Eastgroup Properties Inc (EGP) 2006 Q2 法說會逐字稿

Good day, ladies and gentleman. All sides on the conference are in a listen-only mode, and later there will be an opportunity for questions. I would now like to turn the call over to the President and CEO, David Hoster. Please go ahead, sir.

Good afternoon, and thanks for calling in for our second quarter 2006 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 the results for this quarter that describes certain risk factors and uncertainties that may impact the Company's future result and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time sensitive information that are subject to the Safe Harbor Statement, included in the news release, is accurate only as of the date of this call.

Thanks. Operating results for the second quarter met the midpoint of our guidance. Funds from operations were $0.69 per share, as compared to $0.65 per share for the second quarter of last year, an increase of 6.2%. These results represent EastGroup's eighth consecutive quarter of increased FFO as compared to the previous year's quarter. For the six months, FFO was $1.39 per share compared with $1.29 per share for the first half of last year, an increase of 7.8%. Please note that we calculate funds from operations based on a NAREIT's definition of FFO, which excludes gains on depreciable real estate.

We continue to achieve solid same property operating results in the second quarter with an increase of 5.3% without the straight lining of rents. And with straight lining, same property quarterly results improved by 3.4%. This was the 12th consecutive quarter of positive results for both measures.

On a GAAP basis, our best major markets for same property results in the second quarter after the elimination of termination fees were New Orleans, which was up 17%; San Francisco Bay area, up 16%; San Antonio, up 15%; and Los Angeles, up 9%. The trailing same property markets were El Paso, down 23%, and Houston, down 0.3%. The differences are basically all due to changes in property occupancies in the individual markets.

Occupancy at June 30th was 94% as compared to 93.8% at the end of the first quarter and 91.8% at June 30 last year. Occupancy in our four core states of Florida, Texas, California and Arizona was 94.8% as compared to 86.8% in the non-core markets. El Paso and Memphis are our only two markets that are under-performing.

Our leasing statistics for the second quarter showed continuing strength. Overall, of the 970,000 square feet of leases scheduled to expire, we renewed 57% and re-leased another 23% for a total of 80%. In addition, we leased another 271,000 square feet of vacant space.

As you can see in our supplemental information, we achieved strong rent growth, both for cash and GAAP calculations, increases of 4.1% for cash and 11.1% was straight lining of rents. Our average lease length was down to 3.2 years and our average lease size was 11,700 square feet. Tenant improvements decreased slightly with an average of $1.62 per square foot for the length of the lease, or $0.51 per square foot per year of the lease.

We continue to be pleased with both the prospect interest and leasing activity at our developments. At June 30, our development program had increased to 16 properties containing over 1.2 million square feet with a total projected investment of $88 million. Ten of the properties were in lease up and six were under construction. Geographically, the developments are diversified in four states and six different cities, and overall, are currently 42% leased.

In the second quarter, we transferred Southridge I, with 41,000 square feet, into the portfolio. Also during the quarter, we removed three properties into lease up from construction and began construction of three additional properties. These new developments will total 366,000 square feet and include Southridge III in Orlando, Beltway Crossing II, III and IV in Northwest Houston, and World Houston 23, which is 125,000 square foot build-to-suit for [Cuninega]. Since the end of the quarter, we have started the development of World Houston 22 with 68,000 square feet, which is 66% pre-leased.

Over the balance of the third quarter, we expect to begin construction of new properties in Fort Myers, Palm Beach County, Phoenix and San Antonio. In June, we acquired 17.7 acres at the Sky Harbor Commerce Center in Phoenix. It will support approximately 270,000 square feet of development, which we hope to start before the end of the year. In July, we purchased 15.5 acres in San Antonio, adjacent to our existing Wetmore Business Center. This second phase will allow development of approximately 260,000 square feet.

Including the additional 20 acres, which we have under contract to purchase in Fort Myers, our current land inventory is 270 acres with the potential to develop approximately 3.6 million square feet of new industrial space.

Our projected development starts for 2006 have now increased to over $90 million. These new start, of course, will have limited effect on our FFO for this year, but represent a strong base for FFO growth in 2007 and 2008 as a completed properties lease up.

Although we have made offers on a variety of industrial property packages and individual assets, we have not acquired any properties other than development land so far this year. I would like to think that our lack of acquisition success is simply due to being a disciplined buyer and sticking to our acquisition criteria. But also, I will be surprised if we do not tie up a property or two before the end of the year.

In June, we sold the 125,000 square foot Lamar Distribution Center in Memphis for a price of $3.1 million, which generated a small gain. This sale decreases our ownershipment in the Memphis market to 370,000 square feet with a net investment of approximately $7 million. We will continue to sell these assets as market conditions permit. Keith will now review a variety of financial topics.

As David stated, FFO per share for the quarter increased 6.2% compared to the same quarter last year. Lease termination fee income was $49,000 for the quarter compared to 332,000 for the second quarter of 2005. Bad debt expense was 223,000 for the second quarter of '06 compared to 232,000 in the same quarter last year. The effect of both bad debt expense and lease termination fee income decreased FFO by $0.01 a share compared to the second quarter in '05. FFO per share for the six months increased 7.8% compared to the same time last year.

Lease termination fee income was 234,000 for the six months in 2006 compared to 499,000 in the same period last year. Bad debt expense was 336,000 for the six months of 2006 compared to 331,000 for last year. If you combine both bad debt expense and lease termination fee income, the change on period comparisons is again $0.01 decrease in FFO per share.

Debt to total market capitalization was 30.9% at June 30, 2006. For the quarter, the interest coverage ratio was 3.5 times and the fixed charge coverage ratio was 3.2 times, in line with past quarters. Our floating rate bank debt amounted to 8.8% of total market capitalization at quarter end. We have three mortgages that mature in 2006, totaling $36.1 million at June 30, 2006. Two of these mortgages are with the same lender and we were able to sign an application on a new mortgage on the same properties for $38 million. The non-recourse note will have a 10-year term, 20-year amortization and a fixed interest rate of 5.68%. This loan is scheduled to close in August 2006.

In July, we executed an application on a new mortgage for 78 million. The non-recourse loan will have a 10-year maturity, 20-year amortization and a fixed interest rate of 5.97%. This loan is scheduled to close in October 2006. In total, the two loans will repay 36 million of maturing mortgage loans with the balance of approximately 80 million going to reduce floating rate bank debt.

In June, we paid our 106th consecutive quarterly distribution to common stock holders. This quarterly dividend of $0.49 per share equates to an annualized dividend of $1.96 per share. Our FFO pay-out ratio was 71% 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. We believe this revenue gives stability to the dividend. FFO guidance for 2006 was narrowed to a range of $2.77 to $2.83 per share. And earnings per share is estimated to be in the range of $0.92 to $0.98.

As David mentioned, we had not acquired any properties other than development land this year. We had deleted any acquisitions of income-producing assets in our projections for 2006. This change decreases FFO projections by about $0.01 a share. Also, after our discussions with our auditors, we had determined that Financial Accounting Standards 123R, and that's the compensation standard, requires us to recognize compensation expense on parts of our 2006 compensation plan as if each vesting traunched was an independent award. And that's called the graded vesting attribution method.

We had originally projected these costs vesting on a straight-line method. I will try to give an example of the difference. Assume we have an incentive plan that rewards $500,000 to executive officers. If each group meets an FFO per share growth goal for 2006 and exceeds the average FFO per share growth of a peer group. If these performance goals are met, then the 500,000 would vest 20% at the end of 2006 and 20% each year for the next four years or $100,000 each year.

So we budgeted the $100,000 per year and that's called the straight-line method. The FAS requires us to treat each vesting charge as separate award. With $100,000 at vest at the end of 2006 would be expensed. 50% of the $100,000 at vest at the end of 2007 would also be expensed in 2006 and so forth, resulting in a front-loading expense where 46% of $500,000 or 230,000 was -- would be expensed in 2006. We have asked why this is a better method and no one seems to know. But we know it lowered guidance by $0.01 a share. Now, David will make some final comments.

We continued our positive operating and development momentum during the second quarter. As I mentioned, it was our eighth consecutive quarter of increased FFO as compared to the previous year's quarter. It was our 12th consecutive quarter of positive same property operating results, demonstrating the ongoing strength of our property operations. Our development program continues to expand in both properties under development and land in our pipeline, providing the base for future FFO growth. Our balance sheet remained strong and flexible.

Keith and I will now answer your questions. Thank you very much.

[OPERATOR INSTRUCTIONS] And we'll go first to the side of [Michael Goldman] of Credit Suisse. Please go ahead.

Good afternoon, guys. Just had a question on your guidance for same-store NOI growth, 3% to 5%. You did 5% before the straight-line in the first quarter, 5.3% in the second quarter. And I was just wondering if you were seeing anything in your markets that's preventing you from raising that guidance range?

Just being conservative. There are so many potential little ups and downs in guidance that we just try to be conservative in as many as we can.

But, I mean, would it be fair to say then that at the very least, you should be trending towards the upside of that range?

That would probably be safe to say. But there are some others that you could maybe argue that we're not going to be trending up in. So we don't change our guidance assumptions very much unless we're absolutely sure that that's what we're going to be doing.

Okay. And then, I know you mentioned on finishing up exiting the Memphis market being contingent on market conditions. I mean, do you have any sense for the timing? I mean is this going to be something that clears up in six months?

We would hope next year. Same market conditions is a nice way of saying the buildings have vacancy and we need to lease that up before selling them. And we have pretty good activity with people inspecting the properties, prospects looking at the vacant space. But in terms of executing leases and then being in a position to put a package out, we don't expect to sell any more there this year.

Okay, got you. And just for clarification, how far are you from where you would be comfortable in terms of leasing it up and then selling it in terms of occupancy?

The three or four remaining properties, the 370,000 square feet, I think are a little over 30% leased right now. And our leased number will always look bad in Memphis, because as soon as it hits 100, we sell the building. So all we're going to be holding are the buildings with vacancy. And Memphis is a market where you don't sell on the comp. People buy cash flow, not upside, with potential leasing prospects. So we feel we need to have those buildings 100% or close to that level before we try to market them.

Okay. And then just two final questions on the transaction side. You mentioned that you had put bids out on a couple of properties this year and didn't wind up getting them, do you have a sense for how far off you were in the bidding process? I mean how much above your offer these properties went?

That's a good question. That's hard to determine, because in most cases, there's a long time lag from when you make your bid to when another buyer actually closes and then the information comes out. We've lost out on a number of packages where it was a multiple city and we would just bid on one or two of the cities and generally sellers like to sell to a buyer who is buying the whole package and they don't have to worry about multiple closing. So we've lost out on some attractive properties that way. On the individual ones we've been, I think, real close.

And then just the final question, it looks like also on the changes for the guidance you're not expecting the 18 million of dispositions in the second half. Is that a direct result of you guys deciding not to sell since you haven't closed on any acquisitions? Or is there something else going on that --?

Two factors. Of that 18, three of it was in the Memphis property that we just sold, if I recall that correctly. The other we had hoped or had under various letters of intent, a building we have in Auburn Hills, Michigan that's on a long-term net lease and had hoped to sell that this year. But selling an automobile related facility in the upper Midwest this year is difficult to do. So we don't think that's going to happen this year.

Okay. And actually, if I could just squeeze one more in here, on the automotive front. Could I get an update on -- could we get an update on the Tower Automotive situation, are they current on the rent? Do you have anymore clarity on the status of that facility?

Tower has never missed to beat in their rent to us. They wire it the same day that they did back in the beginning. The bankruptcy court has allowed them to, I think, put off until November the assumption or rejection of any leases while they work out issues with their labor unions.

We've been told this is one of their most profitable operations and if for some reason they cut out -- somebody has to make frames for SUVs and pickup trucks that are assembled just up the road. So we see that as mitigating risk on it. And finally, they've actually come to us and asked about expanding the building. That is a long way off from that happening. It's just early discussions but that's not one of the things that keeps us awake at night.

Okay. Great. Thanks.

Thank you.

Thank you. Our next question comes from the site of Jonathan Litt of Citigroup. Please go ahead.

Hi. It's Craig Melcher here with Jon. Your line balance is getting up relatively close to its current capacity - it's about $40 million away I believe. Can you talk about what your plans are on the capital side and what you're thinking?

Well, if you take our 175 line and the various working capital lines, we're basically, I think, it's 200 million, and then we have an accordion feature on it. So I think we can double that if we want. But with the two first mortgages that Keith mentioned earlier, we will be reducing that line by roughly $80 million before the end of the year.

Okay. And with your development pipeline growing, do you - are you comfortable with your current level of leverage or would you be willing to ramp it up a bit higher?

We're the first admit we're under-leveraged and so we see that our balance sheet has tremendous potential for funding growth. And we had hoped to be more leveraged at this time of the year. If we just simply found some good acquisitions, we would be.

How much of the size of the development do you think your current platform could sustain?

I would hope that we're in the $90 to $100 million level going forward with a potential to possibly grow that a bit. But I don't see us doubling that in the short-term or anything like that.

Okay.

We certainly hope to maintain this level.

And what are you seeing on new yields on new developments versus -- today versus say two years ago? It looks like on the assets during lease-ups, the yields are higher than what the yields are on -- the ones that are currently under construction?

On a very rough analysis, construction costs have shot up, I guess you'd say 25% to 30% over the last couple of years, and we view that we're getting about half of that back in higher rents, because of the strength in the markets where we're developing.

And the other half is in lower yields. And so we've gone from looking at cash yields in the mid-to-high 10's now to low to mid-nines. And when you look at Phoenix and the various California cities, they would certainly below a nine.

And what are you seeing on the acquisition side? What type of premium are you looking for to get when you do your developments versus buying assets?

We have for a long time said that we would like to have a 150 to 200 basis point spread between our projected yield on a development and what we think we'd have to pay if we went out in the marketplace to buy it. I think in some ways the spread's bigger today than it was a couple of years ago.

We're certainly getting 150 to 200 and I would think in some cases 250 point -- basis point spread with our new properties given that the really low cap rates are for the newer institutional quality assets.

And just looking at the leasing that occurred during the quarter, was there anything particular with the shorter lease terms?

No. We seem to have more one, two and three-year leases whereas the first quarter we had more five-year leases. Our goal is to be moving towards the 3 to 5 from 1 to 3, and I just -- I think that was just I hope an aberration. But we would like to have lease average at four years or a little bit higher on that statistics page.

Okay. And just last question. Do you think that could be any portion of why the rental change was -- that the 4% on the cash side was stronger and if the lease term was a little bit longer, would you be willing to have a little bit lower increase in rent?

That might affect the cash yield a little bit, but almost 80% of our leases have bumps of some sort in them. So that would -- in some ways -- sometimes the longer lease gives you a higher GAAP yield or a higher GAAP rent. I don't think that's a real factor in this case.

Okay. So you should be able to continue at that 4% or so percentage growth?

If you look at our statistics on page 15 of the supplemental data you can see the markets that were stronger than others. I mean we still have a couple of markets where we will be rolling down rents, the San Francisco Bay area, for one, I think we have one or two more customers there whose rent's going to go down and renew the leases. In El Paso, we're still experiencing some roll down simply because of the weakness in that market.

But the rest of our markets on average, we assume we're going to have pretty good rent growth and I'll admit, we're doing better right now than I thought we would at the beginning of the year with Florida showing our real strength.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the site of Ross Nussbaum, Banc of America Securities. Please go ahead.

Thank you. It's John Kim here with Ross. David, I just wanted to follow up on your prepared remarks on the acquisition environment. Would you characterize it as more competitive today than at the beginning of the year?

Last year, we were able to buy some properties that were not on the market. And we also saw a number of good assets where there was an unattractive first mortgage that had to be assumed and we built that into our numbers. We've just not been able to find either of those type purchases this year, so -- and we've worked on that. So I -- we're just not seeing more, I guess, what we would call, assets with some hair on them that scare off other buyers.

So - and I don't know why we haven't seen those, maybe there are just not as many around anymore. Also institutions like to sell everything in big packages and it's harder for us to bid on those. As I'd mentioned earlier, it's a multi City package and we're only interested in one or two cities. And I think it's just set of circumstances, I hope that changes soon, but we'll see.

And how is this affecting cap rates? We've heard cap rates have been rising on some tertiary markets. Are you seeing that in any of your markets?

No. One of the problems -- I mean, we're hearing the same thing and brokers are saying the B minus and C assets have the rising cap rates, but I can't give you any anecdotal evidence on that.

And I think part of that's due the fact that you bid on a property today, and you find out somebody else has tied it up after a couple of weeks, and then it's maybe three or four months before it actually closes, and then the information comes out and tells you really what the cap rate is.

So there's such a delay in -- between our bid and when we find out what was paid for it. I can't give you any clear examples of what's happening.

Okay. Going to your development schedule there were a couple of project that the yields have actually -- your expected developments yields have actually gone down this quarter versus last quarter. Can you just talk about this a little bit more? Is it due to cost or lower rent expectations?

My guess is, and I know on Techway at Houston, for one, it's just because we haven't done any leasing. And so that we've got a more capitalized interest making the cost higher and that we would probably in our own projections be a little more aggressive on the rents.

But -- also, if there is a credit tenant whose willing to take a big space and take it fairly quickly, we'll lower our rent to attract that tenant in order to reduce our risk on the asset. So we're looking at the risk-reward on leasing some of those spaces, so in some instances, that's why we lose 25 to 50 basis points in projected yield.

Okay. I believe Ross had some questions.

Yes. Hi, guys. Good afternoon.

Good afternoon.

While we're on the development topic, there's one property in Houston that's still not a lot of activity on - again, a zero leasing --

Yes, Techway Southwest III that I just mentioned, that's downon the southwest side of town, it's our third building there. The other two buildings are 100% leased, but they both took over a year to lease up. We have some good prospects out there. But that's the weakest sub-market or one of the weakest sub-markets in Houston.

Okay.

We hope to show you a little bit better results a quarter from now. But I wouldn't expect it to be 100%. I mean it'd be too easy -- anybody could do it if we could get them all leased up in 12 months.

Sure. On the core NOI front, I'm just looking at the same store results for the quarter and I'm looking back one year ago where the occupancies were in. And obviously you had a positive uplift there that helped the results. As you look at your crystal ball over the next year or so do you think that you're going to be able to push the occupancy higher or are we just naturally going to see the same store growth slowed as just gets back to be contributor?

Yes, we are optimistic that we can end the third quarter a little bit higher than where we are today and keep up that trend through the end of the year. If you go back six or seven years, we averaged around 97% occupancy give or take for, I think, was over three years. We certainly ought to be above 95% as long as the economy holds.

The only markets where you've got some flexibility it looks like really is El Paso and Dallas.

And we expect both of those to improve and we ought to pick up a bit in Houston also and San Antonio where we actually bought assets with lower occupancy. So I think we'll be over 95% on average next year and certainly be disappointed if we weren't above that level. And then as you get to that level, if the economy holds, we will be able to continue to push rents and hopefully that will start to pay off as a bigger contributor to increases in same property results.

Okay. And then final question is that I know you are obviously averse to entering into joint ventures, it's pretty clear at this point. But what about the merchant building front? I mean it's almost to me the reverse psychology of you're losing out on acquisitions, because of what's going on in the market. Why not sell some of the properties into that kind of a market?

You mean sell development properties?

Sure.

Well, I think it's -- the opposite of that is that since we're not able to do a lot of acquisitions, our development program is providing us the base for the growth in FFO with the new properties with above average yields. I mean in '07and '08, as our current program leases up instead of bringing in 10% or 25%, of the NOI of each one of those properties to FFO, we'll be bringing in 100%. And then with a little bit of good management in leasing, we should have that go up every year.

So we just see that we're building our base for growth, since there is not the acquisition opportunity. Now over the next year or so we'll probably build some little buildings for sale just because that's what fits on some of the land that we have. But we do not see any major thrust into the merchant building business.

Thank you.

Thank you.

Thank you. Our next question comes from the site of Bill Crow of Raymond James. Please go ahead.

Good afternoon, guys. A couple of questions. David, you used term if the economy holds a couple of times there. And I'm just wondering how you feel about the development pipeline which has been built up during different economic times than what we have today. How do you feel about that outlook and carrying that pipeline going forward?

Well, we seem to be having improved results on the leasing almost every quarter. The My World Houston examples, I think, are good ones and I don't debate it, that's what we're doing throughout the portfolio, but our World Houston 22 is -- excuse me 23 is a build-to-suit. We haven't been able to do a lot of build-to-suits in the past, but we're seeing a lot more opportunity on that.

So we've just started construction on it in the last few weeks and it's 100% leased to 125,000 square feet. And World Houston 22, which is right next to 21, we've just started moving the dirt and we're already two-thirds leased there. And 21, which we finished three or four months ago, we've just signed a lease for 100% of it. So we're still reviewing our development risk based on our experience in that individual sub-market. And we're experiencing the good leasing and putting out the build-to-suit proposals. So I think we have our hands on what's going on so that if we start to sense a slowdown of any magnitude in any of the sub-markets, we'll be able to slow down the development also. But so far we've not experienced that.

All right. And you took us back five or six years and talked about occupancy. When was the last time that you had peak pricing power, and then how far away do you think we are, assuming a steady state economy from getting that level of pricing power again?

I think we've got that pricing power in almost all of our markets right now. Certainly, in Los Angeles, certainly in all four of our active Florida markets. In Texas, we certainly do not have it in El Paso, I think we're just starting to get it back in Dallas. So we're very optimistic from that standpoint.

And it's -- two years ago we were asking did you get the lease signed of our asset people? Now we're asking, what kind of rent growth are you getting and putting a lot more of emphasis on that. I'm afraid I don't have the statistics in front of me to give you the answer of how long ago was that we had the pricing power we have today but it was certainly, oh, well over four years ago.

Okay. Terrific, thanks.

Thank you.

Thank you. Our next question comes from the site of Art Havener of A.G. Edwards. Please go ahead.

Good afternoon.

Hello Art.

You, in the past have attributed some of the strength in the Florida market to the strong housing business and some of the tenant demand driven by that. Is that still the case or have you seen a little bit of a slowdown?

We have not yet seen any slowdown from a specific type user, whether it be carpet or tile or air conditioning that could be housing-related. We have not seen that yet. In the last six months, we've continued to sign leases with those type users.

The statistics on Florida still remain very strong from a population migration standpoint. The Florida Trend Magazine a couple of months ago, said that the net migration to the state was still like 1,080 people a day, that's net migration. So there's still demand for all sorts of goods and services down there.

Are you using that same statistic to enter the Southwest quadrant of the state, meaning the Fort Myers land bank that you're building?

Yes. Yes the growth there continues to be strong and Fort Myers continues to have the residential development compared to some of the other areas of the state because as far as Florida goes, it's a little bit more affordable.

Okay. On an asset-specific question, I noticed that you're starting another development at the World Houston portfolio.

Right.

Is this a build-to-suit or is this just driven because of the market demand?

World Houston 23 is a build-to-suit; 22, which we just started a couple of weeks ago, was market-driven because we leased 100% of 21. And as we've started to move dirt on the site, we signed a lease for two-thirds of the building.

So although, I think you've heard me say in the past that we see more competition on the horizon for our type product in the north side of Houston than ever before, World Houston because of its location continues to be very strong.

Okay. One last question. This was sort of addressed earlier. But there has been a noticeable volatility in your development pipeline in terms of timing, the cost and some of the returns. And not all of that has been bad, actually some of it has been on the positive side. Can you attribute that just to the fact that your pipeline is getting bigger or is it more of a kind of a location-driven phenomenon?

I think it's location driven.

Okay.

We have exceeded pro forma in several instances where we were just able to get higher rent, and anticipated and some others. It's related to longer-term leases with bumps or longer-term leases with higher TIs, where there is some amortization of that built into the numbers.

Okay, great. Thank you.

Thank you.

Thank you. Our next question comes from site of Chris Haley, Wachovia Securities. Please go ahead.

Hi, good afternoon. Keith I know you're still tongue-tied from that commentary, so I'm going to address David if that's okay.

Thank you very much.

David, I loved your comment about selling a building in the Midwest too. It's just what I needed in a long day, I have a question now, what the Liberty and Duke up do in those hot markets down there in Houston and Phoenix? What are they doing there?

I don't need to put any words in their mouth, Chris.

I'm asking you.

To the best of my knowledge, Duke has not started construction of any thing in Houston or Phoenix. They've just announced, I think, some office development in Houston.

Yes.

And Liberty's done a lot of acquisitions now recently and they're still -- and they're doing some development on the west side of the airport.

In Houston, mostly?

Houston.

Yes, yes. And they're building flex and industrial?

Well, it's very similar to our product.

Yes, yes. Okay. The project has that's having little bit of tough time is I'm trying to recall that but I remember kind of West Side of Houston was viewed as a little bit more attractive given some big corporate moves over the last couple of years there. I wonder what you think the challenge is with the asset? I'm sorry to harp on this one.

Techway Southwest is just north of the interchange of Beltway 8 and the Southwest Freeway.

Okay.

And that is a softer sub-market then the main Hampstead quarter northwest sub-market. And like I say we are - the two buildings there took a little longer to lease up, but they're both 100% leased with good tenants. So this one's going to take just a little bit longer and if we didn't have at least one of the development assets, with unlimited leasing, we wouldn't have anything for you to ask about.

Okay. On your '06, I take the mid point of '06 versus '05 from a280 versus 264, I can't recall whether there's any stuff or junk in the prior year's number. But that's 6% growth. How much of that growth, which again includes no acquisitions, how much of that growth do you think is core versus contributions from the development pipeline? And obviously I'm kind of directing this to looking out to '07?

It's probably a third development, I would think.

Okay. And then it looks like you've got about under $20 million that will contribute in 2006 with development activity. What do you think these dollar value of properties that will contribute to '07 will be, in terms of development?

I'd have to figure that one up -- I'd just be guessing otherwise. So -- we've really not gotten into that kind of detail for '07 projections yet.

But we do try to give some indications on the leasing schedule, page 8, I mean on the development schedule of the timing of when we think that will come on in the yields that we might get.

Okay. All right. Thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]

We'll go next to the site of Paul Morgan of FBR. Please go ahead.

Good afternoon, I'm sorry this is not addressed, I got on a little late. But David, in the past maybe a year ago, say you had mentioned how difficult it was to acquire land due to the bid from the home builder's and particularly in some of the markets where you acquired land recently like Phoenix and the Florida markets.

I wonder if you're seeing any change in that environment, homebuilders have been walking away from some of their option land, and whether that's an opportunity for you potentially?

Not, yet, I can't specifically point to anything that we've benefited from homebuilders backing off. In most of the markets we're operating in, an example Phoenix, the story is the home builder's backing off of land, but it's on the very fringe of development. And that's not where we look to build warehouses, we're looking for more in field sites. And so that land is still very competitive, and there are an awful lot of industrial developers out there, frustrated that they can't find enough land. So prices -- everything we've seen continues to be bid up.

Okay. And on acquisitions, you mentioned the portfolio deals that have been out there that you're not competitive on, because you may not be interested in the entire portfolio. I mean a lot of REITS have been in situations and acquired the entire portfolio and identified certain markets as non-core to sell soon after. Have you considered that, if the portfolio is sufficiently attractive?

We sure have. The issue though becomes if there are eight markets and we're interested in two, then it becomes the tail wagging the dog. If there were three out of four markets, we'd like very much, and had to take the fourth, we'd certainly do that. But I don't think we've seen any like that recently.

Okay. They've been more like sort of national portfolios?

That's correct, with 8 or 10 cities.

All right. Okay. That's all, thanks.

Thank you.

Thank you. And at this time there are no further questions.

Okay. Well, again, thank you very much for your interest in EastGroup. As always, Keith and I are available for any call on issues that we didn't cover today or didn't cover thoroughly enough for you. Talk to you next quarter.

Thank you. Ladies and gentlemen, this concludes today's call. You may disconnect at any time.