EastGroup Properties, Inc. (EGP)

EGP 
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Industry: Consumer Services
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EastGroup Properties, Inc. (EGP)

Q1 2008 Earnings Call

April 23, 2008 11:00 am ET

Executives

David H. Hoster II - Chief Executive Officer, President and Director

N. Keith McKey, CPA - Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Analysts

Irwin Gross - Citi

Michael Bilerman - Citi

William Crow - Raymond James

Brendan Maiorana – Wachovia

Nap Overton - Morgan Keegan

Chris Lucas - Robert W. Baird

Philip Martin - Cantor Fitzgerald

Paul Adornato - BMO Capital Markets

Stephanie Krewson - Janney, Montgomery & Scott

Christopher Pike - Merrill Lynch

Presentation

Operator

Welcome to the EastGroup’s first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the program over to the President and CEO, David Hoster.

David H. Hoster II

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

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

[Recorded Message]

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 subject to the Safe Harbor statement included in the news release is accurate only as of the date of this call.

David H. Hoster II

Operating results for the first quarter exceeded the upper end of our guidance range. Funds from operations were $0.83 per share as compared to $0.72 per share for the first quarter of last year, an increase of 15.3%. The $0.06 per share above the mid point of first quarter guidance was due to good property operating results combined with a number of one-time items.

These included gains on sales of securities, lease termination fees net of bad debts and a gain on involuntary conversion, which was the result of insurance proceed exceeding the basis of an asset.

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

The reduced rate of growth in same property results for the quarter was due to the higher level of occupancy in the first quarter of last year. Consequently, the increases in the first quarter of 2008 are due primarily to higher rents rather than improved occupancy, as we have seen in the past.

In the first quarter, on a GAAP basis our best major markets after the elimination of termination fees were Dallas, which was up 12.6%; Houston, up 7.1%; San Francisco, up 6.3%; and Orlando, up 3.4%. The trailing same property markets were El Paso, down 15.2%; and New Orleans, down 9.6%. The differences between quarters are due to both higher rents and changes in property occupancies in the individual markets.

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

As we discussed in our last conference call, leasing activity has slowed significantly from its peak in the first half of 2007, reflecting the general economic slowdown. The good news is that there are still prospects looking for space, although there are fewer of them and it takes longer to complete lease negotiations.

Our leasing statistics for the first quarter illustrate the slower but generally good real estate fundamentals in our markets. Overall, of the 1.1 million square feet of leases that expired in the first quarter, we renewed 61% and released another 17% for a total of 78%. This is below our average for 2007, but better than the fourth quarter. In addition, we leased 171,000 square feet of space that was vacant at the beginning of the quarter.

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

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

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

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

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