Eastgroup Properties Inc (EGP) 2005 Q3 法說會逐字稿

Good day. All sites are now in place into the main conference in a listen-only mode. I would now like to turn the call over to the moderator for today’s program, Mr. Dave Hoster. Please go ahead, please, sir.

Thank you. Good morning and thanks for calling in for our Third Quarter 2005 Conference Call. We appreciate your interest in EastGroup. Keith McKey, our CFO, will also be participating in the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

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

Thank you. During the third quarter, we continued to build on the strong progress experienced in the first half of the year in both our development program and property operations. Operating results for the third quarter met the upper range of our guidance.

Funds from operations were $0.67 per share compared to $0.64 in the third quarter of last year, an increase of 4.7%. This was the fifth consecutive quarter of increased FFO as compared to the previous year’s quarter. For the first nine months of the year, FFO was $1.96 per share, which was a 6.5% increase over the same period of 2004. Please note that we continue to calculate funds from operations based on NAREIT’s definition of FFO, which excludes gains on depreciable real estate.

In analyzing third quarter operations, we were pleased with the continuing growth in same property operating results. We achieved an increase in same property operations of 4.0% without the straight lining of rents; and with straight lining, same property quarterly results improved by 1.0%. This was the ninth consecutive quarter of positive results for both measures.

For the first nine months of the year, same property results were up 5.2% before straight lining of rents, and 2.2% after straight lining. Our investment and operating strategies are working.

On a GAAP basis, our best major markets for same property results in the third quarter, after the elimination of termination fees, were South Florida, which was up 21%; New Orleans, up 8.4%; Tampa, up 5.2%; the San Francisco Bay area up 5.1%; and Phoenix up 3.6%. The trailing same property markets were Los Angeles, down 8.1%; Orlando, down 6.2%; El Paso, down 7.1%; and Jacksonville, which was down 4.1%. The differences are basically all due to changes in property occupancies in the individual markets.

Occupancy at the end of the quarter was 93.6%, which is our highest quarter-end occupancy in over four years. It represents a 180 basis point improvement over our June 30 level, and is 240 basis points higher than our March 31 occupancy.

Leasing activity in almost all of our markets experienced slow, but relatively steady improvement from April through mid-summer, but then picked up significantly in August, allowing us to finish the third quarter on a strong note. This increased activity has continued into October for both portfolio and development properties.

Occupancy in our four core states of Florida, Texas, California and Arizona was 94.0% as compared to 91.3% in the non-core markets. Looking at third quarter leasing statistics, we renewed or re-leased 80% of the 1.2 million square feet that expired, and leased 504,000 square feet of vacant space.

Combining both renewals and new leases, we experienced the following: average lease length was 4.2 years which was about the same as previous experience, but please note that this figure reflects a change in calculations from a simple average to a weighted average which we will continue to report in the future. Average lease size was 16,500 square feet which was a bit larger than normal. The average cost of tenant improvements was $0.95 per square foot for the life of the lease, or just $0.23 per square foot per year of the lease. This represented a decrease from both last quarter and our average for the nine months.

There was an average decrease in rent of 5.9% on a cash basis, consisting of a 8.7% decrease on new leases and a 4% decrease on renewals. This decrease was greater than last quarter reflecting two large leases in the San Francisco Bay area. On a GAAP basis, rents increased by 1.5% which was the fifth consecutive quarter of positive rent growth and which primarily reflects reduced concessions.

The leasing activity at our development properties continues to be good. As we had previously reported, this activity, combined with the overall firming of our development markets has resulted in our increasing projected development starts for the year to approximately $50-55 million.

At September 30, our development program consisted of 12 properties containing 803,000 square feet with a total projected investment of $53.1 million. The three properties in lease-up are collectively 79% leased and the nine under construction are 4% leased.

In the third quarter, we transferred World Houston 16 into the portfolio. Completed last January, it contains 94,000 square feet and is 86% leased. In July, we initiated construction of South Ridge 4 with 70,000 square feet in Orlando; and Santan 10 Phase 2 with 85,000 square feet in Chandler, Arizona. In September, we started Arion 14 with 66,000 square feet and Arion 17 with 40,000 square feet, both in San Antonio. Arion 14 is 41% pre-leased.

In October, we began construction of Oak Creek 3 in our Oak Creek Commerce Park in Southeast Tampa. This 60,000 square foot building has a projected total investment of $3.7 million and is 76% pre-leased. We hope to start development of three additional properties in the fourth quarter, but one or two of these gets listed at the beginning of ’06 due to permitting delays.

In September, we acquired in two separate transactions 43 acres of land for future development for a total price of $5.8 million. The Freeport land is 33 acres and is adjacent to our Freeport distribution center in Northwest Houston. It will be our third development location in Houston along Beltway 8.

In Fort Myers, we purchased 10 acres and plan to acquire an additional adjacent 20 acres early next year, all of which will be named Sun Coast Commerce Park. Our land inventory currently contains 247 acres with the potential to develop 3 million additional square feet. We have another 48 acres also in three locations under contracts for purchase.

As we repeatedly state, our development program has been and we believe will continue to be both a creator of shareholder value and a major contributor to FFO by adding quality, state of the art assets to our portfolio.

We did not have any operating property acquisition or sales in the third quarter, but in October, as we reported yesterday, we purchased two properties in Houston in separate transactions. Clay Campbell, which contains 118,000 square feet in two business distribution buildings, is located in Northwest Houston and was acquired for $4 million. Built in 1982, it is 100% leased to six customers.

The second acquisition is a 33,000 square foot business distribution building in the World Houston International Business Center, acquired for $2,125,000. Renamed World Houston 18, the building was constructed in 1995 and is 100% leased to a single customer.

We currently have approximately $20 million of properties under contract to purchase and continue to be in negotiations for the sale of a number of our Memphis assets. Keith will now review a variety of financial topics.

Good morning. FFO per share for the quarter increased 4.7% compared to the same quarter last year. Bad debt expense was $320,000 for the third quarter of 2005 compared to $156,000 in the same quarter last year. Although this represents a doubling of bad debt for the quarter, we do not see this as a trend since a significant portion was related to our evicting a tenant in Houston.

Lease termination fee income was $295,000 for the quarter compared to $19,000 for the third quarter of 2004. FFO per share for the nine months increased 6.5% compared to the same period last year. Bad debt expense was $651,000 for the nine months of 2005 compared to $226,000 for last year. Lease termination fee income was $795,000 for the nine months in 2005 compared to $75,000 in the same period of 2004, but if you take the net change for the nine months in these two items, it represents an increase of only 1% per share, $0.01 per share in FFO.

Debt to total market capitalization was 29.6% at September 30, 2005. For the quarter, the interest coverage ratio was 3.7X and the fixed charge coverage ratio was 3.3X. Our floating rate bank debt amounted to 8% of total market capitalization at quarter end. Since the beginning of the year, we have repaid five mortgage notes totaling $18.4 million with a weighted average interest rate of 8%.

The Company primarily funds its acquisition and development programs through its $175 million line of credit and then as market conditions permit, EastGroup issues equity and/or obtains fixed rate, non-recourse, first mortgage debt to replace the short-term borrowings.

In March and May of 2005, the Company issued $31.6 million of common stock. In late November, we expect to close a $39 million non-recourse first mortgage loan. The loan is secured by five properties, has a fixed interest rate of 4.98%, a 10-year term and a 20-year amortization schedule.

In September, we paid our 103rd consecutive quarterly distribution to common shareholders. This quarterly dividend of $0.485 per share equates to an annualized dividend of $1.94 per share. Our FFO payout ratio was 72% for the quarter.

In October, 2005, [Fitch Aperned] its rating of EastGroup at Triple B-. FFO guidance for 2005 was narrowed to a range of $2.64 to $2.67 per share and earnings per share is estimated to be in the range of $0.95 to $0.97. Now David will make some final comments.

During the third quarter, we continue our positive momentum and our strategy of taking full advantage of an improving economy. Occupancy achieved its highest level in over four years. Same property operating results experienced their ninth consecutive quarter of increases. Our development program continues to expand in both new properties under development and land in our pipeline. Our balance sheet remains strong and flexible for future opportunities. Keith and I will now answer any questions you may have. Thank you very much.

(Operator instructions) We will take our first question from Jonathan Litt of CItiGroup. Please go ahead sir.

Hi. This is Akrut Parivol with John Litt and John Stewart. I have a question about the acquisitions that you made in Houston. Given the fact that you have already exceeded your acquisition assumptions for the full year, what are your expectations for the balance of the year for both acquisitions and dispositions, as well as a little bit of color as to what your expectations are for ’06 as well?

Let me answer the last part of your question first. We will discuss our ’06 guidance and assumptions for that guidance probably in the December press release, and then more thoroughly in our February call discussing fourth quarter operations. I will duck that one that way.

On acquisitions for the balance of the year, as I mentioned in my remarks, we have approximately $20 million under contract, that is two properties; one in Tampa, one in San Antonio. Neither of those will close if we go ahead with them, until December so they will have very little effect on ’05 numbers. Our continuing efforts to sell properties in Memphis are moving forward, but slowly. We are in discussions about the sale of four different properties and just trying to tie that down now. We would hope to close those before the end of the year, if not they get pushed into January of ’06, that would be fine. The goal is to move them as we had previously stated, our goal is to sell over 50% of what we had at the beginning of the year in Memphis by the end of ’05. By having another $20 million of acquisitions under contract, we feel that will give us the opportunity to dispose of some additional assets early next year. One that we have targeted is our R&D complex in Auburn Hills, Michigan. That will go on the market in the next couple of weeks. This has a long-term lease on it, it is certainly not a location that is a long-term hold for EastGroup. As we move into next year, we will target some additional dispositions.

So the four sales that you have expected to close by year end are hopefully by year end, and Auburn Hills – what is the total dollar value for that?

Well the range in Memphis is, let’s say $10-15 million. Auburn Hills is in the $17-18 million range.

And on your development front, you mentioned three additional developments that you are looking to start. What markets, given the fact that you have such a large land bank now, what markets are you favoring right now? As well, what was the cost of the land for the 20 acres that you bought or are looking to buy?

To answer the first part of your question, other starts that we are looking at is one in Central Phoenix, the central industrial market of Phoenix; the second is in Tampa in our Oak Creek Commerce Park. The building that we started in October that I had mentioned earlier, it is really like a build to suit, 76% pre-leased so we are in for permit on a 95,000 square foot spec building that will be right across the street from the one we have just started. And we were looking at starting another building in South Ridge, our South Ridge 1 which is a service center type of building where our Orlando office is now located. There is a lease out for signature that will lease the rest of that building. As soon as that is signed, we are all set to begin construction, hopefully in the next two weeks, of South Ridge 2, which is our second and remaining service center building there.

As to the land under contract, given that we are still in negotiation there we do not want to announce a price until we have closed it.

Fair enough. And one last question. Given the hurricanes, given high energy costs and inflation fears and interest expectations going up, are you seeing a reluctance on decision makers parts to go ahead and sign leases and make real estate decisions?

No, just the opposite of that, particularly in Florida and Texas. I guess number one would be Florida. We are seeing, with our development properties and with the portfolio properties, but development in particular, that companies seem to be convinced that business is going to be good for the foreseeable future and might be cautious in some ways, but seem to be ignoring all of the gloom and doom that you read about in the press and you hear on the news about all of the potential things that can cause a recession late next year or in ’07.

We are seeing companies stepping up to new property, new development rental rates which are running 10-20% higher than second generation properties, and committing on five to seven year leases. So we have been very pleased to see that and keep our fingers crossed that that continues.

In Florida, over 400,000 people moved into the state last year and close to that are projected to move in this year. I mean, that is between 1,000 and 1,100 people a day and that is creating an awful lot of demand for real estate and services. We are experiencing the benefit of that.

Great. Thank you very much.

Thank you.

Thank you. We will now take a question from Paul Adornato; Harris and Nesbitt. Please go ahead, sir.

Thank you, good morning. Just to follow up on the storm impact, right after Hurricane Katrina you put out a press release that you leased an additional 104,000 square feet in New Orleans.

Correct.

Was that leased to a relief organization and what was the length of that lease?

A mix on that. We were very fortunate with Katrina, our two submarkets that we are in, our properties both 850,000 square feet, both were above sea level so all we did was suffer some wind damage, some minor roof leaks and gutters and signs blown down, that sort of thing. So there was a demand immediately down there for companies coming in for the rebuilding and also for companies that had either lost their space to the storm or thought they were in a tenants’ market. So within a week we leased that space, I think it was to four different users. One of them was Sprint who had its long distance switch down there messed up. I know that personally because I could not call out from my house for two weeks. And then to three other companies related to reconstruction. All of the leases were for five years, and I think two of them have outs with a penalty after three.

Okay, and any kind of storm-related leasing in Florida? You noted that South Florida, Tampa are also two of your strongest markets.

We have not experienced any increase in activity related to Katrina or Rita, but it is too early to tell on Wilma. Just from very preliminary reports we did suffer some roof damage in Fort Lauderdale, had some overhead doors blow out in Pompano but still trying to quantify that. I understand from talking to our people down there is that there is no electricity, people are running out of gas because the gas stations are not open and it is hard to get around because of the downed trees. So it will be a few days before we can determine how serious our loss is there, but we are comfortable that it is covered by insurance.

And you mentioned that the lease statistics were dragged down by a large San Francisco lease?

One lease in Hayward and another one that was even bigger in Milpitas. On our rents, the GAAP rent was up 1.5% if you take out the San Francisco leases, GAAP rent would have been up 4.1% and cash rent was down almost 6%. If you take out those two leases it would have been down less than 2%. So our building in Milpitas had been a single tenant building, actually it is two buildings are single tenant, we have now leased it to two different, as we view, almost interim users at low rents until that submarket improves.

Okay. And finally, you mentioned that some of your developments might still enter the next quarter due to permitting delays. What is the reason behind the permitting delays? Is there a log jam at the permitting office?

Well it is a whole series of things. One, there is a log jam; two, most of these counties or cities are under-staffed; and three, these different organizations are seemingly tightening up their review of plans and making more comments than they ever have before. You throw in, in Florida, some additional hurricane-related building code additions and I think every one of our markets where we are building, it is taking longer to get through that process than it ever has before.

And are you comfortable that there is not too much competitive product going in the ground at the same time?

In the submarkets where we are building, we are still way, way down compared to where we were three or four years ago. A number of the REITs are building where there are competitors. So far, a lot of the second tier builders, the ones that jump in when the market gets strong have not entered the new construction market yet. Something that I have been saying for a couple of years is EastGroup, as well as most of the other industrial REITs have a leg up on development simply because they already have good land positions, it is easy to finance for them. They can move quickly to meet market demand and so we are seeing the REITs being the more aggressive developers so far.

Thank you.

Thank you.

We will now take a question from Tony Howard of Hilliard Lyons. Please go ahead, sir.

Yes, good morning David and Keith.

Good morning.

Good morning.

I am looking forward to seeing you guys next week in Chicago.

Yes, sir.

A couple of questions. I would like to focus, David, on the Houston market. Where were the cap rates of the two small acquisitions that were announced the other day?

Those were in our press release that went out the other morning. I think at 100% occupancy they were both about an 8.6 or 8.5, mid 8.

Okay. If you count, I think the three projects that you have there under construction in the Houston market, already it is close to 14-15% of your total base revenue, if I am remembering correctly, and it looks like it is heading up close to 20%. I was wondering where you feel comfortable with your exposure in Houston, given how much that area has grown?

Tony, that is an issue that we debate internally, and so far what we have determined is as long as we are comfortable with the Houston market – which we are very comfortable today as you might guess – and see good opportunities there, we will plan to continue to take advantage of it. So we have not set a ceiling on what we want to own in any one market.

Well given the potential of what could have happened with Rita in Houston, is there a percentage that is maybe too much?

Well I would say in the long run there is a bigger threat from an economic problem then there is from a hurricane. Most of our properties are new, we build a majority of them, so a warehouse is a lot of concrete and steel and does not get blown down easily. Houston has been prone to flooding at different times in the past, but that has not been something that has affected us so we are very comfortable from that standpoint.

Houston, in the eighties of course had serious problems related to the gas and oil business, that is still a major part of the economy but not nearly what it was 20 years ago. There has been a lot of diversification and the city has grown tremendously. So we are comfortable with where we are, and as long as there are good opportunities we will continue to take advantage of them.

On a positive note, have you already seen any kind of a pick-up in demand because of the reconstruction effort?

Not in Houston at this point. I know that apartments have, from evacuees, but our increased leasing in New Orleans is the only market that we have a direct result. The little buildings we have in Jackson, Mississippi have had some increased activity but not anything that has made a big difference yet.

Final question. Keith, G&A was down year over year. Were there any particular one-time items that made the difference? What kind of guidance going forward for G&A?

Well what we try to do is give an annual guidance because of our development costs being capitalized each quarter. In the third quarter we had more costs since we had more starts going on in development, more construction activity, we had more costs capitalized. That is the primary reason on that. As far as annual guidance, we are still shooting to be under $7 million.

So that would be what, $1 million or $1.2 million for the fourth quarter?

No, I think it is a little more than that. It looks like $1.7 million.

Okay. Thank you, guys.

Thank you.

Our next question will come from Chris Hailey of Wachovia Securities. Please go ahead.

Good morning, this is Brendan Mayron sitting in for Chris. We wanted to just follow up on some of the rent rate commentary. You talked about it in California and the leases that you had there, but Texas is also down 10%. I am wondering if you can add some color on that market.

Down from a rental rate standpoint, or?

Yes, down from a rental rate standpoint, I think it was down 10% on new leases.

Let me check my figures, but I think that was – some of that is El Paso, which has developed into a weak, soft market for us and also we have had some roll down in Dallas as part of re-leasing some spaces where we had bumps in the rents previously. But the only market that we are concerned with from a leasing standpoint right now in Texas is El Paso. The economy has been very weak there, the [Heliodor] business in Mexico has suffered from manufacturing moving to China and is just now starting to pick back up, so that is a market that we are focusing a lot of our attention on right now.

Going forward, is the negative 2% that you commented on ex the California, the two California/San Francisco leases, is that a fair run rate going forward?

On a cash basis that is probably a good number. We can have a big lease or two distort the individual quarterly numbers, so we have to look more at averages but if you look at the two previous quarters, our cash rents were down 2.2%, 1.9% so 2% is probably a safe number.

And are there markets where you are pushing rents higher?

Florida has been a very good market for us. Some of the comparisons get a little distorted with adjustments for tenant improvements where we are breaking down spaces for smaller users, but that is a market where we talk about how much rent growth we have on each renewal or new lease, whereas in some other markets the first question is, did you get the lease signed? But we are very pleased with what is going on in Florida, in particular Orlando and Tampa.

Okay, yes actually following up on that Orlando comment, I was a little surprised that the same store is down 11.5%, I thought that was one of your stronger markets over there. Anything specific going on in the quarter there?

We had some move outs that we have just about leased all of. Our John Young 2 we lost, county had most of the building and we moved out of another chunk of it and we have re-leased all the 10,000 square feet there. That was in the last quarter, and then earlier in the year we lost a big tenant in our exchange property and I think within 60 days had it released to three different users. So it is just some individual occupancy move outs rather than any kind of trend.

Okay, thanks. I think Greg Korondi has a question also.

Okay.

Hi, guys. I was just hoping you could follow up. You mentioned Orlando as a strong market and did not mention Houston in terms of the Texas numbers going down. Both of those you had some rental declines in the quarter. Were those just small lease rolls from a high in place [inaudible] or was there something else?

We have done very well in getting bumps in our leases there, and so sometimes you get a little bit ahead of the market.

What is the willingness, I mean both Orlando, Jacksonville and Houston where you saw some roll down you guys are above 95% occupancy. Is there some sort of timeline where you would be willing to wait and see if you could get a little bit better rents instead of trying to re-let the space at a discount where it was expiring?

If you want to finance a building or sell a building you are better off going for the higher rent, but in the re world, every month the rent you lose you never see again. It is lost FFO and it is pretty hard to have high enough rent increases to make up for those months of lost rent. So we are always pushing rents on every lease that comes up, but we are certainly geared to occupancy rather than pure rental rate analysis.

So would you expect that trend to reverse for the fourth quarter and going forward for those markets? Houston, Orlando and Jacksonville?

I think we just have to look at the individual leases that are coming up there, and I have not done that recently. If you look at trends rather than just one quarter, we would expect the trends to be positive in those three markets.

Thanks, guys.

Okay.

We will take our next question from the site of Art Havener from AG Edwards. Please go ahead.

Good morning.

Good morning.

You have not addressed the seasonal business. In the past I think your business has had some fluctuation in terms of occupancies and earnings based on the Christmas season. Can you kind of give us an outlook for this year?

Well there is good news and bad news. The bad news is I do not think we are going to have much of it this year. The good news is we are not going to have it because those spaces are already leased. In the past in World Houston we have had a building that has been vacant that we could lease to the post office. We leased space to Wal-Mart in New Orleans, in Tampa and Fresno. All of those spaces, the bigger spaces are leased today. In New Orleans there was a liquor distributor that we leased to for the better part of a year that was related to Christmas and since we are almost 100% there, that is not available.

The occupancy we have is steadier and we would expect to hang in there better than it has in the past, and as a result will not see a big temporary pop in November and December.

Okay, sounds like good news. I am trying to get my arms around what is the current replacement value on your World Houston portfolio. It looks like some of your new developments, there is a wide range of mid-$50 per square foot up to a little bit over $90 so I thought there might be something that skews that range.

What skews that, Art, is World Houston 15, it is two service center buildings and it is 16 clear with a projected, I think 75% office build out where World Houston 16 which we just completed, and 21 which is under construction are our more typical business distribution buildings with 15-25% office build out. That is the difference there.

And it looks like, of your 900,000 plus square feet that you can develop, you are only budgeting a mid-$50 per square foot build out for that over time. Is that realistic at this point? Haven’t costs risen to the point where maybe to really build that out it might cost more?

To over generalize for a minute, our business distribution buildings in Orlando, for example, tend to be around $65 per foot. They are about $55 in Houston and in Tampa what we build at Palm River South I think is in about the $60 range, but at Oak Creek we expect to have slightly larger tenants that are more cost conscious and as a result we are not going to have some of the bells and the whistles on the exterior of the building, and so that should be down probably in the $50 per square foot range.

Okay, and while we are on the topic, can you discuss what you are seeing in terms of suppliers? Are they getting you the goods on time and at the right price? What kind of inflation are you seeing?

Let me answer the first part first. That is the only product that we have had any trouble with is concrete because of shortages of cement, so instead of having the floors done continuously at our Techway property in Houston and Santan in Chandler, instead of taking a week it took two to three weeks to get the foundation to those two poured. But that was just a time factor.

From a cost standpoint, we work very hard to keep those costs down, and as a result – what happens is you hear about, which are true, a lot of individual product price jumps. First it was steel, then cement concrete, PVC pipe, roof installation is supposed to go way up over the next few months. But when you put that in the overall package, instead of the 15-25% to 40% increases, we are looking at anywhere from, in a 12-18 month period, anywhere from a 10-25% increase.

What we do in Florida where we are our own general contractor and have a higher volume of constructions, we build two or three buildings at the same time. We pre-buy some of the construction materials. We work very closely with the same subcontractors transaction after transaction so that in our South Ridge 2, which is 40,000 square feet which is going to come on, we are going to start construction in the next couple of weeks, it is a little less than a year than South Ridge 1, the comparison in cost there is about a 10% increase.

So overall, the prices are going to continue to go up and from a developer’s standpoint, obviously you have some compression of yield even with higher rents. But so far, across the board, we have not seen strong resistance to the higher rents and prospects have stepped up and seem to be willing to pay for new space, a quality environment and an above-average image.

So that is something that we battle everyday, but so far it has not slowed us down.

Great, thank you.

We will take our next question from Bill Crow of Raymond James. Please go ahead.

Good morning, guys.

Good morning.

A couple of questions. First of all, following up on that last topic, the construction. Are you feeling more pressure to start more projects given your land inventory, and the 10-25% increases you have seen last year, potentially next year. Is that going to change your strategy?

The only thing I think it might change, Bill, is that instead of doing 60,000 or 70,000 square foot buildings and waiting for it to be leased up before starting to do the next one, we would do two buildings about that size at the same time.

Our pressure has been to get space available so that we don’t miss opportunities. We have done some leasing fast, way faster particularly in Orlando and Tampa than we had projected, and we are behind on getting the next building done. For example, our South Ridge 5, a 70,000 square foot building was completed in the spring, we are 100% leased and I wish South Ridge 4, which is a mirror image of that building, were done today and we are just [welding] the walls. So you do not want to have any good prospect going to the competition because you do not have space ready for them.

From a pricing standpoint, building sooner has not been a factor. We do not want to be hung out because we are building for the wrong reasons. We are building based on demand.

I have another question, but Paul Puryear here is going to follow on to that same topic.

Yes, David on that subject, should we infer from your comments that you have got 25% inflation in some markets?

I think that is going to be the case if you are looking at a two-year plus time span.

Where is the inflation the strongest? Which markets?

Phoenix and our two Chandler buildings, Santan Phase 1 and Phase 2, we are probably, there is a 18 month to two year difference there, and we are probably looking at a 25-30% increase in cost when you try to adjust it to an apples-to-apples comparison.

And that is ex-land, so it has to impede development down the road, would it not?

Certainly it will slow development if users are not willing to pay the higher rents, but we are seeing a willingness to do that. From our prospect standpoint the economy looks good, so they are willing to step up for it. The places that I think development has slowed way down or are soon will be coming to a screeching halt is Los Angeles, close in Los Angeles and even South Florida where land prices have gone through the roof as well as the construction costs. You see in those two markets where land, industrial land, is priced at such a high level it works only for a developer who is going to flip the building when done or turn it into condominiums.

All right. Let me change the subject briefly. You know, we look at a bunch of different sectors. For example, in the apartment sector it seems like the fundamental improvement is accelerating. I am having trouble seeing that acceleration year over year in your portfolio. Are you feeling that? Are things improving at the same pace or is that initial push behind us now and we are kind of back into the more moderate improvement?

Well EastGroup’s whole strategy is to have steady but constant improvement and we have been doing that. As I said in the remarks earlier, since mid-summer we jumped 180 basis points in occupancy. If you go back to March 31, we have jumped 240 basis points. So we are very pleased with the activity we are seeing in all of our markets, even old Memphis, other than El Paso.

Okay.

So we are seeing companies making long-term commitments. If you go back two or three years, your customers wanted one-year renewals or a five-year lease with an out after two-and-a-half or three years. There is still a little bit of that, but not much. Most companies realize that rents are only going up and they are looking to lock in their space needs and rents today.

Great, thank you guys.

Thank you.

We will now take a question from Srikanth Nagarajan of UBS. Please go ahead.

Hi, most of my questions have been answered, I will make it quick. In terms of the Clay Campbell acquisition, I was just wondering, your press release states some capital improvements were needed. Can you just outline what those capital improvements would be?

When we analyze an investment, we build into our purchase price tenant improvements and commissions of any lease in the first 12 months, or lease up of any vacancy that is already there, which was not the case in Clay Campbell. Also, to be very conservative, we build in the cost of new roofs for both buildings, and we do not think we will have to do the roofs for a couple of years, but we built those into our numbers anyway.

I mean, one of the things that made the investment attractive other than a good yield was when you add in all of that capital, including the two roofs our total investment is still only going to be around $37 a square foot.

All right. Regarding the Freeport land, I heard your remarks you said it was close to the Freeport distribution center. Can you just discuss some prospect development there, looking about two or three years forward? In the Beltway 8 submarket.

The Beltway 8 market has become the primary industrial new development, higher end industrial market around Houston. Loop 610 just has too much traffic, so the Beltway 8 is where you see the 18-wheelers and that is where most of the distribution is done.

We financed and had an option to buy the Freeport building a couple of years ago. It leased up, we bought it and have been eying this land every since. We are working very closely with a group in Houston, Insight, they control the land and we worked a transaction to buy it from them where they will help us develop it and do the leasing for us. We will manage it ourselves and be the co-developer. We would hope to start our first two buildings there in the first quarter.

I see. Since you have covered every conceivable market, I was just hoping to answer your question on – I heard your comments on Los Angeles and it being lagging, can you give us some indication of whether this was very specific to this quarter or are you seeing some general trends in Los Angeles as well?

It is specific to this quarter and actually we have a good bit of Los Angeles turnover scheduled in the first two quarters of next year. I guess if you are going to have turnover that is a good market to have it because the vacancy rate is so low there. I have heard some brokers say that that low vacancy rate is a little bit of a distortion in that there are certain size of spaces that there are a lot of alternatives for users, and if you happen to have a vacancy in that category then you are probably looking at a four to six month re-leasing of the vacancy. But overall, it is very strong. We just happened to lose a couple of customers there that either pulled out of the market or downsized and we could not handle their needs, so we had to re-lease the space.

All right. Thank you so much.

Thank you.

The next question will come from Ross Nussbaum - Banc of America Securities.

Thank you. It is John Kim with Ross. I had a question on your lease with Universal Wilks. It looks like you extended the lease by about a quarter, and this is your largest tenant. Can you comment on this, and why it was only extended one quarter and what the prospects are for potentially signing a longer-term lease?

We had a longer term lease there, that lease has a termination right that moves every six months, I think it is. We signed that a while ago, before Wilks became our partner in the building next door and when the market was not as strong as it is today. So that is a longer lease but with the right of termination and our expectation is that it will not be terminated.

How long is the lease with them?

Just a second, let me look at my statistics here. It is in our leasing statistics on page 17. That lease that has a termination option runs through March of ’06. It has been, I think it was a three-year lease with the right of cancellation. Excuse me, now that is the cancellation. It runs through October of ’05 – now wait a minute, I am getting confused on which one is which. The six months from now takes it through ’06.

And there is a longer term lease on that particular lease, past the first part of ’06?

That is correct, I just do not have that information in front of me, I apologize.

Okay, that is fine, I will follow up. David, you had some interesting comments on how your TIs have been declining this quarter despite increasing construction costs. Was that due to the mix of leasing between more of your office versus industrial, or was that market-driven?

I think it was three factors. One, it is market-driven that as market tightens we can tighten our TI allowance. Secondly, I think there are some individual leases, particularly in Northern California where we had a much lower rent, but no TIs, they took the space as is. And then thirdly in September we signed the previously discussed leases in New Orleans and all of those spaces were done as is, with the tenant moving in immediately. So that helped reduce our TI average.

Okay, and final question maybe for Keith. What happened with the mortgage stat at JetPort Commerce Park? Was that just paid down?

Yes.

And what do you expect as far as the mortgage expiring in ’06, your leverage is pretty low. Do you expect to just pay that down and refinance it?

We probably will pay off all of the mortgages. When you go to refinance sometimes it gets difficult and we like to put mortgages with packages of properties, and that way we can get substitution rights and a lot better rates with it.

Are you surprised that your debt rating is only a Triple B- relative to your coverage ratios and your leverage ratio?

Yes.

Okay, thank you.

The next question is from Steven Zedclick, private investor. Please go ahead, sir.

Yes, EastGroup has lower barriers to entry markets and cheaper rents, are you seeing any evidence of national companies relocating from the more expensive markets?

I would not say we have cheaper rents. Maybe, I guess if you look right at New England up against bigger cities we might have in comparison, but our strategy is to be on infill locations in major markets where there are barriers to new entry, where we can cluster our assets and have those locations where our customers either want to be or have to be and as a result, will pay us just a little bit more.

At the same time, we want to be in the growth areas so that there is continual increase in demand for additional space, and that has served us very well in our four core states. There are always cycles in that, but Florida, Texas, Arizona and California are always up in the top of the fastest growing states. That has served us well.

Okay. In this cycle, have you gotten a sense that lenders are any more disciplined or less disciplined than they were in past cycles, say 10 years ago maybe?

Certainly cap rates have come down and valuation of properties, when you look at a 70-75% loan to value. Industrial real estate has always been an attractive product for lenders to put money out on and there seems to be somewhat of a shortage of that. We certainly think ours are quality assets. We do not think that lenders are taking any greater risk with us, if anything is happening because of the demand, the spreads have come down. Where we used to look at 150 or 175 over the 10 year, the transaction that Keith mentioned in his remarks, we were I think 98 –

95.

95 over the 10 year. So that is really where we see the difference.

Okay, thank you.

John, to answer a question that you had before on the Universal Welks lease, the one with the six-month kick out, that lease runs through June of ’09. Okay.

(operator instructions). We will take a question from Chris Hailey of Wachovia Securities. Please go ahead.

Hi, it is Brendan sitting in for Chris again. I just wanted to ask a question about potential acquisitions or expansion outside of your core markets. Are there any plans or thoughts about that?

We are always looking at new markets, new opportunities. A year ago we went into San Antonio, this year we bought land in Fort Myers, Florida and will start building there probably in the second quarter of next year. We continually look at Las Vegas, Salt Lake, parts of Atlanta. So I would hope that we could add another market in ’06 or early ’07, but it will be in a growth city in a growth state.

Okay, thanks that is all I had.

Thank you.

It appears we have no further questions at this time. I will turn the meeting back over to you, Mr. David Hoster. Please go ahead, sir.

Thank you. We appreciate your continuing interest in EastGroup, and as always, please do not hesitate to call Keith or me with any clarifications of anything we have covered today, or any questions that you did not have an opportunity to ask. Thank you very much.

This concludes today’s teleconference. You may disconnect at any time.