Eastgroup Properties Inc (EGP) 2007 Q3 法說會逐字稿

Welcome to the EastGroup third quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during our q-and-a session. Please note this call may be recorded.

I would now like to turn the call over to David Hoster, President and CEO of EastGroup Properties. Please go ahead, sir.

Good morning. And thanks for calling in for our third quarter 2007 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 including 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's subject to the Safe Harbor statement included in the news release is accurate only as of the date of this call.

Thank you. Operating results for the third quarter exceeded the upper end of our guidance range. Funds from operations were $0.80 per share as compared to $0.70 per share for the third quarter of last year, an increase of 14.3%.

The $0.05 per share increase above the midrange of third quarter guidance was due to $0.03 per share from the lease termination, which we had previously expected to record in the fourth quarter, and $0.02 per share from improved property operations. Without the large termination fee, the increase in FFO for the third quarter would have been 10%.

For the first nine months of the year, FFO was $2.26 per share compared to $2.09 per share in 2006, an increase of 8.1%. If you eliminate both termination fees and land sales from each period, the increase would be 8.8%.

Please note that we calculate funds from operations based on NAREIT's definition of FFO, which excludes gains on depreciable real estate.

We continued to achieve solid same property net operating income results in the third quarter, with an increase of 6.1% without the straightlining of rents. And with straightlining, same property quarterly results improved by 6.5%. Without termination fees, these results were 3.0% and 3.6% respectively. This was the 17th consecutive quarter of positive results for both measures.

On a GAAP basis, our best major markets for same property results in the quarter, after the elimination of termination fees, were South Florida, which was up 23%, El Paso, up 22%, and Houston, up 9%. The trailing same property markets were San Francisco and Phoenix, both down approximately 4%. The differences between quarters are basically all due to changes in property occupancies in the individual markets.

Occupancy at September 30th was 95.7%, a slight increase from the end of the second quarter. Our Florida properties were 97.8% occupied, and California was 97.1%. Houston, our largest market for investment with over 3.7 million square feet, was 100% leased and 97.4% occupied.

Our leasing statistics for the third quarter illustrate the generally good real estate fundamentals in our markets. Overall, of the 1.4 million square feet of leases that expired in the third quarter, we renewed 68% and released another 21% for a total of 89%. In addition, we leased 115,000 square feet of vacant space.

As you can see in our supplemental information, we continue to achieve good GAAP rent growth in the third quarter, 11.7% with the straightlining of rents. The cash rent growth of 2.2% was below recent averages due to one large R&D tenant lease in Santa Barbara. Without this one lease, the cash rent growth would have been 6.1%.

Our average lease length for the quarter was 4.7 years, which is longer than usual and reflects our efforts to increase the statistic. Tenant improvements were $2.20 per square foot for the life of the lease, or $0.47 per square foot per year of the lease. This figure is higher than normal due to an above average number of service center leases, and the splitting up of several large spaces for multiple tenants.

At September 30, our development program had increased to 2.3 million square feet, with a total projected investment of $159 million. Nine of the properties were in lease-up, and 13 under construction. Geographically, the developments are diversified in five states in eight different cities, and overall are currently 43% leased.

During the third quarter we transferred one property with 50,000 square feet into the portfolio, and expect to transfer three properties with 200,000 square feet in the fourth quarter.

Also during the past quarter, we began construction of five properties with 451,000 square feet. Each of these is an additional phase in an existing development. For the year, we continue to expect to have development starts of over $115 million, with a total of approximately 1.8 million square feet. This level of new starts reflects the good leasing activity in our development properties, and will be a major contributor to FFO growth over the next 12 to 18 months.

We've increased our land inventory with two purchases in Houston and one in San Antonio, which will allow for the combined development of 1.2 million square feet of industrial space. We increased our World Houston land by 48 acres and Beltway Crossing by 12 acres, and acquired 32 acres to create Alamo Ridge in the Alamo Downs park in West San Antonio.

We also currently have a partial in Orlando under contract to purchase. Our development program has been, and we believe will continue to be a creator of significant shareholder value.

As we said before, we are not a merchant builder. We are not developing to generate immediate gains through the sale of newly created assets. Our goal as a developer is to add quality, state of the art investments to our portfolio, and thereby increase total returns to our shareholders in both the short and long term.

During the third quarter we did not have any acquisitions other than the development land previously mentioned. We also did not have any dispositions in the quarter, but in October, we completed the sale of our 152,000 square feet Delp I building in Memphis for a price of $3.275 million. The transaction generated a gain of approximately $600,000, and reduced our ownership in Memphis to a net investment of just over $2 million.

Over the past 60 days, the number of industrial property sales packages has increased significantly, as have our number of purchase offers. But we do not currently have any properties under contract. So far, we have not seen any meaningful movement in industrial capitalization rates.

Keith will now review a number of financial topics.

Good morning. As David reported, FFO per share for the quarter increased 14.3% compared to the same quarter last year. Lease termination fee income was $966,000 for the quarter compared to $170,000 for the third quarter of 2006. Bad debt expense was $107,000 for the third quarter of 2007, compared to $254,000 in the same quarter of last year. The net effect of these items increased FFO per share by $0.05 for the third quarter.

FFO per share for the nine months increased 8.1% compared to the same period last year. Lease termination fee income was $1,016,000 for the nine months in 2007, compared to $404,000 in the same period last year. Bad debt expense was $469,000 for the nine months of 2007, compared to $586,000 for last year. The effect on the nine months was $0.04 per share with gains on land sales in 2006, or $0.03 per share.

The net effect of these one-time items increased FFO by $0.01 per share. Debt-to-total market capitalization was 33.7% at September 30. For the quarter, the interest coverage ratio was 3.8 times, and the fixed charge coverage ratio was 3.5 times, a small improvement on the past quarters.

Our floating rate bank debt amounted to 5.7% of total market capitalization at quarter end. Our bank line expires in January 2008, and we are well underway in negotiating the terms to replace the existing facility.

In October, Fitch Ratings affirmed our rating of BBB, noting that EastGroup has a quality portfolio of industrial assets in primarily strong markets, experienced and capable senior and regional management teams, consistently solid property operating performance, and strong debt coverage ratios.

In September we paid our 111th consecutive quarterly distribution to common stockholders. This quarterly dividend of $0.50 per share equates to an annualized dividend of $2.00 per share. Our dividend to FFO payout ratio was 63% for the quarter.

Rental income from properties amounts to almost all of our revenues, so our dividend is 100% covered by property and net operating income. And again, we believe this revenue gives stability to the dividend.

FFO guidance for 2007 was increased $0.10 per share to a range a $3.10 to $3.12 per share. This increase was due to improved third quarter operating results of $0.02 per share, and $0.08 per share from a condemnation award net of related costs to be recorded in the fourth quarter.

A termination fee of $0.03 per share recorded in the third quarter was projected to be received in the fourth quarter, and was already in guidance. EPS is estimated to be in the range of $1.12 to $1.14.

Now David will make some final comments.

We continue to achieve positive development and operating momentum, and expect it to carry through the balance of this year and well into 2008. Although leasing activity has slowed from peak levels in most markets, it is still good overall. Our same property operating results, rent growth, occupancy levels, and development leasing are all still very strong. Development starts are at an all-time high. Our balance sheet remains strong and flexible.

Keith and I will now take your questions. Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from [Kyvin Kim] with Credit Suisse. Go ahead, please.

Good afternoon. You mentioned that you haven't seen material changes in cap ratio markets. But is that the same thing for land prices? Have you seen any downward pressure?

It's very difficult to answer on land prices, because we are looking for a different type of site than a lot of our peer group. We're much more infill, smaller buildings, smaller development sites. We have not seen any real reduction for our type of buildings. We've seen a little bit potential where a large residential developer has a big tract under contract and backs off, and there's potentially opportunity there. But that's generally for the bigger bulk buildings.

Also, there are not really enough land transactions that we look at to say with any certainty that there's been a big drop in price.

Okay. And secondly in Houston, could you just comment on the outperformance there in that market?

The economy in Houston is very strong. It continues to have good job growth, and of course, a lot of that is related to energy. And not just energy in Houston, but energy all over the world. And a lot of goods are shipped out of Houston to other areas.

There is a lot of new construction, much of it our type product. But so far, we've been able to outperform, and I think that's a reflection on both the very good locations of our parks and the quality of the buildings that were building. Needless to say, we're very pleased with being 100% leased in our largest market.

Okay. And just to kind of reconcile what I see in your supplemental, it seems like a rental change on mark-to-market where new leases was 2%. But then it seems -- I don't know why it was up 33%. Was that purely occupancy or, how do you reconcile that?

[By the] same store is greater than the rental rate increases, and that is due to occupancy.

It's a very slight increase in occupancy over a period of time. And as I mentioned, our cash rent growth is somewhat artificially lowered statistically by one R&D lease in Santa Barbara.

Okay. Thank you.

Thank you. Our next question comes from the site of Michael Bilerman with Citi. Go ahead, please. Mr. Bilerman, your line is open.

I guess we lost him.

Our next question comes from Paul Adornato with BMO Capital Markets. Go ahead, please.

Good morning. David, you mentioned that leasing activity, while still good, is not quite as good as the peak. Was wondering if you could just talk a little bit about that statement, and are we seeing a trend? Do you expect a continued slowdown, even though it's still good by historical standards?

Let me answer the first part of your question first. '06 was such a strong year that I think it was hard to match it under almost any circumstances. We were meeting some pent-up demand, corporate America was very optimistic about the economy, so there was a real spurt of leasing activity. Today, it's a lot more selective and prospects are not moving as quickly as they did before.

I think there's a certain amount of maybe stepping back. Not way back, but a little bit back, and trying to figure out what's going to happen to the overall U.S. economy and what's happening to job growth and individual markets. So we're still signing leases and our pro forma rents are better, we're still doing it at the pace we projected.

There are just fewer prospects out there, and each deal takes just a little bit longer to complete than it did before. And obviously, most companies related to housing have either pulled back or certainly not expanding, although we still see strength in that sector in both Houston and in San Antonio.

But the question is what's going to happen in '08. And I'll probably better answer your question sometime in the second quarter, looking on how we do on the leases that roll at that time and the developments that come online. But I think people are just wary. They're not scared, just wary of where the economy's going to go, and are just taking more time to make their decisions.

And so looking out at that portion of the pipeline that's coming online in '08, what's your confidence level in achieving your pro forma stabilized yields?

We've been doing it all through '07. We're always looking over our shoulder, that's just how we do business. But so far, we haven't seen anything that scares us. I think something that's important to note that I mentioned in my prepared statement is that of the five buildings we've put under construction in the third quarter, all five are in existing developments and are being built next door or down the street from existing product that's leased. And we think we have a real handle on what's going on in those submarkets. So we're not doing a lot of pioneering with this amount of development, it's just expanding existing successful positions.

And finally, what kind of economic indicators do you look at market by market, or perhaps, some macro economic indicators that you think are the best for your business?

Well, the number one is what's happening with our properties in a specific submarket. What are our leasing people experiencing every day? Are there prospects? Are they moving to lease? Are they accepting the pro forma rents and other terms of a proposed lease? So that's our really hands-on marketing. And a little bit bigger picture standpoint, it's job growth.

One thing that we like to remind people of is that our customers are generally distributing to the market, the metropolitan area market in which our building's located. So we think we're much more affected by job growth and the economy of a specific metropolitan area than what's happening on a global basis.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Chris Haley with Wachovia. Go ahead, please.

Good morning, guys. It's Brendan Maiorana with Chris. David, you mentioned that customers are taking a little bit longer time to make their decisions, seems like they're being a little bit more patient. Are they pushing back more significantly on any of the leasing terms, whether it be rental rates or TIs or anything like that?

Not yet. We're not experiencing that with our development properties at this point. And as I mentioned before, I think that a reflection of the quality of our buildings, the size of our users, and the locations. We're trying to appeal to the users who either want to be or have to be in our locations to best serve their customers. And as a result, they're location sensitive rather than as rent sensitive as they might be in other locations.

Okay. And then just following up on that, it looks like the TI dollars increased a little bit, just for the most recent quarter. Is that just specific to the lease deals?

I think that's specific to the lease deals. Our R&D buildings in Santa Barbara are pretty close to being office buildings, and so there are higher GIs there. And then we have a multi-building complex called Metro on the north side of Phoenix, and we lost a large long-term tenant a year ago. And we have been subdividing their space for other service center users, and as a result, those TIs have run anywhere from $10 to almost $20 a square foot. So those have distorted our overall numbers. Once we get that property a little higher in occupancy, we'll probably attempt to sell it.

You mentioned that you're trying to increase the length of your lease terms a little bit. Is that just based on trying to minimize an occupancy risk going forward, or is that just more in terms of thinking about trying to lock in current rental rates and maybe the forecast for future rental rate growth would be lower than what it has been over the past couple of years?

It's just to lock in users for a longer period. If we face a recession over the next year or two, we'd rather have them on a five year lease than a two or three year lease. Also, in some markets like Tampa, we have a large number of small tenants who tend to want to renew a lease for one or two years. And part of it's just the hassle factor to get them tied up longer so that you don't have to talk to them every year about a lease renewal. And that's worked well for us, lengthening out those leases.

Okay, great. And then just a point of clarification. David, at the end of your prepared remarks, I just want to make sure I have this right. You were saying that you've seen an increased number of industrial properties or portfolios coming to market over the past couple months, but just no movement in cap rates. Is that correct?

I try not to get on a soapbox too much. I agree with what Barry Vinocur put out in one of his -- I guess it was this morning's daily report -- that determining what average cap rates is, is not really scientific. I don't know how people come up with all those figures, but everybody seems to report cap rates on a little bit different definition.

So my response is just what we expect and what happens. And with our quality locations, I mean, the cities in the metropolitan areas where we're dealing, there still seems to be a significant amount of capital chasing good industrial product. And all it takes is one buyer to keep the cap rates low.

And in talking to brokers, the number of offers seems to have come down in some cases, but the best offers are still around the levels they have been over the last 12 months. It's as though some of those buyers didn't get the memo that cap rates were going up.

Okay, great. Thank you.

Thank you.

Thank you. Our next question comes from the site of Nap Overton with Morgan Keegan.

Good morning. A couple of things. The first one, I think is for Keith. You talked about the $0.10 increase in guidance being a result of the $0.11 gain net of expenses. Are the expenses you're talking about the G&A costs in the fourth quarter that were mentioned?

Yes.

So those are not directly related to that condemnation?

Well, the condemnation increased our goals and performance criteria and increased some G&A costs because of that. If we did not have that condemnation board, we would not have had the increase in G&A costs.

Okay. And then, so would G&A costs in the fourth quarter, David, would you care to share with us a reasonable estimate of the dollar figure, [is it like] $2.6, $2.7 million?

That sounds about right.

And then, what was the capitalization rate on the property that you sold in Memphis?

Depending on how you want to define it, a low to mid nines. Just to put it in perspective, it was almost 40 year-old front load building with a short truck cord and a 16-foot clear height. So we were very pleased with that price.

And then one other thing on the development, as kind of a follow up on what Paul was asking you. I notice that the yields on three of the properties in that nice table that you provided in development in your press release, actually increased pretty meaningfully from the second quarter press release. Does that reflect anything of interest there? It's the first three properties in that table. The yields are up between 40 and 100 basis points on those first three properties listed in that table.

I don't recall it being up 100 basis points. But usually when they go up, it's a result of executed leases where there's some additional TIs that are amortized over the life of the lease, and that increases. Also, in come cases where we have development fees or construction profit -- in Florida we do our own construction -- that are not capitalized with matched up expenses, we reduce the basis a bit in the property, which would slightly increase the yield. We can talk later, but there wasn't one that we increased 100 basis points.

Okay. The South Ridge Orlando property is the one that increased.

Okay, yes. That was related to higher TIs amortizing over the life of the lease.

So TIs are not in that cost figure that you give in this table?

Yes, they are.

They are in that?

Yes. But what happens is, if we're offering an $8.00 per square foot pro forma TI on a shelf space, and a credit user wants us to spend $12 and we are comfortable with the level of improvements, how they're spread out, that there will be lasting improvements to the building, then in many cases we will spend that additional $3 or $4 a square foot and collect that back with an interest factor over the life of the lease that will increase the yield.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from the side of Christopher Pike with Merrill Lynch. Go ahead please.

Good morning, folks. A quick question here, and I apologize if you answered this, I had to hop off real quick. But David, I think that either last quarter or a couple quarters ago, you guys bought an asset to redevelop, I think it was vacant. Do you envision that being a growing part of your business from a value add perspective going forward?

And I guess secondly, quickly, for Keith, the other income line item. Could you just remind me what's in that, and any other one-time items, either if they're [nominal] expected for the remainder of the year?

Let me answer the development question. We'd love to be able to buy assets for redevelopment, that's worked very well for us. We are generally doing that in a sub-market where we own other assets and are very comfortable with the lease-up risk, and with the lease-up risk, get a higher yield. The one you're referring to is Centennial Park. That's on the south side of Denver, just off of the Tech Center on their Centennial Airport.

We repainted the building and are in the process of finishing out some spec TI spaces, and recently signed a lease for 40% of the building, and continue to project a yield of 9% on a GAAP basis. So we think that's an attractive kind of investment. As I say, we'd love to have more like that.

And then, on other income, it's very small this year, $20,000, $65,000 YTD. And last year we had a condemnation on a roof that increased the amounts last year. We don't have any of that this year.

Okay. And we've just got one little follow up NAV question, we'll just follow up after the call. Thanks a lot.

Okay, thanks.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the site of Philip Martin with Cantor Fitzgerald. Go ahead, please.

Good morning, everybody. A couple questions. First of all, on leasing. Do your regional managers, Bill or Brent, or John, mention anything about -- are you seeing better leasing activity for your type of product, which is a smaller, arguably more marketable, more flexible product than, let's say, a larger industrial product? Is there a slowdown in the larger products versus your products?

Since we don't have the larger product, that's not something that we're tracking in looking at how we're doing with the competition. Also, most of our markets are not really -- or a lot of them are not big box markets. So we just really are following what we believe our direct competition is, and how our lease rates and terms and the success rate compares in those buildings. In a number of markets, though, the real growth in new construction is in the big boxes.

Okay. Because I mean, for example, Houston. You're doing very well in Houston, even well above market averages. And I didn't know --

I would be disappointed if we weren't beating market averages in every one of our markets.

That was spoken like a true CEO.

No, but given the quality and the location, REITs have a benefit in many cases. Simply, they have the capital available to better maintain assets and to have higher quality assets.

Than the average.

Than the average. So that we should outperform the averages on that basis, or I ought to get somebody else to run the companies.

But in a market like Houston, Brent isn't telling you "Our space is seeing more leasing activity than some of the larger box space..."

Well, there's not a lot of larger box space that's built back in Houston. Phoenix is another story. I mean, people are going crazy with the big boxes there, out on the west side of town. So that's a very different market. But if you look at statistics -- and I'm afraid I don't have it in front of me, so just a vague recollection -- of new construction in '06 and '07. And the percentage of buildings that are below 100,000 square feet versus the ones above, we're a small fraction of the total, our type building. So as a result we just have less competition in most markets.

Which is a good thing. Now, you mentioned in your prepared remarks that the leasing costs were up a bit because you had more service center leases than you were breaking up, yet you are needing to break up more space for tenants. Are you seeing an increase in demand from your tenants? Smaller leases or requests to break up space which may lead to higher costs going forward, here?

No, I don't view that as a trend. The one that I mentioned before, Honeywell, after 15 years, moved out of our Metro Building. It was 75,000 square feet. We are putting in tenants that range anywhere from about 8,000 ft up to 26,000 square feet. So each one of those requires not a total gut, but close to it with new [demising] walls, new restroom packages, the whole works.

So it's almost operating with a shell, and we're getting higher rents as part of it. But it really runs up the TIs, and that's one of the reasons that we have so little service center. I think that's a tough business. That's almost like operating a one story office building. And so our goal will be to probably market Metro as we get close to 100% occupancy there.

On the longer lease terms that you're getting here, is it pretty easy to convince your tenants? I mean, certainly you have the good locations, but are the tenants themselves pretty confident on the local economies and that's helping them get over the hump of maybe doing a longer lease with you?

To that, yes. And also, I think the more sophisticated users understand rents are going up. And so in their minds now's a good time to tie down a rent. And so we're renewing a number of leases up to a year, 15 months early, because our customers have, in some cases, come to us and said they want to renew early.

Okay. On the development front, are you seeing development starts, or a slowing or being delayed or cancelled at this point yet?

I'm not seeing anything that's cancelled. Industrial people don't announce those way in advance like they do on an office or a mall, announce and then hope to lease it before they start. Industrial's on such a shorter development and leasing cycle.

I'd like to think that the problems in the credit markets will make underwriting of development more difficult for small scale developers. And as a result, some of the local, and maybe even regional industrial developers will pull back from new starts for a while. Which should benefit us.

But at this point, you're not seeing that just yet.

Well, I'm not seeing a lot of new starts, and I don't know the reason for that. But the REITs, with almost unlimited capital, seem to be building fairly aggressively all size industrial. But some of the local developers, once they've leased up and sold what they've built, or in many cases sold at empty, don't seem to be restarting.

In your prepared remarks, you mentioned you're seeing more opportunities, there's more proposals. You haven't really gotten too far with some of these, but is the strategy here just to continue to be a patient buyer, let the sellers -- I'm assuming tighter credit markets is creating a few more opportunities for you.

We've not seen it yet. We keep waiting for it to happen, and on some of the offers we've made, we've not even been close. And there was a deal where a number of buildings -- and they each had mortgages on them of about market rate but low loan-to-value -- and we expected the cap rate to come up a little bit on those buildings. And it was actually -- in my estimation, went down.

So patience still rules the day and that's the right strategy at this point, probably. My last question, dividend growth. Certainly, your FFO growth has been strong. It looks like it's going to continue to be relatively strong going forward. And with a very good payout ratio right now and a nice development pipeline providing some visibility, would you expect over the next couple of years to see that annual dividend growth ramp up a bit?

We, traditionally, have looked at dividend level in our March first quarter meeting, and we will certainly do that in '08. I think the number one factor is what happens with the economy. If our earnings keep up this same growth rate that they have been, yes, certainly, the dividend growth rate should go up.

One point we stated that we wanted our dividend to exceed the rate of inflation in giving our shareholders a net real return gain each year, and we'd hope we'd be able to do that going forward.

Okay. Thank you very much for the time.

Thank you.

Thank you. Our next question comes from Nap Overton with Morgan Keegan. Go ahead, sir.

Just a quick follow up on the cap rate prices haven't changed issue. And that is, that you made the interesting comment, nobody told the buyers that cap rates were supposed to go up. Have the offers that you have been making reflected an expectation for a rise in capitalization rates?

We did a couple that way and didn't make the next round. So we've gone back to what our normal offers have given our cost to capital on each deal's potential upside. REITs get rewarded for FFO growth, not capital gains. So when we look at an asset, an awful lot of it is how can we grow the cash flow of this asset, because that's going to be what grows FFO quarterly going forward.

Okay, thanks.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Mike McShane with McShane Realty Partners. Go ahead, sir.

Gentlemen, greetings from Atlanta. Thank you for the opportunity for a question. My question is, are you looking at renewable energy sources and specific solar in any of your developments?

We've spent a lot of time analyzing the green potential for industrial buildings, and overall, it doesn't offer the opportunities that you do in other type property sectors. Also, maybe green is coming a little more slowly to industrial buildings.

And as we look at the potential for that, we realize that we're already doing a number of things in our building that fit green criteria. For example, in most markets we're using the white TPO roofs. We have lots of skylights. We use retainage ponds as an amenity, and then can use water out of those ponds for irrigation. But that's something we're following very closely.

In an industrial building, the customer tenant is paying all the operating expenses directly with our triple net leases, so we see it as it's going to be somewhat of an educational process for tenants to accept higher rents to reflect that they're going to have lower operating expenses going forward. I mean, everything from switching to the T5 lighting, more windows on the back of a building or windows in overhead doors, that sort of thing.

To answer the question more fully than you probably asked it, I think what's going to happen is there's going to be a brief period where having a green building is going to be a marketing tool. And then soon thereafter, it's going to be something that's expected in new industrial buildings. But it's going to come in the bigger buildings first, where the larger tenants who sign longer leases are more sophisticated and understand the savings they're going to get.

Great. Well, what can we do to get you into Atlanta?

As we've said before, Atlanta has about every industrial developer in the world competing there, and there tends to be, in our mind, almost a continual overbuilding. And we just have not seen the opportunity in Atlanta to get us there where we can create a name for ourselves, have our niche in the market, and be a recognized player. That doesn't mean we won't do it someday, but we're looking at markets where we think we can be a bigger player, like a Charlotte or a Ft. Myers, or San Antonio, where we can make a difference in that market.

Great. Well, thank you very much, and best wishes.

Thank you.

Thank you. Our next question is a follow up from Christopher Pike with Merrill Lynch. Go ahead, please.

Hey, David. I think you answered one of my questions here in terms of the users, and that's who would be more akin to using a green building. The bigger users, which may not necessarily be the business distribution folks that you target.

I think also what's going to happen, companies like Wal-Mart, they don't get much publicity for it, but are going very green. And somebody on a corporate level on high is going to tell their real estate people, "We only want to lease green buildings going forward." And that's going to force industrial owners and developers to very quickly be able to meet their needs.

And I guess in the near-term, would you think it's fair that you have more of the green initiative akin to some of the merchant developers who basically need to -- I don't want to say use it as a marketing tool, but as you pointed out, it kind of is in the near-term.

Well, I think it's actually going to be some of the opposite, because I think there's going to be some people who are long-term owners who believe they can benefit from it well over time. If not in the first lease, then the second round of leases, where an awful lot of merchant builders are building as cheaply as possible so they can flip it and make as much money as possible. The bigger the building, the more rent-sensitive the prospect is. So it's going to be a learning process.

But I guess the green initiative is, as you said, the lure.

I don't think it's far enough along yet to be a major lure. And what I've read, it's a requirement in Europe, or close to that, where in the U.S. people are just coming around to it.

Okay. Thanks a lot, guys.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) It appears we have no further questions. I'll turn it back to Mr. Hoster for any closing remarks.

Thank you. As always, Keith and I are available to answer any questions that we might not have fully covered on the call or come up later, or if any review of our numbers bring up some issues. Again, thank you for your interest in EastGroup.