EastGroup Properties, Inc. (EGP) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the EastGroup Properties Second Quarter 2012 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce David Hoster, President and CEO.

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

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

Thank you. The past 90 days have been productive for EastGroup. Funds from operations for the second quarter met the midpoint of our guidance and increased by 5.5% as compared to the same period last year. Same property operating results were positive for the fifth consecutive quarter. Occupancy slipped slightly, but ended above our internal projections. Rental rate comparisons on rollovers continued to improve. Our Houston development program is expanding significantly and we were able to take advantage of attractive equity markets to improve an already strong and flexible balance sheet by reducing our leverage. Looking at earnings FFO was $0.77 per share for the second quarter as compared to $0.73 per share for the same period of 2011, an increase of 5.5% in the fifth consecutive quarter of growth over the previous year's quarter. For the 6 months of the year FFO increased 6.3% as compared to last year. Same property net operating income for the second quarter increased 1% with straight line rent adjustments and 2.2% without. In the second quarter on a GAAP basis our best major markets, after the elimination of termination fees were Phoenix up 19%, Dallas up 6%, and Tampa and Houston both up 4%.The trailing same property markets were south Florida down 14%, Jacksonville down 11% and Charlotte down 9%. The primary differences between quarters were basically due to changes in property occupancies in the individual markets. Occupancy at June 30 was 93.1%, a 90 basis point decrease from the end of the first quarter, but ahead of our internal projections. We expect occupancy to remain approximately the same during the third quarter, and increase closer to 94% in the fourth quarter. Our Texas markets were the best at 96.3% leased and 95.2% occupied. Houston our largest market with over 5 million square feet was 97.1% leased and occupied. In the second quarter, we renewed 73% of the 2.3 million square feet that expired in the quarter, and signed new leases on another 5% of the expiring space for a total of 78%. We also leased 597,000 square feet that had either terminated early during the quarter or was vacant at the beginning of the quarter. In addition, we have leased and renewed a 177,000 square feet since June 30. Somewhat to our surprise the change in GAAP rents on new and renewal leases was positive, up 3.3% for the first time since the fourth quarter of '08. Cash rent spreads were the best in 13 quarters, but still negative at 3.6%. We expect the change in rents over the next 2 quarters to be similar to our second quarter experience, give or take a little bit. Average lease length in the quarter was 3.3 years, which was less than our recent average. Tenant improvements were $1.46 per square foot for the life of the lease or $0.44 per square foot per year of the lease, which is above our average for the past year, but in line with our 2-year average. At the risk of overgeneralizing, we feel that the leasing interest and activity has slowed over the last 60 days, but not reversed. This has occurred in basically all of our markets, expect for those in Texas, which are clearly the exception. In June, we sold the Estrella Distribution Center in Phoenix for $7 million, generating a gain of $1.9 million. This 176,000 square foot warehouse was 74% occupied at closing and our only bulk distribution asset in the Phoenix market. We currently do not have any operating properties under contract to purchase or sell. At June 30, EastGroup's development program included 8 properties with a total of 591,000 square feet and a projected combined investment of $44.6 million. They are currently 55% leased. During the second quarter we transferred World Houston 31A, a 44,000 square foot service center into the portfolio. It is presently 83% leased. Also during the quarter we started construction of World Houston 33, a 160,000 square foot build-to-suit project located on our World Houston expansion land which we acquired last September. The building's projected cost is $10.9 million. During the second quarter, we purchased 47.8 acres of development land in Houston and Denver for $6.6 million. The land in Houston 42 acres is located in the Katy submarket and will accommodate the future development of what we're calling West Ten Crossing, a business park with an estimated 580,000 square feet in 9 buildings. The Denver land 5.8 acres is located in the city's southeast submarket adjacent to one of our existing properties and it will allow for the future development of Rampart IV, a business distribution building with approximately 83,000 square feet. Subsequent to quarter end, we began development World Houston 34, 35 and 36 with a total of 162,000 square feet and a total projected investment of $12.5 million and also started Beltway Crossing XI with 87,000 square feet and a projected investment of $4.9 million. World Houston 36, 60,000 square feet is our second build-to-suit, on the World Houston expansion land. And the other 3 new developments have no pre-leasing. Later in the third quarter, the company will begin development of West Ten Crossing I, a 30,000 square foot build-to-suit service center with an estimated cost of $3.8 million on the Katy land acquired last month. Looking ahead, we have the potential to start 1 or 2 additional developments in Houston and one more in San Antonio before the end of the year. With a little luck our development program could have 16 buildings with 1.2 million square feet and a projected total investment of $87 million by December 31. Keith will now review a number of financial topics.

Good morning. FFO per share for the quarter was $0.77 per share compared to $0.73 per share for the same quarter last year. Operations have benefited from lower interest rates on refinancing mortgage debt and an increase in property net operating income related to higher occupancy. Lease termination fee income was $87,000 for the quarter compared to $35,000 for the second quarter of 2011. Bad debt expense was $164,000 for the second quarter of 2012 compared to $165,000 in the same quarter last year. FFO per share for the 6 months was $1.53 per share as compared to $1.44 per share for the last year. Lease termination fee income was $257,000 for the 6 months in 2012 compared to $490,000 in the same period last year, and bad debt expense was $387,000 for the 6 months of 2012 compared to $299,000 for last year. Debt to total market cap was 33.8% at June 30, 2012. For the quarter, the interest and fixed charge coverage ratio was 3.4 times and debt to EBITDA was 6.4. Our floating rate bank debt amounted to 5.1% of total market capitalization at quarter end, and we have no mortgages maturing for the remainder of 2012. Our bank debt was $121 million at June 30, and with bank lines of $225 million, we have $104 million of capacity at quarter end. The bank credit facilities mature in January of 2013 and we are in discussions with our banks on the new facility. During the quarter, we repaid $42.3 million of mortgage loans with weighted average interest rates of 7.07%. We accelerated our planned sales of common stock under our continuous equity program. Because of the strength of our stock price in a time when economic news is mixed, we previously budgeted selling the remaining 1,044,865 shares authorized in our program over the second, third and fourth quarters, but instead sold all of the remaining shares in the second quarter. This action resulted in reducing FFO projections by $0.02 a share for the year. The average price was $50.64 a share with net proceeds of $52.3 million. We're in negotiations on an unsecured term loan of approximately $80 million that we hope to close by the end of August. The interest rate is not locked yet, but we expect the rate in the low 3% range. In June, we paid 130th consecutive quarterly cash distribution to common stockholders. This dividend of $0.52 per share equates to an annualized dividend of $2.08 per share. Our FFO payout ratio was 68% for the quarter and rental income from properties amounts to almost all of our revenues. So our dividend is 100% covered by property net operating income. And we believe that this revenue stream gives stability to the dividend. FFO guidance for 2012 has been married to a range of $3.04 to $3.12 per share, which decreased the midpoint from $3.10 to $3.08 per share. The reduction was primarily due to the acceleration of selling shares. Earnings per share is estimated to be in the range of $0.90 to $0.98. Now David will make some final comments.

As stated earlier, the second quarter was productive for EastGroup, and we expect to maintain our positive momentum through the balance of the year. We were especially encouraged by the growth of our development program and its potential carrying well into 2013. Keith and I will now take your questions. Thank you.

[Operator Instructions] Our first question comes to us from Craig Mailman, KeyBanc Capital.

Jordan Sadler is on the line with me as well. David maybe we can start with occupancy. It sounds like you expected to be flat and rebound closer to 94% by year end. I was just looking at what you guys have in terms of time, commenced and the new leases that you signed since quarter end. There’s something going on with a bigger lease exploration in 3Q that maybe keeps the occupancy flat, or is it just the timing of those commencements in the backlog?

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

Okay. And then -- that’s before their lease [ph] in Charlotte correct?

Correct.

Then kind of with the occupancy outlook in sort of the marginal benefit of those gains rolling through the same store, but you guys are just seeing some uptick or some improvement I should say in the rent roll downs. I mean as you guys are looking I know it's early do you think that you guys are going to see the turn early enough in '13 to kind of keep same-store growth positive for the next couple of quarters, or do you think there is a potential you guys to dip flat to negative and then kind of bounce back in early '13?

Well, when you look at the third and fourth quarters we have some pretty strong operations from last year to compare against. So since same-store is looking quarter-to-quarter, that’s why we are projecting or showing a range that is less than what we have achieved to-date just because of the more difficult comparisons with above average occupancy gains in the third and fourth quarters of '11. As you look into '13, a whole lots is going to depend on what happens in the economy and if you tell us what you think is going to happen there, we would probably give you response based on where we think occupancy and the rents are going to be, but one of the positives that we are seeing certainly on rents a little more so than we had originally assumed was a number of the leases that were signed as we went into the recession at very low rents in order to lease vacant space or maintain occupancy, those are rolling and those increases are offsetting more than we expected the remaining roll down from '07 and '08 leases that were at the top of the market.

Okay. Then just to circle back quickly to you comment about last 60 days lease slowdown. Is there any particular trend in tenant type or size range that you guys are seeing in it, or is it just a bit of a summer slowdown?

I'm generalizing.

We’ll take our next question from Evan Smith with Cantor Fitzgerald.

Could you give some color on the 42% roll down in San Diego in the quarter?

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

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

In San Diego?

Or just in portfolio in general with which rolling?

Yes, there is no question that we still have leases rolling that were signed at the peak of the market in '07 and the first half of '08. So we're still going to see individual lease roll downs that in some cases could still be 20%, 25%.

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

As I reported we sold our Australia building in Phoenix as planned at the end of the second quarter and in the next 30 days we will put our brand of asset, 2 building complex in Tulsa on the market and we just assume that, that will alone -- it will be an $8 million to $10 million sale range and that that will close near the end of the year.

We’ll take our next question from Jamie Feldman with Bank of America.

Mr. David, I was hoping you could give a little bit more color on your comment over leasing interest and activity flowing down over the last 30 days, just maybe some more anecdotal evidence, just some more color?

Houston and San Antonio and Dallas has been stronger than we've experienced in the first part of the year. Houston with the energy companies continues and the freight forwarders continue to be strong. San Antonio we are at a recent high in occupancy there. Some of that's related to the energy of the Eagle Ford play the south of town we've just on the last quarter signed 2 leases with energy companies on vacant spaces in San Antonio. Just in the other markets I mean there is, it's just there are less prospects out there that we are giving proposals to. There is less showings and in a market like Phoenix people always say it’s the hot summer, but you never know and I think it's going to take another quarter to see if in fact this is a slowdown reflecting the slowdown we hear about from the Fed and then the economy or whether this is just an aberration for summer time. But I do want to emphasize that we are still signing leases and putting out proposals in every market. No market is dead and we are not seeing other than some known move outs, we are not seeing any unexpected reduction in our market and in our properties in our various markets and in our occupancy.

So are leases you have been working on falling apart or it is just taking longer to get to the finish line?

Exactly the latter. We've had in our projections push back some of the leasing where we are dealing with people. I would just -- more back to I don’t know 12 months ago maybe, where prospects feel little or no urgency to sign leases. The lease negotiations seem to be more drawn out and prospects seem to be slower to respond, but we are still confident in our budget projections, our guidance projections for the balance of the year.

Okay. And do you sense if you are -- as you are talking tenants is it the election, is it uncertainty over how their business is looking, any kind of constant themes that keep coming up more than others?

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

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

Very, very few at this point, and the 20% number is on rent not square footage and that's because we have a higher percentage of service center R&D office type tenants renewing in '13 than we do -- than we have had in '12.

Okay. And then how many would you say are a better model or kind of questionable?

It's too early to give that kind of answer. We're still focused on where we're going this year and into the first half of the next year and we've started negotiations with especially all the bigger users, but too early to make projections for us on occupancy in '13.

Okay. And then you had commented on leasing spreads you feel comfortable they will stay around the second quarter level through the end of the year but you didn't comment on next year is that because you're not looking forward to next year yet or…

Exactly, but I would certainly unless we go back into a recession, we'd certainly expect improvement over where we were in the second quarter and expect to be in the third and fourth quarter this year certainly expect improvement going into next year, simply because the number of leases that are rolling from '07 and '08 are reduced. I would just add, when we report the rent changes, we are reporting it for all spaces no matter how long the space has been vacant and its renewals and new leases and we don’t pull anything out of that. So it includes everything. So people need to keep that in mind when they are comparing the numbers we report to what some other companies might be reporting.

We’ll take our next question from Chris Caton with Morgan Stanley.

David, I was hoping could you talk a little bit about the implications for the business on a slowdown and leasing. Do you -- 2 questions on that, one are there anywhere, where you are hoping to be able to push rent in the back half of the year, where you thought you might have 2 or 3 prospects and now its little bit more challenging? Then the second question is how does that affect -- and it seems like it is affecting your approach to the development pipeline where you are much active in Houston, but can you talk a little bit about your approach to building out the development pipeline in the current leasing environment?

In both Houston and San Antonio. We are still very bullish on what we can do there. In Houston we are still having built-to-suit conversations with a number of users, and we see the opportunity to possibly start some spec product that we haven’t talked about yet, because we have very little of that type space available. San Antonio, we are doing well with our dock high building at Thousand Oaks and would hope to be able to start the third building and the second dock high building in that submarket. Looking into next year, and subject to us falling back into a recession, we would hope to start construction of our Rampart 4 in Denver, where we just bought the land during the last quarter, and do some new development on one of the pieces of land we have in Chandler, south side of Phoenix. Beyond that, we are looking at potential development in Charlotte. And we have actually talked to some people about Fort Myers, but nothing seems to be happening there at this point. So that overall activity continues to be pretty good. As to rents, we are seeing less reduction or actual rent growth in terms of the comparisons where we are doing better obviously, which is in the Texas markets and less so in some Florida cities that haven’t shown the improvement and still having their rent roll downs in Phoenix.

Got you. And so, has there been on the margin any kind of change in you mentality there where you are maybe thinking occupancy might be incrementally higher or more traffic or was rent really not something that you were contemplate pushing through the end of the year?

We try to push rent on every lease we negotiate and the market determines what your rents going to be I think as many people heard me say before. We look at it with a standpoint if a prospect has 7 or 8 or more good alternatives you can talk about pushing rent all you want, but you won't sign any leases. If a prospect has 1 or 2 good alternatives then you push rent and it all determines -- all that's determined by what's available, what the comparable spaces are at the time you're negotiating a lease. And as I mentioned earlier we're doing from a rent standpoint, we're doing a little bit better than we had projected which is a pleasant surprise.

Great. And then last one for me and this is on '13 in the service space and office space you have renewing. I believe you underwrite you typically underwrite kind of 2/3 retention. Have you on average across the portfolio have you experienced a different retention rate for the type of space, the higher finished space that you will be renewing next year historically?

Not in particular I think we're going to be more affected by the economy than by anything else when we get into the '13 renewals, on what happens with Congress between now and the beginning of next year.

We’ll take our next question from Alexander Goldfarb with Sandler O'Neill.

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

I don’t think you can generalize like that Alex. What we look at is there is a good buy on the land, and when do we think we can start development and build in the carry on that? If we think it's going to be 3 years before we can start building, then we look at what we think the numbers are going to be 3 years from now with today's purchase price and capitalize interest and other carry added on to it. From a spec development standpoint, we are looking at what is happening today, what just happened and what we think is going to happen in an individual submarket and what kind of competition is there for our type product and in a development like World Houston or Beltway Crossing where we've just finished and are leasing up spec buildings, then we can say what's our activity, what rents are we getting and do those rents work with construction cost on a new building and do we have the activity to justify new construction and since it takes us -- we are always designing and permitting new buildings, so once we decide to kick it off we are talking about a 6 month construction period. So we think we can meet a market demand quickly and bid leasing before there is big change. So again it’s just, every site, every building is looked at individually of what's going on in that submarket or in the development where we are adding another building rather than a lot of bigger picture statistics.

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

Every piece of land is different and there is not so much land for sale out there that you go out and look at 10 pieces and say, I like these 2 best. In most markets infill type industrial sites are few and far between and we are very sensitive to what we are paying. I would say -- forgetting -- well the World Houston land is whole another story in itself, but looking at the land we just acquired in the energy corridor with Katy, what we bought in Denver, a couple of purchases in Chandler, all those pieces of land we thought were in our minds, our calculations, bargained prices, and they were generally some distress with the seller that allowed us to get in at very attractive prices. Our Katy land, which is ready to develop as soon as we get a permit, we are going to be building on it. There is separate water retention. We bought that for $3.25 a square foot. The land in Denver which is almost at the edge of the Tech Center, we bought for $2.25 a square foot and that's ready to develop. We have to move a little more dirt there. So because of our knowledge of the individual submarkets where we want to build, I think we're on top of finding the opportunities and they don't come along very often, but when you see them you have to jump on them.

Okay. And then on the renewal process, how far out do you guys start the renewal conversations with tenants and has that changed at all in the past 2 to 3 months?

We start when we think it makes sense given what's going on in the market. The bigger the tenant, the sooner you start it and you don't decide one day, woops, we’ve got to start talking to people further out. Lots of times in warehouses which is very different than office, we'll go in and talk to tenant. They'll say this is way too early, come back in 3 months or 6 months, we don't want to talk to you now. But you know and we've known for years the brokerage community is pretty sophisticated and hungry, so any of your bigger users they are going to be out calling on so you need to be talking to your own tenants all the time.

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

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

So an EastGroup unsecured bond maybe a reality at some point in the future?

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

We’ll take our next question from Brendan Maiorana with Wells Fargo.

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

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

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

Well, only time is going to tell, but as I mentioned earlier, the comparisons to 2011 for the third and fourth quarters are real difficult because we certainly outperformed our own projections and I think our peer group in the last 2 quarters of '11 and so that's a tough comparison with cash rents still going down a little bit. So I think it will be close than the third and fourth quarters from that standpoint.

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

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

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

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

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

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

Okay. And then just last one for me. Any plans to institute a new ATM program?

We would hope so. We've done 2 of them over the last 3 or 4 years. They have worked extremely well for the way we do business. I would hope we would institute a new one certainly before the end of the year and whether we use it or not depends on investment opportunities and share price.

We’ll take our next question from John Guinee with Stifel.

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

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

How close are you by your numbers?

This is something we will be discussing with our Board in our September meeting, where we stand on the dividend. We have been very conservative on it, which allowed us to be one of the few REITs that didn’t have to reduce it through the recession. And as Keith pointed out earlier, we’re in the 20th year or something of either raising or maintaining the dividend and our goal is to start raising and again as soon as we're comfortable with the AFFO coverage.

Your next question comes from Bill Crow with Raymond James.

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

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

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

The only one that certainly has on is energy, but no, we've not seen a slowdown in medical, particularly in Florida. You’re just talking about pharmaceutical fulfillment with amazing number of prospects in that field. But no, there’s no one area you can point to. One thing we did ask all our people in the field about was are you seeing any pickup in housing related prospects or housing related tenants now that the housing market seemed to be a little bit better and maybe only in 2 markets are they seeing any pick up in that and it's not affected us.

We’ll take our next question from Mitchell Germain with JMP Securities.

David, what's your plan with West Ten? I know you've got one development that you’re starting. I think you have 9 that you could do. Based on current conditions, how would you view the build out of that park?

I’ll give you a little history on it. Katy is a far western suburb on I-10 from Downtown Houston. I-10 of course is outside the build -- is viewed as the energy corridor and there has been tremendous growth with the energy companies in the Katy area which has led to one of the fastest growing areas for homebuilding at Cinco Ranch, the construction of what is called the Grand Parkway, which is the outer build that will be within like another 2 years connected from Westheimer all the way around the northwest up to the north and that got pushed forward because of the tremendous campus that ExxonMobil is building. And so we just saw a lot going on out there and through the people we work with as our brokerage in Houston came up with a piece of land that if we could close quickly we could get a very good price on. We like the opportunities. I’ve been out there 3 times walking the land. It’s a rectangular piece with a thumb sticking out in one corner. Within about 10 days of closing on the land in June, a Danish company came to us and asked if they could do something on the corner site. We agreed to build this little service center, build to suit for them and we signed the leases last Monday on that. So it shows you how hot that energy area is. There is a chance depending on what we see in the market of doing a spec building or 2 out there before the end of the year and if not before the end of the year I would hope we have at least 2 buildings under construction there in the first or second quarter of next year.

Our next question comes from John Stewart with Green Street Advisors.

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

The only yields that I can speak of with some certainty are what we've seen in Texas because there have been more things for sale that we've looked at and either not bid on or lost the bid on and have seen what they've gone under contract for or actually closed on as the brokers have reported it and when we know the pro forma numbers from looking at the package we can feel pretty certain of what the buyer is ending up with. Both Dallas and Houston have become attractive markets because they are 2 of the bigger growth cities from population and job standpoint in the U.S. Dallas has always had a lower cap rates than Houston but because of the strength of the energy business the Houston cap rates are now matching them and we're seeing some A, A minus deals that are 6.0, 95% stabilized or just below that. And I think that those have to be in particular historic lows for Houston. And we got very aggressive on a package in Dallas that was roughly $40 million and ended up in second place and based on our numbers, what we think the buyer paid, it was again a 6.0 or a high 5 depending on how you looked at stabilized operations. So on the other extreme John is the B to C type properties, or B minus to C older, little bit obsolescence, not as well located. What the brokers are telling us because we follow that also that the cap rates in Houston and Dallas are 8 or a low 8. So there is still surprisingly significant spread between the more institutional type assets and the more opportunistic or value-add type assets. That spread has not shrunk over the last 12 months.

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

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

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

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

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

I would say at the end of the second quarter next year, maybe sooner. I in my own discussions have pushed it out to them and then was pleasantly surprised on how we did in the second quarter of this year, but in terms of getting through all but a few of the '07, '08 high rents, the middle of next year should certainly -- there will be still some, but very few at that point.

We’ll take our next question from Michael Bilerman with Citi.

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

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

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

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

And we’ll take our final question from Ki Bin Kim with Macquarie.

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

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

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

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

And we have no further questions at this time.

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

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