Feb 13, 2014
Executives
David Hoster – President and CEO Staci Tyler – VP and Assistant Controller Keith McKey – CFO
Analysts
Gabe Hilmoe – UBS Jamie Feldman – Bank of America/Merrill Lynch Vance Edelson – Morgan Stanley Kevin Varin – Citigroup Brendan Maiorana – Wells Fargo Brandon Cheatham – SunTrust Robinson Andrew Schaffer – Sandler O’Neill Craig Mailman – KeyBanc Capital John Guinee – Stifel Nicolaus Eric Frankel – Green Street Advisors George Auerbach – ISI Group
Operator
Good morning, and welcome to the EastGroup Properties’ Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later you will have the opportunity to ask questions, during the question-and-answer session. (Operator instructions) Please note, this call maybe recorded.
Now it is my pleasure to introduce David Hoster, President and CEO. Please go ahead sir.
David Hoster
Good morning, and thanks for calling in for our fourth quarter 2013 conference call. We appreciate your interest in EastGroup.
As usual, Keith McKey our CFO will be participating on the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.
Staci Tyler
The discussion today involves forward-looking statements. Please refer to the Safe Harbor language including the company’s news release announcing results for this quarter that describes certain risk factors and uncertainties that may impact the company’s future results, and may cause the actual results to differ materially from those projected.
Also the content of this conference call contains time-sensitive information that is subject to the Safe Harbor statement included in the news release and is accurate only as of the date of this call.
David Hoster
Thank you. The fourth quarter was another productive one for EastGroup.
Funds from operations of $0.84 per share met the upper end of our guidance range, and represented an increase of 7.7% as compared to the same period last year. We have now achieved FFO per share growth as compared to the previous year’s quarter in ten of the last 11 quarters.
For the full-year, FFO was $3.23 per share, an increase of 4.9%, over our per share results for 2012. This represented a third year in a row of increases in FFO per share as compared to the previous year’s results.
Continued good leasing activity resulted in a year-end occupancy of 95.5% and a lease level of 96.2%. Same property net operating results were positive for the 11th consecutive quarter.
We continued to expand our development program, and we have projected a midpoint of $3.42 per share for 2014 guidance, a 5.9% increase over 2013 results. As I just mentioned, occupancy at December 31, was 95.5%, our second consecutive quarter over 95%.
During the first two quarters of 2014, we project occupancy to drop slightly below 95% and then increase above that level in the third and fourth quarters resulting in an average of 95% for the year. At year-end, our California markets were our best at 99.2% leased, followed by our Texas markets at 97.2% and North Carolina at 97%.
Houston, our largest market at 5.8 million square feet was 97.9% leased. Leasing activity continues to be good in all of our markets, from both organic growth of current customers and new prospects to the market.
And we see no reason for this to change over the foreseeable future. In the fourth quarter, we renewed 74% of the 1.7 million square feet that expired in the quarter, and signed new leases on another 10% of the expiring space, for a total of 84%.
We also leased 240,000 square feet that had either terminated early during the quarter or was vacant at the beginning of the quarter. In addition, we have leased and renewed 609,000 square feet since December 31.
For the quarter, GAAP rent spreads on renewal leases were up 9.4% and down 2.4% on new leases. Cash rent spreads were up 2.5% on renewals and a negative 8% on new leases.
Combined, GAAP rents were up 6.2% and cash rents were a small negative 0.3%. GAAP rent spreads on renewal leases have now been positive for seven consecutive quarters, a strong trend.
The weighted average lease length was 5.0 years for the second straight quarter, which is well above our recent averages for the past several years, and probably reflects prospects’ growing confidence of the economy. Tenant improvements were $1.66 per square foot for the life of the lease, or $0.33 per square foot per year of lease, which is slightly below our recent average.
The average amount of tenant concessions continues to decline slowly, but leasing commissions remain elevated. As a result of our strong occupancy, fourth quarter same property operating results increased 1.4% on a cash basis and 1.7% with straight-line rent adjustments.
In December, we sold three small operating properties in Tampa in separate transactions, for a total of $3.2 million, generating gains of approximately $800,000. These buildings which contained a total of 49,000 square feet have been acquired in a large package in late 2011.
We originally planned to sell a number of additional assets during the year, but for a variety of reasons these potential transactions were delayed. As a result, we expect to have a larger number of sales in 2014.
We do not have any property acquisitions in the fourth quarter, and currently have several offers out, for both land and buildings, but nothing under contract at this point. For the year, we acquired Northfield Distribution Center in Dallas and Interchange Park II in Charlotte for a total of 837,000 square feet and a combined investment for $72.4 million.
Guidance for 2014 assumes acquisitions of $50 million in the second half of the year and sales of approximately $15 million. During the fourth quarter, we began construction of Rampart IV in South Denver.
It will be a multi-tenant business distribution building containing 84,000 square feet with a projected total investment of $8.3 million. Also in the quarter, we transferred Beltway Crossing XI and World Houston 38, with a total of 215,000 square feet to the portfolio.
Both of these Houston assets are 100% leased. For the full-year, we started 13 projects containing almost 1.2 million square feet, with projected total cost of over $85 million.
Six are in two different submarkets in Houston, two in Charlotte, two in Orlando, and one each in San Antonio, Phoenix and Denver. Three of the 13 are build-to-suits.
For the year, we transferred 14 properties with over one million square feet into the portfolio. These assets are currently 94.8% leased.
Nine are in Houston, three in Orlando and two in San Antonio. Since the beginning of the year, we have started construction of seven buildings, with 559,000 square feet and a projected total investment of $42 million; four in Houston in three different submarkets, two in Phoenix and one in Charlotte.
We have also transferred three properties to the portfolio; Chandler Freeways in Phoenix, Steele Creek I in Charlotte and Ten West Crossing 3 in Houston. They contained a total of 265,000 square feet and are 100% occupied.
During the balance of 2014, we hope to begin development of at least an additional 10 buildings with approximately 760,000 square feet and a total projected cost of little over $50 million. We have not included any build-to-suits in our 2014 projections.
As of today, our development program consists of 17 buildings with over 1.5 million square feet, and a projected total investment of approximately $110 million. EastGroup’s development program has been, and is again, a significant creator of shareholder value, in both the short and longer term.
To-date, we have developed over one-third of our current portfolio adding over $11.6 million square feet of start-of-the-art warehouse space in our core markets. These assets are currently generating approximately 38% of EastGroup Properties net operating income.
In addition since 2010, all of our developments have been built to LEED standards. As previously announced, we are pleased to have Eric Bolton, as new member of our Board of Directors.
Eric of course is the Chairman and CEO of Mid-America Apartments. Keith, will now review a number of financial topics, including our earning guidance for 2014.
Keith McKey
Good morning. FFO per share for the quarter increased 7.7% compared to the same quarter last year.
Lease termination fee income less bad debts, decreased FFO by $23,000 comparing the fourth quarter of 2013 to 2012. We continued to benefit from acquisitions, development, same property results and debt financing.
FFO per share for the year increased 4.9% compared to 2012. Lease termination fee income, net of bad debts, increased FFO by $467,000 compared to 2012.
During the fourth quarter, we sold 310,887 common shares under our continuous equity program at an average price of $64.33 a share, with gross proceeds of $20 million. Page 13 in the supplemental package, details our sales of common shares through the continuous equity program during the year.
Our outstanding bank debt was $89 million at year-end, and with bank loans of $250 million, we had a $161 million of capacity at December 31. In December 2013, we repaid a mortgage loan with a balance of $50.1 million at an interest rate of 5.75%.
Also in December, we closed a $75 million unsecured loan with a seven-year term, interest-only payments at an effective interest of 3.752%. Debt to total market capitalization was 33.3% at December 31, 2013, compared to 33.6% at December 31, 2012.
For the year, our interest and fixed charge coverage ratios were 3.8x, an improvement from 3.5x last year. The debt to EBITDA ratio was 6.7x for the year, and adjusted debt to EBITDA was 6.1x.
And Page 20 in the supplemental package shows the adjustments. In December 2013, Fitch ratings affirmed EastGroup’s Issuer Default Rating at BBB with a stable outlook.
Previously in March 2013, Moody’s assigned an Issuer Rating of BAA2 with a stable outlook. In the future we plan to primarily issue unsecured debt for future finances.
In December, we paid our 136th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.54 per share equates to an annualized dividend of $2.16 per share.
This was the company’s 21st consecutive year of increasing or maintaining cash distributions to its shareholders. Our dividend FFO payout ratio was 66% for the year, and as we always say, rental income from properties have matched almost all of our revenues, so our dividend is a 100% covered by property net operating income.
FFO for 2014 is projected to be in the range of $3.37 to $3.47 per share. Earnings per share is estimated to be in the range of $1.21 to $1.31.
A few of the assumptions we use for the midpoint are; occupancy rates are projected to average 95%, same property NOI increase of 1.2% for GAAP purposes and 2.6% for cash. The cash number was not included in the press release.
Acquisitions of $50 million of properties in the second half of the year, development starts of $95 million, our mortgage with an outstanding balance of $26.9 million at December 31, 2013 and an interest rate of 5.68% matures in October, issuance of new unsecured fixed rate debt of $65 million at 4.75% in the fourth quarter, and total G&A of $12.4 million with $3.8 million projected for the first quarter. The first quarter is lumpy because of the accounting for stock grants, which is consistent with past years.
We have been active in selling shares under our continuous equity program. In addition to the $54 million sold in 2013, we project to sell an additional $70 million in 2014.
We believe we have a strong balance sheet, and we play very conservative approach to financing our acquisition and development programs. In 2014, FFO per share midpoint is $3.42, which is an increase of 5.9% compared to 2013 results.
Now David will make some final comments.
David Hoster
This is a good time to be in the industrial property business. Market vacancies are declining, rents are increasing and we are seeing a growing number of new development opportunities.
As Keith said, our balance sheet is strong, flexible and conservative and we have a strong track record generating growth and FFO per share. Keith and I will now take your questions.
Operator
(Operator Instructions) And we’ll take the first question from Gabe Hilmoe with UBS. Please go ahead.
Your line is open.
Gabe Hilmoe – UBS
Thanks, good morning. David or Keith, on the same-store NOI guidance, the 1% to 2% gap and then Keith I think you said 2.6% for cash?
Keith McKey
Yes.
Gabe Hilmoe – UBS
I guess at this time last year, I think you put out a range for ‘13 and I think it was down one to plus one gap, ended the year at plus 1.3%. I am just trying to get a sense of when you look at the business and all the moving parts for occupancy and rents, how much conservatism in your opinion is potentially baked into the same-store forecast for ‘14?
David Hoster
I would say conservatism and occupancy. Last year, our results were well ahead of our own projections due to higher occupancy than we originally budgeted or projected.
We’re projecting, as Keith said, 95% on average for occupancy in ‘14. And a big factor in that is when we look to our year-end numbers, some of them were very high and we’re very proud of them, but it’s hard to project numbers of 97%, 98% in our larger markets where we have multi-tenant buildings, and a lot of lease is turning.
Our goal would be certainly to beat the 95%, but you always have surprises in both directions. So we generally aren’t going to project anything higher at almost any circumstances above 95% to change.
Gabe Hilmoe – UBS
Okay. And then just one more.
The cash renewal spreads turned positive in the quarter. I guess when we look into ‘14, what should we kind of expect, as you do have some lease biz from ‘08 and ‘09 kind of roll into the portfolio next year?
David Hoster
We expect the rent spreads to continue to improve as they have over the last couple of years, in particular, last couple of quarters, but there are going to be aberrations in that, because we’re going to have some big leases that were signed still before the recession, or that were signs before the recession and that customer moved out and they’ve been vacant for a while. So that when we lease those, we compare today’s rent to their old rent number, no matter how long the space is vacant.
So we expect improvement, but it might be up and down a bit as we go forward.
Gabe Hilmoe – UBS
Okay. Thank you.
David Hoster
Thank you.
Operator
And we’ll take our next question from Jamie Feldman with Bank of America/Merrill Lynch. Please go ahead.
Jamie Feldman – Bank of America/Merrill Lynch
Great. Thank you very much.
I guess sticking with rents here. Can you just talk generally about what you’re seeing in market rents, potential growth either both in ‘13 and what you are seeing for probably ‘14?
David Hoster
I’ve been talking to our people in the field which we do regularly and we had just had a leasing call last Monday to discuss some of this. Basically rents moving up in every one of our markets, and the leasing activity in every one of our markets is good, in most cases better today than it was in the late fourth quarter or in the first couple of weeks of January, and people always refer to a holiday slowdown, that didn’t always occur, but I think we experienced that this year in the last two or three weeks.
Overall we’ve been very pleased with that pickup. I don’t think we’re very good at projecting where rents are going to be, because each lease has a different set of competitors, but as I mentioned before, we think it is going to be positive compared to where we have been.
Jamie Feldman – Bank of America/Merrill Lynch
Okay. And then I guess back to the guidance, just your occupancy assumption, can you walk through what you’re thinking on the development pipeline, if you look at some of the assets that are less than fully leased?
Can you maybe walk us through how you are thinking about what you can do in those and how that goes into the guidance?
David Hoster
Well, our numbers assume additional leasing in a few developments that are in – that are rolled into the portfolio in ‘13. They still had some vacancy, in particular, in San Antonio, there were small amounts.
And our guidance includes leasing up and in the properties that are just gone into the lease up stage, well we continue to assume a 12-month lease up unless the leasing – actual leasing is better than that. So it’s a 12-month lease up.
So some of it will roll into the portfolio in the next six months, we’re projecting. It will take the lease up into ‘15.
One of the things that helped our numbers good/bad in ‘13 was that the development leasing was well ahead of what we have projected for that full-year lease up period.
Jamie Feldman – Bank of America/Merrill Lynch
Okay. And are there any markets where the conditions have actually weakened since you started construction?
David Hoster
No. I mean clearly Houston has significantly more competition because of all the new development.
But so far, we have not lost, as I am aware of, any prospects based on rent to new development competitor. And I am not saying that won’t happen, but any prospects we’ve lost have been – they’d rather be in a different location in where we are.
Jamie Feldman – Bank of America/Merrill Lynch
And then how do you think about your Houston supply versus other stuff that’s getting built? I mean you have a little bit of different product, right?
Is that...
David Hoster
Yes. That’s a hard thing.
When you look at the overall new development statistics there, they can be a little scary, because I think new development now is exceeding last year’s absorption whose numbers you look at, but we have to narrow it down. I don’t have numbers on it to geographic competitors in different submarkets and size users.
There is a number of our competitors who are building bigger buildings, cross-docks, 200,000, 300,000, 400,000 square feet which are not going to compete with us for prospects, but there are a number – they are putting in more of our business distribution type product. But as I said, so far we don’t think we’ve lost anybody related to that, and we have been able to, in several instances clearly outperform nearby competition.
Jamie Feldman – Bank of America/Merrill Lynch
Okay. And then just finally, I mean it just sounds generally if we listen to your commentary on the call, it does sound like – am I correct in hearing that your new business still feels better than it did even last quarter?
David Hoster
Absolutely.
Jamie Feldman – Bank of America/Merrill Lynch
Okay.
David Hoster
Now, I mean as I said, this is a good time to be in the industrial property business and it’s a whole lot more fun than it’s been for a good many years.
Jamie Feldman – Bank of America/Merrill Lynch
Okay, great. Thanks guys.
David Hoster
Thank you.
Operator
And we’ll take our next question from Vance Edelson with Morgan Stanley. Please go ahead.
Vance Edelson – Morgan Stanley
Great. Thanks.
Good job on the quarter. David, you’ve hinted in the past, the possibility of providing more housing granularity.
Not sure if you’re reading with anything too specific, but if you could just expand on housing as a driver, it seems like every quarter you give us a new item to think about. Last quarter, it was mattresses, the quarter before that furniture.
Anything new you can share on the housing impact?
David Hoster
It continues to be a contributor to demand. It’s picked up.
I think we did not add up all the numbers of leases over the last quarter related to housing, but we’re seeing a pickup in the overall prospects related to construction – commercial construction, other types of construction not just housing. And we’re seeing more and more prospects, consumer-related as you mentioned furniture, floor covering, that sort of thing.
So it’s becoming a bigger factor, but is not dominant in anyways, just a nice extra that in the markets where especially like Houston and San Antonio, a little bit in Dallas were housing is very strong.
Vance Edelson – Morgan Stanley
Okay. It makes sense.
And then following up on the pricing question. Some of your peers seem to speak more aggressively about pricing power having arrived, and now the occupancy items just were kind of leveling out here, maybe it’s due to conservatisms and it’s partially due to the new builds coming online, but it also presumably means you are opting to raise the rents more than push any closer to 100% occupancy, plus you are burning off those pre-2009 leases, which works to your advantage.
So any reason to think that, this combination of factors won’t result in what you told real pricing power in 2014?
David Hoster
We certainly have more pricing power than we did six or 12 months ago. It’s not as strong as it liked to be.
And as I mentioned earlier, we just don’t work very hard on projecting what rents are going to be far into the future, we just try to work each lease the best we can, and in most cases we come out of ahead of our own projections. But yes, the pricing power is better than it has been.
And as I mentioned in my introduction, concessions for tenants have gone down a good bit. They are still trickling down, but brokers are still seeing – have a pretty strong sway and that’s going to next step from a concession standpoint is hopefully some – I am hoping no brokers are listening.
Reduction in the commissions that all jumped during the recession.
Vance Edelson – Morgan Stanley
Okay, that’s good color. And then finally, no acquisition during the quarter.
Could you just elaborate a little more on how much of that is due to competition from outside capital moving more towards your industrial markets? What’s the financing availability for the local speculators?
Is it getting more difficult at all to add to the land bank and do the higher prices and so forth?
David Hoster
On operating properties, traditionally the first quarter, there is not as much on the market. We seem to see or maybe it’s because a lot of institutions take the first couple of months of the year to decide what they are going to sell, and who is going to list it.
So we would anticipate more acquisition opportunities going forward for the rest of the year than we’ve seen today. We’ve just not looked it very much.
We have offers out on a couple of buildings. One, we’re certain – I don’t think we’re going to give another – we’ve got a reasonable chance on buying.
There is clearly more capital chasing industrial assets, particularly in the hot markets, which for us, Houston, Dallas, South Florida, less competition but less properties probably coming on the market in Charlotte, San Antonio, Las Vegas. And we look at things in California, but everything seems to be so expensively priced.
We don’t hold that much hope for being able to do something there. From a land standpoint, it is much harder to buy land today in Houston.
A broker said to me that a $5 square foot industrial land is the new $3 a foot land that we all looked at a couple of years ago. So prices are up and there is a lot more competition for it.
Unfortunately in a number of these markets, we did a good job of buying land during the recession, and got some prime land at well below today’s market prices, because other people weren’t in a position to buy. So that’s the positive.
But we are continuing to look for land in a number our markets, and hope by the next call to be able to announce a couple or more, at least small land acquisitions for future development.
Vance Edelson – Morgan Stanley
Okay, we look forward to that. Thanks David.
David Hoster
Thank you.
Operator
And we’ll take our next question from Michael Bilerman with Citi. Please go ahead.
Your line is open.
Kevin Varin – Citigroup
Good morning. This is Kevin Varin with Michael.
Based on what you see in the market, how large could the development pipeline become in 2014, over and above guidance, and how much spec are you going to take on?
David Hoster
Well, our guidance is basically 100% spec. We have not budgeted any build-to-suits or pre-lease buildings because historically we haven’t had any.
And we’ve been always comfortable building our size multi-tenant business distribution facility spec. And I would like to remind people that most of what we’re building spec is a subsequent phase of an existing park.
So we don’t think we’re taking a risk that you do on, when you’re pioneering up, where you have no other investments. So last year, we were able to do three build-to-suits, the year before started three build-to-suits.
The year before, I think we started four build-to-suits. So that’s going to be where – if we’re going to get to a $125 million or higher in ‘14 or early ‘15, it’s going to come from being able to do some of these pre-lease build-to-suit type transactions in addition to the spec.
And when you look at our projections at the beginning of 2013, because of the build-to-suits and the strong leasing in the spec buildings, we basically doubled what we had originally projected for starts. Now I wouldn’t think that that would be possible this year, as I said, we can certainly get to $125 million or above, with strong leasing in a couple of pre-lease buildings.
Kevin Varin – Citigroup
Okay, thanks.
David Hoster
Thank you.
Operator
And we’ll take the next question from Brendan Maiorana with Wells Fargo. Please go ahead.
Brendan Maiorana – Wells Fargo
Thanks. Good morning.
David, just on the development starts. Are there a lot of – build-to-suits historically haven’t been something that you guys have done a lot of.
Are there a lot more cost prospect or are there sizable level of prospects now, I know you’ve done a lot in Houston over the past couple of years, but not something historically, that’s been the market that you guys have targeted on the development side?
David Hoster
There are a couple that we have proposals out on today, but historically we haven’t done it. And one of the reasons has been that the yields – before the recession, the yields in our mind got ridiculously low because it was such competitive business.
The advantage that we have today is we’ve got a good land bank. It’s pretty hard to win build-to-suit bid if you can’t show where the building is going to be, and it really helps us to be able to do that and show our park environments like World Houston or Ten West Crossing out in Katy in Houston or Horizon, our new development in Orlando.
And I think that’s been a big factor in us getting build-to-suits that we wouldn’t have before over the last couple of years. So I think that land position gives us a better than average shot at these future build-to-suits.
Brendan Maiorana – Wells Fargo
Yes, okay. That’s helpful.
And then…
David Hoster
Let me add one other thing is that, for us a big build-to-suit is about 200,000 square feet. We’re not interested in competing on once you get a lot of publicity on or Amazon buildings or Wal-Mart fulfillment centers where they are 500,000, 600,000, 100,000 square feet or over a million square feet.
That’s a whole different game that we don’t play in.
Brendan Maiorana – Wells Fargo
Yes, understood. A, given that you have an attractive land bank, an attractive basis in your land.
And that the market does seem like it’s firming up in many of your markets, and I think you’ve got to feel more optimistic now than you have previously. Should we think about the yields on your development pipeline is potentially moving higher, because your land is at your cost basis and you are pushing rents up, or is there pressure on development yields, because there is more supply that’s coming out and it’s a little bit more of a competitive market?
David Hoster
That’s a good question because that’s something we’ve debated internally. And I guess the answer is a little bit of everything, but one of the ways that we’ve looked at it is, that if we can fill a building little bit faster by not being too aggressing on the rents, and still have a very attractive yield at 100% or over an 8% yield, if we can still achieve that, and we can put a building into production six or nine months earlier and get the next building going as a public company how we do business, that’s better off for us in both the short and long-term, than missing out on some transactions in order to get a little bit higher yield or very slightly higher valuation on the building.
That higher valuation is more important if you are merchant builder and you are looking to sell the building once it’s leased up. We like that a little higher volume without too much diminution of yield.
Brendan Maiorana – Wells Fargo
Yes, understood. I guess if I am kind of hearing your comments correctly that the stuff that’s under construction has generally been sort of targeted mid 8% yield and it sounds like we should expect that the additional $50 million or so, projects that you start will be in that ballpark?
David Hoster
Correct. I mean example of what I’ve just described is Chandler Freeways in Phoenix or Chandler in the suburb of Phoenix, where we’ve projected initially an 8.3% [ph] yield.
We had a prospect come along as we were finishing – there was a still a month to go before finishing the building, they were willing to take the whole building and move in one month after it was completed. And we were willing to give up 30 basis points a yield to have that building immediately go into the portfolio, 100% occupied and paying.
So that’s an example where we accepted a slightly lower yield, but still 8% in order to have that building contributing sooner.
Brendan Maiorana – Wells Fargo
Yes, okay. That’s helpful.
Last one. Keith, on the FFO progression.
The Q1 guidance I think midpoint is $0.80. That applies about $0.87 of FFO for the remaining three quarters.
If I think about the G&A impact of Q1 just going away in subsequent quarters, that’s probably a couple of pennies. It sounds like you’ve got occupancy that will remain fairly low and not low but lower than where your average will be in Q2.
So should we expect that thinking about your overall guidance for the year relative to kind of where Q1 is, and where it seems like the trends are going for Q2 that there is a pretty big ramp-up in FFO per share in the back half of the year?
Keith McKey
We do have it increasing, but if you look at compared to ‘13, we’re averaging probably 5% to 7% each quarter on increases from the previous year. So it is increasing, but it’s staying about steady from what we have done in ‘13.
David Hoster
The first quarter has been lower for us compared to the preceding fourth quarter and for the remaining three quarters of the year.
Brendan Maiorana – Wells Fargo
Okay. All right.
Yes, I kind of wanted to clarify because I think you mentioned something about occupancy remaining low in Q2 as well, and then it was picking up. So I wasn’t sure if there was maybe more of a back-half ramp in ‘14 relative to what ‘13 where you had a nice pick-up in Q2 and then pick-up in Q3 and Q4 as well?
David Hoster
Yes. And the occupancy is going to be down, but it’s still going to be 94% and change.
So it’s just not like it’s a big drop.
Brendan Maiorana – Wells Fargo
Sure. Okay.
All right, thanks.
David Hoster
Thank you.
Operator
And we’ll go next to Brandon Cheatham with SunTrust. Please go ahead.
Brandon Cheatham – SunTrust Robinson
Hi good morning. Thanks for taking my question.
Just on the lease renewals in the fourth quarter. Can you break out, how many of those were signed during the downturn 2008, 2009, and how does that compare to lease expirations you have coming due in 2014?
David Hoster
I have to dig back to answer the first part of your question. I think we only have – we have less than 150,000 square feet terminating in ‘14 that we signed prior to ‘09.
Brandon Cheatham – SunTrust Robinson
Okay.
David Hoster
So that number is going down significantly each year. Well, it jumps up next year, but that’s a whole another story.
But I can’t answer – I don’t have the numbers in front of me to answer the first part of your question.
Brandon Cheatham – SunTrust Robinson
Sure.
David Hoster
If you call us back, we can help with you that.
Brandon Cheatham – SunTrust Robinson
Yes, let me follow-up offline. And on the same store NOI guidance, the 1.2%.
Can you break out the components how you get there, and how much maybe this decrease in occupancy may drag on that, if let’s say, is a conservative guidance?
David Hoster
Yes. Occupancy up or down has been the major driver of same store results I think for us and everybody in our peer group.
And I mean one of the things that helped us having highest number in our peer group a few years ago was the big moves in occupancy. And since we’ve gotten to the 94%, 95% range, it’s harder to drive it obviously from an occupancy standpoint, where others are now coming closer to that range and making their numbers look good.
So it’s a big factor. I can’t give you how much it is because I don’t have it.
How much is related to strictly rents and how much to occupancy, but from an occupancy standpoint, we’re going to look better in the first two quarters because those were lower occupancy quarters than the third and fourth, where we were over 95%. Unless we’re able to push it up over 96% in the third and fourth quarters this year, they are going to be lower than we should have in the third – in the first two quarters.
Brandon Cheatham – SunTrust Robinson
But basically all that number is from pushing rents for the same store NOI guidance?
David Hoster
No, it isn’t because if you looked, our average occupancy for ‘14 is 95%. It was not that high in ‘13.
Brandon Cheatham – SunTrust Robinson
Okay.
David Hoster
Our average occupancy in ‘13 was about 60 basis points lower. So there is a certain amount of the same store that relate into that 60 basis point increase in occupancy, but clearly the rolling rents will be better in ‘14 than it was in ‘13, which was better than ‘12.
Brandon Cheatham – SunTrust Robinson
Okay. And then just, you talked about the Houston market, but when we look at how much it had been developing in that area over the past couple of quarters, do you expect that to remain at similar levels or tick down based on what you are seeing in your market, your competition?
David Hoster
We don’t expect to do as much in Houston in ‘14 as we did in ‘13 because as I mentioned before, we had three build-to-suits in ‘13 and I think it was four pre-leased buildings in ‘12. And we don’t project any of that in ‘14.
So as a result, there will be less development unless we’re able to lock-up a couple of build-to-suits.
Brandon Cheatham – SunTrust Robinson
Okay. Thank you.
David Hoster
And I think that’s more build-to-suits difference versus additional competition, but ask me the question again about six months and we’ll see.
Brandon Cheatham – SunTrust Robinson
All right. Thanks.
Operator
And we’ll take the next question from Andrew Schaffer with Sandler O’Neill. Please go ahead.
Andrew Schaffer – Sandler O’Neill
Thank you. Just kind of I want to get your comments on the Universal Wilkes [ph], you said it is expiring at the end of ‘14.
Can you just kind of talk about the ongoing discussions and what your expectations are?
David Hoster
Well, he is our partner and we each own 50% of the building. So we are optimistic that his company will remain in the building or otherwise he somewhat shoots himself in the foot.
So we don’t think that will be an issue.
Andrew Schaffer – Sandler O’Neill
All right, thanks. And this one is for Keith.
When you were alluding to these unsecured loans to turn out the line of credit. Are you preferring to kind of use fixed rate or float rate and kind of swap and fixed?
Keith McKey
We’ve done both. I would prefer just to get a flat fixed rate but if the rents are not good enough as quoted by our private placement lenders, then where we have swap and when we go to banks and get seven-year term loans from banks and then we go and swap the rates.
Andrew Schaffer – Sandler O’Neill
Okay, thanks. That’s it for me.
Operator
We’ll go next to John Guinee with Stifel. Go ahead.
Your line is open.
David Hoster
John, are you there?
Operator
Mr. Guinee, your line is open.
Keith McKey
Answered all his questions.
Operator
Okay. We’ll go next to Craig Mailman with KeyBanc Capital.
Please go ahead. Your line is open.
Craig Mailman – KeyBanc Capital
Thanks guys. Apologies if you addressed this, but maybe Keith, can you just remind us what the occupancy ramp is expected to be for the year, when it gets to 95% [indiscernible] 1Q and 2Q suppose come down.
I’m trying to get the magnitude?
Keith McKey
The spread that we show from the low to the high is 94.0% up to 95.6%. So it’s not a big spread.
Craig Mailman – KeyBanc Capital
Okay. Then I am just trying to get from the ending occupancy in 4Q.
What’s the 1Q’s dips expected to be?
Keith McKey
It could be up to a 150 basis points, but we’re ahead of that now, so I am guessing it’s a 100.
Craig Mailman – KeyBanc Capital
Okay. That’s helpful.
And then just David, I am curious. I mean the rent spreads are definitely trending in the right way.
I am just wondering, do you guys feel like you are being aggressive enough with rent increases and escalators that you’re putting in the rents, or do you feel there is more room to be more aggressive?
David Hoster
I would think our asset people in the field are tired of hearing me talking about pushing rents. So my guess is that they would say we’re being aggressive, but that’s something that we discuss regularly.
And when I see an aberration way down or way up on our lease, we have a discussion about it. So I can understand what’s going on.
So a long-winded answer, yes, I think could be pretty aggressive. You just have to value judgment, are you going to lose a customer and how long is it going to take to release it.
And we have some leases that were signed ridiculously low rents during the depth of the recession, and we’re very willing to lose the customer, because they’re not going to pay. Others, it all depends.
Craig Mailman – KeyBanc Capital
Okay. And then just lastly, is there any shift that you are seeing in the Houston market from a tenant perspective?
I know you guys are a little bit different product, but we’re seeing Liberty start 400,000 square feet building which seems big for that market. Is there more Dallas type tenants kind of migrating to Houston now, or is that maybe just sort of an isolated case where maybe they have something else going on?
David Hoster
Well, they like to build those big buildings, and we’re happy to have them build those big buildings than the ones that compete with us. So we applaud them.
But I think on average the size of the buildings in Houston are going up, but not anywhere near what happens in Dallas.
Craig Mailman – KeyBanc Capital
Okay, thank you.
David Hoster
Houston is not a regional distribution hub like Dallas is. So there have not been very many of those big buildings, but they are more of a 200,000 to 300,000 than there have been in the past and those seem to have leased well.
So I assume there will be more build like that.
Craig Mailman – KeyBanc Capital
Great, thank you.
Operator
Okay. And we’ll go back and try Mr.
John Guinee. Go ahead.
Your line is open.
John Guinee – Stifel Nicolaus
Is it working now?
Keith McKey
We hear you.
John Guinee – Stifel Nicolaus
Okay. Couple of softball questions, snowball question.
Keith, you’ve got pretty high debt on your secured mortgages. Any chance that you can access or pay those off earlier than the maturity date, or pretty much stuck with them because of the bridges [ph] prepayment penalties?
Keith McKey
Your last part is correct. We analyze all of our mortgages, and it just does not benefit as to pay them off early because of the prepayment penalties.
John Guinee – Stifel Nicolaus
Got you. Okay.
And then secondly, David, your average – the sweet spot of your business is 50,000, 60,000 80,000 square foot buildings. What’s the average build out in these?
Can you remind me if I look at the development page. Are you building this up to a 5% office percentage, 25% or is it just all over the place?
David Hoster
It’s similar all over the place depending on prospect requirements, but we generally have budget in like 15% office build out. And I am not sure – it’s a very rare circumstantial, we go above 25%, but it’s usually 15% to 20%.
John Guinee – Stifel Nicolaus
Okay. And then if you do the analysis, clearly you guys have a great cost of capital, and you also have the talent to do it, but you tend not to chase the big builders who deal that are, as we all know, very competitive bid and price relatively aggressively.
Are you just choosing not to bid those at all, or are you losing those by 25 basis points or 100 basis points? How is the math on that one?
David Hoster
We don’t always find out how much we’ve lost something by. But I think that one of the biggest factors, John, is most of our land, our goal with land is to be more infill type locations.
And so that our land cost is going to be higher than somebody who is on the fringe of development or well outside of metro area. And that’s where the larger build-to-suits like in Amazon tend to go.
And so just the location, that is one factor related to cost. And I would guess we’re losing by probably – and we haven’t lost a lot recently in the past, it could be a 100 basis points.
We’re willing to do – have our yield go down 25 to 50 basis points to get the 100,000 to 200,000 square foot build-to-suit.
John Guinee – Stifel Nicolaus
Perfect. Okay, thank you.
David Hoster
Thank you.
Operator
And we’ll pick the question from Eric Frankel with Green Street Advisors. Please go ahead.
Eric Frankel – Green Street Advisors
Thank you. Could you just mention what maybe – in terms of your developments starts for the latter half of the year just in geography?
David Hoster
Okay. We hope to build some more on west side of San Antonio.
Hope to do more in Charlotte at our Steele Creek development which so far has been extremely well accepted, it’s just south of the Airport around Interstate Interchange. We hope to do some new development again in Tampa, which has been quiet for us for good many years.
Additional development at Horizon project, along the Beachline Expressway in Orlando and several more in Houston. We’ve mentioned it in the press release this, or I did in my remarks, West Road which is a new project for us that will be probably five buildings, 400 and some thousand square feet, it’s right off Beltway and Interchange with West Road.
It’s in the northwest submarket, industrial submarket Houston. So I think that pretty much covers it.
We are looking for land in South Florida, but that’s expensive and hard to find in good locations. And we continue to look in the Phoenix market.
Eric Frankel – Green Street Advisors
Great. Speaking of which, could you maybe comment on the land environment – or the value of your land and markets other than Houston?
David Hoster
No, I don’t have the figures in front of me. We can talk offline on some of those.
I can look up. It’s a wide range of different values in different locations.
For example in distant Phoenix, you’re out on the west side, it’s a very different number than what you see in Chandler or Tempe which is much more infill. And then when you look at the land prices, you have to look obviously at what sort of infrastructure needs to be added, requirements for ponds, internal roads, all those sorts of things that can really run up your per square foot land costs.
Eric Frankel – Green Street Advisors
And finally, could you just comment on the drop of occupancy in Houston for the quarter? Is that at all supply influenced, or just kind of the rhythm with the market?
David Hoster
I think it’s more rhythm of the market. We had energy company that was acquired by Schlumberger move out to Katy to a new campus.
They were in one full building and two partial buildings, and we’ve released – tenants have not moved in yet. We released the full building and the larger of the two partial building.
So that could affect the fourth quarter numbers a little bit, and will affect the first quarter, but we’re seeing very good activity.
Eric Frankel – Green Street Advisors
Okay, thank you.
David Hoster
Thank you.
Operator
And we’ll take the next question from George Auerbach with ISI Group. Please go ahead.
George Auerbach – ISI Group
Great, thanks. Just one for me.
David, I know you’re not selling that much this year, but any thoughts on how the pricing spread between, A markets and B market have trended over the last six months? And along those lines, any change in investor interest in primary versus secondary?
David Hoster
We just haven’t seen enough properties trade in the last 60 days or 90 days to have too much of a statistical response there. And the A and B markets are I would say anywhere from a 100 to 150 basis point difference.
And A&B product or A&C product, the non-institutional would be 150 to 200 plus basis points spread. I mean three little buildings that we sold in Tampa were to individual investors, and the average of that was – they were just over 9% cap rate.
And almost everything we’re going to sell is going to be at a higher cap rate than what we buy or build, simply because it’s almost by definition – something without the growth potential that new assets is going to be less expensive when you put it on the market. Somebody is buying cash for rather than upside.
George Auerbach – ISI Group
Great. So I guess is it fair to say that the buildings this year and moving forward are going to be that kind of lower 10% of the portfolios will probably in the 8%, 9% type cap rates?
David Hoster
Let’s say mid 7% and up. Mid 7% to 9% we would sell.
George Auerbach – ISI Group
Great, thank you.
David Hoster
Thank you.
Operator
And we’ll take a follow-up from Jamie Feldman with Bank of America/Merrill Lynch. Please go ahead.
Jamie Feldman – Bank of America/Merrill Lynch
Great. Thank you.
So I just was hoping you could provide a little bit more color on the vacancy you expected in first half for the year? Where are those spaces and which are your prospects to backfill and what are you guys assuming?
David Hoster
We could go offline. I can walk through some of the tenants individually because it would take a while, but it’s nothing unusual or anything extra-large.
We just historically – and I think some of the other industrial REITs experienced this, have a dip in the first quarter. And that’s because you have some Christmas or holiday-related leases like we had 50,000 square feet with the post office in a vacancy in World Houston.
And lots of times when somebody wants to extend their lease short-term to October, November, you tell them they have to do it until the end of the year. So we just historically have more turnover in the first quarter.
And so from our leasing call last Monday, people have been – are more optimistic than they had been for a quite a while. There is a just a nice pickup in activity in the last three or four weeks.
So we can talk later on some of the individual tenants, but there is no, I think trend or geographic area that’s suffering any more than any other. And all the time we’re only dropping 100 basis points.
Jamie Feldman – Bank of America/Merrill Lynch
Okay. That sounds like it’s more you’re assuming it’s going to happen given the seasonality rather than non-move outs at this point?
David Hoster
It’s a combination. Lots of times people will say, we’re going to move out because they are building their own building or they are buying their own building.
And it takes them longer than they think, so they stay longer than what you’ve budgeted. So some of the tenants are already out, some are non-move outs, some are still questionable.
I think the big thing that’s going to change your numbers is just better – leasing some of the space faster than we’ve projected.
Jamie Feldman – Bank of America/Merrill Lynch
Okay, thank you.
David Hoster
I mean that’s what drove our numbers in ‘13 with higher occupancy from better leasing both in the portfolio and in development pipeline. So thank you.
Operator
And it appears we have no further comments at this time. So I will turn the program back over to our presenters for any closing comments.
David Hoster
Again, thank you everybody for your interest in EastGroup. Keith and I will be available for any additional questions that we weren’t able to cover or we didn’t cover enough for you during the call.
Thank you.
Operator
This concludes today’s program. We thank you for your participation.
You may now disconnect at any time.