Eastgroup Properties Inc (EGP) 2008 Q1 法說會逐字稿

Good day, and welcome to the EastGroup first quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode, and later there will be an opportunity to ask questions during our Q&A session. And as a reminder, this call may be recorded.

I would now like to turn the program over to President and CEO, David Hoster. Please go ahead.

Thank you. Good morning, and thanks for calling in for our first quarter 2008 conference call. We appreciate your interest in EastGroup. Keith McKey, our CFO, will also be participating in the call.

Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer, covering these statements.

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 of 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 first quarter exceeded the upper end of our guidance range. Funds from operations were $0.83 per share. This compared to $0.72 per share for the first quarter of last year, an increase of 15.3%. The $0.06 per share above the midpoint of first quarter guidance was due to good property operating results combined with a number of one-time items. These included gains on sales of securities, lease termination fees net of bad debts, and a gain on involuntary conversion, which was the result of insurance proceeds exceeding the basis of an asset.

We continued to achieve positive same property net operating results in the first quarter, but at a slower pace than a year ago. Same property quarterly results improved by 2.7% without the straightlining of rents and, with straightlining, increased by 2.6%. Without termination fees, these results were 0.9% and 0.8%, respectively. This was the 19th consecutive quarter of positive results for both measures.

The reduced rate of growth in same property results for the quarter was due to the higher level of occupancy in the first quarter of last year. Consequently, the increases in the first quarter of 2008 are due primarily to higher rents rather than improved occupancy, as we have seen in the past. In the first quarter on a GAAP basis, our best major markets, after the elimination of termination fees, were Dallas, which was up 12.6%; Houston, up 7.1%; San Francisco, up 6.3%; and Orlando, up 3.4%. The trailing same property markets were El Paso, down 15.2%, and New Orleans, down 9.6%. The differences between quarters are due to both higher rents and changes in property occupancies in the individual markets.

Occupancy at March 31 was 94.4%, a 100 basis point decrease in the end of the fourth quarter. 28 basis points of this decline was due to the vacancy in our first quarter Charlotte acquisition. Our California markets were 97.9% occupied and Florida was 95.3%. Houston, our largest ownership market with 3.9 million square feet, was 98% occupied.

As we discussed in our last conference call, leasing activity has slowed significantly from its peak in the first half of 2007, reflecting the general economic slowdown. The good news is that there are still prospects looking for space, although there are fewer of them, and it takes longer to complete lease negotiations. Our leasing statistics for the first quarter illustrate the slower but generally good real estate fundamentals in our markets. Overall, of the 1.1 million square feet of leases that expired in the first quarter, we renewed 61% and re-leased another 17% for a total of 78%. This is below our average for 2007, but better than the fourth quarter. In addition, we leased to 171,000 square feet of space that was vacant at the beginning of the quarter.

As you can see in our supplemental information, we continued to achieve strong rent growth in the first quarter with a 13.3% increase for GAAP with straightlining of rents, and 6.4% without straightlining. These figures are both above our 2007 averages.

Our average lease length was 3.9 years, which is the same as the last quarter. Tenant improvements were $0.76 per square foot for the life of the lease or only $0.20 per square foot per year of the lease; well below our 2007 average costs.

At March 31, our development program consisted of 20 properties with 1.8 million square feet and a total projected investment of $128 million. Eleven of the properties were in lease-up and nine under construction. Geographically, these developments are diversified in four states and seven different cities, and overall, are currently 30% leased.

Reduction in the size of the development program from December 31 resulted from the transfer of four properties, including our large Orlando build-to-suit into the portfolio during the first quarter. These properties total 534,000 square feet and are currently 98% leased.

In the first quarter, we started construction of one property, World Houston 26, and plan to begin the development of at least three additional properties during the second quarter. For the full year, we expect to have new development starts of between $60 million and $70 million, which is a decrease from the $120 million started in '07. This year's total will be higher or lower, depending on potential build-to-suit opportunities and, of course, market conditions. We are very sensitive to the economy and will adjust our plans quickly, if necessary.

As you have heard us state many times, our development program has been and, we believe, will continue to be a creator of significant shareholder value. We are not a merchant builder. We are not developing to generate immediate gains through the sale of newly created assets. Our goal as a developer is to add quality, state-of-the-art investments to our portfolio, and thereby increase total returns to our shareholders in both the short and long-term.

Including properties and lease-up and under construction, we have developed over 30% of our current portfolio. As previously reported, we acquired a portfolio of properties in metropolitan Charlotte at the end of February for a purchase price of $41.9 million. This portfolio consists of five buildings of 669,000 square feet in four different locations and 9.9 acres of developable land. In total, the buildings, which were constructed between 1989 and 2006, are currently 86% leased to 14 customers. This acquisition increased our ownership in the Charlotte market to over 1.6 million square feet.

We are currently marketing our 189,000 square foot Metro Business Park in Phoenix for sale. It is a five-building service center complex, which was originally acquired through a merger. In the next 30 days, we will also offer the smaller of our two remaining buildings in Memphis for sale.

Keith will now review a number of financial topics.

Good morning. As David reported, FFO per share for the quarter increased 15.3% compared to the same quarter last year. As was the case in the fourth quarter of 2007, FFO included a number of one-time items, as disclosed in the press release. These items amounted to $0.04 a share and without these, FFO per share would have increased 9.7%.

Lease termination fee income was $475,000 for the quarter compared to $15,000 for the first quarter of 2007. Bad debt expense was $187,000 for the quarter compared to $149,000 in the same quarter last year. Gain on sale of securities was $435,000, and a gain on involuntary conversion was $175,000.

Debt to total market capitalization was 37.1% at March 31, 2008. For the quarter, the interest coverage ratio was 3.8 times and the fixed charge coverage ratio was 3.5 times, which is an improvement compared to last year. Our floating rate bank debt amounted to 7.3% of total market capitalization at quarter-end.

We are very pleased to have closed two major debt transactions in the first quarter, which were previously announced. In early January, we renewed our credit facility with an increased capacity, lower interest spreads, and improved covenants. On March 19, we closed a $78 million non-recourse first mortgage loan at an attractive fixed rate of 5.5%.

In March, we paid our 113th consecutive quarterly distribution to common stockholders. This quarterly dividend of $0.52 per share equates to an annualized rate of $2.08 per share. This dividend represented an increase of 4% over the previous quarter's distribution, and made 2008 the 16th consecutive year of dividend increases. Our dividend to FFO payout ratio was 63% for the quarter, and 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 stream gives stability to the dividend.

FFO for 2008 is expected to be in the range of $3.26 to $3.36 per share. This is an increase of $0.06 per share from our previous guidance. The increase is due to the strong first quarter results. Earnings per share is estimated to be in the range of $1.07 to $1.17.

Now, David will make some final comments.

We had a good first quarter, in spite of the overall slowing of the U.S. economy, and are working to maintain this momentum. Although leasing velocity is decreased, we are still leasing space while achieving solid rent growth. As Keith pointed out, our balance sheet remains strong and flexible. Our strategy is simple and straightforward and it is working.

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

(OPERATOR INSTRUCTIONS). Michael Bilerman, Citigroup.

Good morning. Irwin Guzman here. Michael Bilerman is on the phone as well. Looking at your development disclosure in the supplemental, it looks like you have a few assets converting in this quarter and sort of over the next six months that are sub-50% leased. I'm thinking specifically of Interstate, SunCoast, and Centennial. Can you talk about what kind of activity you're seeing in those markets and whether your guidance includes any potential dilution from some delivery of vacancy there?

All three of those properties have been a little slower to lease than we would have liked, obviously; but we have good prospects looking at the vacancies in all three. So we're optimistic that if they're not brought up to close to 100 or 100% by the time they're moved, that that will happen soon thereafter. And our guidance just has a mix of conservativism in it on development properties.

And the development guidance that you put out there in terms of starts, $60 million to $70 million, that excludes any of the build-to-suits that you might get for the year, is that right?

That is correct. Those are just too hard to project. We've managed to have almost one a year; difficult to tell in today's environment, but to be conservative, we don't budget any of this.

David, it's Michael. Have you seen anything in your markets, which has clearly been exposed a little bit to a housing slowdown, from any tenant pull-back and sort of the ripple effects from tenant interest or leasing? Maybe you can just dive into that a little bit?

Yes, we absolutely have seen the results of the reduction in housing activity. In Phoenix, we've had one or two downsizings. We had last -- almost a year ago had a cabinetmaker in Dallas, that was a regional or national company, go broke. That was an interesting one. They paid the May 1 rent and then filed Chapter 7 two weeks, three weeks later.

In Florida, we lost a good-sized tenant in Tampa that was supplying -- I think it was Thailand Granite. We immediately re-leased that space. And then we've had a few of the smaller operators in Florida shut down.

But to date, because of the strength of the activity in our markets, we've managed to re-lease most of that space fairly quickly. We really don't have anybody else we're worried about right now. I think that's pretty much cleared out through the system.

Great. Thank you.

Bill Crow, Raymond James.

A couple of questions. Let me start by following up on Michael's question there. I know you have more multi-tenant assets than maybe some peers, but what are you seeing from corporate America, as far as their desire or inquiries to do build-to-suit projects. Are they more likely today to do sale leasebacks? To try and raise cash? Or they showed less desire or more desire to buy the assets in which their operations are housed?

We do very little of a purchase leaseback or very little of selling our buildings. So I can't really answer that other than it hasn't changed and it hasn't been much. We have seen in most of our markets, other than in Texas, that the larger corporations are pretty much standing still. We're seeing very little expansion; some contraction. But I'd also add that in most of our markets, including Florida, we're still seeing companies move into the market. So that is encouraging. But the number of expansions has certainly declined significantly. But we're just seeing in the expansion/contraction the difference in corporate America's view, rather than in any of the other activities.

All right. And then let's focus for a second on Houston, where you had been renting at roughly 100% occupancy. I think you're down to 98%. There's some concerns on the supply front in that market. Could you kind of talk about where that supply is? What your view is toward supply and how that's going to play out over the next year or so?

We've been talking about an oversupply there for, I think, at least two years. And the market has done a pretty good job of absorbing it. The smaller, local entrepreneurial builders have pretty much stopped building there and we're now competing with the well-capitalized REITs and some other national-type industrial builders. So there still is new construction.

Our strong feeling is that because of the location of our buildings, we have continually outperformed our competitors from a leasing standpoint. There's certainly a lot of building going on around the airport, but that continues to be our strongest market with World Houston. The area that we're not competing in on purpose, where I think there could be a huge over-building, would be at the Houston port. I'm going to be out there later this week just to check on that. But that's a sub-market that we're not going to enter in Houston.

But it's hard to keep 99.5% or 100% occupancy when you've got 4 million square feet. So, we're still real pleased with the 98% occupancy.

Terrific. Thanks, guys.

Chris Haley, Wachovia.

Good morning. It's Brendan Maiorana with Chris. David, I think you guys in the past have gotten a little bit of a seasonal lift in occupancy in the fourth quarter. Is there any part of the 70 basis point occupancy decline from Q4 to Q1 that was attributable to some of those seasonal leases rolling off?

No. Our occupancy was -- some good news, bad news -- our occupancy was so good last year that we didn't have that extra space available to lease to the Post Office on a short term basis, or to a Wal-Mart or in some cases, liquor distributors for the holiday season. What we did see -- and we seem to see this every year too -- is that during the year, you have some customers who announce they're going to move out, and then for one reason or another, you get them to extend through the end of the year.

So, we actually did better on our leasing in the first quarter than we had originally projected. And some of that's month-to-month and might catch up with us later, but we're ahead today of where we thought we'd be at March 31.

Out of your core markets, where are you most concerned on an occupancy front?

Probably about -- Phoenix always has so much development going on, that -- that's one that worries me more than others generally, anyway. Because as I mentioned before, we do have activity there.

In Florida, with the overall slowdown, Jacksonville seems to have less activity, less lookers than South Florida or Orlando and Tampa. We had some unexpected vacancies or higher than normal turnover in Tampa, so we're going to have to work a little harder to get that back up. But of the Florida markets, I'd say Jacksonville is showing the least activity right now.

Are there markets where -- if you just think about trying to maintain your high occupancy levels and thinking about the different levers that you can pull, whether it be rental rates or lease concessions -- are there markets where you've gotten a little bit more aggressive in terms of some of those levers over the past three to six months?

Well, we like to take pride in the fact that we think we have a really good handle on what's going on in each of our submarkets. And part of that is for our people to understand what one of our customers or a prospect has as alternatives. And if they've got one or two alternatives, you can be a whole lot more aggressive on how you deal with them than if they have a dozen alternatives. And we are trying to be very careful to have a sense of where rents are going and concessions are going, and not be behind the market in offering those.

It's sort of an over-generalization, but what you start to see in a market as it slows is the beginnings of free rent from owners who've had long-term vacancies and haven't leased them even in a good time, and start to really get nervous. And then that free rent starts to spread and in the merchant building types, they'd much rather give free rent or broker incentives than cut rate, because they're going to sell the property and need that valuation.

Broker incentives, we're starting to see in a number of markets where there's an extra percent paid or there are prizes for leasing a space by the end of a certain period. Some of our markets, we're offering the broker incentives just to be competitive. We don't give away trips to Hawaii or things like that.

The last two things that happened as you see softening or rents dropping and extra TI's, we're seeing a little bit of drop in rents from asking levels, but very little compared to previous rents. So, as you saw on our statistics, our rent growth has still been very good. And what we're seeing is, especially in some of the larger tenants, they want to renew and they're more interested in rate than any kind of improvements. And I think that's reflected in our renewals in the first quarter.

Yes. We did notice that the concession packages were down a bit. Just switching over to development, and you mentioned potential build-to-suits, which would be additive to your projected starts, where do you guys think the yield differential is between spec development and build-to-suit currently?

We look at it somewhere from 50 to 100 basis points; maybe a little bit more in terms of taking the leasing risk out of the project. But we're not a big build-to-suit developer, because the merchant builders get real aggressive on that, and they will build on a very slim spread between pro forma yield and what they think they can sell it for. And we just don't play that game. And the build-to-suits that we're able to work out aren't because we've outbid somebody; it's generally because the prospect wants to be in one of our locations.

And that was certainly the case with the recent build-to-suits we've done at World Houston. I think maybe the best example is United Stationers, a [404,000] square foot build-to-suit we completed in March in our Southridge development. And if you look at the yields there, they're well above any market return. And we had the best looking, best located product available, and that worked for us. That's how we get build-to-suits rather than being the low price provider.

And in terms of your spec developments, have you guys raised your yield criteria?

We haven't raised our yield criteria. What we have raised is our leasing in buildings that are recently developed in that same part, as most of our starts are just a subsequent phase to a successful project in Southridge, Oak Creek, World Houston, Beltway Crossing developments. And this time last year, we were starting the next phase when we were [out] 30% leased in the just-finished building. We've upped that to 50% and that could go up in the future, depending on how we feel about the submarkets.

And then just last -- sorry if I missed this, I jumped on a little bit late, but -- in terms of you guys talked about the $0.04 of items that helped the quarter. But you were still -- there's $0.02 of core operational that also provided a lift to the quarter. Could you just give us a little bit of sense of what that $0.02 was? And raising the guidance to the full $0.06, why we wouldn't expect to see a little bit more flow-through through the back half of the year?

The additional $0.02 was related to both a little higher occupancy than we had budgeted. We renewed some customers we hadn't planned on and had some short-term extensions. And then secondly, we did better on rents, I think, than we had projected. So, we were very pleased with that.

Going forward, with what's going on in the economy and everything you hear and read in the media, we just wanted to be conservative in what we've done. We thought we had good guidance for the next three quarters, but you have some good things happening and some bad things happening. And we just think they'll even out going forward and so we didn't want to get any more aggressive and raise guidance, other than what we've already achieved in the first quarter.

Sounds good. Thank you.

Nap Overton, Morgan Keegan.

Would you say that today you're more optimistic or less optimistic about maintaining or increasing your development pipeline or your development CapEx in '09 versus '08 than you were a few months ago?

I have to admit, we haven't done a whole lot of thinking about what we're going to do in '09. You can start a new industrial development so quickly in most of our markets, that we haven't gotten too far ahead of ourselves on that and really gotten down to look at specific developments. So -- and too much can change in the economy between now and the beginning of next year or the end -- even the end of this year. So, we're not ready to go out on a limb on that one yet.

Okay. So, the essence of the question is would you say now versus last fall you are more inclined to add new development projects than you were six months ago, based on your gut feel?

I would say it's the same.

About the same?

Yes.

Okay. And then on the 5.5% mortgage, what was the loan to value on that transaction?

It was about 75%.

One of the things that we did differently there is it was a seven-year loan instead of a 10-year. We were looking at our maturity schedule and we had very little that matured seven years out. So we thought that was an opportunity to fill that gap. And we got a little better rate as a result.

And you may have said this, but was that a light company or what was the source of that financing?

Light company.

Okay. And then would you say that the key factor or key driver in you hitting the upper or lower end of your 326 to 336 range of FFO guidance would be the occupancy level?

Well, on the $0.02, it's primarily occupancy with rents added, and the other four are the individual items that all seem to come together in the first quarter.

And then on the year, I think it would be on the occupancy.

Yes.

Okay. For the year it is -- occupancy is a key driver of that.

Absolutely. Leasing is what we live and die by.

Thank you very much.

Chris Lucas, Robert W. Baird.

David, can you just give us a sense as to what your thoughts are about the -- and your comfort level with the lease expirations for the remainder of the year? And if there are any singularly large tenant issues that you are concerned about?

We have several large tenants coming up, but we're very comfortable with our projections from that standpoint.

Okay. And then just the --

We're in a discussion with all of them at this point.

In terms of the cap rate environment, any change from, say, your last quarter's comments?

In speaking with some major industrial brokers, they have said that the world changed pretty quickly in the beginning of March. And there's been, at least to our knowledge, properties that we've bid on, little or no closings in our markets. So I don't have enough experience to say much about it. I think there's -- buyers are nervous. Nobody wants to be the last one to buy on a low cap rate if they're going to move up, and everybody seems to think that's the case. And sellers, in many cases, have high expectations and think things are going to get better. So, they've either pulled their properties off the market or haven't put them on the market.

Our metro business center in Phoenix, I guess we're probably going to get a -- I don't know, maybe a 50 to 75 basis point higher cap rate or suffer a higher cap rate of that amount than we would have a year or so ago. But the property wasn't in a situation to be sold earlier. But right now, we're very pleased with the range of offers we've gotten.

And then just a follow-up on the question about the mortgage loan -- what sort of implied or cap rate was used to determine the value on that portfolio?

I think we used 7%.

Yes. The insurance -- we send in what we think is valued and the lenders all recalculate everything. And sometimes it's hard to tell what value they think it is loan to value versus what we've calculated. If they hit our range, we're happy and do the deal.

What was the process you guys went through and how would you characterize it compared to what you would have done six months or a year ago?

I think the real difference is in the spreads. I mean, a year ago we did a deal at 90 over the 10 year. We're always talking to the lenders about what would happen if you did it today. And it would probably be 250 or more over the -- 250, 275 over the 10 year. And also some of the institutional lenders, and from our experience, seem to be hung up on a 6% rate. They'll give you a spread, but they don't want to go below 6%. They seem to feel that the 10 years is somewhat of an aberration; it's going to be moving up and so they don't want to lock in at something lower than 6%. But we will be looking to do another package like we historically do later this year.

Okay. And then I guess my last question is sort of a detailed question about the securities activities for the quarter. Do you guys have a balance of the securities known at the end of last year? And then -- does any of this show up in the balance sheet or was it purchased during the quarter and sold during the quarter? Is that how that worked?

That's how it worked.

Okay. And was there any balance at the end of the quarter?

No, we do not own any shares in other companies at March 31.

And then I guess the question -- is this something that we should be expecting in terms of just activity going forward? I know you've got nothing in terms of gains on the guidance, but is this an activity that you'll continue to pursue?

Well, as you know, EastGroup has always looked at opportunities in buying shares in other REITs when those opportunities look very good compared to acquisitions and development. And after the first of the year, a good many of the REITs took a beating and we saw some real opportunity. But I will add is, I think, for the people who aren't as experienced with our history, is that we have only bought stock in companies where we think there's at least some potential for that company to be combined into EastGroup; even if it's a slim opportunity.

In this case, we saw some real bargains. We bought the stock. Stocks moved back up, and it seemed to make sense to take our profits at that point. We have merged four other entities into EastGroup over time through the '90s, and by buying stock was how we took control of EastGroup and named it that, way back in '83. So this is something we always are just evaluating opportunities, and they jumped out at us in the first quarter.

Okay, thanks a lot, David.

Philip Martin, Cantor Fitzgerald.

First of all, just going on the leasing theme here again. Your expected retention rates this year -- what is that? On the renewals?

That's not something that we put in our guidance. We just give occupancy numbers. But as I mentioned earlier, the retention plus the immediate re-leasing of customers that we lost in the first quarter was right in line with some of our recent averages. So. we were pleased with those results.

Would you expect that -- do you expect any meaningful change from that throughout 2008, based on the discussions you're already having with tenants and where if their leases are expiring?

There's certainly going to be some swings, but we don't see dramatic moves either up or down.

Okay, I have it. As you talk to your tenants in this environment, where there is uncertainty and at least the media is making it out to be fairly bleak, are you getting the same sense from your tenants? Or is the outlook among your tenants about the same or worse or better than what's being portrayed, I guess, in the broader media?

I think there are several parts to that. One, because everybody is worried about the economy, or most people are, the tenants or prospects are much less willing to move forward quickly. A year ago, there was real momentum from the landlord side. And because of shrinking alternatives, prospects felt a sense of urgency to get a deal done, because their first or second choices might be gone while they were thinking about it. With the slowdown in leasing and some new construction, they have more alternatives, so they don't feel that psychological pressure to move quickly, in most cases. So, that's part of what we see.

And secondly, everybody, including EastGroup, are just being more cautious. So they're less willing to make longer-term commitments or take expansion space until they figure out what's going to happen to the economy -- is this going to be down for an expanded period? Or, hopefully, as some people say, we're going to bounce back in the third or fourth quarter. So there's nothing -- each business is a little different; each submarket is a little different.

I mean, and again, I know this is speaking somewhat in generalities and I know it gets very specific a lot of the times, but as you look at your tenant base and do you get a feeling that they are well-positioned to -- that they're fairly well-positioned to weather an economic downturn through '09, if that happens to be the case? Or would you feel (multiple speakers) --

I have trouble projecting a lot of that more than a couple of quarters. If that's all the downturn lasts, I think everybody will be in good shape. The question, are we going to go deeper, like we did in '01, '02, and in that situation, leasing just shut down for awhile. Nobody did anything. People -- their lease came up, they wanted to go month-to-month. And then it took awhile for the psychology to change, as the economy changed. But -- we don't think we know enough to start projecting what's going to happen. (multiple speakers)

No, and I don't want you to -- and I know you're not an economic forecaster. I know that you obviously have much more discussions than we have with your tenants and probably have a better feel. So -- but at least over the next 12 months, you feel they're pretty well-positioned to weather this in terms -- and they're not expanding. I mean, they're slowing things down, but other than that, you feel they're pretty well-positioned.

I would think so. I mean, I think the housing, as I mentioned earlier, our customers that are related to housing are pretty much shaken out. Everybody is just waiting to see what happens.

Now, the other -- on the seller front, how patient are potential sellers out there? I mean, are they -- and for the properties that you might -- or EastGroup might be interested in, I mean, what is your sense, again? How patient are they?

Right now they're being real patient.

Okay.

Patient in terms of time; impatient with the fact that they're not willing to accept a value that's any way significantly less than what they thought it was worth last year. I think there's -- there's still an educational process for a lot of owners, especially the ones that aren't sophisticated institutions who are following the market every day.

So, you're not necessarily dealing with sellers that are in a have-to-sell situation? Or that's not your feeling?

No, that's one of the unique things about industrial real estate is that -- one of the expressions we like to use is that you sell to greedy people and buy from scared people. In the last recession, nobody got scared in the industrial sector. And we certainly haven't seen scared owners and industrial today in this slowdown.

Okay. My last question. You mentioned earlier, after your opening remarks, the strength of activity in your markets. I just wanted you to go into a bit more detail, define that strength and in your markets, what are the key drivers behind that strength versus maybe some other markets that you're not in?

That's a difficult one to answer. I think what we were talking about with strength is, is that we're not getting much push-back on our asking rents. We're achieving good rent growth. There is a slowdown and the people out there understand it. And they just don't feel the urgency to sign leases in a hurry. They're not afraid of losing their first couple of choices to move to.

So, as long as there are people out there looking at our space and we're putting out proposals, we're still reasonably optimistic about what's going on. Because we've seen it at the other extreme.

Okay. I appreciate the answers. Thank you.

Mitch Germain, Banc of America.

I guess everything has been answered at this point. Congratulations.

Thank you.

Be well.

Paul Adornato, BMO Capital Markets.

I was wondering if you could talk about supply dynamics in your markets; specifically, are the traditional sources of capital still out there? Merchant builders, are they active? And are there any distressed situations among developers?

I'll answer the second part first. We have not seen anybody distressed yet. And I think part of the fact is that it's like in the last recession, people felt that it was going to be short. And so, all they had to do was hang on for six or 12 months and everything was going to be okay. And that seemed to stretch out a bit. But there were very few or any that I'm aware of, of foreclosures or really distressed sale transactions.

The local entrepreneurial type builder is pretty much out of the game. And the construction now we're seeing is from our peer group of REITs plus a couple of other private entities that are extremely well-capitalized and tend to do it with their own money. There's still one or two out there that have a financial institution, a matching fund backing them. But fortunately, that is almost gone. So there really is a reduction in supply, except I wish some of our peers would stop building.

Right. And so is there more of a reduction in supply than a decrease in demand?

That's hard to tell at this point. There might be a little more decrease in demand than supply. It's hard to tell because, in most markets, we've been out-performing the competition, as I said, because of our product type, our flexible multi-tenant spaces, the quality of our locations. And so that we're happy with the results we've achieved -- even with the competition out there.

Stephanie Krewson, Janney Montgomery Scott.

Most of my questions have been answered. One was slightly touched down on -- the debt you have maturing in early 2009. What would you approximate the loan to value -- or rather, the value of that property? And would you lever it to about a 65% loan to value when you go to refinance it?

I have to say we haven't run those numbers recently, because we assume we're going to do one or two more loans before we have to refinance those. But I assume those are probably well below 50%, especially when you look at the California assets. And that our goal is to generally do about 75% loan to value. You start to go higher than that and the incremental rate increase just isn't worth it.

But you're right, Stephanie. The loan to values have dropped some. So it will be probably difficult to get a 75% in today's market.

Okay. Related to California, two of your clients -- two of your customers, rather -- Ethan Allen, one of them is Ethan Allen, in a 300,000 square foot facility. How critical is your facility to Ethan Allen?

I've been so wrong on trying to project what big corporations do. It's hard to say. They use it both for manufacturing and distribution. At one point, they had sublet some of it and now they've got that space back and are distributing out of it. Some of those big corporations are like the government -- you never know what they're going to do till it comes down to the end. Sometimes it's illogical and sometimes you benefit or not from it.

Right. Similarly, Tower Automotive facility in Jackson?

Well, they were in bankruptcy for a couple of years. They came out of bankruptcy -- I guess it was last summer or early fall; re-affirmed the lease and never missed a date on their rent payment. Again, they supply Nissan with frames, and Nissan is moving some of that business outside the U.S. And they're just -- but they're introducing some new trucks there that will be made in Canton, Mississippi and they need frames.

That facility was built to their specifications, so it's exactly what they wanted.

Right. Excellent. And Keith, I have a very arcane accounting question that I won't torture the listening audience with. Could you give me a buzz when you have a minute after the call? Thanks.

I'll do it.

He likes those challenges.

Christoper Pike, Merrill Lynch.

I guess you get a lot of talk on the pace of fundamentals and the manifestation of that onto your business. Just wondering, what kind of lag do you typically see or what type of lags do you see in the last downturn, between recession-speak and an overall malaise in the economic backdrop and the manifestation of that in higher vacancy numbers and an inability to push rents?

Because we were looking at some of our [co-star] data this morning, we had a client request, and it seemed about a 12 month lag before occupancy -- or excuse me, vacancy really ticked up after the last downturn. I'm just wondering what your thoughts on that are.

I have to admit that's not something that -- evaluated. Because our position is we just respond to the individual markets in terms of what we're looking for in rent and concessions and with our development program.

I think the whole thing depends on how long the economy is down. And if we start to bounce back, as a number of the economists feel, in the third or fourth quarter, we're not going to get anywhere as low as what we experienced in '02 and early '03. So it's all based on how long we're in it and whether we go any deeper or not.

Okay. And I guess you touched upon who do you see out there in terms of competing with you in terms of some of the more well-capitalized REITs and maybe some of the [IDI's] of the world. How about on the transaction side? Do you still see a bid -- where is the bid from the transaction coming from? Do you see more pension folks or you continue to see pension money, qualified money, looking to allocate towards industrial? Do you get a flavor that perhaps they are full up? What are your thoughts on that?

In talking to people, my impression is people always -- companies and pension fund advisors always seem to be short on their industrial allocation. The only one I can really give you good response on is in Charlotte, we were competing primarily with the pension fund money. I think some of that move to Charlotte that hadn't there before because of slightly higher yields than they can get in other markets.

On the potential buyers for our property in Phoenix, you don't see the pension fund, the big ones, buying much of the service center. So we've been dealing primarily there with investment advisors who represent the private equity but don't do anything on the scale of a TA or a [REIF] or an ING.

And I think they have the same stance as most other people, that nobody wants to be the last one to pay the high price and get the low cap rate. So, there's just a whole lot of everybody stepping back end waiting for something to happen.

Okay, thanks a lot.

There are no other questions in the queue at this time.

Again, thank you, everybody, for your interest in EastGroup. And Keith and I are available for any further discussion or questions we didn't answer fully, so please give us a call. Thank you.

This does conclude today's teleconference. You may disconnect at any time and have a great day.