Eastgroup Properties Inc (EGP) 2011 Q3 法說會逐字稿

Good day and welcome to the EastGroup Properties' third-quarter 2011 earnings conference call.

All sites are currently in the listen-only mode. Later, you will have the opportunity to ask questions. (Operator instructions).

It's now my pleasure to introduce David Hoster, President and CEO of the EastGroup Properties. Please go ahead, sir.

Good morning and thanks for calling in for our third-quarter 2011 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 the quarter that describes certain risk factors and uncertainties that may impact the Company's future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time-sensitive information that is subject to the Safe Harbor statement included in the news release. It's accurate only as of the date of this call.

Thank you. The past 90 days have been productive for EastGroup. Quarterly Funds From Operations per share exceeded the midpoint of our guidance by $0.02 per share and were up by over 7% compared to the third quarter of last year. Occupancy increased by 200 basis points to 93.0%. Same-property operating results were positive for the second consecutive quarter. We completed the purchases of three operating properties. Finally, development property leasing is ahead of our projections, and we have added 133 acres to our successful World Houston development.

Looking at earnings, FFO was $0.75 per share for the third quarter as compared to $0.70 per share for the same period last year, an increase of 7.1% and the second consecutive quarter of growth over the previous year's quarter. For the nine months ended September 30, FFO was $2.18 per share compared to $2.14 per share last year, an increase of 1.9%. Same-property net operating income for the third quarter increased 3.6% with straight-line rent adjustments and 5% without.

In the third quarter, on a GAAP basis, our best major markets, after the elimination of termination fees, were Los Angeles, which was up 14.6%; Southeast Florida, up 14.2%; San Antonio, up 9%; and Phoenix, up 6.3%. The trailing same-property markets were Jacksonville, down 5.8%, and Orlando, down 2.8%. The primary differences between quarters are basically due to changes in property occupancies in the individual markets, despite the fact that average rents are continuing to decline.

Occupancy at September 30 was 93%, a full 200 basis point increase from the end of the second quarter and ahead of our projections. We had not expected to reach this level until the end of the year. It also represented a 470 basis point increase over our occupancy of 88.3% at September 30 of last year. We project occupancy to increase only slightly in the fourth quarter rather than at the pace experienced in the first three quarters of this year.

Our California markets where the best at 96.2% leased and 95.5% occupied. Houston, our largest market with over 4.8 million square feet, was 96.0% leased. At this point, Phoenix continues to be our most challenging major leasing market, although it is showing steady improvement.

In the third quarter, we renewed 78% of the 1.1 million, square feet that expired in the quarter and signed new leases on another 13% of the expiring space for a total of 91%. We also leased 756,000, square feet that had either terminated early during the quarter or was vacant at the beginning of the quarter. In addition, we have leased 227,000 square feet since September 30.

We continue to experience negative rent spreads. GAAP rents decreased 13.8% and cash rents dropped 16.1% during the third quarter. As expected, these decreases were greater than the second quarter but significantly better than first-quarter results.

Average lease length was 4.3 years, which was longer than our recent average. Tenant improvements were $1.49 per square foot for the life of the lease, or $0.35 per square foot per year of the lease, which was the same as second quarter and below our average for the past two years.

Looking at acquisitions, we closed on the purchases of the three properties we mentioned in our last conference call. Lakeview Business Center, located in Charlotte's North submarket, contains 127,000 square feet and is 100% leased to three customers. Constructed in 1996, it was acquired for $7 million.

Ridge Creek II, located in Charlotte's southwest submarket, is 300,000, square feet and 100% leased to two customers. Constructed in '03, it was purchased for $15.4 million.

Broadway VII is a 24,000, square foot single-tenant building constructed in 1999 and acquired for $1.1 million. Located in Tempe, Arizona, it will become vacant at the end of the year.

EastGroup does not currently have any properties under contract to either purchase or sell, although we do have several outstanding offers for purchases.

During the third quarter, we began construction of three buildings -- Southridge IX with 76,000 square feet in Orlando, and Thousand Oaks I and II with 109,000, square feet in San Antonio. They have a projected total investment of $15 million.

At the end of the quarter, we acquired 133 acres in Houston for $10 million and expect to invest an additional $10 million in infrastructure improvements. This land is an expansion of our successful World Houston International Business Center located between Beltway 8 and Bush Intercontinental Airport. This land is projected to add approximately 1.6 million square feet of industrial space to the 2.4 million square feet we already have there.

We had not planned to begin any additional development before the end of the year, but the successful leasing of Beltway Crossing VIII in Houston, now 100% leased; Southridge IX, 73% leased; and World Houston 31, 71% leased, has allowed us to speed up our development schedule. As a result, we plan to start construction of Beltway Crossing IX and X this month and Southridge XI and World Houston 31 B before December 31. These four buildings will contain 247,000, square feet with a total projected investment of $17.1 million.

At September 30, our development program consisted of six properties with 411,000 square feet and a projected total investment of $31.7 million. They are currently 65% leased.

EastGroup's development program has been and, we believe, will again be a significant creator of shareholder value in both the short and longer term. To date, we have developed almost 1/3 of our current portfolio, adding 9 million square feet of state-of-the-art warehouse space in our core markets.

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

Good morning.

As discussed, FFO per share for the third quarter increased 7.1% compared to the same quarter last year. Same property NOI increased $1.083 million and we benefited from lower interest rates on refinancing mortgage debt. Lease termination fee income was $52,000 for the quarter, compared to $378,000 for the third quarter of 2010. Bad debt expense was $128,000 for the third quarter of 2011, compared to $91,000 in the same quarter last year.

FFO per share for the nine months increased 1.9% compared to the same period last year. Lease termination fee income was $542,000 for the nine months in 2011, compared to $2.8 million in the same period last year. Bad debt expense was $427,000 for the nine months of 2011, compared to $833,000 for last year.

Our bank lines totaled $225 million and at September 30, 2011, outstanding bank debt was $144 million. The $200 million credit facility matures in January, and we exercised our right for a one-year extension on the same terms and conditions. We currently are in negotiations with our lead back on the $25 million credit facility that also matures in January. Our lines of credit are primarily used to fund property acquisitions and our development program. As market conditions permit, we employ fixed-rate, non-recourse first-mortgage debt and/or newly issued equity to replace the short-term borrowings.

In October, we executed the application -- an application for a $54 million nonrecourse first mortgage with a fixed interest rate of 4.09%, a ten-year term and a 20-year amortization schedule. We expect to close the loan in early January and will use the proceeds to reduce bank debt. We were pleased both with the amount of the loan proceeds and the interest rate on this transaction.

In 2012, we have four loans maturing that will total $45 million. We have already begun talks on the refinancing of these loans.

Debt to total market capitalization was 43% at September 30. For the quarter, the interest and fixed-charge coverage ratios were 3.3 times. The debt-to-EBITDA ratio was 6.7. Our floating-rate bank debt amounted to 8% of total market capitalization at quarter end.

In September, we paid our 127th consecutive quarterly cash distribution to common stockholders. This dividend of $0.52 equates to an annualized dividend of $2.08 per share. Our FFO payout ratio was 69% for the quarter. This is the first time we have been below 70% since 2009. As you know, we did not cut our dividend or pay it in stock during the recession, and we are pleased with the progress we have made in reducing our payout ratio.

Rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property Net Operating Income. We believe this revenue stream gives stability to the dividend.

FFO guidance for 2011 has been narrowed to a range of $2.95 to $2.97 per share while increasing the midpoint from $2.93 per share to $2.96 per share. Earnings per share is estimated to be in the range of $0.83 to $0.85.

Now David will make some final comments.

The third quarter was a good one for EastGroup in all aspects of our business -- internal operations, development and acquisitions, complemented by our strong balance sheet. Our goal for the balance of 2011 and into 2012 is to build on the positive momentum achieved in the last two quarters.

Keith and I will now take your questions.

(Operator instructions). Jamie Feldman, Bank of America.

Can you talk a little bit about the lease expiration schedule next year? I think you're at 19% of the portfolio and I think in the commentary you had mentioned that rents in some markets are still declining. What kind of drag do you think that puts on same-store growth? How should we be thinking about leasing spreads?

Take a step back. When we reported the second-quarter leasing spreads, as I recall, I made a comment on the conference call that we thought the third quarter was going to be a little bit more negative than the second quarter because of some leases in California that made us look better in the second quarter. That has happened, but we don't feel dropped back to anything like the numbers we had in the first quarter of this year.

We're in the process of doing all our budgeting for next year at this point, so we don't have any solid numbers to report on it, but we feel from experience and gut feel of what's happening in the field that we're going to start to experience or continue to experience a reduction in the negative spreads and hopefully will be breakeven or maybe even up a little bit by the fourth quarter of next year. The economy, of course, is going to affect that to some extent.

But we also see that we really started down the big drops in the first quarter of 2009. With a lot of leases being three to four years, we should start experiencing the termination maturity of the leases that were signed in 2009 that had big drops. And so that should help us a good bit going forward.

Over the last two years, we've had occupancy increases that have significantly more than offset the drop in rents. I think those occupancy increases, just because of where we are today, are going to slow down at the same time the rent declines are going to slow down. So we're as interested as you are in what we're going to put out in the guidance when we do that probably in January or February.

Okay. Then can you give a little bit more color on what do you think the sentiment is among tenants and kind of what your pipeline of demand is? It was a very strong third quarter in the US in general and certainly in your portfolio. But how do we think about how much you can carry forward from here? And then also how much more occupancy growth you think you can get?

Well, we're asked a lot, have you experienced a pushback from existing customers with leases coming up or prospects in the field related to all the bad economic news that has been reported over the last 90 or so days. We really haven't, and I think there are a number of reasons for that. One is I think companies that were capitalized very thinly are gone today. The survivors have higher market shares in whatever business they're in, and we've seen a significant drop in our bad debts and midnight move-out type situations.

We have gotten a little feedback that the lack of bank lending to small business is hurting a bit, but we're not getting the strong feedback, oh I can't make a decision or I'm going to put it off or I better shrink some more, because of the news.

I would also interject at this point, we don't need great economic growth next year to do all right. Given where we have been over the last three years, slow growth is certainly better than what we experienced. Even if the economy is relatively flat for a period of time, we think that will continue to allow us to, if not prosper, have at least some increases in occupancy going forward.

Michael Bilerman, Citigroup.

This question -- when you look at your operating margin, obviously it has improved as you've been able to lift occupancy and sort of raise revenues, but the expenses are down as well. I just didn't know if there was anything in particular that you've done this year relative to the past couple of years to really start to bring those down.

Look at expenses two different ways. The expenses on the properties go down because of our net leases as occupancy goes up. So that when you lease a vacant space or your occupancy goes up, not only do you get the rent from the new customer but you also pass the expenses which you were paying on to that user so that from an operating standpoint that's the case.

Also from operating expenses, we have done a reasonably good job of lowering real estate taxes as a result of the recession. So that has helped some numbers also.

From an overhead standpoint for the Company, our development program picking back up and us paying ourselves a development fee that's capitalized into the cost of each development, we are offsetting some of the overhead of the people doing development in the field.

But the operating expense on the net leases, that you're treating as a recovery into revenues, or you're doing that at direct offset within expenses?

David was talking about the net NOI want number is going down when you can pass it through on the income statement, just the expenses from real estate. They are down this year because we had over-accrued property taxes last year and we did an adjustment in the fourth quarter to that, so making that on the property taxes look a little lower, but we are getting some efficiencies in property taxes. Also our insurance costs are down from that.

Then on the development front where you're capitalizing, that you're pulling out of your G&A line or you're pulling some of that out of operating expenses as well?

No. It comes out of G&A. We have people that are usually -- have been expensed in G&A because with they were not doing development work, but now they're doing development work. Part of that cost is put into development.

So on a G&A base of call it around $11 million, how much heading into next year do you think you'd capitalize from a development perspective?

We disclosed in the supplemental development information, let's see, on Page 5 of the supplemental. And so far this year, we have capitalized development costs. We did $415,000 in the quarter and $781,000 for the nine months.

So we would expect that, as you continue to add more development into the pipeline, that $400,000 on a quarterly basis likely grows?

That's correct. If you look at last year, the amount of capitalized costs was way down because we were not doing much development work and also for '09 it was down. As we do more development work, that number will increase.

From a guidance perspective for the year, it sounds like you took -- you are able to lease up space faster within the year than you thought. So effectively your average occupancy is going to be at the higher end or even a tad above what you thought it was going to be for the year because you've been able to lease the space quicker?

Correct. We thought we would hit 93% occupancy probably in December so that the average when we started the year at 89% and change, the average was based on going from 89% to 93%. Being at 93% at the end of the third quarter brings that average up. As I mentioned, we don't see another 100 or 200 basis point increase between now and the end of the year but only a slight increase because we've done very well in leasing some bigger spaces that we had hoped to lease by December but got done in July, August and September.

Is there anything in the leases in terms of -- you mentioned the average duration was over four years. Was there anything on free rent or anything else that would have skewed that from a cash basis?

I don't think so.

Then is there anything from a lease roll -- you talked a little about the 20% rolling into next year. Is there anything chunky in terms of larger leases from a timing perspective that we would need to be aware of as we think about what the run rate from the fourth quarter heading into next year is?

I would say not compared to some of the large spaces that went vacant in Chino and in Tampa over the last two years. In looking at where we are in 2012, we're down to -- because our average lease length is a little over five years, we have reduced our exposure in 2012 down to about 17.5% at this point.

And my last question just on -- you talked about having nothing, I think, under contract in terms of acquisitions. What is your pipeline today? Is that a reflection of the pricing that you're not comfortable with? Is that a reflection of you wanting to put more money into development? Just what's driving that aspect of the business?

Finishing in second, third and fourth place in a lot of bidding rather than first place. As you're probably aware, there are a great many large packages of industrial assets in the marketplace today. They're primarily I'd say B and C quality assets. It will be very interesting to see how those end up being priced.

We don't let the tail wag the dog. For example, we'd very much like to grow in Dallas, but some of the packages we've looked at, we like one or two properties out of eight or ten that are in that package. We bid on those one or two. The seller usually wants to go the simplest route and selects a buyer who will buy the whole package or that whole city. As a result, we don't end up buying that much.

But the reason that we don't have, let's say, anything else under contract is simply the prices we've bid or the way we've done it by only trying to -- I guess you cherry-pick some of the properties that fit our criteria in those bigger offerings.

(Operator instructions). Sri Nagarajan, FBR.

This is Evan Smith on the line. I was just hoping you guys could touch on if you're seeing any noticeable shift in tenants to renew earlier and also what you're thinking of in terms of retention ratio as you look at the fourth quarter and next year.

We're not seeing enough movement to say that it is a trend on current customers wanting to renew early. The bigger the user, the sooner we go to them, and especially if they have above-market rent today, and then you have some leverage in doing what they refer to (inaudible) a bland and extend to tie them up. But no trend in that direction at this point.

In our internal calculations, we usually look at about a two-thirds renewal rate. When we are budgeting, which we're in the process, as I mentioned, in looking at 2012 -- we budget those not on any specific rate but on what we actually think is going to happen to that user. We go over -- and I personally sit down with each asset person and go over every one of the leasing assumptions for next year. Then we roll them up and take a look at it per city, per state, per the whole portfolio, to make sure we're not out of whack. But when we come out with guidance ,it will be based on what we think is going to happen in every individual suite.

Then can you talk a little bit about what you're seeing in terms of leasing traffic just in October and the end of September versus earlier in the third quarter?

It's about the same. We're not seeing any pickup or drop off. If we thought it was moderate in the summer, we're describing it as moderate today. Even in Houston, which is our strongest city in terms of traffic, we still wouldn't call it great. But in some markets, we are seeing where two different users are bidding for the same space. That's not a trend yet, but that's nice to see.

But no, no big change in traffic over the last 60, 90, 120 days.

Craig Mailman, keyBanc Capital.

Just the fact that you guys basically bumped occupancy to 93% quicker than you had thought, was that just a function of you pulling leases into the third quarter that you might have thought hit in the fourth quarter, or is that incremental demand from other tenants that you just hadn't anticipated?

Probably a little bit of both. There was a big lease. We had a large vacancy in the south side of Tampa where it had been a build-to-suit and the liquor distributor moved out. We actually had two prospects competing for that space, and we had budgeted to lease before the end of the year but were able to put the prospect in, in the third quarter. So, it's a combination of a little better-than-expected demand and knocking down a couple of bigger leases that we had our fingers crossed on. I don't know if you recall, in the second-quarter conference call when I said we'd be 93% at the end of the year, I hedged it a bid, said give or take. So it was especially nice to be able to hit it in September.

Then could you give us a sense? Was the ramp in occupancy more towards the end of the quarter or mid quarter? I was trying to get sort of a run rate impact.

We're small enough that I don't think you can statistically look seriously at some sort of run rate, but it was 60 basis points in July, 60 in August, and 80 in September, to add up to the 200.

So pretty even?

Yes.

Then just lastly, as you're in the process of budgeting now, how much more inclined are the people on the ground to be more aggressive now that you're kind of already at your year-end occupancy target when it comes to rents and just how you're looking at your properties versus what's happening in the markets?

I think our people in the field have battled occupancy and rents now for years, and so there's a certain amount still shell-shocked. So I don't think anybody is becoming overconfident with what we can do next year. As I say, we've kind of rolled up our numbers to say where we think we'll be at the end of 2012. But we just believe we will continue to make steady progress, but it's going to be a lot slower than it was over the last two years, just because there isn't that much room to grow occupancy the way we have since we're at 93% today.

Mitch Germain, JMP.

Congrats on the quarter. Just curious, was the 78% retention -- was that in line with your expectations?

That was actually better. I can't tell you how many basis points better it was, but it was better than we projected, which helped us get to the 93%.

Right. Was there any specific region that performed better than you guys had budgeted?

Not so much from a retention standpoint but from leasing-up Tampa, maybe because it was a little bit lower to begin with and because we had several larger vacancies, was the biggest of our pick up in individual city occupancies. I guess, of that 200 basis points pick up, there was about 60 or 80 basis points of it came specifically from Tampa.

Then Thousand Oaks -- how would you characterize activity that you're seeing there with prospects?

Well, we don't even have the walls up yet. I think we have three proposals out but nothing that has been accepted and going to lease yet. So happy to have that kind of activity when all we've done is poured the foundation and started to form up the walls.

Then just the last question, just with regards to acquisitions and what you're bidding on today, since this summer, have you guys shifted any of your underwriting to be a bit more conservative, given some of the macro headwinds?

No. We tend to bid in a fairly narrow range. A couple of cities were more aggressive than others because we think it's important to grow in those cities, and I guess bit more aggressively, for example, in Dallas because we're trying to grow there. We've opened an office and have a Vice President running that office now and see that as a city that we should have some good upside in. So, we've been a little more aggressive there than we might have been in the past or in some other cities.

But no. We're a long-term investor so that we look at a property, how we think that's going to operate compared to its competition or its peer properties over a number of years, not just in the next 12 or 18 months.

Now, looking at buying vacancy, yes, we might be a little bit more conservative from that standpoint, but not overall from of valuation perspective.

Chris Caton, Morgan Stanley.

Just wanted to follow up on the discussion on rents. Can you think back to the last cycle as you were coming out of it? I mean, you're at 94%, roughly 94% leased now. The markets that you operate in are probably more like 86% to 87%. So how do you think, over the next year or two, you'll approach to run dynamic? Will you need to wait for the markets to catch up and you'll hold occupancy, or you think you'll lead in terms of rent growth? What's your approach going to be over the next 18 months?

You are right. We have outperformed the markets where we're operating. I think the REITs, because of the quality of their properties and location and available capital and all, should outperform the market. So, there will be a little bit of a catch-up.

I think what we have to look at, and we're just doing that now in the markets where we're over 95% leased and above, is what's happening in the individual sub markets where our properties are located rather than overall market statistics and what's happening with occupancy there because our type customer is going to select a sub market because that's where they can better serve their customers. So, it's going to be a little bit of both. But yes, we are definitely ahead of what some of our markets are doing. I think that's going to be a little bit of a drag on our ability to raise rents, even though our lease percentage or occupancies are better.

Then can you help us think a little bit about capital for next year? You leased (inaudible) probably 7 million square feet last year. You've already done 5 million this year. Maybe you'll do just 5 million or a little bit more next year, given where occupancies are.

How can we think about capital next year? Also, on the maintenance capital last year, were you spending incrementally more to kind of spruce up properties that weren't directly related to TIs and LCs but maybe were part of the leasing program that you may not do going forward?

If you looked at during '09 in '10, our TIs per square foot of the lease were up. That has started to come back down, as I reported. As our leases have gotten a little bit longer, which has happened over the last really three or four quarters, well up over four years, the TIs per square foot for year of the lease has also come down and is really at the levels it was back in '08.

So yes, we should have less TIs on that. That's very hard to quantify, though, because you can have an older big space that you need to refurbish, and you demise it for two or three different users and have to build out walls and new office space. That can twist your numbers upward a bit, or a little more roll-over in some of the service center space. But yes, on average, we would expect them to be somewhat -- the TIs to be somewhat less in '12.

Then on, I'm sorry, maintenance capital, were you spending a little bit more on kind of common area maintenance to spruce up properties that wasn't directly flowing through TIs and LCs that you may not need to do going forward as you aren't kind of having to add back 500 basis points of occupancy?

I would like to think the exterior of the properties we keep up pretty well good times and bad times, and I'm out looking at them most of the time and being a pain if they don't look sharp. So I don't think there's going to be much change there.

The other big capital item is roofs. We just look at what each year what we think we're going to have to replace and those numbers could swing back and forth, like fourth quarter will probably be up from the third quarter because of a couple of roofs we know we have scheduled to replace.

So I guess you averaged about $2 million, $2.5 million a quarter last year in 2010. You had a little bit lower run rate this year. I guess I'm trying to triangulate. Is it more like $2 million, $2.5 million, or this year the average is $1.75 million or something like that?

I'm going to have to get back to you on that. That's not something that -- we've not started to put any run rate numbers or those kind of budget figures together for 2012 yet. We're going to know specifically what we think we're going to spend on in another couple of months, so we'd just be guessing.

Okay, thanks. Then last question, talking about leasing for next year, have you looked at Forward Air in Charlotte? Do you think they will stay? I think that's a 9/30 expiration.

Yes, I hate to -- when we're talking about competitive issues like that, we'll just have to wait and see. We always expect our tenants to say, because we're such a good landlord, but every now and then that doesn't work.

Understood. Thank you very much.

Alex Goldfarb, Sandler O'Neill.

I realize it's been a long call. So going to the developments, I'm not sure if you mentioned whether or not the four new deals you're starting -- if there is any element of pre-leasing or if they're all spec or what your thoughts are.

They are all spec. We're comfortable doing that because of the leasing success we've experienced with the buildings that are either just finished or still under construction. I always like to remind people that every one of these buildings is just a follow-on building in an existing successful park that we have, so it's not as though it's a spec deal out in a corn field someplace and we're plowing under the crops to pour concrete. These are established parks where we have a proven track record of what rents we've been getting over the last few months and existing occupancies. That's how our market study works on determining which buildings to start.

So as the Board was giving the okay on these, it wasn't like they were thinking that this could end up being another Sky Harbor, where it takes a few years. They're thinking that this stuff, because of what's already there, they're comfortable with going spec?

Absolutely. Sky Harbor was -- the timing with going into recession because we had some delays in zoning approvals and all our building permits, was an unusual situation. Also, for a variety of circumstances, we had to build all five buildings at one time, which we historically have never done before. It was a lesson in not doing that. So we usually don't have to -- for us to learn that twice. So we're very comfortable with these spec developments. If you add up all the risks we're taking on them and look at the size of the Company, we don't see it as very threatening.

No, I mean $17 million is sort of small. But okay. Just the second question is probably more for Keith. The press release on the -- in the press release, the commentary on the ATM said that where you guys had done it last quarter and that post third quarter nothing has been issued. Just sort of curious, especially with developments ramping up again, are you more price driven with the ATM or use of proceeds driven?

Probably more price. But as you noted, we're getting more developments going. But we're still comfortable with our debt structure like it is, but we would like to issue some equity.

So you're willing to give a little bit on the price element as you go forward if the markets continue what they've been doing since August?

Maybe a little.

Bill Crow.

A couple of questions. First of all, terrific same-store NOI growth this quarter. As you look to the fourth quarter, it comes down kind of in half. Is that just less year-over-year occupancy growth, or is that a factor of expected rent spreads weakening further in the fourth quarter or a combination thereof?

It's a more difficult quarter to compare to. It has nothing to do with the rent spreads. It also -- we don't assume a 200 basis point increase in occupancy again, either.

Right, but I think, if I look back at last year, I think you picked up maybe 100 BPS of occupancy from the third to the fourth. You're still going to be running a good, what, 300 basis points above last year or so. It still should set the table for pretty good growth. Is that right?

Yes, but I'd say it's just -- in terms of the properties that are in that comparison, we're comparing to a tougher quarter than we did in the third quarter. But we certainly expect it to be positive.

Your fourth-quarter guidance of $0.78, as I think about that rolling forward, and I know you haven't given guidance for 2012, but as I think about the pluses and minuses, you clearly have some developments that will be coming on that will be a positive. You have increased capitalization of overhead costs. You've got margins going up because of the occupancy on a year-over-year basis. You talked about the rent spreads next year coming in a little bit, maybe less occupancy growth, certainly.

Should we -- what drives -- is there any risk to that $0.78? It seems like the only risk is to the upside, other than maybe an equity raise. Is that fair?

I think that's probably sort of fair comments. All I can really say at this point is we think that 2012 will have better results than 2011.

You're pretty confident that the same-store NOI is poised for positive results next year? Is that fair?

Haven't run those numbers yet, so given the change in occupancy on a year-to-year, I would think that's probably a safe assumption. But like I say, we don't like to go out on a limb until we get all our numbers in and beat them up and run through them again. We decided a couple of years ago with the crazy up and downs in the economy and the difficulty in projecting that we were going to chicken out and give our guidance in January or February rather than try to do it in October because then you're really basing it on your experience in the summer. Most companies that do that end up having to change it in January or February anyway. So we just don't want to put it out until we're pretty confident about those numbers. I guess the last two years, we've done it in February, on our fourth-quarter year-end conference call.

Well, congrats on the quarter. It's nice to see something positive come out of Tampa. (laughs).

Steven Benyik, Jefferies & Co.

I was hoping you could provide a bit more color on just the state of the financing markets. Obviously, executing a $54 million mortgage at close to 4% is pretty attractive. Just what types of lenders are most active in the market and whether you're seeing any tightening, any institution of interest rate floors or anything of that nature?

We, this time, as we do just about every time, go to four to six insurance companies directly and several banks. The banks have gotten -- they say they're a whole lot more aggressive than they have in been in the past, but they still haven't been able to compete on the rates with the insurance companies. Yes, with where the ten-year has been, you get into floors and stop talking about spreads and here's the number. It might change tomorrow. Take it or leave it.

But that's -- our timing has been pretty lucky, I think, on some of this. The way we package these assets, it generally has a lot of appeal to an insurance company because we put in 8 or 12 properties that are diversified geographically, tenant mix, age, and they are cross-collateralized. On the other side, we get the right of substitution, so if we want to sell one or more, we can exchange properties in and out to give us the freedom that you generally don't have with ten-year mortgages with yield maintenance and prepayment penalties. So, we try to make them happy as well as give ourselves flexibility.

That's helpful. Then I guess on the $47 million of secured mortgages maturing next year, close to 7%, do you think there's the opportunity for incremental proceeds on that and refinancing those loans is a low to mid 4% type of an interest rate achievable, given current markets?

Yes on the incremental proceeds. Who knows on the interest rates? Who would have thought six or 12 months ago we could've done a loan at 4.09%? For at least a day, we were disappointed didn't begin with a 3. So that's just been so crazy, it's hard to guess on that. We certainly are confident that it will be less than the current rates.

I guess switching to development, maybe can provide us just with an update on how you're thinking about future land acquisitions given the current land pipeline you have relative to development starts spending over the next 12 months? Then what type of an economic environment or a portfolio occupancy rate do you think you'd need to achieve, to get anywhere near that $100 million development starts number that you had discussed in the past?

I think $100 million development starts is an admirable number to pursue, but I certainly don't see it happening next year. It's hard to project after that. We don't set a goal for development starts because that gives you the wrong incentive. We have the capital available to develop just about whenever we see the right opportunity on a risk-reward basis.

As to land, we've been very pleased with the two purchases this year (technical difficulty) Chandler, Arizona. We think that -- an excellent price. We bought it after foreclosure. The land in Houston, we have been working on acquiring that land for six or seven years, and it was a natural expansion of what we were doing there.

There are other markets where we have bid on land and have not gotten it but where we would like to see future development occur. Charlotte being a city, potentially Dallas, we would certainly like to do something in Southern California. But again, that's -- if you go way out on the east side of the Inland Empire, there's not much available for our type product. So we just take it one step at a time on land and development starts and do what the market allows us to do on somewhat of an opportunistic basis.

Then I guess just on markets for future development starts, obviously Houston and Orlando have been two that you've focused on recently. Do you see any other markets that are relatively likely for development starts over the next 12 months? I know you spoke positively about Dallas from an operating property/acquisition perspective. But is that a market that you guys would consider pursuing land acquisitions and development in as well?

Absolutely. We have a small site along I-35 in Dallas now where a building that -- highway department took some of our frontage and took down the building so we can put a smaller building on that site. We have an attractive site near the Charlotte Airport that we would hope, if market conditions allow, that we would start a building there.

Our development start in San Antonio is on the north side of town. We have some properties, a nice cluster of assets and some attractive land on the west side of San Antonio, inside the loop road, that we see as a possible place to start.

In Houston, we're building in two locations, World Houston and Beltway Crossing. I think our World Houston new land will give us an opportunity, a greater opportunity to both do build-to-suits and spec development than we had before. So that's something we talk about every day.

Then just lastly, I was hoping you could talk about the 50 basis point improvement in the projected yield on Beltway Crossing. A, how much of that was driven by the timing of the lease-up versus the rental rate? Also just whether you're seeing any real discernible difference in the conversations you're having with tenants for second-gen space relative to new space?

The lease-up was the biggest factor in improving the yield there, and also some of the capital improvements we're putting in for a ten-year lease helped a little bit also. I think it shows that, in the energy business, it was an oilfield services company that took the entire building just as we were finishing up the landscaping. It shows that there's a lot of growth in that business. Houston is clearly the energy capital of the world, and a good bit of construction is going on there. A number of our peers have started or are going to start buildings.

An example not of one of our peers, but Exxon Mobil is building a whole new campus there even though their headquarters is outside of Dallas. When I drove by there a couple of weeks ago, there were eight cranes doing the construction, so lots going on in Houston.

(Operator instructions). John Stewart, Green Street.

Just a couple of quick ones then. Keith, what was the LTV on the $54 million mortgage?

Well, we think it was on, just NOIs, in the low $60s million and probably the insurance company though it was around $70 million, after they do their reserves and stuff. Ours is just computed strictly on the NOI portion.

With respect to the trend in occupancy, it's helpful to get your commentary on the trajectory of the rent roll-downs. But do you have much seasonal leasing activity in the fourth quarter? Do you expect a drop-off in Q1?

Traditionally, we've had at least some drop-off in the first quarter. I don't have those numbers yet on how those have been projected. I don't think the drop-off -- this is gut feel -- will be as big this coming year as it has been at the past. Right now, I can't think of any seasonal leasing that we have in place. A combination of the post office, Wal-Mart and some liquor distributors have been the ones that have had the demand in the past. And so far we've not signed any leases for the Christmas season.

That's helpful. Then I found it fascinating that your development pipeline was 50% leased at the end of the quarter and then you ramped it up to 65% today. I'm sure those deals were negotiated some time ago, but it also looks like it's pretty broad-based across Houston, Orlando, and San Antonio. So I was just wondering if you could give us some commentary on the recent development lease-up in momentum there?

One of the things we use the conference call for is to put a little pressure on people in the field to get leases signed and in so we can report them in our press release and supplemental data. Yes, the lease in Orlando and the one at our Service Center in Houston, World Houston, those have been under negotiation for months. The prospects don't seem to feel a lot of pressure or urgency to sign leases, and you can only push so hard on those. So those were a long time coming.

The Beltway Crossing 8 which we signed right at the end of August, that company moved very quickly because they needed the space almost immediately, so that was a real pleasant surprise and out of the ordinary. But the others you push as hard as you can, but the bigger the company, the slower, usually, the lease negotiations are.

Then just lastly, I take your point that you don't need tremendous economic growth to have a decent year next year. But back to your comment about the timing on the Sky Harbor project, how do you feel about -- what's your confidence level with respect to development starts next year when you do consider the economic backdrop, notwithstanding the solid activity you had this quarter?

I would guess, because look at how we've done it historically, we will not budget any starts beyond what I've just talked about today with additional buildings in Houston and Orlando. We will budget improvements on the land we've just acquired at World Houston, but unless we, between now and when we give guidance, unless we have a lease signed for some new development or are very close to it, we probably won't budget anything more than what we've already talked about today. Some discussion that we shouldn't have started these new developments until next year so we could talk about all the starts next year. But we figured it was better to get them underway and lock in the construction bids because I think there's a sense across the board that it's going to cost more to build next year than it did this year and what we're building this year will be below replacement cost when it's done.

Dan Donlan, Janney Capital.

Just curious. What drove the 400 basis point increase in occupancy in Florida, if you could give maybe an overview of what type of tenants those were?

It's basically the same that we're seeing in other markets, and it's, [to use the term], it's the basic need of the population -- energy, healthcare, food and beverage, clothing and some pick up with 3PLs. But it's the things that people buy every day that have triggered our growth. The big lease in Tampa is to a company that makes and distributes official NFL clothing so that when you go out and buy your Eagles jersey with your favorite player's number on it, there's a good chance it came out of our Tampa warehouse.

Notre Dame got (multiple speakers)

We're talking about NFL.

That is the NFL.

So I guess that comes under the clothing category. The lease in Orlando for the development is healthcare related.

Okay. As we think about the online retailers, I guess there's been discussions that states are going to start charging sales taxes on transactions. Do you think this kind of makes them start to build smaller distribution facilities in each particular state as opposed to having these larger regional warehouses that they're distributing their products out of?

There's a lot of discussion about that. I think the only thing that you can point to to say is a fact and people are making decisions on is what happened in California where Amazon went into Phoenix over the last 12 to 18 months and leased two different over 1 million square foot spec buildings. Amazon will eventually have 4 million square feet in big buildings in Phoenix, or the west side of Phoenix.

So you can point to that and say, okay, they're there because of what they thought was going to happen in other states and what Arizona said was not going to happen. Beyond that, I think it's just, at this point, pure speculation. Some states are going to charge it and others are going to say, okay, we're not, so come to us.

Okay. Then what's the anticipated yield on the new Houston land that you guys acquired, your developments there?

Given that it's a lot of years to build that out, all I can say is that, today, we are looking at yields at 100% occupancy in our developments at anywhere from a low 8 to a low 9. We believe that the cost of that land plus infrastructure cost, plus some carry-over time will allow us to get those yields eventually as we build individual buildings, whether they're build-to-suits or spec.

Then just last question on the dividend -- Keith, you talked about the FFO payout going below 70% since the first time since 2009. Is that some type of magic number you guys were looking for, or is it more occupancy driven, or when do you think you're going to start thinking about raising the dividend?

Well, we'd like to get it as low as we can. We've been in the low 60s% before. On the dividend increase, I will pass that along to David and the Board on that.

I think we will start to discuss that at some point next year.

The other number you look at is AFFO, and we don't report an AFFO number because everybody seems to have their own calculation of what goes into that. But we think we're -- in '11 we'll have a payout below 100% in the AFFO. We don't have any specific target number. An awful lot of it depends on not hitting a number but hitting that number in thinking about what's going to happen going forward. You don't want to raise the dividend if you're not confident in your forward earnings growth.

(Operator instructions). Brendan Maiorana, Wells Fargo.

Sorry, just one quick question, and I'm sorry if I missed this. David, I think you mentioned trying to get a little bit more aggressive in terms of acquisitions in Dallas. Can you just frame up sort of what the metrics are that you'd be comfortable with acquiring your prototypical type of product there in terms of cap rate?

I wouldn't be comfortable because that's all a very competitive. At every location, the quality of every deal is different. How it fits with what we already have is different. I'd just as soon not tell our competitors what cap rates we're looking to buy at. But other than that, I'm happy to answer your question.

All right, fair enough. Thanks. Good quarter.

I'm showing no further questions at this time.

Well, as we mention at the end of every call, we appreciate your continuing interest in EastGroup. If there are any other topics or questions that you'd like to touch on, please don't hesitate to give Keith or me a call. We should both be here for, if not all day, at least for a while. Thank you very much.

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