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 acquires, develops 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, California and North Carolina.

The operations of the Company improved during 2012 compared to 2011. The Company believes its current operating cash flow and lines of credit provide the capacity to fund the operations of the Company for 2013. The Company also believes it can issue common and/or preferred equity and obtain mortgage and term loan financing from insurance companies and financial institutions as evidenced by the closing of a $54 million, non-recourse first mortgage loan in January 2012, the closing of an $80 million unsecured term loan in August 2012, and the continuous common equity offering programs, which provided net proceeds to the Company of $109.6 million during 2012, as described in Liquidity and Capital Resources. In addition, the Company's $225 million lines of credit were repaid and replaced in January 2013 with new credit facilities totaling $250 million, also 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 2012, leases expired on 5,451,000 square feet (17.8%) of EastGroup's total square footage of 30,651,000, and the Company was successful in renewing or re-leasing 81% of the expiring square feet. In addition, EastGroup leased 2,048,000 square feet of other vacant space during the year. During 2012, average rental rates on new and renewal leases increased by 0.7%. Property net operating income (PNOI) from same properties, defined as operating properties owned during the entire current period and prior year reporting period, increased 0.8% for 2012 compared to 2011.

EastGroup's total leased percentage was 95.1% at December 31, 2012 compared to 94.7% at December 31, 2011. Leases scheduled to expire in 2013 were 17.1% of the portfolio on a square foot basis at December 31, 2012. As of February 15, 2013, leases scheduled to expire during the remainder of 2013 were 13.7% of the portfolio on a square foot basis.

The Company generates new sources of leasing revenue through its acquisition and development programs. During 2012, EastGroup purchased three warehouse distribution complexes (878,000 square feet) and 109.8 acres of development land for a total of $64.7 million. The operating properties are located in Dallas (722,000 square feet), Hayward, California (84,000 square feet), and Tampa (72,000 square feet). The development land is located in Houston (71.4 acres), Tampa (18.0 acres), Chandler (Phoenix) (10.5 acres), Denver (5.8 acres) and Dallas (4.1 acres).

EastGroup continues to see targeted development as a 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. During 2012, the Company began construction of nine development projects containing 757,000 square feet in Houston and Orlando. Also in 2012, EastGroup transferred four properties (273,000 square feet) in Houston from its development program to real estate properties with costs of $18.0 million at the date of transfer. As of December 31, 2012, EastGroup's development program consisted of 14 buildings (1,055,000 square feet) located in Houston, San Antonio and Orlando. The projected total cost for the development projects, which were collectively 61% leased as of February 15, 2013, is $80.4 million, of which $29.0 million remained to be invested as of December 31, 2012.

Typically, the Company initially funds its acquisition and development programs through its $250 million lines of credit (as discussed in Liquidity and Capital Resources). As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt to replace short-term bank borrowings. In prior years, EastGroup primarily obtained secured debt. In January 2013, Fitch affirmed the Company's credit rating of BBB, and Moody's assigned the Company a credit rating of Baa2. The Company intends to obtain primarily unsecured fixed rate debt in the future. The Company may also access the public debt market in the future as a means to raise capital.

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 permitting 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: (1) property net operating income (PNOI), defined as income from real estate operations less property operating expenses (excluding interest expense, depreciation expense on buildings and improvements, and amortization expense on capitalized leasing costs and in-place lease intangibles), and (2) funds from operations attributable to common stockholders (FFO), defined as net income
(loss) attributable to common stockholders computed in accordance with U.S. generally accepted accounting principles

(GAAP), excluding gains or losses from sales of depreciable real estate property and impairment losses, 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 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 influencing 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.

PNOI is comprised of Income from real estate operations, less Expenses from real estate operations. PNOI was calculated as follows for the three fiscal years ended December 31, 2012, 2011 and 2010.

                                                              Years Ended December 31,
                                                          2012          2011          2010
                                                                   (In thousands)
Income from real estate
operations                                            $  186,117       173,021       171,887
Expenses from real estate
operations                                                52,993        48,913        50,679
PROPERTY NET OPERATING
INCOME                                                $  133,124       124,108       121,208

Income from real estate operations is comprised of rental income, expense reimbursement pass-through income and other real estate income including lease termination fees. Expenses from real estate operations is 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 following table presents reconciliations of Net Income to PNOI for the three fiscal years ended December 31, 2012, 2011 and 2010.

                                                                Years Ended December 31,
                                                          2012             2011            2010
                                                                      (In thousands)
NET INCOME                                            $    32,887            22,834        18,755
Equity in earnings of unconsolidated
investment                                                   (356 )            (347 )        (335 )
Interest
income                                                       (369 )            (334 )        (336 )
Other
income                                                        (61 )            (142 )         (82 )
Gain on sales of
land                                                            -               (36 )         (37 )
Income from discontinued
operations                                                 (6,989 )            (276 )        (150 )
Depreciation and amortization from continuing
operations                                                 61,696            56,757        57,806
Interest
expense                                                    35,371            34,709        35,171
General and administrative
expense                                                    10,488            10,691        10,260
Interest rate swap ineffectiveness                            269                 -             -
Acquisition
costs                                                         188               252            72
Other expense                                                   -                 -            84
PROPERTY NET OPERATING
INCOME                                                $   133,124           124,108       121,208

The Company believes FFO is a meaningful supplemental measure of operating performance for equity REITs. The Company believes 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 reconciliations of Net Income Attributable to EastGroup Properties, Inc. Common Stockholders to FFO Attributable to Common Stockholders for the three fiscal years ended December 31, 2012, 2011 and 2010.

                                                                   Years Ended December 31,
                                                              2012              2011            2010
                                                             (In thousands, except per share data)
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.
COMMON
STOCKHOLDERS                                            $      32,384           22,359         18,325
Depreciation and amortization from continuing
operations                                                     61,696           56,757         57,806
Depreciation and amortization from discontinued
operations                                                        578              694            544
Depreciation from unconsolidated
investment                                                        133              133            132
Depreciation and amortization from noncontrolling
interest                                                         (256 )           (219 )         (210 )
Gain on sales of real estate
investments                                                    (6,343 )              -              -
FUNDS FROM OPERATIONS (FFO) ATTRIBUTABLE TO COMMON
STOCKHOLDERS                                            $      88,192           79,724         76,597
Net income attributable to common stockholders per
diluted share                                           $        1.13             0.83           0.68
Funds from operations attributable to common
stockholders per diluted share                                   3.08             2.96           2.86
Diluted shares for earnings per share and funds from
operations                                                     28,677           26,971         26,824

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 current year compared to the prior year. For the year 2012, FFO was $3.08 per share compared with $2.96 per share for 2011, an increase of 4.1% per share.

• For the year ended December 31, 2012, PNOI increased by $9,016,000, or 7.3%, compared to 2011. PNOI increased $6,206,000 from 2011 and 2012 acquisitions, $1,833,000 from newly developed properties, and $1,017,000 from same property operations.

• The 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 increased 0.8% for the year ended December 31, 2012, compared to 2011.

Same property average occupancy represents the average month-end percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage for the same operating properties owned during the entire current period and prior year reporting period. Same property average occupancy for the year ended December 31, 2012, was 93.6% compared to 91.7% for 2011.

The same property average rental rate represents the average annual rental rates of leases in place for the same operating properties owned during the entire current period and prior year reporting period. The same property average rental rate was $5.26 per square foot for the year ended December 31, 2012, compared to $5.35 per square foot for 2011.

• Occupancy is the percentage of leased square footage for which the lease term has commenced compared to the total leasable square footage as of the close of the reporting period. Occupancy at December 31, 2012 was 94.6%. Quarter-end occupancy ranged from 93.1% to 94.6% over the period from December 31, 2011 to December 31, 2012.

• Rental rate change represents the rental rate increase or decrease on new and renewal leases compared to the prior leases on the same space. For the year 2012, rental rate increases on new and renewal leases (21.1% of total square footage) averaged 0.7%.

• For the year 2012, termination fee income was $389,000 compared to $565,000 for 2011. Bad debt expense was $640,000 for 2012 compared to $550,000 for 2011.

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 reflecting 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 internal costs are allocated to specific development properties based on construction activity.

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 knows of no impairment issues nor has it experienced any 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 and Comprehensive 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 and on existing tenants before properties are acquired. 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 its allowance for doubtful accounts is adequate for its outstanding receivables for the periods presented. In the event 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 and Comprehensive 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. If the Company has a capital gain, it has the option of (i) deferring recognition of the capital gain through a tax-deferred exchange, (ii) declaring and paying a capital gain dividend on any recognized net capital gain resulting in no corporate level tax, or (iii) retaining and paying corporate income tax on its net long-term capital gain, with shareholders reporting their proportional share of the undistributed long-term capital gain and receiving a credit or refund of their share of the tax paid by the Company. The Company distributed all of its 2012, 2011 and 2010 taxable income to its stockholders. Accordingly, no significant provisions for income taxes were necessary.

FINANCIAL CONDITION

EastGroup's assets were $1,354,102,000 at December 31, 2012, an increase of $67,586,000 from December 31, 2011. Liabilities decreased $17,981,000 to $862,926,000, and equity increased $85,567,000 to $491,176,000 during the same period. The following paragraphs explain these changes in detail.

Assets
Real Estate Properties
Real Estate Properties increased $69,333,000 during the year ended December 31, 2012, primarily due to the purchase of the operating properties detailed below, capital improvements at the Company's properties and the transfer of four properties from Development, as detailed under Development below. These increases were offset by the sale of four properties during the year. Two properties in Tampa, which were held in the Company's taxable REIT subsidiary, sold for $578,000; the Company recognized an after-tax gain of $167,000 in connection with the sale. The Company also sold a property in Phoenix for $7,019,000 and recognized a gain of $1,869,000. In addition, the Company sold a property in Tulsa for $10,300,000 and recognized a gain of $4,474,000.

                                                                             Date
REAL ESTATE PROPERTIES ACQUIRED IN 2012    Location          Size          Acquired         Cost (1)
                                                         (Square feet)                   (In thousands)
Madison Distribution Center               Tampa, FL            72,000     01/31/2012   $          3,273
Wiegman Distribution Center II            Hayward, CA          84,000     08/20/2012              6,894
Valwood Distribution Center               Dallas, TX          722,000     12/21/2012             38,767
Total Acquisitions                                            878,000                  $         48,934

(1) Total cost of the properties acquired was $51,750,000, of which $48,934,000 was allocated to Real Estate Properties as indicated above. Intangibles associated with the purchases of real estate were allocated as follows: $3,305,000 to in-place lease intangibles, $244,000 to above market leases (both included in Other Assets on the Consolidated Balance Sheets) and $733,000 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.

The Company made capital improvements of $18,164,000 on existing and acquired properties (included in the Capital Expenditures table under Results of Operations). Also, the Company incurred costs of $1,338,000 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.

Development
EastGroup's investment in development at December 31, 2012 consisted of properties in lease-up and under construction of $51,422,000 and prospective development (primarily land) of $96,833,000. The Company's total investment in development at December 31, 2012 was $148,255,000 compared to $112,149,000 at December 31, 2011. Total capital invested for development during 2012 was $55,404,000, which consisted of costs of $52,499,000 and $1,567,000 as detailed in the development activity table below and costs of $1,338,000 on development properties subsequent to transfer to Real Estate Properties. The capitalized costs incurred on development properties subsequent to transfer to Real Estate Properties include capital improvements at the properties and do not include other capitalized costs associated with development (i.e., interest expense, property taxes and internal personnel costs).

EastGroup capitalized internal development costs of $2,810,000 during the year ended December 31, 2012, compared to $1,334,000 during 2011. The increase in capitalized internal development costs in 2012 as compared to 2011 resulted from increased activity in the Company's development program in 2012.

During 2012, EastGroup purchased 109.8 acres of development land in Dallas, Houston, Tampa, Denver and Chandler (Phoenix) for $12,998,000. Costs associated with these acquisitions are included in the development activity table. The Company transferred four development properties to Real Estate Properties during 2012 with a total investment of $17,960,000 as of the date of transfer.

                                                          Costs Incurred
                                               Costs           For the       Cumulative     Estimated     Building
                                            Transferred       Year Ended       as of       Total Costs   Completion
DEVELOPMENT                                  in 2012 (1)       12/31/12       12/31/12         (2)          Date
                                                                 (In thousands)
                             Building
                               Size
                              (Square
LEASE-UP                       feet)
Southridge IX, Orlando,
FL                             76,000     $         -               938          6,300         7,100        03/12
World Houston 31B,
Houston, TX                    35,000               -             1,591          2,951         3,900        04/12
Thousand Oaks 1, San
Antonio, TX                    36,000               -             1,130          3,539         4,700        05/12
Thousand Oaks 2, San
Antonio, TX                    73,000               -             1,645          4,809         5,600        05/12
Beltway Crossing X,
Houston, TX                    78,000               -             1,810          3,816         4,300        06/12
Southridge XI, Orlando,
. . .