Feb 12, 2009
Executives
David H. Hoster II - Chief Executive Officer and President N.
Keith McKey, CPA - Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Analysts
Mark Biffert - Oppenheimer & Co. Paul Adornato - BMO Capital Markets Justin Mauer - Lord Abbett Stephanie Krewson - Janney Montgomery Scott LLC
Operator
Good day and welcome to today's program the EastGroup Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode.
Later you will have the opportunity to ask questions during the question-answer session. Please note this call may be recorded.
I will be standing by if you should need any assistance. And it is now my pleasure to turn the conference over to President and CEO, David Hoster.
Please go ahead.
David H. Hoster II
Good morning and thanks for calling in for our fourth 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 describe certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected.
Also, the content of this conference call contains time sensitive information that is subject to the Safe Harbor statements included in the news release is accurate only as of the date of this call.
David H. Hoster II
Thank you. Operating results for the fourth quarter met the upper end of our guidance range.
Funds from operations were $0.85 per share as compared to $0.86 per share for the fourth quarter of last year, a decrease of 1.2%. If the gains on the sale of land in both years are excluded, FFO per share would have increased to 11.8%.
For the year, operating results met the upper end of our original earnings guidance which was issued in January of last year. FFO was $3.30 per share in '08 as compared to $3.12 per share for '07 an increase of 5.8%.
The 2008 results include the expensing of the original issuance cost related to the redemption of our Series D preferred stock in July and a gain from the sale of REIT shares and the sale of a building in our taxable REIT subsidiary. The 2007 results include the gain on the sale of land of $0.11 per share and an unusually large termination fee of $0.05 per share.
Same property net operating income growth for the fourth quarter was 2.1% both with and without straight-line rent adjustments. These calculations have both been negative in the third quarter.
In the fourth quarter on a GAAP basis, our best major markets after the elimination of termination fees were El Paso which was up 22%, San Francisco area up 16.6%, Los Angeles up 7.6% and Charlotte up 5.9%. The trailing same property markets for the quarter were Jacksonville down 9.4% and Tampa down 5.9%.
The differences between quarters are basically all due to changes in property occupancies in the individual markets. Occupancy at December 31 was 93.8%, a 60 basis point decrease from the end of the third quarter, and 160 basis point drop from one year ago.
Our California markets were 97.6% occupied and the Texas markets were second best at 94%. Houston, our largest individual market with 4.2 million square feet, was 97.2% occupied.
Leasing activity generally continues to be anemic. The good news is that there are still prospects looking for space, although there are fewer of them and it takes a lot longer to complete lease negotiations.
Prospects understand that they have numerous lease alternatives and as a result do not feel any urgency to act. In addition they and their brokers expect to receive lease incentives.
Our leasing statistics demonstrate that although our markets are still alive, the level of activity continues to deteriorate. Overall, of the 784,000 square feet of leases will expire in the quarter, we renewed 77% and we leased another 3% for a total of 80%.
The renewal rate is above our historical average and we believe reflects the desired tenants not to make major new lease commitments in an uncertain economic environment. In addition, we have leased another 330,000 square feet that is either terminated during the quarter or was vacant at the beginning of the quarter.
An indication that there continues to be at least some users are in the market looking for space. As you can see in our supplemental information, we again achieved direct growth for GAAP with the straight-lining of rents in the fourth quarter.
But the 4.5% increase was below our average for the year. On the other hand cash rents declined for the first time in 11 quarters.
Average lease length declined to 3.2 years, reflecting the unknowns in the market and was well below our overall 2008 average. Average tenant improvements were $1.22 per square foot for the life of the lease, or $0.38 per square foot per year of the lease.
This was roughly our average for the year. At December 31, our development program consisted of 17 properties, with 1.7 million square feet and a total projected investment of $119 million.
10 of the properties were in lease up and seven were under construction. Geographically, the developments are diversified in three states and nine different cities and are currently 22% leased, the decrease from the end of the third quarter.
During the fourth quarter, we transferred five properties with a total of 286,000 square feet to the portfolio located in Tampa, Houston, San Antonio and Denver. These properties have a combined occupancy of 76%.
In the quarter we also began construction of just one property World Houston 30 and acquired 94 acres of developed land in Orlando and eight additional acres of World Houston. Overall in 2008, we transferred 16 development properties with 1.4 million square feet and an investment of $88 million into the portfolio.
These assets are currently 92% leased. We had originally anticipated new development starts for the year, of between $60 million and $70 million, but ended up with $49 million in new starts.
From the land standpoint, we've sold 49 acres in the development, and added 130 acres for new development. At December 31, our land inventory consisted of 330 acres, with a potential to develop approximately 4.3 million square feet of new industrial space.
Given the current economic climate and the continuing deterioration of the industrial real estate markets, we're projecting no new development starts in 2009. Our development program has had a good long run, and quality state-of-the-art investments to our portfolio.
But we do not expect to see opportunities for new development in the near-term, other than a possible build-to-suit. These opportunities will reappear, and we plan to be ready to take advantage of them when they do.
We did not have any acquisitions or sales of operating properties during the fourth quarter, and do not currently have any under contract. For 2008, we purchased a portfolio of five buildings of 669,000 square feet in Charlotte, North Carolina for $41 million last February.
In May, we received a condemnation award of $4.7 million for a 123,000 square foot, North Stemmons I building and a portion of its land in Dallas. And in August, we sold a small building for $635,000 in Memphis.
Also in August, we acquired and then sold a 128,000 square foot warehouse in our taxable REIT subsidiary of approximately $6 million. Keith will now cover a variety of financial targets.
N. Keith McKey, CPA
Good morning. As David reported FFO per share for the quarter decreased 1.2% compared to the same quarter last year.
Lease termination fee income was $68,000 for the quarter, compared to $133,000 for the fourth quarter of 2007. Bad debt expense was $307,000 for the fourth quarter of 2008, compared to $269,000 in the same quarter last year.
Gain on land sales was $8,000 for the fourth quarter of 2008, compared to $2,579,000 in the same quarter of last year. The net effect of these items reduced FFO per share by $0.11 for the fourth quarter as compared to last year.
FFO per share for the year increased 5.8% compared to 2007. Lease termination fee income was $798,000 for 2008 compared to $1,149,000 last year.
Bad debt expense was $1,590,000 for 2008 compared to $738,000 for 2007. Gain on sales of non-operating real estate primarily land sales was $321,000 for 2008 compared to $2,602,000 last year.
Also 2008 included the expensing of the original issuance cost on the redemption of the preferred stock of $674,000 and a gain of sale of securities of $435,000. The net effect of these items reduced FFO by $0.16 per share compared to 2007.
Our balance sheet is in good shape. In December we closed $59 million first mortgage with a fixed rate of 5.75%.
And our bank debt was a $110 million at year-end. With bank lines of $225 million, we had a $115 million of capacity at December 31.
The bank lines do not mature until 2012 and we have the option to extend the $200 million line for one year. Also we comply with all of our bank line covenants.
Debt maturities for 2009 amounted $31.4 million and we have none in 2010. Currently we have a loan package out to several lenders and have received quotes with a wide range of proceeds and interest rates.
We are evaluating the quotes and hope to sign an application soon. Debt to total market cap was 43.8% at December 31, 2008.
And for the year the interest coverage ratio was 3.75 times and the fixed charge coverage ratio was 3.59 times a small improvement from last year. Our floating rate bank debt amounted to 6.9% of total market cap at year-end.
We had no impairment charges. You are probably tired of hearing us say we are not merchant builders but it sounds pretty good now.
We build and buy to hold and operate our properties a long-term growth. In December we paid a 116th consecutive quarter of distribution to common stockholders.
This quarterly dividend of $0.52 per share equates to an annualized dividend of $2.08 per share. Our dividend to FFO payout ratio improved to 63% for the year.
Rental income from properties amounts to almost all of our revenues, so our dividend is a 100% covered by property net operating income. We believe this revenue stream gives stability to the dividend.
FFO guidance for 2009 is projected to be in the range of $3.09 to $3.21 per share. Earnings per share is estimated to be in the range of $0.89 to a $1.1.
We think we have a conservative projection; occupancy rates are projected to average 1.3% to 3.3% below the occupancy at December 31, 2008. No acquisitions or dispositions are projected, no development starts are projected which also results an increased G&A by about $0.10 per share because of the reduction in capitalized costs related to development.
In addition, to the decrease in the occupancy percentages, we provided for bad debt expense of $0.05 per share and no termination fee income. As we noted earlier, we have a loan package out now and we are obtaining quotes for our five-year and a ten-year fixed rate mortgage.
The five-year fixed rate quotes are from banks and the rates vary from 5.5% to 9% and a recourse. The ten-year quotes are from insurance companies and the rates are around 7.5% with varying proceeds and a non-recourse.
And we plan to sign an application soon. Now, David will make some final comments.
David H. Hoster II
2008 was a very productive year for EastGroup. From a balanced sheet standpoint, we raised $57.2 million with the sale of common equity, the net price of $47.81 per share as the net price.
We concluded new four-year bank lines totaling $225 million, it's the lowest spreads in our history. And we closed two non-recourse fixed rate first mortgage loans totaling $137 million which were used to reduce floating rate bank debt.
Looking at operations, our FFO of $3.30 per share met the upper end of our guidance range and was the highest per share results since we started reporting net calculation. This enabled us to increase our dividend for the 16th consecutive year.
2009 is obviously not going to be as much fun, given the deteriorating economy we expect occupancy to decrease by 250 to 350 basis points by the end of the year. Our FFO to decline for the first time in five years.
The good news is that we're facing the downturn with a strong flexible balance sheet. And a proven management team has been together, working for a minimum of eight years as a group.
We believe that we are about as well positioned as we could be to handle the recession. We will certainly be prepared to take advantage of the recovery when that occurs.
Keith and I will now take your questions. Thank you.
Operator
(Operator Instructions). And we'll take our first question from the side of Mark Biffert with Oppenheimer.
Please go ahead, your line is now open.
Mark Biffert - Oppenheimer & Co.
Good morning, guys. Dave, first question for you.
You guys obviously made quite a bit of land acquisitions during the quarter and I'm just wondering what you're seeing in terms of the greatest opportunities of return and whether it will be in land or assets. And given that you haven't given any guidance for acquisitions next year could that still happen if you see certain opportunity?
David Hoster II
As Keith mentioned earlier Mark, we were just trying to be very conservative on projecting new developments and acquisitions. It's been a crazy market, I think as everybody knows.
There is a big spread between, big nest on property sales and the acquisition we did in February of last year is really an '07 acquisition because it was negotiated in that quarter. So we are bidding on different assets that become available and appeal to us but it's too crazy out there right now to try to project what we might buy and what yield we might achieve on those purchases.
The answer to the first part of your question on land, the parcels that we bought in the fourth quarter are largely in Orlando, we have been working on I think for at least a year. And I wish I could show the area on it, it is an amazing piece of ground with almost a mile of beach line expressway, adjacent to the Florida mall between the (inaudible).
Overtime we believe we can develop about 1.2 million square feet of new industrial space on it and its just between not quite adjacent but between our other complexes along the beach line. So we are really optimistic about that being the in field location for us.
The other piece is just a small parcel in World Houston is one of the those holdings there and it gives us the opportunity to built two small service center buildings which we think we found out to be able to round our offerings in World Houston.
Mark Biffert - Oppenheimer & Co.
All right, okay. And then my next question is related to what you're seeing in terms of leasing in the Florida markets.
It seems like those markets continue to under perform. I'm just wondering if you are seeing any kind of stabilization in terms of occupancy or rent as you look out to 2009?
David Hoster II
Certainly not a stabilization in rents, but our small holdings in South Florida, (inaudible) where it continues to be reasonable activity there and keep our occupancy above our averages. Orlando seems to go and support and I think most of Florida homeowners believe that Orlando will be the City of Florida that leads the state out of the recession, there is a lot of different businesses, going along there now other than simply tourism.
Tampa is one of our most suffering market in the whole portfolio, bigger job loss than the other Florida cities and may be a little more overwhelming in the other markets from an industrial standpoint. So we are more optimistic about doing well in Orlando and less optimistic on Tampa.
Mark Biffert - Oppenheimer & Co.
Okay. And then lastly Keith, you mentioned that you are going to start capital or start expensing some of our capitalized G&A during the quarter, is there any possibility of restructuring charges in 2009, if you were to cut back on your development personnel?
N. Keith McKey, CPA
We have already cut back some on development personnel and I'll let David speak to any, any further deterioration or any other--
David Hoster II
Mark, we are a little differently structured than most of our peer group. We have never been setup with a development team, an acquisition team, disposition group, or management group, leasing group.
Our senior people are responsible geographically for everything that goes on in their region. And they spend their time where they have seen the opportunities to make money for these group.
Over the last few years, those opportunities have been in development. So they have spent more of their time doing that.
As we say going forward, that certainly have a lot less emphasis on what we're finishing up. And I think this is going to be more visible on looking at acquisitions, as we have the capability to make acquisitions and oversee a difficult leasing environment.
We have a small construction operation in Florida and the reduction in head count is more of a four people is more related to that market than any place else.
Mark Biffert - Oppenheimer & Co.
Okay, thanks.
David Hoster II
Thank you.
Operator
And we'll take our next question from the side of Paul Adornato from BMO Capital Markets. Please go ahead.
Your line is open.
Paul Adornato - BMO Capital Markets
Yes, good morning.
David Hoster II
Good morning
Paul Adornato - BMO Capital Markets
Hi, guys, you recently renewed your line of credit. I was wondering if you could talk about the banks in the lending group.
Did you lose any; did you add any banks and just may be talk about the appetite of banks for real estate business these days?
David Hoster II
Quick summary and then let Keith comment. A year ago, we already announced 15 months ago when we started negotiation on it.
We had a couple of banks drop out and we had a couple that were interested and just didn't fit. So we're really pleased with the group we now have.
It's very strong, led by PNC in Pittsburg and we have Wells Fargo, U.S. Bank, Regions, SunTrust and Trustmark Bank, a bank based in Mississippi.
And all those banks seem to be doing reasonably well, and some of them are the leaders in the business. Right now, we have not received any request for anybody to reduce their participation or to exit the alliance that we feel flattered about that.
Paul Adornato - BMO Capital Markets
Okay. And with respect to your guidance, David, I believe that you said that you expect conditions to worsen steadily throughout the year.
Is that the way that you see the year unfolding?
David Hoster II
Yes. I mean in looking at economic forecasts, there are still some people talking about a recovery of the economy in the second half of the year.
Although more and more seem to be talking about mid-2010. That would be a positive if it happened this year, but there always seems to be some lag before your current customers or prospects build up the confidence to start to expand again, need new space and be willing to commit to development spaces.
So we feel we're just, we were in a very much hold on mode from an FFO standpoint, operational standpoint in '09.
Paul Adornato - BMO Capital Markets
Okay. And then--
David Hoster II
But we might pick up but we certainly can't count on that.
Paul Adornato - BMO Capital Markets
Okay. Here we are in the middle of February.
How has the beginning of the year started out for you?
David Hoster II
We're actually doing a little bit better than the first quarter than we thought when we went back five or six months ago and looked at it, but we would expect our occupancy to drop probably another 100 basis points in first quarter.
Paul Adornato - BMO Capital Markets
Okay. And--
David Hoster II
Just to add a little color, we are renewing, retaining customers at a higher rate than we ever have in our history. The difficulty is the ones that are moving out for one reason or another.
There are less prospects to fill that space. So as we increase vacancy it's from a slowdown leasing the space has been vacated.
While at the same time we're doing better than we ever have on retaining customers.
Paul Adornato - BMO Capital Markets
Okay. Thank you.
David Hoster II
Thank you.
Operator
And we'll take our next question from the side of Chris Haley with Wachovia. Please go ahead.
Your line is now open.
Unidentified Analyst
Good morning its Brendan Merano (ph) with Chris. Hi, guys.
First question as it relates to occupancy and thinking about your guidance David you mentioned by year-end it'll be down likely 250 to 300 basis points. How much of that is attributable to the development properties that will be coming out in line throughout the year versus how much of a decline would you expect for same-store pool if you will?
David Hoster II
What goes on the development properties and leasing is going to be a major, could be a major swing for us to the good or bad within, in that range. I don't have the exact figure for you for how much of that drop is related to it but some of it is.
Unidentified Analyst
Do you have... can you just give us may be just a sense of in terms of your same-store pool, how much you might expect in terms of occupancy deterioration throughout the year?
David Hoster II
That would be I would say in 200, this is a little bit of a guess but its 250 to 300 basis point range is same-store and another 50 is or may be slightly more would be related to development.
Unidentified Analyst
Okay, that's helpful. And in terms of the development pipeline, what are you assuming or the lease up assumption on that pipeline, so as I look at your completed developments for 2008, specially the ones that have been transferred into the completed full and the first and second quarters are all well leased now and a bit third quarter is recently leased as well fourth quarter is...
as we look at the development pipeline for '09, how should I sort of think about the progression of that lease as we go through the year?
David Hoster II
In our supplemental data, on the page with development, we show the projected occupancy during the first two quarters of '09, but each one there is a big swing, we're projecting a lot slower lease up for example in Phoenix which is right now one of our weakest markets, and projecting a strong release up in Houston which is our strongest market.
N. Keith McKey, CPA
Brendan also what we did was go through all of our development projects that are coming online, and to see what leasing we were projecting in the numbers that on the developments coming on in the space have never been leased before. And I think that number was $0.06 a share, something like that, and that's a sale spot for us where we can lease that and hopefully we'll beat that, but to give you some idea on future development of what we've got leasing there.
David Hoster II
And what the finance would be.
Unidentified Analyst
That's helpful Keith. Just so I understand, so you are saying that there is $0.06 of kind of dilution on that development pipeline to which if you are able to lease-up that would potentially be additive to your guidance range?
N. Keith McKey, CPA
No, we projected $0.06 in our numbers for leasing-up some of our development.
Unidentified Analyst
Okay, I got it.
N. Keith McKey, CPA
If we lease no new space in development we would lose $0.06 a share.
Unidentified Analyst
Sure, that's helpful. And then it looks like there were a couple of yields that were adjusted and project cost that were adjusted.
Is that just attributable to a longer lease of timing you are assuming?
David Hoster II
Longer lease-up and in some cases lower rents. And with the yields we report our straight-line hence in this market in development, we'll have a whole lot more free rent than we have in the past.
And that affects the straight-line yield more than the cash yields. So yeah all right and I would expect that if the markets continue to deteriorate, that some of the straight-line yields could deteriorate a little bit further.
Unidentified Analyst
David just on the lease-up, I mean relative to six or twelve months ago on average for your development portfolio, are you expecting six months longer leaser time, can you just give us some more color?
David Hoster II
Well, each property is little different, I would say six months has generally been, what has worked for us in the past and especially looking back to '01, '02 recession, instead of 12 months we generally were hitting 18 months. Now, whether we get hit harder this recession or not, I don't know.
But 18 months is really the extreme when we look back seven or eight years ago.
Unidentified Analyst
Thanks. And then just lastly, in terms of your reserving policy and assumptions, can you just refresh my memory on what the policy is and the $0.05 of dilution that you've got in the guidance?
What might be some factors that would cause that number to balance around a little bit?
N. Keith McKey, CPA
Well, we projected no termination fee income. So hopefully any bad debts in excess of that $0.05 would be taken care by termination fees.
If you look at '08, the bad debt net of termination fees was $0.03. So usually we project no bad debt and on the theory that bad debt termination fees will offset each others, but this year we added that in.
Unidentified Analyst
What does it take to get you to reserve a tenant?
N. Keith McKey, CPA
Well, the $0.05 is just a projection and we don't have any tenants that we are reserving on that $0.05. So that's just a number that we thought to put in to be conservative, to actually record a bad debt.
As there is a number of things either they move out, they quick pay in rent and various other factors involved.
Unidentified Analyst
Okay.
David Hoster II
This presents not something we'll review at least quarters sometimes more often than that. And our asset people are really good geared to reporting problems before we actually see it in the numbers.
We have a watch list of tenants is a whole different series and example like the way a bank looks at it.
Unidentified Analyst
All right, thanks guys.
David Hoster II
Thank you.
Operator
And we'll take our next question from the side of A.V. Learner (ph) with Robert Baird.
Please go ahead. Your line is open.
Unidentified Analyst
Hi, everyone. I was just wondering in terms of the tenant retention, looking forward to 2009 do you see the same, that same mentality continuing of tenants staying in place not looking to make major changes?
David Hoster II
Yes, it's same for all of '08 and people in the field are not reporting anything differently so far this year.
Unidentified Analyst
And is that across all markets. It's sort of the same sentiment, or some markets showing more of that than others?
David Hoster II
It seems to be across all markets. I can't identify one another that's higher, significantly higher or lower than that average.
Unidentified Analyst
Okay, all right that's it. Thanks.
David Hoster II
Thanks.
Operator
And we will take our next question from the side of Jason Tein (ph) with Morgan Keegan. Please go ahead.
Your line is now open.
Unidentified Analyst
Good morning, guys. My questions have already been answered, thanks.
David Hoster II
Thank you.
Operator
Well it looks like we have a follow-up question from the side of Mark Biffert with Oppenheimer. Please go ahead.
Your line is now open.
Mark Biffert - Oppenheimer & Co.
Sorry, I was on mute, can you support your question on the capitalized interest you are assuming for 2009?
David Hoster II
Yes.
Mark Biffert - Oppenheimer & Co.
What are you expecting?
N. Keith McKey, CPA
Well. $5.6 million.
Mark Biffert - Oppenheimer & Co.
Okay. And then can you talk a little bit about the lease renewals that you have coming up in 2009 and 2010 on polymer distribution.
You have about 400,000 Premier Beverage, have they indicated at all that they plan to renew or give back space?
David Hoster II
We know we are going to lose Premier Beverage in two locations because they're just finishing up a build-to-suit for themselves in Tampa so we'll lose those two locations. We're in negotiations with basically all...
we're going to lose the Post Office in Tampa 35,000 square feet. They are moving into a large consolidated operation.
We're in negotiations with everybody else.
Unidentified Analyst
Okay, thank you.
David Hoster II
Thank you.
Operator
And we'll take our next question from the side of Justin Mauer from Lord Abbett. Please go ahead.
Your line is now open.
Justin Mauer - Lord Abbett
Good morning, guys.
David Hoster II
Good morning.
N. Keith McKey, CPA
Good morning.
Justin Mauer - Lord Abbett
On the bridge from '08 FFO to '09 call it midpoint of 315, you said $0.10 is expensed G&A, $0.05 bad debt, I was unclear as to whether that's incremental total or just what your assuming and how that compares?
David Hoster II
$0.02 extra from last year.
Justin Mauer - Lord Abbett
Okay. $0.06 from the lease-up of development contribution, right?
David Hoster II
Yes, which is, you don't have a good comparison for '08, but it's at the slower rate than we leased-up in '08.
Justin Mauer - Lord Abbett
Okay. So I'm just trying to see if there's anything else I am missing and within the 330, with term fees and some other things what pro forma number if you will when you exclude that in the preferred redemption and all that stuff?
N. Keith McKey, CPA
Are you talking about for '08?
Justin Mauer - Lord Abbett
Yes.
N. Keith McKey, CPA
'08, there was probably a $700,000 reduction in those unusual items. That's about $0.03.
Justin Mauer - Lord Abbett
So, 327 kind of operating number if you will?
N. Keith McKey, CPA
No, it goes the other way, it's about 333.
Justin Mauer - Lord Abbett
It is okay.
N. Keith McKey, CPA
Yes.
Justin Mauer - Lord Abbett
But even if you take out lease term and all the stuff that was additive?
N. Keith McKey, CPA
For '09, what we are projecting to go from the $330,000 or $333,000 down to $315,000 is as you mentioned the G&A we're recording reductions in NOIs and those are the two big items in that. And then you build the various other things, interest expense and others.
But the two big items are reduction and NOIs and then increase in G&A colors by the capitalization development.
David Hoster II
And then we had several reoccurring and non-reoccurring items in '08, the sale of REIT shares--
Justin Mauer - Lord Abbett
Fine.
David Hoster II
5% and then depending half upon the sale of our building in Tampa that we brought in our TRS and we sold. Those are the unusual items.
Justin Mauer - Lord Abbett
Okay. Well, that what's I was getting at with the kind of the base business, the reduction in NOI, sorry if I missed that, if you mentioned that already, you talked about the occupancy, but what you're anticipating there?
David Hoster II
From year-end to year-end, a drop of and this is a broad range of 250 to 350 basis points. I guess last fall when I was in different conferences I was talking about 250 to 300 and that was five or six months ago.
There is another 50 to my gut reaction on what we are going to do on the downside for occupancy. And then in our guidance, we give what that kind of average range.
Justin Mauer - Lord Abbett
But is the NOI decline assumed?
David Hoster II
We did not actually put in the guidance but with same property reduction was.
N. Keith McKey, CPA
Same property was 1.5, 4.5 on a negative basis and average occupancy we're projecting 90.5 to 92.5 on that.
Justin Mauer - Lord Abbett
That's helpful on the NOI. Thanks.
Just quick on the dividend, kind of philosophically, I mean you guys are in good position as anybody from the balance sheet perspective, but now that you are starting to see you guys pay it in the stock and so on, over your dead body so to speak or what's kind of your feel?
David Hoster II
I am not sure I'd say, quite as strongly but we management board feel very strongly that one of the great appeals of REIT and I've been doing this for almost longer anybody else in the public re-business. And one of the great appeals for REIT is our cash dividend.
And that's why we have a awful lot of investors and probably why we have one more dollar or retail investors and the retail investors were really what helped build e-school from the early in mid-90s. So unless we go into some sort of deeper recession, depression and we give into an issue of survival of the company its our goal to pay a cash dividend.
I think that's important for the recovery of the weak market in general to drawback in the investors, all right? Little philosophical warrant back in the 90s REITs were pitched as a way to get total return of 8 to 12 plus percent a year, total return and the half of that total return was going to be in a cash dividend have to three quarter or two-thirds of that but it will be a cash dividend.
And then for a period that looked very boring when we rolled the tech stocks and mark was going up at least 35% a year. And then in the mid-2000...
2003 to '07 cap REITs were coming down and people started to use their TRSs to become real growth engines and REIT stock got pitched is a growth vehicle when that's really not the nature of real estate. And I'd like to think we're going to go back to the basics and these group has always flourished just doing the basics.
And paying it, hopefully ever increasing cash dividend to its shareholders.
Justin Mauer - Lord Abbett
Yes. Should we think about, I mean you guys have obviously done a good job protecting your balance sheet and I suspect you wouldn't want to take on, even if it's a little bit of time or a little of debt to just pay the dividend and then correct me if that statement is wrong but is the delta, should we think about CAD or FAB in the 230 to 240 range, on that level of FFO or is there some more room there and again think about the dividend in the $2.08 range how much flex or room do you think we need to have between those two metrics?
David Hoster II
Well, let me come out from one direction, may be Keith will come from another. In '08, our dividend was almost exactly equal to our taxable income.
So even with FFO going down some in '09 or projected to we don't have a lot of room to begin with in terms of if we're going to look at reducing it.
Justin Mauer - Lord Abbett
Yes.
David Hoster II
In the last recession, we got to a point where we were paying out I guess may be with 80% of FFO and about a 110% of FAB or CAD and we were able to share or manage, we were able to share with the Board that we are going to earn our layout of that fairly quickly. So we managed to increase our dividend back in '01-'02-'03 here by just a little bit and did what we say we are going to do is earn our way back to where the FFO payout, now is 63% for the past year.
N. Keith McKey, CPA
Then if you look at '09, at 315 if you stay with a 2008 that's about 66% payout ratio and then we are still projecting adjusted funds from operations to exceed how I keep telling you how much room there is on it everybody computes it differently but in that projection we are computing adjusted funds from operations to exceed any dividend payment.
Justin Mauer - Lord Abbett
Yes, I guess finally thought of versus the last recession would be it seems like folks are much more guarded about protecting their balance sheet which I can totally understand given the environment we are in?
David Hoster II
I think may be a different between now and the last recession, I can't give you the statistics, is that things boomed a lot more over the last couple of years and people were doing things because of ever increasing asset values that looks fine to time and in hindsight well of course they've gone way too far. And that's not something that just a way how we operate the company and may be a little bit of work we have ever done.
So I think we're in a different situation and we're proving the strength of our balance sheet by the results now that the kind of borrowing that we're able to look at in '09.
Justin Mauer - Lord Abbett
Yes.
David Hoster II
Interesting side like the, $31 million that's secured by a group of properties that matures in March of this year and we're talking about being able to borrow two times that amount in a new line. So the markets are certainly a lot more difficult than they were a year ago.
But I think for the right buyers and the right properties, they certainly haven't shutdown yet.
Justin Mauer - Lord Abbett
Yes, yes. Then you're saying the bank money is five-year 5% to 9% range, is that right?
N. Keith McKey, CPA
5.5% to 9%.
Justin Mauer - Lord Abbett
5.5% to 9%.
N. Keith McKey, CPA
So there is a... as well.
Justin Mauer - Lord Abbett
I guess Congress needs to hear those numbers relative to them wanting the banks to lend I guess, right?
David Hoster II
They'll lend you money. It's just what you want to pay for it.
Justin Mauer - Lord Abbett
Pretty good spread right now.
David Hoster II
You bet.
Justin Mauer - Lord Abbett
All right, thanks guys.
David Hoster II
Thanks.
Operator
(Operator Instructions). We'll take our next question from the side of Stephanie Krewson with Janney Montgomery Management.
Please go. I'm sorry, Janney Montgomery Scott.
Please go ahead. Your line is open.
Stephanie Krewson - Janney Montgomery Scott LLC
Good morning, guys. Two quick questions.
First is, what's the frictional run-rate that we should expect for quarterly lease termination fees in '09?
N. Keith McKey, CPA
Now, we're projecting zero.
Stephanie Krewson - Janney Montgomery Scott LLC
Okay. And...
what David?
David Hoster II
That was an easy answer.
Stephanie Krewson - Janney Montgomery Scott LLC
Yes. And then second one, and Keith you may want to address this offline.
The total fixed charge coverage ratio that you gave us 3.8 times, that's not the same fixed charge coverage ratio calculation that you have for your line of credit covenant, right?
N. Keith McKey, CPA
That's correct.
Stephanie Krewson - Janney Montgomery Scott LLC
That pencils out something that's lower, correct?
N. Keith McKey, CPA
Correct.
Stephanie Krewson - Janney Montgomery Scott LLC
And would you have ten minutes to go through my calculations before my team and I publish our model?
N. Keith McKey, CPA
I'll be happy to.
Stephanie Krewson - Janney Montgomery Scott LLC
Thank you. Great quarter, guys.
David Hoster II
Thank you.
Operator
And at this time we have no further questions.
David Hoster II
Thank you very much for your continuing interest in EastGroup. And as always Keith and I are available to clarify anything that we didn't do a good job on here.
If you have any other questions that have come up as you read our published data, please do not hesitate to give either of us a call. Thank you.
Operator
And this concludes your teleconference for today. Thank you for your participation.
Have a great day.