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JACKSON, MS-Despite a continued sluggish economy, EastGroup Properties Inc. saw a modest increase in funds from operations during the second quarter and property net operating income. Leasing slowed during the quarter although 341,000 sf of deals still got done.

“We’re seeing the same positive net operating figures, but at a slower pace than a year before,” David H. Hoster II, EastGroup’s president and CEO, told shareholders and analysts in yesterday’s earnings call. The quarter ended with FFO of 80 cents per share, up six cents from Q2 2007 or a gain of 8.1%. Property net operating income rose 11.7% in the year-to-year comparison.

Hoster and EastGroup CFO N. Keith McKey agreed leasing activity has slowed from its peak in Q1 2007. “It takes longer to negotiate for space,” Hoster said. “Prospects and tenants realize they have more options and don’t have much urgency to act.”

But, McKey pointed out that the slow economy didn’t prevent EastGroup from renewing 85% of its 919,000 sf of lease expirations. In addition, the team leased 341,000 sf that was vacant at the beginning of Q2. “Combined with the average lease length, this reflects the desire of customers to make new lease commitments,” McKey said. It also allowed for rental rate increases, which averaged 11% year to date.

Hoster acknowledged activity is varied among markets, pointing out that leasing continues to be steady in Houston and San Antonio whereas it’s slowing down in Phoenix and throughout Florida. And, he adds that no tenant seems to be immune from the slowing economy. “We’re hearing more from tenants that want a break on rent or who want to push off extra rent payments until the end of the lease,” he said. “Almost everyone is feeling some pain–it’s just at different levels.”

The EastGroup executives say the properties are experiencing higher customer retention through shorter term leases and fewer tenant improvements, specifically for dock-high industrial space. “This is reflecting that users want future flexibility so they can determine what will happen with their businesses,” Hoster assessed.

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