EastGroup Properties, Inc. (EGP) Q4 2011 Earnings Report, Transcript and Summary

Good morning. And welcome to EastGroup Properties Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] Please note this call may be recorded. [Operator Instructions] Now it is my pleasure to introduce David Hoster, president and CEO. Please go ahead.

Good morning. And thank you for calling in for our fourth quarter 2011 conference call. We appreciate your interest in EastGroup. Keith McKey, our CFO, will also be participating in the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

The discussion today involves forward-looking statements, please refer to the safe harbor language included in the company’s news release announcing results for this quarter that describes the certain risk factors and uncertainties that may impact the company’s future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time-sensitive information that’s subject to the safe harbor statement included in the news release is accurate only as of the date of this call.

Thank you. EastGroup had a productive fourth quarter. Funds from operations per share met the midpoint of our guidance when acquisition costs are excluded, and they increased by over 8% compared to the fourth quarter of 2010. Occupancy increased for the seventh consecutive quarter to 93.9% at year-end. Same property operating results were positive for the third consecutive quarter. We completed the acquisitions of over 1.3 million square feet of properties. We started 3 new developments. And finally, 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 fourth quarter as compared to $0.71 per share for the same period of 2010, an increase of 8.5% and the third consecutive quarter of growth over the previous year’s quarter. This was achieved even with the expensing of $0.01 per share of acquisition cost in the fourth quarter of 2011. For the full year, FFO was $2.96 per share as compared to $2.86 per share for 2010, an increase of 3.5% and $0.05 per share above the midpoint of our original 2011 guidance. Same property net operating income for the fourth quarter increased 3.6% with straight-line rent adjustments and 4.5% without these adjustments. For all of 2011, the increase in same property results was 1.2% with straight line rent adjustments and 1.8% without. In the fourth quarter, on a GAAP basis our best major markets, after the elimination of termination fees, were Phoenix which was up 21%, Tampa up 8.4%, Dallas up 7.6%, and Los Angeles up 7.0%. The trailing same property markets were El Paso down 10.3%, Jacksonville down 4% and San Francisco down 3.6%. 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 December 31 was 93.9%, a 90 basis point increase from the end of the third quarter and ahead of our projections due to a number of short-term lease extensions and Christmas related leases. It also represented a 410 basis point increase over occupancy at the end of 2010. On a state basis, our Florida markets were the best at 96.3% leased, and 96.1% occupied. Houston, our largest market, with over 4.8 million square feet was 97.1% leased. At this point, Phoenix continues to be our most challenging major leasing market, although it was showing slow, but steady improvement. In the fourth quarter, we renewed 74% of the 1 million square feet that expired in the quarter, and signed new leases on another 8% of the expiring space for a total of 82%. We also leased 516,000 square feet that had either terminated early during the quarter, or was vacant at the beginning of the quarter. In addition, we’ve leased and renewed 1.1 million square feet since December 31. We continue to experience negative rent spreads, but the fourth quarter had the smallest decreases of the year. GAAP rents were down 4.1% and cash rents decreased 8.4%. Average lease length in the quarter was 3.9 years which was our average for the year. Tenant improvements were $1.32 per square foot for the life of the lease, or $0.34 per square foot for the year of the lease which was slightly below our average for the past 2 years. In mid-December, we acquired 2 property portfolios in separate transactions in Tampa and San Antonio, containing a total of 1.3 million square feet for a combined investment of $65.1 million. The $57 million Tampa purchase includes 16 buildings with 1,147,000 square feet in 2 of Tampa’s primary infill industrial submarkets. This portfolio is currently 95% leased. We plan to eventually sell 6 small non-core buildings containing 69,000 square feet. And 2 of these, with 10,500 square feet, are already under a sales contract which should close today. In San Antonio, we acquired Rittiman Distribution Center I and II for $8.1 million. The 2 multi-tenant business distribution buildings contain 172,000 square feet and are located in the northeast quadrant of the city. They are currently 89% leased to 7 customers. We now own 2 million square feet in San Antonio, including our new developments there. Subsequent to year end, we acquired Madison distribution center with 72,000 square feet, and 18 acres of development land in Tampa for $4.7 million. Located in the port of Tampa submarket, the business distribution building is currently 59% leased to 3 customers. And we have preliminary plans for the future development of approximately 270,000 square feet on this newly acquire land. The Tampa acquisitions increased our ownership there to almost 4 million square feet, and to 9.2 million square feet in the state of Florida. For the year, we acquired a total of 1.8 million square feet of industrial properties, with a combined investment of $88.6 million. They are located in Charlotte, Phoenix, Tampa and San Antonio. As part of the 2012 guidance, we have projected the acquisition of $30 million of assets in addition to our January purchase. We did not sell any assets in 2011, but expect to dispose of a number of non-core properties in 2012. We currently do not have any properties under contract to purchase. During the fourth quarter, we began construction of 3 buildings, all of which are in Houston, Beltway Crossing IX and X, with 123,000 square feet, and World Houston 31B, with 35,000 square feet. They have a total combined projected investment of $10.9 million, it should be completed in the second quarter of this year. For all of 2011, we initiated development of 8 projects containing 527,000 square feet, with a combined expected investment of $39.7 million. Five are in 2 different locations in Houston, 2 in San Antonio and 1 in Orlando. In January of 2012, we transferred Beltway Crossing VIII in World Houston 32 from the development program into the portfolio since both were 100% leased and occupied. We also began construction of Southridge XI in Orlando, with 88,000 square feet. For the balance of 2012, we are projecting 3 additional development starts, a goal we hope to exceed. EastGroup’s development program has been, and we believe will again be a significant creator of shareholder value in both the short and longer term. To date, we have developed almost 1/3 of our current portfolio, adding over 9.6 million square feet of state-of-the-art warehouse space in our core markets. Since 2010, all our developments are being built to LEED standards, and we are pursuing formal LEED certification for them. Keith will now review a number of financial topics including our earnings guidance for 2012.

Good morning. As discussed, FFO per share for the quarter increased 8.5% compared to the same quarter last year. Lease termination fee income net of bad debts increased FFO by $65,000 comparing the fourth quarter of 2011 to 2010. FFO per share for the year increased 8.5% compared to 2010. Lease termination fee income net of bad debts decreased FFO by $1,803,000 or $0.07 a share compared to 2010. As David discussed, we had an active year in acquisitions and development, and we exceeded $2 billion in total market cap for the first time. We believe that we have raised capital to fund these transactions on an attractive basis. During the fourth quarter, we closed a $50 million unsecured 7-year term loan with a fixed interest rate of 3.91% and interest-only payments, signed an application for a $54 million non-recourse first mortgage loan with a fixed interest rate of 4.09%, a 10-year term, and 20-year amortization schedule that closed on January 4, 2012. And sold 571,977 common shares under our continuous equity program, for net proceeds of $24.7 million. Our outstanding bank debt was $154.5 million at year end, and with bank lines of $225 million, we had $70.5 million of capacity at December 31. The closing of the $54 million mortgage in January of 2012 increased the capacity to $124.5 million. The bank loans mature in January 2013, and we have begun discussions with our lead bank on a new credit facility. We also comply with all of our bank line covenants. Net to total market capitalization was 40.9% at December 31, 2011. For the year, the interest in fixed charge coverage ratios were 3.3x. The debt to EBITDA ratio was 7.2 for the year compared to 6.5 for last year. But this ratio is a little misleading since all of the debt from the fourth quarter acquisitions and development is included in debt but less than a month of earnings from acquisitions are included in earnings. If the fourth quarter earnings from the acquisitions is annualized, the ratio is 6.7. In January, Fitch ratings affirmed EastGroup’s issuer default rating of BBB with a stable outlook. In December, we paid our 128th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.52 per share equates to an annualized dividend of $2.08 per share. This was the company’s 19th consecutive year of increasing or maintaining cash distributions to its shareholders. Our dividend-to-FFO payout ratio was 70% for the year. Rental income from the properties amounts to almost all of our revenues, so our dividend is 100% covered by property in net operating income. FFO for 2012, is projected to be in the range of $3.02 to $3.14 per share. Earnings per share is estimated to be in the range of $0.97 to $1.09. Occupancy rates are projected to average 92% to 94%. We project acquiring $30 million of property in addition to the $4.7 disclosed in the earnings release. We have mortgages totaling $46.7 million at December 31, 2011, that matured during the year with a weighted average interest rate of 6.97%. We have been active in selling shares under our continuous equity program. In addition to the 25.2 million sold in 2011, we have also sold 9.9 million in 2012. We project selling 1,250,000 shares for 2012, or about 312,500 shares a quarter. We believe we have a strong balance sheet. In these times, we favor a more conservative approach to financing our acquisition and development program. The shares issued in 2011 and planned in 2012, reduce FFO by about $0.04 a share when compared to using debt. The 2012 FFO per share mid-point is $3.08 which is an increase of 4.1% compared to 2011. Now David will make some final comments.

The fourth quarter continued the significant progress achieved during the third quarter in all aspects of our business model. Internal operations, development and acquisitions supported by our strong balance sheet. We expect to build on this positive momentum in 2012. Our strategy is simple, straight-forward, and it works. Keith and I will now take your questions.

[Operator Instructions] We’ll go first to the side of Craig Mailman with KeyBanc.

Jordan Sadler is on the phone with me as well. I guess, maybe I’ll just start with the equity. Keith, it sounds like in guidance, it’s pretty ratable for the balance of the year. Is that just for the ease of modeling? Or is that kind of match up with what you guys think you’re going to need for funding, development and acquisitions?

I think it’s both. We plan on probably finishing out to 312,000 in the first quarter, and as always, we look at the stock price and our needs so if they are accelerating, or are going towards the end of the year, we may adjust that.

Is there any level that you guys get less interest in issuing through the ATM?

Obviously, but we haven’t put an exact figure on that.

That’s fair.

But as Keith said, as Keith said, most -- a lot of it is going to depend on the pace of development and acquisitions, tempered by where the stock price is.

That’s helpful. And then just moving to occupancy, it sounded like, or I guess can you quantify how much of the 90 basis point pick up in the quarter was related to the short-term extensions –- holiday leasing, and maybe how -- we can think about how it’s going to trend in first half or second half, just kind of to get to the 93% average occupancy at the midpoint which is 100 basis points below where you guys ended the year.

Roughly 250,000 square feet represented those lease extensions and some overflow space rentals in the fourth quarter. And we think we’ll stay fairly stable during the first quarter and just given the timing of rollovers, dip some in the second quarter. We’ve had just tremendous increase in occupancy. You go back 2 years and we were below 86% range and started the year at 89-and-change percent. So I think we’ve gotten probably a little bit ahead of our markets and it was pretty hard to project that we were going to go from high 93% to a 95% given the current state of the markets. They’re certainly improving, but we’re ahead of them in results.

Okay. And then just lastly, in guidance, what are you guys assuming for rent spreads and maybe the trajectory of that throughout the year?

We just show that indirectly in our same-property operating result figures. I have to admit that for a while I’ve been saying that I thought rent spreads would be flat or turn positive in the fourth quarter of ‘12. I would say that the markets although improving, have not improved as much as we would like to have seen or expected and that’s probably not going to happen until midpoint of ‘13. But what we’re seeing now, instead of rents being either down a lot or down sort of a medium amount. We’re getting more extremes where the leases that were signed 4 and 5 years ago are seeing double-digit, maybe, still 20% rents drops, but actually seeing some rental increases on the leases that were signed in the last 2 to 3 years. And on average, they’ll still be probably single-digit downturn for most of 2012. Although we think that’ll mitigate by the end of the year, but we probably won’t be reporting positive rents until sometime next year.

Okay. And then just one clarification, the negative 5 -- or negative 0.5% to positive 1.5%, is that cash or GAAP for same store?

That’s GAAP.

Do you have that on a cash basis?

Cash basis was a little bit more -- we were projecting, but it was not substantially more, so.

Then we’ll go next to Jaime Feldman with Bank of America.

Can you talk a little bit more just about fundamentals in the markets and the kind of leasing demand you’re seeing? I think on Prologis’ call they commented that small and midsized users are starting to pick in the market. Are you getting a sense of a real change?

I wouldn’t call it a real change. There is a pickup with smaller users. Of course each market is a little bit different. And a couple of our people in the field is -- when we’ve discussed this, have said yes there’s a pickup. But smaller users certainly aren’t showing any real confidence in their businesses or their future. So they’re almost reluctantly renewing and doing minor expansions. A number of our smaller spaces have been filled by companies who downsized with other owners and some with us. So we’ve been leasing spaces in all sizes across the board. But as they say, some of it is smaller companies picking up the slack and bigger space-users reducing their needs in our various submarkets. So it’s not enough of a trend I’d say yet to be excited about.

Okay. And then as you think about your development pipeline and the amount of spec space, what gives you comfort that it’s time to do spec and that you’re not taking too much risk?

They’re -- basically on the results that we’ve been seeing in the spec buildings that we’ve started. And then I’ll touch on that again in a minute. But secondly on the fact that within the parks where we are building spec, we already have anywhere from 8 to 10 buildings, in World Houston it’s 30-something buildings. And we look at the occupancy of similar type space existing in that park and the demand for that space. For example in Southridge in Orlando, we were 100% leased in the Park and we were turning away prospects and thought we could get a little bit higher rent than we were asking for the second generation space. So we started a spec building and before the roof was on, we leased roughly 70% of it. So we said, “Okay, that seems to be working. Let’s start the next building.” Which we did last month in January. In our Beltway Crossing Park on the Northwest side of Houston, we started Beltway VII, a 100% spec roughly 88,000 square feet. And just as we were putting in the landscaping, a tenant came along, a prospect came along, and took the entire building. And they’re in and operating in that building now. And we’re -- other than for a bulk-type space in that Park, we’re 100% leased. So we started 9 and 10, which are 2 small cross docks next door to each other. And we’ve designed those, we think, to fit the demands of the market, which in that submarket, anyway, are designed so the user can put cranes in the building and have more exterior fence storage than we would have done several years ago. In San Antonio, at Thousand Oaks, we have just finished leasing all of Wetmore, that’s 4 buildings that we had built, spec –- and that was the second phase. First phase was 100% leased and Thousand Oaks is right around the corner. So that gave us the confidence to build the 2 buildings there. In our projection of 3 buildings, additional buildings in ’12, we’re assuming that 2 of those are probably going to be build-to-suits and one would be spec, and the spec building would be at World Houston, where we have a need to provide some more front part rear-load space. And that building would be on our new -- I guess we refer to it as the Golf Course Land, the expansion land of World Houston. In Houston, we have 4 build-to-suit proposals out and hope to have one of those signed in the next week or so. So that gave us the confidence to project 3 buildings. And as I said in my comments that hopefully that’s something that we’ll be able to exceed.

Okay. And then, for Keith, so what does your guidance mean for AFFO? Like how should we think about that number?

We try to give out all the information. We don’t give an adjusted FFO number, but we are comfortable with it now and covering the dividend and it’s looking better.

So I guess asking another way. What should we assume for like straight line rent and CapEx?

Straight line rent, we’re projecting about $2 million. And what other number did you want?

Maintenance and leasing cost, maintenance CapEx and leasing CapEx?

It’s probably going to be similar to last year, in the 21 to 23 range.

Okay. And do you have any FAS 141?

We’re projecting acquired leases and add back of 451,000, mortgages around 100,000 deduct. Stock-based compensation expense close to $4 million, $3.8 million in that area. Amortization loan cost, about $1.1 million.

Okay. Is that everything?

That’s it.

And we’ll go next to the side of Chris Caton with Morgan Stanley.

Well, I wanted to follow on occupancy guidance. I think we’re talking about seeing some dip in the first quarter. David, is it kind of flat from there or as markets improve, do you see your portfolio increasing in occupancy through the year?

As I mentioned before it’s -- we’ve been spoiled with how well we’ve done over the last 2 years. And we think we’ve gotten ahead of the various markets where we’re operating. Where -- they’re still anywhere from -- forgetting Los Angeles, anywhere from 7% or 8% vacant, 15% vacant, so it’s going to be a lot harder to increase from where we are this year. And just being conservative, we expect occupancy to range anywhere from possibly all the way down to 92% to 94%.

Yes. I guess what I was trying to get at is, does your guidance assume that kind of markets improve or do you think that market occupancies will kind of also move sideways? And that’s why it’s a little bit of a tougher comp.

We think markets are going to improve very slowly. And we really don’t base our occupancy projections on -- that we think market is going to get better. We look at where it is when we do the projections and look at every lease rolling and every vacant space and say, “Okay, what are the odds of when we can lease this or renew this customer?” And go from there. It’s very much, excuse me, in depth [ph], bottom-up approach to it. And I’d like to think we’re going to be conservative on these figures, but that’s what we’ve come up with, given where we were in early January when we put these numbers together.

And then I just wanted to ask a follow-up on Florida. You’ve been obviously acquiring there. But also, it’s been an area where the releasing spreads and rents have been particularly depressed, although that reversed in the fourth quarter, somewhat. Wonder if you could just spend a minute talking about what you’re seeing in the Florida market. Do you think kind of the improvement in rents there is sustainable or was that kind of one-time thing and how you see those markets trending in 2012?

We see -- other than Fort Myers, where we used to have a little bit of property -- that the markets are -- I mean Jacksonville is going to be our most difficult market in Florida. We have a lot of turnover on the West side, which is bigger spaces. So that’s our biggest challenge in Florida. I think the other markets are showing slow but steady improvement. Large acquisition in Tampa in December, we bought that at 91%, 92% occupancy, and it’s 95% today. So we’ve already outperformed our projections there. And one of the appealing aspects of that acquisition was that the average rents in the portfolio were roughly at market. I think that’s going to help our overall forward statistics as we go through 2012. But as I said, Jacksonville is going to be our challenge this year. It has less growth at this point than any of the other Florida markets.

And then just last one for me on development. You said you have a goal that you hope to exceed. I wonder what needs to happen. I guess would it just be a quicker lease up in Houston or are there other markets where kind of cusp-y? Can you shed a little more light on how you might outperform your guidance on development?

Well, as I tell you, we have 4 build-to-suits out in Houston, one of think -- which we hope to have signed the lease in the next week. We hope to do a spec building there. And then what happens on those other 3 build-to-suits will be a big determinant. And then how quickly we lease up our Beltway Crossing spec buildings will affect what we do on that side of town. In Orlando, the building that we just started, we have good prospects for. And so depending on how those work out, it will determine whether we start our last Southridge Building this year. And then we have several build-to-suit proposals out for our new horizon development, which is just a little bit farther East, then Southridge on the Beachline Expressway. Again, we just have to see how those shake out. In San Antonio, depending on how we lease the first 2 buildings at Thousand Oaks, we have a third building in the back that we will start with good leasing in front or with some pre-leasing. In it, we have other land that we have buildings designed for more on the West side of San Antonio. And we’ve got a nice site near the airport for a building in Charlotte that will just depend on the market there. And we have site along I-35 in Dallas where the frontage road has expanded and the building we had was torn down. So depending on the numbers on it, that’s a possible start also. Then Phoenix we’re still working on the land we bought last May in Chandler. And the strength of the multi-tenant market in Chandler will determine whether we can get something going before the end of the year or whether it’ll be early next year. So lots of potential things out there and just what gets signed is going to determine how much dirt we move.

And we’ll go next to Brendan Maiorana with Wells Fargo.

Hi, David. So can you just frame up maybe how much if you -- when you kind of pick through all of those development projects and the possibilities what the starts could be, if $30 million is the midpoint?

It could be easily 2x that. But again it could be 0 beyond that or 2.5x. We don’t like to set a goal out there because sometimes when you set a goal, it gets you to do things you shouldn’t do just to hit the goal. All our development starts are based on how we see supply and demand.

Yes, understood. Okay. And then in terms of...

And it could change. One day you don’t think anything is going to happen there. Next day, you have a hot prospect that soon signs the lease and so you start building. We try to do is -- stay ahead in our building designs and construction permitting so that when we do decide to go ahead, it’s not a 3- to 6- or 9-month process to get a building under construction. We can do it very quickly.

Yes. No, that’s helpful. And when you think about the returns, if we look at your pipeline today, they kind of range from 9.5 stabilized yield down to, I think, a little bit below 8, when you’re looking at where rents, where construction costs are today, where are most of the expected returns shaking out for new development starts as you think about them?

We quote those on 100% occupancy because that’s out of the buildings and that basically when they moved into the portfolio. But depending on the length of the build-to-suit lease and the quality of the credit of the prospect, we would certainly dip down well into the 7s on that. And so it would be probably of, I’d say, a low-7 to mid-8. And that works given our cost of capital and what we think that we could sell the finished product for. We’re always looking for at least 150 basis point spread to justify the risk on a spec building.

Sure. And then just turning to guidance, I just wanted to go into the occupancy outlook a little bit more because I think you mentioned in responding to Chris’ question that you did these budgets in I think you said early January. If we look at the leasing that you guys have done thus far in February through mid-February, there’s already been about a million square feet of leasing, which is a lot for 1.5 months out of the year. Do you feel better now than maybe you did at the beginning part of the year? And might that drive your numbers up a little bit? Because even if you take the 90 basis points of gain out in the fourth quarter, you’re still kind of looking at flat occupancy for the remainder of the year.

Yes. As I said, why we think those are -- well, I shouldn’t say we. I think they’re conservative projections, because I’m an optimist on the quality of properties and the people we have doing it. So I’d like to believe we’re going to outperform what we’ve projected. But that 1.1 million square feet is a little bit distorted by the fact that our Chino Building, we terminated, came to an agreement to terminate a lease with a 200,000 square foot tenant and we re-leased the space to the neighbor and extended their lease. And the re-lease was at the higher rent, so that will help the numbers. But that’s about 300,000 square feet that was not coming due normally in 2012. So that increased what looked like we were doing. So far this year, we’ve renewed about 450,000 feet and at least about 125,000 square feet of vacant space.

Okay. No, that’s very helpful. And then last, just a kind of point of clarification. Do your occupancy numbers include the under-construction pipeline projects that will complete in ‘12, but not, I guess, be part of the...

No. It only includes from the point where the property converts or is transferred from development to the portfolio. So if we think it’s going to transfer at 100%, let’s say July 1, then it’ll be in our numbers starting July 1 at that occupancy. If we think it’s going to convert July 1 at 50% occupancy because we have not done -- well, in leasing, we put those figures in, like I say, at the point we think the property will transfer.

Okay. So your numbers aren’t suppressed by development projects coming online that are in the lease up phase?

No.

Yes.

Unless we do a lousy job of leasing them up.

And we’ll go next to Paul Adornato with BMO Capital Markets.

Hi, David. I was wondering if you could comment on what you’re seeing in terms of competitive development in your markets? And secondly, how quickly do you think that the competitive development pipeline could ramp up?

We’re seeing very little competitive development. I can mention to you several markets. For example, as far as I know nobody else is building today in Orlando. In Houston, a number of, I guess about every other industrial REIT or office industrial REIT there is either building or announced development, but they’re tending to do 1 or 2 buildings and a number of them are bigger bulk type buildings compared to what we build. So we don’t see a tremendous amount of competition there. The local developers have not come back into the game yet, except maybe 1 or 2 in Houston who tend to be doing lower quality or less quality buildings than the REITs do. And they’re generally doing those single tenant and or for sale. So the merchant builders in our markets have not jumped back in yet and, of course, a number of those merchant builders don’t exist anymore. And it usually takes the ones that have survived longer to gear up in terms of finding the land, designing the building and raising the capital to start building. Now Miami is another story. We’re not in Miami, so. One of the other -- REITS comments on that. But I have preached for a long time that the industrial REITs in general have a leg up on new development where we all operate because at least most of us kept our development teams in place; we have land, we have capital. And I think a number of others are like us, where we designed buildings, have them permitted, and can kick them off fairly quickly. So the REITs over the last couple recessions have done a good job of skimming off the cream of the new demand as it is created coming out of a recession while the local developers or merchant builders are just getting here back up. So we’re optimistic about how we’re doing in these markets.

Right. And so, what is kind of the first mover advantage? Is it 6 months? Is it a year over the local developers?

I would think it’s -- Miami is a whole different world. But in our other markets, it’s at least a year and probably in some cases 2 years. I think that was our experience coming out of the 2001 period and I think the other industrial REITs probably experienced the same thing.

Okay. That’s helpful. And just a follow up, Keith, I appreciate you, kind of assuming equity issuance. That’s a very realistic touch to guidance, which is often missing in your peers. So the question is what is the range of stock price equity issuance for the remaining 1 million shares to make your guidance range?

I think we put it in at 48, which was bouncing around in that range when we were doing it but as David said it depends a lot on acquisitions. If acquisitions ramp up, we’ll look at the stock price and maybe go a little lower than that if the market is going below that. And if the stock price is higher, that may accelerate the issuance of shares.

And Paul, I would add we look at cost to capital when we’re issuing shares and how that matches up. If we look at a blended cost to capital with debt and equity really on a 60%, 40% basis, 60% equity. And how that matches up with the yields that we can obtain on investing that capital whether it’s in development or acquisitions. And so, it’s a moving target.

And we’ll go now to Ki Bin Kim with Macquarie.

Most of my questions have been answered but there’s a couple of quick follow-ups. You guys did a lot of leasing post the quarter end, 1 million square feet. And given that you only had 1.7 million square feet left to lease in total, I’m wondering, are there any trends that you’ve already noticed in the first quarter which are leasing that might hint at if your guidance might have been conservative or not?

As I mentioned before, 300,000 of that was one building that wasn’t coming up in ’12 anyway. But that was a real positive because we didn’t like our -- I guess, when you don’t like them, they’re a tenant rather than a customer. We didn’t like the tenant and we have a better rent with releasing it quickly. So that takes up some of that. We’re pretty much on track or very slightly ahead on the projections that we did about a month ago that rolled into this guidance. So it’s too early to tell whether how conservative we’ve been on this.

So have lease spreads been slightly better than the fourth quarter leasing spreads? Is that safe to say?

Actually, I don’t have all those statistics in front of me since we were worried about other things on what’s happened so far. But as I mentioned earlier, I think we’re going to get -- we’re still going to have some 20% to 25% roll downs on some Florida, Arizona and California leases. Leases that are 4 or 5 years old. And we’re going to have some flat to up 5% or 10% on the leases that were signed 2 to 3 years ago. And looking at what’s coming up in ’12, about 2/3 were signed in the last 3-plus years and 1/3 was signed in 2008 and before, which was a peak. So the 2/3 are going to look a whole lot better but the 1/3 is still probably going to be down enough so that the total average is going to be down single digit.

That’s helpful. That was actually my last and then my next question but so, if you could -- I don’t know if you actually heard, DEXUS yesterday announced that, well it’s not new news, but they’re going to try to dispose of about $750 million to $1.2 billion of assets in the U.S. of industrial properties. I don’t know if you have any –- I don’t know if you’ve seen that come to market or if you had any kind of color on what you thought about that portfolio quality?

Actually, now, 3 years ago, we bought 2 buildings in Charlotte from a DEXUS entity. Most of what they have in the markets where we’d like to buy are bigger buildings with bigger tenants. So I wouldn’t rule it out, but most of what they have doesn’t fit what we’re looking for.

And we’ll go now to Michael Bilerman with Citi.

Yes, David, it’s Michael. A quick question. You said the lease roll from ’12, 1/3 of it is pre-2008 and 2/3 is post?

Correct.

What would that be if you looked at your entire lease roll today? How much of that signed on those same terms?

You mean –- if you looked in the entire portfolio?

Exactly.

Okay. Well, when we looked at the turn in ‘13, we view that it’s still going to be roughly 2/3, 1/3 but as time, as we get farther into the year, it’s going to be more -- and it’ll probably end-up being 28% or 30% and 13% will be high rents. And probably, 70%, 75% would be leases signed after 2008. And you have to remember that the rents didn’t drop overnight. So it was a steady decline but it wasn’t as though somebody turned the switch. So it’s not going to happen like if somebody turns the switch coming back up.

Right. But you see, if you are to think about it from the prospective of -- if you looked at your average base trend for the portfolio versus the expirees in ’12 and ’13. There’s still a pretty wide gap. But maybe there’s a better way that -- where do you think sort of the mark-to-market is on the portfolio basis today?

That’s something that we’ve never been any good at when people were talking about imbedded rent growth 7 or 8 years ago, like all the office companies talk about that. We found nobody ever got all that imbedded growth and we found the same thing on the downside. But a bit of speculation that is going to be a second quarter, maybe third quarter of ‘13 when our roll statistics start to turn solid positive.

And when you’re thinking about this year’s roll, you talked a little bit about Jacksonville being a difficult market. Obviously, you have a disproportionate share of space rolling there relative to the size that Jacksonville makes up of the portfolio. Is there any sort of large leases expiring in the 4.8 million square feet? It looks like 4 [ph] there is 230,000 but is there anything else in there of size?

No. Well, there are number of size but any rent change in that is built into our ’12 guidance.

And from a timing of expiration, is it pretty split during the year.

We seem to have a higher amount in the second quarter right now, which is a switch. It’s usually in the first quarter, but a larger turn -- and I don’t have the exact figure in front of me, but a larger turn in the second quarter. And that’s why we projected occupancy to dip the most during the year in the second quarter. And we still got time to mitigate a good bit of that, but that’s what our current projections show.

And these 250,000 square feet of space that you said was sort of -- I guess, it was included in month-to-month and all came out of occupancy in the beginning of the year. So the 93.9...

No. It’s coming out from the beginning of the year all the way really through April.

And so, you still started the year, I guess at this 93, not close to this high 93 level.

Yes. We didn’t put in the press release but we finished January at 93.9. That’s unusual for us to have a pleasant surprise.

Right. Right. And then on this Chino termination, there was no -- you said the rents were higher but I guess, did you get any -- do you have to pay out. I mean, will there be any write-offs or termination fees?

Hope not. Well, I think there’s a very small, straight line rent write-off but if you look at ‘12 on a full year basis, we come out ahead.

Okay. And the spread leased versus occupied, that 80 bps. That -- just from memory, that’s about where you’ve been historically? Was there...

I think we run from about 75 to 110. And the higher it is obviously, the more optimistic you can be about the future.

Okay. And then the dispositions, are those on the market today? The 20 million?

Okay, in that 20 million, there’s 0.75 million of these 2 buildings that were in the Tampa portfolio, they’re supposed to close today. There is a bulk warehouse on the west side of Phoenix that is on the market. And at some point during the year, we will put our brand of property in –- I assume we will, our brand of property in Tulsa on the market. We just want to have it 100% leased before we did that. And then there are a couple of others that we’re just taking a look at, we haven’t decided for sure to dispose of them yet. So the 20 is a little bit of a nebulous number from a standpoint of which it could be, 5 million or 6 million below that, or 5 million or 6 million above.

Right. And then Keith, just walking from fourth quarter, to the first quarter, you effectively reported $0.78 when you back out the charge, so you’re going from 78 effectively core down to 75 at the midpoint for the first quarter. Yes, I know obviously, there’s a lot of moving pieces, but it just seems like a more dramatic decline especially when occupancy is holding up, you had the acquisitions, you have the developments coming to service. What’s taking it down that amount?

We issued the shares in the fourth quarter which knocked it down some. And then we also had some -- we also issued the mortgage, first part of January which replaced bank debt.

So we went from a little over -- went from 1% debt to a little bit over 4% debt.

That’s about 3% on 54 million. Those are the 2 major things.

And then you pick up the accretion though from the acquisitions, don’t you?

Correct.

And then, we usually have a little bit of a jump on G&A in the first quarter because of the way executive comp is done. A certain amount of that is accrued during the year, and then a lot of it is subjective, so there’s usually a jump in G&A in the first quarter and that’s something that’s happened the last couple of years.

Right, so we should expect that to pop up probably -- $400,000 or $300,000 or $400,000 sequentially? It’s probably $0.01.

That’s probably the case. It’s...

If you want me to argue for a higher bonus, I can do that also to your board.

I was going to make a wise-ass comment along those lines, but I thought better of it.

About $400,000 to $500,000.

And we’ll go next to John Stewart with Green Street.

David, I realized it’s just been 3 months, but when you look at the existing pipeline from the -- on the percentage leased from the last supplemental until today, it doesn’t look like there’s been a lot of movement. So can you please give us an update on the prospects for the existing pipeline.

For development?

Yes.

Yes. No, we had a flurry of leasing activity in the development pipeline in the third quarter. And so most of those buildings that we did that leasing in -- Beltway VIII went to 100%, so we just started Beltway IX and X. And it’s unusual to do a lot of leasing before you have the walls up and the roof on. And not worried yet, although we do have a prospect for both buildings. But we’re not -- until the building is done, and an industrial prospect has something to look at, I don’t start to get too worried about it. The 2 service center buildings at World Houston, those have been a little bit disappointing in slow activity. But then again in Orlando, the tenant for 70% of Southridge IX has an option to take the rest of the building, right of first refusal. Our hope is that, that happens Southridge XI, we skipped 10 because we had to redesign it, but Southridge XI, which we just started in January, again, doesn’t even have the walls up on it yet. And we’ve got a prospect for all of the building. But I think some of it, John, is just the timing of the stage of construction. Awful lot of industrial users, especially ones that go into our multi-tenant buildings, they don’t think a year in advance, they also want to see what they’re going to move into. So we usually don’t have a lot of pre-leasing during construction.

That makes sense. And then for the $30 million of acquisitions baked into the guidance, which markets are you most interested in or most likely to be active in, in 2012?

We would like to grow just about every one of our core markets. One in particular would be Dallas, we’ve opened an office there, and have an Asset Vice President in that office, and we hope that will lead to some growth in that market. Looking at the purchases that we had in 2011, they were in somewhat secondary markets which allowed us to get the better yields that we obtained there because those were markets where there less institutional buyers who really set the low cap rate prices performing. So one factor is going to be what the yields are when properties come to market, another is, where assets that fit our criteria are being sold, and also in many cases, we see some attractive assets, but they’re in -- a multi-city package, and we’re not interested in the other cities or the type of assets in those cities. So it’s pretty hard to project at this point. And as you saw, we went from no acquisitions in ’10 to $100 million when you throw in the land in ‘11. So it can be a big swing.

Sure. And can you speak to the fit -- and your potential interest level in a couple of the REIT portfolios that are on the market, specifically, Weingarten and Kilroy?

Both of those are very large. And I think it’s hard for us to buy a large portfolio, and this is without speaking directly to both of those, but a large portfolio in a highly marketed package at a yield that works for our strategy. The Weingarten portfolio, there are a couple of buildings who would love to have in it, but overall, it just doesn’t fit us in terms of total geography, age and type buildings.

And how about Kilroy?

I have to admit, I don’t know enough about that one. My guess is it’s going to be a surprisingly low cap rate.

Okay. And then lastly, since it’s almost that time of year, do you want to give us any -- any kind of preview of the proxy season?

From what standpoint?

Open-ended question.

Not at this point.

Okay.

Are you speaking about me?

Yes.

Well, as you’ve seen in the last few years, I keep working longer, and longer. And we’re in a great recovery. The real estate business is fun again, and we’ve got such a great team. At this point, I don’t see any reason to stop working.

And we’ll go next to Bruce Garrison with Chilton.

Well, David, I share your view on working. Is there a strategic plan with respect to bringing down the debt to EBITDA ratio just to move EastGroup into kind of more of a fortress balance sheet going forward in the event of any unexpected dislocations in the economy down the road?

Well I think that of the ATM issuance that we’ve achieved so far, and the issuance that we’ve projected in our guidance are important step towards that. I mean if we were a little more liberal about our debt situation, we could have shown, $0.04 or $0.05 more a share in guidance by letting our debt get higher. We have always stated that we wanted total debt to market cap to be below, 40% give or take. And obviously, stock price affects that somewhat. We didn’t really have to issue all that equity, but we thought we’d air on the conservative side, and in looking at that ratio, 2 things, one Keith mentioned that we have the debt at year-end, without a full year's earnings on 60-some million of acquisitions, and secondly, we think the issuance of debt will -- excuse me, the issuance of the equity that we project is going to help bring that figure down which is already, if it’s not the best in our sector, it’s probably close.

Yes. Keith, have you considered showing that debt to EBITDA ratio by taking out the debt related to construction and the development pipeline?

We thought about that, but have not done that. Do you think we should?

I just think it’d be helpful because anyone with a development program gets penalized on that ratio which increasingly is becoming the most important metric for leverage.

I would also argue that looking at -- I guess it used to be the 6 ratio number, used to be the standard, below that you were in good shape above that, and that was back when you were buying 9% yields and 8.5% yields, and now the standard yields are way below that. And the interest rates have gone down. So actually we’re getting a little better spread now than we were a few years ago. But when you lower the yields on your properties, it makes that ratio go up. I’ve argued with the rating agencies that they should maybe look at a little higher ratio than in the past. And I’ve not been very successful in doing that, but I think people ought to consider that also.

And we’ll go next to Andrew Schafer [ph] with Sandler O’Neill.

So this question is for Keith. I was looking at your guidance, you said that you were expecting to close on a $50 million mortgage at 5% which is 100 basis points over the mortgage you closed in October. I was wondering where this anticipated increase is coming from, or if it’s that you guys are being conservative?

Just being conservative. I hope I’m very wrong on that.

Okay, and [indiscernible] on unsecured, would you look at doing another unsecured offering? Or is that kind of off the table for the rest of 2012?

We’re still looking at unsecured term loans also. We’re not looking to do the public debt route still at this time, but there are a number of people that would do the unsecured term loans, and we will look at those.

Any idea of pricing in relation to the fixed rate?

Right now the -- are you talking about the unsecured term loan?

Yes.

Unsecured term loan we did was actually a little lower, it was a 7-year term. And if you go to the banks, about 7 years is about all they want to go. So probably -- it was probably comparable to a 7-year mortgage at that time.

And we’ll go next to Daniel Donlan with Janney Capital.

Just 2 questions from me. Given that EastGroup’s chairman is also on the board of Parkway, was just kind of curious, are there any properties with the Flagler portfolio that you guys are potentially looking to take from them? I think there’s some land kind of near your Southridge development that Flagler has.

I think there are probably more rumors than facts floating around about the Flagler portfolio. What we looked at are -- I guess there’s the Flagler station in Miami which supposedly is under agreement to be sold as an industrial asset. And then they have JAXPORT, I guess that’s what it’s called at the Jacksonville airport. And they have a variety of pieces of land. And it’s our understanding they’re listing those for sale or attempting to sell those on somewhat of a sequential basis rather than everything upfront. So there have been no formal announcements about who’s doing what yet. Just a lot of good rumors. So yes, we’re looking.

Okay. And then on the land you acquired near the Tampa port, is that going to be your traditional multi-tenant warehouse type of development or is there a potential for some bulk distribution and kind of how does that affect your yields?

Our preliminary plan has a series of our typical front part rear load business distribution buildings. But we don’t think the market is ready for construction there. If a user came along and wanted to -- build-to-suit, bigger building, we’d be more than happy to meet their need. But at this point, it’s too early to say what kind of difference in yield there’ll be.

And we’ll go next to Bill Crow with Raymond James.

Keith, this is for you. Can you quantify, and maybe I missed this, I apologize if I did, but quantify how much a tailwind you’re going to pick up in ‘12 from the capitalization of your development team G&A other costs, that you didn’t have last year as you kind of ramped up toward the back half of the year?

We are projecting an increase of about $0.04 a share. And that is with development fees and capitalized interests.

Keith, you’re gaining $0.04 a share this year relative to last year from the capitalization is that...

‘12 versus ’11, correct.

Yes, okay. Perfect. And then David, one for you. There’s been a lot of talk about the external growth on this call and certainly the momentum seems to be picking up. Have we just seen the opening of the acquisition market? Is it just a lot more property coming to market or it just seems like in the last 6 months, maybe things have changed? Is that fair?

Yes, there have been more packages in the second half of ‘11 than there had been for a couple of years. And in talking to income property brokers, they’re optimistic that there’s going to be a lot of property coming on in ‘12. But it’s so hard to tell. It’s early in the year so there’s really not much out there that we’re taking a look at now. I think a lot of institutions decide in January, February, what to sell, list it in March or April and it hits the market late spring or early summer. And as I said earlier, it’s very hard to tell how big a package is going to be, whether they’ll break up the package, whether they’ll break up the assets within a city. Really the flexibility of the seller. And the bigger the package, the more cities involved, the harder it is for us to make something happen there. The Tampa package we bought in December was an unusual fit for us.

And it appears that we have no further questions.

Thank you for your continuing interest in EastGroup. And as always, Keith and I are available to clarify anything we didn’t on the call. So please give us a ring if you need to. Thanks.

This does conclude today’s teleconference. You may now disconnect and have a wonderful day.