Eastgroup Properties Inc (EGP) 2010 Q4 法說會逐字稿

Good day and welcome to the fourth quarter 2010 earnings conference call. All lines are now online in the listen only mode. Later there will be an opportunity to ask questions. (Operator Instructions). It's now my pleasure to hand off the conference to your moderator David Hoster President and CEO of EastGroup Properties. Please go ahead sir.

Good morning and thanks for calling in for our fourth quarter 2010 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 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 fourth quarter met the midpoint of our guidance range. Funds from operation were $0.71 per share as compared to $0.75 per share for the fourth quarter of last year, a decrease of 5.3%. The decline was primarily due to a drop in same property operations and to increase G&A expense from decreased capitalization of internal development overhead. For the full year, FFO was $2.86 per share, as compared to $3.14 per share last year. A decrease of 8.9%. And $0.01 above the midpoint of our original 2010 guidance.

Same property net operating income for the fourth quarter declined 2% with straight line rent adjustments and 1.5% without. These figures represent an improvement over our same property results to each of the first three quarters of the year. The decrease in same property net operating income for all of 2010 was 4.2% with straight line rent adjustments. And 5.6% without.

In the fourth quarter on a GAAP basis our best major markets after the elimination of termination fees, where Tampa which was up 9%, Houston up 6.3% El Paso up 6.0% and San Francisco up by 5.4%. The trailing same property markets were Los Angeles down 21.8%, Dallas down 14.5% and Orlando down 8.4%. Although average rents are still declining, the primary difference between quarters is basically due to changes in property occupancies in the individual markets. Occupancy at December 31 was 89.8%. A 150 basis point increase from the end of the third quarter and ahead of our projections due to a large Christmas related lease. It also represented a 40 basis point increase over occupancy at the end of 2009. Although we achieved higher occupancy in each quarter of 2010, we expect occupancy at the end of the first quarter of 2011 to decline very slightly to approximately 89% and then increase in each subsequent quarter through the balance of the year to the 93% range.

Our California markets were on a steep basis at best at 95.1% leased. And 95% occupied at the end of the fourth quarter. Houston, our largest market, with over 4.8 million square feet, was 97.3% leased. Our most challenging major markets continue to be Phoenix at 74.8% occupied. And Tampa, and 82.2% occupied. Looking at fourth quarter leasing statistics, we renewed 74% of the 1.3 million square feet that expired in the quarter. And, leased another 626,000 square feet that had either terminated or expired during the quarter, or was vacant at the beginning of the quarter.

Our renewal rate was lower than in the third quarter above our average for the year. Since January 1, we have renewed another 490,000 square feet and signed new leases for 559,000 square feet for a total of 1.049 million square feet, good start to the year. We've shown by our occupancy results, we are achieving progress in leasing but activity is still shallow. Although we cannot call it good yet, the trend continues to be positive. In general, prospects expect cheap rent with significant concessions and feel a little sense of urgency since they still have so many lease alternatives. As you can see in our supplemental information, GAAP rents in the fourth quarter decreased 15.7% and cash rents declined 22.1%. If we exclude the 210,000 square foot Tower Automotive lease in Mississippi, the rental rate decreases would have not been quite as bad at 12.5% and 18% respectively.

Average lease length for the fourth quarter was 4.2 years. Which was about our average for 2010, but longer by 14% than 2009. Tenant improvements were a $1.68 per square foot for the life of the lease, or $0.40 per square foot per year on the lease which was well below our 2010 average. We did not have any property acquisitions or dispositions during the fourth quarter. And, we do not currently have any properties under contract to either purchase or sell. We do presently have a number of offers outstanding to acquire assets in our Core markets. There continue to be a limited number of Industrial property offerings that fit our business distribution criteria but we are optimistic that we will begin to see an increasing number of attractive investment opportunities over the next three to six months. As a result, we have included $25 million of acquisitions as of July 1 in our 2011 guidance.

In December, we began development of World Houston 31 a 44,000 square foot service center building with a projected total investment of $4.6 million. The building, which is 28% pre leased, will be completed for early third quarter occupancy. The only other property in our development program at December 31, the pre leased 20,000 square foot expansion of Arion 8 in San Antonio was transferred to the portfolio on February 1 for the total of investment of $1.9 million. During 2010, we transferred five properties from development to the portfolio. Located in Houston, Tucson, Tampa and West Palm Beach, they contain 426,000 square feet with a total year end investment of $32.9 million, and are collectively 66.3% leased at this point.

We do not have any new development starts projected for 2011, but we will be very disappointed if we are not able to begin construction of at least two or three buildings this year. We are currently working on a number of both potential build to suit and pre leased opportunities and are also evaluating the prospects for select spec construction in our stronger sub markets. We presently have five projects designed, permitted and ready to go. Each groups development program has been, and we believe, or going to be a significant creator of shareholder value in both the short and longer term. Today, we have developed almost one-third of our current portfolio adding 9 million square feet of state of the art warehouse space in our Core markets. Keith will now review a number of financial topics including our earnings guidance for 2011.

Good morning as discussed FFO per share for the quarter decreased 5.3% compared to the same quarter last year. Lease termination fee income was $37,000 for the quarter, compared to $208,000 for the fourth quarter of 2009. Bad debt expense was $202,000 for the fourth quarter of 2010, Compared to $473,000 in the same quarter last year. FFO per share for the year decreased 8.9% compared to 2009. Lease termination fee income was $2.853 million for 2010, compared to $963,000 for last year. Bad debt expense was $1.035 million for 2010 compared to $2.101 million for 2009. Our balance sheet came through the recession in good shape.

In the fourth quarter, we closed on a $74 million non recourse first mortgage loan with a fixed interest rate of 4.39% a 10 year term and a 20 year amortization. This is the best rate for any fixed rate loan I have been involved with in my 30 year career with EastGroup. Our outstanding bank debt was $91.3 million at year-end, and with bank lines of $225 million we had $131 million of capacity at December 31. The bank lines do not mature until 2012 and we have the option to extend the $200 million line for one additional year on the same terms. We also comply with all of our bank lines covenants.

Debt to total market capitalization was 39% at December 31, 2010. For the year, the interest and fixed rate fixed charge coverage ratios were 3.2 times, a small decrease from last year. The debt to EBITDA ratio was 6.5 for the year, compared to 6.1 for last year. Our floating rate bank debt amounted to 4.9% of total market cap at year-end. In January, Fitch Ratings affirmed EastGroup's issuer default rate of BBB with a stable outlook.

In December, we paid our 124th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.52 per share equates to an annualized dividend of $2.08 per share. This was the company's 18th consecutive year of increasing or maintaining cash distributions to its shareholders. Our dividend to FFO payout ratio was 73% for the year. Rental income from properties amounts to almost all of our revenues so our dividend is 100% covered by property net operating income. And, we believe this revenue stream has enabled us to maintain the dividend. But, we do recognize that this dividend exceeds adjusted FFO, but we expect this ratio to improve over the near term.

FFO guidance for 2011 is projected to be in the range of $2.82 to $3.00 per share. Earnings per share is estimated to be in the range of $0.67 to $0.85. Occupancy rates are projected to average 89.5% to 93.1%. We project acquiring $25 million of properties on July 1, 2011. No dispositions or development starts are projected. We plan to benefit from the refinancing of two maturing loans in 2011. We were able to pay off early with no prepayment penalty a $36 million mortgage loan on January 31, 2011 with our bank line. The loan had an interest rate of 7.25%. The other mortgage loan matures in May 2011 and has an interest rate of 7.92% with a balloon payment of $23 million. We have a loan package out to several lenders, and expect to sign an application soon for a new fixed-rate mortgage to replace these loans.

This year, same property information will be presented with and without termination fees, net of bad debts. In 2010, termination fees net of bad debts was $1.818 million, or $0.07 per share. And for 2011, we have projected termination fees net of bad debts to be zero. The FFO per share midpoint range is $2.91 which is an increase of 1.7%, compared to 2010. Now, David will make some final comments.

EastGroup has historically created an accumulative value for its shareholders through its development program. We see this process beginning to come back into play in the second half of this year and become a bigger factor in 2012. We've also traditionally been a leader in our internal operations and same property operating results are expected to be positive or the third and fourth quarters of this year. These factors, combined with our conservative and flexible balance sheet, make us optimistic about EastGroup's potential for future growth and earnings. Keith and I will now take your questions.

(Operator Instructions) It is now my pleasure to introduce Sri Nagarajan with FBR Capital Markets. Go ahead please.

Thank you and good morning. David I think you talked about -- I mean occupancy is ticked up in almost all your markets and obviously even the developer in pre-leasing or leasing is going up very well. Seems that you may have reached an inflection point in occupancy here yet your commentary as usual is pretty conservative on shallow activity, and obviously having other alternatives for the price-sensitive tenant. Could you just talk about you know leasing spread assumptions in 2011 that's driving your same store NOI guidance, and as you look at 16% of your portfolio spreading and generally talk about rental growth expectations in some of your markets here?

We believe that basically, rents have hit bottom in all of our markets. There are always going to be exceptions to that there is always a building that will drop rents because of longtime vacancy or obsolescence or poor quality. But, we think the rents as I say, have hit bottom in a number of cases like South Florida, rents have started to move back up very slightly. But, because of leases rolling that were signed at the peak of the market or close to the peak, we still see negative numbers there, but we think those will mitigate in '11 and certainly in '12.

We've always said that we think you start to have pricing power when occupancies in the 93.5% range, we hope to be close to that as a company at the end of the year, but you really need those higher occupancies in individual sub markets --

Yes.

To get pricing power, so we've not internally projected much improvement in rents other than the drops aren't going to be as big as we experienced in the fourth quarter because we think there were a number of those. A number of leases that caused that that we hopefully won't see the same body with square footage again.

Okay. That's helpful. I think you also mentioned that you were -- I mean obviously there's going to be this smart if you don't start developments in 2011, obviously, give us an idea of the size of developments you are considering. You talked about five pre-design projects. I'm assuming that most of it is Houston and specifically in Texas, so give us an idea of what you are seeing in terms of build to suit opportunities there?

Just, really in the last 60 days we've seen a big increase in prospects for build to suits, and we are really talking about that in four different markets and if everything happens that we're involved with right now we could start six or seven buildings, but that never occurs but the more you have more balls in the air the better chance you have of catching one.

So, we've become in just the last couple of months a lot more optimistic about development starts, but a lot of that is out of our hands. We've got to cut the deals and move forward. But, I think you've all heard me say many times, that we believe the REITs have a real leg up when development opportunities begin again.

Yes.

We've got the teams in place, the land and, as you mentioned, a number of buildings are already designed and permitted so we can start in a matter of weeks if we sign some leases. These are not on build to suits but on some pre leases, and have buildings done in six to seven months from now, so, or whenever the leasing is executed.

So, that's -- how much of that might happen in later this year, but I think it really bodes well for growth in the development program and NOIs and in '12. We are seeing a -- continued seeing a flight to quality with leasing prospects where they see markets have bottomed they are looking to move from a B or C building to an A building for the same rent and are more confident about their own businesses. So --

Okay.

That has helped generate our growth and occupancy.

That's helpful. One final question then I will yield the floor. Acquisition guidance are $25 million obviously very light there, you know, I think your peers have obviously been pretty aggressive in acquiring properties. Where do you think that again private real estate is missing the boat or being overly aggressive here? Thanks.

Well we have seen -- we have bid on a lot of properties and ended up in second place on most of them. And in most of those instances have missed by a mile, which you'd rather miss it by a big number than a little number, and each instance somebody decided they had to own that building, like some transactions in South Florida or in the Los Angeles market where --

Yes.

In our opinion the cap rates have been sub six and unless it's a very unusual circumstance, we are not going to go to that level. But, we're continue to put out offers and I think we will be able to tie up some properties this year although, we certainly pretty much struck out in 2010. But, don't regret not having bid high enough to get some of those deals. We view ourselves as a cash flow buyer, a long-term owner so we're looking what it does to earnings when we buy, and also how that building is going to be operating when we go into the next recession. It's easy to buy something with good numbers when you're in an upmarket, but we hold these properties for a long time and with the kind of assets that are going to be good six, seven, eight, 10 years from now.

Understood, and thank you.

Thank you.

And our next question comes to us from the site of James Feldman with Bank of America Merrill Lynch. Go ahead please.

Thank you and good morning.

Good morning.

Can you talk a little bit about your leasing backlog? You know you say here we are at this point in the cycle where there's more of a flight to quality what would you say -- provide some context about how many tenants are still on the sidelines and then what it means for your renewal schedule next year?

We're starting to see, in most of our markets, that there is a lot of companies are moving from window shopping to actually stepping up and being willing to commit with leases. And so, that we think is a real positive. We've -- with the good leasing we've done since the first of the year, on a square footage basis, we've reduced what was rolling in 2011 from 12.6% of the portfolio down to 9.7%. So, we think that's a good step, a positive step in how we're going to fare this coming 12 months. So, it gives us some more confidence in hitting a 93% occupancy number by the end of the year.

Okay and then you had mentioned potentially starting spec developments in some of your markets. Can you talk a little bit about what your competitors are doing? Are most people thinking along these lines right now?

Well, a number of our competitors in the stronger markets and you probably need to get all the details from them but, in Southern California are doing some spec development related to the port into Ontario as I understand it. A number of others are starting buildings with some amount of pre-leasing where they've controlled customer that needs to expand or change location and have started a building with them as the lead tenant. But so far there's very little of it, more talk of it than is actually happening.

But, when we're looking at spec development we are looking at not a pro forma rent increase above what we've been signing space for, but use our most recent leases in that park as a pro forma to determine potential yields for new development. And when we talk about spec development, and this is not Greenfield kind of development, this is sites that we have within existing, successful parks that are either 100% leased today or close to that. So, it's -- we're using our own experience as our market research for it.

Okay and then finally, you said you think you'll see an increasing number of investments in 2011. I mean everything we are hearing sounds like cap rates are coming in and there is actually increased demand for assets. What are you seeing that's different than that that gives you conviction?

Well, I think the real competitive markets as I mentioned before like southeastern Florida, the Miami Dade County/ Broward area, the cap rates are going to probably be below what we will be willing to acquire on. The Los Angeles area is probably the same. But, I think there are other markets that are markets that we're interested in.

Our core markets in Texas and in some other states where we, we can buy at a little bit higher yield, they're not going to be any more deals done at eights and nines like there were in '09, that lasted for about 12 months. But, I think in some of the, I hate to say, second tier but not super hot coastal markets that an awful lot of people keep talking about, we're going to find some opportunities, that fit our criteria and yield needs.

Okay and then your occupancy guidance you said you expected dips in the first quarter how does you guidance suggest occupancy moves by quarter?

Well, I hate to give you exact numbers of what we are projecting in each quarter, but we traditionally, historically have dropped in the first quarter I guess an awful lot of leases expire at the end of the year, and a lot of customers think on that basis, and, we thought we were going to get lower than 89% when we looked at it a couple of months ago. Now we think it's going to go down from high 89% to 89% roughly, and then inch its way up each quarter and end at 93%. Which I think we should be very pleased with, with that kind of progress in 2011.

Okay. Thank you.

And we will report next quarter on whether we hit our number not.

Thank you.

Thank you and our next question comes to us from Ki Bin Kim with Macquarie. Go ahead please.

Thank you. So, Dave, if you took a kind of a larger scale of view and looked at it where the demand is coming from for industrial properties, you know how would you describe that between like large bulk distribution warehouse users versus some smaller tenants?

Well we don't see a lot of the big users simply because we don't have that kind of product available. I will say we've been a little disappointed that small business, who led us out of 2001, 2002 recession period has not led us out of this one, and I think you can read that in the national press. But, we're starting to see some improvement there. Each market's a little bit different but, and it swings every month where it can be the five and 10s that are looking for space or the 20s, the 30s or 50s, but we had hoped small business would be leading us out of here but so far, they have not.

Any type of industry concentration?

We have seen some improvement, I don't know if this is surprising or not, in clothing, particularly in the Orlando area. We've seen some pickup at 3PL, in convention companies that serve the convention business, food and beverage, wine and spirits, so I guess people haven't stopped drinking. Those have been you know the primary areas. Let me see, I'm looking at my list here, besides the 3PLs the delivery business some pick up in that, and a little bit of pickup in home construction, but nothing to get us anywhere near where we were 10 years ago on that.

Okay and if I could ask on your development pipeline. You have about $293 million of prospective development. If you, just hypothetically, if you had to start development on all those today, what would the kind of expected yield be today? And I ask that just to get a sense of you know how much further market rents have to go up to make these feasible.

That's a good question, but that's not something that we've looked at overall. The development that we're -- the little service center we've started in Houston, we are looking at a cash yield stabilization 12 months after completion over a nine. The GAAP yield's going to be just below a nine, because there's still a lot of free rent in the market. When the good times GAAP rent -- the GAAP yield's higher than the cash yield because of the bumps in the leases and today's market is going to be a little bit lower because of the free rent outweighing the bumps that you're able to obtain. With our cost to capital lower cap rates down, I think we'd be willing to develop at 75 to 100 basis points lower yield then we were looking at three or four years ago.

So what does that mean? I mean, how far is that away, today?

Each market is different. I think we're -- in Houston we are there on some type buildings, close on some other buildings. In Orlando we are reasonably close because of the quality of the location at Southridge, most other markets are, I suppose, rents or anywhere from 10% to 20% away.

Okay and just to follow up on your previous comment. What is the amount of free rent you're giving -- that you gave in 2010 and what do you think it will be in 2011? Just in general.

I would not, not quantify that for 2011 exactly, but, in talking to our people in the field, the amount of free rent is slowly lessening, it's not going to go away. Just about all our markets will still have some amount of free rent on a development deal and probably on almost any vacant space and generally you're not giving any on renewals.

And for a new space is that like one month per 12, or is that like more closer to like two or three?

It really in the worst case instances it is one month per year, but, more than likely it's a third or a half of that.

Okay and last question very quickly. You know the refinancing rate for your fixed rate debt coming due for 2011, it's probably about 100 basis points higher than what you did -- when you closed on the fourth quarter. Is that just a function of Treasuries increasing?

It's Treasury increasing and that's primarily it. We are seeing also the still a strict criteria on the values of the loans that they are still down some and we expect to get something around 5%.

Okay. Thank you.

Sir, we'll be quite 100 basis points above what we did two months ago, we hope.

Okay. Thank you guys.

Thanks.

Thank you and our next question comes to us from Chris Canton with Morgan Stanley. Go ahead please.

Hi, good morning. Dave, you're talking about developing; are you happy with the land bank you have now in your existing markets and are you also looking at say building a platform beyond kind of your core markets, I guess your core markets being Houston, Orlando and Phoenix?

We do not have any land for new development in Phoenix and that bothers us a bit. We've been looking, and actually offering on some land there right now we're thinking that new development in that market is probably unless it was a build to suit at least three to five years away. So, a lot of land sellers aren't willing to sell something on a basis where you have to carry it for that amount of time before you build. So, we need to do something in the Arizona markets. Los Angeles we would love to do some development there. And we've looked at some land parcels, but again unless you go way out on the East side, the pricing is still not justified in new development.

So, we are constantly looking. In Charlotte we have a site for one building and we've been looking at a couple others. We think there's going to be some opportunity there probably in the next 24 to 36 months. So we're constantly still looking. It's just that unless you are buying big tracks on the fringe, infill locations haven't seem to have come down enough to justify acquisition yet.

So, is it -- or I thought I also heard you say that sellers are not willing to part for the price that you think it's worth. So is it a combination of either the good sites, just the sellers have an unreasonable expectation, and the outlying sites you just don't have the desire to develop there at this point?

Yes, exactly right. We are an infill site developer and going every time you get through a recession, the results of your properties in different locations confirm that strategy, and so that it's what you said, it's -- also in an environment where people are now starting to get more optimistic, sellers, unless they've got a lot of debt, figure if they hold longer, they'll get their price. And a lot of land sellers, owners they think their land is worth something and they don't care how long it takes they're going to wait to get it. So, it's a little bit counterintuitive. There's not the kind of land opportunities that you would expect or like to see in a downturn that fit our criteria.

And are you, are you looking at -- it sounds like you're looking at even kind of smaller, single parcel situations or would you look to do kind of bigger master-planned?

Both. The single parcel type things wouldn't be doing pioneering with that, but if it's -- if it adds to a cluster of assets in an existing sub-market we'd certainly be interested in that kind of location. Compliments what we already have in a sub-market.

Got you. And then, separate question. You leased up a lot of vacancy during the year, during 2010. How much, how much were the expenses that you are carrying on the vacant space that you're now able to pass through to tenants? Was that at all meaningful?

We have not actually quantified, I think someplace that number, but as we leased as occupancy moves up, we are probably looking at, I don't know, on average $2.00 a square foot, I guess, on an annual basis of expenses that turn around and are passed through to tenants.

So that would be like property taxes and some -- ?

Property taxes, insurance, landscaping cost, common electrical, lighting, exterior lighting, exterior repairs and maintenance.

Got it. Thank you.

Thank you.

Thank you we now move on to the site of Alex Goldfarb with Sandler O'Neill. Go ahead please.

Yes, hi, good morning.

Morning.

Just, Keith, want to go back to the lending side. The two transactions, the loans that you are forecasting for this year and just in general, two parts. One is, are you seeing new faces showing up, folks who either may not have not lent to industrial in a longtime coming back or else new people who are starting to look at the product? And two, you made some comments, a few questions back about LTVs, but I'm not sure I caught it correctly. Where do LTVs stand now versus last year? Are you seeing those LTVs come up, even though you may not want to take advantage of them, but are you seeing people offer you higher LTVs now versus last year or has it been pretty consistent?

Well on the second part first, the LTVs, as the rents roll down, you are getting less value on the property. And so if you started out last year with rents higher then, that's a factor and so they roll down some from that, and it does not seem to be that the lenders are giving much more loan-to-value based on in place rents than they were last year. As far as new lenders go, I think what we've seen are the banks are coming in and making a strong pitch to you. Either on a secured basis or an unsecured basis. For us, since we don't go to the public debt markets, but as far as the lenders go, we stick with primarily the same ones on that and have about four lenders we go to and it varies from them as to sometimes on their appetites.

We have long-term relationship Keith has built over many years and I think they tend to be more competitive. We've gone outside to talk to different lenders and they never seem to get close to what one or two of the longtime associated lenders have done.

Okay. And then my second question is, you know if you think about all the sort of excitement that's going on in industrial land these days obviously big merger announcement and then you're seeing some large, private investors funds coming in. What is your take? Is your view that, you know, a lot of people are seeing a recovery play or is this just a in a sort of yield chasing environment, folks have, you know realized that maybe industrial from a yield perspective is more attractive then let's say apartments. Or is this a, you know, a play of size and scale where people are just trying to get to be the biggest the fastest?

I think first of all, it's nice to be popular again. We were sort of the stepchild of the REIT world or real estate property world for a couple of years, with hotels and apartments reporting the growth results and everybody excited about them. And I think that the investing community is recognizing that all cycles and the industrial bottom's been hit. And that the prospects are brighter today for a good industrial assets than they've been for two or three years and, we're getting that reflected. Also as you said, there's higher yield and maybe more opportunity given how some of the other sectors have run up over the last 12 to 18 months. But, we're happy to have the spotlight a bit back on us compared to where it was the last two years.

And, do you think though that all this money, do you think this creates opportunity as people maybe prune assets, or you think net this is just going to drive up you know, valuations and make it more difficult for you guys to compete on the acquisition front?

Well probably both. It's very difficult as I mentioned before to compete on -- in the coastal markets, because that's the common wisdom of the future today although we wouldn't agree with that, you talk about that another time. But that probably as the yield spread between those coastal markets and the really good interior markets continues to widen, that the opportunities in those interior markets like Texas, Arizona are going to start to look better and valuations will change there. And, that's really where as I said, where we see some of our opportunities in 2011.

But as I mentioned in my prepared remarks, our real growth engine is going to be development, not acquisitions. And it was through the last decade, through development, not acquisitions. Acquisitions just added at different times almost icing on the cake to the positive growth of the company, but for us to get back to where we need to be, want to be in growth is going to come from our proven development program.

Okay. No, it's helpful, I was using acquisitions both on you know buying dirt as well as existing assets but, thank you.

Thank you.

Thank you we next go to Paul Adornato with BMO Capital Markets. Go ahead please.

Hi good morning. Hey, if you were to look at fourth quarter leasing activity, how much of it would you say is due to pent up demand that is from users that had deferred leasing decisions and how much of it might be attributable to what you might call you know organic growth or fundamental need for space?

I think it's really only been in the last 60, 90 days or maybe at the very end of the fourth quarter, where we're starting to see prospects expanding and new companies coming to the various markets. And through most of 2010, it was just a reshuffling of the deck where companies were upgrading their space, or right-sizing; however you define that into to fit the new economic situation as they saw it, and they just more recently, it was made it optimistic to see companies moving into, expanding into Phoenix, Orlando, Houston. So that's real positive.

Last year the real pent up demand was experienced in the first half of the year and, I think really in 2011 we are going to see, see that again and hopefully it hangs in through the whole year where companies are finally now deciding it's time to make a decision.

Yes. So, so, so you would say there's still a significant amount of potential activity from this pent-up demand?

From having I don't know if you want to call it pent up demand, but it's companies that have been shopping in the marketplace for three to six months.

Yes.

And we thought a deal was dead and they've come back and said okay, let's get serious again.

Yes.

So, I think it's companies decided it's finally time to make a decision on whatever they were talking about doing six months ago, and like I said I'm not sure it's demand that has been pent up, it's just indecisiveness that is finally resolved where companies just determined what space they actually do need, that they are going to survive for the next three to five years and are willing to sign a longer lease. And I understand that rents aren't going any lower than they are today so --

Right.

You've got to make the decision to do it now rather than wait six to 12 months and pay more.

Right. Right. Okay. And, was wondering if we could just drill down to your experience in Phoenix. I know you guys you know have a nice location, very close to the airport, and then obviously Phoenix is a big, sprawling industrial market. And so, you know what happened during this cycle? Was there, you know we talked about a movement towards more desirable space, were you guys the beneficiary of that? What was, maybe you could just drill down some of the dynamics in that market?

Our Sky Harbor development was 260,000 square feet. We brought that online in about the worst time possible in hindsight. And, the leasing was very slow. We're now over 60% leased and a couple of those leases were with customers who were new to the market, but the vast majority of the companies who just said this is an A location and an A or A-plus quality property, and as we reduce rents to attract occupancy, we've attracted those type tenants. That's, I think that's proven out.

One of the things that was the unusual I think in Phoenix this year, is in Tempe for example, in particular the Broadway Park, where we have a variety of smaller buildings, that had always stayed full in previous recessions because of the strength of the small business and that Park, because of how small business was beaten down in the recession, has experienced more vacancy than been in the past and has been a little bit slower to lease back up. I guess an awful lot -- many times that small business was more attached to the housing industry than it seemed at the time.

Yes, yes. Okay.

But the difference is some of those closed in spaces, like I say in Tempe, have been a disappointment. They did so well through the last, through the earlier recession not this current one.

Yes, okay. And now finally, sorry if I missed this. Keith, what did you say the drag from development overhead was this quarter, and what would it be assuming you know no development activity attributable to projects?

You're talking about how much we capitalized?

Yes.

Let's see, we capitalized $35,000 is all we did in the fourth quarter.

Okay.

So, we are about done on capitalizing development costs until we start back up again.

Okay and so then what would the quarterly drag be with zero development activity?

We don't compute that number. We just do what we capitalized, because all of our people do so many various things.

Okay.

But we've -- if you look back at the peak to where we were in the fourth quarter on an annualized basis, we're down $0.12 to $0.15 a share on capitalizing overhead.

Okay. That's helpful. Got it. Thank you.

Thank you and our next question comes to us from the site as Stephen Boyd with Cowen and Company. Go ahead please.

Thanks. Dave, I think if I remember correctly a significant percentage of your ABR that roles in 2011 relates to some high finished space out in Santa Barbara. Just curious if you had any update there on the negotiations for that lease? And, where you think the rents might be versus what's in place today?

Good memory. It's our University Business Center, which is what we call an R&D building, but pretty much 100% office. We are in negotiations with both of those customers and we're optimistic about renewal. And since we're in negotiations, I'll report on what happened to the rent after the lease is signed.

Okay. So, I guess maybe what have you assumed in the guidance in terms of those leases? Have you assumed that you renew or -- ?

Yes.

Okay. And then just thinking about the guidance, you know back of the envelope, if I took the midpoint of your same store NOI that maybe gets you about $0.12, you got to take out at least $0.07 for the lease term and the bad debt assumption, but then you've got sort of built-in earnings from the refinancing of the debt, so I'm just curious, the up 5% or $0.05 excuse me, year-over-year midpoint, seems a little low in light of all that so I'm just wondering if I'm failing to consider something?

Well we had the mortgage in the fourth quarter that rolled in.

Yes.

And which we, if you're look -- I don't know what you're comparing to, but that would have reduced for the fourth quarter rolling forward. We've got probably about $0.02 additional G&A computed for '11 also.

Okay. All right. Thanks guys.

Thank you.

We now move on to the site of Joshua Attie with Citi. Go ahead please.

Hey, actually it's actually Michael Bilerman. Good morning guys.

Good morning, Michael.

David, I wanted to go back, in your opening comments you talked about the lease spreads in the quarter which were obviously quite negative, and I think you said excluding one lease in Mississippi, they would've gone from down 22% cash to down 18%?

Correct.

And I guess the down 18% is still up a large number in what appears that you really pushed occupancy in California, and just again if you could give a little bit more details on sort of that leasing activity in the quarter and obviously filling up the space, and why that wouldn't really continue at that sort of magnitude as you go into 2011. Because I've got to assume that the leases that you are rolling now are still, especially if you head to '11 and '12, are still some pretty high leases, high rent leases that you had signed towards the peak?

Yes when we go, went back and looked at the individual tenant spaces that had the biggest drops, we assumed that we were not going to have quite as many and a lot of that is a gut feel in projections in 2011, because of the markets not improving, at least stabilizing. So, I think only times going to tell whether we can beat that 12.5% down gap and 18% on cash, but it's been a combination of a couple Florida markets, Los Angeles, where we had some big, older vacancies and in some Phoenix slots, where we went we were down 30% and 40% and we don't think that's going to be a trend going forward. And, we're starting to see in some of our Texas markets in the Houston, San Antonio , a strengthening. So, if it's going to be down there it's going to be a very small number, flat or maybe even positive in some circumstances. So, only time will tell if people are a little bit optimistic on it, but we're comfortable with the numbers that we put in the guidance.

But let's attack it from a different way. You've already signed I think you said about just over 1 million square feet of space in 2011?

Right.

So where were those signed?

In Phoenix, Southern California -- .

In terms of the rent though, where were the rents on those?

We have not put those statistics together yet. Not, not published those statistics yet. From my own experience with those, the rents are down but, but we think signing in other markets will offset the big downs in those situations.

I mean, just looking at your lease expiration schedule. All right, the average rent that's expiring in 2011 is $6.10 a foot. Your average in place is $4.76. 2012 it's $5.22, you look at where the leases are expiring in 2011, with a heavy portion relative to your ownership base in Florida, and a little bit higher in California relative to the portfolio, I guess I'm still having a hard time understanding why that $6.10 is not coming down meaningfully in 2011. Even, and I take your comment, I know lease activity is accelerating and I know rent has probably hit bottom in markets, so market rates will start to increase, but I guess what I'm having a harder time with this is why you won't continue to see the same sort of level of declines in your portfolio when you're comping over north a $6 rent 2011?

I think, maybe a little bit of that answer is as I mentioned before in Santa Barbara where we have close to 100% office buildout on some very expensive leases and we don't see the down on those numbers equal to some of the other downs that we've experienced in Los Angeles, which is now starting to firm up, Phoenix and some of Central Florida. So, what we do in our budgeting is just go space by space and NOI by NOI per building, and come up with our same store same property operating results numbers and don't go through and look. We look at each lease from the standpoint of where we think it's going to end up, but we get such variations going forward that we don't come up with in our guidance a specific rent increase or decrease number that's built into our same store numbers.

Right, so you don't have a forecast that you're putting out that rents will be down 10% to 15% versus 15% to 20% or down 5%?

That's correct. Historically, we just built that into our same property operating results. And, I guess if managed in most instances where the rents have declined greater than was budgeted internally per space, made up for that in higher occupancy so that same-store projections tend to fall pretty close to what we've budgeted.

Right so even though the rents came down a significant amount of portfolio throughout 2010, the increase in occupancy you saw through the year, the further increases in 2011, are helping you to put yourself into a positive same-store despite what still may be rent declines in 2011?

Exactly. We more than make it up in occupancy and that's what Keith mentioned earlier, the termination fees were so big in -- termination fees net of bad debt in '10 were so big in essence we're starting in the whole $0.07 a share, if you assume no termination fees in excess of bad debt in '11.

Right.

That's where we say that -- with termination fees, same store is going to be about flat, negative in the first part of year positive in the second half, if you take out the termination fees, they should be positive across the board.

Was there anything happening on the operating expenses in the quarter? $11.4 million is obviously considerably less than you've been running sort of $13 million, $13.5 million for most of the year and even last year you were sort of in that, you know let's call it your north of $12 million sort of zip code. I guess was there -- what's sort of happening with $11 million, $11.4 million number?

We were over accrued in property taxes and a lot of them that we were hoping to get lowered, we did get lowered, so we were -- when we were over accrued we reduced the expenses and then reduced also the pass-through income portion of it too, so both of them, revenue decreased and the expenses were reduced.

By how much?

Well, you see that in where we show in the supplemental data where we show the expense ratio, that the expense ratio which really represents the expenses we pay on vacant space, was down in the fourth quarter compared to the fourth quarter of last year.

Right so what was the impact in the quarter?

Let's see, the expense was -- Mike, we can get back to you with the exact number on how the property taxes affected that?

Okay. But it sound like there was -- ?

We've just got the totals here. So we'll work that out and give you a call.

It sounds like there was at least a positive FFO benefit in the quarter from that?

Yes.

And it could have been probably upwards of potentially like $1 million is that fair?

Oh, no, no, not that much.

Okay. On the acquisitions, David, you talked about having some pretty -- ?

Excuse me, let me answer that. It could have an affect on one side, but then you reduce that affect on NOI by what the three quarters you were going to pass through.

Right I just didn't know what the net number was.

Yes, we'll get you the net number.

You talked about having some purchase offers outstanding currently? What, sort of what's the value of that today?

It's about $35 million or $40 million. Realistically, it's probably about $10 million.

Right. Okay. Perfect. Thank you.

Thank you.

Thank you we now move on to Brendan Maiorana with Wells Fargo. Go ahead please.

Thanks, good morning.

Good morning, Brendan.

David, you talked about your development pipeline being the engine of growth for the company as you look out over the next several years. Your pipeline from '05 to '08 ranged from a low, I think, of $30 some odd million to high of $160 million; as you look out into '12 and '13, where do you think that pipeline gets to?

Good question. I've been worrying more about what is going to be the balance of this year and early '12 rather than three years out. That's all going to depend on what happens to markets. You know us long we don't make some grandiose projections we're going to be up to, back up to $100 million or $200 million in three years, because it's all going to depend on how strong market activity is in each one of our areas. But, we would certainly hope to have, by I would say the middle of next year, anywhere from five to over 10 buildings under construction or in lease up. For us to grow the way that we want to grow and grew in the past, we are going to need to be over $100 million.

Okay. That's helpful. And the return -- I think you mentioned in answering a previous question that your returns expectations are going to be down 75 to 100 basis points on a stabilized basis relative to a few years ago. Can you maybe just frame up a little bit with a little more specificity sort of what the returns that you'd be comfortable starting projects today, both on a build to suit basis and some of the spec stuff that you're considering as well?

I know you are trying to pin me down on that one, but on a build to suit, it depends on the credit of the prospect, length of the lease, the amount of improvements that we would build in the warehouse, location on --

How about a range?

I suppose, no, I don't want to -- I'd be giving out competitive information at this point.

All right. Fair enough. Well --

On a spec or a semi-leased building, I think on a cash yield basis, we'd be wanting to look at a probably give or take a mid eight, low to mid eight.

And then how does that compare to the acquisitions. It sounds like you're with a seven handle if I was kind of reading between the lines?

I would -- I mean we're still looking on a conservative calculation that if we are going to build on a spec basis or almost totally spec basis that we need 150 to 200 basis point yield differential, development risk differential, above what that finished product would be valued at, is stabilization. We got spoiled in the last cycle and sometimes that spread I think went 200 to 250 basis points or even a little bit higher.

Yes.

Don't expect to see that again for a while.

Sure, and then just lastly, if you are ending the year at call it 93% somewhere around there, how do you think that compares to the market overall? I mean, do you expect to sort of increase the -- your share of the market that your spread will increase your occupancy level over market occupancy or do you think that's sort of in lockstep with most of the markets that you're in?

I mean, we believe that all reach should be outperforming their markets. Because, we think we have better than average properties and A&B properties, we have the capital to maintain them, the expertise to lease and manage them as well or better than anybody else, so we should be outperforming.

But you are outperforming today. Do you think your outperformance increases or do you think you just kind of keep the same relative level of outperformance?

That's not something we've actually thought about. I was -- to be conservative, I'd say we continue to outperform. The higher the market occupancy is the higher, the harder it is to beat that. I mean if we are beating market occupancy by 5% now, and that occupancy goes to 93%, then the spread we are going to be over that market is going to shrink.

Yes. Okay. All right. Thanks guys.

Thank you.

Thank you our next question comes to us from Steve Frankel with Green Street Advisors. Go ahead please.

Good morning, guys.

Good morning

A couple of questions. Since a lot of ground has already been covered this morning. When you guys are looking at acquisitions and you noted, David, earlier that you guys have been second in a lot of these notable deals in Florida and California and other markets, what's the divergence from what prices people are paying on an IRR basis and unlevered IRR basis from what you guys are willing to pay on some of these transactions?

I don't, I don't know what they're levered IRR basis, is because we all would have very different assumptions on what is going to happen over the next seven to 10 years. But, in my mind, that's about the only way that some buyers can justify some of the prices they are paying today. Because we've -- a number of transactions that we bid on, we felt that the NOI of the asset or assets were going to drop over the next two to three years and then build back up and you might have a good IRR, but the next couple of years were still unattractive for us we weren't willing to bid those prices.

But, with your calculus was your unlevered IRR somewhere around eight ,or was it lower than that and you are still unable to, with your assumptions, underwrite the deals where you were the winning bidder?

We, on, we look much more at IRR on deals like development. On acquisitions, we generally are looking just two to three years out on where we think, especially in today's world where contract rents are above market, where you can have a drop in occupancy before it goes back up. We are looking generally at the next just two to three years, ghere we're going to come out on that. And, seldom is a seven to 10 year IRR or projection pro forma ever come out to be true. Other, unless on a situation where it's a single tenant building with a long-term lease. Some of our theory on what we buy is that it's very difficult for us to try to predict cycles and how high or how low they are going to go but to have an acceptable yield going in, with an acceptable expectation over the next two to three years, and then to have acquired quality assets where our capital and expertise are going to allow that asset to outperform the market and our peers whether that market does up or down.

Okay and then kind of as a follow-up to that. You made a comment earlier that the spread between coast and inland markets has increased considerably. Maybe it expands further but, we will see what ultimately happens, but you do on a lot of assets in California where as you noted cap rates are sub six and there's been people that are outbidding you on certain deals there. At what point's the yield spread wide enough to start selling your California holdings and deploying the capital into maybe developments in Houston or just straight property acquisitions in some of your more inland target markets?

Well, fortunately, EastGroup was seldom been in a situation where we've had a shortage of capital and really had to allocate it, in say we've got to sell this asset over year to fund another asset. We've had more capital or capital availability than we've had opportunities to invest it on a basis that's attractive to us. So that, that's a good question, but one of the things I think we look at certainly, is obviously if you sell something in a growth market, can you invest that capital better, more productively, and maybe it's a higher yield going in but less upside market because of the growth? So that has held us back in most instances from selling say a sub-six in Southern California and putting that money someplace else.

Okay. Thank you very much.

Thank you.

Thank you we next go to the site of Mitch Germain with JMP Securities. Go ahead please.

I'm all good guys thanks a lot.

Okay. Thanks.

Very well, then we will move on to Steve Benyik with Jefferies. Go ahead please.

Sure. Thanks very much. Can you provide us with some color about how you're thinking about the credit facility that matures in 2012 and the likelihood that it may be or renegotiate in 2011 versus renewed for the year end 2012, and then also just how the renegotiated terms would compare to the existing terms say the current terms are LIBOR plus 85 to 90 bits?

It matures January '12 and we expect to extended it to January of '13. If we did the loan now, it would probably be another 150 basis points to 250 basis points more. And probably get some change in covenants, so we expect to ride it out until January of '13.

Okay and then, I guess regarding guidance can you provide us with the assumed retention ratio in the numbers, and also how we can think about leasing CapEx? Looks like it's up about 15% in 2010 but then improved in the fourth quarter to 258 so just sort of what you think on the margin is going to happen this coming year?

We don't publish what our renewal rate is just what we think the occupancy is going to be and we assume CapEx, TIs I should say, are about equivalent to what our average has been over the last two years.

Okay and then just finally, on dispositions. In the 2.2 million square foot bucket of other markets, how much of that might be considered non-strategic and then you know how do you think about the right point in the cycle to pursue some of those dispositions given the relatively low interest rate environment still?

We have single buildings in Memphis, Oklahoma City, Tampa, that are all non-core markets, that either need the rents to go up or in most cases some leasing to be done to maximize the value of those buildings, but makes sense to sell them at the bottom of the market or sell them with vacancies in less attractive markets like in our mind, those three are. You don't get credit for vacancy like you might in Southern California. So, we've got to do a little work on those assets before it makes sense to expose them.

Okay and then just anything that we should read into North Carolina been added to the list of core markets in terms of the potential for future acquisitions or development over the long term?

We have said for a while that Charlotte is a market where we want to grow both through acquisitions and development. And, it has become big enough that we thought it was time and appropriate to, on the supplemental data, breakout Charlotte, North Carolina, as a core market and have to decide whether we are going to color our map with of that state, with Florida, Texas, Arizona and California, but showing markets where we're almost at 2 million square feet there, so just from a disclosure standpoint there it makes sense to break it out.

Okay,, thanks very much.

Thank you

We now move on to the site of Dan Donlan with Janney Capital. Go ahead please.

Hi thank you. It's good afternoon at this point. Just a quick question on the CapEx. It looks like the total CapEx for 2010 is about $24 million versus about $16 million in 2009, how should we think about that for 2011?

That was up for a number of reasons, for competitive causes we upgraded a number of older buildings where we increased the sprinkler capacity to ESFR, we added I should be able to tell you, but I can't how many square feet we've added to T5 or T8 lighting to be more competitive in older buildings as an attractiveness to prospective customers. But at one point you can do some of that and build it into the rent. With making space in slow markets, we thought that it was important to do that sort of thing up front is a leasing attractiveness, so we do not expect in particular the fourth quarter, but the 2011 numbers to be a run rate in 2011.

Okay so maybe around $20 million a year or something like that?

Yes, I think that's probably a safe number.

Okay, okay.

Sometimes it's hard to tell, if different competitive edges change; you find out you have to replace some roofs that you didn't plan on that sort of thing, but we expect that those capital numbers to come down this year.

Sure. And then as you think about the dividend on a going forward basis can you maybe give us a range of where you want your payout ratio to go before you would look at increasing that?

Well certainly, the payout ratio needs to be below 100% of AFFO. I don't know how you might calculate that and our goal is in 2011, we will be right around that number.

Okay.

And going forward, it's just going to depend on the growth of FFO and AFFO, and I think that as market improve we will probably be reducing -- being able to reduce capital a bit and the combination of higher NOIs and a little bit lower capital it increases the prospects of a dividend increase.

Okay, sure. And then lastly kind of on developments, in comparison to the last cycle, how is the competition changed? Are you seeing the same developers starting to come back into the market now, or do you think you're going to have a little bit of a lead on some of these people given maybe where there capital capacity is, or maybe they are sitting on the vacant buildings that need to lease up before they can go out and do something else?

As I've been saying for a while, and was really experienced from the last recession that the industrial leads have a real leg up over new development. We've got land ready to go and in some cases buildings designed and permitted, we can start in a matter of weeks. We've got our development team is 100% in place, so we are ready to go and I think a number of the other industrial REITs are in the same situation.

From a competitive standpoint, generally, local developers or regional developers have to go out and raise equity capital, debt capital, find land if they don't already have it, design and permit buildings, so that generally gives I think the REITs, I think anywhere from a 12 to 24 month jump. In addition, this time around, a lot of the regional and national merchant builders are gone. They just don't exist anymore. So I think again that gives the REITs an edge, and we are trying to be in an ideal situation to take full advantage of that as the markets improve.

Okay. Thank you.

Thank you.

And it appears our last question comes to us from David Aubuchon from Baird. Go ahead please.

Thanks. Want to more fully understand the occupancy forecast decline in Q1. Just given the success we've had in Q3 and Q4 of last year, and then clearly, thus far this quarter to date, you've signed a lot of leasings so is it just as you mentioned, just a lot of roll early in the year? Or are there some month-to-month leases that are going away or just maybe just provide a little bit more detail why the occupancy would be going down this quarter?

It's a combination of things, but primarily we seem to have a disproportionate number of leases that are December 31, and it's been that way for years. And, maybe five out of the last six or nine out of the last 10, I'd have to look back years. We have dipped in the first quarter before coming back up and, we're the numbers I gave are really (inaudible), but we're not dipping as much now as we probably were going to, so ended the year at 89.8%, and we are looking to drop down to right around 89% and then start back up. So, it's not much of a dip, but it is a really skipping a quarter in terms of consecutive quarter growth in occupancy.

Of the 3.5 million square feet that's expiring, can you quantify what the number is in Q1? And maybe where -- what markets are where your most exposed to?

I don't have that broken out by market in Q1, but why don't you give us a call later and we can maybe give you a little bit more color on it, but I don't have those, we don't break it out that way by quarter.

Okay, thanks guys.

Thanks.

And I'm showing no further questions at this time

As always we appreciate your continued interest in EastGroup, and if somehow Keith or I didn't answer all your questions we will be here. Give us a ring and we will see what we can do to further clarify anything. Thank you.

Ladies and gentlemen this does conclude today's teleconference you may disconnect at this time.