Eastgroup Properties Inc (EGP) 2012 Q1 法說會逐字稿

Good morning and welcome to EastGroup Properties fourth-quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question and answer session. (Operator Instructions). Please note, this call may be recorded, and I will be standing by if you should need any assistance.

Now, it is my pleasure to introduce David Hoster, President and CEO. Please go ahead.

Good morning and thanks for calling in for our first-quarter 2012 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 risk factors and uncertainties that may impact the Company's future results and may cause the actual results to differ materially from those projected.

Also, the content of this conference call contains time-sensitive information that is subject to the Safe Harbor statement included in the news release is accurate only as of the date of this call.

Thank you. EastGroup had a good first quarter. Funds from operations exceeded the midpoint of our guidance by $0.02 per share and increased by 8.5% compared to the first quarter of last year. As a result, the midpoint of our guidance for 2012 was increased by $0.02 per share. Occupancy increased for the eighth consecutive quarter to 94% at March 31. Same property operating results were positive for the fourth consecutive quarter. We acquired a business distribution property and started a new business distribution development, and we took advantage of attractive debt and equity markets to fund these and future investment activities.

Looking at earnings, FFO was $0.77 per share for the first quarter. This compared to $0.71 for the same period in 2011, an increase of 8.5% and the fourth consecutive quarter of growth over the previous year's quarter.

Same property net operating income for the first quarter increased 2.8% with straight-line rent adjustments and 4.0% without.

In the first quarter on a GAAP basis, our best major markets, after the elimination of termination fees, were Phoenix, which was up 23%; Dallas, up 16%; and Tampa, up 9%. The trailing same property markets were South Florida, down 6%; Jacksonville, down 4%; and Los Angeles also down 4%.

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 March 31 was 94.0%, a 10 basis point increase from the end of the year and ahead of our internal projections. It also represented a 350 basis point increase over occupancy at the end of the first quarter last year.

Our Florida markets were the best at 96% leased and 95.6% occupied. Houston, our largest market with over 5 million square feet, was 97.5% leased.

Looking ahead, we expect occupancy to decrease to approximately 93% in the second quarter and then increase back up to 94% by the end of the year. In the first quarter, we renewed 81% of the 1.5 million square feet that expired in the quarter and signed new leases on another 5% of the expiring space for a total of 86%.

We also leased 568,000 square feet that had either terminated early during the quarter or was vacant at the beginning of the quarter.

In addition, we have leased and renewed 454,000 square feet since March 31.

We continue to experience negative rent spreads, but the first quarter had the smallest decrease in 13 quarters. GAAP rents were down 0.1%, and cash rents were off 7.2%. This improvement was somewhat distorted due to a single large lease in Los Angeles. Without it, the decrease would have been 3.8% on a GAAP basis and 9.8% for cash rents.

Average lease length in the quarter was 4.2 years, which was greater than our lease in average. Tenant improvements were $1.43 per square foot for the life of the lease or $0.34 per square foot per year of the lease, which is our average for the past year but below our two-year average.

In late January, as previously reported, we acquired the Madison Distribution Center located in the Port of Tampa submarket for $3.5 million. Built in 2007, this 72,000 square foot business distribution building is 59% leased to three customers. The purchase increased our ownership to 3.9 million square feet in Tampa, which is our second-largest market behind Houston.

In February, we sold two small warehouses with a total of 10,500 square feet in Tampa for a price of $578,000, generating a gain of $167,000, which was included in FFO. These properties had been acquired as part of a large portfolio last December and were offered for sale through our taxable REIT subsidiary.

We currently do not have any operating properties under contract to purchase, but we are in the process of negotiating a sale of a bulk warehouse building in Phoenix.

At March 31, EastGroup's development program included eight properties with a total of 475,000 square feet and a projected combined investment of $38.4 million. They are currently 19% leased.

During the first quarter, we transferred Beltway Crossing VIII with 88,000 square feet and World Houston 32 with 96,000 square feet into the portfolio. These two Houston developments are both 100% occupied.

Also during the quarter, we began construction of Southridge XI in Orlando. It will contain 88,000 square feet with a projected cost of $6.2 million.

In April, we started construction of World Houston 33, a 160,000 square-foot build-to-suit with a projected investment at $10.6 million.

Since the beginning of the year, we have acquired two parcels of land for future development. As part of the purchase of the Madison Distribution Center in Tampa, we bought 18 adjacent acres, which should support approximately 270,000 square feet of new development. We also purchased 10.5 acres in Chandler in an established business park, which will allow for the development of approximately 120,000 square feet of business distribution space.

Keith will now review a number of financial topics.

As David reported, FFO per share for the quarter was $0.77 compared to $0.71 for the first quarter last year, an increase of 8.5%. FFO per share was $0.02 above the midpoint guidance. The increase over our guidance was primarily due to increased property net operating income, lower G&A costs, lower interest costs, and a gain on the property sales.

Lease termination fee income was $170,000 for the quarter compared to $455,000 from the first quarter of 2011. Bad debt expense was $223,000 for the quarter compared to $134,000 in the same quarter last year. Termination fee income, net of bad debt expense, was $374,000 lower than last year or a $0.01 per share reduction in FFO per share.

Debt to total market capitalization was 37.3% at March 31, 2012. For the quarter, the interest and fixed charge coverage ratios were 3.3 times, and the debt to EBITDA ratio was 6.8.

Our bank debt was $119 million at March 31, and with bank lines of $225 million, we had $106 million of borrowing capacity at quarter-end.

On January 4, 2012, we closed a $54 million mortgage loan that we discussed last quarter. The nonrecourse mortgage has a fixed interest rate of 4.09%, a 10-year term and a 20-year amortization schedule.

On March 1, 2012, the Company repaid a mortgage loan with a balance of $3.5 million and an interest rate of 5.68% and a maturity date of June 1, 2012.

Subsequent to quarter-end, EastGroup repaid an additional mortgage loan with a balance of $8.7 million and an interest rate of 7.98% and a maturity date of June 1, 2012. The Company now has two mortgage loans due in the remainder of 2012 with a weighted average interest rate of 6.84% and balloon payments totaling $33.3 million.

We have been very pleased with our continuous equity program both in the share price and volume. We have sold 511,371 shares since December 31, 2011, with gross proceeds of $25 million or $48.89 per share. And the last 15 million of shares sold have been over $50 a share, which is the highest price we have sold shares in our history. Since the start of the program in July 2011, we have sold a total of 1,098,348 shares and gross proceeds of $50.7 million or $46.16 per share.

In March we paid our 129th 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 68% for the quarter, and rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property net operating income. And we believe this revenue stream gives stability to the dividend.

We increased the midpoint of our FFO guidance for 2012 by $0.02 per share to $3.10. The increase was due primarily to the increase in the first quarter. Earnings per share is estimated to be in the range of $0.81 to $0.91.

Now David will make some final comments.

During the first quarter, we continued to build on the positive momentum achieved in 2011 in all aspects of our business -- internal operations, development, and acquisitions. At the same time, our strong balance sheet has kept pace and gives us excellent flexibility for future growth and earnings.

Our strategy is simple and straightforward and it works. Keith and I will now take your questions.

(Operator Instructions). Michael Bilerman, Citi.

Yes, great. David, you mentioned in your opening comments that you thought occupancy was going to go down to 93% from 94% in the second quarter, so about a 300,000 square foot drop sequentially. I'm just wondering can you walk through the pieces that sort of get there? Because it would seem based on the rollover you have for the rest of the year, which is about $1.1 million a quarter, the renewal rate you have been able to get at almost 80%, the 450,000 square feet of leases you already have done for the second quarter, getting down to a 93%, something must be going on.

We have a tenant in Tampa with, I think, just under 100,000 square feet that had lost a government computer contract, and they had in their lease when they renewed it that they could cancel it if they lost the contract, and they did. That is at our Palm River South complex that we have developed. So that one was a surprise.

In the Westside of Jacksonville, we have three larger bases coming back to us. Two of them were temporary expansions that occurred near the end of last year, and the space is no longer needed by -- on one case, it is a building products company and another a 3PL.

And then we also had a company that makes those plastic bags that nobody likes you to use at the grocery store anymore, and they gave us back about a third of their space as part of their renewal. So the Jacksonville we knew was coming, the one in Tampa was a surprise, and they add up to just over 300,000 square feet.

But that assumes -- and that's over, I guess, from what is expiring in the second quarter -- that's separate from what's expiring in the second quarter. So this is all in addition to.

Well, no. The Tampa one was an addition that we had not originally projected at the beginning of the year. The ones in Jacksonville we had projected and were built into our numbers from original guidance. We always hope something is not going to happen, but it has happened there.

So we're just going to have to work extra hard to get those vacancies re-leased. Less worried about Tampa than we are Jacksonville. That market is just a lot slower for leasing at this point in time.

And how much is rolling in the second quarter in terms of square footage?

Let me look up that statistic, but I don't have that right in front of me. I'll have to get back to you on that.

One thing I will point out that, I guess, relates to that is our supplemental data. We show that the square footage expiring in the last three quarters, the last nine months of the year is 12.6%. We have since reduced that to 8.8%.

Right. You have 3.4 million expiring in the rest of the year. So, if it is evenly spread, call it 1.1 million, if you are running an 80% renewal rate, that's -- call it, you lose 224, but you have --

We don't project -- Michael, we don't project an 80% renewal rate. I wish we could. We generally project about a two-thirds renewal rate. And one of the ways that we beat our guidance in the first quarter was that higher renewal, particularly some renewals in Houston. I wish that were our standard, but we just project two-thirds, generally.

Right. So effectively, that would be -- you lose 400,000 in your guidance, plus this other 100,000 in Tampa. So you're down 500,000 before you crawl back up in terms of leasing that's been completed to get down 300,000 for the quarter.

Correct.

And can you just talk a little bit about the development in terms of the pre-leasings or what the demand is like? I know there's nothing leased yet, but can you just talk a little bit about that space and what tours are like and where you see -- how you see that being leased up and when?

Well, it hurts your numbers, your lease numbers when your two complexes of 100% move out of the development portfolio into the Company overall portfolio. So that knocked us down from that standpoint.

But if you look at what we have under construction, you're right. We don't have any -- we have not done any leasing there. We have very good activity on every one of those buildings, except World Houston 31B, which is a little service center, and I think we are going to report on a lot of progress on our July conference call. Because of those buildings under construction, we're just now completing a couple of them, and traditionally you don't do much industrial leasing with the buildings under construction. People like to see them completed and where they are going to fit into it. So we're not in any way worried yet about the zero leasing on the properties under construction. As I say, part of that is we've got extremely good activity on every one of those, except the little service center.

And then, as I mentioned in my remarks, what is not on that schedule is a build-to-suit that we just signed in Houston that is 100% as a build-to-suit obviously, 100% pre-leased, and it will be our first building on what we refer to as the golf course land expansion that is part of World Houston. So we don't -- we started moving dirt on the improvements there, but the roads haven't even been started or any of the utilities. To have a build-to-suit already signed, we thought was a great step.

And the dollar and square footage of that project?

It is 160,000 square feet and about $10.6 million. It's a little higher per square foot than some of other developments because we've included some extra land in it for exterior storage, which is something that the freight forwarders and air freight companies like in Houston.

Great. Thank you very much.

Craig Mailman, KeyBanc.

Thanks, good morning. Jordan Sadler is on with me as well. David, maybe we can stick on the development pipeline. Can you just I guess first give us a sense of what you're seeing in terms of build-to-suit yields, maybe using Houston as an example versus the spec stabilized yield you guys are targeting?

We don't have a real rule of thumb on that, and we won't announce the yield on this recently signed build-to-suit in Houston until next quarter. But generally the build-to-suit yields are anywhere from 50 to 75 basis points lower than our spec buildings.

Okay, that's helpful. It sounds like you guys have good traction on the stuff that's in the pipeline already. I mean how comfortable are you guys continuing to ramp that, or how much would you need in terms of pre-leasing by next quarter to add another project or two into the pipeline?

It really is not pre-leasing of buildings that are just on the drawing board. It is the leasing of the properties that are under construction.

Right. That is what I meant. I'm sorry.

For example, on Southridge XI in Orlando, we do some significant leasing there. We'll start our last Southridge building. On Beltway Crossing IX and X, we have very good prospects to take one of those buildings totally and some interested parties in the other one. We leased one of those two, we will start Beltway Crossing XI, which is our last building in that park.

So it's just a matter of leasing what's there, and we start in the next building in line as part of our phasing in of development where some companies will build five or six buildings all at one time, and that just hasn't been our style. We like to do it one or two at a time.

If you look at the balance of the year, we're pretty sure that we're going to be able to start at least -- well, in our guidance, I think we have one more buildings built in. And if the world works right, we could be up to eight to 10 total starts for the year.

And you guys backfilled the land bank a little bit this quarter. Is there anywhere else that you guys are looking at land or where you think you need it at this point?

Well, we are looking at land seriously in Charlotte, Jacksonville, although we wouldn't be able to start there right away. We're always looking in South Florida, except it's extremely expensive there, and we have a little piece of land in Dallas, and we would certainly like to do more there. It is basically all our core markets where we see there is an opportunity to grow.

Our development program, as you've heard me say many times, has really over time been a tremendous creator of value for our shareholders. And we were looking at some statistics the other day that what we have developed, which is approximately a third of our current portfolio, is over 97% leased. So what we've built is outperforming the overall portfolio. It gives us a good incentive to keep going.

Great. Thanks, guys.

Thank you.

Sri Nagarajan, Cantor Fitzgerald.

Thanks and good morning. The question I had was on the impact of the Los Angeles lease on the leasing spreads. I think I missed that. I believe the impact was about 2 percentage points, negative 2 percentage points.

And more broadly speaking, the cash leasing spreads in Florida improved dramatically, and I just want to get your color and commentary on what you might be seeing in general? I know you said that Jacksonville is weak, and are Tampa and Orlando getting better from your sense?

Well, we have been saying for a while that leasing spreads -- well, the decline in leasing spreads is going to mitigate over this year, and hopefully by about the middle of next year, we will be even or starting to report positive spreads.

What happened in Los Angeles is we had a large tenant that we had given a teaser rate, and he gave us some really good incentives to get him in the building. They decided they didn't need all the space. The tenant next-door wanted to expand, and so it was one of those fortuitous situations where the existing tenant with a loan rent left and had been under market, and we were able to re-lease it at a higher number. And I think we're going to see more of that over time.

We don't do an analysis that says, this is our embedded rent growth or embedded rent decline. That changes almost every day in every market. So it's hard to identify. And I also like to point out that when we report rent spreads, it is -- no matter how long lease has or how long the space has been vacant. I know other companies have their own definitions of that. If our space has been vacant for three or four years, we still compare what the new lease rent is to what it was when the last tenant was paying.

Great. And from your perspective, I mean are you seeing a lot of those -- that space has been vacant for more than two years in your analysis here when you quote these rates?

I can't tell you what -- how many or that way, but it's all across the board.

Okay, understood. The second question I had was on general -- would love your commentary on TIs and free rents in Florida and Arizona versus a stronger market than Houston compared -- let's just see -- if you can tell us how the free rents and TIs are improving over time, that would be helpful as well.

Okay. The free rent -- I don't have it by market handy, but I can tell you as a company the leases with free rent have shrunk significantly over the last three quarters, and the average free rents in the leases where we are giving it has shrunk significantly. I was actually -- we looked at those statistics earlier, and I was surprised how much that had improved.

As to TIs, that's harder to identify because in many cases we do more TIs for which we receive higher rent.

So the percentage of leases that are asking for free rents has dropped. Would you say it has drastically dropped, say, let's say it's only about now 40% to 50% of your leases you are signing, or is it still at 60%, 70% levels?

No, it would be well below half, and you do very little free rent on renewals. So the more renewals versus new leases, the less free rent you'll be giving.

Right. Got it. Sorry, the last question that I had was acquisitions and dispositions. If I heard your commentary right, Dave, you said that you do not have anything in your acquisition pipeline, but you're planning a disposition of a bulk warehouse in Phoenix. Is that accurate, or can you give us some more color on that?

No, I'll answer that two different ways. First of all, on the sale, we're just negotiating that now, and hopefully we will announce results next quarter with some details on that. It's a bulk building that didn't fit us. The west side of Phoenix is pretty hot right now, and you always like to sell properties into strong markets. So we thought it was an appropriate time to sell something that didn't fit us, although it's not a bad asset, certainly.

From an acquisition standpoint, a lot of the packages that are out today tend to be companies cleaning up some of their portfolios, and so they are B to C assets. And so we're not bidding on anything right at this point. But we expect in talking to the income property sales brokers that there's a lot more coming on the market over the next 90 to 120 days because there is a lot of capital seeking industrial assets. So the market is going to see a lot more transactions this year, I believe, than last year, and hopefully we will be participating in that.

Okay, great. Thank you so much. That was very helpful. Thanks.

Thank you.

Chris Caton, Morgan Stanley.

Thanks. Two questions. First, I just want to ask a follow-up on the Phoenix disposition. Do you expect to recognize a gain there, and how do you expect to manage the tax if so?

We'll get into gains, losses, sales, products entering next quarter, as I mentioned. We have room in our dividend currently to absorb a certain amount of gains so that there's not going to be any issues on taxable income.

Also, although we won't do it here, we have a long history of doing 1031 exchanges. So the taxable gain is not going to be an issue for us.

Great. And then I wanted to ask about the occupancy ramp after the second quarter. Is there anything specific in your markets or specific leases that you are negotiating that gives us confidence in the kind of recovery you expect through year-end?

Just the activity that we're seeing on the vacancies that we have. Just about every one of our markets has greater activity than it did three to six months ago, and it's not -- we can't call it great yet, but we've been encouraged -- there is positive activity -- that there are companies expanding, and there in certain markets companies entering the industrial market for the first time. So it's just based on what we're seeing every day.

Is there any particular customer verticals that are more active today versus three or six months ago?

Well, in Houston, for example, the energy business continues to be extremely strong, the freight forwarding and air cargo. And an awful lot of that is related, of course, to the energy business, sending goods all over the world.

But it's the same basics that we have been talking about for probably at least the last year, where it's energy, food and beverage, clothing, health care. And I will say, some of the construction businesses have started to pick up, but we can't pinpoint any place where we picked up occupancy-related to any recovery in the housing industry yet.

Not Phoenix?

If so, very slightly. Not enough activity yet to start seeing our housing-related customers expand or new ones come into the market.

Yes, understood. And then the last one for me, can you compare and contrast timing of move-ins and move-outs that you talked about on the call? I think you talked about occupancy going down to 93% and then building from there versus your occupancy guidance of an average of 92% to 94% for the year. Does the new guidance include an average of something like 93%? But it sounds like occupancy on a quarter-to-quarter basis may average between 93% and 94%.

I think if I understand your question correctly, I think your latter comment is correct. I mean what we do is in our regional guidance and what we revise every quarter is we go back to every space and project what we think is going to happen to that space, whether we are going to lose, renew, or re-lease. And that's what our guidance is based on -- not any wide statistics or anything like that. It's what we think is going to happen very specifically to each space in each one of our buildings.

Thanks, David.

Thank you.

Blaine Heck, Wells Fargo.

Just a couple of quick ones. First one being, just wanted to see if you guys starting to see your competitors coming into your markets and beginning to develop?

The only market where we're seeing anybody else develop right now is Houston, and Liberty has a couple of buildings that are very close to our Beltway Crossing. ProLogis has just one building under construction. DCT has one under construction and another one announced. So, when we say that, it sounds like a lot, but in terms of square footage, I think all those together yield less than 1 million square feet. But nobody else to my knowledge is building in San Antonio or Orlando or any of the other markets where we were considering building.

Okay. And then in your Dallas market, there seemed to be a pretty significant occupancy drop. I wanted to see if you guys could comment on that.

We had a big moving in storage company in an older building close in Dallas; moved out I think it was 90,000 or 99,000 square feet. And it was a bigger factor on occupancy than it was on NOIs because the rents are low there.

We also had another company downsized. The moving and storage was the biggest one.

Okay. Thank you.

Thank you.

John Guinee, Stifel Nicolaus.

John Guinee here. When we initiated coverage, David, you, like any good CEO, called right away and said, you know, John, your cap rates for your NAV range, we use 7 to 7.5, are way too high, and it should be much lower. What do you think is an appropriate range, and what is the thought process there?

I'm not sure I used those, those quite as strong words. There might have been some expletives in there, but not such strong words.

Cap rates are something that in the major markets for quality properties bounce around a bit. And I know I'm coming from the prejudiced side here, but I believe over the years, the sell-side analysts have generally underestimated the NAVs of industrial REITs, not just us but just about everybody in the sector.

I've seen some cap rate maps that CBRE has put out, and I've listened to what some other institutional sales-type brokers that specialize in industrial transactions who put out -- and for Class A core properties and you can debate whether A, B and C is forever, but I think some of the sell-side people are way high compared to what some of those cap rates are, especially when you're talking about the ability to sell a whole park rather than an individual building. So that the Class A in most markets are well under 7%.

Now, when we go to sell some things, there could very easily be some cap rates above that. And I think that's probably the case with the other REITs, too, but most of us are selling the properties that we don't think fit and, as a result, would have some prior cap rates. So I would argue every time somebody sells a higher cap rate property, the average cap rate for the rest of the portfolio goes down.

Good. Okay, next question. You've got about $84 million of land on your balance sheet roughly 4% of total enterprise value. Do you think there is an appropriate number? It's 4% too high, 4% too low? Where do you think you'll be in a couple of years?

I would hope -- let me say that is something that I have not looked out and had a specific goal for in terms of dollars. What we have looked at is that, if you don't have well-located land that fits your development criteria, you can't develop. And if you at the last minute decide to buy land, you're not going to usually find what you want, and you're going to pay higher prices for it. And I think a lot of people found that out right before the last recession, and that was proven by the recession.

So we're looking at more -- what we would like to have as potential development inventory in the markets where we would like to develop. We internally have some guidelines that we talked to our Board about, but those aren't something that we would publish, and we certainly have some land in some markets right now where we don't want to develop for a while, and in some other markets, we wish we had more land. So probably you can really look at averages.

Great. Thank you very much.

Thank you.

Alex Goldfarb, Sandler O'Neill.

Dave, just want to go back to your comments. You had said earlier to a prior question that activity had picked up across all your markets versus, call it, six months ago.

With the recent economic data that we're reading says, hey, this year could be like prior years where economics accelerated into the year and starts to cool off. Does any of what we read in the newspaper jive with what your guys are seeing from the field? Are you guys saying, commenting at all that they are seeing any slowdown, or is this some sort of -- whether it is a disconnect or perhaps your markets just are doing very well and maybe some of this economic data is driven by markets where you guys are not in?

You get in trouble any time you start to try to put national statistics on individual markets or even individual states. And the reason we're in the Sunbelt is because historically that has had more growth, and that is occurring there today. I wouldn't say any of our markets are great, other than some of the Texas markets. It's just that like the economy, it's moving forward not at the pace we'd like, but at least it's positive. And we don't have to have a boom or GMP growth at 2 or 3 times what it is today in order for us to slowly fill up buildings and give us the opportunity to develop. It just puts a lid on the capacity, how high we can go on that.

So I don't want anybody to think that our markets are great. It is better than they were. Our occupancy has proven that. And, as I mentioned before, we think there has been and will continue to be a little bit more vibrancy in the Sunbelt markets as they recover and, as you've heard me say many times, that that demographic shift of the population to the Sunbelt starts to pick back up when it -- once it is zero or even reversed a little bit in the worst part of the recession.

Right now just to throw out some statistics that seem where Florida is supposed to have a net migration, in migration of 200,000 people this year. Houston is supposed to have 100,000 new jobs. So I think it's a lot of where you are very specifically.

Okay. And on the leasing front, you had said your renewal of 80% is above your historic or where you guys budget of two-thirds. Obviously, you guys are clearly good landlords, and people would want to beat tenants in your property. But how much are your tenants upon renewal, how much are they actively going out and trying to find a cheaper deal down the road to come back and retrade you guys versus just saying, hey, we're happy where we are, just give us a fair deal and we will renew?

I can't give you a split on the percentage of that, but tenants seem to be a whole lot more sophisticated today than years ago, and leasing brokers are pretty aggressive. So most of them know what the market is. And it's always -- if they don't need to change the size of their space, it's always easier and less expensive to stay if you're taking good care of them. And that is just what our approach is. We try to be more hands-on than maybe some of the other industrial owners have been. So I can't put a percentage on it, but I think our renewal results are proof that we do a pretty good job of it.

Along those lines, would you expect your renewals going forward to sort of be at that elevated 80% level, or do you think they'll start to tick back down to a normal level?

I would guess it's the difference between goals and projected budgets. We have a goal to be that high, but we can't budget those, numbers. So our guidance, our projections are based on a two-thirds figure. Our projections are based on what we think is going to happen, but we usually don't project much above the two-thirds or much below it.

Okay. And final question, just for Keith. Keith, on the G&A in second quarter, we should expect that to go down by about $400,000 or so, is that right?

It should go down, let's see, I think about $500,000.

$500,000. Okay. Thank you.

Thanks.

Dave AuBuchon, Baird.

Keys, a couple of modeling questions. You ended the quarter with 28.1 million shares outstanding. I believe, that's what you have on the supplemental on page 11. If you assume you are at 312,500 shares of issuance in Q2, should boost that number closer to a 28.3 million share count number in Q2 versus what you have in your assumptions. What am I missing there?

That's correct. The weighted average -- let's see, we are projecting in Q2 is about 28.1 million.

Right, okay. But just given your assumptions you've outlined, it probably -- you've already issued 143,000 shares. It seems like it would be a little bit ahead of that. Is that right?

I'll have to go back and look at it. That's not what I have. I can reconcile with you later. But then in the third quarter, we are projecting about 28.4 million.

Okay.

And then about 28.7 million in the fourth quarter.

Okay. And then also as it relates to your interest rate assumption on your $50 million of debt that you plan to issue in September of this year, 5% -- you obviously just closed a deal in Q1 at 4%. What sort of debt are you looking at that would be at that level?

We hope to get a lower interest rate than that. We were just putting in that to give us a little room.

And where you getting quoted by your lenders right now?

I think it's still around 4%.

Okay. Thanks for that.

And then, David, you mentioned that there's a lot of capital looking for industrial buildings right now. Why not be more aggressive selling assets to help fund your development and your acquisition?

At this point, we don't feel any shortage of capital to fund those. And what we want to sell is at the lower end -- in most cases, is at the lower end of what we're holding. So that if you talk about a low to mid 6 cap rate in a Texas city, what we're selling is our B or B- assets, so it would be a higher cap rate. And right now there's not a lot of money chasing that yet, which is an interesting thing in the marketplace and a good question, that in talking to them, income brokers, that there's been anywhere from 100 to 300 basis point spread between core A properties and B to C properties and you get into whether a market is a B or a C market or an A market, but it's almost historically high spread. And that widened in certainly the fourth quarter and maybe the third and fourth quarter of last year.

And so it will be interesting to see if the capital that is out there chasing that have driven down the cap rates in the core markets for the A assets whether they will have to turn to the B assets and start to drive those cap rates down also.

Did you say it was 100 to 300 basis point spread?

Yes.

Okay. And what the profile of the acquisitions that you're looking at, do you prefer just to take a lease uprisk right now in your development pipeline, or at what point would you feel comfortable taking leaseup risk on your acquisitions?

It all depends on these submarket where the asset is.

When we bought this portfolio in Tampa last December, it was about 92% leased. I think we're over 95% pleased with it today. We bought the two buildings in San Antonio. They were 70%-something leased. They are 100% today. So if we are comfortable with the submarket, we're more than happy to buy some vacancies, especially if it gives us a little bit higher yield for taking that risk that we don't see maybe as great a risk as somebody else does.

Great.

And there's no rule of thumb on that you go by. It is what is going on in each deal.

Okay. I was just curious whether or not you are still looking at more stabilized deals on the acquisition side versus leaseup.

Last question I have is on your development page, Southridge IX versus Southridge XI. There is a 110 basis point difference in your estimated stabilized yield. Can you just walk through why the yield would be so different for both of those assets?

On IX, we have leased roughly 70% of the building to a group as a pharmaceutical fulfillment, and they wanted a very expensive buildout and a fully air-conditioned building. And we were willing to do some of that capital ourselves, which allowed us to increase the yield on the transaction. And then they put in even much greater amount of capital on their own on a long-term lease. So the improvements and the return on those improvements are what increased the yield there and increased also the per square foot investment.

Got it. Thank you.

Thank you.

John Stewart, Green Street.

Thank you. Keith, one quick one for you. Was hoping you could help us understood what drove the upward revision to your same-store forecast? It looks like the occupancy guidance is unchanged, and I'm guessing the 7% rent rolldowns on a cash basis during the quarter were not way ahead of your expectations. So what prompted the upward same-store revision?

Actually, there was a slight uptick in projection guidance for occupancy. I think I've raised it 50 basis points or something like that. I'd have to go back and doublecheck. And that was because of the higher occupancy in the first quarter. And, as a result, we project slightly higher occupancy than we originally had for the balance of the year.

Okay. And, David, I know that you don't like to try and peg where the mark-to-market is across the portfolio. But maybe you could help us understand what you are expecting for the 1.4 million square feet that are rolling in Florida in the balance of the year.

To be slightly better than what it has been. How's that for an answer?

Like down single digits on a cash basis?

I would say probably 8 to 10. That's a gut feel. I don't have that exact number right in front of me.

Yes, okay. That's helpful. And then, lastly, David, just wanted to come back to your comments about the investment sales market, and you indicated you expect there's a lot more product coming to the market, and you guys hope to participate. I was hoping you could just help us understand a little bit about at what pricing levels you are comfortable being aggressive on acquisitions at this point? I mean it seems like you're selling into strength in Phoenix, and indications would seem to be that pricing is pretty strong, and participating in that way wouldn't seem to be as contrarian as your disposition program. What's your underwriting process on the investment market in this climate?

I guess a little bit of ducking your question is that each one of the markets is different. And we were able to buy last year in Charlotte and Tampa and have yields that we viewed as stabilized at above 7 because there was not a lot of institutional buyers looking at those two markets.

And institutions, just like in the REIT stock market, are the ones that really caused the pricing to change in one direction or another.

For example, South Florida, every institution in the industrial business thinks they need to own in Dade County. And, as a result, the yields are 5% to 5.5%. We are not going to compete in that.

Also, I'm a little skeptical sometimes when people talk about what yields they're buying at because we all say it is stabilized, and most people don't define what stabilized means. So some people quote yields at the current occupancy -- some at 95%; some at 100%.

So I don't think you're going to see us reporting stabilized yields at certainly below a 6%. But if we think there's an opportunity to buy the right asset with upside, we don't mind paying up for it because over the longer term we think we'll be able to report rent growth and NOI growth, and it will help our numbers and our valuation going into the future.

So I don't think there's any rule of thumb we look at in particular. Just some markets you believe there is more upside. And then also when people talk about yields, in many markets what you're looking at our rents. They are going to go down before they go up. So you have to value on that basis, also.

Thank you.

Thank you.

Bill Crow, Raymond James & Associates.

David, when you changed your projection for positive rent spreads from the end of this year to the middle of next year, what was that driver? Is that more lease-specific as you looked at your portfolio? Is it more economic, or was it kind of the underperformance of the markets relative to where you are? And how surprised would you be at this point if you did achieve positive rent spreads ahead of that mid-13 expectation?

I would be very pleasantly surprised. Two things have happened. One is that, although, I guess, every one of our markets is at least stabilized and rents have started back up. They haven't started back up as quickly as we might have expected or hoped.

Secondly, when we looked a year or so ago at the leases that were signed in 2006, 2007, and 2008 and projected out when they were going to roll, I think I underestimated how important that affect was going to be. And so that with four to five-year leases, those run you well into 2013, and especially looking at markets like Florida, where we signed a lease in 2007 or 2008, those five years was at the peak of the market, and we were able to obtain 3% annual bumps. You take a peak of the market add 3% 4 times, and you are going to have a pretty good drop.

So I think some of that was my mistake on looking at when we were going to burn through that. But, as I said, also some of the markets have -- we have outperformed the markets from an occupancy standpoint. And even though we're 94% occupied or 95%-plus leased, you can't raise rents when the rest of the market is at 90% or below.

Right. How is this recovery playing out? I know you've seen a cycle or two. How is it playing out compared to your prior experience?

We look back at 2000/2001, and in hindsight that looks like just a blip rather than a recession, and what seemed to really drive us out of that was the housing industry and in the Sun Belt markets. People were building houses like crazy, and we had more housing-related customers than I think we really thought we did. And so that's -- when the market turned, that knocked us down all the way to 86% occupied. But it sure helped coming out of that previous recession.

I think another factor we read about is obviously true, just about -- well, everybody stopped building warehouses certainly on a spec basis, almost totally whether build-to-suit or anything else, with the depth and length of this recession. So that there's very limited overhang of any first generation product in our Sun Belt markets. So that I think when the markets really get into a serious recovery, there's going to be tremendous opportunity for those of us who are in position to quickly build new product and meet that demand for first-generation space. And that's what we're trying to be prepared for.

All right. That's it for me. Thank you, guys.

Thank you.

We have no further questions at this time.

Well, again, thank you, everybody, for calling in. We will point out at that we've been mailing out our 2011 annual report, and it is on the webpage and ask you to take a look at that.

And thanks for your interest in EastGroup, and if you have any additional questions, just call Keith or me.

This concludes today's teleconference. You may now disconnect, and have a wonderful day.