Eastgroup Properties Inc (EGP) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Third Quarter 2009 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have the opportunity to ask questions during our question-and-answer session. (Operator Instructions). Please note, this call may be recorded. I will be standing by if you should any assistance. And it is now my pleasure to turn the conference over to Mr. David Hoster, President and CEO. Please go ahead, sir.

Good morning, and thanks for calling in for our Third Quarter 2009 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 describes 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 is 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 $0.76 per share, as compared to $0.82 per share for the third quarter of last year, a decrease of 7.3%. For the first nine months of this year, FFO was $2.39 per share, as compared to $2.45 per share for the same period in 2008, a decrease of 2.4%.

Same property net operating income for the third quarter declined 3.9% with straight-line rent adjustments, and was a negative 3.1% without straight-line rent adjustments. Both of these figures represent a somewhat greater decline than that which was experienced in the first two quarters, but were in line with our expectations.

In the third quarter on a GAAP basis, our best major markets, after the elimination of termination fees, were Dallas, which was up 10.3%; and Los Angeles, up 3.9%. The trailing same property markets were Phoenix, down 18%; and San Francisco, down 16%.

Although average rents are declining, the difference between quarters is basically due to changes in property occupancies in the individual markets. Occupancy at September 30 was 88.9%, a 230 basis point decrease from the end of the second quarter. Approximately one-third of this drop in occupancy was due to the transfer into the portfolio of two large development properties that were only 7.3% occupied. It is important to note that our occupancy statistics include our development properties that were moved to the portfolio at the earlier of 80% occupancies or one year after shell completion. We have been consistent with this reporting method.

If the remaining properties in our development program at September 30 were added to the portfolio at their current occupancies, EastGroup's overall occupancy at quarter-end would have been 87.8%. Our California markets were our best at 94.1% occupied and 98.7% leased at the end of the quarter. Houston, our largest market with over 4.6 million square feet, was 94.1% occupied and 94.6% leased.

Although we experienced an overall drop in occupancy during the third quarter, we believe that our markets are at a bottom or very very close to the bottom. Only a couple of quarters of upticks in leasing will let us know for sure. We expect our fourth quarter occupancy to be approximately the same as the third quarter.

There is presently leasing activity in all of our markets, but prospects continue to expect cheap rent with significant concessions and feel no sense of urgency, as they have so many lease alternatives. Looking at our third quarter leasing statistics, we renewed 62% of the 845,000 square feet that expired in the quarter. This represents about one half of our normal quarterly expirations, and our renewal rate of these square feet slipped slightly. We leased another 480,000 square feet that had either terminated or expired during the quarter or was vacant at the beginning of the quarter, an indication that users out in the market are actually signing leases.

As you can see in our supplemental information, GAAP rents in the third quarter decreased 7.3% and cash rents declined 12.7%, which is somewhat greater decline than in the first two quarters of the year. We expect negative rent growth for the next several years until average occupancies recover to the 93% to 94% level. This was the case coming out of the last recession.

Average lease length was four years, which is our average for 2009. Tenant improvements were $1.95 per square foot for the life of the lease, or $0.49 per square foot per year of the lease, which is above our nine-month average of $0.39 per square foot.

With no new construction starts this year and none planned, our development program at September 30 had decreased to six properties with 577,000 square feet and a total projected investment of $37.5 million, which only 9% of this cost remains to be spent. All six of the properties are in lease-up and are currently 37% leased.

During the third quarter, we transferred four properties with a total of 486,000 square feet to the portfolio. Located in Houston, Phoenix, and Fort Myers, they are currently 47% leased. We plan to transfer one additional property to the portfolio in the fourth quarter, and the remaining five will transfer next year.

In mid-August, as previously announced, we acquired three business distribution buildings containing 226,000 square feet in Dallas for a combined purchase price of $6.7 million. The buildings are located in the city's close-in northwest submarket along the Stemmons Freeway, and are either adjacent to, or across the street from, existing EastGroup assets.

We currently have two buildings in Charlotte with a total of 193,000 square feet under contract to purchase. One is adjacent to an existing EastGroup asset, and the other is approximately one block away.

Our Las Vegas and Dallas purchases this year and the Charlotte assets, all fit our acquisition criteria of business distribution buildings in in-fill sites with barriers to new competition. Two of the three complexes increased our clusters of assets in core markets, and the third is our entry into a target market.

We also now have a small building in El Paso under contract to sell. This property is currently vacant and the sale is expected to close in the fourth quarter.

There continue to be only a limited number of industrial property offerings in the market, and even fewer are actually going to closing. But it does not take many good acquisitions to make a difference for us.

Keith will now review a number of financial topics.

Good morning. FFO per share for the third quarter decreased 7.3% compared to the same quarter last year. Lease termination fee income was $313,000 for the quarter, compared to $186,000 for the third quarter of 2008. Bad debt expense was $211,000 for the third quarter of 2009, compared to $452,000 in the same quarter last year. This is the lowest bad debt we have experienced in six quarters, but it is too early to call it a positive trend.

FFO per share for the nine months decreased 2.4% compared to the same period last year. Lease termination fee income was $755,000 for the nine months in 2009, compared to $730,000 in the same period last year. Bad debt expense was $1,628,000 for the nine months of 2009, compared to $1,283,000 for last year.

To put our operations in perspective, I would like to give a history of our FFO. Our third quarter FFO per share of $0.76 is better than any prior quarter -- than any quarter prior to the third quarter of 2007. And we are projecting FFO per share for the year 2009 to beat FFO per share for the year 2007. In 2008, we had a record FFO per share of $3.30 per share.

We have not had dilutive equity offerings, impairments of properties, extensive layoffs of employees, the shutdown of business segments, downgrades from rating agencies, or problems with debt. A decrease in FFO is due to occupancy declines from the economy. And we believe that when the economy recovers, we should be able to not only increase FFO per share, but to take advantage of acquisitions and/or developments of properties.

We are in a strong financial position. In the third quarter, we sold 145,939 shares of newly issued common stock, using our continuous equity program at an average gross price of $38.98 per share. Through today, we have sold 903,646 shares with net proceeds of $31 million. Our current equity program allows the issuance of up to 1,600,000 shares.

Our bank lines totaled $225 million at September 30, 2009. Bank debt outstanding was $100 million, leaving a capacity of $125 million at quarter-end. The bank lines do not mature until 2012.

Debt-to-total market capitalization was 41.5% at September 30. And for the quarter, the interest and fixed charge coverage ratio was 3.3 times. The debt-to-EBITDA ratio was 6.2 times. Our floating rate bank debt amounted to 5.9% of total market capitalization at quarter-end, and we have no mortgages that mature in either 2009 or 2010.

In September, Fitch Ratings affirmed our rating of BBB, noting that EastGroup has a solid debt service coverage, adequate liquidity, moderate leverage, and high quality properties.

In September, we paid our 119th consecutive quarterly cash distribution to common stockholders. This dividend of $0.52 per share equates to an annualized dividend of $2.08 per share. Our FFO payout ratio was 68% 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 stream gives stability to the dividend.

FFO guidance for 2009 has been narrowed to a range of $3.13 to $3.15 per share, and earnings per share is estimated to be in the range of $1.04 to $1.06. The FFO midpoint was increased from $3.13 per share to $3.14 per share.

Now David will make some final comments.

Industrial property fundamentals are lousy. Occupancy has dropped to the levels of the 2000-2001 recession and reported rent changes will experience declines for a number of years to come. We believe that we are now at the bottom and will begin to see at least a stabilization in rents in most markets and a slight improvement in occupancies next year.

The good news for us is that EastGroup is well positioned to take advantage of the recovery as it occurs. With our strong and flexible balance sheet, we are actively seeking attractive acquisition opportunities and will initiative new developments as markets allow.

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

(Operator Instructions). We'll take our first quarter from Ki Bin Kim with Macquarie. Please go ahead.

Thank you. So if you could turn to your top tenant page and look at the near-term expirations, it looks like you added some additional disclosure about which tenants you could expect to vacate. If you could touch on Premier Beverage, the Postal Service and Ethan Allen and your expectation for re-leasing on those spaces?

Okay. Ethan Allen, we've talked about a number of times. Chino, where the building is located, is in the western Inland Empire. Leasing a 3,000 -- excuse me, 300,000 square foot vacancy is obviously a big task and especially given the current market. But I think I'd rather have that size vacancy, if you're going to have one, in Los Angeles than any one of our other markets. Inland Empire has suffered tremendously. If you looked at the western part of it, where this building is located, has about two-thirds of the vacancy that the rest of the Inland Empire has. The tenant, Ethan Allen, will not be out of the building until the end of January and they're doing their restructuring and moving this operation to North Carolina, so we did not lose them to a competitor.

The Postal Service in San Antonio, we did not -- we chose not to renew that lease, because a customer in the building next door wanted to increase their space to include the Postal Service building, [an area] in San Antonio, and so they are taking that building and we are doing in addition a small expansion for their existing building.

Premier Beverage, again we've discussed many times, they are moving into an extremely large build-to-suit. They've been at a built-to-suit we did for them 10 years ago.

50,000 in Jacksonville, I might have incorrectly stated in the past that that was re-leased, it's not. But that is an improving market and we have a number of buildings in that market. So we're as comfortable we can be with the vacancy at this point.

Universal Wilkes, 35,000 square feet that they're going to be giving up next month, that was just short-term expansion space for them. Did I cover it all?

Yeah, pretty much. And just to touch on that San Antonio space, what would the rent spread be compared to what's expiring?

That's -- let me think for a second. It's a slight increase as I recall. But the important part for us was that we had a customer next door, and I don't recall their exact size, but it's larger than the Postal Service space, renewing for an extended period of time and us doing that expansion for them that will give us a good return on that investment. And so we're very pleased with how that one's worked out.

And I guess last question, this might be hard to answer, but if you had to look at your real estate portfolio, and let's say for example it's 90% leased, how much of that leased space is being fully utilized by the tenants? So for example, if there's one space that's completely leased, are the tenants utilizing it to the fullest capacity, or is it at 70% capacity where it takes time to -- for demand to really pick up to expand?

I would just be really speculating if I gave you a percentage on that, because an awful lot of our customers are businesses, can go up and down pretty quickly. And what we try to do is stay on top of the individual customers and work with them if they need to downsize or work with them if they need to up-size. That changes so often so quickly, I wouldn't want to just guess a number on it.

Okay. Thank you.

Thank you.

We will go next to James Milam with Sandler O'Neill. Please go ahead

Good morning, guys. I guess my first question just quickly, can you talk a little bit about what signals you're seeing that make you feel comfortable the market is bottoming and you're going to see some improvement in, I guess, both leasing, I guess, demand and then obviously how that affects rents?

Well, I think one thing that maybe gets -- on rents, let me answer that first, that gets a little bit confusing is when we talk about rents continuing to go down for a number of years, that's what we report, which is different than what's going on in the market. Our people in the field, it's their feeling today that market rents have pretty much stabilized. There's always going to be somebody that's going to give away lower rent space to get it leased, but that where we are today in the markets is probably going to be reasonably flat going forward. But because of leases signed at higher rents in the past, we will be reporting rents going down for a number of years. As I mentioned in my comments, that was what we experienced, and I think most other people experienced in the last recession.

From an occupancy standpoint, we just have a sense that less of our customers are going dark, that there is customer -- potential customers out there signing leases and that some of the panic with companies that you started to experience a year ago has not gone away totally, but it's certainly slacked off. And an awful lot of companies have now decided that they're going to be a survivor, maybe not the way they'd like, but they're going to survive. They need to make their warehouse space decisions to move forward. Some of those are contractions and we're trying to work with people on that. But it's the response we get from people in the field and our senior people's gut reaction and talking to prospects and leasing agents.

Okay. So do you think a lot of that new leasing activity, is that -- are you seeing some tenant expansion or is a lot of that just sort of reconfiguring space needs some more to sort of musical chairs? And then I guess also I know you guys are focused on the small tenant market, but can you talk about what you're seeing or what you're hearing small tenants versus big tenants on the leasing side?

Answering the second part first, historically you start to see, we have anyway, the recovery with the smaller users and we see a lot more activity in the 5,000 to 15,000 to 20,000 square foot users than we do in the 100,000 to 150,000 square foot users. And that's why, in a number of instances, we're going to spend extra TIs to split up spaces. And we're about to do that in a couple of markets to sign leases and appeal to four, five smaller tenants rather than go for that one big home run that we've lost. So there's more activity with the smaller prospects.

But as to -- there is certainly more downsizing than upsizing at this point and I think that's probably going to continue until the supposed recovery that we are now experiencing is felt on the ground.

Okay, great. And then this is my last question. Just on the capital front side, with the slow-mo and obviously liquidity through the line of credit still, how should we think about timing of additional equity and is that something that you're doing based on acquisition volume? Would you do it say down the line and free up capacity there, I guess just what are your thoughts going forward on that front?

Well, we had slowed it down because of the acquisition volume, not hitting our expectation that some of it -- what we had tied up being delayed. Everything seems to take two or three times as long as it used to, and also the price on the stock. So we're in no hurry to issue, it's just when it makes sense for us.

Great. Thanks a lot guys.

Thank you.

We'll take our next question from James Feldman with Bank of America - Merrill Lynch. Please go ahead.

Thank you. I was hoping you could talk a little bit more about the acquisition outlook. I mean it sounds like there's not a lot out there right now, but what kind of capacity if there were deals to do you think you would be able to handle?

Internally, we've said we can do $75 million to $100 million of acquisitions. And the main reason for -- primary reason for issuing stock through the continuous equity program is that we can issue it at a net price that allowed us to make acquisitions looking at yields compared to cost of capital, and at worst we're break-even, in several cases would give us a small spread. And as we improve the occupancy of the acquisitions, we'd really make that sale of stock accretive, and we hope to have more closed and under contract at the end of this year. But we're just very picky in what we're looking for and trying to be disciplined to stick to our multi-tenant business distribution criteria.

A lot of -- as I mentioned, we have the two buildings in Charlotte under contract and there is no money at risk on those yet. And we have one other offer outstanding, and it's something we offered on six or eight months ago. And I think there were two or three buyers ahead of us on price, and they didn't close, and so it's back to us. Now whether that works out or not, I don't know.

Since you brought up acquisitions, I think there's something interesting to point out that you don't see a lot of right now, because there are not many leads buying properties. But you now have to, under the accounting guidelines, expense your acquisition costs and -- rather than capitalize them, and we show that in our supplemental data. For example, in the Dallas purchase we expensed roughly $77,000 of acquisition costs, which was higher than normal for us, but we had to do a phase 2 environmental, which ran up that expense.

But it makes for an interesting strategic and when you think about it, you buy a building in the first quarter and you expense those extra dollars, you get the rest of the year to make it up and show a return on your investment. You close something in December and it can be a negative for you because of the expenses that go against FFO, where in the past they've been capitalized. But since not many people are buying, I just thought I'd point out that, because if you put our two acquisitions together it's a little less than $0.005 a share of expenses that a year ago would have been treated differently.

It's a good point. What do you think it's going to take for the acquisition market to open up? And I know there's talk in Congress about banks changing how they recorded assets on their -- or loans on their balance sheet. I mean do you think that flows into your markets as well?

I don't see us buying a lot of what I guess you call distressed assets, because I don't think there is many in the industrial sector as there are in the other sectors. Remember, industrial is not an area where people generally speculated. It's not area where it was 95% financed with mezzanine debt and all sorts of gimmicks, that's not the nature generally of the industrial investors. So I don't think we're going to see a lot of the distressed.

I'd like to think what's going to happen as we get into next year is a lot of sellers are going to see that prices are fairly stable, and that the market's not going to go -- have some great compression of cap rates, so they're holding on for that, and it will be just time to sell and move on. And so there'll be some good assets where I'm going to say people have accepted that that market is the market. I would expect, though, that there can be a slight decline in cap rates in good industrial property, because there is a lot of money out there looking and more and more is being raised in opportunity funds or ultra funds, and I don't think cap rates are going to drop 200 basis points, but I think they could very easily go down 75 or 100 basis points and that could shake some additional assets loose for investment.

And where would you say those cap rates are now?

I would say probably a high eight to a low nine. But again, as you get into how do you define cap rate in terms of do you look at the current roll, do you write all the leases down to current market or just the ones that are turning in the next two or three years. So it's -- cap rate is a moving target today.

Okay. And then just my final question is in terms of the demand side and your commentary about the markets bottoming, can you just give a little bit more color about what types of businesses are back in the market looking for space, and you had mentioned in the -- to the -- in response to the prior question about the smaller users that are more active. I just want to get a better sense of kind of the economic picture in your markets of who's -- what businesses are back to life and which are more perhaps still struggling?

We're seeing a pickup in the 3PLs and I think that's something that's happened historically where companies don't want to make the commitment to increase their own warehouse space or their own distribution expense, and so they contract that. So we're seeing a pickup there. We're continuing to see prospects related to the food industry and a certain number related to health/medical. Those are really the three that we see the most recently.

Are 3PL the bigger user?

There are an awful lot of small 3PLs you've never heard of.

Okay.

I mean it is amazing, in [our world] Houston development at the entrance of Continental Airport. If you just drive that whole submarket, there are incredible number of freight forwarders, 3PLs, the air cargo people that you've never heard of. And some of them are small users, and we find that a number of them survived because they're into specialty business.

Okay, all right. Thank you.

Thank you.

We'll go next to Mark Biffert with Oppenheimer. Please go ahead.

Yeah, good morning. Dave, I was just wondering can you -- what kind of lease term are those 3PLs signing right now? Are they feeling more confident in signing longer term leases?

No, they usually only want to sign a lease as long as their contract. So if they've got a two-year contract with a distributor or a manufacturing firm, they don't want to go beyond two years on that. And --

Okay.

We find the same thing on the 3PL renewals. It's all what their customers are looking for, and so they'd reach up over, "Here is the deal I got. I'm not going to sign a lease longer."

So can you push a higher rent in those scenarios typically?

Yeah, we wish, not in today's market.

Okay.

Because most of them, Mark, are taking space as is.

Okay.

I mean they will come in and say "I need it by the -- beginning the next month," and you say "Great." They sign a lease quickly. They move in quickly. They're not looking for fancy office space or an unusual tenant improvements. So it's easy to do, it doesn't cost you anything, so you are flexible, and there are probably 10 other landlords that would do the same thing. So we just have to match the market.

Okay. And then previously you mentioned that you were thinking about splitting up some larger spaces to meet the demand that you're seeing on the smaller user side. What's the rent differential between those two, and could you see a bump -- even though rents are coming down, could you see a bump in rents from that?

Yes, I mean I can't give you an exact percentage, but yeah the rent you're going to get on a 20,000 square foot space is I would say 10% to 15% higher than what you would get on a 120,000 square foot space. What skews some of your statistics is when you break off that 20,000, put in the [rising] wall, put in a 10%, 12% office build-out, with a couple of sets of restrooms and a little kitchen, your TIs look very high. But they're TIs that you're going to use for a long long time with that building, long after the current tenant moves out. So that can be a little bit deceptive. We always pitch industrial is great because you don't send all your TIs out in the dumpster like you many times do an office building. So we view that as a long-term investment and it brings the space down to fit our typical customer.

Okay. And then my last question is just on Florida. I'm just wondering that the types of tenants that are coming into the Florida market and just their views are -- I mean are they feeling more confident on the economy in Florida, kind of what your tenants are seeing there?

I think the best we can say in Florida is that it's bottomed. We don't see any renewed vigor or enthusiasm or confidence in our tenants there as we have in some other markets. So there are still some companies moving in. One of them that we worked with that did turn out was a medical device manufacturing company ended up going to Texas. But the Florida people aren't excited yet about a turnaround. We're seeing more sense of a recovery in Charlotte and just a slightest bit in Texas. Phoenix, we're seeing some companies still move in, but the existing tenants aren't looking for expansions.

Okay. Any -- are there are any build-to-suit opportunity; they have had any conversations on doing build-to-suits now that your pipeline is empty?

Yes, we have, and we've obviously not had any of them work out. We got real close on one in Houston and they ended up just renewing where they were, but it was a good exercise for us. And I would guess that Houston or Orlando will probably be our first market where we're able to do a build-to-suit.

And what are the returns that you're trying to target for that?

Right now -- as soon as we announce the deal with a lower return, I'm sure you'll bring it up on the conference call. But right now we'd be looking at a build-to-suit somewhere in the 9s.

Okay. Thanks.

Okay.

(Operator Instructions). We'll go next go to [Chris Caton] with Morgan Stanley. Please go ahead.

Hi, good morning.

Good morning.

My question is also on leasing we've been talking about a little bit this morning. I noticed you had some pickups in the development pipeline. I wonder if you could comment on kind of where the sweet spot is in leasing. I think you mentioned smaller, I'm wondering what size you have in mind. And then also as we bottom here and begin to come off the bottom, what industries do you see kind of leading the way up and what do you see kind of lagging?

Our sweet spot in the development leasing is really our sweet spot in all our leasing, and it's -- again it's 10,000 to 20,000 square feet. And the thing that's been encouraging that and there is really not a way for us to report it very well is that in the properties that we've moved into the development program over the last -- well since the first of this year, we have continued to sign leases on vacant spaces with those properties. So some properties that were 60%, 70%, 80% leased when they went into the program are now 80%, 90%, 100% leased.

So we're still signing leases, and I think it's in the last quarter we signed -- maybe it was eight leases and almost 500,000 square feet of first generation space of '09 development transfers. So that's encouraging and still happening. And it's encouraging that people are paying up to go -- to still move into a new building, so I'd say that's a positive. And there doesn't seem to be any trend in exactly what uses those new tenants or what business they're in.

Coming out of the recession, that's hard to tell. We certainly like to see a little recovery in housing because that's where we've lost a lot of occupancy, in particular in the Florida cities and Phoenix. And as housing residential construction starts to recover, I think that's going to be a big plus for us. But I think just in general is companies have to start having confidence in their own futures and as they see a pickup in business respond to it. And the smaller users, the more entrepreneurial private companies seem to respond first to that where Corporate America, at least coming out of the last recession, was very slow in making growth decisions. But when they did, a lot happened, and that's when our development program really took off in '03 and '04 responding to that growth.

Thank you.

Thank you.

We'll go next to Brendan Maiorana with Wells Fargo. Please go ahead.

Thanks, good morning.

Good morning.

David, just to follow up on your pipeline, I hear your comments about -- that absolute rent levels have hopefully stabilized from here, but it looks like the projected yields dropped a little bit at least on the same pool of projects that are in your pipeline. Can you just help me reconcile for what may be stabilizing rent levels and potential declining yield expectations at least as it relates to the third quarter?

Well the yield expectation decline is due to two things, one that the buildings are leased up more slowly, so the capitalized carry on them goes up. But I would say the bigger factor is rents. And although the new buildings garner rents that are well above what you'd call general market for second and third generation space, we have lowered rents in order to lease up these buildings.

Another factor that plays into it, again that doesn't get really reported is that what we're reporting as yields is GAAP rents. And in a normal market, in up market, GAAP yields are usually going to be 50 to 75 basis points higher than your cash yields, because that's average rent over a five to seven year lease. And in down market, obviously like we're in today, the GAAP yields are below the cash yields because prospects are looking for free rent. So that you're giving three to five months free rent on a five to seven to 10 year lease, and so that the average rent, because of that free rent, is down. So there's a flip-flop so that on these properties we're looking at that are still in our development program. In most cases, the cash yield is higher than the GAAP yield today, which is the opposite of what it would have been three years ago.

But the cash yield once the rent -- obviously once the cash rent commences, but there is a period of free rent initially?

That's correct, but usually when -- if you're looking at what's the building worth, it's -- developers are typically going to sell the building once the cash rents have all kicked in and look at a capitalization of the NOI on those cash rents, not the GAAP rents.

Right. And has the level of annual escalators changed or is it more now a flat term in terms of the cash rents after the free rent period versus annual bumps previously or is that --?

No, in most cases we still seem to be getting bumps. That's not been a hot button for us. The hot button for prospects is either lots of free rent or a teaser rent that's very low for a year, a year and a half going in. They tend to be looking more in the short-term than where it's going to be four or five years from now.

All right. And just to match up those comments, I think we stated earlier in the call, so today the level of concessions, free rent and the level of kind of base rent that is starting to stabilize now, so we are not seeing an increase in concessions and a decrease in the base rent as we sort of sit here today.

I think that's -- on average that's safe to say. I mean when you are in a down market like we are now, as to our experience in '01, '02, '03, the amount of street line rent adjustment on accounting statements goes up dramatically, because of the amount of free rents that's given versus what you see in an up market.

Yes. And then where you see a lag? So if we've got rent that are stabilizing and hopefully it sounds like occupancy should at least hold in there if not improve a little bit into next year, where do you feel like you need to get to or the market needs to get to before we actually get some rent growth not relative to your in-place rents, but just relative to where market rents are today?

I think there is going to be a little uptick in market rents just as occupancies have stabilized and prospects understand that they need space and that there is activity in the marketplace so much of how the markets viewed is psychological. And then I think you've heard me say this before, that a prospect knows that there are 12 or 15 different alternatives, five or six of them are good. He feels no urgency and feels that they can negotiate aggressively and get all sorts of breaks and it doesn't change until that prospect calls his broker and the brokers says, "Well, your number one choice leased last week, your number two choice is now under letter-of-intent, what do you want to do?" They start to feel a sense of urgency, and they don't want to be left out, they want one of their top choice spaces, and the whole psychology of the marketplace changes. You really have to be -- I think before you get true pricing power, you have to be up over 93% occupied, 93% to 94%.

Right. I am assuming you are not expecting that in your markets for a few years then?

Correct.

And then are you seeing any of the seasonal demand that you sometimes get in the fourth quarter, are you seeing any of that activity pick up this year? I know it's fairly early in the fourth quarter thus far.

No. It's very very light. One, the post office in many times wants more space, I think it's feeling budget issues. And some of the retailers who would want extra space, I don't think we're anticipating a retail season where they're going to need that. Where we have found temporary users is retailers that are upgrading or remodeling stores, and that's not related to Christmas, but we've half a dozen leases over the last 12 to 18 months of retailers where we have a vacancy particularly in the new buildings. All we have to do is put in the lights in maybe the rest room and re-lease the space to -- for six to eight months and that's very profitable. We haven't seen any nice Christmas surge yet.

All right. I mean just the lack of activity if you will, does that say anything to you about the pace of the recovery or the robustness of the potential recovery as you look out into next year and beyond?

Maybe you said -- all I think come up with is maybe it means it's going to be a lousy or marginally better retail season at best because the retailer seems to drive that Christmas desire for extra space.

Okay. And then just lastly, it looked like one of the projects in your development pipeline lost a pre-leased tenant. Is there something that was going on there specific or is that just a couple of deals dropped out? I think in Beltway Crossing 7?

That was -- we had Wal-Mart for a store remodeling and they leased it for six or eight months and moved out.

Okay, got it. All right, thank you.

Thank you.

(Operator Instructions). We'll go next to Dan Domlan with Janney & Montgomery Scott. Please go ahead.

Good morning. Just two questions from me. On a typical transaction, how much is your acquisition cost as a percentage of the deal?

It's more often -- it runs anywhere from I would say $15,000 to $25,000.

Okay.

Signing the deal. Unless it a multi-building deal, really the acquisition costs are in legal, environmental, possibly engineering studies as the condition of the roof and structure and parking lot. And it's pretty simple in an industrial building and it goes up from there when the environmental comes back and says, there is a problem in the neighborhood or something like that, you have to investigate it further.

Okay, thank you. And I guess a question for Keith. It looks like your capitalized interest, obviously it's going to be going down, so you're going to have less developments, but could you maybe give us some guidance as to where you think that will move in 2010 possibly?

Oh, it's going to be lower in 2010. And how much lower? We haven't put together our numbers yet, but it will be lower.

Okay. Thank you.

Thank you.

And it appears so we have no further questions at this time.

Again, thank you all for your interest in EastGroup. And as always, Keith and I are available for any questions that come up as you go through any of our material or anything that we didn't cover today. Look forward to talking with you next quarter.

That does conclude today's teleconference. You may disconnect your lines. Thank you and have a great day.