Eastgroup Properties Inc (EGP) 2011 Q1 法說會逐字稿

Welcome to the EastGroup Properties first-quarter earnings conference call. I will now turn the conference over to David Hoster, President and CEO. Please go ahead.

Good morning, and thanks for calling in for our first-quarter 2011 conference call. We appreciate your interest in EastGroup. Keith McKee, our CFO, who 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 statement 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's 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 midpoint of our guidance by $0.01 per share. Funds from operations were $0.71 per share as compared to $0.73 per share for the first quarter of last year, a decrease of 2.7%. This decrease was primarily due to a reduction in termination fee income in 2011.

Same property net operating income for the first quarter declined 1.4% with straight-line rent adjustments and 1.2% without. These figures represent our best results since the fourth quarter 2008.

When termination fees are excluded, same-property net operating income in the first quarter increased by 1.8% with straight-line rent adjustments, and was up 2.1% without.

In the first quarter on a GAAP basis, our best major markets after the elimination and termination fees were San Antonio which was up 7.6%, Tampa up 6.1%, and Los Angeles up 5.2%.

The trailing same property markets were Dallas, which was down 14.1%, El Paso down 7.7%, and Charlotte down 7.6%. The primary difference between quarters is basically due to changes in property occupancies in the individual markets. Despite the fact that average rents are continuing to decline.

Occupancy at March 31 was 90.5%, a 70 basis point increase from the end of the fourth quarter and ahead of our projections due to a strong uptick in March. It also represented a 430 basis point increase over our occupancy at March 31 of last year. We expect occupancy to continue to increase in each quarter this year and in 2011 in the 93% range.

Our California markets were the best at 97.1% leased and 96.1% occupied at the end of the first quarter. Houston, which is our largest market with over 4.8 million square feet, was 96.2% leased.

Our most challenging major markets continue to be Tampa at 83.4% leased, and Phoenix at 82.7% leased. Although both of these markets have improved since the end of the year.

Increasing, occupancy is the good news. As you can see from our leasing statistics, the steep decline in average rents is the bad news.

GAAP rants in the first quarter decreased 20.7% and cash rents dropped 24.3%. Although reported rents will continue to be negative well into 2012, we believe that the rate of decrease will begin to reverse in the second quarter.

In the first quarter, we renewed 67% of the 1.1 million square feet that expired in the quarter and signed new leases on another 22%. We also leased 686,000 square feet that had either terminated or expired during the quarter, but was vacant at the beginning of the quarter.

Average lease length was 3.9 years, which was slightly below our average in 2010. And improvements were $1.48 per square foot for the life of the lease, but $0.38 per square foot per year of the lease, which was our lowest in almost two years.

Industrial leasing activity is improving. Almost all of our major markets have experienced positive net absorption for at least two consecutive quarters.

Overall, the leasing trends are good. We did not have any property acquisitions or dispositions during the first quarter. And we do not currently have any property under contract to either purchase or sell. In spite of this, we continue to be optimistic that we will begin to see an increasing number of attractive investment opportunities over the next three to six months.

As a result, we have not changed our guidance of $25 million of acquisitions, but we have pushed it back to October 1.

As previously reported, we began development of two new business distribution buildings in existing EastGroup parks in Houston. World Houston 32 will contain 94,000 square feet and has a projected total cost of $6.8 million. It is 100% pre-leased to a single tenant and is scheduled to be completed by the end of the year.

Beltway Crossing 8 will offer 88,000 square feet of multi-tenant space with a projected total cost of $5.3 million, and should be available for occupancy in October.

On October 31, our development program consisted of three properties. The two just mentioned in World Houston 31, which was started in December, giving us a total of 226,000 square feet, which is presently 47% pre-leased. All three buildings are LEED designed and registered for LEED certification. Our goal is for all our future developments to be LEED certified.

During the first quarter, we transferred the 20,000 square foot Arion 8 expansion in San Antonio into the portfolio.

EastGroup's development program has been and we believe will again be a significant creator of shareholder values in both the short and longer term. To date, we have developed almost one-third of our current portfolio, adding 9 million square feet of state-of-the-art warehouse space in our core markets.

We have not projected any additional development starts for the balance of 2011. But we will be disappointed if we are not able to begin construction of at least another two buildings this year. We continue to work on a number of both potential build-to-suit and partial pre-lease opportunities. We presently have four projects designed, permitted and ready to go.

Keith will now review a number of financial topics, including our updated earnings guidance for the balance of 2011.

Good morning. As David reported, FFO per share for the quarter was $0.71 compared to $0.73 for the first quarter last year. Looking at the primary differences, lease termination fee income was $455,000 for the quarter compared to $1,413,000 for the first quarter of 2010. Bad debt expense was $134,000 for the quarter compared to $616,000 in the same quarter last year.

Termination fee income net of bad debt expense was $476,000 lower than last year or $0.02 a share. Debt to total market capitalization was 38.6% at March 31, 2011. For the quarter, the interest and fixed charge coverage ratios were 3.14 times and the debt to EBITDA ratio was 6.6.

Our bank debt was $144.2 million at March 31, and with bank lines of $225 million, we had $80 million of capacity at quarter end. The bank credit facilities will mature in January of 2012, and at our option, we can extend the $200 million line for one year on the same terms.

We have only one mortgage due in the remainder of 2011, which matures in May. Its balance, at March 31 was $22.9 million with 7.92% interest rate. We also repaid a mortgage on January 31 that had a balance of $36.1 million, and an interest rate of 7.25%.

In March, we executed an application for a $65 million nonrecourse first mortgage with an interest rate of 4.75%, a 10-year term, and a 20-year amortization. The loan should close at the end of May.

The collateral for this loan is the properties that secured the two loans maturing this year, less one property that has 611,000 square feet.

In summary, we are paying off $59 million with a blended interest rate of 7.51% and using less collateral for a $65 million loan at 4.75%.

In March, we paid our 125th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.52 per share equates to an annualized rate of $2.08 per share. Our dividend to FFO payout ratio was 73% for the quarter.

Rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property and net operating income.

We believe this revenue stream gives stability to the dividend. We increased the midpoint of our FFO guidance for 2011 by $0.01 per share to $2.92. Guidance changes have operations increasing $0.025 per share, but we moved the proposed operating property acquisition of $25 million from July 1 to October 1 close, which reduced FFO guidance by $0.015 per share. Earnings per share is estimated to be in the range of $0.71 to $0.87.

Now David will make some final comments.

We believe 2011 is a turnaround year for EastGroup. Our major markets are experiencing improved leasing activity, and our occupancy is up and should be higher in each quarter of the year. In addition, same-property operating results are turning positive.

We have historically created an accumulated shareholder value through our development program, and we are again, developing in several of our existing parks. And finally, our strong balance sheet gives us the flexibility to do just about whatever we want. Keith and I will now take your questions.

(Operator Instructions). Michael Bilerman, Citi.

This is David Shamis here with Michael. So, it looks like your same store NOI guidance actually came down about 65 basis points at the midpoint from your previous guidance. So just wondering if that reduction was primarily due to first quarter coming in below your expectations or just the more cautious view for the balance of the year?

Somewhat more cautious and just being able to narrow the spread, given revised projections for the balance of the year. I think it's important to note that we think that in the second quarter, it will be about a break even with termination fees in there, and that's -- and we still -- we had some large wins in the second quarter of last year. After termination fees, it should be positive, and then we expect the remaining two quarters to be positive.

And then on occupancy, you had expected the first quarter to come down, which obviously didn't happen, so I'm just wondering what changed during the quarter. And then also, you mentioned that you expect occupancy to build over the rest of the year, but at the same time, the lower end of your occupancy guidance came down, so what drove that decrease in your expectations and what would have to happen for you to get to that low end?

We outperformed our own projections in the first quarter just simply because leasing activity picked up, and we signed more leases than expected, and had some earlier move-ins. We had a nice little, as I said before, uptick in March. And we think that we will be able to, as we actually said a couple of months ago, that each quarter will show a bit higher occupancy.

The range on the guidance, I don't want to say that our guidance is not important, but we really start with the midpoint and work out, and that midpoint reflects what our up-to-date projections show. And then we put a little fudge factor on each side rather than showing two extremes and averaging the difference.

And then just turning to your rents, obviously, the magnitude of the rolldowns is pretty steep. From a competitive standpoint, are you aggressively trying to undercut your competition or is that just where your market rents are today?

Let me add one thing on the previous question on, that actually the low point of our occupancy on the spread and guidance went up a little bit as the top came down just a hair. And those are average -- meant to be average numbers, not extremes.

On occupancy and rents, we look at each individual potential transaction and decide how long the space has been vacant, how long it will be vacant if we don't get aggressive with the outstanding prospect and make those individual decisions.

And one of the things that affected us in the first quarter was our large lease, 200,000 square feet in Chino. And I hate to say, well, if you take that out it would've looked better because that always ends up being something of a recurring, nonrecurring item, but the first-quarter numbers would have been about the same as the fourth quarter if we had taken that large 200,000 square foot lease out.

But there's something else I'd like to add on rent and rent spreads, is that there are really two types of downturns in rent, and you don't like either one of them, but one is where you are renewing a lease and the rent goes down 25% and your cash flow from that asset immediately drops 25% because of that.

The other is when a space has been vacant 12 to 24 months or longer, and you re-lease it, and the rent spread is 20% or 25% below what that previous tenant was paying several years ago, and that's a real positive for your cash flow because on a year-to-year comparison you had zero, and actually you were paying expenses on that space in the previous year.

So as I say, you don't like either one of them, but when you're leasing the space that's been vacant for longer than a year, it's going to help your FFO numbers going forward.

Right. And you had also said that you expect the rate of the rental declines to moderate in the second quarter. So we're a couple weeks into the quarter now. Just are you seeing anything to give you confidence? Or is that just what you think?

We looked at the leases that have been signed in the first couple of weeks and the ones that are being negotiated, and we see some improvement, not dramatic, but at least some improvement.

And, coming out of the last recession, we've looked back at our numbers, and it took four years from the time that we started to report negative rent growth to the point that we again started to report positive growth. And probably some of that is related to the average lease length of four-plus years coming into play. And another factor is getting occupancy back over 93.5%. So, we don't expect the rent spreads to turn dramatically in the short term, but when they do turn, historically, we have somewhat of a rent spike. It went from rents being slightly down or flat to a double-digit rent growth over a one- to two-quarter period. So, we're looking forward to that happening again.

Great. Thank you very much.

Jamie Feldman, Bank of America.

Thank you and good morning. Just a quick follow-up on that last question, so when do you think you could see spreads turn positive?

Certainly not this year. In being optimistic, probably mid to late next year, at the earliest. But that would be at the very earliest. But I mean look, as I say, looking back historically, it took at least that long coming out of the last recession.

And the other thing I think that's important to note, although rent spreads were negative, that we had nice growth in FFO simply because occupancy was going up and very much more than offset the drop in rents over that period of time. And, when you start to throw in new investments, whether it's acquisitions or development, that adds, certainly, to your bottom line, and that was, again, the case early in the last decade.

Okay. And then in terms of the leases you've been signing lately, what kind of free rent periods are you including?

Renewals, there is generally little or no free rent. One or two months at the most on a renewal, just as an extra incentive. On spaces that have been vacant for a while, the free rent is -- gut feel, it's less than it has been, but on average, it's still probably pretty close to one month per year of the lease.

One thing we are doing in several of the Florida markets in particular is we're -- rather than a lot of free rent, we are doing a low teaser rate, but bumps that are well above average to get us back up on a three- to five-year lease, but with a really low teaser rate the first year.

Okay, and then what's the average lease duration for leases for vacant space?

That's -- in some ways it's hard to calculate, but when we look at the vacant spaces that we have just leased in the last quarter, it's somewhere roughly a year and a half to a little bit higher.

You're saying the total lease is a year and a half?

Oh, no, no, I'm saying how long it's been vacant.

Oh, no, no, I'm trying to -- I'm saying if you were to just break out the leases you've been signed for place that was vacant, what do you think the average lease length is?

Oh, let me look at my table here.

I guess what I'm trying to get at is when do we start to see a free rent period burn off where your cash NOI and your GAAP NOI get a little bit closer? Or because of lease expirations, will it kind of consistently be the same straight-line number?

Oh, no. It -- historically, as markets improve, you give less free rent, and straight-line rent as a number in the equation shrinks dramatically. But on our new leases, the average lease length is 4.6 years. On renewals, it's 3.1.

Okay. I mean I guess do you think we're getting at the point of the -- like how far do you think we are from that point of your cycle, your portfolio cycle where the straight-lines start to shrink? Or is it you're constantly -- as long as you are doing renewals, you are constantly giving away the same amount of free rent?

I think the amount of straight-line rent -- I've not looked at those numbers specifically, but that should start to shrink going forward, just because we are giving less free rent.

Okay. And then your comments on the development pipeline, can you give a little more color on possible magnitude and which markets?

Just from a competitive standpoint, would not -- I don't want to get into too many specifics on markets, but we're still looking at some additional development in Houston. That market has been reasonably stable. There's a demand from the energy-related companies for newer space, so we see that possibly having a start or two in Orlando, and we are looking closely at San Antonio.

Okay. But I guess --

(multiple speakers) I was going to say our average development is somewhere between $5 million and $8 million a deal. So if we did two more this year, we would be looking probably at another $10 million to $12 million of starts.

Okay. That's kind of the range you're thinking about, in terms of things ramping up?

I hope that that is a minimum. It all -- build-to-suits are bigger numbers, and harder to pin down. Starting the building with a little bit of pre-leasing or spec, it's strictly confidence in the market.

Build-to-suit is generally a long, drawn-out negotiation, and so far, the ones that we have been working on really since the fourth quarter last year, we haven't lost any. The companies just haven't decided to move forward yet. So we could have something happen in fairly short order there or nothing. So I'm a little more comfortable talking about what we can do with our typical business distribution building that would have little or no pre-leasing.

Okay. And then finally, in terms of being priced out of acquisitions, what kind of pricing are you seeing that's too rich?

Well really in the last quarter, it's not been so much pricing. It's been there just haven't -- assets fit our business distribution criteria. We've seen an increasing number of service center type deals being offered, of single-tenant larger industrial buildings, bigger boxes in a variety of markets, most of which don't fit us. But, in talking to brokers, we -- we are told that we are going to see a lot more being offered over the balance of the year. And that a larger number are going to fit our criteria.

Okay. But not giving any sense of where pricing is?

No.

Thank you.

Ki Bin Kim, Macquarie.

Thank you. just going back to your comments about free rent and teaser rates, is there a -- under your projections, is there a -- what time period are we looking at where most of that starts to burn off and your cash NOI starts to increase?

When we look at our productions, we just look at every space from the standpoint of when we think a customer will occupy, and when their cash rent starts. I don't have a figure that (multiple speakers) to tell you what -- in so many months that's going to switch.

Maybe I can ask a different way. How much NOI right now is being lost due to free rent on teaser rates?

I have got to admit, I haven't calculated that number.

Okay. Next question. Where's the demand coming right now, from your occupancy increases? Is it really kind of the bulk [done] -- distribution users or just small business owners?

As always with us because of the nature of our buildings, it's a real mix. Construction-related users seem to be up, and I don't have an easy answer for you as to why that's happening. Maybe so many of them cut back so much in the depth of the recession, but we are seeing a pickup on all sorts of construction-related things from people that do doors and windows to heavy construction to still electrical and plumbing. So that's a little bit of a surprise, but that's been on a percentage basis, maybe our biggest.

Then secondly is the pre-PO, logistics-related, airfreight were delivery, even some moving and storage. Then, as we have talked about in previous calls, food and beverage is just fairly steady, and that includes alcohol. That business doesn't seem to have suffered much in the recession. And oh, and then in Houston, the vast majority is energy related, in all aspects of the energy business.

And last question [if only gone] -- if you're talking about developments, how far are market rents to justify new developments? How far are we from market rents to justify new development?

I don't think you can generalize through our portfolio or any portfolio. You have to look at individual markets and individual submarkets. One submarket in Houston we think we are right there. And that's why we started Beltway Crossing 8. In another submarket, we are very, very close. In some of our Florida markets, it's much further away, although Orlando, we're 9% and 10% away. And, so we think we are real close, and that's to the point where maybe you can sign a pre-lease of a portion of the building, prove the market to yourself and then go ahead and start it.

And --

But once rents start back, as I mentioned, it can happen very quickly in a submarket.

So, given that it seems like acquisitions are getting harder to come by, at this point, are you guys more willing to maybe buy more land or things like that?

That's a good question. We are actually working on a number of land purchases now, and I don't think it's a change in our approach. It's just we see some opportunities into some markets where there have been full enclosures, or where owners have decided that it's time to cash out.

So we are working on a number of those now and again, it's just like acquisitions. We could end up buying three or four parcels of land or none. But, there's a lot more activity in that area than we had three or six months ago.

Is there a sense of dollar volume that you could give us?

I hate to at this point because then you will -- on the next call, (technical difficulty) hit it or something, so --. We would rather report what we have under contract, and it's just in discussion stages now.

Okay, thank you.

Chris Caton, Morgan Stanley.

I wanted to ask a little bit more about your markets and the leasing velocity there. I noticed you had a pretty big pickup in leasing in Arizona. Maybe, can you talk about the momentum there, which is one of your more challenged markets, and then maybe you could compare it to Tampa which is, I think you mentioned, your other kind of most challenged market.

Phoenix has been a very pleasant surprise to us, and I think to the industrial community out there. If I remember my statistics correctly, I think Phoenix has had 2 million square fee of net absorption in each of the last three quarters. And a number of the bigger spaces on the west side are now being filled up.

And I was out there a couple of weeks ago, and a certain amount of that seems to be users that want to do business in Arizona versus California, which is a positive. Also, the overall economy is, I think, picking up faster there than prognosticators had previously predicted. So, that's been a nice pickup for us.

And part of the fact that we were down was, of course, we brought a big development online at an inopportune time really close to the bottom of the market. And, happy to report that we've got enough prospects to sell it. Whether that happens or not, we're a whole lot more optimistic on what's going on the Phoenix market than we have been in the last couple of years.

Tampa is just not seeing a similar pickup in activity. It's -- things are getting better there, but not at the same pace as Phoenix. There's -- the psychology, the leasing psychology, broker's psychology in Phoenix has changed. That's not happened in the Florida markets yet.

Thanks. A couple questions on the development pipeline. First, picking up on the rent commentary, you said you had seen it in the Beltway 8 kind of area. If rents are on that are about $5, where do you think kind of they were at the bottom or a year ago? Can you give us a sense of how quickly that market moved recently?

Our comparison in that market, in the Beltway Crossing 8 submarket in the north, north/northwest submarket, rents didn't come down that much. We just weren't leasing much space for about a year, and then there was a big pickup in Beltway 7, which is sharing parking head-to-head with Beltway 8, and the last three leases we signed there in the last six months were all that rents that justified kicking off Beltway 8. So that was our market study that we had filled all of the front park, rear-load space that we owned in that park, and that we were signing in at rents that worked. That's really how we look at it.

What are we signing rents for today? What's the demand? So I tell you there wasn't any -- Houston never had a big dip, so it was more of I guess a stutter than a drop, and we work harder to keep our pro forma rents on a development deal than we would on a second- or third-generation vacancy.

Understood. Just last question for me, looking at the Houston 31 and World Houston 32 properties, it looks like 31 is about $100 a foot, maybe even a little more, versus 32 at about $70. So, can you -- is there a special buildout that you are performing with it? Why the difference?

Yes, well, World Houston 31 is designed as a service center. You know, and we expect customers to be anywhere from 50% to 100% buildout. And the first user, if I recall correctly, is 100% built out, and the prospects that we have now -- we've had word of good activity there. We haven't signed any other leases, but we think we are close -- is close to 100% buildout users.

So it's a classic service center that is -- that does not have dock doors, and it's 16 clear, and where it has overhead doors in the back, and in some cases take those out and put in the glass for 100% office buildout. So it's a very different type use.

Thank you.

Good enough.

Sri Nagarajan, FBR Capital Markets.

Good morning and thanks for taking my questions. Specifically, I want to ask about development yield on your projected starts. Are you still looking here at north of 10% or it's more like 8%, 9% given some of the land base this year?

Well, we determine our hurdle rate on yield based on a number of things. One of them is looking at 150 to a 200 basis point spread over what we think the building is worth when it's -- they're salable at, when it's completed and leased up.

We also look at our cost of capital in comparing that. And, cost of capital is down a bit, and cap rates compress, certainly in, very quickly in the stronger markets, and Houston is one of the stronger markets. Not matched up with Southern California or anything, but still lower cap rates, and so that justifies doing a development with a yield in the 8's.

Okay. Since I guess since you brought up the cap rate here, what cap rates would you be looking at your kind of product, light distribution product in Houston versus let's say your Los Angeles product here?

In Houston, the few somewhat comparable sales I would say, our products would sell at a low 6. Southern California, you probably -- you've read the same statistics I have. Product seems to be trading if it has any redeeming qualities, below a 6. And you know, and even down to recently, a low 4. So, that's always been a very different cap rate market.

Fair enough. I guess in response to another question you had said about your kind of product not being offered or not fitting your criteria, the products that was being offered from an acquisition perspective; why do you think that is the case from a seller perspective that this kind of product did not fit your criteria, and you're going to see more product coming in the future? What's happening in the credit environment or in the seller environment that you think motivated that?

The product that we have seen has, as I say, have been -- tend to be bigger box, single tenant. And that's what a lot of the institutions are most comfortable owning because they can put out more money when they buy it.

Or the service center which tends to come from private investors or local developers. And what we think is coming in the future is just what we have gotten from developers that a number of funds have -- the time is right now that with compression cap and rates to be able to move the better product.

And if you didn't have to sell over the last two or three years, you wouldn't have sold and time just catches up with people, so it's time to move it. At least that's what our hope is, and income property brokers.

Right. Okay, that's helpful. Thanks for the questions. Thanks for answering my questions. Thanks.

Steven Frankel, Green Street Advisors.

Good morning. Just a quick question about the real estate loan, the $65 million that you guys have under contract or are about to contract next month? The financing rate looks pretty attractive on that. Is financing still available on that kind of band right now? And the availability of that debt, is it across the board mostly banks, mostly life insurance companies?

We went to a number of life insurance companies and banks in our proposal and still the insurance companies have the best rates, especially when you go longer term. And as far as today's rates, I have not checked on a proposal, so I couldn't give you hard rates, but I would think it had ticked up just a little bit.

So the LTVs in the 65%, 70% range like we've seen some other companies achieve recently?

It was probably in the 60% to 65% range, depending on how you valued your portfolio.

And are you guys starting to see CMBS return to the sector as well?

We do not do CMBS. Have stayed away from that and so we are not real up-to-date on that.

Okay. And then I just want to turn real quick to just spec versus spec development like some of the other guys were asking about earlier. You have a nice piece of land in Orlando that's very well located. Your park in Orlando is very well occupied. Is that the next site for spec development for EastGroup?

That probably -- well, let me say it's the most likely one in Florida right now. And that's the one when I talk about a couple of additional developments between now and the end of the year, that we would hope to kick off Southbridge -- I guess the Southbridge 9, and have three more, 9, 10, and 11 that are roughly 80,000 to 90,000 square foot buildings each that we can put into that park. And we are starting next month the site improvements for our Horizon Park, which is just a little further east along the beach line Expressway, so that we hope to be ready to go to first buildings in Horizon as we finish up Southbridge.

Is there a certain amount that rents need to increase or incentives need to come in or just competition from other projects, the leasing of things that DCT and others have been building a couple of years ago needs to get to before you would break ground?

Some of the first generation -- a good bit of the first generation space that came on a little late in terms of the cycle has been vacant for a while and is starting to be absorbed. And that's just one of the factors in our looking at -- at kicking off a new building is not what the competition is with second generation space, but that remaining first generation space. And so as I say, we're encouraged to see that being absorbed. And the rents on that really don't worry us because that space has been on the market for quite a while, and so we will -- we're looking at a different set of numbers from when we kick it off.

Great. Thank you.

(Operator Instructions). Mitch Germain, JMP Securities.

Good morning, David. How are you? I guess I'm just curious, what gets you to the top end of your guidance range?

(laughter) The economy taking off like a rocket, and us being able to buy a lot more than 25 million, and that we do it sooner rather than later. That's I guess a quick summary of what --

So I guess it's not really the assumptions that are on the sheet right now, but it would be additive to that?

Yes. I mean what -- and the way we do guidance is maybe different from others, but I think you've heard me say that we start off on a space by space, building by building, city by city basis, and pull it all together in what we think is going to happen is a midpoint. And then we say okay, well what positive and what negative could happen and we throw in a fudge factor.

It's -- we don't look at what's the worst could be and what's the best and average them. So our midpoint is truly what we project is going to happen, and because if all the good things happen, you blow through $3. If all of the bad things happen, you fall well below the low end of the range.

Great. And then just with acquisitions, I appreciate the commentary you provided earlier. It seems like there's a lot of bidders, and clearly as you said, cap rates have come down a bit. Is it safe to assume you might be maybe picking up the risk in terms of looking more for the value add sort of deals rather than the core transactions?

We look at -- if the type building and the location fit us, we look at the full range, Mitch.

Okay.

We bid on a deal in Southern California that was I guess I don't know, a third of the tenants were paying rent at a fraction of what the market rent had been. But the building fit our criteria, and we were just outbid on that one. And you say well what cap rate? Well, this was a value add deal that was going to take at least three and maybe five years to get to back to where it should be. So there really wasn't much of a cap rate; we were looking at a range. We'll do -- the location and the type building is more important to us, and that building's individual specifications are more important to us than whether it has vacancy or not.

Great. Thanks, David. Be well.

Brendan Maiorana, Wells Fargo.

Thanks. Good morning. So David, just wanted to go into the leasing again a little bit. Out of the leases that were signed in the quarter, the 1.6 million square feet, and I think it's about 1 million square feet, maybe 1.1 million on leases that were signed for space that was previously occupied, how much of that took effect in Q1?

I don't have that number for you. We always are running -- we always hope to be running about 100 basis points, anyway, leased above occupied. Because, every week we have people moving in and moving out. And so that -- that's not a number that I keep track of.

I guess what I was just trying to drive at a little bit is taking rents down 24% is a big headwind to overcome even though you've had good occupancy gain. And if that 24% rolldown happened, but most of that hasn't taken effect in the Q1 numbers that we have seen, you've got some headwinds, as we would think about it, going into Q2 and for the rest of the year. Whereas if most of that 24% is already reflected in the Q1 numbers that we are seeing, then I guess those headwinds shouldn't be as significant if the rent rolldowns for the remainder of the year are going to be less. So I'm just wondering if you can kind of provide any color around thinking about the rent headwinds that you had in Q1 and whether or not that's kind of showing up in the numbers that we are seeing for Q1.

I would say that there probably are some amount of headwinds, given what you are describing, but I know some of the biggest -- bigger leases that with the biggest drops are already built into the numbers.

And I think a second thing, as I had mentioned earlier, that you have to keep in mind when you look at FFO projections or any modeling, is if that space was vacant last year, any rent that we get is a positive and the customer is picking up the operating expenses at the same time. So that we can have a significant rent drop on a space, but it makes the '11 numbers look a lot better than '10.

I can -- I appreciate that, but what I'm looking at from numbers on kind of looking at clean, same-store 2010 Q1, if you strip out the lease term fees and you strip out the bad debt expense, which was a big negative for your Q1 2010, was not that big for Q1 2011, you're at around $29 million of clean, same-store NOI.

If I look at those same things for Q4 2010, it's about $29.2 million, so you are up a little bit but not that significant, stripping out the bad debt expense change. At the same time, your occupancy has gone up 430 basis points. And some of that is free rent, but free rent is actually down a little bit in Q1 '11 versus Q1 '10. And so you've got a lot of occupancy growth but not a lot of same-store NOI growth, and I'm just trying to think about how that plays out through the remainder of the year if you continue to get some good occupancy gains as you expect to do, but you still have some rent headwinds.

There's no question we are going to have rent headwinds, as I say, well into not all the way through next year. But the occupancy numbers we give you are quarter-end numbers. They're not an average for the quarter. So that, for example, in the first quarter of this year, we went from 89.1% dip from the end of the year at the end of January, up 140 basis points in the month of March. So, again, it's individual. Now, I have to admit I have not looked at it the way that you are talking about, but we are confident -- I don't want to sound Pollyanna-ish about this -- but we are confident that we're going to grow our same-store results quarter by quarter going forward.

And you are talking about -- so same-store results on a sequential basis, so even though kind of -- because you get a little bit of dip as you look year over year versus last year in the middle part of the year, but you think kind of where you are, your same-store portfolio Q1 '11 as you go into Q2 and Q3, your NOI numbers should move up?

Yes.

Okay. Okay, and then just -- that's helpful.

Last for me, just on the build-to-suit proposals that I think you had mentioned last time around, are those still active? And I think you had one potential that was down in Fort Myers that could have been a significant one. I'm just wondering if you can kind of give a little bit of an update on some of the build-to-suit proposals that are out there?

We still have a number active, and we have not lost any of those prospects to the competition. They just haven't done anything yet.

Okay. All right. Thank you.

There are no further questions.

Okay. Well, thank you, everybody, for your continuing interest in EastGroup, and as always, Keith and I are available to answer any follow-up questions that you might have that we didn't cover today. Again, thank you.