we could think about it maybe in 2018 or we didn't really think about it this year.

I think if we stay 12%-13%-14% that's probably towards the high end of it and really more of that will be driven by how fast we can built out say Miami.

How fast we can get up and running in I realize it’s incredibly competitive in California but that's certainly an under allocation within our if you look kind of our investment spectrum and so if we can, what I would hope is each of our major markets we have runway when we find opportunities to set forward and hopefully that let’s Houston on a near term drift or settle back to that 13%-12% type within our portfolio..

Okay, helpful, thank you. I dialed in the call little bit late so maybe you addressed this little bit earlier.

But Brent now that you have totally taken control of the balance sheet do you have – what are your observations kind of step into the CFO role and do you see the balance structured different at all going forward?.

Yes Keith, like you took control of what but no, much like Marshall said when he took over for day, I mean, me taking over Keith a very much [indiscernible] it is putting hands on the steering wheel we have a great accounting team and great support.

No, our conservative balance sheet keeping 65-35 70-30 debt to market cap being very judicious with issuing new equity, my primary goal is try to do my first loan that’s even more basis point lower than what Keith did and so I can needle in with that.

But it will be very similar I mean our structure is very simple and straight forward and we will continue, my goal is just to continue to help Marshall and the guys in the field, they are finding lots of great opportunities to where I hope we are making decision about equity versus debt and those types of things going forward..

Okay, great. Final question you might have addressed this earlier as well are there any particular industries that are doing particularly well or you’re seeing increased leasing activities obviously then what the term last mile might be little bit over-use but certainly little bit more good e-commerce demand.

Have you seen any other particular industry or segment that are doing well and leasing well in your markets?.

No, you mentioned e-commerce so that probably steady demand, steady growing demand quarter after quarter, I mean one we mentioned we just signed a lease with Wayfair for example and Florida and they popped up on our radar as a growing e-commerce [indiscernible] that surfaced in other markets as well. So that segment which is maybe an easy one here.

Home building is another one that feels like it's picked up some more people related into the home building industry and that probably fits our type size buildings but those tenants have picked up a little bit.

Thankfully, it's been very broad based and a little bit of everything so it's hard to pick any one sector it feels like the home building industry is doing well these days and that said some of, I’m thinking like that’s expanded if you talk to Nick Jones, who runs Charlotte for us, a couple of examples of his comment with all of my leasing has been expansions.

So we have expanded part in home with one tenant into another tenant space. What organically we like is seeing that much more expansion. Charlotte that's really driven a lot of our leasing and then in Tucsan we have a tenant basically it's garage door opener company that outgrew their building one of our developments is 300,000 foot building for them.

We were worried about previously about getting their 100 and well over 150,000 square feet back but an existing tenant grew and it has taken 80% of that building when they vacate next spring.

So it's one of those kind of seamless transition that outside of EastGroup people would notice but we were concerned about getting a 150 something thousand feet back in a market it's not huge like Tucsan but it was nice to see a public company auto parts supplier take 80% of their space and when they are out we are working on existing tenant with an NOI moving at least to take the balance of their space.

So we had a leasing call just recently and we continue to hear more and more about expanding tenants really across the broad spectrum than which I like better than us taking a tenant from one of our other industrial peers which is [indiscernible]..

Okay. It's helpful. So once again Keith congratulations on your really successful career and best of luck with your hopefully lighter schedule..

Okay. Please come to Jacks..

I will try..

Thank you. We will take our next question from [Indiscernible] with Bank of America..

Good morning guys. I just wanted to get back to Houston. One thing you said in the past that I guess some of the lingering drag from 3PL leases where the customer shut down a few years ago but the 3PL [indiscernible] is only just expiring now.

How much longer do you expect that overhang will last?.

Well, it's hard to tell for us just internal within our portfolio as I mentioned we are excited that we only have 5% rollover for the remainder of this year and just a little over 5% for all of next year.

So we are looking at just around 10% rollover for the next 18 months that just by default is going to inflate us from that activity so within our own portfolio that's mitigating.

But I think for the most part within the Houston market most of that had shuffled and played itself out as tenants have rolled and have the opportunity to resize as I mentioned these tenants aren't leaving, they just readjusting.

We have signed 30 leases in the first six months of this year that equaled what we did all of last year and we were excited about what we did last year. So I would like to think that things are getting incrementally better as opposed to going the other way..

Got it. Thank you.

And then, further why you think there is less development in the shallow bay market versus big box, is it just big box effects here or?.

I don't, I mean, good answer is that -- probably a little bit of it, it was always more fun to build bigger things and smaller build, a lot of it is the dollars you can place.

And so we are an institutional investor but so many of our peers are larger than us especially when you get to the pension funds and they have dollars to place and it, call it our average building maybe 9 million to 10 million it's minimum wage or manual labor for them to put the dollars out.

They have got a key pace and go, if you go by a 600,000 foot or 700,000 foot building on the edge of town you can place dollars so much more efficiently than putting it out describer their development program as a subdivision but a $10 million home after another and we have one when the next one gets leased up, when the last one gets leased up.

So I think they just, it's an inefficient way for them to place the sized capital they have to invest.

And for the merchant developers the fees are larger on a – absolute fees are bigger on a larger building than smaller building that's a little bit we are happy with the assets for long term but what we saw in four orders where a good market, a growing market long term but where they built four buildings at once where we would have built probably one to two buildings at a time.

And then I am thankful for it, it’s just an interesting fact in our market..

Okay. Thanks..

We will take our next question from Craig Millman with KeyBanc Capital Market..

Thanks guys. Marshall just curious follow-up on the fact that shallow bay has less development than big box here. Just thinking the tenant profiles different than what you see in big box I am just curious with more limited development you think you would be able to push rents even harder than you would in larger distribution facilities.

I am just curious if that's what you are seeing on the ground or if cost structures for the supply chain differ that much between the two tenant basis that it becomes harder?.

Good question. Rent spreads are up, one thing that has been nice this year our leasing volume is higher through the first half of the year. We are little bit bigger than it's ever been but also our rent spreads are up. We are about 12% and 15%, I’m doing this from memory 15 and 16 and we are 16% year-to-date.

So our rent spreads are up and really there is, I say there is less supply but there is always competition and there is usually always pretty good competition so when we are out with space especially you have the little more leverage on the renewal than you do a vacant new space.

But they always have a options and we are pushing rents and we don't see a trend of it turning down, I always thought the best brokers really know what your competition is, what your – here is the two or three places they are looking at and here is the pros and cons of those spaces so I like that everyone is full for the most part and but there is always still seems to be, every tenant has an option or two where the tenants usually can be a little bit flexible and they are racking of what size square footages they can use things like that.

Brent anything that you want to add..

Yes. I would say there is still strong demand in the big box so it's not as though they don't have the power to push their rents as well. So part of that factors into it and so you push a couple of big 500,000 square foot leases on a run rate that will move the needle quicker than say if we move a handful of small tenants run rates.

But the good news we are both in a position to lever just following up on that in terms of small box, our peer group the idea of building up 100,000 square foot building and leasing it to 4, 5 or 6 tenants it's just doesn't move it fast enough.

And even from an institutional buyer standpoint or development standpoint they don't like the tenants roles where you have maybe a portfolio where you have got 20-30 tenants versus where you might have two or three tenants in large building for the same amount of square footage.

So sometimes thankfully they do shy away from that type administrative work..

Helpful. Then Marshall you had indicated that you’re still seeing cap re-compression across almost all of your markets.

Just curious where you’re seeing the biggest moves lower kind of which market you are seeing the lowest cap rate across your portfolio as well?.

Kind of the feedback we get when we talk to a couple of the different national brokers, their commentary was a longer lines to say the top five markets maybe I will use Inland Empire and California where it was already four or really a little bit below four.

Those are pretty much stabilized but what we are hearing industrial is a safe heaven and you certainly are enjoying that from the equity side but for institutional capital they started under-allocated to industrial and now compared to retail or maybe some other sectors.

So we are seeing really those markets that maybe one through five have held steady maybe markets five through 15 or really probably up even into the low 30s where it would be San Antonio, Charlotte, Tampa some of those markets where it's probably come down to 25 basis points is what the brokers are saying nationally.

Their transaction volume is pretty consistent with 2016 because people are underwriting higher rent growth, their comments from more total current expectations are about the same but because everyone seeing rent growth are willing to find more, they underwrite more rent growth it's pushed cap rates down maybe another 20-25 basis points this year.

And really, kind of how do we think about it it's a good time to continue selling assets where we can it probably pushes us a like, it makes our development program all that more attractive and really pushes us more towards the value add type acquisition.

If it's a building that's been built and vacant that we can step in and continue spending capital on like we did in South Florida and Los Vegas and some others that's probably where our strategy will take us that just to go head to head with an institution on a class A project with credit tenants is just a tough fight and I am not sure anybody wins that right now..

Hey Keith. Congrats again, enjoy and thanks for the help over the years..

Thank you very much Craig..

We will take our next question from Ki Bin Kim with SunTrust..

Thanks and congrats Keith and Brent.

So just a broad question on Houston do you think we reached the bottom in the north sub market [indiscernible] and maybe you could -- any commentary on what you are seeing in market rents in that market?.

Yes. It's hard to say it's in the bottom when you, the vacancy rates for the market has stayed under 16 time to time but for the North specifically I would think so I mean certainly there has been no – there is no and has been no spec development so that alone is allowing it to get more stable.

In terms of rental rates I mean we have been very pleased and satisfied with internal rates all in all as you can see our spreads have tightened some and I was just looking back over Houston for example and second quarter alone we signed five leases and those leases were signed at an average run rate of $0.53 a foot.

So I have seen a lot of press about rates being well below that I guess I would just have to say I am glad those brokers aren't doing releasing. But they’ve held in there well when we leased our central green building 80,000 square feet it had been vacant for a while.

We are able to get a really good rental rate there and that's really what drove our positive this time. We had two prospects that got into hotly contested desire to have the building and so one of them ramped up and went through the leasing process very quickly and signed the lease for it. So again incrementally better.

I don't, not like a deflection straight up but we are feeling positive. Feel good about the rates we achieved for the quarter and again the low rollover going forward we are looking forward to that..

Alright and quick one on maybe what you are seeing in terms of any large known tenant move outs in the foreseeable future I mean again your top ten tenant page, I know you guys always show the expiration date there but all the one seems like matches [indiscernible] Iron Mountain maybe a few of those that might be popping up in the next year any sense today on what's happening with those?.

Nothing. Good question. Nothing within our top ten tenants thankfully I mean after that we actually did a long term renewal with last year so they should be put to bed, Iron Mountain, again knock on wood we have had a good portfolio wide retention rate with them.

Knock on wood tenant we get questions about because they are retailer and they’ve actually – they’ve got term left on their lease and are actually in the market looking for additional space for distribution in Charlotte.

So thankfully there we’ve got a couple of move outs in Houston and then the other move out that we’re working our way through that I would describe our 240,000 feet in Santa Barbara it’s four buildings, three of them are full but we had one tenant that had been there 20 years that grew and grew and really took the entire building at just over 50,000 feet and they vacated during second quarter.

So the tricky part in Santa Barbara, the good news is it’s a high rent market. The bad news is when it’s vacant it’s an expensive vacancy and it’s more of as you would expect for Santa Barbara smaller tenant R&D projects. So you said one of our challenges this year right after Houston is probably releasing that square footage in Santa Barbara.

We have prospects but it’s a center market so we’re working our way through it but if you said overall where our move outs have been, it’s couple more coming still in Houston probably between now and will between now and year end and we got hit with one, a tenant move out in Santa Barbara that we’re working to re-tenant..

Anything notable on metrics or is that say –.

They have term on the Houston lease, so yes, there’s nothing really there..

No, I know they were acquired by a South African firm. I maybe off on that but I believe so. I think there is nothing that I am aware of, seem to be fine and no news one way or the other.

We get questions about retailers within our portfolio and thankfully don’t have that many and I’ve got like Nordstrom is in Southern California but they’ve been there 20 years on our Walnut Project. So not that many retailers..

Okay thank you..

Thank you..

And will take a follow-up from Eric Frankel with Green Street Advisors..

Yes just commenting on the acquisitions market that you think is pretty and certainly competitive. We certainly see that as well. It’s worth understanding that I think your share prices were up pretty good over the last year or so.

Have you thought about taking the plunge in terms of more acquisitions just as your cost to capital being a little bit lower and maybe you can also talk about how acquisitions compared to development and what do you think your competitors are underwriting in terms of development profit margins and what you’re underwriting as well?.

Okay our development yields for this quarter were at 8%. We keep thinking it will come down and it will trend down just because we worked our way through most of our inexpensive land. We put into service.

Everything we’re acquiring land wise, so our development yields could come down but we have been thankfully able to stay well above that 150 kind of basis points over what a fully value and what we think we could exit it for to kind of justify the development risk.

In terms of acquisitions and we mentally try to decouple I mean it’s almost like on and off maybe we were in the early 50s or low 50s a little over a year ago thankfully on a start price we weren’t reactive or looking for acquisitions.

As our start price moved up and our cost to capital came down we started looking more and more for acquisitions and we’re active in that market at the end of last year and have been this year. Tried to decouple those as much mentally.

If we don’t like it I don’t think we should buy something just because we have capital I’d rather you not be grilling and thankfully Keith will retire, but you’ll be grilling Brent and I about it two years from now if we buy simply because we have the capital.

So try to mentally decouple it but we are active and looking and it’s kind of when as you know, when you see it probably and in Atlanta or in Southern California or Northern and it probably steers us more towards value add again because people if there’s nothing wrong with it.

People are willing to pay such great prices for it and I also like the fact that we’re a long-term holder. It helps us kind of underwrite and look further down the road. I think our – I don’t want to say our peers within the reach so much but again what we are doing is people are willing to underwrite more rent growth.

So that’s what driving the compression and cap rates and the under allocation. Probably if you can’t get into Dallas, Chicago, Southern California, Northern New Jersey then Tampa, Phoenix, Orlando any number of our other markets just get that much more attractive.

So it probably helps from an NAV perspective or where we’re looking at it but it’s – the acquisitions won’t be of primary path to growth and probably shouldn’t be right now unless it’s buying vacancy where we can take on some risks that others are uncomfortable with..

Okay and just a comment as your development yields are on legacy and certainly good but if you had to buy land at a pseudo market value today do you think cap rate – what do you think your spread would be relative to prevailing cap rate unstable at that that’s –.

We’re probably, a couple of that would look like Austin when we’re not finished there but we’ll probably be mid 7s in Austin and probably if we sold them mid five and half, five and three quarters and I am estimating a brand-new product in Austin and Atlanta.

It’s an allocation with the building but we’ll be a high seven to when we do it – when we finish it and that’s probably easy five and half brand new building and along I-85 and Atlanta would be a low five cap rate. So the spreads are hanging in there. We’re looking at something else.

It’s about a seven and a half that’s go into investment committee this week elsewhere in the country and probably again easy 150 basis point spread.

And that Eric will vary by market when we get active with our day county development project when we bought the land last quarter that spread will be tied up, but again that’s different market dynamics and has different long term growth. Certainly I know something in California from a development standpoint.

Again that spread would look different just because of the market dynamics. So, it’s not a one size fits all necessarily but from most of our markets it’s along the lines of what Marshall described..

Okay, thanks for the color..

And it apparently we’ve no further questions, I’ll return the floor to Marshall Loeb for closing comments..

Thank you everyone for your time this morning, I appreciate your interest in EastGroup and I’ll join the chorus of wishing Keith well on the golf course. So thanks everyone..

And this will conclude today's program. Thanks for your participation. You may now disconnect..