Marshall Loeb - CEO, President & Director Brent Wood - CFO & EVP.

James Feldman - Bank of America Merrill Lynch Blaine Heck - Wells Fargo Securities Emmanuel Korchman - Citigroup Alexander Goldfarb - Sandler O'Neill + Partners Craig Mailman - KeyBanc Capital Markets Robert Simone - Evercore ISI Richard Anderson - Mizuho Securities Christopher Darling - Green Street Advisors.

Good morning, and welcome to the EastGroup Properties Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. Now it is my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead..

Thank you. Good morning, and thanks for calling in for our third quarter 2017 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. And since we'll be making 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, 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, Kina. The third quarter saw a continuation of EastGroup's positive trends. Funds from operations was at the high end of our guidance, achieving a 3.8% increase compared to third quarter last year and actually up 5.9% when excluding land sales. This marks 18 consecutive quarters of higher FFO per share as compared to prior year quarter.

The strength of the industrial market is further demonstrated through a number of our metrics, such as another solid quarter of occupancy, reaching a record quarter-end percent leased, positive same-store NOI results and quarterly high records for re-leasing spreads.

In summary, our increasing FFO and dividend prove the success we're seeing in all 3 prongs of our long-term growth strategy. At quarter-end, we were 97.4% leased and 95.6% occupied. This is our highest percent leased in over a decade, and as market commentary, we've never maintained this high level of occupancy for this long.

Drilling into specific markets at September 30. A number of our major markets, including Orlando, Jacksonville, Charlotte, Phoenix, San Francisco and Los Angeles, were each 98% leased or better. And Houston, our largest market with over 5.5 million square feet, down from over 6.8 million square feet in first quarter 2016, was 94.1% leased.

Supply, and specifically, shallow bay industrial supply, remains in check in our markets. In this cycle, the supply has been predominantly institutionally controlled. As a result, deliveries remained disciplined. And as a byproduct of institutional control, it's largely focused on big box construction.

In fact, a CBRE study showed shallow bay deliveries remained below prerecession levels. Rent spreads continued their positive trend for the 18th consecutive quarter on a GAAP basis, rising approximately 21%, which represents a quarterly high record.

And overall, with roughly 95% occupancy, strengthening markets and disciplined new supply, we continue seeing upward pressure on rents. Third quarter same-property NOI rose on a GAAP basis by 3.1%. Average quarterly occupancy was 95.2%, which was down 60 basis points from third quarter 2016.

Also similar to last quarter, there was 180 basis point margin between percent leased to occupied. This is an atypically large margin. It's driven by several lease signings where build-out and permitting are underway. And while quarterly occupancy rose 70 basis points sequentially, we're still turning a number of signed leases into occupying tenants.

It will take a few months to begin seeing the full impact of these results. We expect same-property results to remain positive going forward. The increases will continue to reflect rent growth. As with mid-90s occupancy, we view ourselves as fully occupied.

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

The average investment for our business distribution buildings is around $10 million. We develop in numerous states, cities and submarkets. And finally, we target 150 basis point minimum projected investment return premium over market cap rates.

At September 30, the projected return on our development pipeline was 8%, whereas 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 third quarter in our development pipeline, we began construction in Orlando on the 104,000 square foot Horizon X building. And on the other end of the pipeline, we transferred 2 properties totaling 278,000 square feet into the portfolio, each 100% leased.

As of September 30, our development pipeline consisted of 13 projects in 9 cities, containing 1.7 million square feet with a projected cost of $138 million, which is 43% leased. Finally, during the quarter, we acquired a 40-acre development site in San Antonio, with plans to ultimately develop 5 buildings totaling approximately 620,000 square feet.

For 2017, we project development starts of over $100 million and 1.3 million square feet. What's gratifying is our ability to reach this level again in 2017 with no Houston starts.

And then looking ahead to 2018, I'm optimistic that market permitting, you'll see us continuing development within our successful parks in markets like Charlotte, Dallas, Orlando and San Antonio. In addition, we restarted Phoenix development midyear this year, and we're hoping to be able to restart Houston development.

The final and third leg of this development stool is we'll have active developments in new markets such as Miami, Austin and Atlanta next year. Our asset recycling is an ongoing process. Year-to-date, we've sold $39 million in assets with a couple of other opportunities we're evaluating pending pricing.

And over the past few quarters, as we've recycled capital, the portion of our NOI coming from Houston declined while the quality of our Houston portfolio rose. Specifically, in early 2016, Houston represented over 20% of our NOI, with 3 properties still under development.

Today, Houston represents 15% of 2017's projected NOI and will continue declining as we move into 2018. Brent will now review a variety of financial topics, including our updated guidance..

Good morning. We continue to see positive results due to the strong performance of our operating portfolio. FFO per share for the quarter exceeded the midpoint of our guidance at $1.08 compared to $1.04 the same quarter last year, an increase of 3.8% and, as Marshall mentioned, represents a 5.9% increase, excluding gain on land sales.

FFO per share for the 9 months ended September 30 was $3.12 per share as compared to $2.94 last year, an increase of 6.1%. Operations have benefited from the continual conversion of well-leased development properties into the operating portfolio, an increase in the same-property net operating income and acquisitions.

Debt to total market capitalization was 26.2% at September 30. For the quarter, the interest in fixed charge coverage ratios rose to 5.3x and debt to adjusted EBITDA was 5.9. The adjusted debt to pro forma EBITDA ratio was 5.4 for the quarter. Floating rate bank debt amounted to only 3.3% of total market capitalization at quarter-end.

From a capital perspective, in the third quarter, we issued $10 million of common stock under our continuous equity program at an average price of $85.82 per share. In August, we retired a $45 million mortgage loan with an interest rate of 5.6%. Over the past 5 years, our secured debt collateralized by specific properties has decreased by 67%.

In September, we executed a commitment letter for $60 million of unsecured private placement debt with a 7-year term and a fixed rate of 3.46%. We anticipate closing this transaction in mid-December. Also in September, we paid our 151st consecutive quarterly cash distribution to common stockholders.

The dividend of $0.64 per share represented a 3.2% increase and equates to an annualized dividend of $2.56 per share. Our FFO payout ratio was 59% for the quarter. Rental income from properties amounts to almost all our revenues, so our dividend continues to be 100% covered by property net operating income.

FFO guidance for the fourth quarter is estimated to be in the range of $1.10 to $1.12 per share and $4.22 to $4.24 for the year. Those midpoints represent an increase of 2.8% and 5.2% compared to the prior year, respectively.

Guidance changes from previous estimates include an increase in same-property NOI, offset by reducing potential acquisitions by $15 million and projecting an additional $20 million of common stock issuances, $10 million of which we executed in the third quarter.

In summary, our financial metrics and results continue to be some of the best we have experienced. 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 and geographically diversifying our portfolio.

We're also committed to maintaining a strong, healthy balance sheet with improving metrics, as evidenced by our equity issuance year-to-date. Overall, we're excited about 2017 and the pathway it's creating into 2018. From a holistic standpoint, our expectations are for another solid year. And I use holistically as I mean it in 2 ways.

First, I like the current industrial market. I like where we fit in the food chain and the consistent steady value we're creating each quarter. Secondly, I use it in terms of people. We made a number of people moves earlier in the year. We're happy with our team and how everyone has settled into their new role.

This is playing positively into our results. And we'll now take your questions. Thank you..

[Operator Instructions]. And our first question comes from Jamie Feldman from Bank of America..

Marshall, you gave some color into 2018 and your comment on $100 million of development starts in '17 ex Houston.

Do you think you're on track to actually have more starts in '18 at this point than in '17?.

Good question, and thanks. Market permitting, which we like the market better today than we probably did 90 days ago, in fact. But with Miami coming online and just a little bit higher cost per square foot, higher land cost, I think we'll certainly roll out next quarter our detailed starts for 2018.

But I'm optimistic, based on early indications, that we'll beat our usual $100 million kind of run rate. We picked up Phoenix kind of the back half of this year in terms of restarting development. And we're actually looking at Houston again, which is the first time in a few years of being able to have a start there.

So we'll give more detail next call, but I'm hopeful we'll beat $100 million, and that assumes the market hangs in there over the next year..

Okay. And then sticking with Houston and kind of the outlook for next year. So if you think about the drag you had this year from Houston, how does that drag look next year? And then can you talk about - I mean, you still had a pretty negative print this quarter for Houston.

Can you talk about what drove that? And how - are we - you're getting towards the end of that pain or if you're getting towards the end of that pain..

Sure. I'll start and then, Brent, chime in, if you would. We had expected move-outs this year. We actually thought our occupancy would drop into the high 80s. In the last call, we bumped that up to about 90%. So early third quarter, kind of maybe internally, I'll speak internally and externally, we knew our occupancy was going down, and that happened.

But thankfully, we stopped at about 90%, which is where we ended third quarter. Thankfully, if you look at the percent leased, it's back over 94%, so we're ahead of where we expected to be as a percent leased. And then maybe not quite a month later since quarter-end, we're over 95% leased. So we've seen a pickup in Houston activity.

We think we're still early in on the impacts from Harvey. We've seen homebuilders re-sign the lease with Lumber Liquidators. We've seen Home Depot and Lowes be active in the market that in - I guess as we've thought about it, the numbers we've seen, 100,000 homes were damaged, about 16,000 multifamily units.

So Camden in Mid-America and some of the multifamily and mini storage REITs or self-storage REITs sort of an immediate impact will be once the rebuilding starts, once the adjusters and the insurance is settled. So we're seeing a little bit of that activity, but we're optimistic more on Houston than we've been in several years.

The other thing we like on the internal perspective of Houston, for the last couple of years, I mean, '16 and '17, when you think about it, our expirations, and I'll use round numbers, have been, call it, 18% and our retention ratio has flipped, where we've lost 2/3 of our tenants and kept about 1/3.

So that's 12% rolling each year or vacating each of the last couple of years in Houston. Looking from third quarter to the end of '18, that number drops to about 7.5%, down from 18%. So we believe that ratio may normalize post Harvey, and Houston was improving pre Harvey as well, but that would only be 5% versus 12% over the last couple of years.

So our exposure to [indiscernible] vacates upon lease expiration is way down in Houston over the next 15 months, and we think the market has been improving and may pick up post Harvey, post insurance..

Yes. The only thing I would add to that - I think, Marshall, well said. We're pleased. Looking back at the first quarter, we have projected Houston lease percentage for third quarter, and we've been signaling we thought this to be the low point. We started at 88%, then we're 87%, then we adjusted to 90%, and then we've actually come in at 94%.

So Kevin and the team there has done a great job. I'd point out, we've signed 39 leases for almost 1 million square feet year-to-date in Houston. That was compared to the 25 leases this time last year. And then we signed an additional 370,000 square feet of short-term leases. So the activity is there. The indicators are still there.

And as Marshall said, with just over 7% roll over the next 15 months, we feel, at least, good Houston not being a headwind for us, if nothing. Even if they would just stabilize to even, it would be a positive for us. So as Marshall said, we feel as good about the market there as we have in a while..

And our next question comes from Blaine Heck from Wells Fargo..

Marshall, can you just comment on development yields a little bit more? I think we've been hearing a lot about increasing costs on the construction side, which have generally brought down yields recently.

But when I look at your development pipeline, your yield increased a little bit this quarter to 8.2% on projects under construction, and that's actually quite a bit higher than the 7.5% yield on the properties delivered thus far this year and the properties in lease-ups. So maybe you can give a little bit of color on what's driving the higher yields.

Is it just market mix? Or is there something else going on?.

Good analysis. And probably market mix, I think you hit on it. It's a little bit at least in my mental kind of framework, I've been thinking 7.5% to 8% is where we typically - most of our projects seem to settle in that range.

We have been saying and thankfully, the guys that are delivering these buildings have hung onto those yields longer than I probably would have expected and we've chewed through the inexpensive land that we acquired early in the cycle.

When we buy a land now, we typically try to [indiscernible] into production immediately because it's more expensive than it was several years ago. And you're right. We were talking just the other day. We've seen construction cost rise. We were nervous in Texas, I mentioned Harvey earlier, with the rebuilding there.

But we're also seeing that in the Eastern region as well, talking to John Coleman, Florida and Charlotte, where we're getting bids in on kind of that next round of developments that will be going there. There's a labor shortage, and that's driving up construction cost. And ultimately, it's frustrating for us on the development side.

It will push our yields down a little bit, but it's also got to push up everybody else's rents in time that - for people that continue developing, that construction costs are rising. We had been saying at the pace of inflation, but they're probably up in the mid- to higher single digits.

I mean, that's pretty real time, what we've seen on our last few [indiscernible] bids that we've seen out there. So our absolute yield will probably come down. Our 150 basis point margin that we target, we've been beating that handily.

And then we've also seen, really, in the last 90 days, cap rate compression not so much in the major markets, but cap rate compression even in our - kind of those markets 10 to 25.

As we've chased acquisitions, we were a slower quarter transactionally than we intended to be, and we even pulled the $15 million [indiscernible] that actually hurt us on our earnings forecast as we were hoping to be able to place a little more capital.

But we came in second or third on any number of bids kind of over the summer that cap rates continued to compress and the pricing actually exceeded where the broker guidance was in a good handful of transactions..

Great, that's helpful. And then can you talk a little bit about the San Antonio market? It's about 8% of your rental revenue at this point. But you've got 4 projects underway there in the land banks that, I think, is second only to Houston.

So I guess what's giving you confidence in that market? And how big do you think we could see it grow to as a percentage of the overall portfolio?.

We like San Antonio, obviously, as the numbers show a lot. Typically, we've been building like Alamo Ridge is northwest side of the city and Eisenhauer is an infill site in the northeast kind of quadrant of the city.

So there've been two noncompeting submarkets, and then we bought the land that is in that northeast - maybe a little bit further out far northeast, as they call it.

So it's the, kind of quietly, the seventh largest city in the country, and [indiscernible], our Vice President that handles San Antonio, usually, when we have the conferences or send me an email or on when we're talking on the phone, don't mention it because it's not as competitive as, say, in Atlanta or Dallas or everybody in the world as there.

So we feel like we've been quietly able to create a lot of value there over time, and it's a good, solid market. Tourism, military, insurance, USAA is based there. It's a really stable economy and growing economy.

And maybe within Texas, at least in my mind, I've always thought you read, certainly, with us that we get so much focus on Houston, a lot on Dallas, Austin. San Antonio is a really good - it's a large city that gets overlooked, a little bit like Charlotte, by most people in other parts in the country.

Size-wise, I mean, we would probably coming up with absolute numbers, 10%, 11% is probably about as much as you want to be in about any market. And we've kind of got - we have a traffic light that we've internally created for each market based on the size of the population, the size of the industrial market. So good catch.

I mean, we've capitalized on the opportunities. We've seen there in San Antonio but don't want to get to too much larger. We'll be mindful. And every market has its day. So at some point, if San Antonio has a hiccup, we don't want to be overexposed within our portfolio..

And our next question comes from Manny Korchman with Citi..

Marshall, just to sort of think about any new leasing and new developments you're doing, especially in sort of Houston with the rebuilding efforts.

Has there been any desire from the tenants to change their lease terms or desires from you to change the lease terms, especially to make them shorter, sort of looking out at how long that recovery might last or the rebuilding efforts might last, sort of matching the term to how long they expect to be there?.

We've not - maybe we're early enough. I would say kind of on the recovery, we're still probably - it's been, what, I mean, 6 weeks post Harvey, around Labor Day. Early in, we have signed a couple of shorter-term leases, one with the post office came and took a big block of space [indiscernible] by the World Houston airport.

That's happened before, and that's measured in months. So we've signed a couple of shorter terms. But by and large, I don't see the market having shifted to shorter-term leases or anything like that. The Lumber Liquidators was another lease, but that was a normal-term lease that came in, and that's probably a lot from just rebuilding post Harvey.

So it's hard to know which ones are exactly a reaction of Harvey and which ones may have happened anyway. But we have signed a couple of short-term leases, but I don't believe those are Harvey-related, or it's hard to really parse that apart that much. We certainly think about that - go ahead..

No, please..

I would say we certainly think about that as we kind of evaluate new development opportunities. If we had a lot of month-to-month or 6-month leases in there, that would make us - if it helps kind of your thinking about us.

We'd be a little more hesitant to step on the gas with a new development if a lot of our occupancy - I mean, that's kind of one of the things we thought about, how much of the pickup is that one-year lease or six-month lease versus, hey, we're going to break ground, we're 100% if a lot of it is still on short-term leases..

Are you seeing a lot of others sort of try to target the same type of activity, whether by trying to grab land or trying to get billings out of the ground in the near term to do sort of the same as what you're thinking about?.

Not just yet. Maybe everything that's been planned - about half of the development in Houston is, on that southeast side, kind of port-related. I guess as we look at [indiscernible] occupancy tightened up. It's 5.4% in the market, and the north submarket where World Houston is, it's come down 3 quarters in a row.

So we've seen a little bit of pickup in supply, but it's about 1% of the overall market in terms of new supply. It's still not that much there. Although I think certainly, in the northwest, which is about half the market vacancy, people focused a little more supply there. But by and large, it's been port-related and institutionally controlled.

And thankfully, for us, so much of what people build are 300,000-foot buildings and up, that it really doesn't compete with the same tenants. We see some, but for the most part, most of the new development isn't what we're building..

And I would just add that we're seeing a little bit of spec development pickup Northwest Houston, but that's generally with the long-term view. You don't really get into that just thinking, hey, let's sign a few tenants that might need a short-term type requirement related to a rebuilding or something.

I think that may have spurred some of it to move along a little quicker, but I think there's a general cautious optimism within the market that things are trending in the right direction.

And it was good, I would point out, to see 1.2 million square feet of positive net absorption in the north sub market, which is where World Houston is located and which has been one of the softer submarkets. So it's good to see that take a step forward..

And Brent, maybe a quick one for you.

Just as we think about funding for the development next year, especially if you maintain levels or even ramp them, is the ATM still sort of the right way to think about that?.

Yes, I mean, certainly, at the current pricing, that's certainly available to us. Interest rates have remained low, so really, both avenues for capital are there. But yes, the pricing right now, it's certainly something that we would look at to continue to keep our debt metrics low by doing that.

And really, our bottleneck right now is more finding those opportunities because obviously, we feel pretty comfortable about the capital, the access to capital right now currently, thankfully..

And our next question comes from Alexander Goldfarb with Sandler O'Neill..

Just the first question on Houston. You guys mentioned there was some short-term leasing that you guys did. It sounded like that was subsequent to Harvey.

But as far as just getting expectations of The Street versus what you're seeing for demand, should we expect like, when you guys report fourth quarter, we're going to see material pickup in Houston as far as your commentary in some of the stats in the supplement? Or your view, Marshall, is that, by the time the insurance proceeds take a while, that we're probably really not going to see any incremental movement in the Houston stats or the commentary until later next year..

Maybe my answer is yes. And maybe as I explain it, in my mind, there's certain property types, being like the multifamily, where your home was damaged, your apartment unit was damaged, and you've got to go find somewhere to live. And that almost happens literally overnight or within a week.

And you've seen Camden and some of the other multifamily operators pick up. We picked up. And then if you look at the end of September, we were 90% occupied. We were 400 basis point difference, which is a large one in any one of our markets between leased and occupied. And now we're north of 95% leased in Houston. So that income is rolling in.

And I think fourth quarter - I'm an optimist, and it's a crystal ball. I think fourth quarter will be ahead of where third quarter was. But I think rather than one large spike and we're full, I think it will play out over the next several - sequentially over the next several quarters.

So I think Houston will be better in fourth quarter and then, hopefully, better in first and second quarter of next year as well, assuming the market doesn't have some kind of global shock or things like that.

And that's what has us kind of tinkering with the idea of is next year a good opportunity or does the window open for us to develop again in Houston, just like Phoenix did earlier this year..

Okay. And then the next question is sort of a - can you just talk a little bit about the latest in Atlanta? You guys made an entry there. What are you seeing for more opportunities? It sounds like - obviously, outright acquisitions sound pricey. Maybe there's some stuff that you find that you're underwriting.

But can you just talk about it, if it's going to be more acquisition or development? And then are there other markets that you guys are looking at? Or Atlanta was sort of the last missing piece that you wanted to enter?.

Okay. Good question. We like Atlanta, spending more time kind of turning stones over, looking at things. What we - a couple of stats we like about Atlanta for the last 4 years, they've absorbed over 17 million square feet. And this year, it was 17 million square feet by the end of third quarter. So Atlanta has been a strong distribution market.

Rents were up, and these are kind of the CBRE stats, 9% year-to-year. So we're happy with what we bought there earlier in the year. We do have the site that came with our Broadmoor acquisition, so we'll have our - with the plan being to break ground in first quarter next year. So we'll have our first Atlanta development. So our plans are to grow there.

We like the market, continue to look for opportunities. I mentioned one of the ones that we - we lost out on a good handful of assets, one of them being - really, I guess it was last week. We were in the second round of an acquisition in a submarket that we're already in, and pricing is going to come in below.

It hasn't closed, but our expectations, as we underwrote it, well below a 5% yield. So something that's laced in. It's just hard. Everybody has a checkbook, and those are hard bids to win. We like the approach where either we develop it or some value-add creation.

And if you remember last year, we've kind of called them the triplets that Brent bought the Fort Worth project, Mike Sacco got the one in Las Vegas, where they were newer projects, and then we bought one more in Weston, in South Florida, that were partially leased but not complete.

And we like those assets long term, and we're earning yields that are above core assets. So somewhere in Atlanta, we'll - probably, our best avenue in almost all of our markets are either to develop or buy an asset we like and finish leasing it up because just to buy a core asset, and not that we wouldn't, it's just awfully competitive.

And when we talk to brokers, the phrases we hear, there's a wall of capital out there that likes industrial. Everybody - thankfully, it shows up in our stock price as well. People like industrial product these days.

And that people are underwriting higher rent growth on their August model, so with that, they're willing to accept lower initial cap rates. And we don't disagree, but we're trying to be a disciplined buyer in a tough market to win as a disciplined buyer feels like..

Okay.

And any other markets?.

Sorry, yes, nothing in the near term. I mean, there's some we're turning over stones and looking. But my personal preference, I'd just rather us be larger in the major markets in California, if we can find those opportunities in Denver that we've been in. There's any number of markets. Atlanta is a good market.

I don't feel compelled to - we don't feel compelled to go to a new market for growth. We see pretty good opportunities within our existing markets, and there's less - certainly less risk because we learned - we know those markets well..

And our next question comes from Craig Mailman with KeyBanc..

Maybe I just want to hit on the lease roll here, kind of 2 questions. I guess, first, Tampa looks like about 25% of the roll for next year, and you have some larger tenants there. Just curious what your viewpoint is there on retention and maybe what you think the mark-to-market on that asset, that lease is.

And then just more broadly, what do you think the mark-to-market on the '18 roll is close to on a cash basis?.

Okay. Maybe a two-part answer. You added cash in at the end. And I'll channel my inner Keith McKey and say, we like the GAAP numbers because you capture the free - we think free rent manners and things like that. So year-to-date, Tampa, which is probably a better way to measure year-to-date than quarterly, but we've been happy with Tampa.

We're 9.5% cash and north of 25% on a GAAP basis in Tampa. So we do have a fair amount of roll there. No one that has us abnormally worried, and with the kind of rent growth we've seen in Tampa, I'm almost - we're thankful for the rent rolls that we have there that it gives us the opportunity to push rent there.

It's hard to estimate very specifically what those numbers will be mainly because we kidded and said we're just not very good at it. But I think we should be able to push rents in Tampa, and thankfully, we've been able to for the first 9 months of the year in Tampa and as well as within the portfolio.

And Florida has been another overall just strong market for us. So we're optimistic. As we think about '18, the 17% GAAP increases through the first 9 months of the year, we'll get the full year impact of those next year as well as, kind of as you pointed out, Tampa being one of those markets where rents are going to roll up.

It's just how much, assuming the market stays where it is today..

I guess more specifically, the Iron Mountain and Mattress Firm leases, it's a little more than 1/3 of that.

Have you had any indications kind of when do those roll?.

Nothing in specific. And again, Iron Mountain usually, historically, as a company, because they put so many - so much capital in, a lot of times, they'll have in-rack sprinkler systems and things, that Iron Mountain usually is a pretty sticky tenant.

And Mattress Firm, we have them in a number of locations, but I'm not aware that was a building - that they took the full building as John Coleman finished it. So I feel pretty comfortable that, that fits their needs.

I know they were acquired within the last year, but early to say, but not aware of anything that has us abnormally concerned about either 1 of those 2 tenants..

That's helpful. And I guess second question, big picture. As you guys - the lease percentage is in good shape. You're kind of getting through the Houston drag. I'm just trying to put the components together with like escalators, where you are on a rent spread basis.

I mean, higher level, I know you guys aren't giving '18 guidance, but it looks like 3.5% to 4% wouldn't be out of the question for cash same store next year.

I'm just curious, what would be the headwinds that would limit a decent acceleration relative to '17?.

Brent, chime in. I like your optimism, and I share it. If you said - I guess just answering your question, what would be the headwinds would be some economic shock that would turn us backwards.

I'm trying to think of where - within same store, one of our kind of stickier vacancies, we have 50,000 square feet in Santa Barbara that's been vacant since April, and that's in an R&D building. That's been a little bit harder to lease. It makes me appreciate single-story industrial buildings.

Having a 2-story R&D building in Santa Barbara, that's been a more persistent vacancy. So I - we worry less about oversupply just because we struggle so much to find good sites and we see construction prices rising, as we mentioned earlier.

So Brent, what am I missing in terms of the headwinds?.

Yes. I think we feel good about what's - as I said, if Houston could even just moderate going into next year, that would be less of a drag overall. We've seen improvement in Phoenix, although some of that is shown here toward the end of the year. Our California rent pushes have been great.

Also, in the same-store pool next year, you'll see some of those value-add assets that Marshall referred to, Parc North, Jones, some of those. They've rolled into the portfolio, and because we had bought them well after they had been developed, they entered the portfolio a little quicker than a typical development would.

And you'll see those add to the bottom line. So we feel good about the building blocks that are there. You look at the rents in the other markets. The headwind, when you really get down to it, would be leasing. And we feel good about it now, but if any particular market stumble or had an issue, that would certainly be pause for concern.

But apart from that, we feel fairly optimistic going into next year about maintaining the momentum and hopefully having maybe a little less drag..

And maybe the good news is I feel like I didn't answer your question very well. As I thought about it, it's like maybe - we're optimistic. I mean, I'm hopeful. I'm excited in 90 days. But we think next year should be another positive year for us, and maybe that's why I did such a bad job answering your question as to what our headwinds will be..

No, no. It wasn't a bad answer. I guess I'm just thinking kind of bigger picture. The stock's done very well this year, and I think part of that is an expectation acceleration. I just want to make sure I'm kind of thinking about it the right way, the building blocks up there. That 3.5% to 4% is kind of through out there.

I mean, without giving guidance, is that kind of, at least, the lower bound of that rational way to think given kind of the burn-off of some of the headwinds?.

We'll tell you in about six months how that looks, Craig.

How's that?.

Yes. I mean, I hate to - just because we're rolling up our original budget now and I hate - I like - honestly, we have not gotten that granular to see it. But I think you're right that the pieces are all there, that it should be a good year. But until we roll it up and get our arms around it, I hate to misspeak and be wrong..

And our next question comes from Rob Simone with Evercore ISI..

Just a quick one on the land banks. So you guys have about a - it looks like about 1.5 million of potential density in Houston. I was just wondering if Harvey and the flooding had any implications for your landholdings given that you're talking about kind of restarting development there.

And just in general, with your land bank, how do you feel about it? What are you kind of seeing on the ground in terms of your ability to procure land? Just trying to get your feelings as it relates to shallow bay industrial..

Okay. Maybe Houston is the first one. We went in and in the process now, post Harvey, kind of not knowing exactly, and still, I think that will be fascinating to watch the impact of Harvey kind of play out over the next couple of quarters and what that means to us and kind of means within Houston.

But we went in and are pulling permits for 4 buildings in 3 different parks - 3 of our different parks, really, with the thought being, with all the rebuilding, there's going to be a long line of permits in Harris County, and let's try to beat the rush into the city and have those ready to go because we think timing and delivery and having your contractors and everything lined up as much as you can will be very valuable if and when that kind of spike or as the demand kind of flows in.

So we have a good chance. We're hopeful to kind of work our way through our Houston land bank. I like that it separated into several different parts. Most of it is at World Houston, up by the airport, but we also have land - our Ten West Crossing, our West Road. It's spread out kind of within Katy, so that's good.

As I think about our land bank of - we wish we had some more in Atlanta today. Tampa's been a good development market. That's one where we've got Oak Creek VII, but we'd love a little more land in Tampa at this point in the cycle if we could find the right piece of land.

And also, as we think about our land bank, we have kind of an internal target of no more than 6% of our assets. We're below that today. And as I mentioned earlier, since we're - everybody's kind of paying full retail for land at this point in the cycle. Try to, whatever we buy, put it into production as quickly as possible.

Another kind of just statistic to throw at you on our land bank, about 1/4 of it is in Miami in terms of value and the gateway, which - we're excited about Dade County. We're right there on the turnpike in County Line Road.

And John Coleman and the team have done a good job of getting that land teed up to start development on it, really, first quarter, early next year. And as we work our way through that, that will take down the value of our land bank fairly quickly.

If you say what's one of our biggest challenges long term, it's, as we mentioned, finding land and keeping a good land bank..

And our next question comes from Rich Anderson with Mizuho Securities..

So your same-store guidance still, if you back into Houston, still implies like a negative 10% type number despite the fact that you've gotten better readings on lease percentage and everything that's been said on this call.

Could we - does that mean that come fourth quarter, there'll be like a true-up type of situation? Or does the occupancy and lease percentage statistics still imply that type of downside despite it being better than originally expected at the start of the year?.

I think, Rich, what might moderate that some is - thankfully, we had performed very well in Houston. So as we continue to deal with the roll-over and vacates this year, '16 was still a pretty high bar to measure against for '17. Going into '18, there will be a little bit - that bar will have been lowered a little bit as you compare '18 to '17.

So a combination of what we're comparing to combined with we feel like we'll perform better given our lower exposure, 7.5%, for the next 15 months, hopefully, those 2 factors together add up to a better year next year. So I would be disappointed if we had similar numbers next year.

I think given the way it's set up, those should be - we're counting on that being better next year..

Right. But I mean, you would have - if you implied same store in Houston to start the year was down 10% or 12% and that assumed 87% kind of trough occupancy, you never got there, but the bottom line same-store number didn't change. I mean, I'm all for being conservative. I just want to make sure I'm doing my math right.

And mainly, you're saying it's just a year-over-year comp discussion.

Is that correct?.

Maybe a two-part answer, Rich. Each quarter and kind of for the year, they're different pools. So we don't have a pool for the year if that make sense. I know everybody calculates it - or not everybody, but people often calculate it differently. So our quarterly pool will be different than our annual pool.

But looking - I guess, as Brent was talking, he gave me chance to look at Houston just for fourth quarter, and again, our projections are that it does roll positive. I know some of these leases we've got signed. There's one that started already. There's one that's targeted to start, Central Green, in November.

That's a long-term lease that we've gotten signed, that hasn't moved in since third quarter. So our Houston numbers, again, for just a quarter - I'm with Brent. I think next year will be more positive. And for fourth quarter, it actually looks better in Houston compared to 4Q of 2016..

And the last thing I would add to that, Rich, looking at the Houston supplemental page, in third quarter, we've already moderated some. We were - excluding termination fees, we're just down 4.5%. And then on a cash basis - that's on a straight line. Then on cash basis, just down 5%.

So third quarter, the numbers are a good bit lower than what we experienced earlier in the year..

Okay. And then the second question is just kind of looking at your pre-leased percentage in your development pipeline, 43%. Just looking back a year ago, that number was closer to 25%. I know the way you run your development pipeline is you kind of piggyback off of previous deals.

But is there anything about the higher lease percentage in your development pipeline that is just a protection mechanism? I know everything is going great, but bad things can sneak up on you.

So do you have any sort of elevated lease percentage that you're sort of targeting now versus a year ago?.

I'm glad up. Probably part of what drives that - it's a big asset for us. As I just kind of look at it, it's Chamberlain in Tucson where it's been a 20-year tenant that outgrew the building, and we're in the process and will deliver first quarter next year around 300,000-foot pre-leased building to them. So that, overall, helps our percentage.

I like our mechanism in the sense of, and maybe that's easier for me to say as I call myself a relatively newcomer, how it worked well in Houston, where we stopped development when we got nervous about the market.

And I liked how we stopped and have started Phoenix that we - looking back at Phoenix, for example, we were - our 2-year average occupancy through June of this year was just below 90%, and we got - and we moved. We're 95% - a little over 95% leased at the end of third quarter.

And so that allowed us, really, to kind of say, hey, the market's responding. It's not done at corporate, but as our leasing dictates, we can step on the gas and started building on our last Phoenix land sites. That's another market where we'd like some more land. We're under development but are out of land in Phoenix now.

So I think our internal mechanism where it's really market-driven based on vacancy, if I'm answering your question right, I think it's worked pretty well, looking at Houston and Phoenix, where we've had to tap the brakes in a couple markets. We haven't stepped on the gas in Houston but certainly considering it as we turn the corner into next year..

And our next question comes from Eric Frankel with Green Street Advisors..

This is Chris Darling. I'm filling in for Eric today. I was just hoping you could discuss the recent leasing activity in San Diego a little bit and what drove that triple-digit rent comp this quarter.

And also, are there any other opportunities where you can drive rents like that kind of maybe scattered throughout the portfolio anywhere?.

Yes. We're thrilled with San Diego. And some of those , depending on when it was done, at kind of the low point in the cycle, that - and we're south of town kind of that Otay Mesa, Chula Vista, our submarket. So it was an older lease that rolled, and John Travis did a great job, who's our Vice President over in San Diego, of really pushing rents.

And then when you look - it's nice - San Diego is good, but when I look at California year-to-date at 47%, basically, the California market, that's why we like them. Unfortunately, everybody likes them a lot, but it - and Florida markets, all of those, especially South Florida.

We're excited about developing in Miami, where it's - with that land constrained and with construction costs rising, we think rents will continue to bump up.

So we've got more leases rolling in those markets, but really, you hate - usually, you hate to see leases expire, but at this point in the cycle, with the rent growth we've seen, that's where our upside is on our FFO, where you kind of prove out that you had good assets that you acquired or built when the leases roll in time..

And our next question comes from Jamie Feldman with Bank of America..

Just a quick follow-up. We're hearing from some of your industrial peers about just the higher appetite for build-to-suits.

So can you talk about - do you think we'll start to see more of that in your portfolio as these markets tighten even more and kind of just want just very specific properties? And then also, what is your appetite for kind of a style creep to get into more of the big box, especially if it was to be more of a build-to-suit?.

We probably have not tried to - probably by market. Good question. Dallas - serving the Dallas market certainly is a bigger square footage than serving the Jacksonville market. So we've said a little bit of our tenants could be larger. It's typically served their larger market, so the larger the market, maybe the larger the tenant, if that makes sense.

We've had some style creep that way [indiscernible]. We try to react more to market than really target that. We have a couple of build-to-suits for pre-leases. We've got Chamberlain underway. We delivered a building for Universal Studios earlier this year.

What's been interesting - and we just kind of had our internal leasing call within the last week, and hearing that echoed in Tampa - and I was just in Charlotte last week. Brent and I were. The number of tenant expansions, talking to some of our asset managers, Vice President level, they were comparing it. It's like a Rubik's Cube.

If I can move this tenant here, I can get that expansion, that tenant accommodated and another. So we're certainly seeing, which I think is the best form of growth in our markets - it's not a zero-sum game when we're moving someone into our building and out of another. It's expansions, and we've seen more and more of those.

And I think, ultimately, that leads to more build-to-suits. And we've talked about - our developments went up this quarter for the year. We added another building in Charlotte, and that is really - we're three million square feet. We're 100% leased, and our asset manager - our best prospects are a couple of existing tenants.

So we're - probably, it will be a byproduct. We'll end up with a pre-lease or a build-to-suit, and we typically tend towards - maybe a subtle difference, but a build-to-suit sounds more tailored for that tenant. We like pre-leased.

We want to make sure it's a building we like and think a lot about what's the building going to be like when that tenant vacates. We try to pre-lease a building rather than customize one, and you end up with a needle in a haystack as you're trying to re-lease it..

And some of that, Jamie, I would just add that we will go bigger for a build-to-suit, obviously. That takes some of the leasing risk out, again, like Marshall said, assuming the building works long term for us. World Houston is a good example. Over the past year or 2, we've pursued some very large build-to-suits. We haven't won any of them yet.

But given part of that plays into land inventory, we have quite a bit of land inventory and the size and the ability to do a big box like that there.

So in order to work through that inventory is something we've entertained, and some of the other markets where we're buying for our multi-tenant type buildings, they just aren't configured to fit a 600,000 square foot box. It takes quite a large track of land.

But yes, we're hopeful that, that - if the markets stay tight, we're hopeful that, that avenue shows itself to us going into next year. It would be great..

So if you think about the - I don't know, I think you said $100 million or so for next year.

How much of that do you think would be greater than 300,000, 400,000 square feet, I mean, for [indiscernible]?.

So what's on our diagram or kind of initial back of the envelope? None. I mean, just a specific answer. Not to say we wouldn't do it, but right now, it's none..

And we have no more questions at this time..

Thanks, everyone, for your time. I appreciate your interest in EastGroup. Brent and I are certainly around and available for any follow-up questions people may have, and we look forward to seeing you here or I feel like tomorrow, probably, at NAREIT in Dallas. Take care..

Thank you..

This does conclude today's program. Thank you for your participation. You may disconnect at any time..