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EastGroup, Parkway two of the nation

Founder’s departure for MDA a smooth move for PKY, EGP

JACKSON — With Parkway Properties (NYSE: PKY) and EastGroup (NYSE: EGP) founder Leland Speed focusing on his duties as executive director of the Mississippi Development Authority, how are two of the nation’s most successful REITs (real estate investment trust) handling the leadership change?

“It’s been six years since Leland gave up the executive officer title at Parkway and EastGroup,” said EastGroup CEO David Hoster II. “Before that, Steve (Rodgers) and I were presidents of the two companies while Leland was CEO, and then he passed off the CEO titles to us. He’s remained involved as chairman of the board, which really doesn’t involve the day-to-day operations. We see a little less of him, which is too bad, but he’s still fully fulfilling his duties. It’s fun to see him so excited, energized and animated about his new role, because there’s never been a more selfless cheerleader for Jackson and the State of Mississippi. It’s great to see him have a forum where he’s recognized for making a difference rather than always being behind the scenes.”

Parkway Properties CEO Steve Rodgers said one of Speed’s attributes is that of “being a great delegator.”

“We made a seamless transition years ago,” he said. “The fact that it hasn’t been visible in the marketplace is a tribute to Leland and the great team we have in place.”

Rodgers was named company president in 1993 and CEO in 1998.

“We’ve really had ample time in the saddle, and an opportunity to develop our own style, program and strategies,” he said. “Leland began very early on with a great succession plan. Now he’s capping a successful career in the private sector with another one in public service.”

Jackson-based EastGroup Properties, an equity real estate investment trust, originated in the Northeast but has focused on acquiring, operating and developing industrial properties in Sunbelt markets in the U.S., especially in Arizona, California, Florida and Texas, where 85% of their holdings are located.

“After the last census, those four states picked up seven congressional seats,” said Hoster. “They were practically recession-proof.”

As of Dec. 31, 2003, EastGroup owned 166 industrial properties and one office building, comprising about 19 million square feet of space. The company has developed more than 20% of its portfolio. Business distribution space represents three-quarters of its total holdings, with 21% in bulk distribution space and the remainder in business service space.

For the first quarter of 2004, EastGroup revenues rose 3% to $27.7 million, while net income rose 64% to $4.4 million. In 2003, sales totaled $108.4 million, up 2.4%. Net income totaled $20.4 million, down 13.6%. In the last year, the stock price has varied from a low of $25.45 on June 24, to a high of $36 on Feb. 3. The company’s market capitalization is approximately $669 million. About 60 people are employed at EastGroup.

Parkway Properties, also based in Jackson, is a REIT specializing in the acquisition, ownership, operations, management and leasing of mostly CBD (central business district) office properties in the Southeast and Southwest, and in Chicago, where 10% of its rental space is located. On March 1, the company owned or had part ownership in some 60 office properties located in 11 states, representing a total of more than 10 million square feet of leaseable space. The company typically doesn’t renovate office buildings, but occasionally adds parking garages to existing properties, like the one being built for City Centre in downtown Jackson.

For the three months ended March 31, Parkway’s revenues dropped 2% to $37.3 million. Net income fell 32% to $4.1 million, after bankruptcy proceedings forced WorldCom to move SkyTel employees from Parkway’s SkyTel Centre (now City Centre) in downtown Jackson on Dec. 31.

“That departure accounted for 80% of the drop,” explained Rodgers. “However, we re-leased that space, so that vacancy has disappeared.”

In 2003, the company reported sales of $158.9 million, up 2.1%, and net income of $43.2 million, up 46.4%. The company’s market capitalization is $446.18 million. During the last 12 months, the stock price has varied from $36.80 to $48.70, and its employee count has grown 7.3% to 236.

“Both companies were on a roll until the bond market had a big sell off in April, when REITs took a big haircut,” said Ashby Foote III, president of Vector Money Management in Jackson. “Parkway was down 1%, and EastGroup was up 16% over the last 12 months, relative to the industry. The industrial and real estate index is up 11%, so EastGroup is outperforming the sector. Parkway had way outperformed the industry for a long time and now they’re giving up a little premium.”

Despite the dip, EastGroup remains America’s best performing REIT in total return to shareholders, according to Citigroup Smith Barney. Citigroup’s June 4 weekly “REIT Strategy” reported that Parkway’s stock outperformed in eight of the past 11 years, delivering a 22.5% compound annual total return and outperforming the industry by 11% on average annually: “While Parkway shares had a number of out-of-the-park years in the early 1990s, its more recent stock performance has still been impressive, with the exception of 2000 and 2003.”

Hoster said there are several reasons why EastGroup has been performing above the industry average.

“One, we have a strong track record of performing better than industry averages, and we’ve been recognized as a leader from that standpoint for a number of years,” he said. “Two, industrial real estate has always been thought of as the property category or type to be one of the leaders coming out of a recession. Shopping center REITs and industrial REITs should be the first ones to feel the benefits of a recovery. Then usually apartments and offices follow. That’s part of the economic cycle of real estate. On average, industrial REITs have outperformed categories other than retail shopping centers. Retail REITs have done the best through the recession because the consumer has been out there spending.”

The bond market fallout followed strong national job reports, said Rodgers.

“The REITs had moved up an awful lot,” he said. “We moved up 26% last year. Even though I’d like to claim great credit for such an increase in our stock price, there are extraordinary funds flows from other investment types coming into real estate in 2003. In March, a very strong job report came out, and the bond market reacted violently. Interest rates ran up very quickly, anticipating inflation coming back in. Then the April job report came in very strong. So was May’s. We gained back in three months the jobs that were lost in a couple of years. The market reacted a little wildly. For office companies like us, job growth is great. That’s the only way to fill up office buildings. So, as cooler heads prevailed, stock prices moved back up.”

For every occupancy percentage uptick, Parkway’s profit increases 14¢ a share. For every point that interest rates move up, Parkway only loses 7¢ on the expense side, said Rodgers.

“So all I can say is, bring on more jobs,” he said. “The more, the merrier. The bad news is, we’ll probably be hanging around these low rental rates for a year or so. When we have a low vacancy rate and raise rental rates, hopefully by late 2005 or early 2006, then we’ll really be back to a full recovery in office buildings.”

Parkway also has an investment in the Toyota Center, a historic renovation adjacent to the Triple-A baseball stadium complex in downtown Memphis.

“I signed the agreement to name the building four years ago,” said Rodgers. “Leland probably didn’t even know about it, and it has absolutely had no bearing on his relationships with Nissan or any other automotive company.”

EastGroup’s markets are “better off now than they were six to 12 months ago, but none of them are what I’d call good,” said Hoster.

“We see continuing improvement as a result of the recovering U.S. economy and expect that to continue,” he said. “We are constantly looking for new investments, but they’re very difficult to find in the industrial sector in our target markets. One of the reasons we’ve been allowed to make the purchases over the last six to 12 months is because the properties have vacancy. We’re comfortable buying that vacancy because we can lease it up. And by being more of an opportunistic investor, we’ve been able to buy more properties. Right now, we have nothing under contract. But we’re always looking.”

Contact MBJ contributing writer Lynne W. Jeter at mbj@thewritingdesk.com.

About Lynne W. Jeter

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