Eastgroup Properties Inc (EGP) 2009 Q2 法說會逐字稿

Good day, and welcome to today's EastGroup Second Quarter 2009 Earnings Conference Call. (Operator Instructions.) Please note, this call may be recorded. It is now my pleasure to turn today's program over to David Hoster, President and CEO. Please go ahead, sir.

Good morning, and thanks for calling in for our Second 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 is subject to the Safe Harbor statement included in the news release, is accurate only as of the data of this call.

Thank you. Operating results for the second quarter exceeded the upper end of our guidance range. This was due primarily to better-than-projected property occupancy, lower interest expense, and lower overhead, partially offset by higher bad debt.

Funds from operations were $0.80 per share, which was the same as the second quarter of last year. For the first six months of this year, FFO was $1.63 per share, the same as for the first half of 2008. Same property and operating income for the second quarter declined 2.6%, with straight line rent adjustments, the same as the first quarter. It was a negative 2.3% without straight line rent adjustments.

In the second quarter on a GAAP basis, our best major markets after the elimination and termination fees, were South Florida, which was up 10.2%; Dallas, up 6.1%; El Paso, up 4.8%; and Los Angeles, up 2.7%. The trailing same property markets were Phoenix, down 22%; San Francisco, down 7.4%; and Orlando, down 7.2%.

Although average rents are declining, the difference between quarters is basically due to changes in property occupancies in the individual markets.

Occupancy on June 30th was 91.2%, a 160-basis point decrease from the end of the first quarter and a 380-basis point drop from one year ago, reflecting the current economic environment. Our Texas markets were 93.6% occupied, and Houston, our largest market with 4.5 million square feet, was 96.2% occupied. Of our major markets, Los Angeles, with 2.2 million square feet, continues to be the best performer at 97.8% occupied.

Leasing activity continues to overall be anemic. The good news is that there are prospects in all of our markets looking for space. It seems as though many businesses have determined that the economic bottom has been hit and that they now have to make decisions about their warehouse space needs. They expect cheap rent with significant concessions. They feel no sense of urgency, since they have so many lease alternatives.

Our leasing statistics illustrate that although our markets are still alive, we're experiencing continued deterioration. Overall, of the 1.5 million square feet of leases that expired in the quarter, we renewed 65% and re-leased another 14%, for a total of 79%. 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 526,000 square feet that had either terminated during the quarter or was vacant at the beginning of the quarter, an indication that there continues to be users out in the market actually signing leases.

As you can see in our supplemental information, GAAP rents in the second quarter decreased 5.0% and cash rents declined 8.9%, roughly the same as for the first quarter. We continue to trade rents for occupancy.

Average lease length increased slightly to 4.3 years, which is in line with our recent experience. Tenant improvements were $1.56 per square foot for the life of the lease, or $0.36 per square foot per year of the lease, which was slightly above our recent average.

With no new construction starts this year and none planned, our development program at June 30 had decreased to 10 properties with 1.1 million square feet and a total projected investmetn of $80 million, of which only 10% remains to be spent. Eight of the properties were in lease-up, and two under construction. Geographically, the developments are in seven different cities and are currently 33% leased.

During the second quarter, we transferred five properties with a total of 461,000 square feet to the portfolio. Located in Houston, Tampa, and Orlando, these properties are currently 73.6% leased. We plan to transfer an additional four properties into the portfolio in the third quarter.

At the end of May, as previously announced, we acquired the 142,000-square foot Arville Distribution Center in Las Vegas for $11.2 million. Arville, which was constructed in 1997, is a multi-tenant business distribution complex located in the close-in southwest submarket of the city. Las Vegas is a new market for us and is one for which we have been interested for a long time but have not been able to afford the cost of entry.

We currently have three buildings in Dallas with a total of 227,000 square feet under contract to purchase. The three are adjacent to assets that we have owned for a long time in that market.

We also have a small building in El Paso under contract to sell. This property is currently vacant.

There are very few industrial property offerings now in the market, and even fewer are actually going to closing. Keith will now review a number of financial topics.

Good morning. As David reported, FFO per share for the quarter was the same compared to the same quarter last year. Lease termination fee income was $210,000 for the quarter compared to $69,000 for the second quarter of 2008. Bad debt expense was $639,000 for the second quarter of 2009, compared to $643,000 in the same quarter last year.

FFO per share for the six months was also the same as compared to the same period last year. Lease termination fee income was $442,000 for the six months in 2009 compared to $544,000 in the same period last year. Bad debt expense was $1,417,000 for the six months of 2009, compared to $831,000 for last year.

We were pleased to increase our capital in the two primary ways that we have always raised capital -- mortgage debt and selling common stock. During the second quarter we sold 737,041 shares of newly issued common stock using our continuous equity program, with net proceeds of $24.6 million. The average price was $33.92 per share, and after a 1% sales agency fee and other expenses, the net price per share was $33.42.

Our prospectus supplement states that we can issue a total of 1,600,000 shares. The purpose of selling the shares is to better position the Company to acquire properties, and since to date we have only purchased $11 million, we will reevaluate the sale of additional shares as investment opportunities arise.

Also, we closed a new, $67 million, 10-year mortgage with an interest rate of 7.5%.

Debt to total market capitalization was 45.2% at June 30, 2009. For the quarter, the interest and fixed charge coverage ratio was 3.6 times, and we added a new ratio, debt divided by EBITDA, to our financial statistics in the supplemental package. We are very fortunate to have both an attractive rate and term on our bank line, and since we have a low bank rate the interest coverage ratio does not capture debt at market rates and the debt to total market cap has not been a consistent ratio.

The debt to EBITDA ratio provides additional information to evaluate debt levels, and our ratio is 6.2 times, which we believe is a strong ratio. Our floating rate bank debt amounted to 6% of total market capitalization at quarter end, and we have no mortgages that mature in 2009 and 2010.

In June, we paid our 118th consecutive quarterly cash distribution to common stock holders. This dividend of $0.52 cents per share equates to an annualized dividend of $2.08 per share. Our FFO payout ratio was 65% for the quarter, and rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property net operating income, and we believe this revenue stream gives stability to the dividend.

FFO guidance for 2009 has been narrowed to a range of $3.09 to $3.17 per share, and earnings per share is estimated to be in the range of $0.96 to $1.04. The FFO midpoint was decreased from $3.15 per share to $3.13 per share, and this decrease is primarily due to a $0.03 per share dilution from the stock issuance in the second quarter.

Now, David will make some final comments.

Our strategy continues to be simple and straightforward and it works in all phases of the economic cycle. During the second quarter, we improved an already strong and flexible balance sheet by issuing new common equity at an attractive price, including as Keith said, a new 10-year first mortgage. We believe that we are well-positioned to take advantage of a number of attractive acquisition opportunities over the next 12 to 18 months while maintaining a good balance sheet.

Our goal is to continue 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.

Keith and I will now take your questions.

Thank you. (Operator Instructions). We'll take our first question from the site of Mark Biffert with Oppenheimer. Please go ahead, your line is open.

Thanks. Good morning. First, I just wanted to ask about the large vacancy loss that we saw in San Francisco. I was wondering if you could just comment on who the tenant was, or if there was multiple tenants, and then as well about the impact that you expect from Ethan Allen in your Southern California portfolio.

In Northern California, we lost a tenant that was roughly 90,000 square feet to consolidation into a build-to-suit, and we have re-leased that space and the new tenant will move in before the end of the year. In Chino, our 300,000-square foot building that Ethan Allen is vacating won't affect '09 numbers. That's in January of next year, and we've not put out any guidance on what's going to happen next year yet. And the effect of that move-out will be determined by how long it takes to re-lease the space.

Okay, and then on the debt to EBITDA target, is that net debt to EBITDA or is it debt to EBITDA, that you guys are utilizing?

It's the debt on the balance sheet, which includes the bank debt and the mortgage debt.

Okay, but you're not taking back cash or adding back cash?

No.

Okay, and in terms of a target, I mean, historically have you looked at that number? Is that a range that you want to keep it in? Some other people have commented being closer to a 5 times. I mean, is that something you guys have evaluated?

We've got it, on page 19 of the supplemental, it goes back to '05. There was one time we were below 5%, but in '07 and '08 it was close to the 6% mark-- 6 times mark.

Okay, and then, in terms of the acquisition front, you had said that there were few properties in the market, that few are closing. If you could just provide a little more color on the conversations you're having with sellers and what markets and opportunities you think might be out there over the next six months?

Your guess is probably as good as mine. The sellers that we've seen to date are institutional and just seem to have a variety of reasons for selling. There's no one single thread through all that. And there's an awful lot of press on the great influx of properties to the market coming up over that 12- to 18-month period, but so far we certainly haven't seen any industrial properties.

So, your anticipation is that it will get delayed until next year, a lot of this transaction activity?

Well, if it happens. I mean, we hope it happens, but only time will tell. Some people feel that there's not going to be as many properties coming on the market as some people have projected, but we hope -- that fit our criteria. We've bid on a number of things, some of which we weren't the winner. We were in third or fourth place with our pricing, and some others, they were pulled off the market. And there are some that we didn't even bid on, because the early round of sellers tend to be older, less attractive properties, and they haven't met our criteria.

Given that you haven't met that hurdle, have you thought about lowering your hurdle rate to try to compete? Or, to get these assets?

No. As I mentioned in my prepared remarks, we have our criteria and stick pretty close to it, and have done that for years, and it's worked very well for us. If we were a short-term investor, I think you can buy some stuff and if pricing changes over the next two years you could probably flip it and make money, but that's not the business we're in. We're a long-term investor looking for properties where there's the opportunity for us to raise occupancy, have pricing power, and have those properties contribute to our growth in same-property operating results and FFO increases in years to come.

Okay, thanks.

Our next question from the site of [Kivan Kim] with Macquarie. Please go ahead, your line is open.

Hey, good afternoon. It looks like beyond just Ethan Allen there's a couple big leases expiring by the end of 2009, like the Universal Wilkes and Premier Beverage as a couple of examples. Any color on there, (inaudible) leasing?

Absolutely. Wilkes is a 3PL and has a right, if I recall correctly, to cancel the lease every six months. So, it's always going to show six months from the last time they had the right. So, we do not expect any problem with that. Premier Beverage, I think we've announced before, that they are moving out of two of our buildings -- one was a build-to-suit we did 10 years ago -- into a building that's two times the size that they built for themselves, that can be expanded another two times. So, we are going to lose them in the beginning of September.

We had leases coming up at Palmer Distribution, another 3PL, in Houston. We have renewed two of those and expect to renew the third. What I'm doing is going down page 18 of our supplemental data. Post Office, we're going to lose a 35,000-square foot space to a consolidation, and then in San Antonio they have a 64,000-square foot space that we decided not to renew because have an adjacent tenant who's going to take that space.

Ethan Allen, you mentioned, that property is listed now for re-leasing and we're optimistic that even though that market has softened it's still reasonably good compared to the national industrial markets.

Just to back to your comment on Premier Beverage, is it the two Tampa assets they're vacating? Or, Jacksonville?

The two Tampa assets, they're vacating, and the Jacksonville asset the tenant next door has been set to take that space for the last five years, I think. So, that's re-leased.

All right. And, a second question. Could you give an update, if you have any change in plans, for your World Houston Center project, given that it seems like demand in Houston looks pretty stable. Any plans on moving forward on new developments there?

Not yet. I would guess that's probably the first market that we will start developing again, but we have no plans to do an additional amount this year. We've been very pleased with the leasing of our World Houston 30, which was 100% spec. I think they're just putting in the landscaping now, and it's 49% leased. So, we've done real well with that building.

We have plans for several additional buildings, but we would like to have the market a little stronger before we kick those off.

Mr. Bilerman, your line is open.

Good morning, guys. This is David Shamas, here with Michael Bilerman. Just sticking to your development pipeline, it looks like your yields came down pretty significantly for a number of projects, particularly Phoenix. Just wondering if you can give us some color on what's happening there.

Well, when occupancies are going down and rents are doing down, usually yields are going to follow. Phoenix is one of the softest, most competitive markets that we're in, in the Sun Belt, at this point, and our development leasing at Sky Harbor has, needless to say, fallen behind our original projections. So, as I say, rents have come down, and the lease-up period's extended, the yield's going to come down.

We still believe this is going to be a premier property in 12 to 18 months from now, and if you're near Phoenix in November we'd like to show it off to you. But, yes, no question, the yields are down on most of our development properties, just because of slower lease-up and lower rents.

Okay. And the 9% decline in cash rents over the last few quarters, is it fair to assume that that's the limit for you, in terms of trading rent for occupancy? Or, are you willing to go lower?

We don't look at a specific percentage and say, this is our rule of thumb, or this is our strict guideline. Every vacant space and its own prospects get evaluated differently, and it's how long has the space been vacant, what does it take to put the prospect in our building, how long do we think the space will remain vacant if we don't do it.

I mean, if the markets continue to go down or get no better over the next nine to 12 months, having some rent is a whole lot better than no rent. So we evaluate each one independently, and what continues to happen in the markets will determine what that drop in rent is.

Of course, that drop in rent is from what the previous customer paid, so that reported number can reflect that somebody signs a lease at the peak of the market and now they're gone, or it's a renewal at today's rates.

Okay, and just turning back to acquisitions, you had mentioned at NAREIT that you plan on building critical mass within Las Vegas. So, I was just wondering if you have any update there, in terms of any other potential acquisition opportunities?

No update at this point. We're working to grow there.

And the Dallas acquisitions, is it fair to assume that pricing would be in line with the Las Vegas purchase?

On a yield basis -- I'll say yes, it's going to be better from a yield basis, because of the difference in markets. But, we'll report all those details when that closes.

Any idea on timing, when you expect that to close?

As I say, we're working on it. Nothing seems to happen as quickly as you would like in this environment.

Right. Okay, thank you.

Thank you.

Let's go to our next question. That's from the site of James Feldman with Bank of America. Please go ahead, your line is open.

Thank you very much. I was just hoping you guys could spend a little bit more time on the bigger picture of, like, how were your conversations in this quarter with your tenant base versus last quarter, in terms of what they're thinking about? Are they more focused on their balance sheets? Are they thinking that -- are they kind of preparing for the future? Just, how have things changed?

I believe -- and this is just totally subjective -- that, as I mentioned in my remarks, that there's more activity in the marketplace, because current customers, prospects, other peoples' tenants have realized that their own company isn't going to go broke, that they're going to be around, that they've put off making space decisions, and now they're running out of time and they have to decide what they need. And so, we're seeing a little bit better activity.

It's not reflected yet in any increase in occupancy, but it seems that although there are still companies going broke, there are still companies pulling out of markets, that at least there's activity. You had a sense before that people were hiding under their desks because the world was going to cave in on them. And now they have to go out and make some real business decisions. So, that's been encouraging.

If you look back on our numbers in the last recession -- of course, it wasn't as deep or as long -- but once we hit bottom -- and who knows where that's going to be -- occupancy started back up very quickly. It took a long time to get pricing power back for rents, but occupancy bounced back very quickly. So, we're optimistic that we're going to see better things next year. Only time will tell.

Okay, thank you.

Thank you.

We'll take our next question from the site of Paul Morgan, with Morgan Stanley. Please go ahead, your line is open.

Good morning.

Good morning.

Just sticking with that, could you talk a little bit about Phoenix and where you think the market is, from the trajectory? Is it just bouncing along the bottom, or traffic is improving, or actually it's still very negative?

We've had a significant pickup in traffic in the last 30 to 45 days. We've signed some leases that haven't taken occupancy, and we've got more lease proposals out right now than we have for quite a while. I hope that's a sign that we're bouncing back very slightly. Although, our occupancy is way low for us in Phoenix, I think a lot of that is due to timing of some leases coming up and an unusual amount of tenants going broke. The real softness in that Phoenix market, though, is in the big box out on the West Side.

That's a lot of vacant buildings out there, and some very big ones where the owners and developers planned to take tenants out of California for a better business climate, and if that's happened it's to a very small extent. So, I think there's going to be a bloodbath in the 300,000, 400,000, or 500,000-square foot spaces for a lot longer than it is in our type user.

And then, in your projected occupancy for the developments that are in lease-up, I mean, you're basically not showing any new deals by the end of the year. Is that just being conservative? Do you think you -- are you in discussions about some of the spaces? Or, you really don't think that at the end they'll be much better?

No, we have some pretty good prospects -- not for all our buildings, but for a number of them -- it's just everything takes so long now. The prospects don't feel any sense of urgency. They've got a lot of different choices.

And every time we've revised our numbers this year we've pushed the development leasing farther out. So, that's forced us to be real conservative in our projections. We might do a little bit better in the second half of the year or so. Really, anything we do between now and the end of the year is going to affect 2010 more than it is this year.

Okay, and then lastly, I guess, David, it felt to me that you were a bit more optimistic last quarter about acquisitions, in terms of the tone? Am I misreading it? Or, is it pricing? Or, is it just the number of opportunities?

There's is very little on the market today, and in a number of cases it's the sellers' -- it's too strong to use the word here -- dregs. But, there's been some stuff that's so low-quality that we didn't even take a close look at it. And we've also seen in a number of cases where a package was put out with, let's say, 14, 15 properties in it, and a couple of years ago they wouldn't have sold it unless somebody bought the whole package.

Some brokers in Dallas put a great title on one that we like. They called it "a la carte." And so, what's happening is, instead of selling 15 properties to one buyer, they're selling seven or eight properties to two or three buyers. And then what didn't sell has come back on the market in a new package. We've already rejected it once, and it wasn't because of price, it was the quality or it didn't fit our criteria.

So, there's been -- in the last 30 to 6 days, I don't think there's been anything new on the market that we've gotten at all excited about. So, it's been frustrating.

Right, okay. Thanks.

I have Brendan Maiorana from Wells Fargo. Please go ahead, your line is open.

Thanks good morning. David, the development pipeline, I just wanted to follow up on that. It seems like -- I mean, obviously the yields came down -- it sounds like that's because I'm assuming leases got more pushed out, more so than rents are down. Because I think rents were certainly under pressure three months ago as well?

No, I think it's both.

It's a combination?

Yes.

If you look at the 33% pre-leased rate right now, what do you think is baked into your exceptions in terms of when that pipeline would be stabilized?

That's so speculative, at this point. It will be some time next year. You have to look at each individual property. One of the things that's positive that happened is, some of the properties in the third and fourth quarter of last year that went into the portfolio that weren't 100% have now been leased out.

So, we're still leasing these properties out, but instead of taking 12 months it's taking 18 to 24 months because of the individual markets. So, it's just going to take longer to lease them than we anticipated. For example, the 160-basis point drop we had in occupancy in the second quarter, 30 basis points of that was because of vacancy that rolled into the portfolio from our purchase and the development program.

Right, I'm just trying to -- I mean, I think I understand -- I'm just trying to get a sense of, you know, how much cushion you've got baked into kind of the current yield on your pipeline, which is moved down.

I hope it's a good cushion. Only the next six months are going to tell. But as I say, for almost every one of the properties that are in lease-up there, there are prospects out there, whether we close the transactions or no is another thing. But, we're talking to somebody I think on all of these but one.

Right, okay. That's helpful. Looking at the same store by market, it seems like Phoenix dropped pretty significantly sequentially but the occupancy rates stayed the same there. Was there just a large lease that rolled down there? Or, what's going on there?

I think it was just the timing of the leases, because we report occupancy at the end of the quarter, and so somebody that we lost at the end of the first quarter, it really didn't affect same store until going forward. There was no one single customer that we lost there that knocked that down, just a lot of little ones and a surprising number that just went dark. Their leases -- some terminated, but a number of leases where they just closed the doors.

Right. In terms of guidance, in Q2 I think you mentioned that bad debt was a little bit higher than what you expected, but your revised guidance, the net bad debt expense is down a little bit from your previous expectations. Is that because you've gotten some lease term fees or you have some lease term fees baked in which is offset against that bad debt? Or, do you expect that bad debts for the year will be a little bit lower than what you had projected?

We think bad debt will be a little bit lower over the balance of the year. We lost some people in the second quarter that we'd been watching for quite a while. They're gone now. So, we'd like to think that our -- as we call it -- "watch list" is smaller and there's less likelihood of more bad debts. The other thing, just statistically, there are very few big ones on it. We just lost a lot of the smaller to medium-sized customers to the economy. So, there were a lot of them, but not any big numbers that added up to that total.

Okay, and just lastly, the amount of equity issuance through the CEO program was-- can you just give a little bit of color in terms of the amount that you raised relative to the acquisition that you did, which was smaller than that? And why you decided to raise a little bit more than the overall kind of bite-sized acquisition that you did in the quarter?

We raised $25 million on a net basis. It was just a hair below that. We had Las Vegas that we knew we were going to close. We thought we would have closed Dallas by now. And, we had a number of other offers out that we were optimistic out, and we were pleased with the number of offerings that we saw back in May when we were rolling on the program, and we sold stock on a net basis higher than we pro forma'd it. So, we were very pleased with that.

And then as the acquisition opportunities seemed to disappear, we said, let's stop, catch our breath, and see what's happening. We are still very concerned about dilution, and to be somewhat of a wiseass, we may be one of the only REITs that's still worried about that. But, that's why we stopped.

Well, we appreciate that you're worried about that dilution.

Thank you.

All right, thanks.

We will take our next question from the site of [Avi Lerner] with Robert W. Baird. Please go ahead, your line is open.

Hi. I just wanted to follow up on one of the bad debt questions. I was hoping you could talk a little bit about for your process for establishing the provisions? I guess, how the decisions are made, with respect to timing and overall level of reserves?

We go down tenant by tenant and look at, of course, the people that quit paying and are moving out. You record those. But, we also put all the tenants in a watch list, in possible and probable categories, and monitor their payments each quarter, and then if they've moved out of their space but are still paying, we look at that also. And then we determine how much bad debt to record based on that, and then on the watch list we're very careful about continuing and following up on those.

And how many tenants on the watch list are not paying rent?

I think all of them are paying rent on the watch list, but it's -- they have asked, they've called us and said that there's, like, a price break, or they-- various other things that their business may not be as good.

Okay, thank you very much.

I'd like to add, we put a lot of responsibility on our asset managers' shoulders in terms of visiting the tenant, looking at their space, following up sometimes with their banker or other references. So, there's no percentage of loss reserve or anything like that that we carry. As Keith said, it's on a case-by-case basis.

Okay, all right, great, thanks.

We'll take our next question from the site of Jason Payne, with Morgan Keegan & Co., Inc. Please go ahead, your line is open.

Actually, all my questions have been answered, thanks.

Thank you.

(Operator Instructions.) We'll go to our next question, from the site of [Daniel Domlan], with Janney Montgomery Scott. Please go ahead, your line is open.

Thank you. Just a quick question for Keith. Capitalized interest was roughly $3.4 million in the first half of the year. Where do you see that panning out for the second half of the year?

It's going down. As we stop development and some of the developments are rolling into the portfolio, that will decrease that pretty good.

Okay. All right, and then, just curious on your dividend. You guys have increased your dividend for I think it's 16 consecutive years. Just curious, is that something you're looking at to do in the fourth quarter? Is that on your mind? Or, how do you look at that?

I'm sure we'll have a discussion at the board meeting in the fourth quarter. I think a lot of that decision will be based on how we see 2010, if we see continued deterioration in the markets and FFO, it makes it a whole lot harder to raise the dividend. But, that'll be a December decision.

Okay, thank you.

Thank you.

(Operator Instructions.) We'll take our next question from the site of Scott Kirkpatrick with Teton Capital Advisers. Please go ahead, your line is open.

Yes, thanks for taking going my question. I tuned in a little late, and just wanted to make sure I heard what you said about occupancy, pricing, and bad debt in this quarter. And then probably more importantly, if you've given any kind of directional guidance on that or shared your thoughts just generally, how you see those maturing going forward through this year? And if you care to postulate on 2010, I'd like to hear that, too.

Although we're seeing more activity in really all our markets, we don't see any end to the deterioration of both rents and occupancy through at least the end of this year.

And I'm sorry, where was occupancy? And if you have an ASP on rents, where was that at the end of the quarter?

We dropped 160 basis points from the first quarter to the second quarter. 30 basis points of that was just from some vacancy from our Las Vegas purchase, and some development vacancy rolling into the portfolio. To the best of my knowledge, we have had and still do have the highest occupancy of any of the industrial REITs.

Down that 160, where did that put you?

91.2%.

Okay, yeah, that's a strong number. And so, I think you just that you expect to see continued pressure there going forwards?

Correct. And the way that we report -- and I think all REITs report rents -- is you're comparing not what's happened in the last quarter to what was a market rent in the previous quarter or even the previous year but what that space was leased for when the lease expired on the tenant going out, or on the renewal. So that, you're looking at some peak rents. And what we found in coming out of the last recession is, we hit bottom I think it was in the first quarter of '02 on occupancy, but it took four years to report rent growth.

What was the prior occupancy bottom?

88.8%, for us.

And I know it's kind of hard to compare the two cycles because things are so different, but would you generally say this situation that we're in now is more challenging than the past cycle?

It's certainly been longer and so far deeper. I'd like to believe that we have responded earlier to it this time and better than we did in the last cycle. I think the important thing is, occupancy starts back up first, and we had very strong FFO growth and very strong same-property operating result growth as occupancy went up. Your occupancy, really, in various markets has to get back up to maybe 93.5% or a little higher before you have true pricing power. So, the earnings respond first to occupancy, and as that hits somewhat of a peak, then the rent growth picks up the reason for FFO going up.

Now, we've got to get closer to the first and second quarter next year before I can really project what might happen then.

In 2010?

Correct.

Have you put any color around where you think the bottom in occupancy could be in this cycle, given you more rapid reaction to what's going on?

You'd have to tell me what you think is going to happen with the economy, and when officially we're coming out of the recession, and when employment is going to turn the corner, and all those different things.

Okay, well, I'll just throw out -- I think maybe 2% growth going forward in the back half of this year, employment probably peaks first quarter next year around 10.5%, and just --

I would hope that we'd start to have a bottom then in either the fourth quarter of this year or no worse than the first quarter of next year. But, don't bring that back up a year from now when you get on.

It's all speculation, and I appreciate you sharing your thoughts. And then just going back to bad debt -- what was the actual number? And I think I heard you say earlier you all believe it might be lower in the back half of this year, some of the watch list folks are gone now.

So, far, we've expensed $1,417,000 for the six months, and then for the remaining period, we have that in our projections--

I'm sorry, would you just be kind of enough to know, was your quarterly expense amount higher than the prior quarter?

It was a little lower. We were 700-something the first quarter and 600-and-something-- Let's see. $778,000 in the first quarter and $639,000 in the second quarter.

So, that metric seems to be improving a little.

Yes, I'm not sure that's statistically significant yet. I hope it is.

Okay, but your guess would be that it might continue to decline going forwards?

Yes.

Okay, great, thank you very much.

Thank you.

It appears that we have no further questions at this time. (Operator Instructions.) We'll take a few moments to see if any other questions queue.

Okay, well, again, thank you very much for calling in, and as always, please don't hesitate to call either Keith or me with anything else that comes up or anything that wasn't covered on the call that we could help you with. Thank you.

This concludes today's teleconference. You may disconnect at any time. Have a wonderful day.