OVERVIEW
EastGroup's goal is to maximize shareholder value by being a leading provider in its markets of functional, flexible, and quality business distribution space for location sensitive tenants primarily in the 5,000 to 50,000 square foot range. The Company develops, acquires and operates distribution facilities, the majority of which are clustered around major transportation features in supply constrained submarkets in major Sunbelt regions. The Company's core markets are in the states of Florida, Texas, Arizona and California.
The Company believes that the slowdown in the economy has affected and will continue to affect its operations. The Company has experienced decreases in occupancy and rental rates and has no plans for development starts. The current economic situation is also impacting lenders, and it is more difficult to obtain financing. Loan proceeds as a percentage of property value has decreased, and long-term interest rates have increased. The Company believes that its current lines of credit provide the capacity to fund the operations of the Company for the remainder of 2009 and 2010. The Company also believes that it can obtain mortgage financing from insurance companies and financial institutions and issue common equity as evidenced by the closing of a $67 million mortgage loan in May and the continuous equity offering program, which provided net proceeds to the Company of $30.2 million in the first nine months of 2009, as described in Liquidity and Capital Resources.
The Company's primary revenue is rental income; as such, EastGroup's greatest challenge is leasing space. During the nine months ended September 30, 2009, leases on 3,628,000 square feet (13.4%) of EastGroup's total square footage of 27,073,000 expired, and the Company was successful in renewing or re-leasing 74% of the expiring square feet. In addition, EastGroup leased 1,333,000 square feet of other vacant space during this period. During the nine months ended September 30, 2009, average rental rates on new and renewal leases decreased by 5.5%. EastGroup's total leased percentage was 90.8% at September 30, 2009, compared to 95.1% at September 30, 2008. Leases scheduled to expire for the remainder of 2009 were 3.1% of the portfolio on a square foot basis at September 30, 2009, and this figure was reduced to 1.6% as of October 30, 2009.
Property net operating income (PNOI) from same properties decreased 3.9% for the quarter ended September 30, 2009, as compared to the same quarter in 2008. For the nine months ended September 30, 2009, PNOI from same properties decreased 3.4% as compared to the same period in 2008.
The Company generates new sources of leasing revenue through its acquisition and development programs. During the first nine months of 2009, EastGroup purchased four operating properties for a total of $17,725,000. These properties, which contain 368,000 square feet, are located in Las Vegas and Dallas. EastGroup continues to see targeted development as a major contributor to the Company's long-term growth. The Company mitigates risks associated with development through a Board-approved maximum level of land held for development and by adjusting development start dates according to leasing activity. EastGroup's development activity has slowed considerably as a result of current market conditions. The Company had no development starts in the first nine months of 2009 and currently has no plans to start construction on new developments for the remainder of the year. During the nine months ended September 30, 2009, the Company transferred eleven properties (1,092,000 square feet) with aggregate costs of $77.1 million at the date of transfer from development to real estate properties. These properties, which were collectively 66.8% leased as of October 30, 2009, are located in Phoenix, Arizona; Houston and San Antonio, Texas; and Ft. Myers, Orlando and Tampa, Florida. During the first nine months of 2009, the Company funded its acquisition and development programs through its $225 million lines of credit, the closing of a $67 million mortgage, and the proceeds from its $30.2 million common stock offering (as discussed in Liquidity and Capital Resources). As market conditions permit, EastGroup issues equity, including preferred equity, and/or employs fixed-rate, non-recourse first mortgage debt to replace short-term bank borrowings.
EastGroup has one reportable segment - industrial properties. These properties are primarily located in major Sunbelt regions of the United States, have similar economic characteristics and also meet the other criteria that permit the properties to be aggregated into one reportable segment. The Company's chief decision makers use two primary measures of operating results in making decisions: property net operating income (PNOI), defined as income from real estate operations less property operating expenses (before interest expense and depreciation and amortization), and funds from operations available to common stockholders (FFO), defined as net income (loss) computed in accordance with U.S. generally accepted accounting principles (GAAP), excluding gains or losses from sales of depreciable real estate property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The Company calculates FFO based on the National Association of Real Estate Investment Trusts' (NAREIT) definition. PNOI is a supplemental industry reporting measurement used to evaluate the performance of the Company's real estate investments. The Company believes that the exclusion of depreciation and amortization in the industry's calculation of PNOI provides a supplemental indicator of the properties' performance since real estate values have historically risen or fallen with market conditions. PNOI as calculated by the Company may not be comparable to similarly titled but differently calculated measures for other real estate investment trusts (REITs). The major factors that influence PNOI are occupancy levels, acquisitions and sales, development properties that achieve stabilized operations, rental rate increases or decreases, and the recoverability of operating expenses. The Company's success depends largely upon its ability to lease space and to recover from tenants the operating costs associated with those leases.

Real estate income is comprised of rental income, pass-through income and other real estate income including lease termination fees. Property operating expenses are comprised of property taxes, insurance, utilities, repair and maintenance expenses, management fees, other operating costs and bad debt expense. Generally, the Company's most significant operating expenses are property taxes and insurance. Tenant leases may be net leases in which the total operating expenses are recoverable, modified gross leases in which some of the operating expenses are recoverable, or gross leases in which no expenses are recoverable (gross leases represent only a small portion of the Company's total leases). Increases in property operating expenses are fully recoverable under net leases and recoverable to a high degree under modified gross leases. Modified gross leases often include base year amounts and expense increases over these amounts are recoverable. The Company's exposure to property operating expenses is primarily due to vacancies and leases for occupied space that limit the amount of expenses that can be recovered.
The Company believes FFO is a meaningful supplemental measure of operating performance for equity REITs. The Company believes that excluding depreciation and amortization in the calculation of FFO is appropriate since real estate values have historically increased or decreased based on market conditions. FFO is not considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance, nor is it a measure of the Company's liquidity or indicative of funds available to provide for the Company's cash needs, including its ability to make distributions. In addition, FFO, as reported by the Company, may not be comparable to FFO by other REITs that do not define the term in accordance with the current NAREIT definition. The Company's key drivers affecting FFO are changes in PNOI (as discussed above), interest rates, the amount of leverage the Company employs and general and administrative expense. The following table presents, on a comparative basis for the three and nine months ended September 30, 2009 and 2008, reconciliations of PNOI and FFO Available to Common Stockholders to Net Income Attributable to EastGroup Properties, Inc.

                                                  Three Months             Nine Months Ended September
                                               Ended September 30,                     30,
                                              2009             2008           2009             2008
                                                      (In thousands, except per share data)

Income from real estate operations         $   43,164           42,904        129,518          124,415
Expenses from real estate operations          (12,735 )        (12,193 )      (37,996 )        (34,559 )
PROPERTY NET OPERATING INCOME                  30,429           30,711         91,522           89,856
Equity in earnings of unconsolidated
investment (before depreciation)                  115              113            344              338
Income from discontinued operations
(before depreciation and amortization)              -               10              -              201
Interest income                                    73              125            229              189
Gain on sales of securities                         -                -              -              435
Other income                                       22               16             61              232
Interest expense                               (8,537 )         (7,596 )      (23,855 )        (22,478 )
General and administrative expense             (2,246 )         (2,250 )       (6,973 )         (6,349 )
Noncontrolling interest in earnings
(before depreciation and amortization)           (148 )           (220 )         (483 )           (613 )
Gain on sale of non-operating real
estate                                              8              301             23              313
Dividends on Series D preferred shares              -              (14 )            -           (1,326 )
Costs on redemption of Series D
preferred shares                                    -             (682 )            -             (682 )
FUNDS FROM OPERATIONS AVAILABLE TO
COMMON STOCKHOLDERS                            19,716           20,514         60,868           60,116
Depreciation and amortization from
continuing operations                         (13,587 )        (13,436 )      (39,941 )        (38,428 )
Depreciation and amortization from
discontinued operations                             -               (3 )            -              (71 )
Depreciation from unconsolidated
investment                                        (33 )            (33 )          (99 )            (99 )
Noncontrolling interest depreciation and
amortization                                       51               51            153              151
Gain on sale of depreciable real estate
investments                                         -               83              -            2,032
NET INCOME AVAILABLE TO EASTGROUP
PROPERTIES, INC.
  COMMON STOCKHOLDERS                           6,147            7,176         20,981           23,701
Dividends on Series D preferred shares              -               14              -            1,326
Costs on redemption of Series D
preferred shares                                    -              682              -              682
NET INCOME ATTRIBUTABLE TO EASTGROUP
PROPERTIES, INC.                           $    6,147            7,872         20,981           25,709

Net income available to common
stockholders per diluted share             $      .24              .29            .82              .97
Funds from operations available to
common stockholders per diluted share             .76              .82           2.39             2.45

Diluted shares for earnings per share
and funds from operations                      25,916           25,069         25,473           24,517

The Company analyzes the following performance trends in evaluating the progress of the Company:

· The FFO change per share represents the increase or decrease in FFO per share from the same quarter in the current year compared to the prior year. FFO per share for the third quarter of 2009 was $.76 per share compared with $.82 per share for the same period of 2008, a decrease of 7.3% per share. PNOI decreased 0.9% primarily due to a decrease in PNOI of $1,164,000 from same property operations, offset by additional PNOI of $617,000 from newly developed properties and $219,000 from 2008 and 2009 acquisitions.

For the nine months ended September 30, 2009, FFO was $2.39 per share compared with $2.45 for the same period last year. PNOI increased 1.9% mainly due to additional PNOI of $3,624,000 from newly developed properties and $816,000 from 2008 and 2009 acquisitions, offset by a decrease of $2,875,000 from same property operations.

· Same property net operating income change represents the PNOI increase or decrease for the same operating properties owned during the entire current period and prior year reporting period. PNOI from same properties decreased 3.9% for the three months ended September 30, 2009, and decreased 3.4% for the nine months.

· Occupancy is the percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage as of the close of the reporting period. Occupancy at September 30, 2009, was 88.9%. Quarter-end occupancy ranged from 88.9% to 94.4% over the period from September 30, 2008 to September 30, 2009.

· Rental rate change represents the rental rate increase or decrease on new and renewal leases compared to the prior leases on the same space. Rental rate decreases on new and renewal leases (3.7% of total square footage) averaged 7.3% for the third quarter of 2009. For the nine months ended September 30, 2009, rental rate decreases on new and renewal leases (14.8% of total square footage) averaged 5.5%.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's management considers the following accounting policies and estimates to be critical to the reported operations of the Company.

Real Estate Properties
The Company allocates the purchase price of acquired properties to net tangible and identified intangible assets based on their respective fair values. Goodwill is recorded when the purchase price exceeds the fair value of the assets and liabilities acquired. Factors considered by management in allocating the cost of the properties acquired include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. The allocation to tangible assets (land, building and improvements) is based upon management's determination of the value of the property as if it were vacant using discounted cash flow models. The purchase price is also allocated among the following categories of intangible assets: the above or below market component of in-place leases, the value of in-place leases, and the value of customer relationships. The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term and
(ii) management's estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above and below market leases are included in Other Assets and Other Liabilities, respectively, on the Consolidated Balance Sheets and are amortized to rental income over the remaining terms of the respective leases. The total amount of intangible assets is further allocated to in-place lease values and customer relationship values based upon management's assessment of their respective values. These intangible assets are included in Other Assets on the Consolidated Balance Sheets and are amortized over the remaining term of the existing lease, or the anticipated life of the customer relationship, as applicable. During the period in which a property is under development, costs associated with development (i.e., land, construction costs, interest expense, property taxes and other direct and indirect costs associated with development) are aggregated into the total capitalized costs of the property. Included in these costs are management's estimates for the portions of internal costs (primarily personnel costs) that are deemed directly or indirectly related to such development activities. The Company reviews its real estate investments for impairment of value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any real estate investment is considered permanently impaired, a loss is recorded to reduce the carrying value of the property to its estimated fair value. Real estate assets to be sold are reported at the lower of the carrying amount or fair value less selling costs. The evaluation of real estate investments involves many subjective assumptions dependent upon future economic events that affect the ultimate value of the property. Currently, the Company's management is not aware of any impairment issues nor has it experienced any significant impairment issues in recent years. EastGroup currently has the intent and ability to hold its real estate investments and to hold its land inventory for future development. In the event of impairment, the property's basis would be reduced, and the impairment would be recognized as a current period charge on the Consolidated Statements of Income.

Valuation of Receivables
The Company is subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables. In order to mitigate these risks, the Company performs credit reviews and analyses on prospective tenants before significant leases are executed. On a quarterly basis, the Company evaluates outstanding receivables and estimates the allowance for doubtful accounts. Management specifically analyzes aged receivables, customer credit-worthiness, historical bad debts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. The Company believes that its allowance for doubtful accounts is adequate for its outstanding receivables for the periods presented. In the event that the allowance for doubtful accounts is insufficient for an account that is subsequently written off, additional bad debt expense would be recognized as a current period charge on the Consolidated Statements of Income.

Tax Status
EastGroup, a Maryland corporation, has qualified as a real estate investment trust under Sections 856-860 of the Internal Revenue Code and intends to continue to qualify as such. To maintain its status as a REIT, the Company is required to distribute at least 90% of its ordinary taxable income to its stockholders. The Company has the option of (i) reinvesting the sales price of properties sold through tax-deferred exchanges, allowing for a deferral of capital gains on the sale, (ii) paying out capital gains to the stockholders with no tax to the Company, or (iii) treating the capital gains as having been distributed to the stockholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to the stockholders. The Company distributed all of its 2008 taxable income to its stockholders and expects to distribute all of its taxable income in 2009. Accordingly, no provision for income taxes was necessary in 2008, nor is it expected to be necessary for 2009.

FINANCIAL CONDITION

EastGroup's assets were $1,179,283,000 at September 30, 2009, an increase of $23,078,000 from December 31, 2008. Liabilities increased $9,064,000 to $751,893,000 and equity increased $14,014,000 to $427,390,000 during the same period. The paragraphs that follow explain these changes in detail.

Assets

Real Estate Properties
Real estate properties increased $109,075,000 during the nine months ended
September 30, 2009, primarily due to the purchase of four operating properties
and the transfer of eleven properties from development, as detailed under
Development below.


REAL ESTATE PROPERTIES ACQUIRED                                            Date
IN 2009                               Location            Size           Acquired          Cost (1)
                                                      (Square feet)                     (In thousands)
Arville Distribution Center        Las Vegas, NV             142,000     05/27/09      $         11,050
Interstate Distribution Center
V, VI and VII                      Dallas, TX                226,000     08/13/09                 6,675
   Total Acquisitions                                        368,000                   $         17,725

(1) Total cost of the properties acquired was $17,725,000, of which $15,957,000 was allocated to real estate properties as indicated above. Intangibles associated with the purchases of real estate were allocated as follows: $1,207,000 to in-place lease intangibles, $568,000 to above market leases (both included in Other Assets on the Consolidated Balance Sheets) and $7,000 to below market leases (included in Other Liabilities on the Consolidated Balance Sheets). All of these costs are amortized over the remaining lives of the associated leases in place at the time of acquisition. During the first nine months of 2009, the Company expensed acquisition-related costs of $115,000 in connection with the Arville and Interstate acquisitions. These costs are included in General and Administrative Expenses on the Consolidated Statements of Income.

The Company made capital improvements of $11,688,000 on existing and acquired properties (included in the Capital Expenditures table under Results of Operations). Also, the Company incurred costs of $4,368,000 on development properties subsequent to transfer to Real Estate Properties; the Company records these expenditures as development costs on the Consolidated Statements of Cash Flows during the 12-month period following transfer.

Development
The investment in development at September 30, 2009, was $95,244,000 compared to $150,354,000 at December 31, 2008. Total capital invested for development during the first nine months of 2009 was $26,320,000, which consisted of costs of $21,952,000 as detailed in the development activity table and costs of $4,368,000 on developments transferred to Real Estate Properties during the 12-month period following transfer.
The Company transferred eleven developments to Real Estate Properties during the first nine months of 2009 with a total investment of $77,062,000 as of the date of transfer.

                                                                    Costs Incurred
                                                           For the Nine
                                                           Months Ended      Cumulative as       Estimated
DEVELOPMENT                                 Size              9/30/09          of 9/30/09       Total Costs
                                         (Square feet)                      (In thousands)
LEASE-UP
 12th Street Distribution Center,
Jacksonville, FL                               150,000     $         291              5,141           5,300
 Beltway Crossing VII, Houston, TX              95,000             1,148              5,361           6,400
 Country Club III & IV, Tucson, AZ             138,000             2,433             10,480          11,200
 Oak Creek IX, Tampa, FL                        86,000               858              5,058           5,500
 Blue Heron III, West Palm Beach, FL            20,000               603              2,501           2,600
 World Houston 30, Houston, TX                  88,000             4,078              5,669           6,500
Total Lease-up                                 577,000             9,411             34,210          37,500
PROSPECTIVE DEVELOPMENT (PRIMARILY
LAND)
 Tucson, AZ                                     70,000                 -                417           3,500
 Tampa, FL                                     249,000               (40 )            3,850          14,600
 Orlando, FL                                 1,254,000               949             15,402          78,700
 Fort Myers, FL                                659,000               759             15,773          48,100
 Dallas, TX                                     70,000                54                624           5,000
 El Paso, TX                                   251,000                 -              2,444           9,600
 Houston, TX                                 1,064,000             2,049             14,835          68,100
 San Antonio, TX                               595,000               467              5,906          37,500
 Charlotte, NC                                  95,000                82              1,077           7,100
 Jackson, MS                                    28,000                 -                706           2,000
Total Prospective Development                4,335,000             4,320             61,034         274,200
                                             4,912,000     $      13,731             95,244         311,700

                                                                  Costs Incurred
                                                           For the Nine
                                                           Months Ended        Cumulative as of
DEVELOPMENT                                Size              9/30/09                9/30/09
                                        (Square feet)                  (In thousands)

DEVELOPMENTS COMPLETED AND
TRANSFERRED
TO REAL ESTATE PROPERTIES DURING
2009
 40th Avenue Distribution Center,
Phoenix, AZ                                    90,000     $            -           6,539
 Wetmore II, Building B, San
Antonio, TX                                    55,000                 10           3,643
 Beltway Crossing VI, Houston, TX             128,000                149           5,756
 World Houston 28, Houston, TX                 59,000              1,850           4,230
 Oak Creek VI, Tampa, FL                       89,000                 55           5,642
 Southridge VIII, Orlando, FL                  91,000                338           6,339
 Techway SW IV, Houston, TX                    94,000                918           5,761
 SunCoast III, Fort Myers, FL                  93,000                294           7,012
 Sky Harbor, Phoenix, AZ                      264,000              1,046          23,875
 World Houston 26, Houston, TX                 59,000                661           3,479
 World Houston 29, Houston, TX                 70,000              2,900           4,786
Total Transferred to Real Estate
Properties                                  1,092,000     $        8,221          77,062  (1)

(1) Represents cumulative costs at the date of transfer.

Accumulated depreciation on real estate properties increased $33,367,000 during the first nine months of 2009 due to depreciation expense on real estate properties. . . .