EastGroup Properties, Inc. (EGP) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to EastGroup Properties’ First Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note this call may be recorded and I will be standing by if you need any assistance. Now, it is my pleasure to introduce David Hoster, President and CEO. Please go ahead.

Good morning, and thanks for calling in for our first quarter 2012 conference call. We appreciate your interest in EastGroup. Keith McKey, our CFO, will also be participating in the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

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

Thank you. EastGroup had a good first quarter. Funds from operations exceeded the midpoint of our guidance by $.02 per share. It increased by 8.5% compared to the first quarter of last year. As a result, the midpoint of our guidance for 2012 was increased by $0.02 per share. Occupancy increased for the eighth consecutive quarter to 94% at March 31st. Same property operating results were positive for the fourth consecutive quarter. We acquired business distribution property and started a new business distribution development. And we took advantage of attractive debt and equity markets to fund these and future investment activities. Looking at earnings, FFO is $0.77 per share for the first quarter, as compared to $0.71 for the same period in 2011, an increase of 8.5% in the fourth consecutive quarter of growth over the previous year’s quarter. Same property now offered an income for the first quarter increased 2.8% with straight-line rent adjustments and 4.0% without. In the first quarter on a GAAP basis, our best major markets, after the elimination and termination fees, were Phoenix, which was up 23%, Dallas up 16%, and Tampa up 9%. The trailing same property markets for South Florida were down 6%, Jacksonville down 4%, Los Angeles also down 4%. The primary differences between quarters are basically due to changes in property occupancies in the individual markets, despite the fact that average rents are continuing to decline. Occupancy at March 31st was 94.0%, a 10 basis point increase from the end of the year, and ahead of our internal projections. It also represented a 350 basis point increase over occupancy at the end of the first quarter last year. Our Florida markets were the best, at 96% leased, and 95.6% occupied. Houston, our largest market with over 5 million square feet, was 97.5% leased. Looking ahead, we expect occupancy to decrease to approximately 93% in the second quarter, and then increase back up to 94% by the end of the year. In the first quarter, we renewed 81% of the 1.5 million square feet that expired in the quarter, and signed new leases on another 5% of the expiring space, for a total of 86%. We also leased 568,000 square feet that had either terminated early during the quarter or was vacant at the beginning of the quarter. In addition, we have leased and renewed 454,000 square feet since March 31st. We continue to experience negative rent spreads, but the first quarter had the smallest decrease in 13 quarters. GAAP rents were down 1.1%, and cash rents were off 7.2%. This improvement was somewhat distorted due to a single large lease in Los Angeles. Without it, the decrease would’ve been 3.8% on a GAAP basis, and 9.8% for cash rents. Average lease length in the quarter was 4.2 years, which was greater than our recent average. Tenant improvements were $1.43 per square foot for the life of the lease, or $.34 per square foot per year of the lease, which is our average for the past year but below our 2-year average. In late January, as previously reported, we acquired the Madison Distribution Center, located in the port of Tampa submarket for $3.5 million. Built in ’07, this 72,000 square foot business distribution building is 59% leased to 3 customers. The purchase increased our ownership to 3.9 million square feet in Tampa, which is our second largest market behind Houston. In February, we sold 2 small warehouses with a total of 10,500 square feet in Tampa, for a price of $578,000, generating a gain of $167,000, which was included in FFO. These properties have been acquired as part of a large portfolio last December and were offered for sale through our taxable REIT subsidiary. We currently do not have any operating properties under contract to purchase, but we are in the process of negotiating the sale of a bulk warehouse building in Phoenix. At March 31st, EastGroup’s development program included 8 properties with a total of 475,000 square feet, and a projected combined investment of $38.4 million. They are currently 19% leased. During the first quarter we transferred Beltway Crossing VIII, with 88,000 square feet, and World Houston 32, with 96,000 square feet, in the portfolio. These 2 Houston developments are both 100% occupied. Also during the quarter, we began construction of Southridge XI in Orlando. It will contain 88,000 square feet, with a projected cost of $6.2 million. In April, we started construction of World Houston 33, a 160,000 square foot build-to-suit, with a projected investment of $10.6 million. Since the beginning of the year, we have acquired 2 parcels of land for future development. As part of the purchase of the Madison Distribution Center in Tampa, we bought 18 adjacent acres, which should support approximately 270,000 square feet of new development. We also purchased 10.5 acres in Chandler, an established business park, which will allow for the development of approximately 120,000 square feet of business distribution space. Keith will now review a number of financial topics.

Good morning. As David reported, FFO per share for the quarter was $.77 compared to $.71 for the first quarter of last year, an increase of 8.5%. FFO per share was $.02 above the midpoint guidance. The increase over our guidance was primarily due to increased property net operating income, lower G&A costs, lower interest costs, and the gain on the property sales. Lease termination fee income was $170,000 for the quarter, compared to $455,000 from the first quarter of 2011. Bad debt expense was $223,000 for the quarter, compared to $134,000 in the same quarter last year. Termination fee income net of bad debt expense was $374,000 lower than last year, or $.01 per share reduction in FFO per share. Debt-to-total market capitalization was 37.3% at March 31st, 2012. For the quarter, the interest and fixed charge coverage ratios were 3.3x, and the debt to EBITDA ratio was 6.8x. Our bank debt was 119 million at March 31st, and with bank lines of 225 million, we had 106 million of borrowing capacity at quarter end. On January 4th, 2012, we closed a $54 million mortgage loan that we discussed last quarter. The non-recourse mortgage has a fixed interest rate of 4.09%, a 10-year term, and a 20-year amortization schedule. On March 1st, 2012, the company repaid a mortgage loan with a balance of 3.5 million at an interest rate of 5.68% and a maturity date of June 1st, 2012. Subsequent to quarter end, EastGroup repaid an additional mortgage loan with a balance of $8.7 million and an interest rate of 7.98% and a maturity date of June 1st, 2012. The company now has 2 mortgage loans due in the remainder of 2012, with a weighted average interest rate of 6.84% and balloon payments totaling $33.3 million. We have been very pleased with our continuous equity program, both in the share price and volume. We have sold 511,371 shares since December 31st, 2011, for gross proceeds of $25 million or $48.89 per share. And the last 15 million of shares sold have been over $50 a share, which is the highest price we have sold shares in our history. Since the start of the program in July, 2011, we have sold a total of 1,098,348 shares, for gross proceeds of $50.7 million, or $46.16 per share. In March, we paid our 129th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.52 per share equates to an annualized rate of $2.08 per share. Our dividend-to-FFO payout ratio was 68% for the quarter, and rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property net operating income. And we believe this revenue stream gives stability to the dividend. We increased the midpoint of our FFO guidance for 2012 by $0.02 per share, to $3.10. The increase was due primarily to the increase in the first quarter. Earnings per share is estimated to be in the range of $.81 to $.91. Now David will make some final comments.

During the first quarter, we continued to build on the positive momentum achieved in 2011, in all aspects of our business, internal operations, development, and acquisitions. At the same time, our strong balance sheet has kept pace and gives us maximum flexibility for future growth and earnings. Our strategy is simple and straightforward and it works. Keith and I will now take your questions.

[Operator instructions] We’ll go next to Michael Bilerman from Citi.

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

We have a tenant in Tampa with just 100,000 square feet that had lost the government computer contract, and they had in their lease, when they renewed it, that they could cancel if they lost the contract, and they did. That’s our Palm River Sound Complex that we’ve developed. So that one was a surprise. In the west side of Jacksonville, we have 3 larger spaces coming back to us. Two of them were temporary expansions that occurred near the end of last year, and the space is no longer needed by - well in one case it’s a building products company and another a [indiscernible]. And then, we also had a company that makes those plastic bags that nobody likes you to use at the grocery store anymore. And they gave us back about 1/3 of their space as part of their renewal. So, the Jacksonville, we knew was coming. The one in Tampa was a surprise, and they add up to just over 300,000 square feet.

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

Well no, the Tampa one was an addition that we had not originally projected at the beginning of the year. The ones in Jacksonville, we had projected, and were built-in to our numbers from our original guidance. You know, we’re assuming it was not going to happen, but it has happened there. So, we’re just going to have to work extra hard to get those vacancies re-leased. I’m less worried about Tampa than we are Jacksonville one. That market is just a lot slower for leasing at this point in time.

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

Let me look up that statistic, but I don’t have that right in front of me. I’ll have to get back to you on that. One thing I will point out that, I guess relates to that, is our supplemental data. We show that the square footage expiring in the last three quarters, last 9 months of the year, there’s 12.6% and we have since reduced that to 8.8%.

Right, you have 3.4 million expiring the rest of the year. So, if that’s evenly spread, call it a million one, if you’re running an 80% renewal rate, that’s, you know call it, you lose 224, but you’ve …

We don’t project. Mike, we don’t project an 80% renewal rate, I wish we could. We generally project about a 2/3 renewal rate. And one of the ways that we beat our guidance in the first quarter, was that higher renewal, in particular, some renewals in Houston. So, you know, I wish that were our standard, but we just project 2/3 generally.

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

Correct.

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

Well, it hurts your numbers, your lease numbers when your two complexes of 100% move out of the development portfolio into the company overall portfolio. So that knocked us down from that standpoint. But if you look at what we have under construction, you’re right, we don’t have any. We have not done any leasing there, but we have very good activity on every one of those buildings except World Houston 31B, which is a little service center. I think we’re going to report a lot of progress on our July conference call because of those buildings under construction. We’re just now completing a couple of them. And traditionally you don’t do much industrial leasing with buildings under construction. People like to see them completed, and where they’re going to fit in it. So we’re not, in any way worried yet about the 0 leasing on the properties under construction. Part of that is we’ve got extremely good activity on every one of those except the little service center. And then, as I mentioned in my remarks, what’s not on that schedule, is a building suit that we just signed in Houston, that’s 100% as a building suit, obviously 100% pre-leased, and it is our -- will be our first building on what we refer to as the Golf Course Land Expansion that’s part of World Houston. So we’ve started moving dirt on the improvements there, but the roads haven’t even been started or anything. Utilities and to have a build-to-suit already signed, we thought was a great step.

And the dollar and square footage of that project?

It’s 160,000 square feet, and about $10.6 million. It’s a little higher per square foot then some of our other developments, because we’ve included some extra land in it for exterior storage, which is something that the straight forwarders and air freight company like to [indiscernible].

And we’ll go next to Craig Mailman from KeyBanc.

Jordan [indiscernible] is on with me as well. David, maybe we could stick on the development pipeline. Can you just, I guess, first give us a sense of what you’re seeing in terms of Delta Suit yields, maybe using Houston as an example versus the spec Stabilize yields you guys are targeting?

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

Okay, that’s helpful. And it sounds like you guys have good traction on the stuff that in the pipeline already. How comfortable are you guys continuing to ramp that or how much would you need in terms of preleasing by next quarter to add another project or two into the pipeline?

It really is not preleasing of buildings that are just on the drawing board. It’s the leasing of the properties that are under construction right now.

Right, that’s what I meant.

I’m sorry, for example on South Ridge 11 in Orlando, we do some significant leasing there. We’ll start our last South Ridge building on Beltway Crossing 9 and 10. We have very good prospects to take one of those buildings totally and some interested parties in the other one. If we lease 1 of those 2, we’ll start Beltway Crossing 11, which is our last building in that park. So it’s just the matter of leasing what’s there and we start the next building in line as part of our phasing in of development. Where some companies will build 5 or 6 buildings all at one time, that just hasn’t been our style. We like to do it 1 or 2 at a time. If you look at the balance of the year, we’re pretty sure we’re going to be able to start at least -- well, in our guidance, I think we have one more building built in and if the world works right, we could be up to 8 to 10 total starts for the year.

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

We’re looking at land seriously in Charlotte, Jacksonville, although we wouldn’t be able to start there right away. We’re always looking in South Florida except it’s extremely expensive there. And we have a little piece of land in Dallas, and we’d certainly like to do more there. It’s just basically all our quarter markets where we see there’s an opportunity to grow. Our development program is, as you’ve heard me say many times, is really, over time, been a tremendous creator of value for our shareholders and we were looking at some statistics the other day that what we’ve developed, which is approximately 1/3 of our current portfolio, is over 97% leased. So what we built is out preforming the overall portfolio. It gives us a good incentive to keep going.

We’ll go next to Sri [ph] Nagarajan with Cantor Fitzgerald.

The question I have was on the impact of the Los Angeles lease on the leasing spread. I kind of missed that. I believe the impact was about 2 percentage points, negative-2 percentage points. And more broadly speaking, the cash leasings, for instance, in Florida improved dramatically, and I just want to kind of get your color and commentary on what you might be seeing in general. I know you said Jacksonville is weak and Tampa and Atlanta are getting better from your sense.

We’ve been saying for a while that leasing spreads -- the decline in leasing spreads is going to mitigate over the this year and hopefully by about the middle of next year we’ll be even of starting to report positive spreads. What happened in Los Angeles is we had a large tenant that we’d given a teaser rate and given us really good incentives and get them in the building. They decided they didn’t need all the space. The tenant next door wanted to expand and so it was one of those fortuitous situations where existing tenant with a loan rent left and it had been under market and we were able to re-lease it at a higher number. And I think we’re going to see more of that over time. We don’t do an analysis of it this is our embedded rent growth or embedded rent decline. That changes almost every day and every market so it’s hard to identify. And I also like to point out when we were poor rent spreads it’s -- no matter how long the lease has, or how long the space has been vacant, I know other companies have their own definitions of that, if our space has been vacant for 3 for 4 years we still compare what the new lease rent is to what it was when the last tenant was paying.

Right and from your perspective, are you seeing a lot of those, that space being vacant for more than two years? In your analysis here when you code these rates?

I can’t tell you how many are that way but it’s all across the board.

Okay, understood. The second question I had was on general -- I would love your comment on TI’s and free rents in Florida and Arizona versus a stronger market than Houston. If you can us how the free rents and the TI’s are approving over time that’ll be helpful as well.

Okay well, the free rent, I don’t have it by market handy but I can tell you as a company, the leases with free rent have shrunk significantly over the last 3 quarters and the average free rent in the leases where we’re giving it has shrunk significantly. I was actually -- we looked at those statistics earlier and I was surprised how much that had improved. As for TIs, that’s harder to identify because in many cases we do more TIs for which we receive higher rent.

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

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

The last question that I have was, on acquisition and dispositions. If I heard your count it right, David, you said you do not have anything in your acquisition pipeline with your planning and disposition of bulk out in Phoenix. Is that accurate? Or can you give us some more color on that.

No. I’m going to answer that 2 different ways. First of all on the sale, we’re just negotiating that now and hopefully we will announce results next quarter with some details on that. It’s a bulk building that didn’t fit us. The west side of Phoenix is pretty hot right now you always like to sell properties into strong markets. So we thought it was an appropriate time to sell something that didn’t fit us although it’s not [indiscernible] assets at some point. From an acquisition standpoint, a lot of the packages that are out today tend to be companies cleaning up some of their portfolios. And so they are B to C assets, and so we’re not bidding on anything right at this point. But we expect in talking to the income property sales brokers that there’s a lot more coming on the market over the next 90 to 120 days because there’s a lot for capital seeking industrial assets. So the market’s going to see a lot more transactions this year, I believe, than last year, and hopefully we’ll be participating in that.

And we’ll go next to Chris Canton with Morgan Stanley.

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

We’ll get into gains, losses, sales price and everything next quarter, as I mentioned. We have room in our dividend currently to absorb a certain amount of gains so that there’s not going to be any issues on taxable income. Also, although we won’t do it here, we have a long history of doing 1031 exchanges. So that taxable gain is not going to be an issue for us.

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

No, just the activity that we’re seeing on the vacancies that we have. Just about every one of our markets has greater activity than it did 3 to 6 months ago and it’s not -- you can’t call it great yet, but we’ve been encouraged that there is positive activity, that there are companies expanding and they’re in, certain markets, companies entering the industrial market for the first time. So it’s just based on what we’re seeing every day.

Is there any particular customer vertical that are more active, you know, today versus 3 or 6 months ago?

Well, in Houston, for example, the energy business continues to be extremely strong, freight forwarding air cargo, and an awful lot of that is related, of course, to the energy business sending goods all over the world. But it’s the same basics we have been talking about for probably at least the last year where it’s energy, food and beverage, clothing, healthcare. Some of the construction business has stated to pick up, but we can’t pinpoint any place where we’ve picked up occupancy related to any recovery in the housing industry yet.

Not Phoenix?

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

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

I think -- if I understand your question correctly, yes, I think your later comment is correct. What we do is, in our original guidance and what we revise every quarter, is we go back to every space and project what we think is going to happen to that space, whether we’re going to lose, renew, or re-lease and that’s what our values is based on. You know, not any wide statistics or anything, nothing like that, it’s what we think is going to happen, very specifically, to each space in each one of our buildings.

And we’ll go next to Blaine Heck with Wells Fargo.

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

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

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

We had a big moving and storage company in an older building close in Dallas, I think it was 90,000 or 99,000 square feet and it was a bigger factor on the occupancy than it was on NOIs because the rents are low there. We also had another company downsize. I think those were -- the moving and storage was the biggest one.

And we’ll go next to John Guinee with Stifel.

John Guinee here. When we initiated coverage, David, you, like any good CEO, called right away and said, “you know, John, your cap rates for your NAV range, we use 7 to 7 ½, are way too high and it should be much lower.” What do you think an appropriate range and what’s sort of the thought process there?

I’m not sure I used those quite as strong words. There might have been some expletives in there, but not those strong words. Cap rates are something that in the major markets for quality properties bounce around a bit and I know I'm coming from, I guess, the prejudiced side here, but I believe over the years the south side analysts generally underestimated the NAVs of industrial reach. I discussed this with just about everybody in the sector. I have seen some cap rate maps that CVRE has put out and I’ve listened to what some other institutional sales type brokers that specialize in industrial transactions have put out and with Class A core properties, you can debate whether A, B and C is forever, I think some of the [indiscernible] side people are way high compared to what some of those cap rates are, especially when you’re talking about the ability to sell a whole park rather than an individual building. So that the Class A, in most markets are well under 7%. Now, when we go to sell some things, there could very easily be some cap rates above that and I think that’s probably the case with the other REITs too, but most of us are selling the properties that we don’t think fit and as a result, would have some higher cap rates. So I would argue every time somebody sells a higher cap rate property, the average cap rate for the rest of the portfolio goes down.

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

I would hope -- well, that’s something that we’ve not looked at and had a specific goal for. What we - in terms of dollars, what we’ve looked at is that if you don’t have well located land that fits your development criteria, you can’t develop. And if you, at the last minute, decide to buy land, you’re not going to usually find what you want and you’re going to pay higher prices for it. I think a lot of people found that out right before the last recession and that was proven by the recession. So we’re looking at more what we would like to have as potential development inventory and the markets where we would like to develop. We internally have some guidelines that we talked to our board about, but those aren’t something that we would publish. And we certainly have some land in some markets right now where we don’t want to develop for a while, and some other markets we wish we had more land. I don’t think you can really look at averages.

We’ll go next to Alex Goldfarb with Sandler O’Neill.

I just -- Dave, I just want to go back to your comments you had said earlier to a prior question that activity had picked up across all your markets versus -- call it 6 months ago. With the, you know, the recent economic data that we’re reading, you know, says, hey, this year could be like prior years where economics sort of accelerated into the year and start to cool off. Does any of what we read in the newspaper jive with what your guys are seeing in the field? Are your guys saying -- commenting at all that they’re seeing any slowdown or is this some sort of, you know, whether it’s a disconnect or perhaps your markets just are doing very well and maybe some of this economic data is driven by markets where you guys are not in?

I think -- you get in trouble any time you start to try and put national statistics on individual markets or even individual states and the reason we’re in the Sunbelt is because, historically, that’s had more growth, and that’s occurring there today. I wouldn’t say any of our markets are great, you know, other than some of the Texas markets. It’s just that, like the economy, it’s moving forward, not at the pace we’d like, but at least it’s positive and we don’t have to have a boom or GNP growth 2x or 3x what it is today in order for us to slowly fill up buildings and give us the opportunity to develop. It just puts a lid on the capacity, how high we can go on that. So I don’t want anybody to think that our markets are great, it is better than they were. Our occupancy has proven that. And as I mentioned before, we think there has been, and will continue to be a little bit more vibrancy in the sunbelt markets as they recover and as you’ve heard me say many times, that that demographic shift of the population of the sunbelt starts to pick back up. It went to 0, even reversed a little bit in the worse part of the recession. Right now, just to throw out some statistics, Florida is supposed to have a net migration, 200,000 people this year. Houston is supposed to have 100,000 new jobs. So I think it’s a lot of where you are very specifically.

Okay. And on the leasing front, you had said your renewal of 80% is above your sort of historic or where you guys budget of 2/3. Obviously you guys are clearly good landlords and people would want to be tenants in your property, but how much are your tenants, upon renewal, how much are they actively going out and trying to find a cheaper deal down the road to come back and retrade you guys versus just saying, “hey, we’re happy where we are, just give us a fair deal and we’ll renew”?

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

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

I would guess it’s the difference between goal and projected budgets. We have a goal to be that high, but you can’t budget those numbers so our guidance, our projections are based on a 2/3 figure. Our projections are based on what we think is going to happen, but we usually don’t project much above the 2/3 or much below it.

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

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

500,000, okay. Thank you.

And we’ll go next to Dave Aubuchon with Baird.

Keith, a couple modeling questions. You ended the quarter with 28.1 million shares outstanding, I believe. That’s what you have on the supplemental on Page 11. If you assumed your 312,500 shares of issuance in Q2, it should boost that number closer to a 28.3 million share count number in Q2 versus what you have in your assumptions as -- what am I missing there?

That’s correct. The weighted average, let’s see, we’re projecting in Q2 is about 28.1.

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

I’d have to go back and look at it. That’s not what I have. I can reconcile with you later, but then in the third quarter we’re projecting about 28.4 million. And then about 28.7 million in the fourth quarter.

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

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

And where are you getting quoted by your lenders right now?

I think it’s still around 4%.

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

At this point, we don’t feel any shortage of capital to fund those. And you know, what we want to sell is at the lower end, that way, in most cases, it’s at the lower end of what we’re holding so that if you talk about a mid -- a low-to-mid-6 cap rate in Texas, what we’re showing is our B or B minus assets so it would be a higher cap rate. And right now, there’s not a lot of money chasing that yet. Which is an interesting thing in the marketplace. It’s a good question, that in talking to the income brokers, that there’s been anywhere from 100 to a 300-basis point spread between core A properties and B to C properties and you get into whether a market is a B or C market or an A market. But it’s almost a historically high spread and that widened in certainly the fourth quarter, maybe the third and fourth quarter of last year. And so it will be interesting to see if the capital is out there chasing that have driven down cap rates in the core markets for the A assets, whether they will have to turn the B assets and start to drive those cap rates down also.

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

Yes.

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

It all depends on the submarket, where the asset is. When we bought the portfolio in Tampa last December, it was about 92% leased. I think we’re over 95% leased with it today. We bought 2 buildings in San Antonio, they were 77 -- 70-some percent leased. They’re 100% today. So if we’re comfortable with the submarket, we’ll be more than happy to buy some vacancies, especially if it gives us a little bit higher yield for taking that risk that we don’t see maybe is a great of risk as somebody else does. There’s no rule of thumb on that, what you go by is what’s going on in each deal.

Okay. I was just curious whether or not you’re still looking at more stabilized deals on the acquisition side versus lease up. Last question I have is on your development page, South Ridge 9 versus South Ridge 11. There’s 110 basis point difference in your estimated stabilized yield. Can you just walk through why it would be so different for both of those assets?

On 9, we have leased roughly 70% of the building to a group for pharmaceutical fulfillment. And they wanted a very expensive build out, a fully air conditioned building and we were willing to do some of that capital ourselves, which allowed us to increase the yield on the transaction and they put in a significant -- a much greater amount of capital on their own on a long-term lease. So the improvements and the return on those improvements are what increased the yield there and increased also the first quarter investment.

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

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

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

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

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

Like down single digits on a cash basis?

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

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

I guess a little bit of ducking your question is that each one of the markets is different and we were able to buy last year in Charlotte and Tampa, and have yields that we view as stabilized at above 7 because there was not a lot of institutional buyers looking in those 2 markets. Institutions, just like in the REIT stock market, are the ones that really cause the pricing to change in one direction or another. For example, South Florida, every institution, industrial business thinks they need to own in Dane County and as a result, the yields are 5 to 5.5. We’re not going to compete in that. Also, I’m a little skeptical sometimes when people talk about what yields they’re buying at because what I’ll say is stabilize and most people don’t define what stabilized means. And so that some people quote yields at the current occupancy, some at 95, some at 100, so it’s -- I don’t think you’re going to see us reporting stabilized yields at certainly below a 6, but if we think there’s an opportunity to buy the right asset with upside, we don’t mind paying up for it because over the longer term, we think we’ll be able to report rent growth and NOI growth and it will help our numbers and our valuation going into the future. So I don’t think there’s any rule of thumb that we look at in particular, just some markets, you believe there’s more upside. And then also, when people talk about yields and money markets, which are looking at rents, they’re going to go down before they go up. So you have to value them on that basis also.

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

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

I’d be very pleasantly surprised. Two things have happened. One is that although -- unless every one of our markets is at least stabilized and rents have started back up, they haven’t started back up as quickly as we might have expected or hoped. Secondly, when we looked -- it was a year or so ago, at the leases that were signed in ’06, ’07 and ’08 and projected out when they were going to roll, I think I underestimated how important that effect was going to be. And so that with 4-to-5 year leases, those run you well into ’13 and especially looking at markets like Florida where we signed a lease in ’07 or ’08, it was 5 years, it was at the peak of the market and we were able to obtain 3% annual bumps. You take a peek at the market at 3% 4 times, and you’re going to have a pretty good drop. So I think some of that was my mistake on looking at when we were going to burn through that. But as I say also, some of the markets -- we have outperformed the markets from an occupancy standpoint even though we’re 94% occupied or 95-plus percent leased, you can’t raise rents when the rest of the market is at 90 or below.

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

We look back at 2000, 2001 and in hindsight, that looks like just a blip rather than a recession. And what seemed to really drive us out of that was the housing industry and in the sunbelt markets. People were building houses like crazy and we had more housing-related customers than I think we really thought we did. And so that’s -- when the market turned, that knocked us down all the way to 86% occupied, but it sure helped coming out of that previous recession. I think another factor we read about and it’s obviously true, just about -- well, everybody stopped building warehouses, certainly on a spec basis and almost totally built to suit or anything else with the depth and length of this recession so that there’s very limited overhang of -- of any first-generation product in our sunbelt markets. So the -- I think when the markets really get into a serious recovery, there’s going to be tremendous opportunity for those of us who are in position to quickly build new product and meet that demand for first-generation space. And that’s what we’re trying to be prepared for.

I have no further questions at this time.

Well again, thank you everybody for calling in. We’ll point out that we’ve been mailing out our 2011 annual report and it is on the webpage, and I ask you to take a look at that. Thanks for your interest in EastGroup and if you have any additional questions, just call Keith or me.

This concludes today’s teleconference. You many now disconnect.