Apr 30, 2008
Executives
David H. Hoster II - Chief Executive Officer, President and Director N.
Keith McKey, CPA - Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Analysts
Irwin Gross - Citi Michael Bilerman - Citi William Crow - Raymond James Brendan Maiorana – Wachovia Nap Overton - Morgan Keegan Chris Lucas - Robert W. Baird Philip Martin - Cantor Fitzgerald Paul Adornato - BMO Capital Markets Stephanie Krewson - Janney, Montgomery & Scott Christopher Pike - Merrill Lynch
Operator
Welcome to the EastGroup’s first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the program over to the President and CEO, David Hoster.
David H. Hoster II
Good morning and thanks for calling in for our first quarter 2008 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.
[Recorded Message] 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 subject to the Safe Harbor statement included in the news release is accurate only as of the date of this call.
David H. Hoster II
Operating results for the first quarter exceeded the upper end of our guidance range. Funds from operations were $0.83 per share as compared to $0.72 per share for the first quarter of last year, an increase of 15.3%.
The $0.06 per share above the mid point of first quarter guidance was due to good property operating results combined with a number of one-time items. These included gains on sales of securities, lease termination fees net of bad debts and a gain on involuntary conversion, which was the result of insurance proceed exceeding the basis of an asset.
We continued to achieve positive same property net operating results in the first quarter, but at a slower pace than year ago. Same property quarterly results improved by 2.7% without the straight lining of rents and with straight lining, increased by 2.6%.
Without termination fees, these results were 0.9% and 0.8% respectively. This was the 19th consecutive quarter of positive results for both measures.
The reduced rate of growth in same property results for the quarter was due to the higher level of occupancy in the first quarter of last year. Consequently, the increases in the first quarter of 2008 are due primarily to higher rents rather than improved occupancy, as we have seen in the past.
In the first quarter, on a GAAP basis our best major markets after the elimination of termination fees were Dallas, which was up 12.6%; Houston, up 7.1%; San Francisco, up 6.3%; and Orlando, up 3.4%. The trailing same property markets were El Paso, down 15.2%; and New Orleans, down 9.6%.
The differences between quarters are due to both higher rents and changes in property occupancies in the individual markets. Occupancy at March 31 was 94.4%, a 100 basis-point decrease from the end of the fourth quarter.
28 basis points of this decline was due to the vacancy and our first quarter of Charlotte acquisition. Our California markets were 97.9% occupied and Florida was 95.3%.
Houston, our largest ownership market with 3.9 million square feet was 98% occupied. As we discussed in our last conference call, leasing activity has slowed significantly from its peak in the first half of 2007, reflecting the general economic slowdown.
The good news is that there are still prospects looking for space, although there are fewer of them and it takes longer to complete lease negotiations. Our leasing statistics for the first quarter illustrate the slower but generally good real estate fundamentals in our markets.
Overall, of the 1.1 million square feet of leases that expired in the first quarter, we renewed 61% and released another 17% for a total of 78%. This is below our average for 2007, but better than the fourth quarter.
In addition, we leased 171,000 square feet of space that was vacant at the beginning of the quarter. As you can see in our supplemental information, we continue to achieve strong rent growth in the first quarter with a 13.3% increase for GAAP with straight lining of rents and 6.4% without straight lining.
These figures are both above our 2007 averages. Our average lease length was 3.9 years, which is the same as the last quarter.
Tenant improvements were $0.76 per square foot for the life of the lease, or only $0.20 per square foot per year of the lease, well below our 2007 average cost. At March 31, our development program consisted of 20 properties with 1.8 million square feet and a total projected investment of $128 million.
Eleven of the properties were in lease-up and nine under construction. Geographically, these developments are diversified in four states and seven different cities and overall are currently 30% leased.
Reduction in the size of the development program from December 31 resulted from the transfer of four properties, including our large Orlando build-to-suit into the portfolio during the first quarter. These properties total 534,000 square feet and are currently 98% leased.
In the first quarter, we started construction of one property, World Houston 26 and plan to begin the development of at least three additional properties during the second quarter. For the full year, we expect to have new development starts of between $60 and $70 million, which is a decrease from the $120 million started in 2007.
This year’s total will be higher or lower depending on potential build-to-suit opportunities and of course market conditions. We are very sensitive to the economy and will adjust our plans quickly if necessary.
As you have heard us state many times, our development program has been, and we believe, will continue to be a creator of significant shareholder value. We are not a merchant builder.
We are not developing to generate immediate gains through the sale of newly created assets. Our goal as a developer is to add quality, state-of-the-art investments to our portfolio, and thereby increase total returns to our shareholders in both the short and long-term.
Including properties in lease-up and under construction, we have developed over 30% of our current portfolio. As previously reported, we acquired a portfolio of properties in metropolitan Charlotte at the end of February with the purchase price of $41.9 million.
This portfolio consists of five buildings, 669,000 square feet in four different locations and 9.9 acres of developable land. In total, the buildings, which were constructed between 1989 and 2006 are currently 86% leased to 14 customers.
This acquisition increased our ownership in the Charlotte market to over 1.6 million square feet. We are currently marketing our 189,000 square foot Metro Business Park in Phoenix for sale.
It is a five-building service center complex which was originally acquired through a merger. In the next 30 days, we will also offer the smaller of our two remaining buildings in Memphis for sale.
Keith will now review a number of financial topics.
N. Keith McKey, CPA
As David reported, FFO per share for the quarter increased 15.3% compared to the same quarter last year. As was the case in the fourth quarter of 2007, FFO included a number of one-time items as disclosed in the press release.
These items amounted to $0.04 cents a share, and without these, FFO per share would have increased 9.7%. Lease termination fee income was $475,000 for the quarter compared to $15,000 for the first quarter of 2007.
Bad debt expense was $187,000 for the quarter compared to $149,000 in the same quarter last year. Gain on sales of securities was $435,000 and a gain on involuntary conversion was $175,000.
Debt-to-total market capitalization was 37.1% at March 31, 2008. For the quarter, the interest coverage ratio was 3.8x and the fixed charge coverage ratio was 3.5x, which is an improvement compared to last year.
Our floating rate bank debt amounted to 7.3% of total market capitalization at quarter end. We are very pleased to have closed two major debt transactions in the first quarter, which were previously announced.
In early January, we renewed our credit facility with an increased capacity, lower interest spreads, and improved covenants. On March 19, we closed a $78 million non-recourse fresh mortgage loan at an attractive fixed rate of 5.5%.
In March, we paid our 113th consecutive quarterly distribution to common stockholders. This quarterly dividend of $0.52 per share equates to an annualized rate of $2.08 per share.
This dividend represented an increase of 4% over the previous quarter’s distribution in May 2008, the 16th consecutive year of dividend increases. Our dividend to FFO payout ratio was 63% for the quarter and rental income from properties amounts to almost all of our revenues, so our dividend is a 100% covered by our property net operating income.
We believe this revenue stream gives stability to the dividend. FFO for 2008 is expected to be in the range of $3.26 to $3.36 per share.
This is an increase of $0.06 per share from our previous guidance. Increase is due to the strong first quarter results.
Earnings per share are estimated to be in the range of $1.07 to $1.17. Now, David will make some final comments.
David H. Hoster II
We had a good first quarter in spite of the overall slowing of the U.S. economy and are working to maintain this momentum.
Although leasing velocity is decreased, we are still leasing space or achieving solid rent growth. As Keith pointed out, our balance sheet remains strong and flexible.
Our strategy is simple and straightforward and it is working. Keith and I will now take your questions.
Operator
(Operator Instructions) Your first question comes from Irwin Gross - Citi.
Irwin Gross - Citi
Looking at your development disclosure in the supplemental, it looks like you have a few assets converting in this quarter and over the next 6 months that are sub 50% leased, I am thinking specifically of Interstate, SunCoast and Centennial. Could you talk about what activity you are seeing in those markets and whether your guidance includes any potential dilution from some delivery of vacancy there?
David H. Hoster II
All three of those properties have been a little slower to lease than we would have liked obviously, but we have good prospects looking at the vacancies in all three. So we are optimistic that if they are not brought up to close to 100% by the time they are moved, that that will happen soon or after.
Our guidance just has a mix of conservatism in it on development properties.
Irwin Gross - Citi
And the development guidance that you put out there in terms of starts, $60 to $70 million, that excludes any other build-to-suits that you might get for the year, is that right?
David H. Hoster II
That is correct. Those are just too hard to project.
We’ve managed to have almost one a year, difficult to tell in today’s environment, but to be conservative, we don’t budget in any of those.
Michael Bilerman - Citi
Have you seen anything in your markets which has clearly been exposed a little bit to a housing slowdown from any tenant pullback and the ripple effect from tenant interest or leasing, maybe you can just dive into that a little bit?
David H. Hoster II
Yes. We absolutely have seen the results of the reduction in the housing activity.
In Phoenix, we have had one or two downsizings. Almost a year ago, we had a cabinetmaker in Dallas that was a regional and national company go broke.
That was an interesting one. They paid the May 1 rent and then filed Chapter 7 in two weeks, three weeks later.
In Florida, we lost a good-sized tenant in Tampa that was a supplier, I think it was tile and granite. We immediately re-leased that space.
And then we’ve had a few of the smaller operators in Florida shut down. But to date, because of the strength of the activity in our markets we’ve managed to release most of that space fairly quickly.
We really don’t have anybody else we’re worried about right now. I think that’s pretty much cleared out through the system.
Operator
Your next question comes from William Crow - Raymond James.
William Crow - Raymond James
You have more multi tenant assets than maybe some peers, but what are you seeing from corporate America as far as their enquiries to do build-to-suit projects, are they more likely today to do sale-leasebacks to try and raise cash, or they showed less desire or more desire to buy the assets in which their operations are housed?
David H. Hoster II
We do very little of a purchase leaseback or very little of selling our building. So I can’t really answer that other than it hasn’t changed, and it hasn’t been much.
We have seen in most of our markets other than in Texas that the larger corporations are pretty much standing still. We’re seeing very little expansion, some contraction, but I would also add that in most of our markets including Florida we are still seeing companies move into the market, so that is encouraging.
But the number of expansions has certainly declined significantly. But we are just seeing in the expansion/contraction, the difference in corporate America’s view rather than in any of the other activities.
William Crow - Raymond James
On Houston where you had that running at roughly 100% occupancy and it came down to 98%. There are some concerns on the supply front in that market.
Could you talk about where that supply is, what your view is towards supply and how that’s going to play out over the next year or so?
David H. Hoster II
We’ve been talking about an oversupply there for I think at least two years, and the market has done a pretty good job of absorbing it. The smaller local entrepreneurial builders have pretty much stopped building there, and we are now competing with the well capitalized REITS and some other national type industrial builders.
So there still is new construction. Our strong feeling is that because of the location of our buildings we have continually outperformed our competitors from a leasing standpoint.
There is certainly a lot of building going on around the airport, but that continues to be our strongest market with World Houston. The area that we are not competing in on purpose where I think there could be a huge overbuilding, it would be at the Houston port.
I’m going to be out there later this week just to check on that. But that’s a sub market that we are not going to enter in Houston, but it’s hard to keep 99.5% or 100% occupancy when you’ve got 4 million square feet.
So we are still real pleased with the 98% occupancy.
Operator
Your next question comes from Brendan Maiorana - Wachovia.
Brendan Maiorana - Wachovia
David, I think you in the past have gotten a little bit of a seasonal lift in occupancy in the fourth quarter. Is there any part of the 70 basis point occupancy decline from Q4 to Q1 that was attributable to some of the seasonal leases rolling off?
David H. Hoster II
No. The good news/bad news, our occupancy was so good last year that we didn’t have that extra space available to lease to the post office on a short-term basis or to a Wal-Mart or in some cases liquor distributors for the holiday season.
What we did see, and we seem to see this every year too is that during the year you have some customers who announce are going to move out and then for one reason or another you get them to extend through the end of the year. So we actually did better on our leasing in first quarter than we had originally projected.
And some of that is month-to-month and might catch up with us later, but we are ahead today of where we thought we’d be at March 31.
Brendan Maiorana - Wachovia
Out of your core markets, where are you most concerned on an occupancy front?
David H. Hoster II
Phoenix always had so much development going on that’s one that worries me more than others generally, anyway, because I mentioned before, we do have activity there. In Florida, with the overall slowdown, Jacksonville seems to have less activity, less lookers than South Florida or Orlando and Tampa.
We had some unexpected vacancies or higher than normal turnover in Tampa, so we are going to have to work a little harder to get that back up. But of the Florida markets I’d say Jacksonville is showing the least activity right now.
Brendan Maiorana - Wachovia
Are there markets where if you are just think about trying to maintain your high occupancy levels and thinking about the different levers that you can pull, whether it be rental rates or lease concession, are there markets where you’ve gotten a little bit more aggressive in terms of some of those levers over the past three to six months?
David H. Hoster II
Well, we like to take pride in the fact that we think we have a really good handle on what’s going on each of our submarkets, and part of that is for our people to understand what one of our customers or our prospect has as alternatives. And if they’ve got one or two alternatives you can be a whole lot more aggressive on how you deal with them than if they have a dozen alternatives.
And we are trying to be very careful to have a sense of where rents are going and concessions are going and to not be behind the market in offering those. An over generalization but what you start to see in a market as it slows is the beginnings of free rent from owners who have long-term vacancies and haven’t leased them even in a good time and start to really get nervous.
Then that free rent starts to spread and then the merchant building types, they’d much rather give free rent or vote for incentives than cut rate because if they are going to sell the property you need that valuation. Broker incentives, we are starting to see in a number of markets where there’s an extra percent paid or there’re prizes for leasing the space by the end of a certain period, some of our markets where we are offering the broker incentives just to be competitive, we don’t give away trips to Hawaii or things like that.
The last two things that happen as you see softening are rents dropping and extra TIs. We are seeing a little bit of drop in rents from asking levels but very little compared to previous rent.
So as you saw in our statistics our rent growth has still been very good, and what we are seeing is, especially in some of the larger tenants, they want to renew and they are more interested in rate than any improvements, and I think that’s reflected in our renewals in the first quarter.
Brendan Maiorana - Wachovia
Yes, we did notice that the concession packages were down a bit. Just switching over to development, and you mentioned potential build-to-suits which would be additive to your projected starts, where do you think the yield differential is between effective element and build-to-suit currently?
N. Keith McKey, CPA
We look at it as somewhere from 50 to 100 basis points, maybe a little bit more in terms of taking the leasing risk out of the project. But we are not a big build-to-suit developer, because the merchant builders get real aggressive on that and they will build on a very slim spread between pro forma yield and what they think they can sell it for.
And we just don’t play that game. And the build-to-suits that we are able to work out aren’t because we’ve outbid somebody.
It’s generally because the prospect wants to be in one of our locations. And that was certainly the case with the recent build-to-suits we’ve done at World Houston, and I think maybe the best example is United Stationers of 404,000 square foot build-to-suit we completed in March in our Southridge development.
And if you look at the yields there, they’re well above any market return, and we had the best look and best located product available in that workforce. That’s how we get build-to-suits rather than being the low price provider.
Brendan Maiorana - Wachovia
And in terms of your spec developments, have you raised your yield criteria?
N. Keith McKey, CPA
We haven’t raised our yield criteria. What we have raised is our leasing in buildings that are recently developed in that same park.
Because most of our starts are just a subsequent phase to a successful project in Southridge, Oak Creek, World Houston, Beltway Crossing developments. And this time last year, we were starting the next phase when we were about 30% leased in the just finished building.
We’ve upped that to 50% and that could go up in the future depending on how we feel about the submarkets.
Brendan Maiorana - Wachovia
You talked about the $0.04 of items that helped the quarter, but still there was $0.02 of core operational that also provided a lift to the quarter. Could you just give us a little bit of sense of what that $0.02 was?
And raising guidance a full $0.06, why we wouldn’t expect to see a little bit more flow through to the back half of the year?
N. Keith McKey, CPA
The additional $0.02 was related to both a little higher occupancy than we had budgeted. We renewed some customers we hadn’t planned on and had some short-term extensions.
And then secondly, we did better on rents, I think than we had projected. So, we were very pleased with that.
Going forward, with what’s going on in the economy and everything you hear and read in the media, we just wanted to be conservative in what we’ve done. We thought we had good guidance for the next three quarters.
But you have some good things happening and some bad things happening and we just think they’ll even out going forward and so we didn’t want to get any more aggressive and raise guidance other than what we’ve already achieved in the first quarter.
Operator
Your next question comes from Nap Overton - Morgan Keegan.
Nap Overton - Morgan Keegan
Would you say that today you’re more optimistic or less optimistic about maintaining or increasing your development pipeline or your development CapEx in 09’ versus 08’ than you were a few months ago?
David H. Hoster II
I have to admit, we haven’t done a whole lot of thinking about what we’re going to do in ‘09. You can start a new industrial development so quickly in most of our markets that we haven’t gotten too far ahead of ourselves on that and really gotten down to look at specific developments.
So too much can change in the economy between now and the beginning of next year, or even the end of this year. So, we’re not really going out on the limb on that one yet.
Nap Overton - Morgan Keegan
Would you say now versus last fall you are more inclined to add new development projects than you were six months ago based on your gut feel?
David H. Hoster II
I would say it’s the same.
Nap Overton - Morgan Keegan
On the 5.5% mortgage, what was the loan-to-value on that transaction?
N. Keith McKey, CPA
It was about 75%. One of the things that we did differently there is it was a 7-year loan instead of a 10-year.
We were looking at our maturity schedule, and we had very little that matured seven years out. So, we thought that was an opportunity to fill that gap, and we got a little better rate as a result.
Nap Overton - Morgan Keegan
Was that a life company or what was the source of that finance?
David H. Hoster II
Life company.
Nap Overton - Morgan Keegan
Would you say that the key factor or key driver in you hitting the upper or lower end of your $326 to $336 range of FFO guidance would be the occupancy level?
David H. Hoster II
Well, on the two senses, primarily occupancies, but with rents added in the other four are the individual items that all seem to come together in the first quarter.
N. Keith McKey, CPA
And then on the year, you have to think it would be on occupancy.
David H. Hoster II
Yes. Absolutely, leasing is what we live and die by.
Operator
Your next question comes from Chris Lucas - Robert W. Baird.
Chris Lucas - Robert W. Baird
David, can you just give us a sense as to what your thoughts are and your comfort level with the lease expirations for the remainder of the year, and if there are any singularly large tenant issues that you are concerned about?
David H. Hoster II
We have a several large tenants coming up, but we’re very comfortable with our projections from that standpoint. We’re in discussion with all of them at this point.
Chris Lucas - Robert W. Baird
In terms of the cap rate environment, any change from your last quarter’s comments?
David H. Hoster II
In speaking with some major industrial brokers, they have said that the world changed pretty quickly in the beginning of March, and there has been, at least to our knowledge, properties that we’ve been on, little or no closings in our markets. So, I don’t have enough experience to say much about it.
I think buyers are nervous. Nobody wants to be the last one to buy on a low cap rate, if they’re going to move up and everybody seems to think that’s the case.
And sellers, in many cases, have high expectations and think things are going to get better, so they’ve either pulled their properties off the market or haven’t put them on the market. Our Metro Business Center in Phoenix, we’re probably going to get a, I don’t know, maybe a 50 to 75 basis point higher cap rate, or suffer a higher cap rate of that amount than we would have a year or so ago.
But the property wasn’t in a situation to be sold earlier, but right now we’re very pleased with the range of offers we’ve gotten.
Chris Lucas - Robert W. Baird
And then just a follow-up on the question about the mortgage loan, what implied or cap rate was used to determine the value on that portfolio?
N. Keith McKey, CPA
I think we used 7%.
David H. Hoster II
We sent in what we think is a value, then the lenders all recalculate everything and sometimes, it’s hard to tell what value they think it is loan-to-value versus what we’ve calculated, and if they hit our range we’re happy and do the deal.
Chris Lucas - Robert W. Baird
And what was the process you went through and how would you characterize it compared to what you would have done six months or a year ago?
David H. Hoster II
I think the real difference is in the spreads. A year ago, we did a deal at 90 over the ten-year, and we’re always talking to the lenders about what would happen if you did it today and it would probably be $250, $275 over the ten-year.
And also, some of the institutional lenders, from our experience, seem to be hung up on a 6% rate, they’ll give you a spread, but they don’t want to go below 6%. They seem to feel that the 10 years somewhat of an aberration is going to be moving up and so they don’t want to lock in on something lower than 6%.
But, we will be looking to do another package like we historically do later this year.
Chris Lucas - Robert W. Baird
Did you have a balance of the securities owned at the end of last year or did any of this show up in the balance sheet or was it purchased during the quarter and sold during the quarter? Is that how that worked?
David H. Hoster II
That’s how it worked.
Chris Lucas - Robert W. Baird
Was there any balance at the end of the quarter?
David H. Hoster II
No. We did not own any shares in other companies at March 31.
Chris Lucas - Robert W. Baird
Is it something that we should be expecting in terms of just activity going forward? I know you’ve got nothing in terms of gains on the guides but this is an activity that you’ll continue to pursue?
David H. Hoster II
EastGroup has always looked at opportunities in buying shares in other REITs, when those opportunities look very good compared to acquisitions and development. And after the first of the year, a good many of the REITs took a beating and we saw some real opportunity.
I think for the people who aren’t as experienced with our history is that we have only bought stock in companies where we think there is at least some potential for that company to be combined into EastGroup, even if it’s a slim opportunity. In this case, we saw some real bargains, we bought the stock, stocks moved back up and it seemed to make sense to take our profits at that point.
We have merged four other entities into EastGroup over time through the ‘90s, and by buying stock was how we took control of EastGroup and named it that way back in ‘83. For this is something we always are just evaluating opportunities, and they jumped out at us in the first quarter.
Operator
Your next question comes from Philip Martin - Cantor Fitzgerald.
Philip Martin - Cantor Fitzgerald
First of all just going on the leasing theme here, your expected retention rate this year, what is that on the renewals?
David H. Hoster II
Well, that’s not something that we put in our guidance. We just give occupancy numbers.
But as I mentioned earlier, the retention plus the immediate re-leasing of customers that we lost in the first quarter was right in line with some of our recent averages. So, we were pleased with those results.
Philip Martin - Cantor Fitzgerald
Do you expect any meaningful change from that throughout 2008 based on the discussions you are already having with tenants and where their leases are expiring?
David H. Hoster II
There is certainly going to be some swings, but we don’t see dramatic moves either up or down.
Philip Martin - Cantor Fitzgerald
As you talk to your tenants in this environment to where there is uncertainty and at least the media is making it out to be fairly bleak. Are you getting the same sense from your tenants?
Or is the outlook among your tenants about the same or worse or better than what’s being portrayed in the broader media?
David H. Hoster II
I think there is several parts to that. One, because everybody is worried about the economy, or most people are, the tenants or prospects are much less willing to move forward quickly.
A year ago, there was real momentum from the landlord side, and because of shrinking alternatives, prospects felt a sense of urgency to get a deal done because their first or second choices might be gone while they were thinking about it. With the slowdown in leasing and some new constructions, they have more alternatives, so they don’t feel the psychological pressure to move quickly, in most cases.
So, that’s part of what we see. And secondly, everybody, including EastGroup, are just being more cautious.
So, they are less willing to make longer-term commitments or take expansion space until they figure out what’s going to happen to the economy. Is this going to be down for an extended period, or as hopefully, as some people say, we’re going to bounce back in the third and fourth quarter?
So, each business is a little different, each submarket is a little different.
Philip Martin - Cantor Fitzgerald
As you look at your tenant base do you get a feeling that they are well positioned to weather an economic downturn through ‘09 if that happens to be the case.
David H. Hoster II
I have trouble projecting a lot of that more than a couple of quarters. And if that’s all the downturn lasts, I think everybody will be in good shape.
The question, are we going to go deeper like we did in ‘01-’02, and in that situation leasing just shut down for a while. Nobody did anything.
The lease came up, they wanted to go month-to-month and then it took a while for the psychology to change, and the economy changed. But we don’t think we know enough to start projecting what’s going to happen in late ‘09.
Philip Martin - Cantor Fitzgerald
No. And I know you are not an economic forecaster.
I know that you obviously have much more discussions than we have with your tenants and probably have a better feel. But at least over the next 12 months you feel they are pretty well positioned to weather this in terms and they are not expanding.
They are slowing things down, but other than that you feel they are pretty well positioned?
David H. Hoster II
I would think so. I think the housing, as I mentioned earlier, our customers that are related to housing are pretty much shaken out.
And everybody is just waiting to see what happens.
Philip Martin - Cantor Fitzgerald
On the seller front, how patient are potential sellers out there? Now are there for the properties that you might, or EastGroup might be interested in.
What is your sense again, how patient are they?
David H. Hoster II
Right now they are being real patient, well, patient in terms of time. Impatient on the fact that they are not willing to accept a value that’s going to be significantly less than what they thought it was worth last year.
And I think there’s still an educational process for a lot of owners, especially the ones that aren’t sophisticated institutions who are following the market every day.
Philip Martin - Cantor Fitzgerald
So you are not necessarily dealing with sellers that are in a have-to-sell situation?
David H. Hoster II
No. That’s one of the unique things about industrial real estate is, one of the expressions we like to use is, is that you sell to greedy people and buy from scared people.
In the last recession, nobody got scared in the industrial sector. And we certainly haven’t seen scared owners in industrial today in this slowdown.
Philip Martin - Cantor Fitzgerald
You mentioned earlier after your opening remarks, the strength of activity in your markets. I just wanted you to go into a bit more detail as to define that strength.
And in your markets what are the key drivers behind that strength versus maybe some other markets that you are not in?
David H. Hoster II
I think what we were talking about with strength is that we are not getting much pushback on our asking rents. We are achieving good rent growth.
There is a slowdown and the people out there understand it. And they just don’t feel the urgency to sign leases in a hurry.
And they are not afraid of losing their first couple of choices to move to. So, as long as there are people out there looking at our space and we are putting out proposals, we are still reasonably optimistic about what’s going on because we have seen the other extreme.
Operator
Your next question comes from Paul Adornato - BMO Capital Markets.
Paul Adornato - BMO Capital Markets
Could you talk about supply dynamics in your markets? Specifically, are the traditional sources of capital still out there?
Merchant builders, are they active? And are there any distress situations among developers?
David H. Hoster II
We have not seen anybody distressed yet, and I think part of the fact is in the last recession, people felt that it was going to be short, and so all they had to do was hang on for six or 12 months and everything was going to be okay. And that seemed to stretch out a bit, but there were very few that I am aware of foreclosures or really distressed sale transactions.
The local entrepreneurial-type builder is pretty much out of the game and the construction now we are seeing is from our peer group of REITs plus a couple other private entities that are extremely well capitalized and tend to do it with their own money. There are still one or two out there that have a financial institution, a pension fund backing them, but fortunately that is almost gone.
So, there really is a reduction in supply except I wish some of our peers would stop building.
Paul Adornato - BMO Capital Markets
Is there more of a reduction in supply than a decrease in demand?
David H. Hoster II
That’s hard to tell at this point. There might be a little more decrease in demand than supply.
It’s hard to tell because in most markets we’ve been outperforming the competition as I say because of our product type, our flexible multi-tenant spaces, the quality of our locations, and so we are happy with the results we’ve achieved even with the competition out there.
Operator
Your next question comes from Stephanie Krewson - Janney, Montgomery & Scott.
Stephanie Krewson - Janney, Montgomery & Scott
The debt you have maturing in early 2009, what would you approximate the value of that property, and would you lever it to about a 65% loan-to-value when you go to refinance it?
N. Keith McKey, CPA
I have to say we haven’t run those numbers recently because we assume we are going to do one or two more loans before we have to refinance those, but I assume those are probably well below 50%, especially when you look at the California assets and that our goal is to generally do about 75% loan-to-value you start to go higher than that and the incremental rate increase just isn’t worth it.
David H. Hoster II
But you’re right, Stephanie. The loan-to-values have dropped some.
So, it will be probably difficult to get a 75% in today’s market.
Stephanie Krewson - Janney, Montgomery & Scott
Related to California, two of your customers, one of them is Ethan Allen in a 300,000 square foot facility. How critical is your facility to Ethan Allen?
David H. Hoster II
I have been so wrong on trying to project what big corporations do. It’s hard to say, they use it both for manufacturing and distribution.
At one point they had sublet some of it, and now they’ve got that space back and are distributing out of it. Some of those big corporations are like the government, you never know what they are going to do until it comes down to the end and sometimes it’s illogical and sometimes you benefit or not from it.
Stephanie Krewson - Janney, Montgomery & Scott
Right, similarly Tower Automotive facility in Jackson?
David H. Hoster II
They were in bankruptcy for a couple of years. They came out of bankruptcy, it was last summer or early fall, reaffirmed the lease and never missed a date on their rent payment.
Again, they supply Nissan with frames and Nissan is moving some of that business outside the U.S. and but they’re introducing some new trucks there that will be made in Canton, Mississippi and they need frames.
N. Keith McKey, CPA
That facility was built to their specification, so exactly what they wanted.
Operator
Your next question comes from Christopher Pike - Merrill Lynch.
Christopher Pike - Merrill Lynch
What lag do you typically see or what type of lags do you see in the last downturn between recession speak and an overall malaise in the economic backdrop and the manifestation of that in higher vacancy numbers and an inability to push rents. Because we were looking at some of our CoStar data this morning at a client request and it seemed about a 12-month lag before vacancy really picked up after the last downturn.
I am just wondering what your thoughts on that are?
David H. Hoster II
I have to admit that’s not something that we’ve evaluated because our position is we just respond to the individual markets in terms of what we are looking for in rent and in concessions and with our development program. I think the whole thing depends on how long the economy is down.
And if we start to bounce back as a number of economists feel in the third or fourth quarter, we are not going to get anywhere as low as what we experienced in ‘02 and early ’03. So, it’s all based on how long we are in it and if whether we go any deeper or not.
Christopher Pike - Merrill Lynch
Whom do you see out there in terms of competing with you in terms of some of the more well capitalized REITs and maybe some of the IDIs of the world? How about on the transaction side?
Where is the bid from the transaction coming from, do you see more pension folks or do you continue to see pension money, qualified money looking to allocate towards industrial, do you get a flavor that perhaps they are full up? What are your thoughts on that?
David H. Hoster II
In talking to people, my impression is companies, and pension fund advisors always seem to be short on their industrial allocation. The only one that I can really give you good response on is in Charlotte, we were competing primarily with the pension fund money.
I think some of that moved to Charlotte that hadn’t been there before because of slightly higher yields than they could get in other markets. On the potential buyers for our property in Phoenix, you don’t see the pension fund, the big ones buying much of the service center.
So we’ve been dealing primarily there with investment advisors who represent private equity but don’t do anything on the scale of a TA or a REIF or an ING. And I think they have the same stance as most other people that nobody wants to be the last one to pay the high price, get the low cap rate.
So, there is just a whole lot of everybody stepping back and waiting for something to happen.
Operator
There are no other questions in the queue at this time.
David H. Hoster II
Again, thank you everybody for your interest in EastGroup, and Keith and I are available for any further discussion or questions we didn’t answer fully. So please give us a call.
Thank you.