EastGroup Properties, Inc. (EGP)

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EastGroup Properties Inc. (EGP)

Q1 2010 Earnings Call

April 29, 2010 11:00 AM ET

Executives

David Hoster - President and CEO

Keith McKey - CFO

Analysts

Ki Bin Kim - MacQuarie

James Miller - Sandler O’Neill

Paul Morgan - Morgan Stanley

Jamie Feldman - Banc of America/Merrill Lynch

Mitch Germain - JMP Securities

Dan Donlan - Janney Capital

Presentation

Operator

Good day. And welcome to EastGroup’s First Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded and I will be standing by should you need any assistance.

It is now my pleasure to hand the call over to David Hoster, President and CEO of EastGroup Properties. Please go ahead, sir.

David Hoster

Good morning. And thanks for calling in for our first 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.

Unidentified Company Representative

The discussion today involves forward-looking statements. Please refer to the Safe Harbor language included in the Company’s news release announcing results for this quarter that describe certain risk factors and uncertainties that may impact the Company’s future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time sensitive information that is subject to the Safe Harbor statement included in the news release is accurate only as of the date of this call.

David Hoster

Thank you. Operating results for the first quarter exceeded the midpoint of our guidance range. This increase was due primarily to achieving higher than projected property occupancies. Funds from operations were $0.73 per share as compared to $0.83 per share for the first quarter of last year, a decrease of 12%. The $0.10 per share decline was in part the result of lower property occupancies and less capitalized interest during the first quarter of this year.

Same property net operating income for the first quarter declined 3.8% with straight-line rent adjustments and 5.1% without. These figures represent a somewhat lesser decline than what we experienced in the fourth quarter of last year.

In the first quarter on a GAAP basis, our best major markets after the elimination of termination fees were San Francisco, which was up 11.6% and San Antonio are up 3.8%. The trailing same property markets were Los Angeles down 21%, New Orleans down 20% and Tampa down 11%.

Although, average rents are declining, the difference between quarters is basically due to changes in property occupancies in the individual markets. EastGroup’s occupancy at March 31 was 86.2%. Although, this represented a significant decline from yearend, it was 120 basis points higher than we had originally projected in January. 320 basis point decline from December 31 was due to 110 basis points or one-third of the decline from our Chino vacancy, one of our largest properties; 80 basis points from lease terminations and another 60 basis points to new acquisitions and developments moving into the portfolio.

We believe that occupancy will be approximately the same in the second quarter and then increase in each of the remaining two quarters of this year. Please note that our occupancy statistics include our development properties that were moved to the portfolio at the earlier of 80% occupancy or one-year after shell completion.

Our Texas markets were the best at 94.2% leased and 93.4% occupied at the end of the quarter. Houston, our largest market with over 4.7 million square feet, was 96% occupied. Our worst major market continues to be Phoenix at 72% occupied.

In spite of the first quarter decline, the leasing fixtures changed for the better. Specifically, there is leasing activity in all our markets. But prospects expect cheap rent, significant concessions and feel a little sense of urgency since they have so many lease alternatives.

Since the first of this year, our markets have experienced leasing activity that has been better than or at least as good as that seen in the fourth quarter of last year. Looking at the first quarter leasing statistics, we renewed 51% of the 2.2 million square feet that expired in the quarter or two-thirds of the number of leases expiring.

We leased another 988,000 square feet that had either terminated or expired during the quarter or was vacant at the beginning of the quarter, a clear indication that users are out in the market and are actually signing leases.

In total, we signed 108 leases in the first quarter, which was the highest quarterly number ever. In addition, since March 31, we have signed an additional 565,000 square feet. Business is being done, though not necessarily at the price we would like or as fast as we would like, but it is happening. We currently have only 6.9% of the portfolio rolling over the balance of this year.

As you can see in our supplemental information, GAAP rents in the first quarter decreased 8.3% and cash rents declined 13.6%, a greater decline than in the fourth quarter of last year. We expect to experience negative rent growth until occupancies recover to the 93% to 94% level. This was the case coming out of the last recession.

Average lease length was 4.5 years, which is well above our average for last year. Tenant improvements were $1.93 per square foot for the life of the lease or $0.43 per square foot per year of the lease, which was our average in 2009.

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