Jul 28, 2008
Executives
David Hoster - President and CEO Keith McKey - CFO
Analysts
Irwin Guzman - Citigroup Michael Bilerman - Citigroup Paul Adornato - BMO Capital Markets Mitch Germain - Banc of America Chris Lucas - Robert W. Baird & Company Nap Overton - Morgan Keegan Chris Haley - Wachovia Securities
Operator
Welcome to today's teleconference entitled the EastGroup Second Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, you will have the opportunity to ask questions during our Q&A session. Please note this call may be recorded.
I would now like to turn the call over to your moderator for today, David Hoster, President and CEO of EastGroup Properties. Please go ahead, sir.
David Hoster
Good morning, and thanks for calling in for our second 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.
Unidentified Company Representative
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 Hoster
Thank you. Operating results for the second quarter exceeded the upper end of our guidance range.
Funds from operations were $0.80 per share as compared to $0.74 per share for the second quarter of last year, an increase of 8.1%. The $0.02 per share above the midpoint of our second quarter guidance was due to good property operating results and lower-than-projected interest expense.
For the first six months of 2008, FFO was $1.63 per share compared to $1.46 per share for the first half of last year, an increase of 11.6%. We continued to achieve positive same-property net operating results in the second quarter, but at a slower pace than a year ago.
Same-property quarterly results improved by 2.7% without the straightlining of rents and with straightlining, increased by 0.9%. Without termination fees, these results were 2.5% and 0.8%, respectively.
This was the 20th consecutive quarter of positive results for both measures. For the second quarter on a GAAP basis, our best major markets, after the elimination of termination fees, were Los Angeles, which was up 10.2%; Phoenix, up 6.7%; and Houston, up 6.5%.
The trailing same-property markets were South Florida, down 12.2%, and Tampa, down 5.4%. The reduced rate of growth in same-property results for the quarter was due to the high level of occupancy in the second quarter of last year.
Consequently, the overall increases in the second quarter of '08 are due primarily to higher rents rather than improved occupancy as we have seen in the past. Occupancy at June 30 was 95%, a 60 basis point increase from the end of the first quarter.
Our California markets were 98.1% occupied and Texas was 95.4%. Houston, our largest market with 3.9 million square feet, was 98.1% occupied.
As we have discussed in our last several conference calls, leasing activity has slowed significantly from its peak in the first half of last year, reflecting a 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.
Prospects understand that they have more lease alternatives than before, and, as a result, do not feel any urgency to act. Our leasing statistics for the second quarter illustrate the generally good real estate fundamentals in our markets.
Overall, of the 919,000 square feet of leases that expired in the quarter, we renewed 85% and re-leased another 5% for a total of 90%. This total is well above our average, and, combined with a decrease in average lease length, we believe reflects the desire of customers not to make major new lease commitments in an uncertain economic environment.
In addition, we leased another 341,000 square feet of space that was vacant at the beginning of the quarter, a good indication that there are still users out in the market. As you can see in our supplemental information, we continued to achieve rent growth in the second quarter with a 9.4% increase for GAAP with straightlining of rents, and 1.2% without straightlining.
The lower-than-average cash rent growth was due to a large renewal at UBC in Santa Barbara, an R&D building, and a previous above-market-rent lease renewal with Houston. The increase in average tenant improvements to $2.16 per square foot for the life of the lease, or $0.59 per square foot per year of the lease, was the result of leases at UBC and at Metro, a service center in Phoenix.
We expect TI expense to be lower for the balance of the year. At June 30, our development program consisted of 23 properties with 2 million square feet and a total projected investment of $144 million.
Fifteen of the properties were in lease-up and eight under construction. Geographically, these developments are diversified in four states and nine different cities, and overall, are currently 33% leased, a slight improvement from the first quarter.
Development leasing continues to be good and relatively steady in both Houston and San Antonio, but is slow and behind budget in Phoenix and our Florida markets. During the second quarter, we transferred three properties with a total of 199,000 square feet to the portfolio.
Located in Orlando, San Antonio and Phoenix, these developments have a combined occupancy of 88%. Also during the quarter, we started construction of five properties, with 373,000 square feet, and a total projected investment of $28.5 million.
Two of these developments, World Houston 28 and 29, are both 100% leased. The other three are located in Tucson, Tampa and West Palm Beach.
Two weeks ago, we acquired a 150,000 square foot vacant warehouse on the west side of Jacksonville for a price of $3.7 million. The purchase was part of our Orlando build-to-suit transaction with United Stationers.
We plan to invest an additional $800,000 to $900,000 to redevelop this asset, which is adjacent to another EastGroup property. For the full year, we expect to have new development starts of between $65 million and $70 million.
Last week, we acquired 12.2 acres of land in San Antonio for future development. The price was $1.9 million and we plan to build approximately 176,000 square feet in three buildings to be called Thousand Oaks Business Park.
The property located in North Central San Antonio is one block from our 480,000 square foot Wetmore Business Center. We currently have 130 acres under contract to acquire in Orlando.
This site will allow for approximately 1.2 million square feet of new industrial development. Including the Orlando acquisition, our land inventory now contains 370 acres, with the potential to develop approximately 4.6 million square feet of new buildings.
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.
We did not acquire any operating properties during the second quarter, and currently do not have any under contract to purchase. In an unusual transaction, we sold our 120,000 square foot North Stemmons Dallas building, and a portion of its land, to the Texas Department of Transportation in lieu of a condemnation for highway widening.
The condemnation award was $4.7 million, and we recorded a gain of $1.9 million, which, of course, was not included in FFO. We retained 4.9 acres, which we plan to redevelop for the new business distribution building.
We currently have two properties under contract to sell. Metro Business Park in Phoenix, which is a 189,000 square foot service center complex, and Delp III, a 20,000 square foot warehouse in Memphis.
Both of these were acquired through earlier mergers. Keith will now review a number of financial topics.
Keith McKey
Good morning. As David reported, FFO per share for the quarter increased 8.1% compared to the same quarter last year.
The increase was due primarily to strong leasing on developments completed in 2007, and a decrease in interest rates on our floating rate bank debt. Lease termination fee income was $69,000 for the quarter compared to $36,000 for the second quarter of 2007.
Bad debt expense was $643,000 for the second quarter of 2008, compared to $212,000 in the same quarter last year. Bad debt expense for the quarter was well above our average.
We have reviewed our tenants and do not see the higher amounts as a trend, or expect an unusual amount of bad debts for the rest of the year. We believe that we are being conservative in providing bad debt allowances, and there is a possibility of reversing the allowances on some of the tenants.
FFO per share for the six months increased 11.6% compared to the same period last year. Lease termination fee income was $544,000 for the six months in 2008, compared to $51,000 in the same period last year.
Bad debt expense was $831,000 for the six months of 2008, compared to $361,000 for last year. Debt to total market capitalization was 36% at June 30, 2008.
For the quarter, the interest coverage ratio was 3.7 times and the fixed charge coverage ratio was 3.4 times. Our floating rate bank debt amounted to 5.1% of total market capitalization at quarter-end, and we have no mortgages that mature in 2008.
During the second quarter, we sold 1,198,700 shares of newly-issued common stock, with net proceeds of $57.2 million, which was immediately used to reduce bank debt and for general corporate purposes. The net price to EastGroup from Merrill Lynch was $47.81 per share on a closing price of $49.75 per share.
On July 2, 2008, we redeemed our 7.95% perpetual preferred stock at par for a total of $33 million. This redemption triggered the expensing of $674,000 or $0.03 per share in original issuance calls which will be recorded in the third quarter.
Together with our new $200 million bank line and $78 million mortgage which was closed in the first quarter, we believe our balance sheet is strong, flexible, transparent and easy to understand. In June, we paid our 114th consecutive quarterly distribution to common stockholders.
This quarterly dividend of $0.52 per share equates to an annualized dividend of $2.08 per share. Our FFO payout ratio was 65% for the quarter.
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. FFO guidance for 2008 is expected to be in the range of $3.24 to $3.34 per share, and the earnings per share is estimated to be in the range of $1.18 to $1.28.
The FFO midpoint was decreased from $3.31 per share to $3.29 per share. This decrease reflects a $0.01 per share dilution from the stock offering in the second quarter, a $0.03 charge on the redemption of the preferred shares, and reduced NOI projections for developments completed this year.
These items are partially offset by same strong store NOI and interest costs. Now, David will make some final comments.
David Hoster
We experienced a good second quarter in the face of a slow US economy. Improved FFO per share, continuing growth in same-property operating results and higher portfolio occupancy.
In addition, we were able to take advantage of an increase in share price to raise new equity at an attractive valuation. I would like to mention two potential trends in industrial real estate that we think will most likely benefit the EastGroup.
The first comes from Torto Wheaton Research. Their study shows that small and midsized warehouses, those below 350,000 square feet, are outperforming larger warehouses.
The second potential trend is more speculative. With higher transportation costs, users should prefer closer-in metropolitan area locations rather than those on the fringe of population concentrations.
Only time will tell on this theory. Keith and I will now take your questions.
Thank you.
Operator
[Operator Instructions]. We will take our first question from the side of Michael Bilerman of Citi.
Go ahead, please.
Irwin Guzman - Citigroup
Good morning, it's Irwin Guzman. Michael Bilerman is on the phone as well.
David Hoster
Good morning.
Irwin Guzman - Citigroup
Keith, can you talk about some of the developments that you have on the development page where you have negative basis? Is that because you've sold land at a profit in those sites?
Keith McKey
Let's see. Alright, that's really not the basis.
What we're doing there is transferring land out of the prospective development category. So, if a piece of land is moved into actual development where the construction of the building begins, it's showing a negative under that prospective development category.
So, that's the just the movement of land and -- which includes the capitalized carry cost and planning costs on that land.
Irwin Guzman - Citigroup
Okay. And, my other question is, and I'm sorry if I missed this earlier, you mentioned the write-off of straight-line rent -- that expense.
Can you give a little bit more color about who it is that you're tracking that might go bankrupt, or if it's market-specific or tenant-specific?
Keith McKey
Interesting question. We discussed a lot internally and do it each quarter.
Surprisingly, there is no real trend either geographically or by company type in those write-offs or loss reserves. We run everything from a direct mail marketing company to an entity that supplies saline solution to companies, to a moving company, which I guess could maybe be related to the housing industry, to a tenant related to airline business.
So, it's really across the board and I think just reflects the slowdown in the economy and that a lot of companies are struggling in this environment.
Irwin Guzman - Citigroup
Can you quantify the magnitude of the space that you think might go dark in the next six months?
Keith McKey
Wouldn't really want to speculate on that now, because it's amazing how long some of these customers, users, can hang in there, and I don't want to get too specific on that. We'll just report it when it happens.
Irwin Guzman - Citigroup
Okay, thank you.
Keith McKey
Thank you.
Operator
Okay. We'll take our next question from the side of Paul Adornato of BMO Capital.
Go ahead, please.
Paul Adornato - BMO Capital Markets
Hi, good morning. I was wondering if you could add your own commentary to the Torto Wheaton statement that small and midsized warehouses seem to be doing well.
To what do you attribute that?
David Hoster
Well, they put out a -- I think they do -- it's a weekly report that covers different real estate topics that they put out. It's free, and this one's entitled Warehouse Performance Vary Among Different Asset Sizes, and it was dated last month, June 27th.
And, what they say that the reduction in consumer spending affects the bigger buildings first because they're the ones that tend to be distributing the goods that consumers are buying. And a second part of that is that over the last couple of years, a large percentage of the new construction has been in the bigger box facilities, because you can put out more money, and, this is my subjective opinion on it, that you can put out more money in a bigger building and also that's what a lot of the institutional buyers have been looking to acquire.
So that there is more overbuilding in the buildings above 350,000 square feet than those below.
Paul Adornato - BMO Capital Markets
And, so, part of what you said is a little bit ominous, and that is the big building -- the big boxes are affected first, meaning you might expect some softness in the smaller boxes to trickle down. Is that a fair --?
Keith McKey
It all depends on what happens with the economy. Our customers seem to be hanging in there from the standpoint that we've actually increased occupancy during the second quarter.
If the economy stays relatively stable where it is, I think we're going to continue to outperform. If we go into a deep recession, or into a recession at all, that's going to affect everybody and we will certainly eventually feel that.
Paul Adornato - BMO Capital Markets
And, secondly, I was just wondering, you have always benefited from your development activities. Yet -- and you're still committing new funds to development, but given some of your earlier statements that leasing activity is slowing, and there's not a sense of urgency on the part of tenants to sign to space, I was wondering if you could give us your experience as to the end of the development cycle, what that looks like, and if you're starting to see that -- those conditions emerge at this point?
Keith McKey
I think what we're seeing across the board, and Houston and San Antonio are probably not part of this, but that industrial users are as uncertain of the economy, what's going to happen over the next 6 to 12 months, as all of us are, and, as a result, don't want to make any dramatic changes. And, so, we're seeing higher customer retention at shorter term leases, and generally in our dock-high space, lower tenant improvements.
It reflects those users wanting to have future flexibility so that they can first determine what's going to happen with their business and then decide whether they need to grow or shrink, and don't want to make longer-term commitments today. As I say, Houston and San Antonio seem to be the exception to that.
Paul Adornato - BMO Capital Markets
And -- oh, I'm sorry, go ahead.
Keith McKey
I was just going to say, what we are also doing -- most of our developments are additional phases in parks that we've had under development for a period of time, and to recognize the slower market -- in this case even in Houston and San Antonio, we're requiring going over 50% leased in an existing building before we start the next building in that park, and that's up from about 30% a year ago. And, if things continue to slow, we'll probably push that hurdle higher.
Paul Adornato - BMO Capital Markets
And is there an obsolescence factor at work that makes new development more attractive than existing space?
Keith McKey
Absolutely, but in an economic turndown most users aren't interested in paying extra for that. They're waiting to see.
They don't want to go out and make a big investment in a new space if the economy is going to become worse. So, as I say, we're seeing people with a wait-and-see attitude and that affects our development leasing, and also, people start thinking price more than quality and location.
And I think that has a negative effect also.
Paul Adornato - BMO Capital Markets
But it can't be -- you must not be seeing that in too many markets because you still have a pretty full pipeline.
Keith McKey
Well, two of the starts I mentioned the second quarter were at World Houston where we were able to lease the two buildings 100% before we ever started them. Tucson is one of the stronger markets.
It's not a real deep market, but it's one of the stronger markets in the country right now and has its lowest vacancy maybe in recent history. Our Tampa start reflects the fact that we're two-thirds leased in the previous building and we think it's a little bit of a unique offering we're going to have at Oak Creek on the new building there, and, finally, the last is a service center in West Palm Beach or Palm Beach County that we've been trying to get approvals on for almost two years, and we think the service center market there is strong enough and will be better when we finish that little building.
It's only 20,000 square feet.
Paul Adornato - BMO Capital Markets
Okay, thank you.
Keith McKey
Thank you.
Operator
We'll take our next question from the side of Mitch Germain of Banc of America. Go ahead.
Mitch Germain - Banc of America
Hey, David, how are you doing?
David Hoster
Good morning, thank you.
Mitch Germain - Banc of America
Just some thoughts on San Francisco. I see you're overweighted in the expirations for the back half of the year.
David Hoster
We have one large tenant that's on our top tenant list, International Paper. They have two spaces in Hayward.
One we got the signed lease back on yesterday and that's reflected in the schedule. I got a hard time, because we changed the schedule at the last minute, but wanted to have that in there.
And they've committed to renew the other lease there, so that is going to happen. We are going to lose two tenants, one to the economy and one to a consolidation.
But, that's a reasonably tight market although vacancy's gone up a little bit. So, would rather have the vacancy there than in some of our other areas.
Mitch Germain - Banc of America
And just some thoughts on Florida. I mean, I remember the last time we sat down, you had spoken about some weakness.
I think it was specifically in Orlando. It seems to have held up a little more resilient than I expected.
Is this a -- the bottom, or should we expect a little more softness in that region?
David Hoster
I would certainly like to think that Orlando's started back. A number of Florida economists have identified Orlando as the strongest and probably the first to start to improve in Florida, because of taking away construction there's still a lot of job growth there from tourism and defense contractors and the medical business.
Something that we're seeing in almost all our markets is defense contractors and anything to do with the medical business seem to be doing pretty well. There still is new construction in Orlando.
It's a little bit discouraging. I think we still have some of the best locations and are able to outperform, but a number of developers just in the last couple of months have started new properties there.
Mitch Germain - Banc of America
Great, thanks a lot for your comments.
David Hoster
Thank you.
Operator
We'll take our next question from the side of Chris Lucas of Robert W. Baird & Company.
Go ahead, please.
Chris Lucas - Robert W. Baird & Company
Good morning, David.
David Hoster
Good morning.
Chris Lucas - Robert W. Baird & Company
Just some broad questions on -- what are you hearing from your tenants regarding the strength of their businesses right now?
David Hoster
It's all across the board. And we certainly have more requests than a year ago for customers who want a break on rent, a temporary break, or a push-off rent, some rent payments towards the end of the lease, and as we reported, our -- we had a big disappointing month from a loss reserve standpoint in the second quarter.
So, almost everybody is feeling some pain, just at different levels.
Chris Lucas - Robert W. Baird & Company
And just a follow-up on that debt reserve question. What's the criteria from an accounting perspective, for moving those reserves?
David Hoster
I'll let Keith answer that one.
Keith McKey
We have various ones, and if they miss a cash payment, regular rent payment, they're immediately notified and then the reasons for that, and sometimes it's just that something got mixed up. But, we follow on that very closely.
Of course, bankruptcies -- when they -- some of the tenants will phone in and say that they can't make any more payments and they plan on moving out -- we try to work with them on that. It's just visiting with the tenants and staying in touch with them and seeing what their business is.
David Hoster
One of the things you can tell in a warehouse is if you stick your head in through the dock door and the warehouse is pretty empty, your customer's got a problem. If it's overflowing with goods, times are probably much better for him.
But, as I say, as Keith pointed out, it's really individual and a lot of it goes with their past payment history, and I think Keith pointed out also previously, that the write-offs and the reserves we set up are in straight-line rent. Customers don't get very far behind in cash payment before we're in a position to evict it, so it's those straight-line rents that bite you.
Chris Lucas - Robert W. Baird & Company
Okay, and I guess this is for a follow-up on that comment about utilization. Are you hearing anything from your onsite people either anecdotally or quantitatively as it relates to occupied space, but is maybe underutilized and particularly with tenants that are -- have lease expirations over the next several quarters.
Is there any concerns there?
Keith McKey
We've had more discussions about reductions in space than expansions in space right now, but it's -- we've not had a lot of that happen yet, but there's been a lot of discussion about it. And a lot of the users are, as I mentioned before, just trying to figure out what's going to happen with their business and are looking for flexibility, whether it's in rent payments or use of space, or length of lease.
Chris Lucas - Robert W. Baird & Company
Then my last question just on deal flow. What are you guys seeing out there?
Is there any sense that the instability of the debt markets is pushing sellers to be a little bit more realistic in the environment, or are you still at a wide bit aspread environment ?
Keith McKey
In talking to a number of income property brokers, industrial transactions are down 75% to 80% from 12 to 18 months ago, and anecdotally you hear that cap rates are going up, and on the sales we're working on we're experiencing that. But, there are just not a lot of transactions so it's hard, I think, to come up with any real statistics, but cap rates have moved up some and the lower the quality of the property, the more they've moved up.
Chris Lucas - Robert W. Baird & Company
Would you care to quantify?
Keith McKey
Oh, every market's different, Chris, and we're still out of bidding on some of the properties that are out there, and some we've bid on the sellers are just taking them off the market. Nobody wants to be the last one to pay a high price, and nobody wants to be the one that sold a property at too high a cap rate before the credit markets open back up.
So, it sounds like the tenants try to figure out what's going to happen. The buyers and sellers are too, and so, there's just not a lot of activity.
Chris Lucas - Robert W. Baird & Company
Great. Thanks a lot guys.
Keith McKey
Thank you.
Operator
Thank you. We'll take our next question from the side of Nap Overton of Morgan Keegan.
Go ahead, please.
Nap Overton - Morgan Keegan
Good morning. I know you don't provide guidance on 2009 right now, but if based on what you see and feel right now in terms of demand, would you expect your development starts to be up, down or about the same in '09 as you're running here for '08, at what, $65 million to $70 million for the year?
David Hoster
I would expect them to be, if nothing changed from today, to be about the same or slightly down. What -- we try to prepare both for the best and the worst, and we are still proceeding with designing the subsequent phases of developments that we have underway.
Takes longer and longer to have new buildings permitted, so what we're trying to do is in each area have at least one, if not two buildings permitted, so that when there is a turn and users are back in looking for new quality space, we don't start from scratch. So we've got buildings ready to go and can start moving dirt the next day.
Nap Overton - Morgan Keegan
Okay, and then what would you say over the last six months your view of the potential for rental rate growth is on new and renewal leases? How has that changed over the last six months?
Keith McKey
Well, it's down a little bit but we're still pleased with the rent growth that we've achieved in the first two quarters of this year. It's still both cash and GAAP are positive, and, without our Santa Barbara, which is almost an office building complex, the cash rent growth would have been higher.
So, it really the first thing that starts to go in a downturn are you start paying more brokerage commissions because brokers, procuring brokers, want an extra percent and you start offering a little bit of free rent. Then comes maybe some higher TIs, although those aren't as much of a factor in industrial, and then, finally, rent starts to drop.
And, although we're seeing some reduction in what asking rents were 6 to 12 months ago, the figures that we're achieving are still above the leases rolling.
Nap Overton - Morgan Keegan
Okay, and then one last separate question on capital structure. I applaud you for raising equity when you didn't necessarily need it, and just additional question is, is there any additional color on your capital structure?
Have you done what you need to do this year already so far in your activity in the first half? And, what might prompt you to do something different with your capital structure going forward?
David Hoster
We're pleased. I mean, we've done a series of things that after we did it somebody would always say, well, you can't do that again in today's market, and we seem to be able to pull that off.
And I think we've been able to get the good debt and the good equity because of the strength of the balance sheet, and, so, it feeds on itself. Sometime probably in the beginning of the fourth quarter, or sometime in the fourth quarter, we will do an additional fixed rate mortgage, institutional-type mortgage 10-year, just to keep our bank line from getting too much over $100 million, which is what we've done traditionally for years.
So, that's really the only thing that we're hoping to achieve in the next six months, and I would hope to have that locked and probably be able to report that to you at our next conference call.
Nap Overton - Morgan Keegan
Okay, thanks.
David Hoster
Thank you.
Operator
We'll take our next question from the side of Chris Haley of Wachovia. Go ahead, please.
Chris Haley - Wachovia Securities
Good morning, David and Keith.
David Hoster
Good morning.
Chris Haley - Wachovia Securities
Two items. Your second quarter guidance spread was a couple of pennies.
Your third quarter guidance spread is a little wider. Would you care to comment on why that might be the case?
David Hoster
I think there are more unknowns going forward than there were three or four months ago.
Chris Haley - Wachovia Securities
Okay.
David Hoster
And you know how we like to be conservative.
Chris Haley - Wachovia Securities
Understood. Secondly, Keith, could you comment on specific projects or markets where you did move out your NOI contributions on the development product side?
David Hoster
I'll answer that, if you don't mind. I mentioned both the Florida markets and Phoenix, in Florida, Orlando, Tampa and Fort Myers, we pushed out our leasing projections, our leasing assumptions.
So that hurt, and then in Phoenix the leasing has been somewhat disappointingly slow, although in both areas in the last 30 to 45 days, we've had a spurt of activity. And, so, in Phoenix we've got a number of leases out for signature that we'd hoped we were going to be able to talk to you about today, but they haven't happened.
So, at least we're still putting out proposals, still preparing leases, so, fortunately even though those two states have slowed for us, it's not anything like 2002, when the market just went totally quiet.
Chris Haley - Wachovia Securities
Okay. Would you care to provide -- what is the occupancy assumption by year-end built into the mid and the high point of your guidance range?
David Hoster
We just do everything in a range. Because --
Chris Haley - Wachovia Securities
-- shoot an arrow in the middle. What does that imply in terms of leasing philosophy for the rest of the year?
David Hoster
Off the top of my head, I would say we're probably 50 to 100-plus basis points projecting lower between now and the end of the year.
Chris Haley - Wachovia Securities
For your midpoint?
David Hoster
Well, what we do is just test each one of the assumptions and then come out with a number that we're comfortable with. So it's -- once we set up the model we -- it's a lot more of a gut feel than a scientific -- this is the exact number we're using.
There are too many variables.
Chris Haley - Wachovia Securities
So, if I inquire about the comments before about your shallow bay product having less risk than big box modern II product, would that imply then that you think that big box product will decline more in occupancy?
David Hoster
Well, that's what Torto Wheaton says.
Chris Haley - Wachovia Securities
What do you say?
David Hoster
We don't have enough big box product for me to compare our to internally, and I'd have to say I don't follow that as closely as I follow our direct competitors. And, so, I don't have any statistics that we've come up with or even direct experience that other than when you drive out I-10 in Phoenix, just observing what's empty.
I'm speculating, not stating fact.
Chris Haley - Wachovia Securities
The big box market is more at risk because of supply ads.
David Hoster
Yes, that's one of the two major factors that Torto Wheaton stated.
Chris Haley - Wachovia Securities
Less so demand. However, the big box product is priced at a price lower than yours, and the risk becomes that the big box product starts subdividing and becomes a cost alternative versus your higher product price.
I'd be interested in your views --
David Hoster
Chris, that's not likely.
Chris Haley - Wachovia Securities
You think you and your private competition will do or will use as the market softens a little bit further. Are you more inclined to use lower rent, more free rent, or more capital inducements?
David Hoster
Let me -- before I jump on that, let me make a comment before. What -- a big box building 400,000, 500,000 or 600,00 square feet, can generally only be divided so many different ways.
And the biggest factor on that's just the depth.
Chris Haley - Wachovia Securities
Yes.
David Hoster
So that most of those big boxes can't go much below 100,000 or 150,000 square feet. Since we have little or no spaces that size, that even when they slice them up, seldom do their smallest spaces compete with our largest spaces.
Somewhat of an over-generalization, but that's our experience, because we build our buildings usually 160 to 180 feet deep, sometimes up to 200, but seldom even that deep. So, it's -- that puts us in a different category.
As to what we give first, a lot of that relates to what the prospect wants. And what it takes to get the deal.
And, if they're hung up on and want to be able to brag about how much free rent they got, and they're not interested in what TI's we give them, or in some cases a lower rent, a gross rent, then we'll try to meet their needs in the most beneficial way for us as an operator. But, as mentioned before, usually what happens is we start paying the broker more because he implies you're not going to see the prospect if you don't agree to that, then secondly, especially in a development, giving free rent is fairly easy because you have a 12 month lease-up in your assumptions to begin with.
And then on that extra TIs, you usually try to have those amortized over the life of the lease, and so, as markets soften, you end up paying more and amortizing less. And, then, finally you break on rent unless somebody's just a pure rent identifier and then you have to -- then you start there.
Chris Haley - Wachovia Securities
Thank you.
David Hoster
Thank you.
Operator
We'll take your next question as a side from Mitch Germain, Banc of America.
Mitch Germain - Banc of America
Hey, David, Keith. Just an idea on pricing possibly on what you're looking to -- on the debt you're looking to secure in the second half of the year.
Keith McKey
Sure. It seems to be changing almost daily, but I would guess it's going to be somewhere between 200 and 250 basis points over the 10 year.
Mitch Germain - Banc of America
Great.
Keith McKey
Would sure love to have it under 200, but it's all -- there's a lot of supply and demand factors in there and then as we get into loan-to-value and some other things, you add some variables that can affect it.
Mitch Germain - Banc of America
And, just if you can remind me because I know it's been a while, the debt you secured over the first quarter, what was that at?
Keith McKey
5.6%.
David Hoster
5.5%, I think, and we had a gap in our maturity schedule so we did that at 7 years and we got a little better spread and the 7 year was lower than the 10, so, that was not quite our typical deal, but we had a gap in the maturity schedule and we got better terms that way.
Mitch Germain - Banc of America
Thanks, guys.
Operator
Thank you. There are currently no more questions in the queue.
David Hoster
Okay, again, thank you everybody for your interest in EastGroup, and as always, Keith and I will be available for any additional questions by telephone that we might not have covered in the detail you wanted or anything else that comes to mind. Talk to you next quarter.
Thank you.
Operator
This concludes today's teleconference. You may disconnect at any time.