Eastgroup Properties Inc (EGP) 2008 Q3 法說會逐字稿

Good afternoon and welcome to today's program listed at EastGroup Third Quarter 2008 Earnings Call. At this time, all participants are in a listen-only mode, but later, you will have the opportunity to ask questions during our q-and-a session. You may rest assured to ask a question at any time by pressing the *1 key. You can withdraw that question by pressing the # key. Please note this call is being recorded, and I would like to turn this call over to the President and CEO, David Hoster. Please go ahead, sir.

Good morning, and thanks for calling in for our third quarter 2008 conference call. We appreciate your interest in EastGroup. As usual, 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'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 met the upper end of our guidance range. Funds from operations were $0.82 per share as compared to $0.80 per share for the third quarter of last year, an increase of 2.5%. The increase over the midpoint of our guidance was due to better property operations and the sale of a building that had been purchased in our taxable REIT subsidiary. In comparing quarter to quarter, please note that the third quarter of this year included the expensing of $0.03 per share of original issuance costs due to the redemption of our Series D perpetual preferred shares in July. Also, the third quarter of last year had a large termination fee of $0.04 per share included in FFO.

For the first 9 months of 2008, FFO was $2.45 per share, compared to $2.26 per share for the same period last year, an increase of 8.4%. Because of the large termination fee in the third quarter of 2007, same-property net operating results were negative for the third quarter of this year.

Excluding termination fee income, same-property operating results increased by 0.3% with straightlining of rents, and by 1.4% before straightlining of rent adjustments. This was the 21st consecutive quarter of positive results for this measure.

For the third quarter on a GAAP basis, our best major markets, after the elimination of termination fees, were El Paso, which was up 14.1%, San Francisco up 12.8%, Charlotte up 12%, and Houston up 7.4%. The trailing same-property markets were Tampa, down 12.2%, Dallas, down 8.5%, and Jacksonville, down 6.8%.

Occupancy at September 30 was 94.4%, a 60 basis point decrease from the end of the second quarter, but the same level as the end of the first quarter.

Our California markets were 97.5% occupied, and Texas was 95.3%. Houston, our largest market with 4.1 million square feet, was 98.4% occupied. As we have discussed in our last several conference calls, 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 a lot longer to complete lease negotiations. Prospects understand that they have numerous lease alternatives, and, as a result, do not feel any urgency to act. In addition, they and their brokers expect to receive lease incentives.

Our leasing statistics illustrate that our markets are still alive. Overall, of the 1.4 million square feet of leases that expired in the quarter, we renewed 75%, and released another 8%, for a total of 83%. This total is above our historical average, and we believe reflects the desire of tenants not to make major new lease commitments in an uncertain economic environment.

In addition, we leased another 266,000 square feet that was vacant at the beginning of the quarter, a good indication that there continues to be users out there in the market looking for space. As you can see on our supplemental information, we continue to achieve good rent growth in the third quarter, with a 15.8% increase for GAAP with the straightlining of rents, and 9.1% increase without straightlining. Four large leases in the Los Angeles and San Francisco areas generated these above-average results.

Average lease length increased to 4.8 years, again primarily due to the California leases. Average tenant improvements were $1.68 per square foot for the life of the lease, or $0.35 per square foot per year of the lease. These figures are below last quarter's figures, but slightly above our historical averages.

At September 30, our development program consisted of 21 properties, with 1.9 million square feet, and a total projected investment of $129 million. 14 of the properties were in lease-up, and 7 under construction. Geographically, these developments are diversified in 4 states, and 10 different cities, and overall are currently 28% leased, a slight decrease from our second quarter level.

Development leasing continues to be good and relatively steady in Houston and San Antonio, but also continues to be slow and behind budget in Phoenix and our Florida markets. During the third quarter, we transferred 4 properties with a total of 372,000 square feet to the portfolio. Located in Fort Myers, San Antonio and Houston, these developments have a combined occupancy of 83%.

Also during the quarter, we started construction of Beltway 7, with 95,000 square feet in Houston, and acquired the 12th Street Distribution Center with 150,000 square feet in Jacksonville, which we are in the process of redeveloping. The acquisition of 12th Street was part of our Orlando build-to-suit transaction with United Stationers.

For the full year, we have reduced our expectation for new development starts to approximately $50 million to $60 million. This lower projection reflects current leasing activity in our development markets.

In July, we acquired 12.2 acres of land in San Antonio for future development. The price was $1.9 million, and we plan to build approximately 176,000 square feet in 3 buildings, to be called Thousand Oaks Business Park. The property located in north-central San Antonio is 1 block from our 480,000 square foot Wetmore Business Center.

As previously reported, we also currently have 130 acres under contract to acquire in Orlando. This site will allow for approximately 1.2 million square feet of industrial development. Including the planned Orlando acquisition, our land inventory contains 360 acres with the potential to develop approximately 4.5 million square feet of new industrial product.

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.

In August, we purchased a 128,000 square foot vacant warehouse in Tampa through our taxable REIT subsidiary. This acquisition, like 12th Street in Jacksonville, was part of our Orlando build-to-suit transaction with United Stationers, and had been under contract since March of 2007. Unlike 12th Street, we did not think it would be good long-term investment, and sold the building, generating a net after-tax gain of $294,000, which was included in the third quarter FFO and net income.

In August, we sold a 20,000 square foot Delp Distribution Center 3 in Memphis for $635,000, and recorded a gain of $83,000. This transaction reduced our Memphis ownership to a single lane 2,000 square foot warehouse.

In September, we sold 41 acres of residential land in San Antonio for $841,000, with no gain or loss. This property was acquired as part of our Alamo Ridge industrial land acquisition in September 2007. Last quarter, we reported that our Metro Business Park in Phoenix was under contract to sell. The transaction did not close due to the buyer's inability to perform. Keith will now review a number of financial topics.

Good morning. As David reported, FFO per share for the quarter increased 2.5% compared to the same quarter last year. Lease termination fee income was $186,000 for the quarter, compared to $966,000 for the third quarter of 2007.

Bad debt expense was $452,000 for the third quarter of '08, compared to $107,000 in the same quarter last year. The net effect of these items decreased FFO per share by $0.05 for the third quarter as compared to last year's third quarter.

Other one-time items in the quarter were the expensing of the original issuance costs on the redemption of the preferred stock of $0.03 per share, and gain on sale of non-operating real estate of $0.01 per share. FFO per share for the 9 months increased 8.4% compared to the same period last year.

Lease termination fee income was $730,000 for the 9 months in '08, compared to $1,016,000 in the same period last year. Bad debt expense was $1,283,000 for the 9 months of '08, compared to $469,000 for last year. The net effect of these items decreased FFO by $0.05 per share. We are in a strong financial position.

Our bank lines total $225 million, and with the expected closing of a $59 million mortgage in December, we expect bank debt to approximate $110 million, leaving a capacity of $115 million at year-end. The bank lines do not mature until 2012.

The other debt we have are mortgages. And we have no maturities for the remainder of 2008, only $31.4 million in 2009, and none in 2010. We feel confident that we can withstand the slowdown in the economy and the credit crunch for a good period of time.

For the quarter, the interest coverage ratio was 3.8 times, and the fixed charge coverage ratio was 3.7 times, a small improvement from past quarters. Interest and fixed charge ratios will be the same in the future due to the redemption of our only preferred shares in July.

In September, Fitch Ratings affirmed our rating of triple B, noting that EastGroup has a higher quality portfolio of industrial assets, the strength of its management team, consistent solid property operating performance, and strong debt coverage ratios. Fitch views favorably EastGroup's manageable development portfolio and its relative short construction timeframe and stabilization periods which provide Fitch with some comfort that EastGroup could either scale back or control the timing of development starts, especially during periods of considerable economic uncertainty.

In September, we paid our 115th consecutive quarterly distribution to common stockholders. This quarterly dividend of $0.52 per share equates to an annualized dividend of $2.08 per share.

Our dividend to FFO payout ratio was 63% 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.

And, again, we believe this revenue gives stability to the dividend. FFO guidance for 2008 was narrowed to a range of $3.28 to $3.30 per share, with the midpoint of $3.29 per share, unchanged from prior guidance. Earnings per share is estimated to be in the range of $1.24 to $1.26. Now, David will make some final comments.

With the current turmoil in the financial markets, and the expected continuing deterioration of the economy, the next 12 to 18 months will not be as much fun in the real estate business as it has been over the last couple of years.

But with our strong balance sheet, debt coverages and borrowing capacity, we believe we are well-positioned to deal with whatever problems or opportunities that present themselves to EastGroup. Our strategy is simple and straightforward, and it works. Keith and I will now take your questions. Thank you. Operator?

Yes, sir. Would you like to accept questions?

Please.

Okay. Again, all participants can submit a question by pressing *1, and you can withdraw that question at any time by pressing the # key. Looks like our first question will come from Michael Bilerman from Citi. Please go ahead, sir.

David, Keith, good morning. It's Irwin Guzman here with Michael.

Good morning.

I'm sorry if you mentioned this and I just missed it, but you talked about development start guidance. I'm just wondering, you know, as you look at your pipeline right now, you're developing sort of a 9% yield -- given what you're seeing in the capital markets, how do you think about where that yield should be to justify new development based on where you think cap rates are going, and what sort of the cost of that is on these assets?

I wish I had an exact answer for you on that. I don't think anybody really knows what's going to happen with cap rates and debt costs over the next 12 to 24 months. We are now looking at starting possibly just 2 more developments, probably do 1 per share of World Houston spec building and the other, which could get postponed to next year, is Alamo Ridge in San Antonio, two markets where we're still having success in development leasing, and with both of those, we are still comfortable with our projected yields in the 9% range on a cash basis, a little higher on a GAAP basis.

But what happens with starts in '09, we haven't come to a conclusion on those yet. So, need a little more information on what's happening with the capital markets and, actually, more importantly, with what's happening with our leasing markets.

Thanks. And, Keith, can you just clarify why the gain on the asset sale would be recorded in FFO as opposed to being backed out?

When we did the United Stationers deal, it was 3 parties to it. One is a build-to-suit for United Stationers, and then they had 2 buildings that they wanted to sell us. One we wanted to keep and put in our portfolio, and the other one we did not plan on keeping, so we put it in the taxable REIT subsidiary, never depreciated it and always planned on selling it.

Okay. Thank you.

Thank you.

Our next question will come from Mark Biffert from Oppenheimer. Please go ahead.

Good morning, guys. First question, Dave, is towards these 130 acres you're looking at, or that you have under contract in Orlando. Has there been any delays in terms of the closing of that because of the financial markets, and if this continues, do you think that you would have to, or could walk away from that deal, and if that's the case, are there any termination fees that you guys might be exposed to on that?

We have money at risk on the transaction. We are extremely comfortable with the price we're paying, which we will announce when we close it. We think this is an unusual buy, tremendous location with almost a mile of frontage along the Beechline Expressway, between our Sunport development and our Southridge development, right basically next door to the Florida Mall.

We think that we were able to negotiate an attractive price and attractive structure on it because of what was happening in the capital markets, and in the past, we've found that some of our best land purchases have been when we're looking at difficult economic times. There's less competition for the land, and buyers enjoy dealing with somebody that doesn't have financing contingencies. Our Southridge development, all that land was acquired during the last recession, so that process has worked well for us in the past.

Okay. And then, lastly, just looking at lease termination fees. What are your expectations for the fourth quarter, and then how is leasing going when you look at the remaining fourth quarter expirations, and then into '09, what are you seeing in terms of tenants wanting to resign early?

A number of the leases that we executed in the third quarter were '09 renewals actually. We're finding just a mixed bag. We don't expect to have any termination fees in the fourth quarter, but that could always happen.

Our expectation is somewhat of a continuing deterioration of the economy, so we expect, not a steady, but several steps down in occupancy over the next 6 to 12 months, but we haven't tied down all our projections for '09 yet.

We traditionally have released guidance in the middle of January for the upcoming year, so at that point we'll be able to give you a lot more detail on what we see happening in '09. We still have plenty of time to sign leases this year and that can really affect those '09 renewal projections.

Okay, thanks.

Our next question will come from Mitch Germain from Banc of America. Your line is open.

Hey, David. You had mentioned potentially another development at World Houston in the fourth quarter.

Yes. Our -- what we -- World Houston 30, obviously our 30th building in World Houston, it would be a speculative development of front park, rear load. We have almost no vacancy in that type product at World Houston now. We've got, I guess, a 14% vacancy remaining in our World Houston 24, which is a similar building. Everything else in that style is -- that prototype is leased. So we think that it makes sense to put up a spec property, given the environment and how we're doing at World Houston.

So, just to take from that, it's different than the World Houston 26.

Yeah, 26, which we finished just a little bit ago, is a crosstalk building, and geared to smaller crosstalk users, and we've just -- 25, which was next door to it, another 66,000 square foot crosstalk -- we've just recently brought it to 100% occupancy, really since the end of the quarter. So, we're not -- too early to be worried about that crosstalk product, and we do have a prospect for some of the space now.

Okay. And I apologize if you mentioned this already, I got on the call a little late. The new -- the $59 million mortgage debt scheduled for the fourth quarter. What's the loan-to-value on that?

It was in the 60% to 65% range.

Okay. And just quickly, browsing through your markets, David, you know, can -- I guess, considerable pressure in Florida. I mean, how much of that is related to the housing market, and how much of that, you know, could be related to any other factors? If I can get some comment.

I think. Excuse me, I think Fort Myers and Tampa are probably, of our 4 or 5 Florida cities, are more affected by the housing market than any of the others. Orlando is projected by Florida economists to come back first of the Florida markets. And we're already, I think, seeing a little bit of improvement there, nothing to get really excited about yet, but that's happening.

Tampa has had tremendous job loss, and looking at the statistics that are out recently on job growth or job loss, and, so, of our Florida markets, that's probably our most disappointing one at this point in time.

Great. Thanks, guys.

Thank you.

Our next question will come from Paul Adornato from BMO Capital Markets. Please go ahead.

Hi, good morning.

Good morning.

Could you characterize the bad debt in the quarter? Number of tenants, size of tenant, industry exposure.

As Keith is pulling some of that out, I -- as usual with us, there's no, I think, trend in either type of business or the size of the business. It's across the board. I guess we're still seeing a little bit of problem from companies that weren't full-time housing-related, but at least on a periphery basis were -- are exposed to construction.

(inaudible) was 50,000.

I'm sorry, what was that?

Well, there's a company in Tampa --

Okay.

They made security gates for shopping centers and shopping malls.

Okay.

They filed bankruptcy, so I won't say that that's residential, but it's real estate-related. I'm going to give David some of these other larger ones that they didn't come in on the phone. It's nothing real big. They have a lot of --

We're starting to see some problems with companies that sell furniture. One of them related there. I guess you could say that's related to housing, but, again, it's no specific trend where you can say, okay, we need to watch any type business more closely than any other, and our actual bad debt in the third quarter was down from the second quarter, but trending above last year.

Right. Okay. And, could you also talk about traffic, particularly in September and into October?

We've not seen any significant decline in traffic over the last couple of months. I'm asked all the time how is the credit crunch affecting your customers, and so far, I think not enough time has passed before there'd be any direct consequences.

I'm sure we'll hear more about it going forward, but the complaints that we hear from our tenants is very simply that their business is off and they either -- the ones with problems either need to downsize or want a break in rent, or would like to get out of their lease. These are the normal things that happen in an economic downturn.

I would guess next quarter, if there's any real problems related to inability to raise credit, we'll hear about it and be able to report it to you at that point.

The good news, and I've said this a number of times, is that really I guess in every market but Fort Myers, we still have people out looking for space, which is very different than what happened in really that fourth quarter of '01 and first quarter of '02, where we hit our low in occupancy and the phone didn't ring. It was just dead. Fortunately, we haven't gotten to that point yet, and hopefully will not.

Okay. Great, thank you.

Thank you.

Our next question will come from Wilkes Graham from FBR. Please go ahead.

Hey, David. You may have just answered my question from the previous question, but I guess I'm just trying to get a sense for, given what's gone on over the past few weeks, and you haven't seen traffic change, but just how have your expectations changed for, you know, lease rollovers next year, and just your ability to resign tenants, or resign leases overall next year?

I guess it's more of a -- this is personal response, not anything on any kind of real data on leasing, but the bad news seems to be getting more frequent and worse, and maybe it's just the media, but there doesn't seem to be much light at the end of the tunnel right now in terms of what's reported, and we get barraged every night, or -- well, for us, every day, on what's happening to REIT stock prices, what's happening to the overall market, unemployment going up, credit crunch, all those sorts of things, and I think a lot of that has not filtered down to people running day-to-day businesses, and it's too early to tell how much they're going to be affected by that.

And how severe it's going to be on them, and it's going to take some time to feel that, so everything I hear and read, people no longer are talking about this being a short-lived recession, that it's going to be longer and I don't know if that's a good sign that soon as there's total despair, things usually start to get better, but there doesn't seem to be anything in the economy today providing the catalyst for things to improve between now and the end of next year. So, we're still doing our projections for '09, and they will probably be colored by just what we hear every day in the media.

Okay. Thank you.

Thank you.

Our next question will come from Chris Haley from Wachovia. Please go ahead.

Could you -- my apologies if this question has been answered -- regarding the preferred redemption, I can't recall -- haven't had a chance to check what the coupon was on that, but could you give us a pro and con of buying that in, versus alternative uses of capital?

When we made the decision to do that, the world was very different, obviously. It was a 7.95 coupon, and we knew at the time that we couldn't have reissued it at that rate. We didn't have any plans to.

And we looked at our capital situation having just done an equity offering at an attractive price, and looking at the debt that we were locking down for 10 years, and there was a nice spread. In hindsight, I wish we hadn't done it, but not for capital reasons, but if we hadn't done it, we could have probably bought it in as a discount today, given what's happened to preferred prices.

But you would have to redeem it at par, correct?

No, we could have bought it in the open market if we'd announced that we were going to do that.

Okay. But when did you actually buy it in? When did you actually redeem it?

July the 2nd, I think.

Yeah, it was the first week of July.

It was the first week of July, after the equity transaction, so you decided to remove a fixed expense.

Well, as I just mentioned, what we did was in March, we had done a, I think it was a $79 million 7-year loan at 5.5%.

Right.

So, I was looking at a fixed expense for --

For that versus --

10 years of 5.5% versus a fixed expense for longer than 10 years, but I thought that was a long enough time horizon to be evaluating it, and we were making the spread on 250 basis points on that $31 million, and we didn't think the $31 million, or $33 million, was a big enough number that it was going to make a big difference to our capital structure in the long run anyway.

So, when I think about that transaction, then, so you would have a full quarter benefit of the paydown at near-rate versus using under 6 capital -- that was a benefit to the third quarter, is that fair?

Factor in the common stock issuance also.

So, the net of those items, Keith, would be what? Plus or minus?

It'd be a plus.

Would be additive to the FFO per share?

For the third -- second quarter it was a breakeven -- (inaudible). Yeah, if you take out the redemption costs, that was $0.03, so we had to put -- I think it was close to a breakeven, or maybe a little positive.

Okay. And the reason your fourth quarter is up at $0.85 -- in the mid-80s is because, obviously, you're not -- your run rate is $0.85 without the OID.

I don't know if we've got a run rate anymore, Chris.

Well, I would hope you would have a run rate.

Well, that's what we're projecting for the fourth quarter. I don't know what the run rate's going to be.

Well, that's what I meant. Is -- why are we up in the fourth quarter versus the third quarter?

Yeah, because of the $0.03 is gone on the (inaudible) and property operations are holding up well, debt structure's good.

And one thing, if you go back to our original projections in January of this year, we had projected selling our Metro Business Park, and by not selling it, that was a positive of a little less than $0.01 a share, because it's 100% leased -- good asset, but we had hoped to sell it because it was a service center, not a dock high building. So that sale falling through benefited us at least in the short run.

And thankfully LIBOR rates have come down a little bit, too. That'll help.

But they've gone back up. If I look at the end of the year for the last --

Not in the last couple of days, but that's okay.

In the last couple of years, you guys have benefited from some short-term occupancy pickup in the latter month -- latter weeks of each year -- calendar year. And what is the perspective on whether or not you think the early inquiries for that type of occupancy pop might occur again?

Probably not. We haven't ruled it out, but retailers don't seem to be buying extra inventory when they haven't -- with a need to park it someplace till they sell it at Christmas, so -- and also, we've traditionally provided space for the post office in several different markets, and that need has not been out there yet.

Alright. Well, thank you, and thank you for keeping things clean.

Thank you.

Our next question will come from Dick Bower from Merrill Lynch. Please go ahead, sir.

Hey guys, it's actually Chris here. David, just sort of wondering what your thoughts on construction costs, especially in some of your sun belt markets, with perhaps some loosening up in labor costs. Where do you see things trending on the construction side?

In our most -- well, our most recent activity has been in Houston, and although labor costs and availability of labor has improved some, at least when we did a number of the World Houston properties that we're starting now, steel costs were still up, and concrete took a huge leap up.

That seems to be counterintuitive, but concrete is now over $100 a yard in Houston, and that's been unheard of. That's been our cheapest market. Now, as time goes forward, I would hope those price increases don't hold. I would certainly hope that we get in the middle or late next year and construction costs will reflect the lack of construction and a weak economy. But, we've not seen anything dramatic yet.

Okay. And then, I guess one of our prior conversations we were talking about regional -- some of the regional banks and the strength, or lack thereof, and some regional lenders, and given your customer base, smaller in nature, maybe their ultimate financing sources come from these more regional -- regionally-based lending banks, what are your thoughts nowadays and the strength of that lending base?

How do you think that may, or how do you start to see it manifest itself in the financing of some of your customers, and is that in any way, shape or form leading to some of the slower lease -- with respect to your market niche, in terms of who you look to?

On an anecdotal basis, we have not heard, as far as I know, the first word about the credit crunch affecting any of our customers' tenants. Now, whether that holds true, I have no idea. But, right now, that has not been a negative effect, and I think the credit crunch has not gone on long enough for a lot of that to filter down.

But, the negative feedback we get is that just business stinks. Not that they can't finance it or anything else like that, and when there's an unknown in the economy, then prospects are not interested in making generally long-term commitments, and that's why, I think, through the good-news, bad-news -- the good news is is that our renewal rate in our current portfolio is the highest it's ever been, reflecting that our customers don't want to make any changes because they don't know what changes to make.

The bad news is that it means those same customers, or other prospects, aren't interested, or have a whole lot less interest in signing long-term leases in new buildings where they themselves have to make a capital commitment, and, so, that's hurt our development leasing in Phoenix, and in our Florida cities.

So far, that's not seemed to have affected too much our development leasing in San Antonio and Houston. I mean, it's slowed, but it's still well above any of our averages. So, the long-winded answer that what's happening to the banks -- so far, we have not heard anything is affecting our customers.

Okay. Thanks a lot, gentlemen.

Okay.

Our next question will come from Chris Lucas from Robert W. Baird. Please go ahead.

Hi. Good morning, guys.

Good morning.

Just a couple of followup questions, David, on that last comment about the development pipeline. What are you guys doing now to manage the pipeline versus 6 months ago, particularly in the softer markets like Phoenix and the Florida coast. In particular, are you looking at stretching the development process out, or in doing more phasing of the development?

Well, we've always -- except for one exception, we've always done phasing of development, and that's worked very well for us. What's different is that say 2 years ago, if a brand-new building was 30% to 35% leased, we'd start the next building.

And about a year ago, we said that current building had to be 50% leased to start the new building, and now, we don't have any set rule, but I would say it would need to be 75% leased or higher, and still having a certain comfort in the market. Our average building size is about 70,000 or 80,000 square feet, and, so, the average investment's $5 million.

So, we don't view ourselves as being really hung out in any one market, and I think our development in all these different cities is -- shows why we're diversified, why we're in 4 primary growth states, and how being in cities where it's things -- good things are still happening, can offset being in some cities that are slower.

But, we've not put together any schedules for what we think we're going to do next year, because that's really going to depend on leasing and not just occupancy, but the rents we're getting and the construction costs in the markets where we hope to build subsequent phases.

Okay. And, then, you guys have been through a number of cycles. As you think about where we are, are you looking at managing your overhead any more aggressively than you currently do?

Obviously, thinking about that. We certainly expect there to be less development, and, as a result, less construction in our various development markets, and, as a result, we actually do have a reduction in head count in our little construction operation.

But, our people are -- well, the way we're set up is that when somebody is a senior vice president, vice president, asset manager in a market, they're involved with everything in that market, from acquisitions to sales to development, to leasing, to management, and, so, the fact that we're slowing down development some, doesn't mean there are a bunch of people sitting around doing very little.

I mean, our overall head count at EastGroup has always been pretty darn efficient. I mean, we're only at 63 employees, for what, $1.8 billion in assets or something. So, we like to think that we run a pretty tight ship without layers of bureaucracy that some bigger companies might have.

Agreed. And, then one last question here is that historically you've looked at this type of environment -- at other opportunities, particularly in the, you know, M&A arena. Can you remind us as to what characteristics you would be looking for when analyzing potential candidates?

What we're trying to do is to look at a wide range of opportunities and try to take advantage of the best ones as they are presented to us. And that can -- entails anything from buying completed assets, to assets under development, to stock in other companies, and I certainly think that there are going to be more opportunities 6 to 12 months from now than there are today.

And I think there's a big difference today than in '01, '02. Back then, everybody believed the recession was going to be short, and so nobody -- especially people in the industrial sector -- got scared, and there certainly was no credit crunch, so nobody had those pressures.

I think that the change in the mentality of people just in the last 60 days has changed to make that very different this time around, where nobody thinks it's going to be a short downturn, whether it's a recession or whatever you want to call it, and, so, they're looking out to maybe 2010 to recovery, so if you've got leasing problems today and debt coming due, you're going to be scared. And be willing to provide an opportunity for somebody with capital.

So, we hope to come across some of those and be very selective, and maybe allow us to buy in some markets where we haven't been able to afford previously. But more than likely, the real opportunities are going to be with properties that have leasing risk, and, so, that if we find some, my guess is they won't help the bottom line initially, but looking out a year or two, we hope that they would really contribute to future growth.

Thank you very much.

Thanks.

Next, we'll go with Philip Martin from Cantor Fitzgerald. Your line is now open.

Good morning, David. Good morning, Keith.

Good morning.

Good morning.

I have a couple of questions here. A bit all over the map, but in terms of your fourth quarter tenant retention, are you seeing that track pretty similar to the third quarter with -- you know, which was quite good?

We expect, as you can see in our guidance assumptions, to lose some occupancy in the fourth quarter. But we're not seeing any big move away from what we've been doing.

Okay. I -- you know, and you mentioned, David, that you still have tenants. You know, there are still tenants looking for space out there. Can you characterize what type of tenants those are, and, you know, who is looking for space out there right now?

Every market's different. I mean, in talking to our people in Phoenix, they say a big difference there is that the prospects are people moving around Phoenix, where a year or two ago, it was new companies coming to Phoenix. So -- and because of the negative job situation there, that's changed dramatically. In some other markets, there's companies that are still coming to town. But, no, there's no one area that we see as -- that you could concentrate on to lease space.

But you're still seeing activity. Is that really just part and parcel of your strategy of focusing on smaller tenants and buildings, you know, at least relative to many of your peers?

I've (inaudible)

You know, that better positions you -- that you just have more potential tenants out there?

Well, yes, that's absolutely the case. I think the other factor is that in a downturn, your overbuilding tends to be in the bigger boxes on the fringe of development, whether it's out far east from Los Angeles or far west from Phoenix. It's in the fringe. I think that's not just industrial, but you see it in residential and retail, and that's not where we build, and that's not the type product that we construct or buy, so that I think that insulates us, at least for a while.

Would you characterize the competitive supply in your existing markets as still pretty tight?

No. I think that the vacancy is rising basically in every one of our submarkets. I mean, even at World Houston, where we continue to do very well, there's more vacancy around the Intercontinental Airport. It's just that we have a premier park in a premier location, and, as a result, have been able to outperform there. But, no, vacancy's going up basically all over.

Okay. It's just that you're benefiting from one or two locations.

It's affecting the -- infill locations are going to last longer with -- than the big boxes on the fringe. I think that's, you know, that's normal.

Are you -- and it might be too early to tell, but would you -- are you, or would you expect to see these tenants -- I mean, location -- and it depends on the tenant, but location can be -- is very important to some tenants -- it's probably less important for others. But will that location give you -- that location advantage that you seem to have -- in your opinion, would it continue to give you some pricing power? Is location the most important thing for the majority of your tenants?

I think location's the most important thing for almost all industrial tenants. And especially with the fuel costs, costs of distribution having gone up, as vacancy goes up, pricing power goes down. I mean, we have had, from our statistics, tremendous pricing power over the last few years, and I think that's proved for verification that our infill locations in growth submarkets, where there's population growth, job growth, it's certainly paid off for us.

We wouldn't have had the tremendous same-property operating result growth if it hadn't been for those growth markets that allowed us to raise rents and keep occupancy up at the same time, but, as overall vacancy increases, you just steadily lose pricing power and you can't follow the markets down. That's why we spend so much time with our asset leasing people determining what a prospect's alternatives are, and you can't be arbitrary about the rent you want in a down market, or nobody talks to you.

So, you have to follow, or in most cases, actually lead a trend if you want to keep your occupancy up in your individual submarket.

Now, in terms of, you know -- Keith, in terms of the mortgage debt expiring through 2010, you know, I know earlier in the call you mentioned that some near-term mortgage debt -- the approximate loan-to-value there is about 65%, I think you said.

Yes.

What cap rate does that assume?

7.

About 7. Okay. Okay. Thank you very much.

Thank you.

Now we'll take a question from Nap Overton from Morgan Keegan. You may go ahead.

Thank you. A couple of things. Good morning, David, Keith. Your development starts have been declining recently in your estimates of development starts. It's safe to assume that they would be flat or down next year versus '08?

I think that's a safe assumption today.

And the two properties --

(inaudible)

I beg your pardon?

I think it's a safe assumption. I hope maybe it will get better, but I'm not holding out a lot of hope. We're not planning on that.

Okay. And the two specific properties you were talking about, thinking about starting -- the World Houston 30, I think, and Alamo Ridge in San Antonio. Those two that you were thinking about starting in the fourth quarter here in 2008.

Yes. We plan to start World Houston 30 in the fourth quarter, and we haven't determined yet whether Alamo Ridge would be fourth quarter this year or early next year.

Okay. Alright. And then I had a question on the development transfers in the third quarter. The 83% occupancy level -- is that an unusually low level for those 4 properties to have come in at, or is that an -- are you having an increasingly difficult time leasing up the development properties is the basic question?

No, you're right. That's lower than we've traditionally done. I guess we've usually been about 98%. Significantly above any of our peer group averages, but yeah, actually in that report, our World Houston 24, we signed a lease late yesterday, so that one's up to 86%, so it brings the total up a bit, but -- and the one in San Antonio, we bring properties in either when they reach 80% occupancy, or 12 months, whichever happens earlier. That one reached 80% occupancy before we hit the 12 months, so we still haven't gone through the full 12 month period on it. But, yeah, no, that -- it just reflects softer markets.

Okay. And then, just one other question. Has your outlook for the Houston over the next, you know, 18 months or so, changed at all with $70 a barrel of oil instead of $140 a barrel of oil?

When you talk to people in Houston, they all say that they made their plans based on $60 a barrel oil. I don't know how true that is. We talked to one of our large users, who has leased a whole World Houston building, and they said that 80% of their backlog was based on $60 oil, so, I mean, it has to hurt a little bit. But they all claim they're going to be -- they're still be making a lot of money if it -- over $60 or above, but, you know, only time's going to tell.

Thank you.

Thank you.

And, again, any participant who would like to ask any final questions can just press *1 again. We'll take one from Justin Maurer from Lord Abbett. Please go ahead.

Good morning, guys.

Good morning.

Just a philosophical question. Given what we're seeing, you know, broader -- more broadly in terms of merchant development cuts because of balance sheet pressures, hence placing pressure on cap rates for everybody given the cost of capital as well.

You know, on the one hand, you can paint that positively and say that that should be a better thing for supply growth, maybe being a little bit more calibrated to the realities of the market, you know, and, of course, on the flip side, which is what everybody's doing currently, is getting increasingly concerned about balance sheets and cap rate pressure and so on. You know, where do you guys, obviously, given your conservative backgrounds on that spectrum of extremes, would rather see things shake out?

I think in the short term, cap rate movement doesn't mean much to us, other than the fact that we hope that means we'll have less new development competition -- starting to feel that in the market. The local developers who were building and flipping to an institution have stopped building.

We're still seeing some developers building with mutual partners that you scratch your head over why they're doing it, but I think they're doing it because they have the money. For us, whether cap rates have moved to 7 or 7.5 or 8, if we can build to something higher than that in a market where we're comfortable, it's still going to be a real good asset for us.

We were just looking at some numbers the other day, and we looked at the overall occupancy of everything that we've built as a developer, and it's over 96%. So, here's our portfolio at a good number, 94.4% occupied, but the developments that we've built over the last 8 or 10 years are 96.2% or a little bit higher, which says that what we've built has had a very positive effect on our portfolio, because of the quality, location, building to fit the needs of an individual submarket. So, we see that we're still building at cap rates that are above what we could buy these properties for, and they meet other needs for us, other than just a spread on a cap rate.

Yep. Okay. Thank you very much.

Thank you.

It appears we have no further questions.

Thank you all, and, as always, Keith and I are available for any questions that come up going forward, or that you didn't get to ask on this call. We look forward to hearing from you. Thanks.

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