Eastgroup Properties Inc  (NYSE:EGP)
Q3 2018 Earnings Conference Call
Oct. 19, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone and welcome to the EastGroup Properties Third Quarter 2018 Earnings 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)

It is now my pleasure to turn the call over to Marshall Loeb, President and CEO.

Marshall A. Loeb -- President and Chief Executive Officer

Good morning, and thanks for calling in for our third quarter 2018 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call this morning. And since we'll make forward looking statements, we ask that you listen first to the following disclaimer.

Keena Frazier -- Director of Leasing Statistics

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.

Marshall A. Loeb -- President and Chief Executive Officer

Thanks, Keena (ph). Our team performed well this quarter. As a result, it was a strong quarter with a continuation of EastGroup's positive trends. Funds from operations came in ahead of guidance achieving an 8.3% increase compared to third quarter last year. This marks 22 consecutive quarters of higher FFO per share as compared to the prior-year quarter. We are especially pleased with third quarter FFO, given that equity raise year-to-date has far exceeded our original budget. The strength of the industrial market and our team has further demonstrated through a number of metrics such as another solid quarter of occupancy, same-store NOI results, and positive releasing spreads. As the statistics bear out, the current operating environment is allowing us to steadily increase rents and create value through ground-up development and value-add acquisitions.

At quarter-end, we were 97.1% leased and 95.7% occupied. This marks 21 consecutive quarters, or since third quarter 2013, where occupancy has been 95% or better, truly a long-term trend. Looking at our specific markets at quarter-end, several of our major markets, including Phoenix, Orlando, Los Angeles, San Francisco, and Charlotte were each 98% leased or better. And Houston, our largest market was 97% leased. While still our largest market, Houston has fallen from roughly 21% of NOI to our projected 14% at year-end. Supply, and specifically, shallow bay industrial supply remains in check. In this cycle, supply is predominantly institutionally controlled and as a result, deliveries remain disciplined and as a byproduct of the institutional control, it's largely focused on big box construction.

Our quarterly pool, same-property NOI growth was strong at 6.2% cash and 5% GAAP. We were pleased with average quarterly occupancy at 95.7%, up 50 basis points from third quarter 2017, while rent spreads continued their positive trend rising 5.6% cash and 16.6% GAAP respectively. Further, our year-to-date GAAP releasing spreads are 15.6% and when omitting Santa Barbara R&D space, they are 16.3%.

Given the intensely competitive and expensive acquisition market, we view our development program as an attractive, risk-adjusted path to create value. We effectively manage development risk as the majority of our developments are additional phases within an existing park. The average investment for our shallow bay business distribution buildings is below $12 million. And while our threshold is 150 basis points projected investment return premium over market cap rates, we've been averaging 200 basis points to 300 basis point premiums.

At September 30th, the development pipeline's projected return was 7.6%, whereas we estimate an upper 4% (ph) as market cap rate. During the third quarter, we began construction in four cities on properties totaling 670,000 square feet with a total projected investment of $53 million. Coming out of the pipeline, we transferred 200% leased buildings totaling 286,000 square feet. Demonstrating the strength we're seeing in the market, our development pipeline and value-add percent leased rose from 27% to 43% even with the five new additions and two 100% leased buildings transferring out. As of September 30, our development pipeline and value-add properties consisted of 20 projects in 11 cities containing 2.5 million square feet with a projected cost of $220 million. And for 2018, we originally projected $120 million in starts. Today, that forecast is a $145 million.

Additionally, we have several projects depending weather (ph) and obtaining permits, will either commence late 2018 or create a solid start for 2019. One of the things I'm excited about has been this greater number of development markets. This diversity reduces our risk and continues enhancing our ability to grow the pipeline. During the quarter, we acquired Allen Station, a two building 227,000 (ph) square foot, 87% leased property in Allen, Texas and Northeast Dallas suburb for $25 million. We also acquired the 115,000 square foot Siempre Viva Center in San Diego for $14 million. This property which became vacant post closing is now 100% leased. And on the disposition front, we closed the sale of the 50 plus-year-old, a 125,000 square foot, 35th Avenue Distribution Center in Southwest Phoenix were roughly $8 million or slightly sub 6% (ph) cap rate.

Brent will now review a variety of financial topics, including our updated guidance.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Good morning. We continue to see positive results due to the strong overall performance of our portfolio. FFO per share for the quarter exceeded the upper end of our guidance range of $1.17 compared to $1.08 for the same quarter last year, an increase of 8.3%. The outperformance was primarily driven by terrific leasing results in both the operating and development programs, which pushed occupancy and net operating income above our budget range. Notably all seven projects listed in the lease-up phase of the development and value-add pipeline experienced additional leasing success with five becoming 100% leased.

Other positive contributors for the quarter were lower interest and G&A expense. Our balance sheet is strong and flexible and our financial ratios continue to trend in a positive direction. Our debt-to-total market capitalization was 24% at quarter-end and our adjusted debt-to-pro forma EBITDA ratio, which normalizes the impact of acquisitions in active development was 4.65, down from an already healthy 5.44 at December 31.

From a capital perspective, we issued 31 million of common stock under our continuous equity program at an average price of $96.56 per share. That increases our year-to-date gross equity raise to a record high of $114 million.

FFO guidance for the fourth quarter of 2018 is estimated to be in the range of $1.17 to $1.19 per share and $4.66 to $4.68 for the year. Those midpoints represent an increase of 3.5% and 8.9% compared to the prior year respectively, excluding the involuntary conversion accounting gain recorded earlier in the year. The increase in the guidance midpoint for the year of $0.06 is a result of a $0.03 outperformance in the third quarter, driven by successful leasing results. This activity then reduced leasing risk for the remainder of the year, increasing our budget average month-end occupancy for the fourth quarter by 120 basis points to 96.3% and raised our estimated occupancy for the year about 40 basis points to 96%. As a result, we increased the midpoint of our same-property guidance from 3.2% to 3.9% on a GAAP basis and a 4.3% on a cash basis.

You'll also notice that we enhanced our same-store presentation in both our guidance table and supplemental package to provide clarity among the various metrics. We hope you will find these changes informative and useful. Other notable guidance assumption revisions for 2018 include increasing our estimated common stock issuances by 34 million to 144 million, and as a result we deferred our next budgeted debt closing to early first quarter of 2019.

In summary, our financial metrics and operating results continue to be some of the best we have experienced and we anticipate that momentum continuing into 2019.

Now, Marshall will make some final comments.

Marshall A. Loeb -- President and Chief Executive Officer

Thanks, Brent. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in, upgrading and geographically diversifying our portfolio. As we pursue these opportunities, we're also committed to maintaining a strong, healthy balance sheet with improving metrics as demonstrated by our year-to-date equity issuance. We view the combination of pursuing opportunities, while continually improving our balance sheet as an effective strategy to manage risk, while capitalizing on a strong operating environment. The mix of our operating strategy, our team and our markets has us optimistic about the future.

And now, we'd be happy to open up and take any questions you may have.

Questions and Answers:

Operator

(Operator Instructions) And we will take our first question from Jamie Feldman. Please go ahead, your line is open.

James Feldman -- BofA Merrill Lynch -- Analyst

Great, thank you and good morning.

Marshall A. Loeb -- President and Chief Executive Officer

Good morning.

James Feldman -- BofA Merrill Lynch -- Analyst

I was hoping you guys could talk a little bit about -- just more about the types of tenants that are leasing space. I know you had mentioned, you are a little bit protected from the big box construction, but business sounds like it was better than you thought it would be. Can you just talk about the specific markets and the specific types of tenants and uses that are driving this?

Marshall A. Loeb -- President and Chief Executive Officer

Good question, and good morning. It's -- what we liked about this quarter, what got us excited is, it was very broad based. We kept hearing over the summer and probably mentioned even a little bit in second quarter that what we were hearing from our guys and the brokers we work with that everybody was having a busier than normal summer. And thankfully, that activity turned -- you know sometimes you have that, it won't turn into a lease, but thankfully they turned into leases. And it's been pretty broad based if we can put it into two different buckets. What's nice about this economy is, our traditional businesses, whether it's homebuilding or construction, plumbing, all of those tenants we continue to see more and more expansions within our portfolio. That's what helped us kick off one of the Houston developments that we have under way, for example. And then, within that -- I know those can be last mile of last mile for the HVAC guy to get two homes in North Atlanta or Northeast Dallas, but also last mile, we've signed a few leases with Wayfarer and have them as a prospect of, kind of, I'd say a material prospect within our development pipeline. Whether that happens or not, time will tell. We're talking to Amazon, really as they continue to roll out their last mile, one -- hope not violating them. We've seen Lowe's is rolling a program where you order your appliances online and you can either probably could pick it up, or probably more likely deliver to your home. We signed a lease with them, which was one of their first locations as I understand it under this program and are hopefully close to a lease on a second location. So it's been pretty broad-based medical and kind of pharmaceutical, Arizona Nutritional supplements has jumped up on our Top 10 list, it's a tenant we've had for a while, but they've expanded their private manufacturer distributor of supplements, we've seen online pharmacy fulfillment grow, those seem to be mainly in Arizona and Florida. So it's been pretty broad-based tenant wise and this quarter what we'd liked as we rolled up the numbers I was curious, was if one or two markets say Dallas, Orlando that really drove our beat, but it was every market was a little bit ahead and when we added those up, all of a sudden we were $0.03 ahead for the quarter and that momentum was carrying over into fourth quarter is like what we're seeing.

James Feldman -- BofA Merrill Lynch -- Analyst

Okay, thanks, that's helpful. And then as you think about the development opportunities, looking ahead to next year, do you think you could do more starts in 2019 than 2018?

Marshall A. Loeb -- President and Chief Executive Officer

Yes, my crystal ball has been known to be wrong is often at least as it's right. But as I mentioned, we could potentially beat our $145 million, there some starts that for example the Houston, the pre-lease that we have there, that's not in our $145 million, but the lease is signed, so we are committed to this building at World Houston, which we're excited about. Our $145 million could grow still in 2018 but if that doesn't grow we'll really have a good running start through for example our development pipeline, the CreekView project we're basically out of space and that park and Dallas are hurrying to catch up with demand little bit and the same thing with Steele Creek and Charlotte and then Gateway down in Miami we've lease space, we've got the balance of the building accounted for with leases out. So all of those, some could still fall into this year, but if not, it makes me comfortable that we could meet or exceed our $145 million in 2019 and my huge assumption and all that is just this operating environment, the economy, it doesn't need to improve, but if it stays where it is today or doesn't materially get worse, we could meet or exceed it next year.

James Feldman -- BofA Merrill Lynch -- Analyst

Okay, great. Thank you.

Marshall A. Loeb -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And we will take our next question from Alexander Goldfarb with Sandler O'Neill. Please go ahead, your line is open.

Alexander Goldfarb -- Sandler O'Neill & Partners -- Analyst

Oh, hey, thank you. Good morning down there. I have two questions, first on Mattress Firm. If you could just give us an update on where you think your expectations for that tenant, if you think they're staying or going and then if they are departing, what you think the downtime or the impact would be?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Yes, good morning this is Brent, I would say with Mattress Firm, their current at all five of our locations and we received no closure notice thus far. And in fact, we've had dialogue with them about their existing leases, that's still somewhat of a fluid situation but I would point out that Mattress Firm only equates to 1% of our annual revenue, and that's actually declining over time as we continue to bring properties into the operating portfolio. And our Top 10 as a whole is only just slightly over 8%, which I think is the best if not the best, one of the best in the industrial sector in terms of diversity. So the 1%, we're keeping an eye on it for the most part their rents are less than market at each of those locations there in new buildings, the average building age is 6.5 years in those five locations, so we are in contact with them and monitoring. From what we're seeing and anticipating again, we have just the distribution centers, they've announced, I think it's in the neighborhood of 400 retail closure so far and that may go as high as 700 we understand, but in our markets they haven't closed more than just a few locations, which leads us to believe they are going to continue to need the distribution. So the good news, they are moving quickly, I think they would like to have a forward plan in place for the end of the year. And so we're going to stay on top of it but right now we're cautiously optimistic about what the end result will be, but time will tell.

Alexander Goldfarb -- Sandler O'Neill & Partners -- Analyst

Okay and then the second question is as we think about next year, clearly, the momentum that you guys have in the third quarter and fourth quarter is pretty strong. But Brent, as we think about the properties and lease-up, how much are those properties on the lease-up schedule are contributing in the third quarter versus those that are yet to deliver meaning, yet to be in the pipeline, so the $0.03 beat this quarter to $0.02 beat next quarter, these lease up ones will be additive to that. I'm just trying to break out what's already in the run rate NOI versus what would be incremental to?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Yes, it's page 9 of our supplemental where it's listed development value add properties. There is no leasing in the third quarter, certainly attributable to any other properties in lease-up and they would be, I'm looking at anticipated conversion date, there will be minor impact in the fourth quarter, most of the impact doesn't occur until you look at page 10, those are the properties that have transferred into the portfolio. It isn't to their end and churning that they actually contribute, so none of the properties in current lease-up contributed other than the two properties, you see we had two-third quarter roll-ins carrying Kyrene 202 and Steele Creek, those two might have nominal impact to discuss they did roll in third quarter. But as we point out that we've got over somewhere $210 million, $220 million between lease-up and under construction and none of that's come through to the bottom line here from an earnings standpoint.

Marshall A. Loeb -- President and Chief Executive Officer

And I'll add. Some of the things that helped is it just last year we were $120 million in starts and so that's what's helped and then we've called our value add kind of platform, our shadow pipeline, it's got to about $150 million over the last call it 2.5 years and all that's pretty much stabilized other than a project we acquired in Atlanta at the very end of last year. So all that is besides the market and the ability to simply raise rents. I think that as we can as we view of our development pipeline as we stamp out building after building that is what's pushing our NAV and also helping our earnings.

Alexander Goldfarb -- Sandler O'Neill & Partners -- Analyst

Okay. Marshall, appreciate it. Thank you.

Marshall A. Loeb -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And we will take our next question from John Guinee with Stifel. Please go ahead, your line open.

John Guinee -- Stifel Nicolaus -- Analyst

Great, thank you. A couple of little cleanup questions. First, what do you expect to happen to G&A in 2019 because of the lease accounting rules and capitalizing versus expensing your in-house leasing people? Second, can you talk a little bit about your 12.5% dividend increase and the ability to maintain that? And then third, are your very attractive return on costs based on the fact that you've got your land at a really low basis or that's just the market return on cost in your markets?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

I'll take the first two and maybe remind Marshall what the third is when we get there, but on the 2019 G&A, we do finally have what we feel is a solid run rate, remember last year we had conversion to the straight line, bright line testing for compensation that calls last year to be heavier, but our $13.8 million that we are budgeting for this year or $13.6 million, we view that they will just be your typical increase year-over-year, nothing significant and we're only considering about 175,000 based on the last year or two of impact from the changes in having to expense some lease-related cost. As a reminder, we have no in-house leasing personnel. So we haven't had a big internal overhead G&A allocation or capital offset for those services. For us it will primarily just be a third party attorney that we use that reviews the majority of our leases. So we think it'll be a pretty minimal impact for us. As far as the 12.5% increase in the dividend, our philosophy is that our cheapest capital is a capital we don't have to expend, the good news there is it was just simply driven by our significant steady growth, especially over the last year or two. And last year we were fortunate to kind of scrub just barely above the number, but that all led to the 12.5% increase. We certainly view that dividend can be maintained into the next year, but certainly not that dividend growth rate. We think that would moderate and certainly not be at the level of 12.5%, but we certainly think that given the positive momentum into 2019, that we think that dividend will certainly be maintainable. I'll let Marshall touch on the reason we have such good returns in the development pipeline.

Marshall A. Loeb -- President and Chief Executive Officer

And John part of this I'll say is I can only speak factual for what we do and then a little bit since we don't build big box just was -- kind of a second half of my question is maybe a little more speculative. But I think our guys do a great job of finding land at reasonable prices, really the cheap land we bought in the last downturn, we've pretty much burned through. So everything, our goal is now as soon as we acquire land, to put it into production and (inaudible) as we build out our park, and I think we've got shared driveway, shared retention within our park, so there's maybe some economies of scale as compared to a stand-alone big box building. Our office content, while not higher, probably 10% to 20% is higher than a big box that would be maybe 5%. So that -- usually as we put our dollars in and also the tenants usually put their own dollars into that build-out that pushes the rents a little higher and probably helps our return. And then third part, usually if you're doing a large, say a 700,000 foot lease with a Whirlpool, Target, WalMart, they know the value. They've got their own real estate department, they've got a broker or brokerage team and several people, if you pick say South Dallas or South Atlanta, there is usually pretty intense competition for those type of tenants. They know the values they bring when they sign a lease. So those are -- I feel those as awfully out in advance and heavily shopped and tough negotiations where a lot of times ours is someone looking and they need space fairly quickly. I think our tenants and the tenant rep broker certainly negotiate hard, but I -- I like what I used to say. I like where we fit in the food chain. It's not as intensely competitive, it's less of a commodity and so our cost within their distribution system is pretty low and the spaces are a lower component. So I think it gives us the ability to price a little better versus an 800,000 foot building on the far left side of Phoenix, for example.

John Guinee -- Stifel Nicolaus -- Analyst

So you like your business model better than the big box model?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

No -- yeah, I like the guys who do. (inaudible) I'm not saying anything, they make money too. But I like where we are. I'm glad we do what not everybody else is doing. Maybe another way of -- a better way to say it.

Marshall A. Loeb -- President and Chief Executive Officer

It's a big tent, John.

John Guinee -- Stifel Nicolaus -- Analyst

All right, thanks a lot, guys. Nice job.

Operator

And our next question will come from Rich Anderson with Mizuho Securities. Please go ahead, your line is open.

Rich Anderson -- Mizuho Securities Co., Ltd. -- Analyst

Thanks, good morning team.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Good morning.

Marshall A. Loeb -- President and Chief Executive Officer

Good morning.

Rich Anderson -- Mizuho Securities Co., Ltd. -- Analyst

So, Brent or whoever, can you hazard a guess the utilization of the ATM to do a lot of your funding? How much is that impacting what you could otherwise have achieved from an FFO standpoint? Is there a number of dilution that you're willing to take on because you're going that route with your stock trading well above NAV?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Yes. It's a good question, Rich. When we look at it, and actually it's a tricky computation, because as you move different parts and the way we look at it at some point beyond this near-term, you're going to go -- or need either equity or debt. And so we just view what -- the premium to the stock, the value that we perceive as being north of an NAV, certainly north of an NAV consensus, that we view that as attractive. And so we've been -- we've used that as a mechanism to raise equity in the last couple of years more so than normal. But we've also seen periods of time where that equity is not available and we're certainly well positioned then to switch gears and go the debt route being only 24% debt-to-total market cap that certainly weren't there. So we have these internal discussions probably once a week about what is enough and what's not too much, and Marshall always reminds me, he wasn't a hoarder until he likes our stock price, and then he becomes a hoarder. So that is something we monitor and we feel like the good news is, we have good uses for all this capital, we are putting money to work at an average of 7.5 to an 8 (ph) and that volume has picked up and the leasing has been terrific. So it's a little bit of a dance between the two. But my guess is going into '19, if the stock price maintains its healthy course, we will continue to certainly utilize ATM as a method of proceeds.

Rich Anderson -- Mizuho Securities Co., Ltd. -- Analyst

But in terms of -- its -- is it almost the cost of debt versus the cost of equity almost on top of one another in the sense that it's not creating a whole lot of dilution for you whichever direction you go?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Yeah, in our internal calculations, give or take, it's probably within 30 basis points, which for us is -- that is historically tied if that's been typically the debts of good bids (ph), less expensive than the equity. But yes, it's in the small category and that certainly avails the ATM to use too, because it's not as expensive to do as it sometimes can be.

Marshall A. Loeb -- President and Chief Executive Officer

I agree with Brent. Another comment a few years ago, we had looked in kind of some of the attributes of the -- not simply industrial REITs, we admired where they had strong balance sheet. So, we have said that's of the blue chip REITs. That was one common trait we could imitate. So we like having a strong balance sheet and then we've had internal debates. We're certainly not seeing it, but everybody says this real estate cycle has lasted so long. You are near the end and the beginning, and we could debate that the balance of the day, but we've said, I like the combination of a healthy development pipeline as long as the market supporting it. Let's kind of keep delivering and completing the next building, but it makes me feel better that at the same time we're -- if the market allows us, that we can keep deleveraging the balance sheet. I think those two risk offset themselves in my mind a little bit. Our balance sheet is stronger and as we grow our development pipeline, hopefully, it's giving us that much more safety. And hopefully, as our balance sheet gets stronger, I'd argue we should trade at a higher multiple versus if we were 45% leased with a large portion of that in floating rate debt, for example.

Rich Anderson -- Mizuho Securities Co., Ltd. -- Analyst

Right, so you almost answered my next question, but I mean, part of the risk I think here is meeting expectation is the new miss in your space and maybe largely in your stock. And -- so market is kind of pricing in these beat and raise type of quarters, how much are you perhaps planning for the inevitable point where performance perhaps fall short of expectations? Is this -- and what you're perhaps doing today is not so much a present tense consideration, but considering what could be happening down the road, say two years, three years from now, you know the market is chirping about a possible recession in some periods in the next couple of years, are you -- when you think about all the things that you're doing whether it's capital raising or investing or whatever it is, is there an eye? Is there a very significant eye toward the next couple of years, or are you thinking more, well, the market giving me this now, so I'm going to take it? I'm wondering how the longer term is influencing you.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Yeah, we would certainly think longer term. I mean as you say it, I was kind of thinking of you know, Keith McKey, our prior CFO, I said take equity when you can, be opportunistic. It won't always be there when you need it. And then right now, we do need it with our development pipeline and value-add. So we like it from that perspective and I guess it always -- you're not the only person that's mentioned to us that we have our guidance and the market expects us to beat it, whatever we say and so I think a beat and raise, if that -- if that's expected of us, gosh, that's the best compliment we could get as a company. I hope that, that market thinks we are -- I'd like to be viewed more conservative than aggressive and if people think we're going to outperform, then I guess we'll hate the quarter when we miss it, but I am proud of the team and I am happy with that reputation. If we can earn it, then people expect you to be there and improve. And if we -- you know most people don't regret. At some point, it is a cyclical business, so it will slow down and I remember having a discussion with our Board, two-and-a-half years ago in our annual planning meeting that they thought the cycle was ending then. And thankfully, the market will let us know when it's over. Thankfully, we didn't pull our horns in then, for example.

Marshall A. Loeb -- President and Chief Executive Officer

So, we will --

Rich Anderson -- Mizuho Securities Co., Ltd. -- Analyst

Okay.

Marshall A. Loeb -- President and Chief Executive Officer

We will rather have the better balance sheet and we think a couple of years down the road, but other than worry about it, I don't know much more we can do about it.

Rich Anderson -- Mizuho Securities Co., Ltd. -- Analyst

Yes, agreed. Thanks very much.

Marshall A. Loeb -- President and Chief Executive Officer

Sure, thank you.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Thank you. Thanks, Rich.

Operator

Thank you. And our next question will come from Bill Crow with Raymond James. Please go ahead, your line is open.

William Crow -- Raymond James & Associates, Inc. -- Analyst

Hey, good morning. A question for you, we'd talked a lot in the past about the inflation in construction cost. I'm just wondering if -- for whatever reason if construction cost were to turn around and fall 15% or 20%, how long would it take for the market to kind of get out of balance from a supply demand perspective? Are there are a lot of projects out there that might go ahead if it was cheaper to build that would throw us out of whack?

Marshall A. Loeb -- President and Chief Executive Officer

Good. That's good. I like that thinking on it, interesting thing. We struggle so hard -- yeah, this is Marshall to find land that we think even when construction prices were low, supply didn't get out of balance. So if you said what -- besides Rich's question, down the road or downturn, what really keeps us up at night is finding the next land sites to continue building our park. So we are not -- on construction pricing, I like your optimism, we don't see you talking to outsiders, the shortage in workers and what we're seeing in steel prices, that construction went up probably 10% to 20% fairly quickly and has been more moderate. But we've even heard stories in one of our markets, for example, that the people are so short on workers that they were -- a concrete company was showing up at our job site trying to hire the workers away while they were pouring the slabs and things like that, and you've seen things that we watch where Amazon raised their minimum wage for employees. We've heard that FedEx is doing kind of several different things to kind of retain their employees as well. So we don't think unfortunately that the labor shortage is -- it's here and may last for a while. But thankfully our -- what we view is our market -- we are full and our markets are pretty full. And with rents -- we're hoping rents keep pace with inflation basically is what will be my best guess.

William Crow -- Raymond James & Associates, Inc. -- Analyst

So, Marshall you are thinking that cost inflation has moderated from -- you quoted, 10% to 20%. Are we run running 5%, 6% a year you think now?

Marshall A. Loeb -- President and Chief Executive Officer

Maybe a little bit. I guess you're talking to guys in the field. Now they are for a while every pro forma -- one thing and -- what Reid, who runs our Texas Group, said the pro forma I said earlier in the week I had -- I thought was conservative and three days later we got bids in and now I'm learning that it's not. And they are saying prices are more moderate. So may be that 3% to 5%, and again pending how trade talks go with China and everything else, we were happy to see a trade agreement get resolved with Mexico. And again -- (inaudible) details with the auto workers where we're hearing auto components may need to contain more US-based product that, that probably benefits us being there, so many auto plants and things like that. But we -- we are happy to hear that construction prices, although they spiked have kind of leveled out a little bit. And I hope that holds.

William Crow -- Raymond James & Associates, Inc. -- Analyst

Great. That's it from me. Thank you.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And our next question will come from Manny Korchman with Citi. Please go ahead, your line is open.

Emmanuel Korchman -- Citigroup -- Analyst

Hey, good morning everyone. Marshall, if we go back to the conversations you're having with tenants, how many of those conversations are leading you to think about markets you're not in or is the conversation more focused on land or a building you have and presenting it to a batch of tenants?

Marshall A. Loeb -- President and Chief Executive Officer

It's -- primarily the latter. When we look at what opportunities can we find, we like the markets and within our existing markets, we do spend time looking at new markets even if we pass. We feel like we're -- we're learning about that market, and we've also said, kind of maybe touching earlier, if there's a downturn. I'll use one market we've kicked tires in for a while and probably should have entered years ago Nashville, Tennessee. It's fits in our footprint, it's been a great economy, it's hard for us to think we can jump in there today and add a lot of value. So we do look at markets that by and large -- maybe two-part, by and large, we think of how can we accommodate our tenants' growth and the opportunities we're seeing within Orlando where we're running low on land today, or continue to find land in South Florida or Dallas or things like that. The other trend we're seeing more and more, it probably will fit more of the big box tenants, but we are seeing it in our smaller shallow bay buildings is, we're running into the same tenants and the same brokers-over and over again in different markets, be it a Wayfarer or a Lowe's or Amazon where -- or even some HVAC contractors where we are working on having a conforming lease and accommodating them makes it easy for them to lease space in Orlando and go to San Antonio, and maybe to LA as well. So we are seeing more tenant and broker overlap than we probably saw a few years ago. And that potentially could lead us to a new market, but we really at least like our footprint today and are hesitant to enter new markets especially probably later in the cycle than early.

Emmanuel Korchman -- Citigroup -- Analyst

Thanks. And then if we think about the transaction or acquisition environment, what would you need to change in order to increase those volumes? Is a matter of losing deals based on price, is it -- that the types of assets for your (inaudible) and like aren't available, where do -- where do things sort of sit?

Marshall A. Loeb -- President and Chief Executive Officer

Yeah, good question. We see properties we like. Well, it's we just can't afford them. I mean, that's at least passed on -- you know how large number of deals in California and for example, and all of South Florida, we just will make it first, second, maybe the third round, which is really the buyer interview. And we -- we try to set a ceiling before we start bidding because once you start bidding everybody and me included, you get emotional about it. You get excited about the properties. So they are -- they are out there. It is -- CBRE refers to it the wall of capital which really comes from all over the globe, there's a lot of people that like US industrial real estate right now. And I'm glad we built it and we are better off finding, for example, I'll stick with our -- the property we just bought in San -- South San Diego. We bought it, we expanded two tenants, it's fully leased now and we're in the low-6s (ph), we are in the same park buildings which we -- we looked at are going to trade still 5 (ph). So we could buy and we're just trying to -- we watch our cost of capital and the growth that we think we're going to have on those leases. And as usually -- everybody's got a checkbook and there's someone that's willing to outbid us that usually lost the last deal or two, and we go to bat a lot and we don't get many hits basically.

Emmanuel Korchman -- Citigroup -- Analyst

Thanks, Marshall.

Marshall A. Loeb -- President and Chief Executive Officer

Sure. You're welcome.

Operator

Thank you. And our next question will come from Craig Mailman with KeyBanc Capital. Please go ahead.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hi, guys. Marshall, maybe just a follow-up on the land conversation you kind of threw up. Orlando is one where you guys are looking for more inventory and just looking at the list of markets you have, I mean Atlanta is kind of running low here? Can you just give us a sense, do you have anything in the tail-end in some of these markets? I mean is there even really any land on the market that fits kind of what you guys want to do in the locations you want to do? I'm just trying to get a sense of, you know, we're talking about development starts into next year just to be able to do it on a broad base, just wanted to know what the probability of that is given land inventory?

Marshall A. Loeb -- President and Chief Executive Officer

Sure. We feel, at least near term, pretty good that we can keep our development starts again. If the economy hangs in there, we can maintain the run rate. If you said what markets are you (inaudible) a little bit like Orlando, as we mentioned, where Alvin (ph) and John Coleman and Chris they have a few sites where we're pursuing nothing where they are -- you know, they are to close or announce. Tampa is another market that we've been in Tampa 20 plus years we really like, but where we don't have developable land there, and it's a balance. You don't want to get too much land and then you have to carry it and your yields go down. Atlanta, given the value-add properties we bought there and I mentioned, not everything -- we had a good quarter, proud of the team, there is always a place or two like Atlanta. We've chased a lot of deals and have landed (ph) them. So we'd like to finish our value-add project in Atlanta before reloading with the next batch of land. So it's five in Atlanta, but we've seen a couple of sites we've looked down and that was maybe I'll tie it to the prior question. One of the things we liked about when we entered Atlanta, I was shocked -- this was a few years ago when we sat down with brokers, how little land they could find us within a market as big as Atlanta or how hard it is in Dallas. So that makes us feel good about supply, which is great, but it worries us about ability to grow going forward. We've -- you know those are probably the markets where we're liked today, those three.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful. Then just as we are later cycle now, just curious on your thoughts internally about kind of caps on development. I know the Company has gotten bigger, balance sheet is in great shape. I'm just curious how much -- how big the pipeline you want to be carrying is at this point?

Marshall A. Loeb -- President and Chief Executive Officer

I guess it -- yeah, good question. A lot of it depends where in the pipeline. That there is a -- looking at our pipeline now there's a handful of deals that are all 100% leased. So again, that's pretty atypical, but once we hit there, I worry less about those. I guess you still worry about all of your kids, but worry less about those. We typically target of about 6% of our assets as kind of an informal of what we want to have at least in terms of land on the balance sheet. And then we also track what -- between value-add and construction and simply land of what is that as a percent of our balance sheet. So obviously, that's a higher number, but when they get closer to coming out of the pipeline -- and as they are leasing, or a pre-leased building what several of the starts we had this quarter, at the bottom of our development pipeline all had a fair amount of pre-leasing we feel a little bit better, so it's up, I'm not giving you a very exact number because maybe it's not an exact science, balancing act, but we, I'm sure there is an absolute number, $220 million in our pipeline that's about as big as it's ever gotten but a several of these are going to roll out in the next 30 to 45 days too.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

It's helpful. And then just lastly, you guys clearly had a great quarter on the leasing front. Just curious, the guidance you gave last quarter seemed like it assumes some move-outs I mean, did those move-outs happen and you guys as back-filled way quicker than you thought, the tenants that you have a higher probability of leaving stay, can you kind of give us some context of was it more people just realized they couldn't leave and so they stayed or is it just really quick back-fills on some of the things that did roll out?

Marshall A. Loeb -- President and Chief Executive Officer

Kind of a yes is the answer. It was little of all, some tenants that we -- again we usually don't project 90% retention rate, we typically average around 70% historically. So some of the tenants were nearly budgeted people to leave because we didn't want to budget enough, 90% of our tenants staying. So some state that we had budgeted vacating, some held over longer. So there were some of those were the tenants -- few of those are still there, where it doesn't mean they are there permanently but hey we're few months beyond your lease expiration and they haven't worked out a deal or stayed to either stay or leave and in those cases we'll collect a premium rent typically on those and then, in some markets something like in Tucson where we relocated, built a new building for Chamberlain, moved amount of 160,000 feet into a new building, Mike Sacco was able to back-fill that with one existing tenant, one new tenant way ahead of what we found in a small alike Tucson, but it's a smaller market and so now we're back to 100% leased in Tucson. So that was a nice budget pickup in that market for example. Brent anything you want to add.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Basically like Marshall said, it was well spread out and I'd also point out that our development pipeline that the leasing and getting permits in little faster than we had budgeted there also was part of the help. So it was broad based, leasing combined with a few tenants staying that we have budgeted to move out, but it was really across the Board.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

If I could just sneak one last one I mean as you guys are budgeting people to move out, is it because they are outgrowing the space in your opinion or you don't think that they want to pay the rents that you're going to roll them up to? Just curious kind of as you guys think about that space by space what's the biggest driver at this point of the cycle, kind of utilization or cost?

Marshall A. Loeb -- President and Chief Executive Officer

It's typically more on cost, I mean sometimes you will hear a tenant bought their own building or they made a decision, sometimes it is simply those are the ones that make me feel better, it is an assumption, one of our asset managers Craig don't budget, you're going to renew all 10 tenants, so even if you think that somebody is going to surprise you and decide to leave but a lot of times we've just had a conversation about a tenant in California, for example there in sticker shock over their renewal rate but the renewal rate we're proposing in that market and most everybody we deal with as a tenant rep broker probably thankfully at this point, the cycles that educates them of they may be a little bit in shock on the rents but there's nowhere else for them to go and incur the moving costs that and so it's typically that people have out grown our building which is one of the other things we really like about building the park settings, a lot of our new development comes as a way to accommodate and we've got existing tenants they paid the rent for a while and thankfully their business is good like I mentioned, Arizona Nutritional supplements ANS earlier, there in a building and they filled up a new development we had thankfully. So if we can move people from building three to building eight for example, that's one of the beauties of building a park.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great, thanks guys.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And our next question will come from Eric Frankel with Green Street Advisors, please go ahead.

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. First up, Brent, thanks for the clarified disclosure on same store reporting, I think that should be helpful to everybody. First question, I know you've diluted your exposure to Houston, but maybe you can just talk about leasing trends a little bit there, it seems that releasing spreads has been a little bit choppy you've had some good quarters and not so good quarters and this quarter seems to be pretty healthy.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Sure, I'll talk, and thanks for the comment on same-store and I remember our conversation from a quarter ago, as I'm glad that's helpful and Houston is certainly recovering, we said a couple of kind of big picture comment and then more detail on leasing. We started the year hoping or really expecting to start eight building in Houston and we did and that one is a 100% leased and then we had an existing tenant expand and extend their lease and that kicked off our second building at Ten West Crossing and now we've gotten the building, which we haven't broken ground on with the pre-lease. So all of a sudden the Houston economy has picked up with all and just the economy in general, they've added 110,000 new jobs in the past 12 months, which has to put it Number 1 or 2 probably them and Dallas in the country over the last year.

Our leasing spreads, the market is recovering there, the rents are not back to their peak in Houston, but they are certainly moving in that direction, it was a good quarter and really last quarter we stretched to, it was a large building at World Houston to make the deal a single-tenant building and so it was probably a little bit of an arbitrary kind of odd data point that pushed it down, that much probably shows a little bit worse than the market, but the market is still not back to its peak in Houston, but it's 5.1% vacant and recovering pretty nicely.

So we're happy with Houston and again we're certainly cognizant of having been at 21% and then in the penalty box on Houston a few years ago and so we're glad to see it roll down to 15% as I mentioned the three starts I wouldn't want you or anyone on the call as we if you took our portfolio, annualized it and really stabilize the development portfolio, that actually gets and so you're getting a year down the road or little more, gets Houston down below 14% of our NOI.

So we like the market a lot, we're good historically Brent and Kevin and Reid and the team have created a lot of value in Houston over the years, but we'd like that we're able to play offense there and continue to shrink, it is a kind of -- as a portfolio allocation more than anything, indicative of the market.

Eric Frankel -- Green Street Advisors -- Analyst

Okay, thank you. It's a small question, I know you obviously are going to introduce guides next quarter. Maybe you could talk, I was wondering, though, if you could talk about any plans given where asset prices are to maybe clean up the portfolio a little bit more and add some more non-core assets and maybe can also added for commentary on how Santa Barbara is doing especially with the lease roll there next year?

Marshall A. Loeb -- President and Chief Executive Officer

Yes, Santa Barbara, we pretty much addressed the large vacancy we had a year ago that 51,000ft, 44,000ft of it has now been leased thankfully and so we've got one 7,000 foot space and are we're talking to a couple of prospects have a prospect that we will see hopefully will fill in and we have a larger renewal there next year another lease that rolls at the end of this year.

So we'll see how, it's a little bit early to know I hope we can renew the tenant, the market is reasonably healthy and you're right in terms of non-core assets, we bought our partner out of two other buildings last year reworked a little bit of the partnership there, that is one over time given that it's two story R&D buildings and in the market they've good assets, but we'd like to reduce our exposure in Santa Barbara over time and in some other ones, we've got another asset or two lined up that we'd like to sell next year.

Eric Frankel -- Green Street Advisors -- Analyst

Okay, thanks just final question regarding some of the last mile requirements that seemed to picking up steam, are you seeing any sort of automation or robotics in those buildings, in terms of their user or is it still fairly manual ?

Marshall A. Loeb -- President and Chief Executive Officer

I'm sure more than we've seen certainly like the pharmaceutical kind of online pharmacy, there's all in a lot of technology and a lot of investment in that kind of in the medical, we're seeing more HVAC warehouse, things like that and maybe that's part of our geography and I think it's coming, but we're not heavy -- heavy there yet and then probably last mile is certainly not the automation technology the big box has, but it's with the labor shortages and all that it's coming our way but you can overcome some, we don't think any of buildings are obsolete But you can overcome obsolescence with location on a lot of those properties too.

Eric Frankel -- Green Street Advisors -- Analyst

Okay, thank you. That's it from me.

Marshall A. Loeb -- President and Chief Executive Officer

Sure.

Operator

Thank you. And our next question will come from Jason Green with Evercore. Please go ahead.

Jason Green -- Evercore ISI -- Analyst

Good morning, you guys have talked about kind of the scarcity of land assets out there in the amount of capital that's chasing them. I'm curious kind of how competition for assets has changed today versus about a year ago?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Yes, for land acquisitions -- this is Brent telling it. We've seen really that -- what you have to have is a more in-depth (inaudible) on the ground that you can look. The days are just driving and this many year ago, you drive out where there's roads and infrastructure, you just buy land and build buildings. That's in the major markets. That's gone. So you've got to really spend some time, as in our Point project in San Antonio, that was a two-year process to get that land zone changed, bought and it's doing terrifically now. But -- so I would say what's changed is and it's part of what has kept supply down is not as easy to just go top piece of land and began to put up buildings, and (inaudible) and sell them especially for local developers. You've got to really be willing to put in the time and in some cases, do a conversion, like the Gateway project Miami where we converted the horse stables to the Churchill Downs racetrack. We've converted old municipal golf courses, we've changed retail zoning to industrial zoning which is not easy to do. So I would just say as the opportunities get more difficult, you've got to think outside the box more and along with that comes out a little longer lead time. So I know John, in Florida, this takes quite a bit of time to get land ready there. So you want to be looking well advanced of when you actually think you may actually need to put the dirt into progress.

Jason Green -- Evercore ISI -- Analyst

I guess today versus a year ago or kind of a year-and-a-half ago, they are far more bidders for land assets? Or that hasn't really changed at all?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

That probably has. Most of the land we acquire isn't really -- maybe it's listed but it's not, maybe one comparison is like if it's a building, a large brokerage group will come out where the bids are due on this day and if you make it through that round, they will have a second round of bids and it's a pretty orchestrated process. Landfills like it's out there on the market and there's bidders, but it is not -- all of you show up with your bid on Wednesday by 5 o'clock. So there's -- probably they have to be given the returns and the profits being made there more, there's less land out there and there's more people kind of scouring through it to find land certainly, California, South Florida, those markets. But I don't know that it's gotten much more intensely competitive for that. It has for the last few years, been very intensely competitive for just a core acquisition, that we were shocked in Atlanta. For instance, recently there were, we were one of -- on a package and there were good buildings, but probably 20 years old. We were one of 24 or 25 bidders in that first round. So that gives you a sense of what your odds and we weren't -- we did win it. So what the competition is like. Same thing in the San Diego package, I mentioned earlier, we bid on it, but it was a who's who list of institutional bidders that wanted to buy those. We'd like to own, but we just got out there, then I think we made the second round in that round of bidding.

Jason Green -- Evercore ISI -- Analyst

Got it. Thanks very much.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you and we will take our last question from Jamie Feldman with Bank of America. Please go ahead.

Jamie Feldman -- Bank of America -- Analyst

Great, thank you. I just wanted to get some -- your thoughts on cap rates. I mean are you guys still seeing cap rate compression across your markets at this point or you think they've kind of stabilized?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

I guess it's entering with interest rates going up or not, they were compressing but the major markets have held flat and could be so for. We felt like there was a contagion that markets like Denver, Phoenix, Las Vegas, cap rates came down. They're not rising with interest rates. I had a conversation with one of the national kind of investment guys with one of our brokerage groups earlier in the week, and he said that they've gone up on triple-net and certainly B and C industrial, but A quality industrial. I don't think they're coming down anymore, but they haven't moved. Maybe a couple of bidders that used a lot of depth have dropped out, but for the most part, they've been flat, probably in the last 60 days, 90 days, but still a healthy number of people that want to acquire industrial.

Jamie Feldman -- Bank of America -- Analyst

And I guess are you talking specifically about your product set or just overall? I'm wondering about you have more revenues versus the beginning.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

And probably, I'm just kind of -- I'm assuming from that conversation and this was again was one of the national partners with the Group. He was probably lumping industrial and as a whole. I mean, he knows our product type. We've worked with him before. So certainly our product type, but I'm thinking big boxes, the same and we see those packages as they come out and kind of track, on just to see where the market is. So there's still 4s and sub 4 in California, sub 4 South Florida, things like that, big box and shallow bay.

Jamie Feldman -- Bank of America -- Analyst

Okay, and were shallow bay later to compress this cycle? So I was wondering if you can kind of continue for longer, but maybe not?

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Probably a little bit later. It seems like if you have a package, the more dollars you can put, the more bidders it seems to attract, which seems to have -- so we can be a package cabinet and some groups like that and have been very good at buying wholesale and selling retail by putting things into our portfolio. And so that maybe is one disadvantage shallow bay has had a little bit, it's just you can't put as many dollars out unless like in Atlanta, it was almost a million square feet. So it was shallow bay, but it was enough buildings that attracted up institutional bidders to get the dollars out. So that probably drives it a little more than product type.

Jamie Feldman -- Bank of America -- Analyst

All right, thank you.

Brent W. Wood -- Executive Vice President and Chief Financial Officer

Sure. Thanks Jamie.

Marshall A. Loeb -- President and Chief Executive Officer

Thanks.

Operator

And we have no further questions at this time.

Marshall A. Loeb -- President and Chief Executive Officer

Okay. Thank you everyone for your time. Thank you for your interest in EastGroup. Have a good weekend and if we can answer any follow-up questions, we will be around later today. Take care.

Operator

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

Duration: 61 minutes

Call participants:

Marshall A. Loeb -- President and Chief Executive Officer

Keena Frazier -- Director of Leasing Statistics

Brent W. Wood -- Executive Vice President and Chief Financial Officer

James Feldman -- BofA Merrill Lynch -- Analyst

Alexander Goldfarb -- Sandler O'Neill & Partners -- Analyst

John Guinee -- Stifel Nicolaus -- Analyst

Rich Anderson -- Mizuho Securities Co., Ltd. -- Analyst

William Crow -- Raymond James & Associates, Inc. -- Analyst

Emmanuel Korchman -- Citigroup -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Eric Frankel -- Green Street Advisors -- Analyst

Jason Green -- Evercore ISI -- Analyst

Jamie Feldman -- Bank of America -- Analyst

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