Eastgroup Properties Inc (EGP) 2012 Q2 法說會逐字稿

Welcome to the EastGroup Properties second 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 our Q&A session. (Operator Instructions) It is now my pleasure to introduce David Hoster, President and CEO.

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

Thank you. The past 90 days have been productive for EastGroup. Funds from operations for the second quarter met the midpoint of our guidance and increased by 5.5%, as compared to the same period last year. Same-property operating results were positive for the fifth consecutive quarter. Occupancy slipped slightly, but ended above our internal projections. Rental rate comparisons on rollovers continued to improve. Our Houston Development Program is expanding significantly. We were able to take advantage of attractive equity markets to improve an already strong and flexible balance sheet by reducing our leverage.

Looking at earnings, FFO was $0.77 per share for the second quarter, as compared to $0.73 per share for the same period of 2011, an increase of 5.5% and the fifth consecutive quarter of growth over the previous year's quarter. For the six months of the year, FFO increased 6.3%, as compared to last year. Same-property net operating income for the second quarter increased 1%, with straight-line rent adjustments and 2.2% without.

In the second quarter on a GAAP basis, our best major markets after the elimination of termination fees were Phoenix, up 19%; Dallas, up 6%; and Tampa and Houston, both up 4%. The trailing same-property markets were South Florida, down 14%; Jacksonville, down 111%; and Charlotte, down 9%. The primary differences between quarters were basically due to changes in property occupancies in the individual markets.

Occupancy at June 30 was 93.1%, a 90 basis point decrease from the end of the first quarter, but ahead of our internal projections. We expect occupancy to remain approximately the same during the third quarter and increase closer to 94% in the fourth quarter. Our Texas markets were the best at 96.3% leased and 95.2% occupied. Houston, our largest market, with over 5 million square feet, was 97.1% leased and occupied.

In the second quarter, we renewed 73% of the 2.3 million square feet that expired in the quarter and signed new leases on another 5% of the expiring space, for a total of 78%. We also leased 597,000 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 177,000 square feet since June 30.

Somewhat to our surprise, the change in GAAP rents on new and renewal leases was positive, up 3.3% for the first time since the fourth quarter of 2008. Cash rent spreads were the best in 13 quarters, but still negative at 3.6%. We expect the change in rents over the next two quarters to be similar to our second quarter experience, give or take a little bit. Average lease length in the quarter was 3.3 years, which was less than our recent average. Tenant improvements were $1.46 per square foot for the life of the lease, or $0.44 per square foot per year of the lease, which is above our average for the past year, but in line with our two-year average.

At the risk of over generalizing, we feel that the leasing interest and activity has slowed over the last 60 days, but not reversed. This has occurred in basically all of our markets except for those in Texas, which are clearly the exception.

In June, we sold the Estrella Distribution Center in Phoenix for $7 million, generating a gain of $1.9 million. This 176,000 square foot warehouse was 74% occupied at closing and our only bulk distribution asset in the Phoenix market. We currently do not have any operating properties under contract to purchase or sell. At June 30, EastGroup's Development Program included eight properties with a total of 591,000 square feet and a projected combined investment of $44.6 million. They are currently 55% leased.

During the second quarter, we transferred World Houston 31A, a 44,000 square foot service center into the portfolio. It is presently 83% leased. Also, during the quarter, we started construction of World Houston 33, a 160,000 square foot build to suit project located on our World Houston expansion land, which we acquired last September. The building's projected cost is $10.9 million.

During the second quarter, we purchased 47.8 acres of development land in Houston and Denver, for $6.6 million. The land in Houston, 42 acres, is located in the Katy submarket and will accommodate the future development of what we're calling West Ten Crossing, a business park with an estimated 580,000 square feet in nine buildings. The Denver land, 5.8 acres, is located in the city's southeast submarket, adjacent to one of our existing properties and it will allow for the future development of Rampart IV, a business distribution building with approximately 83,000 square feet.

Subsequent to quarter-end, we began development of World Houston 34, 35, and 36, with a total of 162,000 square feet and a total projected investment of $12.5 million and also started Beltway Crossing XI with 87,000 square feet and a projected investment of $4.9 million. World Houston 36, 60,000 square feet, is our second build to suit on the World Houston expansion land and the other three new developments have no pre-leasing. Later in the third quarter, the Company will begin development of West Ten Crossing, West Ten Crossing I, a 30,000 square foot build to suit service center with an estimated cost at $3.8 million on the Katy land acquired last month.

Looking ahead, we have the potential to start one or two additional developments in Houston and one more in San Antonio before the end of the year. With a little luck, our Development Program could have 16 buildings, with 1.2 million square feet and a projected total investment of $87 million by December 31.

Keith will now review a number of financial topics.

Good morning.

FFO per share for the quarter was $0.77 per share compared to $0.73 per share for the same quarter last year. Operations have benefited from lower interest rates on refinancing mortgage debt and an increase in property net operating income related to the higher occupancy. Lease termination fee income was $87,000 for the quarter compared to $35,000 for the second quarter of 2011. Bad debt expense was $164,000 for the second quarter of 2012 compared to $165,000 in the same quarter last year.

FFO per share for the six months was $1.53 per share as compared to $1.44 per share for last year. Lease termination fee income was $257,000 for the six months in 2012 compared to $490,000 in the same period last year. Bad debt expense was $387,000 for the six months of 2012 compared to $299,000 for last year.

Debt to total market cap was 33.8% at June 30, 2012. For the quarter, the interest and fixed charge coverage ratio was 3.4 times and debt to EBITDA was 6.4. Our floating rate bank debt amounted to 5.1% of total market capitalization at quarter-end. We have no mortgages maturing for the remainder of 2012. Our bank debt was $121 million at June 30 and with bank lines of $225 million, we had $104 million of capacity at quarter-end.

The bank credit facility is mature in January 2013 and we are in discussions with our banks on a new facility. During the quarter, we repaid $42.3 million of mortgage loans with weighted average interest rates of 7.07%. We accelerated our planned sales of common stock under our continuous equity program. Because of the strength of our stock price in a time when economic news is mixed, we previously boasted selling the remaining 1,044,865 shares authorized in our program over the second, third and fourth quarters, but instead, sold all the remaining shares in the second quarter. This action resulted in reducing FFO projections by $0.02 a share for the year. The average price was $50.64 a share, with net proceeds of $52.3 million.

We are in negotiations on an unsecured term loan of approximately $80 million that we hope to close by the end of August. The interest rate is not locked yet, but we expect a rate in the low 3% range. In June, we paid our 130th consecutive quarterly cash distribution to common stockholders. This dividend of $0.52 per share equates to an annualized dividend of $2.08 per share. Our 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. We believe that this revenue stream gives stability to the dividend.

FFO guidance for 2012 has been narrowed to a range of $3.04 to $3.12 per share, which decreased the midpoint from $3.10 to $3.08 per share. The reduction was primarily due to the acceleration of selling shares. Earnings per share is estimated to be in the range of $0.90 to $0.98.

Now, David will make some final comments.

As stated earlier, second quarter was productive for EastGroup. We expect to maintain our positive momentum through the balance of the year. We were especially encouraged by the growth of our Development Program and its potential carrying well into 2013.

Keith and I will now take your questions. Thank you.

(Operator Instructions) Craig Mailman, KeyBanc Capital.

Jordan Sadler is on the line with me as well. David, maybe we could start with occupancy. It sounds like you expect it to be flat and rebound closer to 94% by year-end. I was just looking at what you guys have in terms of signed but not yet commenced and then the new leases that you signed since quarter-end. Is there something going on with the bigger lease expiration in 3Q that maybe keeps occupancy flat, or is it just the timing of those commencements in the backlog?

We're going to lose a large tenant in Charlotte, I think in September, late September, mid-September, that is going to keep it down in the third quarter. As I mentioned in the prepared remarks, we have seen over the last 60 days a slowdown in leasing activity. We're still putting out proposals. We're still signing leases. Nothing's reversed. We're not going backwards, but basically all of our markets have seen a bit of a slowdown, except for Texas, which continues to be strong.

Okay. Then, that's the Forward Air lease in Charlotte, correct?

Correct.

Okay. Then, with the occupancy outlook and the marginal benefit of those gains rolling through the same-store, but you guys are seeing some uptick or some improvement, I should say, in the rent rolldowns. I mean, as you guys are looking, I know it's early. Do you think that you guys are going to see the turn early enough in 2013 to keep same-store growth positive for the next couple quarters? Or do you think there's a potential for you guys could dip flat to negative, then bounce back in early 2013?

Well, when you look at the third and fourth quarters, we have some pretty strong operations from last year to compare against. So, if same-store looking quarter to quarter, that's why we're projecting, or showing a range that is less than what we have achieved to date, just because of the more difficult comparisons with above-average occupancy gains in the third and fourth quarters of 2011. As you look into 2013, a whole lot's going to depend on what happens in the economy. If you tell us what you think's going to happen there, we could probably give you a response based on where we think occupancy and rents are going to be. But one of the positives that we're seeing certainly on rents, a little more so than we had originally assumed, was a number of the leases that were signed as we went into the recession at very low rents in order to lease vacant space or maintain occupancy, those are rolling and those increases are offsetting more than we expected the remaining rolldown from 2007 and 2008 leases that were at the top of the market.

That's fair. Then just to circle back quickly to your comment about the last 60 days of leasing slowed a little bit. Is there any particular trend in tenant type or size range that you guys are seeing then? Or is it just a bit of a summer slowdown?

I'm generalizing.

Evan Smith, Cantor Fitzgerald.

Could you give some color on the 42% rolldown in San Diego in quarter -- in the quarter?

We only -- we have a single building we've owned a long time and just one small cost-free building complex there. So any rollover is magnified, because it's not really statistically significant. But we bought Ocean View in the depth of the recession, what we thought was a very -- we still believe is a very attractive price and understood at the time that the face rents on leases were well above market and built that into our calculations. What you're seeing are those leases above market leases rolling to market, which was no surprise for us. I mean, that was, I say, built into our cash flow analysis when we bought the asset.

Okay. Are there any other similar anomalies like that in the back half of the year?

In San Diego?

Or just in the portfolio in general with what's rolling.

I'm -- yes, there's no question that we still have leases rolling that were signed at the peak of the market in 2007 and the first half of 2008. So we're still going to see individual lease rolldowns that in some cases could still be 20%, 25%.

Okay. Then could you give a little bit more color on the planned acquisitions and dispositions through the rest of the year that are baked in the guidance?

As I reported, we sold our Estrella building in Phoenix as planned at the end of the second quarter. In the next 30 days, we will put our Braniff asset, two-building complex in Tulsa on the market. We just assume that will be in the $8 million to $10 million sale range and that will close near the end of the year.

Jamie Feldman, Bank of America.

David, yes, I'm hoping you could give a little bit more color on your comment over leasing interest and activity slowing down over the last 30 days. Just maybe some more anecdotal evidence, just some more color.

As I said, Houston and San Antonio and Dallas -- Dallas has been stronger than we've experienced in the first part of the year. Houston, with the energy companies, continues and the freight forwarders, continues to be strong. San Antonio, we're at a recent high in occupancy there. Some of that's related to the energy of the Eagle Ford play that's south of town. We've just in the last quarter signed two leases with energy companies on vacant spaces in San Antonio. Just in the other markets, I mean, it's just there are less prospects out there that we're giving proposals to -- there's less showings. In a market like Phoenix, people always say it's the hot summer, but you never know. I think it's going to take another quarter to see if in fact this is a slowdown reflecting -- this slowdown we hear about from the Fed and then the economy, or whether this is just an aberration for summertime. But I do want to emphasize that we are still signing leases and putting out proposals in every market. No market's dead. We're not seeing, other than some known move-outs, we're not seeing any unexpected reduction in our market, in our properties, in our various markets in their occupancy.

So, are leases you've been working on falling apart?

No.

Or are people just taking longer to get to the finish line?

No. Exactly the latter. We have had to, in our projections, push back some of the leasing where we're dealing with people and had just -- we're more back to, I don't know, 12 months ago maybe where prospects feel little or no urgency to sign leases. The lease negotiations --

Then do you sense that -- sorry. Go ahead. I'm sorry.

I was going to say, the lease negotiations seem to be more drawn out and prospects just seem to be slower to respond. But we're still confident in our budget projections, our guidance projections for the balance of the year.

Okay. Then do you sense -- if you're talking to tenants, is it the election? Is it uncertainty over how their business is looking? Any constant themes that keep coming up more than others?

No, just I think, uncertainty in the economy. Anybody that gives the excuse that I got to see how the election goes, then you say, well, if one party wins or another, how is that going to change your business? They just really don't know. It's just another unknown in a period of a lot of mixed economic news and people are not making decisions or putting off those decisions a bit until they get a better feel. But I don't want anybody to think that it's come to a screeching halt, like it did going into the recession. We're still signing leases. It's just we are just trying to be straightforward to everybody, that the first quarter had great activity and we think it's tailed off a bit, but certainly hasn't stopped in the second quarter.

Okay. Then, as you think ahead to your expirations for next year, I think it's like, over 20%. What's the percentage of those that are known move-outs, like the one you mentioned for the third quarter?

Very, very few at this point. The 20% number is on rent, not square footage and that's because we have a higher percentage of service center R&D, office-type tenants renewing in 2013 than we do -- than we have had in 2012.

Okay. Then how many would you say are -- of that amount are questionable?

It's too early, too early to give that answer. We're still focused on where we're going this year and into the first half of next year. We've started negotiations with especially all the bigger users, but too early to make projections for us on occupancy in 2013.

Okay. Then, you had commented on leasing spreads. Do you feel comfortable they will stay around the second quarter level through the end of the year?

Yes.

But you didn't comment on next year. Is that because you're not looking forward to next year yet, or --

Exactly, but I would, certainly -- unless we go back into a recession, would certainly expect improvement over where we were in the second quarter and expect to be in the third and fourth quarter this year, certainly expect improvement going into next year simply because the number of leases that are rolling from 2007 and 2008 are reduced.

All right, great. Thank you so much.

I would just add that we -- when we report that the rent changes, we're reporting it for all spaces no matter how long the space has been vacant and its renewals and new leases and we don't pull anything out of that. So it includes everything. So people need to keep that in mind when they are comparing the numbers we report to what some other companies might be reporting.

Chris Caton, Morgan Stanley.

David, I was hoping, could you talk a little bit about the implications for the business on a slowdown and leasing? Do you -- two questions on that. One, are there anywhere where you were hoping to be able to push rent in the back half of the year or where you thought you might have two or three prospects and now it's a little bit more challenging? Then the second question is, how does that affect -- and it seems like it is affecting your approach to development pipeline, where you're much more active in Houston. But can you talk a little bit about your approach to building out the development pipeline in the current leasing environment?

In both Houston and San Antonio, we're still very bullish on what we can do there. In Houston, we're still having build-to-suit conversations with a number of users and we see the opportunity to possibly start some spec product that we haven't talked about yet, because we have very little of that type space available. San Antonio, we're doing well with our Dock-High building at Thousand Oaks and would hope to be able to start the third building or the second Dock-High building in that submarket. Looking into next year, subject to us falling back into a recession, we would hope to start construction of our Rampart IV in Denver, where we just bought the land during the last quarter and do some new development on one of the pieces of land we have in Chandler, the south side of Phoenix. Beyond that, we're looking at potential development in Charlotte and we've actually talked to some people about Fort Myers, but that's -- nothing seems to be happening there at this point. So that overall activity continues to be pretty good.

So -- go ahead.

As to rents, we're seeing less reduction or actual rent growth in terms of the comparisons where we're doing better obviously, which is in the Texas markets. Less so in some of the Florida cities that haven't shown the improvement and still having the rent rolldowns in Phoenix.

Got you. So has there been, on the margin, any change in mentality there, where you were maybe thinking occupancy might be incrementally higher or more traffic, or is it -- or was rent really not something that you were contemplating pushing through the end of the year?

We try to push rent on every lease we negotiate. The market determines what your rent's going to be. I think, as many people heard me say before, we look at it from the standpoint if a prospect has seven or eight or more good alternatives, you can talk about pushing rent all you want, but you won't sign any leases. If a prospect has one or two good alternatives, then you push rent. And it all determines -- all that's determined by what's available, what the comparable spaces are at the time you're negotiating the lease. As I mentioned earlier, we're doing, from a rent standpoint, we're doing a little bit better than we had projected, which is a pleasant surprise.

Great. Then, last one for me and this is on 2013 in the service space and office space you have renewing. I believe you underwrite, you typically underwrite two-third retention. Have you on average across the portfolio, have you experienced a different retention rate for the type of space -- the higher finished space that you will be renewing next year, historically?

Not in particular. I think we're going to be more effected by -- in the economy than by anything else when we get into the 2013 renewals, in what happens with Congress between now and the beginning of next year.

Alexander Goldfarb, Sandler O'Neill.

Just further going along the slowdown in the past 60 days. As you contemplate your guys' appetite for land acquisition and development, how much -- how long would this slowdown have to be where it would start to impact your decision to buy more development land and then to start spec?

I don't think you can generalize like that, Alex. What we look at is, is it a good buy on the land and when do we think we can start development and build in the carry on that? If we think it's going to be three years before we can start a building, then we look at what we think the numbers are going to be three years from now with today's purchase price and capitalized interest and other carry added onto it. From a spec development standpoint, we're looking at what is happening today, what's just happened and what we think's going to happen in an individual submarket and what kind of competition is there for our type product? In a development like World Houston or a Beltway Crossing, where we've just finished and are leasing up spec buildings, then we can say what's our activity, what rents are we getting and do those rents work with construction costs on a new building and do we have the activity to justify new construction? Since it takes us -- well, we're always designing and permitting new buildings. So once we decide to kick it off, we're talking about a six-month construction period. So we think we can meet a market demand quickly and be leasing before there's a big change. So, again, it's just every site, every building is looked at individually of what's going on in that submarket or in the development where we're adding another building, rather than a lot of bigger picture statistics.

Okay. Then on the acquisition front for stabilized product and certainly in some of the markets, the pricing has gotten really hot. What you guys see as pricing for development land, has that escalated to a point that starts to make you concerned, or right now the land is still a good buy, where it may -- you can carry it for a few years, it's not at a point where you start having to say it's pricing up where you start to consider that?

Every piece of land is different and there's not so much land for sale out there that you go out and look at 10 pieces and say I like these two best. In most markets, infill type industrial sites are few and far between and we're very sensitive to what we're paying. I would say -- forgetting -- well, the World Houston land's a whole another story in itself, but looking at the land we just acquired in the energy corridor with Katy, what we bought in Denver, a couple of purchases in Chandler, all those pieces of land we thought were at, in our minds, our calculations, bargain prices and they were generally of some distress with the seller that allowed us to get in at very attractive prices. At our Katy land, which is ready to develop. I mean, as soon as we get a permit, we're going to be building on it. There's separate water retention. We bought that for $3.25 a square foot. The land in Denver, which is almost the edge of the Tech Center, we bought for $2.25 a square foot. That's ready to develop. We have to move a little more dirt there, but because of our knowledge of the individual submarkets, where we want to build, I think we're on top of finding the opportunities and they don't come along very often, but when you see them, you have to jump on them.

Then on the renewal process, how far out do you guys start the renewal conversations with tenants and has that changed at all in the past two to three months?

We start when we think it makes sense, given what's going on in the market. The bigger the tenant, the sooner you start it. You don't decide one day, whoops, we got to start talking to people farther out. Lots of times in warehouses, which is very different than office, we'll go in and talk to a tenant and they will say this is way too early, come back in three months or six months. We don't want to talk to you now. But you know, and we've known for years, the brokerage community is pretty sophisticated and hungry. So any of your bigger users, they are going to be out calling on, so you need to be talking to your own tenants all the time.

Okay. Then just final question is, with the sharp drop in the 10-year, you're now doing a little bit more on the unsecured term loan front. You have the one rating from Fitch Just curious on your thoughts of perhaps going for the investment grade, speaking to Moody's and S&P as the corporate bond market has just become a lot more competitive and in the past, certainly this year with the drop in the 10-year. Just want to get your take on that.

We're glad you asked that question. We were hoping somebody would. Yes, we're doing all of that. Because of the extra equity that we raised as scheduled in the second quarter and the fact that we did a term loan for $50 million last December instead of a mortgage and the fact that we're looking at another term loan now puts us -- which allows our unencumbered pool of assets to be a higher percentage, puts us in the best position the Company has ever been in to look at a second or third debt rating and to just add flexibility in the capital markets.

Okay. So in EastGroup unsecured bond may be a reality at some point in the future?

I wouldn't hold my breath, but, yes, we like the idea of a bit lower leverage. This is something that we'll be talking to our Board about in a lot of detail, because of what it allows us to do. It's significant additional flexibility in the debt markets and a lot of that's due to having a higher multiple on the stock. If you look around at what you might want to call, or people call the blue chip REITs, the ones selling at the highest multiples over an extended period of time, one of the factors is lower leverage, with attractive ratios. This is something that we're paying attention to.

Brendan Maiorana, Wells Fargo.

David, question just on the occupancy guidance. I think if I look at where you guys were in the first half of the year and then the average occupancy that you expect per your guidance, it suggests that the back half of the year would be around 92.5% average, but it sounds like you think you're going to be about 100 basis points higher than that number, if you're flat in the third quarter and then up to 94% in the fourth quarter. Could you just reconcile the difference?

We're going to be higher than we initially budgeted when we first gave guidance back in February. I think the numbers you're throwing out are a little bit higher when you talk about averages that we will probably in the -- we usually just give year-end, or quarter-end statistics, but, yes, for the third and fourth quarters, we should average I would say 93% or slightly above.

Okay. Is the same -- can we infer the same relationship as it relates to same-store? Because if I look at what you guys did in the first half of the year, it suggests that your same-store numbers are likely to be negative in the comparisons in the back half of the year versus -- to get to the midpoint of your guidance versus where you guys were in the back half of last year. Or do you think that you've got a bit higher occupancy that you're suggesting probably makes your same-store numbers not as high as they have been in the first half of the year, but not negative year-over-year?

Well, only time's going to tell. But as I mentioned earlier, the comparisons to 2011 for the third and fourth quarters are real difficult, because we've certainly outperformed our own projections and, I think, our peer group in the last two quarters of 2011. So that's a tough comparison with rents, with GAAP rents still going down -- or excuse me, cash rents still going down a little bit. So I think it will be close in the third and fourth quarters from that standpoint.

Okay. Fair enough. In terms of acquisitions, are you seeing some of the leasing slowdown that's been talked about a lot on the call? Are you seeing any of that filter into -- is that filtering into asset prices at all? Is there any relief at least in some marginal assets that you guys might be able to pick up a little bit more cheaply than maybe you expected a few months ago?

I would probably say no. Things don't happen that quickly and I don't want people to read too much into us slowing down. It's not as though we've hit a wall or something. We're just trying to be straightforward to let you know what's going on in the market. That it has slowed some, but again, that's just been the last 60 plus days. The sale of real estate takes months and months. But when people are buying A and A down to B plus properties, they are looking more at what it's going to be a year from now or a couple years from now, not what it's going to be next month. There is a tremendous amount of capital chasing good assets in prime markets. I think everybody knows what those are. So that yields have come down. I think come down farther than a lot of people thought.

So if I look at your capital, you guys exhausted the ATM program, you -- I think Keith mentioned that with some of the macro concerns out there and a high share price caused you guys to accelerate that. If I look at doing the $80 million term loan at 3.3%, you could argue that your cost of capital now is probably as low as it's been in a very long time and maybe lower than it's ever been. Is that influencing your decision in deploying capital? Can you get more aggressive deploying capital, or do you still -- are your underwriting standards still unchanged from where they were 6 or 12 months ago?

No, you're absolutely right. The lower cost of capital, both debt and equity, or we talk about a blended costs of capital, has allowed us to look at properties, bid on assets at lower cap rates than we would have over the good many years. It's also allowed us, as I think we've talked about in the past, to build -- do developments on lower yields than we did in the last decade.

Sure. Do you think that those development yields will continue to come down, or do you think where they are now is pretty steady?

We're probably pretty steady where we are now. We could come down on some pre-lease and build-to-suit transactions, but on average, we'll be in the range that you're seeing today.

Okay. Then just last one for me, any plans to institute a new ATM program?

We would hope so. We have done two of them over the last three or four years. They have worked extremely well for the way we do business. I would hope we would institute a new one certainly before the end of the year and whether we use it or not depends on investment opportunities and share price.

John Guinee, Stifel.

Just a quick question, David, thank you. If I work backwards the difference between FFO and FAD, or AFFO, it seems to me as if you're straight line run rate's about a $2 million number and your base building CapEx is about an $8 million per year number. If I look at 25% of the lease rollover every year, which is 7.5 million square feet at about $2.25 a square foot for TI's and lease and commissions, that's a $17 million number. You add that all up, you're at $27 million or $0.90 to $0.95 a share. You have about a $2.08 dividend right now. So if you're working backwards, where does your FFO have to get to, that you're comfortable raising the dividend?

Well, you lost me at about the third set of statistics there. So if you want to go back through those numbers, why don't you give Keith or me a call after the conference call. But I think some of your numbers are too high in terms of capital and lease roll and all that sort of thing. But we can discuss that at another time. But I -- we don't have a specific number, but it would be below 90% AFFO payout.

How close are you by your numbers?

(laughter) This is something we will be discussing with our Board in our September meeting.

Great.

Where we stand on the dividend. We've been very conservative on it, which allowed us to be one of the few REITs that didn't have to reduce it through the recession. As Keith pointed out earlier, what are we, the 20th year or something of either raising or maintaining the dividend, and our goal is to start raising it again as soon as we're comfortable with the AFFO coverage.

Bill Crow, Raymond James.

Quick question for me. You've talked over the past year or so about how your leasing has outperformed the markets and that you wouldn't really have a chance for pricing power until the market's caught up, at least to some extent to close the gap. Are the markets closing the gap? Is the slowdown that you're seeing being felt by the market overall, or maybe because you have such limited occupancy, vacancy at this point, others are starting to take a little more share?

No. We look at the CBRE's leasing statistics every quarter and a lot of the markets haven't reported the June 30 numbers yet, but those statistics are showing that in the second quarter or by the end of the second quarter, that the markets had slowed some. Some are still getting better, some are going down. But I think one of the things that has helped the rents, and this is just a gut feel from talking to our people in the field, is that there are a lot less -- fewer desperate landlords who have had long vacancies and would give away the ranch just to put somebody in the space. So you don't hear about crazy deals anymore. They are still very competitive, but there's not somebody who will do anything just to put a prospect, slam them in the space. So I think that has helped the overall market rent results. A lot of our markets have shown, not a significant slowdown, but at least they have -- the occupancies are not going up or they are going down by 10 or 20 basis points from the first quarter.

Right. Don't want to make a bigger deal out of it than it is, and I know you're being pretty general. Any industry in particular that you say has definitely slowed down their interest level?

It seems to be -- the only ones that certainly hasn't is energy. But, no. We've not seen a slowdown in medical, particularly in Florida. When you hear talk about pharmaceutical fulfillment, an amazing number of prospects in that field, but there's no one area you can point to. One thing we did ask all our people in the field about was, are you seeing any pickup in housing-related prospects, or housing-related tenants now that the housing market seemed to be a little bit better and maybe only in two markets have they seen any pickup in that and it's not affected us.

Mitch Germain, JMP Securities.

David, just what's your plan with West Ten? I know you've got one development that you're starting. I think you have nine that you could do. Based on current conditions, how would you view the buildout of that park?

To give you a little history on it, Katy is a far western suburb out I-10 from downtown Houston. I-10, of course, is outside the belt, is viewed as the energy corridor, and there's been tremendous growth with the energy companies in the Katy area, which has led to one of the fastest growing areas for home building at Cinco Ranch, the construction of what's called the Grand Parkway, which is the outer, outer belt that will be within like another two years connected from Westheimer all the way around the northwest, up to the north. That got pushed forward because of the tremendous campus that Exxon Mobil is building. So we just saw a lot going on out there and through the people we work with, as our brokers in Houston came up with a piece of land that if we could close quickly, we could get a very good price on. We liked the opportunity. I've been out there three times walking the land. It's a rectangular piece with a thumb sticking out in one corner. Within about 10 days of closing on the land in June, a group, a Danish company came to us and asked if they could do something on that corner site. We agreed to build a little service center, build-to-suit for them and we signed the leases last Monday on that. So it shows you how hot that energy area is. There's a chance depending on what we see in the market of doing a spec building or two out there before the end of the year and if not before the end of the year, I would hope we would have at least two buildings under construction there in the first or second quarter of next year.

John Stewart, Green Street Advisors.

David, I wanted to quickly come back to your comment a few minutes ago that yields have come down. I'm wondering specifically over what timeframe you were referring to? I guess, specifically when you think about your comments about a slowdown over the past 60 days, have you seen any movement in yields over the past 60 days?

The only yields I can speak of with some certainty are what we've seen in Texas. Because there have been more things for sale that we've looked at and either not bid on or lost the bid on and have seen what they have gone under contract for or actually closed on as the brokers have reported it. When we know the pro forma numbers from looking at the package, we can feel pretty certain of what the buyer's ending up with. Both Dallas and Houston have become attractive markets because they are two of the bigger growth cities from population and job standpoint in the US. Dallas has always had lower cap rates than Houston, but because of the strength of the energy business, the Houston cap rates are now matching them and we're seeing some that, A, A-minus deals that are 6%, 95% stabilized or just below that. I think those have to be, in particular, historic lows for Houston. We got very aggressive on a package in Dallas that was roughly $40 million and ended up in second place and based on our numbers, what we think the buyer paid, it was, again, a 6% or a high 5%, depending how you looked at the stabilized operation. So on the other extreme, John, is the B-to-C type properties, or B-minus to C, older, a little bit off, so less and it's not as well located, what the brokers are telling us, because we follow that also that the cap rates in Houston and Dallas are 8% or a low 8%. So there's still a surprisingly significant spread between the more institutional-type assets and the more opportunistic or value-add type assets. That spread is not shrunk over the last 12 months.

That's helpful. Thank you. Likewise, your comments on the balance sheet strategy and the steps you're taking there were helpful as well. I wanted to gauge your appetite for the preferred market and where you thought you might be able to issue, if you were to tap that market.

We thought, if you go back 60 or 90 days, that without a second debt rating, that we would probably be in a high 6%, maybe 6.75%, something like that. There have been some eye-popping low yields just in the last 30 days. So we're going to take another look at it and see where we stand and then where we might stand with the second debt rating. But with the attractive common equity market and the attractive debt market, some of the preferreds still looks a bit expensive to us on a relative basis.

What would be the timeframe for when you think you might have the second rating in place?

Well, first of all, we have to decide that's something we want to pursue, but I would guess it's 90 to 120 days.

Okay. Lastly, just wanted to come back to the peak rent rolldown. Without asking you to opine on where market rents are headed, when should we expect that really the bulk of your rents that were signed at the peak will have flushed their way through the system and will be looking at, at least comps that are easier? At what point is that going to happen?

I would say at the end of the second quarter of next year.

Okay. Thank you.

Maybe sooner. I -- in my own discussions have pushed it out to then and then was pleasantly surprised on how we did in the second quarter of this year. But in terms of getting through all but a few of the 2007-2008 high rents, the middle of next year should certainly -- there will still be some, but very few at that point.

Michael Bilerman, Citi.

It's Josh Attie. David, can you remind us what the seasonality of leasing activity's been over the last few years and to what extent you may have usually seen some slowdown heading into the summer?

We tend to see some slowdown in July, August, and everybody says well, we'll get back to it after Labor Day. But this just seems to be a little bit more pronounced and started a little bit earlier. I -- the difference is that the first quarter was so good, that maybe we got spoiled, and just less activity. That can -- 30 days, it can be very different again. But we just want to be straightforward with everybody about what our people in the field have seen in most of our markets, again, other than Texas. Tampa's doing pretty well, too, but not so well in the other Florida markets. What we're seeing and not just what we're seeing, but what brokers are telling us. Brokers in these -- we know brokers that don't represent us in every market. So when there's a little bit of a slowdown, you talk to them too, just to make sure there wasn't something you did. That's what -- that's the kind of response we're getting.

So, when you look at the situation in totality, is your best judgment that it's a combination of having a very, very strong first quarter and then a normal seasonal slowing? Or do you feel like there's real hesitancy and demand slowdown on the part of your tenants? I know it's tough to tell exactly, but given what you know today, what's your best judgment?

Over generalizing, it seems our people in the field have been a little bit surprised by the level of slowdown on what was expected, but at the same time, we're not projecting any lower occupancy. It's just the number of lookers are not as great. The number of proposals we're putting out are not as great. But we have basically got the same occupancy projected for the end of the year that we did at the beginning of the year. After the first quarter, we are a little more optimistic about beating it. Now we're thinking we're going to hit it. So, again, in 30 days things could pick back up, but I just think the -- there's not much working towards that in the US economy today and -- well call it the tax cliff and what could happen in the election in terms of being pro business or not versus levels of regulation, everything. There are a lot of reasons for people to put off making a decision today.

Ki Bin Kim, Macquarie.

Sorry if you already answered this question. But just going back to your comments just now. I noticed your lease terms for both new leases and renewals have shortened a bit this quarter. I know one quarter's not a trend, but I was wondering, does this just coincide with the slowdown you've been talking about and do you think it's here to stay until we see some material pickup in some of the lead indicators for the economy here?

I think you have answered the question. My guess is that part of that is unknown of what's out there for the economy. But I don't like to make generalizations on our statistics after just one quarter, because it could swing back very quickly.

Is there a difference between the larger users versus the smaller users that have been a little bit more bearish or bullish?

I, again, at the risk of over generalizing, I would say our smaller users, those 10,000-15,000 square feet and below are less bullish. Small business is still struggling a lot more than bigger business. We're seeing, we're not losing those type tenants, but we're not seeing the expansion or the growth in them that historically we have coming out of past recessions.

We have no further questions at this time.

Again, thank you, everybody, for your interest in EastGroup. Keith and I, as always, are available for any questions that we didn't clarify to the level you would like, just give us a ring.

This concludes today's program. You may disconnect at any time. Thank you, and have a great day.