Eastgroup Properties Inc (EGP) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to today's program, EastGroup first quarter 2009 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.) I will be standing by should you need any assistance.

And it is now my pleasure to turn your conference over to Mr. David Hoster, President and CEO. Please go ahead, sir.

Good morning, and thanks for calling in for our first quarter 2009 conference call. We appreciate your interest in EastGroup. Keith McKey, our CFO, will also be participating in the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

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 describe 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.

Thank you. Operating results for the first quarter exceeded the upper end of our guidance range. This was due primarily to both better than projected operating property results and lower than expected interest expense. Funds from operations were $0.83 per share which was the same as for the first quarter of last year. If the gains on sales of securities and a gain on involuntary conversion are excluded from the '08 results, FFO per share for this year would have shown an increase of 2.5%. Same property net operating income for the first quarter declined 2.6% with straight line rent adjustments and was a negative 1.1% without straight line rent adjustments.

In the first quarter, on a GAAP basis, our best major markets, after the elimination of termination fees, were Charlotte, which was up 10.2%, Los Angeles up 4.1% and Dallas up 2.6%. The trailing same property markets for the quarter were Phoenix, down 11%, Orlando, down 6.4%, South Florida down 5.8% and Tampa down 5.4%. The differences between quarters are basically all due to changes in property occupancies in the individual markets. Occupancy at March 31 was 92.8%, a 100 basis point decrease from the end of the fourth quarter, a 160 basis point drop from one year ago, reflecting the current economic environment.

Our California markets were 96.8% occupied. And the Texas markets were second best at 93.4%. Of our major cities, Los Angeles, with 2.2 million square feet, is the best performer at 99.4% occupancy. Houston, our largest market, with 4.2 million square feet, was 94.5% occupied. Leasing activity generally continues to be anemic. The good news is that in most of our markets, the number of prospects out looking for space seems to have increased over the past 30 to 45 days. The bad news is that this increased number of lookers has not yet led to more leasing. Hopefully, this will come with time.

Our leasing statistics illustrate that although our markets are still alive, we are experiencing continued deterioration. Overall, of the 1.3 million square feet of leases that expired in the quarter, we renewed 67%, and we leased another 6% for a total of 73%. This renewal rate is in line with our historical average, and we believe reflects the desire of tenants not to make major new lease commitments in an uncertain economic environment. In addition, we leased another 342,000 square feet that had either terminated during the quarter or was vacant at the beginning of the quarter, again, an indication that there continues to be at least some users out in the market actually signing leases.

As you can see in our supplemental information, GAAP rents in the first quarter decreased 5%, and cash rents declined 9.3%. To use an old real estate expression, we are aggressively trading rents for occupancy. Average lease length increased to 4.1 years which is above our recent experience. Tenant improvements were $1.35 per square foot for the life of the lease or $0.33 per square foot per year of the lease, which is roughly our average for last year.

At March 31, our development program consisted of 15 properties with 1.5 million square feet and a total projected investment of $109 million. 11 of the properties were in lease up, and four were under construction. Geographically, the developments are diversified in three states and eight different cities and are currently 35% leased, an increase from the end of the fourth quarter.

During the first quarter, we transferred two properties with 145,000 square feet to the portfolio. Located in Phoenix and San Antonio, these properties have a combined occupancy much 83%. We plan to transfer an additional six development properties into the portfolio during the second quarter. We did not start any new developments in the first quarter, and given the current economic climate, do not start to plan any this year.

To date, we have not had any property acquisitions or sales in 2009. We do have a 142,000 square foot complex in Las Vegas under contract to purchase and are currently in the middle of our due diligence process. Las Vegas will be a new market for us and is one which we have been interested in for a long time but have not been able to afford the cost of the entry. We are seeing an increase in industrial property offerings and are pursuing the ones that fit our criteria.

Keith will now discuss a number of financial topics.

Good morning. As David reported, FFO per share for the quarter was the same as the first quarter last year. And he also pointed to one-time items, the gain on sale of securities and a gain on involuntary conversion. Lease termination fee income was 232,000 for the quarter compared to 475,000 for the first quarter of 2008. Bad debt expense was $778,000 for the quarter compared to $188,000 in the same quarter last year. Bad debt expense was unusually large this quarter and was about half of the 2008 annual bad debt and more than all of 2007. We have projected an additional $0.04 per share of bad debt expense, net of termination of fees for the remainder of 2009. Debt-to-total-market capitalization was 50.3% at March 31 with a stock price of $28.07 per share. Using the closing price yesterday of $32.09 per share, the ratio is 46.9%. For the quarter, the interest and fixed charge coverage ratios were 3.8 times, which is the same as last year for the interest coverage ratio and an improvement to the fixed charge ratio.

In February, we repaid a maturing $31 million mortgage with a 6.8% interest rate. And our floating rate bank debt balance was $164 million at March 31. In March, we executed an application on a $67 million mortgage loan that is expected to close on May the 5th and will reduce the bank debt. The mortgage will have a fixed interest rate of 7.5%, a ten-year term, and a 20-year amortization, our standard mortgage that we like to do.

Our debt maturities are in good shape. We have a mortgage with a balance of $305,000 that will fully amortize in September, and there are no other maturities or mortgage loans in 2009 and 2010. Also note on our mortgage debt schedule in the supplemental information that we plan our maturities to minimize large amounts of maturities in any one year. The bank credit facilities mature in January of 2012, and at our option, we can extend for one year.

In March, we paid our 117th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.52 per share equates to an annualized dividend of $2.08 per share. Our dividend-to-FFO payout ratio was 63% for the quarter. Real income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property net operating income. We believe this revenue stream gives stability to the dividend. FFO for 2009 is expected to be in the range of $3.09 to $3.21 per share, unchanged from our previous guidance. Earnings per share is estimated to be in the range of $0.91 to $1.03.

Now David will make some final comments.

With noted developments, acquisitions or sales, plus a strong balance sheet in a well-covered dividend, this presentation has been relatively short. We do not expect to be able to take advantage -- we do expect to be able to take advantage of a number of attractive acquisition opportunities over the next 12 to 18 months. Our goal is to maintain our disciplined approach and purchase only properties that strictly fit our criteria and which will provide EastGroup with above-average same property operating growth as we come out of the recession. Our strategy continues to be simple and straightforward, and it is working.

Keith and I will now take your questions.

(Operator Instructions.) Our first question will come from the site of Michael Bilderman from Citi. Your line is open. Please go ahead.

Good morning, guys, this is David Shamus here with Michael. You guys talked about your leasing spreads. They got hit pretty hard in the first quarter, especially in Florida and California. Should we expect similar rolldowns for the next few quarters?

I think that's fairly safe to assume. The Florida and Arizona markets, in particular, have become extremely competitive. And almost all landlords have become very aggressive in trying to attract the prospects that are out in the marketplace and are looking to put bodies in the buildings. And so we're seeing a real reduction in rents. And our theory is that if we can put a good prospect in the building, as time goes on, we'll have the opportunity to raise rents on them as we move into a recovery.

Okay, thanks. And just a few questions on that -- on the limited recourse loan. What are some of the recourse features on that loan? And how is it different from nonrecourse?

It's a $5 million recourse, and it's on some maturing rents and leases and has a two-year -- excuse me -- after a two-year period, if we lease the space back up, then the $5 million goes -- $5 million recourse provision goes away.

Okay. And on the Las Vegas property that you guys are under contract to purchase, what's the approximate cap rate?

We'll get into a lot more detail once we get through our due diligence period. I hate to talk about prices and yields and occupancies until we actually have money at risk. And we will announce it when we go to closing. But I think this gives me an opportunity that, as we talk about acquisitions -- and obviously the big question is what's the cap rate -- my question back is, what NOI do you capitalize?

Basically, every -- I think every market in the country is having some deterioration in rents. So when looking at cap rates, we're looking at a whole range, everything from what the current rent roll is producing to what current market rents are if all of the leases turn to what happens over the next two to three years with just those leases turning at current occupancy, at what we think might be a lower occupancy because of a soft market and then eventually what we think it can get back to at 95%, how we generally evaluate our multi-tenant complexes. So I think when you hear some announcements on cap rates, the seller's cap rate and the buyer's cap rate might not sound similar at the time of closing. So it will be interesting to see how a number of these are reported. We will probably end up giving you a range when we report it.

Okay. And what's the timing on that acquisition?

We hope to close at some point in May if everything works out.

Okay. Thank you guys.

Thank you.

Our next question will come from the site of Paul Morgan from Morgan Stanley. Your line is open. Please go ahead.

Good morning.

Good morning.

Just sticking to the acquisition, maybe you could just characterize a little bit what -- you said to meet your criteria. It's not just obviously assets that are in markets you're currently in because you're looking in Las Vegas. There's a lot of property on the market right now. What kind of fits inside the basket that you'd be interested in at this point in time?

It's basically our sunbelt markets in metropolitan areas with over a million population where we can identify properties on infill sites where there's barriers to new entry for new competition, multi-tenant, business distribution-type assets, the medium-sized industrial buildings from 60,000 to 100,000 square feet that they've already been demised into multiple spaces, and there's a staggered termination schedule for the leases.

We see this current environment as an opportunity to achieve a number of things, one is to fill in maybe some holes in markets where we're already operating. Secondly, to do that and enter some new markets where prices have been so out of our range that we've really not even bid on them before, both Northern and Southern California, Las Vegas, possibly Austin, Texas, South Eastern Florida markets. Those have been with cap rates of 6% or below, and now with the change in valuations, they're back up to numbers that work for us from a cost to capital standpoint. So we're going to stick to our business distribution criteria.

And as I mentioned in prepared remarks, we're trying to buy assets not that will just give us a good yield when we acquire them at closing, but more importantly, provide what we think will be good growth in NOI two, three, four years out as we're coming out of the recession, and will help lead in our growth in same property results and growth in FFO. So that's a long-winded answer to what we're looking at today.

And how do you view the argument that, with prices moving in the wrong direction, you'd get paid to wait a little bit longer versus employing that figure now?

Couple thoughts on that. One, if we pay a little bit higher today than what we might 12 months from now, or six months from now, I don't think that's going to make a big difference to us in the long run. You know, we are, as a REIT, rewarded not for capital gains but for our growth in quarterly operations. And so it's more important for us to be identifying the assets that will provide us that growth because of the location in the submarkets and the major metropolitan areas. And that's a bigger deal than saving 50 basis points in a cap rate. As long as it's not diluted going in, the growth is the key to us.

Secondly, generally what we're trying to buy is not all that fungible. If you're looking at big boxes, big distribution buildings on the outskirts of major markets, that's a much more, in our mind, fungible-type asset, and if you miss one today, you'll be able to get a similar one in six to 12 months maybe at a better price. In our infill-type locations, we're trying to make sense of assets that might not be available again or have similar assets available in six to 12 months.

Okay, thanks. And then if you look at the high end of your guidance, it would imply that, you know, in the second half of the year, things are at a higher run rate than what you are guiding for the next quarter. Is some of that due to the potential for [creative] acquisitions?

That's a possibility. But much more, it's improved leasing. And I have to say, we're not seeing that today. I mean, we're doing a very good job in renewing our current customers. Where we were falling short because of the increasing vacancy in every one of our markets is in leasing the space that becomes vacant. And there are more prospects out there today so the markets are feeling a little bit better. But say they -- we're not seeing a pickup in leases being signed yet. And only time will tell when that occurs. And so the higher end of the range is just that we do better in leasing than what we're doing today or what we are projecting.

Thanks.

Thank you.

(Operator Instructions.) Our next question will come from the site of "Mike" Biffert from Oppenheimer & company. Your line is open. Please go ahead.

Good morning. It's Mark. Quickly, can you talk about the leverage targets that you would use on the acquisition that you're looking at?

Well, under our current situation, we feel we have the potential to borrow $75 million to $100 million and still be reasonably comfortable with our level of debt. And we look at the debt as a percent of the value of the total company, not on an individual asset, and in determining cost to capital, look at a blended equity debt ratio there.

But I think one of the things that's -- with stock prices all over the board today, one of the things we like to look at is our fixed charge, which is basically the same as our interest coverage ratio. And given we're in mid to high three times, we're very comfortable with that kind of coverage.

Okay. And then you had mentioned that you are seeing more prospects looking at space but just not closing. What is it that they're looking for? Were they expecting rents to be down lower, and they're just waiting for that to happen? Or is it that they're just not ready to take the risk on of additional space?

I think prospects are starting to look earlier for space. Industrial prospects, especially the smaller ones, are notorious for waiting till 30 or 60 days before they need the space. We're seeing prospects today that don't need the space till the end of the year or the beginning of next year, even.

One thing I will point out is the prospects we're seeing are in the 5,000, 10,000, 25,000-square-foot range. The ones that are 50,000 and above, and certainly at 100,000 and above, are few and far between. So it's the smaller, more entrepreneurial users that are out there.

And this is just a gut feel from talking to our people in the field and our brokers in the various markets, is that a number of companies seem to have weathered the downturn so far, realized that they're not going to go broke, that they have a business to operate and have to make some decisions on space and so are out in the marketplace. But because there are so many choices with the higher vacancy and the fact they're looking earlier, they just don't feel any urgency to jump into a new lease until they find something that's perfect. And they love to have owners bid against each other for their lease.

Okay. And then, well, as part of that, I notice that your leasing costs rose quarter over quarter. Is the expectation that that continues to rise through the end of the year?

We don't see our tenant improvement costs going up in any big way. They fluctuate based really on what we're doing with the spaces. And they get bigger when we're leasing service center-type space in those few instances or when we're demising a larger space and having to add offices to it. So we don't see that going up much. The leasing commissions are going to go up some, but not dramatically. And in a number of markets, leasing brokers are looking for incentive commissions, bonus-type commissions. And so that cost will go up some, but not so much that we're going to feel any kind of pinch as a result.

Okay. Thanks.

Thank you.

Our next question will come from the site of Alexander Goldfarb from Sandler O'Neill. Your line is open. Please go ahead. .

Good morning.

Morning.

Morning.

I just wanted to get some more color on -- and maybe I missed it because I jumped on a little late -- on the jump in bad debt, why that was so big in the first quarter and what gives you comfort that it will be $0.04 net for the balance of the year?

I'd like to think that the big jump was an aberration and may be reflecting that the economy hopefully has hit a bottom or very close to it and that going forward, if our customers have made it this far, the odds are they're going to make it on out of the recession. We do have more budgeted than we ever have before, so we hopefully will have that covered that way. And really, when we budget it, we tend to -- we talk about it being net of termination fees, and we expect to have at least some amount of those.

Okay. And of the people who -- of the tenants who became bad debt, were all of them sort of no surprise to you, or were there a bunch where suddenly you're like, "Oh, my God, I can't believe that this tenant or that tenant suddenly went dark"?

There is a mixture. I would say the majority, the vast majority, have been on our watch list simply because of late payment or what we know is going on in their space and what they've been telling us. But there are always a few where you come in Monday morning, and the lights are out, and the warehouse is empty. I think for the first time ever, I don't know if it's a sign of the times, we've had two customers move out in the middle of the night, and they even took their signs with them. So we try to be very aggressive on pursuing them, too.

So where do you stand right now as far as delinquencies and slow-pay tenants relative to historic?

Well, I can't give you an exact figure, but it's certainly up historically. And again, part of it, too, is we're just a whole lot more sensitive to what's going on and talking to our customers on a very regular basis. And I will point out that a disproportionate amount of the bad debt does come out of Florida. And as you can see from our statistics, that's where we've had our biggest drop overall in occupancy. And Phoenix, on a proportionate basis, is not too far behind. Again, that's reflecting the higher vacancy and economic problems in that individual market.

Okay. And then just going to the capital front for a minute, obviously, you've had well over $6 million of equity raise. Just want to get your thoughts, you know, on doing a potential overnight versus putting in a continuous equity program. I can't remember if you have one or not, but just want to get your thoughts on the equity front.

It is -- I probably say this almost every call, looking at the potential for raising a bite-size amount of equity that's not going to dilute shareholders, that we can put to work effectively, is something that we are continually looking at. And we certainly are open to whatever makes the most sense for EastGroup. And there's sure a variety of ways of it happening going on in the market today. But I think it's very, very important for us to point out that we are not going to do something that's going to be diluted to our current shareholders because we don't have to.

And to use the euphemism that the market is employing today, we don't need to re-equitize. So if the opportunity is there for us to raise money and put it to work on a [lucrative] basis, we will do it. And that's what we've been doing for 15 years, so it would be right in character with how we have raised common equity in the past.

Great. Thank you.

Thank you.

(Operator Instructions.) Our next question comes from the site of Brendan Maiorana from Wachovia. Your line is open. Please go ahead.

Yes, good morning. This is Yon Ku here with Brendan. Back to the guidance question, David or Keith, now that you guys beat the higher end of Q1 guidance by $0.02, but you guys haven't adjusted for your numbers, have your expectations for back end 2009 changed since the last call?

We've gotten more conservative on that view. We beat the guidance because of better property operations and lower interest expense. As Keith mentioned, doing the $67 million first mortgage and paying off a bank debt at below 2%, that hits us about $0.03 a quarter right there. So that's part of the reason for it. Also, some of our first quarter numbers were better than we'd anticipated because we had some customers that we know are going to move out, hold over. And we did a couple of short-term leases in a number of buildings that will only be short term. So we're just getting more nervous about the second half of the year and trying to be conservative.

So your occupancy expectation of 90.5, 92.5, that range hasn't really changed then.

No. No. We will go down -- continue to go down in the second quarter. And we're projecting that we'll really pretty much stabilize after that. But we've got a lot of known move-outs for a whole variety of reasons, a number of them build-to-suits that we're losing customers to in the second quarter. So we see a drop. There's going to be a drop in occupancy in the second quarter, but our goal is to keep it above 90% for the whole year.

Okay. Thank you. And my next question is regarding the Houston market. David, you previously said that demand in Houston operates at a level that assumes approximately about a $60 oil price. Obviously, that's changed. What kind of things are you hearing from those tenants?

When oil dropped to $40 right at the end of the year, we had a number of prospects who went quiet and said, "We think we'll wait and see what happens." Some of those have come back as oil stabilized, what, around $50 now. And some others, we have not heard from again. The activity there is certainly slower than it was in the fourth quarter, but it's still better than probably any of our other markets other maybe than Los Angeles. So we're still leasing space both in our development buildings and in our other vacancies, doing well on the renewals there. But the pace is slower than it was at the end of last year, third and fourth quarters.

Gotcha. Final question is for Keith. You guys really don't have any liquidity problems as some of your peers do. Looking at your debt to EBITDA, it looks like it's about six times. You talked about being comfortable with fixed coverage at around three. But what kind of longer term debt-to-EBITDA level or capital ratio do you guys target?

Well, as David said, we think we can go up to about $100 million on the acquisitions if we see some that are very beneficial to us and raising on debt. But we've always, year after year, done fixed rate financing and also equity raising. So we want to stay a conservative company.

So about seven times, maybe?

Well, I don't know --

That's really not a --

It's a number.

-- ratio that we spend a lot of time looking at. We're looking at interest rate coverage, debt as a percentage of what we think the portfolio is worth. If the stock price is up, we'll talk about if there's a percentage of total capitalization. But it's -- we're so much more conservative than anybody else in our sector. That's not something we've worried about recently.

Got it. Great. Thank you.

Our next question will come from the site of Jason pain from Morgan Keegan. Your line is open. Please go ahead.

Morning, guys. I don't know if you mentioned the size of your pending acquisition in Las Vegas. If you did, I missed it. Can you remind me, please?

It's a little over 140,000 square feet. And then, I don't want to mention the price or any of the numbers on it until --

Sure.

-- the deal is done.

Sure, sure. Thanks. That's --

Somehow that kills it if you give too much information [unintelligible] on it.

Certainly. That's what I was looking for. And then secondly, I noticed that last quarter you explicitly mentioned some of your G&A increases this year. And those were left out of the discussion so far in the first quarter, and I wonder, has your outlook changed for G&A changed at all?

No. And that's why we didn't bring it back up. There were no changes, and it's tracking along as we projected.

All right. Thank you guys.

Thank you.

Our next question will come from the site of A.V. Lerner from Robert W. Baird. Your line is open. Please go ahead.

Hi, good morning. I was wondering if you could specify which tenant types or industries are showing relative strength over the others.

It's easier to tell you what has been weaker.

Okay.

That, we still are having some customers that have been -- and related to the housing and construction industry, that have gotten this far, and maybe that wasn't their total business, but it was a part of it. And so we are seeing an even more weakness. There is people that weren't affected six months ago now are feeling it more. Some of the moving companies, trucking companies that just because less goods are moving around have been affected there. We are seeing a little bit of a pickup in 3PL business. I think that's because, in a downturn, lots of companies would rather do a short-term contract with a 3PL to distribute their product than make company commitments.

But the problems just seem to be across the board. It's in the -- leasing is a wide range. One of the things we have seen in some prospects from out of town are companies that are looking to move out of the Upper Midwest or New England in order to be in a no-income state -- no-income tax state. And given -- seems like a majority of the states in New England and Upper Midwest are taking about raising income taxes and/or business taxes. We think that, in the long run, is going to help us.

Okay. And then I was wondering if you could discuss the expectations for how much capitalized interest will move to the expense side and the level that's built into guidance with the projects coming, leaving the development page, getting stabilized.

Maybe I better get with you after that. That's more an involved question on --

Okay. Okay, no problem.

-- detail, okay?

All right, thanks. That's all.

Okay? Thank you.

Our next question will come from the site of Scott Kirk from TCAP. Your line is open. Please go ahead.

Thanks and congratulations on a good quarter in a tough environment. I just want to go back to the bad debt for a second. Can you quantify for us how much you have budgeted, or could you give us sequentially how that changed from the December quarter to this quarter?

We budgeted $313,000, I think, a quarter, net of termination fees. And that's what we kept in for the second, third and fourth quarter. In the first quarter, the bad debt expense was $778,000, and termination fees were $232,000, so $546,000 difference. And so the $546,000 is the net that hit the first quarter. And so that was $200,000 more than what we had projected in the first quarter.

And what was the net number for the December quarter, please?

For the December quarter --

The total bad debt in the December quarter was $308,000.

That's total, or that's net?

That's the total one.

"338." So that will compare to the $778,000?

Yes. It's a little over two times in the first quarter.

See, in the fourth quarter, we had bad debt expense of $307,000 and lease termination fee income of $68,000.

Okay. Okay. And --

-- [unintelligible] quarter.

I'm sorry?

$239,000, net number.

Now, is there typically a seasonal impact here, or is this really just a function of the economy hitting its lows during that period?

I think it's just the economy. We look back at our numbers on a quarterly basis, and the first quarter of '08, our total bad debt was $187,000. And the biggest quarter last year was the second quarter, so -- and that came down in the third and fourth.

How did that -- can you give us a breakout of that on monthly, or just let us know what the trajectory is? Did it sort of peak in January and get maybe better in February and March?

It was pretty much spread evenly. And that's not something we -- I mean, we look at it quarterly, but it's not something we evaluate monthly.

Okay. And do you have an actual delinquency percentage that you can share with us that might help us understand the trend there?

Yes. We, on total debt, bad debt expense for -- I don't know how -- how far do you want to go back?

Just for the quarter, if you would, and the prior quarter.

I've got it by annualized for '07, it was .5% of revenues. '08 was 3.67% of revenues. No, that's a quarter number.

That's the December quarter of '08?

That's not a good number there.

One of the interesting things is that over half of the writeoff is straight line rent. So the cash -- not that they aren't the same against earnings, but --

Okay.

-- the straight line rent that gets -- receivables gets billed up. That hurts you more when you lose a customer than their back rent.

I see.

I would think' 08 would be around 1% of revenues. And in the first quarter, it was 1.8%. So the run rate in the past has been anywhere from a low of .22% in '04 to where we are today.

Okay. And then regarding that straight line, if we look at your perspective on, you know, what you will do to preserve occupancy, you mentioned cash rents were down about 9%. Do you have a philosophy on that going forward? At what point are you willing to sacrifice occupancy because the rents are down too much? Is there a percentage hurdle there?

No. That's much more a gut feel of understanding what the market is. And in a lot of cases, somebody with a building that is obsolete, bad location, poor condition, is going to offer ridiculously low rent. And you don't try to match those.

Right. Okay.

There's always somebody that's going to give space away, almost. And so we're looking at -- we hope our asset people give them the responsibility of understanding the market and what a user's alternatives are, and given all that, work it as hard as they can.

What's your perspective on the decline in cash rents? Do you think that we may have hit our peak in the first quarter, or do you expect that number maybe to come off as the environment remains competitive?

Well, the way we report it, I think all REITs report rent. It's going to show a significant decline through this year. And then the decline will lessen. But when we report whether rent is up or down, it's from what the previous occupant of that space was paying.

Okay. So it's a bit of a lagging --

Yes. And a somewhat scary statistic, as we look back at the last recession, and our lowest occupancy was the first quarter of '02, we were at 88.8%, I think. And then we looked forward and said, when was the next time that we report the rent growth? It was four years. But during that time, our FFO and our same property operating results were on a very strong upward trend because we are increasing occupancy.

Okay.

You basically can't raise rents probably in any sector. But in an industrial, till you're 93.5% or 94% occupied.

Okay.

The first spurt you get is increased occupancy. Then as that -- you only get so high on that, and then the rents start to shoot up.

Now, on the occupancy front, I believe you mentioned earlier that you expect that to improve in the second half of the year. Did I hear that correctly?

No. I think what we say is it's going to drop in the second quarter, and then we expect it to be fairly stable, give or take 50 basis points in the third or fourth quarter.

I think we were talking about how to get to the upper range. It's when we were discussing the leasing --

Oh, it was leasing in the second half.

We don't expect occupancy to improve until sometime next year. And on the fourth quarter call for this year, we'll let you know what we think on going forward.

Okay. Now, on -- what gives you the sense that you can improve leasing in the second half of the year?

Well, I'm going to say -- I don't say we improve it. We're just going to stabilize it.

Okay.

Are you talking about to get to the upper range?

Well, no, I'm just talking about, if I heard correctly, you mentioned you might see improved leasing in the back half of this year.

I think we're going to see -- I'd like to believe, because of what we're seeing today, we're going to see improved activity. But I don't see improved occupancy -- you know, we're going to fall -- and I've been actually saying this for quite a while that we're going to fall down to 90% occupancy plus a little bit, I think. And I don't think we're going to do any better than that this year because every one of our markets are experiencing higher vacancy. And a good REIT should beat the occupancy in the marketplace. And you can really beat them maybe one or two quarters. But if an overall market is falling 5% or 6% in occupancy, you can't go up.

Okay.

It's basically impossible. The market's the market. So we expect it to not go any lower than 90% in the third and fourth quarters.

And just lastly -- and thank you for the time -- the concept of leasing versus owning is getting a lot of press, particularly among the home building analysts. And I don't know if there's a metric that we can look at or what you can say to help dispel the concern that as mortgage rates come down, you won't see more tenants buy versus leasing.

I think a couple factors there. One is I'm not so sure mortgage rates are going to be coming down for commercial properties. I mean, we're just borrowing money at 7.5%. I'd be pleasantly surprised if anybody can borrow ten-year money on a nonrecourse basis or even on a recourse basis for less than that. Secondly, the lenders, and this would include banks, are a lot more conservative in their underwriting so that, just like in buying houses, it takes more of a downpayment and proof that you can pay the mortgage rather than just a high loan-to-value. So we have actually had a couple of customers who told us they were going to move out and buy their own building. And they haven't been able to do it for one reason or another. So I don't see that as a threat to our leasing markets. If it's a threat, it's way at the bottom of the list.

Great. Thank you very much. And congratulations again in a really tough environment.

Thank you.

Our next question will come from the site of Stephanie Krewson from Janney. Your line is open. Please go ahead.

Thank you. What NOI yield are the banks underwriting on your $67 million in mortgages?

They don't tell us. What they do is we give them the NOIs. We say, "Here is how we value it." Then they come back and say, "Here is what we'll lend you."

Okay. Can you tell us what the NOI pool is that they're underwriting, then?

We can tell you that they're doing about a 60% loan-to-value.

Okay. Second question --

And just so you said, we get a wide range of what they'll lend.

Right, right.

So each one is underwriting it very differently.

Sure. Second of three quick questions, because a lot of them have been answered. David, I know you've been doing this a long time, so I don't mean any disrespect when I ask this, but how confident -- how confident -- but you also know that I will ask things that just come right out of my mouth. So how confident are you in your occupancy expectations? Are you confident that they're conservative enough? Because I was actually looking at your last recession numbers, and you went from 97% occupied down to 88.8% in about 14 months. And that was a much less severe recession than this one.

I'd like to believe that we reacted more quickly in this recession in terms of trying to renew customers sooner, and a bigger spread between when we talked to them and when their lease was coming up, that we have been more aggressive in offering attractive rents to both current customers and prospects than we were in the past. We are working very hard not to be self-righteous about how wonderful our buildings are and how they deserve a certain rent. We're doing what it takes to keep our current customers. And I think our very high renewal rates over the last 12 to 18 months have shown that that's working. We're approaching every prospect as though they're the last prospect we're going to see for the next 12 months, because that happens to you sometimes. You can't follow rents down, or you won't sign any leases.

Right.

So I'd like to think we're doing a better job this time. Only time will tell. You can say "I told you" so in the fall if we don't match it.

I would never say that to you, David.

Thank you.

Last question, and this touches on a question that was asked earlier, which is, why haven't you issued equity? For example, I know that you traditionally like to have acquisitions lined up when you do that. But why not just pay down your line of credit balance so that you have total flexibility for making opportunistic acquisitions? It wouldn't be dilutive to [NAV] at these prices.

No, but it would be dilutive to FFO in the short term.

Tell me who's focused on that. Tell me an investor who is focused on FFO right now, David. I mean --

Everybody says they're not. But, you know, I think one of the things that have allowed us to outperform on a total return to shareholders is that we stay pretty focused on a whole variety of things. But we certainly are constantly reviewing the possibility of raising equity of some amount. I think the biggest equity we've ever raised was $65 million or $67 million. We just do it on a very conservative, bite-size basis where we can digest it without it being dilutive in any way. And it all depends what happens with earnings and stock price and what's going on in the market. We don't have to do it, so we don't feel any pressure to do it. We like to be able to do it when it fits our needs rather than what the market might be saying.

I understand. Thank you very much.

I would add one other thing, Stephanie.

Sure.

What we're trying to do, too, is the real estate community is saying, oh, you can buy great assets at a 9 or 9.5 or 10 or 10.5. And in the industrial sector, prices never really shot up dramatically. There's no real speculation in industrial.

Right.

And so I don't think we're going to see as big a drop in prices there as many some of the other sectors. And so we just need to confirm that we can invest money at those levels before we get some -- what might otherwise seem as expensive equity.

Right. Thank you.

Thank you.

And we have no further questions in queue.

Well thank you all for your interest in EastGroup. And as always, Keith and I are available to answer any questions that you'd like to call us with, if for one reason or another, we didn't answer to your satisfaction during the call. Again, thank you.

This concludes today's teleconference. You may disconnect at any time. Thank you and have a great day.