Eastgroup Properties Inc (EGP) 2009 Q4 法說會逐字稿

Good day and welcome to the EastGroup Properties fourth quarter 2009 earnings conference call. All lines are now in the listen-only mode. Later you will have the opportunity to ask questions. (Operator Instructions)

It is now my pleasure to hand off the conference to your moderator, David Hoster, President and CEO. Please go ahead, sir.

Good morning. Thanks for calling in for our fourth 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 describes certain risks 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 date of this call.

Thank you. Operating results for the fourth quarter met the mid-point of our guidance range. Funds from operations were $0.75 per share as compared to $0.85 per share for the fourth quarter of last year, a decrease of 11.8%. For the full year, FFO was $3.14 per share as compared to $3.30 per share for 2008, a decrease of 4.8%.

Same property net operating income for the fourth quarter declined 5.6%, both with and without straight-line rent adjustments. These figures represent a somewhat greater decline than that was experienced in the first three quarters, but they were in line with our expectations. The decrease in same property net operating income for the year was 4.3% in straight-line rent adjustments, and 4.0% without.

In the fourth quarter on a GAAP basis, our best major markets, after the elimination and termination fees, were San Antonio ,which was up 7.1%; San Francisco, up 4.6%; and Jacksonville, up 4.1%. The trailing same property markets were New Orleans, down 21%; Tampa, down 15%; and Phoenix, down 14%.

Although average rents are declining, the difference between quarters is basically due to changes in property occupancies in the individual markets. Occupancy at December 31 was 89.4%, a 50 basis point increase from the end of the third quarter and ahead of our projections due to a pickup in December.

Please note that our occupancy statistics include our development properties that were moved to the portfolio at the earlier of 80% occupancy, or one year after shell completion. We have been consistent with this reporting method. If the remaining properties in our development program at 12/31 were added to the portfolio at their current occupancies, EastGroup's overall occupancy at quarter end would have been 88.6%.

Our California market continued to be our best as of year end at 97.2%, both leased and occupied. Houston, our largest market with over 4.6 million square feet, was 97.8% leased and 96.7% occupied. Our worst major market was Phoenix at 72.2% occupied.

Although year end occupancy was above third quarter results, we expect first quarter occupancy to decrease to approximately 85% and then increase in each subsequent quarter through the balance of the year. This first quarter decline in occupancy reflects an above average number of known large move-outs and lease terminations.

There is presently leasing activity in all of our markets, but prospects continue to expect cheap rent with significant concessions and feel little sense of urgency since they have so many lease alternatives.

Since the first of this year, leasing activity has been better than or at least as good as that experienced in the fourth quarter of last year. Looking at our fourth quarter leasing statistics, we renewed 54% of the 1.3 million square feet that expired in the quarter with our renewal rate slipping slightly. We leased another 516,000 square feet that had either terminated or expired during the quarter or was vacant at the beginning of the quarter, an indication that users out in the market are actually signing leases. In total, we signed 84 leases in the fourth quarter and 340 leases for the full year.

As you can see in our supplemental information, GAAP rents in the fourth quarter decreased 4.4% and cash rents declined 10.4% which was better than in the third quarter and approximately equal to our averages for 2009. We expect to experience negative rent growth for the next several years until average occupancies recover to the 93% and 94% range. This was the case coming out of the last recession for us. Average lease length for the fourth quarter was 3.6 years which was about our average for 2009.

Tenant improvements were $1.63 per square foot for the life of the lease or $0.45 per square foot per year of the lease. This number is slightly above our 12 month average of $0.43 per square foot for each year of the lease.

Although there were no property acquisitions during the fourth quarter, we did close two purchases subsequent to year end. In mid-January we acquired two multi-tenant business distribution buildings containing 193,000 square feet in Charlotte for a total price of $5.3 million. One is adjacent to an existing EastGroup asset, and the other is approximately one block away.

At the end of January, we purchased a 274,000 square foot three-building business distribution complex in San Diego for a price of $17 million. This multi-tenant state--of-the-art property was constructed in 2005 and acquired at a price approximately 20% to 25% below replacement cost. It represents our fourth purchase in the last nine months and brings our total of newly invested capital assets to approximately $40 million over that period.

In November, we sold a 62,000 square foot vacant building in El Paso to a user for $979,000 and recorded a small gain on the transaction. There continue to be only a few industrial property offerings on the market, but we are optimistic that we will begin to see an increasing amount of investment opportunities over the next three to six months.

We believe that capitalization rates will be decreasing somewhat in 2010 as compared to last year, but that we will be able to find a number of attractive acquisitions that fit our business distribution criteria.

During the fourth quarter, we transferred one property out of the development program and added a property expansion. The 150,000 square foot 12th street distribution center in Jacksonville, which was the redevelopment, was moved into the portfolio in November at 100% occupancy.

In December, we began a 20,000 square foot expansion of Arion 8 in San Antonio for the existing tenant and projected development cost is $1.9 million, which will increase the building size to 105,000 square feet. At December 31, our development program consisted of six properties with 447,000 square feet for a total projected investment of $35.5 million, of which only 15% of this cost remains to be spent. These properties are currently 38% leased.

For the full year, we transferred 12 properties from development into the portfolio. They contain a total of 1.2 million square feet with a cumulative investment of $86.1 million and are currently 79% leased. Five of the properties are located in Houston, two in Phoenix, and one each in San Antonio, Tampa, Orlando, Fort Myers, and Jacksonville.

In December, we purchased the second phase of our Sand Lake land in Orlando, which consisted of 36 acres for a price of $4.9 million. The acquisition increased this land holding to 130 acres with a total investment of $15.7 million.

Keith will now review a number of financial topics including our guidance for 2010.

Good morning. As David reported, FFO per share for the quarter decreased 11.8% compared to the same quarter last year. Lease termination fee income was $208,000 for the quarter, compared to $68,000 for the fourth quarter of 2008.

Bad debt expense was $473,000 for the fourth quarter of 2009 compared to $307,000 in the same quarter last year. FFO per share for the year decreased 4.8% compared to 2008. Lease termination fee income was $963,000 for 2009, compared to $798,000 for last year. Bad debt expense was $2.1 million for 2009 compared to $1.6 million for 2008.

Gain on sales of non-operating real estate, primarily land sales, was $31,000 for 2009 compared to $321,000 for last year. Also, 2008 included the expensing of the original issuance costs on the redemption of the preferred stock of $674,000 and a gain on sales of securities of $435,000. The net effect of these items reduced FFO by $0.02 per share, compared to 2008.

Our balance sheet is in good shape. In the fourth quarter we completed our continuous equity program by issuing the balance of 717,000 common shares at an average price of $38.59 per share.

For the year, we issued 1,600,000 shares at an average price of $36.48 per share with net proceeds to the company of $57.6 million. Our bank debt was $89 million at year end and with bank lines of $225 million, we had $133 million of capacity at December 31. The bank lines do not mature until 2012 and we have the option to extend the $200 million line for one additional year. We have no debt maturities in 2010, and we comply with all of our bank line covenants. Debt to total market capitalization was 40.3% at December 31, 2009.

For the year, the interest and fixed charge coverage ratios were 3.5 times, a small decrease from last year. Debt divided by EBITDA was 6.1 for the year, the same as last year. Our floating rate bank debt amounted to 5.2% of total market capitalization at year end.

In December, we paid our 120th 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 66% for the year.

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 2010 is projected to be in the range of $2.75 to $2.95 per share. Earnings per share is estimated to be in the range of $0.66 to $0.86.

Occupancy rates are projected to average 85% to 89%. In addition to the two acquisitions of $22.3 million in January that David mentioned, we project purchasing another $20 million of property on July 1, 2010, and $20 million on October 1, 2010. No dispositions or development starts are projected.

Termination fees, net of projected bad debt expense, add approximately $0.04 per share to FFO in the first quarter. We are also projecting proceeds of $65 million from the first mortgage to close on October 1, 2010, at a rate of 6.25%.

The FFO per share mid-point range is $2.85, which is 9.2% below the 2009 FFO per share of $3.14. The decrease is primarily due to $0.20 from same property NOI, $0.05 from a reduction in capitalized G&A costs due to lower development activity, and $0.04 from issuing common shares in the fourth quarter of 2009 that have not been invested in new acquisitions.

Now David will make some final comments.

As we stated in the last quarter's call, we believe industrial property fundamentals have hit bottom. For EastGroup, the first quarter of this year is projected to be our worst from an occupancy standpoint, and we expect to experience an improvement in each succeeding quarter of 2010.

A good way to describe our approach is paranoid optimism. Last year we raised $57.6 million of new common equity, as Keith stated, strengthening an already strong balance sheet, and we are systematically putting it to work with a series of accretive new acquisitions. In 2010, we are continuing to seek attractive investment opportunities and are in an excellent position to initiate new development as markets allow.

Keith and I will now take your questions.

Thank you. (Operator Instructions) It is now my pleasure to introduce Ki Bin Kim from Macquarie. Go ahead, please.

Thanks. This is Jon Petersen. I have Ki Bin on the phone with me as well. Can you give us some more color on the acquisitions that you've made within the last couple of months in the first quarter. Specifically, who are the tenants there, when do the leases roll, and how does the in-place rent compare to current market rents?

That is more information than we traditionally give out on a public standpoint. I can say that in both of the purchases that we believe the pricing was '09 pricing because the deals were negotiated in early and late fall of '09 and I don't believe that we could obtain the prices that -- or buy at the prices we have, if those properties were put on the market in 2010.

They are -- both are multi-tenant with a variety of tenants, which is what we like and with a variety of different rents with some slightly above market and some more above market. And that is why it is difficult when you are asked to quote a yield on the purchase and that is why we quote it the way we do, which is what the yield is at current occupancy, current rents as the leases state since it really starts to change immediately, both from a rent standpoint and an occupancy standpoint.

Hey, David, this is Ki Bin. If we could turn to your large tenant exposure? So you've outlined Universal Wilkes Company and Ethan Allen to not renew this year. Can you describe the type of space and is it very specific to those tenants, and will it take a lot of TI to reposition those assets or is it pretty plain vanilla assets?

It is pretty plain vanilla, I guess is a good way to describe it. One of the reasons that our occupancy has dropped in the first quarter is that Universal Wilkes, which is a 3PL company, in City of Industry, they were --- had planned to give us back roughly 60,000 square feet in December, and right after the first of the year they announced they were going to give us the balance of that one building space back, so we are getting back or have gotten 160,000 square feet from them. That was one of the major factors in what has happened so far this year. But it is just real basic front load space.

The Chino space that Ethan Allen is now out of can be subdivided a variety of different ways. Our hope is to lease it to a 3,000 square foot user, but it can be knocked down easily for two different prospects. We probably wouldn't like to do it, but could certainly do it to more. We do not believe in either instances the TIs are going to be exceptionally high.

It has been frustrating that the large number of large customers that we have lost either to their consolidation or to the economy and, in many ways we view this as a validation of our strategy. Big tenants are nice when they renew, but they carve you when they move out, and so the movement in our occupancy has been related to a series of big move outs over the last six to nine months and we would like to think that we are at the end of that and can start to build occupancy back up.

All right. Thanks. And just a follow-up. So what does the traffic look like for those big spaces in terms of tenant demand or tenant interest?

So far, we do not have any good prospects. Universal Wilkes' space in City of Industry has just happened and actually Ethan Allen's lease didn't terminate until the end of January. So although we have been working on fixing up spaces and marketing it, not much time has passed to really be a good test for activity. Los Angeles, the vacancy factor there has doubled in the last 12 months, but it has only gone to 5% or 6% which is one of the best in the country. So, we are optimistic that we will be re-leasing some or all of that space before the end of this year.

Thank you.

Thank you. We now go to the site of Paul Morgan with Morgan Stanley. Go ahead, please.

Hi, good morning.

Good morning.

On the acquisition opportunities, I mean, what you have in your guidance is sort of consistent with the pace that you were on last year, and how you refer a little bit to being optimistic that things are going to accelerate? I mean, what do you -- what is your pulse on the likelihood that, you know, you could beat that number and things actually accelerating versus what you have done over the past couple of quarters?

It's sort of a good news bad news like I guess a lot of things in real estate are today. The good news is that we are hearing from brokers and from discussions with institutional investors, the pension fund advisors, who hold a huge amount of industrial, that because the markets have come off the bottom in terms of valuations, and because of timing of some of their pools of assets that they will be offering more for sale this year than they did last year.

The bad news is that a lot of them are also going to be back into the market as buyers, so we think there are going to be a good many more attractive assets being offered, but it is going to be more competitive, and as a result that yields cap rates are -- however you want to define those in today's market -- are going to come down, and we don't expect to obtain the kind of yields that we have on our recent four purchases. And we are hearing that in a number of the stronger, bigger city markets where they are very attractive to institutional investors that cap rates are 7% to 8% for good industrial assets.

Now you say, okay, well is that market rents? I think maybe that is the swing in the 7% to 8% is how long the leases are, the quality of the tenants, and how far off the current market is to the leases in place. But, you know, we are shooting that we will probably be buying properties in the low to mid eights on average in 2010. And only time will tell on really how many are -- shake loose. But in what we are hearing, it is going to be a lot more than in the last year.

Okay. And then what are you thinking about the lease-up of your developments, and kind of how have you incorporated that in your guidance, and kind of how is it generally going?

It is -- we are doing more lease-up -- well, there are always one or two exceptions but we have continued to lease development space that is rolled into the portfolio in the last 12 to 18 months and, for example, in Phoenix we have had a whole lot more activity on our Sky Harbor development that rolled into the portfolio last summer than we have in the second generation spaces.

I think prospects are becoming a little more confident and a little more sophisticated from the standpoint that they see that the markets are at a bottom, and that this is a good time to trade up and still get an attractive rent. So I think that is what we are seeing now.

Fort Myers we have not done any leasing, and Tampa, Oak Creek IX are the two exceptions but in the other markets we are slowly making progress on leasing development space that has been built in the last couple of years. And that is just built into our general guidance.

Okay. And then last thing on Tampa, you mentioned also that is one of your worst markets from an occupancy perspective. Is it -- are there any -- is there any -- is it just bouncing along the bottom now or is there any --?

Well, since the first of the year we have seen a pickup in activity, not anything to get really excited about, but we have signed a couple of leases and have -- are more optimistic there, at least on the smaller spaces, you know, 25,000 square feet and below, than we certainly were three to five months ago.

Great, thanks.

Thank you.

We will now go to the site of Alexander Goldfarb with Sandler O'Neill. Go ahead, please.

Good morning.

Good morning.

I just wanted to -- maybe you said it and it was buried in there, but Sky Harbor, you commented that Phoenix is on the tough side, and yet it looks like you made some pretty good progress on leasing that up. So just want to get a little more color on, one, if it was --- if you could just do normal leasing terms or if you had to do some extra heavy incentives et cetera, and then, two, those tenants are they new to the market or they are relocating within the market?

In terms of incentives you don't sign leases in Phoenix anywhere without incentives. That is a major fact of life there where there is lower rents, free rent, broker incentives, the whole shooting match. But we have been very pleased with the progress at Sky Harbor, and we think besides just us doing a good job that it shows the quality of the property and its great central Phoenix location near the Sky Harbor airport, and our new customers are a combination.

We have a couple that are new to the Phoenix market, strangely enough with the downturn there, and then we have had some other, both expansions and consolidations, and our projected yield on that property shows as it has come down a little bit each quarter, and I guess we are now around about a 6% yield on it. It reflects the concessions that we have had to give to lease it up. But as I mentioned, we have good progress there and have good prospects that we are dealing with today and it is outperforming our second generation assets in Phoenix.

Okay. Then along those lines, the home builders seem to be taking advantage of this tax credit to build more homes, I'm not really sure why, but are you seeing more demand across your portfolio from home building related tenants, or has that not really flowed through?

I -- we have not seen any pickup yet. It is just -- it has been a slowdown in those type users going broke or going out of business. And a lot of that I think has already happened. But no, no place have we heard that the increase in home construction has changed anything in the industrial sector.

It is just a positive sign for the individual metropolitan areas that the number of houses on the market, whether new or old, has come down a lot. But no, we have not seen anything where we could say, boy, this is great, these are going to be good prospects in '10 or '11 yet.

Okay, and then just the final question is, just on the leasing front going back to some of the earlier comments. There is some like the Tower which is up at the end of the year. How far out are you going to speak to tenants on renewal?

And what are the -- what do you find the brokers doing? Are the brokers just -- I mean I'm assuming they are doing the typical try to play everyone against each other and try and get the best deal and drum up fees. But what is the sense as far as the tenants go? Do they feel they need to rush now to lock in? Are they willing to sign new deals a year or so out from expiration or are people waiting fairly close to the end before they make their decision?

It's a little bit of everything but we are seeing -- and I think this is encouraging -- that people are looking a year out now or close to a year out for industrial space, and that is almost unheard of, at least in our experience, especially for the smaller users.

But we are talking to prospects who will need space in the fourth quarter, and I think that is two reasons there. One you mentioned, the brokers like to book commissions, and so they are having their clients look sooner and if a lease can be extended then they get paid today.

But I think secondly, the point as I mentioned earlier where some of the prospects that are comfortable with their own business and where it is going to be in the next couple of years are saying this is a great time to tie up space, rents aren't going to be any better today in the foreseeable future so if I can make the commitment, I certainly will.

We view that as a positive sign in the market and where somebody -- if we have a vacant space and somebody wants to sign a fourth quarter lease, a few years ago you would say no, I'm going to have somebody in there before that. Now we are looking at it as a bird in hand and we have got plenty of other vacancies to work on. So people are signing farther out in industrial, which is unusual.

Okay, thank you.

Thank you.

We now move on to Gina Glenna from Bank of America.

For your $40 million of future acquisition assumption are you forecasting yields of the kind of low to mid 8% that you mentioned, or something closer to the January acquisition in-place yields?

Mid 8% -- low to mid 8% on average. We don't think we will match the '09 yields.

I see. Thank you. And then just in terms of, you know, you guys have one of the best balance sheets out there, would you consider increasing your leverage if you find more opportunities that meet your criteria out there?

Absolutely. When we started our continuous equity program, we assumed that we were going to increase the balance sheet by 60% equity and 40% debt. So, looking at raising almost $58 million of common equity last year, if you do that in 60/40 it means we can borrow another roughly $40 million to take the $95 million and we have spent, on acquisitions, $40 million. So just with that combination, we have over $50 million of purchasing power and debt capacity just to bring our balance sheet back to where it was before we started the equity program last May.

Great, thank you.

Thank you.

We now move to the site of Michael Bilerman with Citi. Go ahead, please.

It's Eric Wolfe here with Michael. You already touched upon this a bit, but in terms of your expectation for a pickup in occupancy in the back half of 2010, what specifically gives you confidence in this expectation? Was it the stronger leasing that you saw in the fourth quarter, or something particular to your portfolio that gives you comfort from a bottoms up perspective, or is it more of a macro top down perspective given the return of GDP growth recently?

We do just about everything from the bottom up because of our -- on average smaller customers that are really focused on what is going on in their individual metropolitan areas and individual sub markets, and really starting after early December, after Thanksgiving, we have experienced a pickup in leasing activity.

Now, as some of our people in the field describe it, it is inconsistent. You get lots of calls for two or three weeks and then it is dead for ten days and then picks back up. So we can't be really excited about it yet, but we see more inquiries; we're putting out more proposals than we did in the third quarter and early fourth quarter.

And as I mentioned earlier, I think it is safe to say that in every one of our markets, the first half of the first quarter the activity has been better, or at the very least equal to what we were experiencing before the end of the year. And in spite of all these move outs, we have over 900,000 square feet moving out in the first quarter and half of that is two tenants.

But in spite of that, because we can certainly have that identified, that we have been making progress in our leasing, and as I said expect to have occupancy work its way back up at each quarter end in 2010.

Got you. It makes sense. Thanks for the detail.

Thank you.

Thank you. We now move on to Paul Adornato with BMO. Go ahead, please.

Thanks, good morning. Just have a few more follow-up questions on the leasing activity and specifically I was wondering if you could focus on the expiration schedule for 2010? First, I was wondering if there are any other large tenants out there expiring in 2010 where you don't know what their plans are? And secondly, was wondering if you could characterize the remaining expirations as, you know, likely to renew, likely to move, or simply do not know at this time?

Our budget reflects on a sweep-by-sweep basis, tenant--by-tenant basis what we think is going to happen, and I don't have in front of me the number that shows renewal versus move out, re-lease, that sort of thing. In our supplemental data, we show that in 2010 that 15.3% of our portfolio turns in this year.

We have already reduced that. Some of it is because of move outs, but we've already reduced that down to 11%. So we are actually ahead of where we are in February in past years so I think that is a positive.

When you look at our major tenants, our top ten customers, we are getting a little shift there obviously with Ethan Allen moving out, and Universal Wilkes dropping back to the 309,000 square feet that are in the building that we co-own with the company, but we really don't have any other big -- in that size category -- big companies coming up until the end of the year and the biggest is Tower Automotive, the small space in Houston, Ceva Freight, and we are in discussions with Tower.

And is that 2010 or 2011?

Well, it is 12/31/10 so it doesn't affect our '10 numbers, but it certainly will affect us going forward if we are not able to renew that lease, but we are optimistic about that given a lot of things that are happening with the, almost next door, Nissan plant and what they are doing making trucks there and that sort of thing. I learned a lot more about the truck business than I knew before.

Okay, thank you.

Thank you.

Now, we will move on to Mitch Germain with JMP.

Hey, David. How are you doing?

Good morning.

Just on the Charlotte and San Diego transactions were they widely marketed?

Oh, absolutely. All four of our purchases in the last 9 or 10 months have been marketed by CB Richard Ellis out of different offices. I think they have done a majority, at least recently, of the industrial property transactions. And we have found that institutional sellers widely market things because they are trying to prove to their clients that they got market for the property, whether they like the price or not, that it was widely marketed to the world.

And in the San Diego purchase I think that was originally offered in the late spring and we were the third or fourth or fifth highest bidder and we threw the package away when they told us, you know, what they were selling it for, and then they called us back in late October or beginning of November and said can you raise your price a little bit?

And we do well in all of our other purchases because we have a reputation for closings. There are no financing contingencies; we don't beat up sellers over nickel and dime things when we are a buyer. If it is a problem with a roof, we get that straightened out, but we just have -- patting ourselves on the back -- a really good reputation for doing what we say we are going to do, and so many times we can buy at a lower price than somebody with a lot of contingencies and so that has worked well for us in the past year and we hope that will continue this year.

Thank you for the comments. And you had mentioned there were only a few offerings in the market right now. I mean what sort of deals are you guys looking at? Are there ones that sellers possibly facing financing or tenancy issues, or are you seeing more of the stable assets on the market right now?

It is institutional. Whether it is the pension fund advisors, or large developers that are strongly capitalized or REITs. And so we have not seen any real distressed assets in industrial yet. And maybe that will come, but I have said for a long time that industrial real estate tends to be held in strong conservative hands, primarily by institutions, and we don't expect to see a lot of problem real estate.

Great. Thanks for your thoughts.

Thank you.

And we will now go to Bill Crow with Raymond James. Go ahead, please.

David, I joined a little bit late so I apologize if this has been mentioned, but where is your occupancy today after those move outs?

We are down to, in February, we're 86% and change.

86%, okay. So you gave guidance for 85% to 89% or 90%, I think for the year but you are going to count --

Average for the year.

Average for the year, but you are going to bounce off of first quarter. Could first quarter be below 85% then?

Who knows but -- anything can happen, but we project that it will not be.

Okay, great. And then --

And like I said, we have been making good progress against our projections so far.

Yeah. You talk about the leasing coming back in the back half of the year. Is it going to come back enough that we see positive NOI, same store NOI by 4Q this year, or is the rent spreads going to keep that from happening?

Rent spreads are certainly going to hurt that, but I think occupancy still is going to be a bigger factor. You know, we finished the fourth quarter at over 89.4% occupancy, and I don't believe that we are going to average that for the fourth quarter of this year. Our hope would be to get back to that number, but not average it for the quarter. And you throw in the rent declines and so we do not -- we certainly see a -- less of a decline of same store as we go forward, but it is not going to go positive until 2011, and occupancy is the real driver of same store.

As we learned coming out of the last recession we were reporting negative rent, as the way we reported for several years, three or four years. But FFO was going up because occupancy was going up so much, and you really don't get that increase in rents in any significant way until your occupancy is over 93% and you really have pricing power again.

Okay, great. That's it. Thanks.

Thank you.

We now move on to Brendan Maiorana from Wells Fargo. Go ahead, please.

Great, thank you. Good morning. This is Young Ku here for Brendan. David, you've said before that small box tenants tend to improve earlier on in the recovery. Are there any markets that you think might be different this time around or be more challenged for a longer period of time?

Phoenix probably. Phoenix has thrived on job growth and a lot of that was related to the housing industry. And although it was getting close to bottoming out, I think it will be a while before that bounces back strongly. I think Phoenix could be slower coming back.

Within our portfolio we are starting to see things cycle a bit. Florida was really our first market into the recession because of housing and over the last 60 days, we have seen more positive things happen there than we have in a couple of years. Where Los Angeles has been steadfast for years, we have seen, obviously, an increase in vacancy in the city and an increase in our own portfolio.

So that is one of the reasons we are in the states we are in, because they don't all react or cycle the same way,, and we are optimistic that we are going to see steady -- continued steady improvement in Florida maybe other than Fort Myers but we don't have much there. But in the other cities we expect to see occupancy tick up.

Thank you for that. Speaking of Florida, you bought some additional acres in Orlando and occupancy picked up quite a bit. What is different between Orlando and Tampa?

Tampa seemed, in hindsight, was much more tied to the housing industry, and took a much bigger harder hit as a result of that downturn than Orlando did. Orlando still has the tourism business; everybody is still going to Disney World and SeaWorld. It is growing as a medical center and it is still a big defense contracting area, which are all industries that seem to be holding on or improving as compared to the consumer industry. So we just feel better about Orlando at this point.

The land purchase was something that was negotiated a couple of years ago at a very attractive price. As we moved forward, we were able to make the price even more attractive, so that will be our next major development site in central Florida. It has almost a mile of frontage on the Bee Line Expressway, so it has got great exposure. So hopefully in 12 to 18 months we will be talking about what we will be doing there.

Okay, and the Jacksonville project that was delivered in Q4, the stabilized yields seem to have been driven down quite a bit. What was the driver behind that?

We have a food related company that took the first 100,000 square feet of the building, close to 100,000 square feet. And they talked about expansion and for them to take the whole rest of the building, we made them an attractive offer for that last 55,000 square feet, and that is a straight-line yield that you see. So, as time goes, the cash rents will show a nice improvement there. But that was an incentive to get the building leased.

Got you. Okay. And, Keith, $65 million in mortgage debt that you guys are expecting for the year at 6.25% rate. That is a pretty good rate. Is that what you are seeing in the market or is that something that is more firm?

We are seeing in the market now at even a tad below 6% on some good deals so we think 6.25% is a pretty good rate to put in right at this time.

Okay. Got it. And finally, where do you guys include acquisition costs on your income statement?

That is just in the G&A and we break that out on the deals that have closed in the supplemental data.

Okay. Got it. And what are --- so okay. Got it. Thank you very much.

Yeah.

Thank you. We now go to Dan Donlan from Janney Capital. Go ahead, please.

Morning.

Morning.

Just real quick on the capitalized interest. You guys did about $0.23 in 2009. I think you said that capitalized interest is going to be down about $0.05 in 2010. So is that -- am I thinking about that right?

No. The $0.05 that was in the G&A category and that was the capitalized development costs that were down $0.05 that was mentioned there.

Okay.

Capitalized interest will also be down; from 2008 to 2010 is probably almost down a half.

Okay, all right. And then on the California spaces, what is the cost of carry there per year? Can you give maybe a per square foot number? Is it $0.25 a quarter or --?

I can't quote you that number exactly. Each area is different given the property taxes and insurance related to -- it is really the CAM charge on that and on an annual basis I think that runs -- I would just be guessing so I'm not going to give you a number right now. We can get back to you with that number if that is important.

Okay.

That is just built into property operating expenses on the income statement, and is just not reimbursed through a CAM charge.

Okay. And then lastly, and while this is a ways off, I was just kind of curious, with the widening of the Panama Canal coming in 2014, you know, U.S. imports are supposed to increase dramatically to the east coast. Was just kind of curious, what impact you think that could have on your Florida markets as well as maybe California?

Well, in California, some people say that --- or project that Long Beach and L.A. ports will lose some business. Our properties are fairly close in; Chino is western Inland Empire. I think if there is a negative there, it is going to be way out in the eastern Inland Empire, so we don't see much of a negative effect there. I believe the population of Los Angeles is going to continue to grow, and that is what benefits our assets.

In Florida it is a little early to tell, but we have a presence in Jacksonville, which has just upgraded its port, and presence in Tampa. Our South Florida assets probably will not be affected one way or another. But we think we will benefit as the economies of those metropolitan areas benefit by additional trade and jobs.

We have never tried to directly be tied to a port because that generally is the bigger box space and can be specialized. So, we just hope to pick up the ancillary benefits when they occur.

Okay. Thank you.

Thank you.

Thank you and we will now go to Ross Nussbaum from UBS. Go ahead, please.

Hey, David. Good morning.

Good morning.

I want to talk a little about cap rates. I get the sense from going out and talking to investors that there is this view that industrial cap rates are somehow 7% to 8% nationally, and yet when I go out and talk to a number of your private peers and get a sense of the types of transactions that are in the works, the cap rates in your markets are consistent, it seems, with where you are actually buying them.

You know, I'm just staring at a list of notes that I have got just from conversations over the past few weeks and I have got 300 plus million of transactions in the works at 8.5% to 9.5% cap rates. So I guess I'm just curious, is that where pricing really is?

One of the things that is difficult in a market with falling rents is how do you define cap rate? When we look at a purchase we put together four or five pro formas with everything from current rents, current occupancy, to bottom-of-the-market rents, at 95% occupancy; recovery, at 95% occupancy; or some combination looking out two years with vacancy and leases rolling at what we think would be a conservative market rent, plus the contractual rents that are still in place. So it is really a moving target.

I think also that most brokers will tell you that there is a growing dichotomy between Class A assets and Class B or C assets, older assets that have some --- they might have a great location but a physical obsolescence. I think there is a real dichotomy between good [dock high] Class A assets versus showroom or flex assets which have much higher cap rates.

I think the cap rates that I hear thrown around that are under 8% are in the prime markets, Class A, if not brand new space or close to new space, certainly space with little or know obsolescence. So it is the best asset so you can be having them trade at the lowest cap rates. So I think the range between good and bad is widening.

Yes, no, I would agree with that. I guess the question, you know, was in the spirit of it, it seems like it is easy to paint stuff with a pretty wide brush when you hear about assets trading at 7 handle cap rates and you just sit back and say you just can't apply that to the whole sector.

Exactly, and again, I think -- I believe cap rates -- and I have been saying this for awhile -- are coming down this year because there is going to be more money chasing those investments, and people have more confidence, whether it is warranted or not, but more confidence about markets hitting bottom, the economy improving, so they can start again buying on expectation rather than pessimism.

And so I think anything that really is traded through the first quarter of this year like our two deals in January are '09 pricing, and that, you know, it is going to take deals closing in the second and third quarter for an establishment of what this year's cap rates are. Because all of this data is historical, and I think this is changing fairly rapidly. I don't think it is going to be a massive change, but it is changing rapidly, so I mean we -- as I said before, we don't expect to buy assets this year and talk about 9-plus yields.

Thank you.

Thank you.

(Operator Instructions) Well, sir, I am showing no further questions at this time.

Thanks, everybody, very much. As always, Keith and I are available if there is something that needs to be clarified or we didn't touch on something you want to discuss, so please give us a call and look forward to hearing from you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.