1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-7094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 ONE JACKSON PLACE
188 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (601) 354-3555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SHARES OF COMMON STOCK, $.0001 PAR VALUE,
SHARES OF SERIES A 9.00% CUMULATIVE REDEEMABLE PREFERRED, $.0001 PAR VALUE
NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES (x) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 8, 2000 was
$316,410,717
The number of shares of common stock, $.0001 par value,
outstanding as of March 8, 2000 was 15,577,143
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III.
2
PART I
ITEM 1. BUSINESS.
Organization
EastGroup Properties, Inc. (the "Company" or "EastGroup") is an equity
real estate investment trust ("REIT") organized in 1969. The Company has elected
to be taxed as a real estate investment trust under Sections 856-860 of the
Internal Revenue Code, as amended, and intends to continue to qualify to be so
taxed.
Administration
The Company is self-administered and maintains its principal executive
offices in Jackson, Mississippi. As of March 8, 2000, EastGroup had 42 full-time
and four part-time employees.
Current Operations
EastGroup is a self-administered REIT focused on the ownership,
acquisition and development of industrial properties in major Sunbelt markets
throughout the United States. As of December 31, 1999, EastGroup's portfolio
included industrial properties comprising approximately 16 million square feet
of leasable space. As of December 31, 1999, the industrial portfolio was 97%
leased.
During 1999, EastGroup significantly expanded its industrial properties
portfolio through 13 acquisitions in five states and purchase of the remaining
25% interest in Jetport Commerce and 56th Street, aggregating 1,651,000 square
feet of leasable space for a total cost of approximately $57,672,000.
Additionally, $45,846,000 was invested in industrial development projects, and
capital improvements amounting to $9,397,000 were made on existing properties.
In addition to direct property acquisitions, EastGroup also seeks to grow its
portfolio through the acquisition of other public and private real estate
companies and REITs. EastGroup invested $10,172,000 in stock of other REITs
during the year. The recycling of capital has always been an important element
of EastGroup's growth strategy. Through recycling, we are continually improving
the physical quality and location of our properties and increasing the
clustering of assets in our core submarkets. In 1999, the Company sold two
industrial properties, one office building, two small parcels of land and a land
purchase leaseback for net proceeds of $51,160,000 and gains for financial
reporting purposes of approximately $14,360,000.
The Company intends to continue to qualify as a REIT under the Code.
Ordinary taxable income will continue to be paid to the stockholders. The
Company has the option of (i) paying out capital gains to the stockholders with
no tax to the Company, or (ii) paying a capital gains tax and retaining the
gains on sales, 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 book value of the
property sold and the retained portion of capital gains, if any, are generally
reinvested by the Company. Some of the factors considered in making these
investments are type of property, location, current yield and potential for
appreciation.
3
EastGroup incurs short-term floating rate debt in connection with the
acquisition of real estate and payment of costs of development projects, and
attempts to replace floating rate debt with fixed-rate term loans secured by
real property or to repay the debt with the proceeds of sales of equity
securities as market conditions permit. EastGroup also may, in appropriate
circumstances, acquire one or more properties in exchange for EastGroup's equity
securities.
EastGroup holds its properties as long-term investments, but may
determine to sell certain properties that no longer meet its investment
criteria. The Company may provide financing in connection with such sales of
property if market conditions so require, but it does not presently intend to
make loans other than in connection with such transactions.
EastGroup has no present intentions of underwriting securities of other
issuers. The strategies and policies set forth above were determined and are
subject to review by EastGroup's Board of Directors, which may change such
strategies or policies based upon its evaluation of the state of the real estate
market, the performance of EastGroup's assets, capital and credit market
conditions, and other relevant factors. EastGroup provides annual reports to its
stockholders, which contain financial statements audited by the Company's
independent public accountants.
Environmental Matters
Under various federal, state and local laws, ordinances and
regulations, an owner of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner knows
of, or was responsible for, the presence of such hazardous or toxic substances.
The presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to use such property as collateral in its borrowings. All of
EastGroup's properties have been subjected to environmental audits by
independent environmental consultants, which reports have not revealed any
potential significant environmental liability. Management of EastGroup is not
aware of any environmental liability that would have a material adverse effect
on EastGroup's business, assets, financial position or results of operations.
ITEM 2. PROPERTIES.
The Company conducts its primary operations from approximately 11,000
square feet of rented office space located at 300 One Jackson Place, 188 East
Capitol Street, Jackson, Mississippi. In March 1998, EastGroup acquired Ensign
Properties, Inc., an independent industrial developer in Orlando. This
acquisition allowed EastGroup to become self-managed in all of its Florida
markets. It also significantly increased the Company's development capability in
Florida. In September 1998, EastGroup opened a western regional office based in
Phoenix, Arizona. This office manages the Company's operations in Arizona and
California that total over 5.1 million square feet of industrial space.
At December 31, 1999, the Company did not own any single property that
is 10% or more of total book value or 10% or more of total gross revenues and
thus is not subject to the requirements of Items 14 and 15 of Form S-11.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material litigation nor,
to its knowledge, is any material litigation threatened against the Company or
its properties, other than routine litigation arising in the ordinary course of
business or which is expected to be covered by the Company's liability
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
SHARES OF COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's shares of Common Stock are presently listed for trading
on the New York Stock Exchange under the symbol "EGP." The following table shows
the high and low share prices for each quarter reported by the New York Stock
Exchange during the past two years and per share distributions paid for each
quarter.
Calendar 1999 Calendar 1998
------------- -------------
Quarter High Low Distributions High Low Distributions
- ------- ---- --- ------------- ------ --- -------------
First $19.13 15.38 $ .36 $22.13 19.44 $ .34
Second 21.88 15.81 .36 20.88 18.88 .34
Third 21.13 17.38 .38 21.88 16.31 .36
Fourth 18.81 16.25 .38 19.75 16.75 .36
------ ------
$1.48 $1.40
====== ======
SHARES OF SERIES A PREFERRED STOCK MARKET PRICES AND DIVIDENDS
The Company's shares of Series A 9.00% Cumulative Redeemable Preferred
Stock are also listed for trading on the New York Stock Exchange and trade under
the symbol "EGP PrA." The following table shows the high and low preferred share
prices for each quarter reported by the New York Stock Exchange during the past
two years and per share distributions paid for each quarter (no Preferred Shares
were outstanding in the first quarter of 1998).
Calendar 1999 Calendar 1998
------------- -------------
Quarter High Low Distributions High Low Distributions
- ------- ---- --- ------------- ---- --- -------------
First $ 25.25 22.25 $ .5625 N/A N/A N/A
Second 24.75 21.75 .5625 25.50 25.38 N/A
Third 24.50 22.25 .5625 25.50 23.50 .1625
Fourth 22.75 18.00 .5625 25.25 23.50 .5625
------- ------
$2.2500 $.7250
======= ======
As of March 8, 2000, there were 1,315 holders of record of the
Company's 15,577,143 outstanding shares of common stock. Approximately 91% of
the Company's outstanding common shares are held by CEDE & Co., which is
accounted for as a single shareholder of record for multiple common stock
owners. All of the $1.48 per common share total distributions paid in 1999 were
taxable as ordinary income for federal income tax purposes. In 1998, of the
$1.40 per common share total distributions paid, $1.36 per share was taxable as
ordinary income for federal income tax purposes and $.04 per share represented a
long-term 20% capital gain.
As of March 8, 2000, there were 67 holders of record of the Company's
1,725,000 outstanding shares of Series A preferred stock. Approximately 97% of
the Company's outstanding Series A preferred shares are held by CEDE & Co.,
which is accounted for as a single shareholder of record for multiple preferred
stock owners. All of the $2.25 per share Series A preferred stock distributions
paid in 1999 and the $.725 per share distributions paid in 1998 were taxable as
ordinary income for federal income tax purposes.
5
SHARES OF SERIES B PREFERRED STOCK MARKET PRICES AND DIVIDENDS
In September 1998, EastGroup entered into an agreement with Five Arrows
Realty Securities II, L.L.C., an investment fund managed by Rothschild Realty,
Inc., a member of the Rothschild Group, providing for the sale of up to
2,800,000 shares of Series B 8.75% Cumulative Convertible Preferred Stock at a
net price of $24.50 per share. The Series B Preferred Stock, which is
convertible into common stock at a conversion price of $22.00 per share, is
entitled to quarterly dividends in arrears equal to the greater of $0.547 per
share or the dividend on the number of shares of common stock into which a share
of Series B Preferred Stock is convertible. In December 1998, the Company sold
$10 million of the Series B Preferred Stock to Five Arrows and the remaining $60
million in September 1999. All of the $1.641 per share Series B distributions
paid in 1999 were taxable as ordinary income for federal income tax purposes. No
dividends were paid on the Series B preferred stock during 1998.
6
The following table sets forth selected consolidated financial data for the
Company and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report.
Years Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ----------- ----------- ------------- -------------
(In thousands, except per share data)
OPERATING DATA:
Revenues
Income from real estate operations $ 83,320 74,312 49,791 37,143 28,386
Interest 1,367 1,868 2,571 1,718 1,036
Other 1,549 548 1,260 910 842
------------- ----------- ----------- ------------- -------------
86,236 76,728 53,622 39,771 30,264
------------- ----------- ----------- ------------- -------------
Operating expenses from
real estate operations 19,941 19,328 14,825 13,262 11,575
Interest 17,688 16,948 10,551 8,930 6,287
Depreciation and
amortization 20,178 16,574 10,409 7,759 5,613
General and administrative 4,580 3,822 2,923 2,356 2,180
------------- ----------- ----------- ------------- -------------
62,387 56,672 38,708 32,307 25,655
------------- ----------- ----------- ------------- -------------
Income before minority interest
and gain on investments 23,849 20,056 14,914 7,464 4,609
Minority interests in
joint ventures 433 433 512 289 220
------------- ----------- ----------- ------------- -------------
Income before gains
on investments 23,416 19,623 14,402 7,175 4,389
Gain on real estate investments 15,357 9,713 6,377 5,334 3,322
------------- ----------- ----------- ------------- -------------
Income before cumulative effect
of change in accounting principle 38,773 29,336 20,779 12,509 7,711
Cumulative effect of change in
accounting principle 418 - - - -
------------- ----------- ----------- ------------- -------------
Net income 38,355 29,336 20,779 12,509 7,711
Preferred dividends-Series A 3,880 2,070 - - -
Preferred dividends-Series B 2,246 - - - -
------------- ----------- ----------- ------------- -------------
Net income available to
common shareholders $ 32,229 27,266 20,779 12,509 7,711
============= =========== =========== ============= =============
BASIC PER SHARE DATA:
Net income available to
common shareholders $ 2.01 1.67 1.58 1.44 1.22
Weighted average number of
shares outstanding 16,046 16,283 13,176 8,677 6,338
DILUTED PER SHARE DATA:
Net income available to
common shareholders $ 1.99 1.66 1.56 1.43 1.21
Weighted average number of
shares outstanding 17,362 16,432 13,338 8,749 6,362
OTHER PER SHARE DATA:
Book value (at end of
year) $ 16.47 16.12 15.88 13.78 13.06
Common distributions declared 1.48 1.40 1.34 1.28 1.23
Common distributions paid 1.48 1.40 1.34 1.28 1.23
7
Years Ended December 31,
1999 1998 1997 1996 1995
-------------- ------------- ------------- ------------- -------------
(In thousands, except per share data)
OTHER DATA:
Funds from operations:
Net income $ 38,355 29,336 20,779 12,509 7,711
Preferred dividends-Series A (3,880) (2,070) - - -
Convertible preferred dividends-Series B (2,246) - - - -
-------------- ------------- ------------- ------------- -------------
Net income available to
common shareholders 32,229 27,266 20,779 12,509 7,711
Add:
Depreciation and amortization 20,178 16,574 10,409 7,759 5,613
Real estate investment trust
dividends received (equity method) - - - 77 182
Cumulative effect of change in
accounting principle (1) 418 - - - -
Convertible preferred dividends-Series B 2,246 - - - -
Limited partnership units 48 - - - -
Deduct:
Gains on investments, net (15,357) (9,713) (6,377) (5,340) (3,322)
Equity in earnings of real
estate investment trust - - - (43) (203)
Other (241) (324) (284) (142) (134)
-------------- ------------- ------------- ------------- -------------
Funds from operations (2) $ 39,521 33,803 24,527 14,820 9,847
============== ============= ============= ============= =============
Cash flows provided by (used in):
Operating activities $ 46,750 29,393 23,685 13,996 9,746
Investing activities (68,871) (123,592) (79,959) (577) (5,721)
Financing activities 21,994 95,685 57,134 (13,007) (4,300)
BALANCE SHEET DATA (AT END
OF YEAR):
Real estate investments, at cost (3) $ 649,754 582,565 419,857 292,620 162,400
Real estate investments, net of
accumulated depreciation and
allowance for losses (3) 598,175 539,729 387,545 269,058 143,194
Total assets 632,151 567,548 413,127 281,455 157,955
Mortgage, bond and bank
loans payable 243,665 236,816 147,150 129,078 71,562
Total liabilities 262,839 251,524 155,812 136,129 75,055
Total shareholders' equity 369,312 316,024 257,315 145,326 82,900
(1) Represents previously capitalized start-up and organizational costs that
were expensed on January 1, 1999 in accordance with the requirements of
Statement of Position 98-5.
(2) EastGroup defines funds from operations ("FFO"), consistent with the
National Association of Real Estate Investment Trusts ("NAREIT") definition, as
net income (loss)(computed in accordance with generally accepted accounting
principles ("GAAP")), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate related depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures. The
Company computes FFO in accordance with standards established by EastGroup,
which may differ from the methodology for calculating FFO utilized by other
equity REITs and, accordingly, may not be comparable to such other REITs.
Further, FFO does not represent amounts available for management's discretionary
use because of needed capital replacement or expansion, debt service
obligations, or other commitments and uncertainties. FFO should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make distributions.
(3) Does not include a 50% controlled joint venture investment of $4,367,000 at
December 31, 1996 that was sold in 1997, or the $500,000 land purchase-leaseback
sold in 1999.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION:
Assets of EastGroup were $632,151,000 at December 31, 1999, an increase of
$64,603,000 from December 31, 1998. Liabilities (excluding minority interests)
increased $11,678,000 to $260,499,000; minority interests decreased $363,000 to
$2,340,000; and stockholders' equity increased $53,288,000 to $369,312,000
during the same period. Book value per common share increased from $16.12 at
December 31, 1998 to $16.47 at December 31, 1999.
Industrial properties increased $73,411,000 during the year ended December
31, 1999 as compared to 1998. This increase was primarily due to the acquisition
of 13 industrial properties for $55,869,000 and the purchase of the remaining
25% interest in Jetport Commerce and 56th Street for $1,803,000 for a total of
$57,672,000 (as detailed below), capital improvements of $8,945,000 made on
existing and acquired properties and the transfer of eight industrial properties
from industrial development with total costs of $36,048,000. These increases
were offset by the transfer of four industrial properties to real estate held
for sale with costs of $29,254,000.
Industrial Properties Acquired in 1999 Size Date Acquired Cost
Location (Square Feet) (In thousands)
- ------------------------------------ ------------------------ ----------------- ----------------- -------------------
Central Green Houston, Texas 84,000 01-07-99 $ 4,600
Blue Heron West Palm Beach,Florida 110,000 01-15-99 4,617
Rojas Commerce Park El Paso, Texas 172,000 06-11-99 4,570
Yosemite Distribution Center Milpitas, California 102,000 07-09-99 7,344
Jetport Commerce Center and
56th Street (25% interest) Tampa, Florida 100,000(1) 07-09-99 1,803
Interstate Commons Center Phoenix, Arizona 136,000 07-20-99 4,430
Meadows Industrial Tampa, Florida 30,000 08-06-99 1,913
Jetport 517 & 518 Tampa, Florida 64,000 08-06-99 2,718
LeTourneau Center of Commerce Tampa, Florida 88,000 08-06-99 1,612
Fairmont Distribution Center Tempe, Arizona 19,000 08-23-99 948
Kyrene Distribution Center Tempe, Arizona 70,000 09-16-99 2,898
Altamonte Commerce Center Orlando, Florida 123,000 10-01-99 4,170
Southpointe Distribution Center Tucson, Arizona 205,000 11-19-99 3,981
Southeast Crossing Business Center Memphis, Tennessee 348,000 12-23-99 12,068
-------------------
Total Industrial Acquisitions $57,672
===================
(1) Represents 25% of total square footage (100% of properties amounts to
400,000 square feet).
Industrial development increased $9,798,000 during the year ended
December 31, 1999. This increase resulted primarily from development costs of
$45,846,000 on existing and completed development properties, offset by costs of
$36,048,000 on completed development properties transferred to industrial
properties, as detailed below.
Costs Incurred
-------------------------------------
Size at For the Twelve
Completion Months Cumulative As Estimated
(Square Feet) Ended 12/31/99 Of 12/31/99 Total Costs (1)
- ------------------------------------------ ------------------ ------------------------------------- -------------------
(In thousands)
Lease-Up:
John Young II
Orlando, Florida 47,000 $1,897 2,562 2,938
Rampart Distribution Center III
Denver, Colorado 92,000 2,581 4,754 5,920
Sample 95 II
Pompano, Florida 70,000 2,490 3,501 3,779
Chestnut Business Center
City of Industry, California 75,000 2,680 4,354 5,487
Westlake I
Tampa, Florida 70,000 2,691 4,302 4,729
Palm River North I
Tampa, Florida 96,000 4,602 4,711 5,287
Glenmont I
Houston, Texas 108,000 2,738 3,674 4,065
Main Street
Carson, California 106,000 3,982 3,983 5,669
------------------ ------------------- ----------------- -------------------
Total Lease-up 664,000 23,661 31,841 37,874
------------------ ------------------- ----------------- -------------------
Under Construction:
World Houston 11
Houston, Texas 126,000 586 586 5,455
------------------ ------------------- ----------------- -------------------
Total Under Construction 126,000 586 586 5,455
------------------ ------------------- ----------------- -------------------
Prospective Development:
Phoenix, Arizona 123,000 960 960 6,200
Tampa, Florida 366,000 134 821 17,578
Orlando, Florida 116,000 1,272 1,272 5,568
Houston, Texas 110,000 - - 3,700
------------------ ------------------- ----------------- -------------------
Total Prospective Development 715,000 2,366 3,053 33,046
------------------ ------------------- ----------------- -------------------
1,505,000 $26,613 35,480 76,375
================== =================== ================= ===================
Completed Development and
Transferred to Industrial
Properties During Twelve
Months Ended December 31, 1999:
Airport Commerce Center
Tampa, Florida 108,000 $4,198 5,584
World Houston 9
Houston, Texas 155,000 4,144 5,160
Premier Beverage
Tampa, Florida 222,000 6,827 7,235
Westside Expansion
Jacksonville, Florida 35,000 673 673
World Houston 7 & 8
Houston, Texas 166,000 2,934 7,622
Walden Distribution Center II
Tampa, Florida 122,000 62 4,252
Sunbelt Distribution Center II
Orlando, Florida 61,000 113 2,325
John Young
Orlando, Florida 51,000 282 3,197
------------------ ------------------- -----------------
Total Transferred to Industrial 920,000 $19,233 36,048
================== =================== =================
(1) The information provided above includes forward-looking data based on
current construction schedules, the status of lease negotiations with potential
tenants and other relevant factors currently available to the Company. There can
be no assurance that any of these factors will not change or that any change
will not affect the accuracy of such forward-looking data. Among the factors
that could affect the accuracy of the forward-looking statements are weather,
default or other failure of performance by contractors, increases in the price
of construction materials or the unavailability of such materials, failure to
obtain necessary permits or approvals from government entities, changes in local
and/or national economic conditions, increased competition for tenants or other
occurrences that could depress rental rates, and other factors not within the
control of the Company.
Other real estate properties decreased by $8,843,000 as a result of the
transfer of one apartment complex to real estate held for sale with a cost of
$8,984,000, offset by capital improvements of $141,000.
Real estate held for sale decreased $7,569,000 primarily due to the
sales of two industrial properties, one office building, two parcels of
land and a land purchase leaseback with total costs of $45,670,000. Also, one
property in held for sale was written down by $448,000. These decreases
were offset by capital improvements of $311,000 and the reclassifications of
five properties to real estate held for sale with total costs of $38,238,000.
Accumulated depreciation on real estate properties and real estate held
for sale increased $8,743,000 due to depreciation expense of $18,640,000, offset
by the sale of three properties with total accumulated depreciation of
$9,897,000.
Mortgage loans receivable decreased $108,000 during 1999 as a result of
principal payments of $2,000 and the repayment of $10,137,000 on seven mortgage
loans receivable. These decreases were offset by amortization of loan discounts
of $330,000, recognition of deferred gains of $1,515,000 on the payoff of the
Country Club and Gainesville mortgage notes receivable, the issuance of three
new notes receivable for a total of $8,137,000 and an increase of $49,000 on one
note.
Investments in real estate investment trusts increased from $5,737,000
at December 31, 1998 to $15,708,000 at December 31, 1999 primarily as a result
of purchases of other real estate investment trust shares for $10,172,000 and
unrealized gains of $61,000. These increases were offset by the sales of other
real estate investment trust shares with a cost basis of $262,000.
Other assets decreased $3,187,000 during 1999 compared to 1998 primarily as
a result of a net reduction in cash escrows for 1031 exchange properties,
reclassification of prepaid costs for the Series B Preferred Stock offering to
additional paid in capital when additional shares were funded in September 1999,
write-off of organization costs accounted for as a cumulative effect of a change
in accounting principle in 1999 and refund of the good faith deposit paid in
1998 relating to the $47,000,000 Metropolitan Life loan obtained in March 1999.
These decreases and others were offset by increases in unamortized leasing
commissions and loan costs and increases in receivables and other costs.
9
Mortgage notes payable increased $26,171,000 during 1999, as a result of
the Company's new $47,000,000, nonrecourse first mortgage loan with Metropolitan
Life and a $1,103,000 note assumed on the Kyrene Distribution Center
acquisition, offset by loan payoffs of $18,199,000 on the Interstate
Distribution Center, West Palm Distribution Centers, 8150 Leesburg Pike Office
Building, and Waldenbooks/Borders Distribution Center mortgages, and regularly
scheduled principal payments of $3,733,000.
Notes payable to banks decreased $19,322,000 during 1999 as a result of
payments of $316,548,000 offset by borrowings of $297,226,000. The Company's new
credit facilities, which replaced the $100,000,000 acquisition line and the
$50,000,000 working capital line at December 31, 1998, are described in greater
detail under Liquidity and Capital Resources.
Unrealized gain on securities increased $61,000 as a result of an
increase in the market value of the Company's investments recorded in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Undistributed earnings increased from $18,076,000 at December 31, 1998
to $26,654,000 at December 31, 1999, as a result of net income available to
common shareholders for financial reporting purposes of $32,229,000 exceeding
dividends on common stock of $23,651,000.
In September 1999, the Company sold $60,000,000 of Series B 8.75%
Cumulative Convertible Preferred Stock to Five Arrows Realty Securities II,
L.L.C. for $24.50 per share, net of a 2% discount per share. For a more detailed
discussion of this issue, see Note 7 in the Notes to the Consolidated Financial
Statements.
10
RESULTS OF OPERATIONS
1999 Compared to 1998
Net income available to common shareholders for 1999 was $32,229,000
($2.01 per basic share and $1.99 per diluted share) compared to net income in
1998 of $27,266,000 ($1.67 per basic share and $1.66 per diluted share). Income
before gains on investments was $23,416,000 in 1999 compared to $19,623,000 in
1998. Gains on investments were $15,357,000 in 1999 compared to $9,713,000 in
1998. Income before cumulative effect of change in accounting principle was
$38,773,000 in 1999 compared to $29,336,000 in 1998. Cumulative effect of change
in accounting principle was $418,000 for 1999 and zero for 1998. The paragraphs
that follow describe the results of operations in greater detail.
Property net operating income (PNOI) from real estate properties,
defined as income from real estate operations less property operating expenses
(before interest expense and depreciation), increased by $8,395,000 or 15.27%
for 1999, compared to 1998. PNOI and percentage leased by property type were as
follows:
PNOI
Years Ended Percent
December 31, Leased
1999 1998 12-31-99 12-31-98
---- ---- -------- --------
(In thousands)
Industrial $59,954 47,003 97% 98%
Other 3,425 7,981
------- ------
Total PNOI $63,379 54,984
======= ======
PNOI from industrial properties increased $12,951,000 for 1999 compared
to 1998. Industrial properties held throughout 1999 and 1998 showed an increase
in PNOI of 5.8% for 1999. The increase in PNOI from industrial properties
resulted primarily from the 1998 and 1999 acquisitions, from an increase in same
store property operations and from stabilized operations of 13 industrial
development properties.
PNOI from other properties decreased $4,556,000 for 1999 compared to
1998. This decrease was primarily the result of the sale of the Columbia Place
Office Building in December 1998, the sales of four apartment complexes in 1998
and the sale of the 8150 Leesburg Pike Office Building in July 1999.
Interest income on mortgage loans decreased $581,000 for 1999 compared
to 1998. The following is a breakdown of interest income for the year ended
December 31, 1999 compared to 1998:
Years Ended December 31,
1999 1998
---- ----
Interest income from: (In thousands)
----------------- -----------------
Industrial mortgage loans $ 348 -
Land mortgage loans 588 886
Apartment mortgage loans 143 556
Motel mortgage loans 41 174
Other mortgage loans 3 88
---------------- ---------------
$1,123 1,704
================ ===============
Interest income from industrial mortgages in 1999 is due to the
issuance of two new notes for industrial properties. One of the properties was
acquired in the first quarter of 2000, and the mortgage note was repaid. On the
other note, EastGroup has the option to purchase the property that is
collateralizing the note. Land mortgage interest decreased due to the repayment
of the West Houston note in mid-1999. Apartment and motel mortgage interest
decreased as a result of the repayment of these loans in early 1999. Other
mortgage interest decreased due to the repayment of one loan.
11
Other revenues increased $1,001,000 in 1999 compared to 1998 primarily
as a result of an increase in dividends on real estate investment trusts shares
owned by EastGroup.
Bank interest expense increased $444,000 from $6,668,000 in 1998 to
$7,112,000 in 1999. Average bank borrowings were $104,335,000 in 1999 compared
to $94,488,000 in 1998 with average interest rates of 6.82% in 1999 compared to
7.06% in 1998. Average bank borrowings increased primarily as a result of the
Meridian acquisition and the acquisition and development of industrial
properties. Bank interest rates at December 31, 1999 were 7.50% on $77,000,000,
7.44% on $8,000,000 and 7.75% on $10,000,000. The bank interest rate at December
31, 1998 was 6.96%. Interest costs incurred during the period of construction of
real estate properties are capitalized and offset against the bank interest
expense. The interest costs capitalized on real estate properties for 1999 were
$1,834,000 compared to $822,000 for 1998.
Interest expense on real estate properties increased $1,308,000 from
$11,102,000 in 1998 to $12,410,000 in 1999, primarily as a result of mortgages
assumed in 1998 on Estrella and World Houston 1 & 2 and other mortgages assumed
in the Meridian VIII merger, and from the issuance of the $47,000,000 mortgage
loan with Metropolitan Life (discussed in Liquidity and Capital Resources) and
assumption of the Kyrene Distribution Center mortgage. These increases were
offset by the sales of Columbia Place Office Building, the Sutton House and
Doral Club Apartments, the 8150 Leesburg Pike Office Building, and the
Waldenbooks/Borders Distribution Center.
Depreciation and amortization increased $3,604,000 in 1999 compared to
1998. This increase was primarily due to the industrial properties acquired in
both 1998 and 1999, offset by the sales of several properties in 1998 and 1999,
and the transfer of several properties to real estate held for sale
(depreciation not taken on those properties held in real estate held for sale).
The increase in general and administrative expenses of $758,000 for the
year ended December 31, 1999 is primarily due to an increase in general and
administrative costs due to growth of the Company.
In 1999, the Company recognized gains of $15,357,000 consisting
primarily of the sale of three properties, two parcels of land and a land
purchase leaseback, a write-down of one property and the recognition of other
deferred gains. In 1998, the Company recognized gains of $9,713,000 consisting
primarily of the sale of eight properties and the recognition of other deferred
gains. See Note 2 of the Consolidated Financial Statements for details of these
sales.
NAREIT has recommended supplemental disclosures concerning capital
expenditures and leasing costs. Capital expenditures for the years ended
December 31, 1999 and 1998 by category are as follows:
1999 Capital Improvements
------------------------------------------------------------
Industrial 1998
Industrial Other Development Total Total
------------- ------------- ---------------- --------------- ----------
(In thousands)
Upgrade on Acquisitions $ 2,288 - - 2,288 2,555
Major Renovation 49 - - 49 793
New Development 772 - 44,431 45,203 24,072
Tenant improvements:
New Tenants 2,802 274 - 3,076 2,100
New Tenants (first generation) 204 - 1,415 1,619 1,657
Renewal Tenants 484 9 - 493 1,307
Other 2,360 155 - 2,515 570
------------- ------------- ---------------- --------------- ----------
Total Capital Expenditures $ 8,959 438 45,846 55,243 33,054
============= ============= ================ =============== ==========
12
The Company's leasing costs are capitalized and included in other
assets. The costs are amortized over the lives of the leases and are included in
depreciation and amortization expense. A summary of these costs for the years
ended December 31, 1999 and 1998 is as follows:
1999 Capitalized Leasing Costs
----------------------------------------------------------------
Industrial 1998
Industrial Other Development Total Total
------------------- ----------- ---------------- --------------- -----------
(In thousands)
Capitalized leasing costs:
New Tenants $1,032 9 - 1,041 1,465
New Tenants (first generation) 80 - 1,137 1,217 246
Renewal Tenants 1,007 5 - 1,012 1,130
------------------- ----------- ---------------- --------------- -----------
$2,119 14 1,137 3,270 2,841
=================== =========== ================ =============== ===========
Amortization of leasing costs $1,538 1,072
=============== ===========
Rental income from real estate operations is recognized on a
straight-line basis.
13
1998 Compared to 1997
Net income available to common shareholders for 1998 was $27,266,000
($1.67 per basic share and $1.66 per diluted share) compared to net income in
1997 of $20,779,000 ($1.58 per basic share and $1.56 per diluted share). Income
before gains on investments was $19,623,000 in 1998 compared to $14,402,000 in
1997. Gains on investments were $9,713,000 in 1998 compared to $6,377,000 in
1997. The paragraphs that follow describe the results of operations in greater
detail.
PNOI from real estate properties, defined as income from real estate
operations less property operating expenses (before interest expense and
depreciation), increased by $20,018,000 or 57.25% for 1998, compared to 1997.
PNOI and percentage leased by property type were as follows:
PNOI
Years Ended Percent
December 31, Leased
1998 1997 12-31-98 12-31-97
---- ---- -------- --------
(In thousands)
Industrial $47,003 25,080 98% 97%
Office Buildings 4,856 5,735 100% 100%
Other 3,125 4,151 99% 94%
--------- ------
Total PNOI $54,984 34,966
======= ======
PNOI from industrial properties increased $21,923,000 for 1998 compared
to 1997. Industrial properties held throughout the year showed an increase in
PNOI of 4.8% for 1998. The increase in PNOI from industrial properties resulted
primarily from the 1997 and 1998 acquisitions and from an increase in same store
property operations. Of the increase in PNOI relating to acquisitions,
$6,121,000 was attributable to the Meridian acquisition in 1998, $4,081,000 was
attributable to other acquisitions in 1998, and $9,416,000 was attributable to
1997 acquisitions.
PNOI from the Company's office buildings decreased $879,000 for 1998
compared to 1997. This decrease was primarily the result of the sale of the
Santa Fe Office Building in July 1997 and the Columbia Place Office Building in
December 1998. Office properties held throughout the year showed an increase in
PNOI of 9.6% compared to 1997.
PNOI from the Company's other properties decreased $1,026,000 for 1998
compared to 1997. This decrease is primarily attributable to the sale of three
apartment complexes in 1998. Other properties held throughout the year showed an
increase in PNOI of 19.6%.
Interest income on mortgage loans decreased $309,000 for 1998 compared
to 1997. The following is a breakdown of interest income for the year ended
December 31, 1998 compared to 1997:
Years Ended December 31,
1998 1997
---- ----
Interest income from: (In thousands)
-------------------------------------
Land mortgage loans $ 886 915
Apartment mortgage loans 556 533
Motel mortgage loans 174 364
Other mortgage loans 88 201
---------------- ---------------
$1,704 2,013
================ ===============
14
Interest income from motel mortgage loans decreased as a result of the
repayment of the Jacksonville mortgage loan. Due to uncertainty of collection,
interest income from the motel mortgage loans is recorded as received, and the
notes have been written down to their estimated net realizable value. Interest
income on other mortgage loans decreased primarily as a result of the repayment
of three mortgage loans.
Interest expense increased $6,397,000 from 1997 to 1998. Average bank
borrowings were $94,488,000 in 1998 compared to $11,155,000 in 1997 with average
interest rates of 7.06% in 1998 compared to 7.55% in 1997. Average bank
borrowings increased primarily as a result of the Meridian acquisition and the
acquisition of other industrial properties. Bank interest rates at December 31,
1998 and 1997 were 6.96% (LIBOR plus 1.40%) and 7.49% (LIBOR plus 1.50%),
respectively. Interest cost incurred during the period of construction of real
estate properties is capitalized. The interest cost capitalized on real estate
properties for 1998 was $822,000 compared to $401,000 for 1997. Interest expense
on real estate properties increased primarily as a result of mortgages assumed
in 1997 on Southbay, and on mortgages assumed in 1998 on Estrella, World Houston
1 & 2 and Meridian VIII merger discussed previously.
Depreciation and amortization increased $6,165,000 in 1998 compared to
1997. This increase was primarily due to the industrial properties acquired in
both 1997 and 1998, partially offset by sale of the real estate properties
discussed below.
The increase in general and administrative expenses of $899,000 for the
year ended December 31, 1998 is primarily due to an increase in general and
administrative costs due to growth of the Company.
In 1998, the Company recognized gains of $9,713,000 consisting
primarily of the sale of eight properties and the recognition of other deferred
gains. In 1997, the Company recognized gains of $6,377,000 consisting of the
sale of three properties, a write-down on a mortgage note receivable and the
recognition of other deferred gains. See Note 2 of the Consolidated Financial
Statements for details of these sales.
NAREIT has recommended supplemental disclosures concerning capital
expenditures and leasing costs. The Company expenses apartment unit turnover
costs such as carpet, painting and small appliances. Capital expenditures for
the years ended December 31, 1998 and 1997 by category are as follows:
1998 Capital Improvements
-----------------------------------------------------------
Industrial 1997
Industrial Other Development Total Total
------------- ------------- ---------------- --------------- ----------
(In thousands)
Upgrade on Acquisitions $2,555 - - 2,555 742
Major Renovation 793 - - 793 105
New Development 165 - 23,907 24,072 14,053
Tenant improvements:
New Tenants 1,701 399 - 2,100 2,187
New Tenants (first generation) 53 - 1,604 1,657 883
Renewal Tenants 1,200 107 - 1,307 383
Other 315 255 - 570 988
------------- ------------- ---------------- --------------- ----------
Total Capital Expenditures $6,782 761 25,511 33,054 19,341
============= ============= ================ =============== ==========
15
The Company's leasing costs are capitalized and included in other
assets. The costs are amortized over the lives of the leases and are included in
depreciation and amortization expense. A summary of these costs for the years
ended December 31, 1998 and 1997 is as follows:
1998 Capitalized Leasing Costs
----------------------------------------------------------------
Industrial 1997
Industrial Other Development Total Total
------------------- ----------- ---------------- --------------- -----------
(In thousands)
Capitalized leasing costs:
New Tenants $1,348 117 - 1,465 1,247
New Tenants (first generation) 53 - 193 246 324
Renewal Tenants 1,130 - - 1,130 514
------------------- ----------- ---------------- --------------- -----------
$2,531 117 193 2,841 2,085
=================== =========== ================ =============== ===========
Amortization of leasing costs $1,072 718
=============== ===========
16
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, Statement of Position (SOP) No. 98-5, "Reporting on the
Costs of Start-Up Activities," was issued. This SOP provides guidance on the
financial reporting of start-up costs and organization costs, and requires that
these costs be expensed as incurred effective for fiscal years beginning after
December 15, 1998. Unamortized organization costs were written off in first
quarter 1999 and accounted for as a cumulative effect of a change in accounting
principle. Note 12 of the Notes to the Consolidated Financial Statements
presents the cumulative effect of the change in accounting principle on basic
and diluted earnings per share for 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $46,750,000 for the year
ended December 31, 1999. Other sources of cash were collections on mortgage loan
receivables, sales of real estate investments, mortgage borrowings, bank
borrowings and proceeds from the Series B preferred stock offering. The Company
distributed $23,651,000 in common and $4,594,000 in preferred stock dividends.
Other uses of cash were for capital improvements at the various properties,
construction and development of properties, purchases of real estate
investments, bank debt payments, mortgage note payments, purchases of real
estate investment trust shares and repurchase of common shares. Total debt at
December 31, 1999 and 1998 was as follows:
December 31,
1999 1998
---- ----
(In thousands)
Mortgage notes payable - fixed rate $148,665 122,494
Bank notes payable - floating rate 95,000 114,322
-------- -------
Total debt $243,665 236,816
======== =======
On January 13, 1999, the Company replaced its $50,000,000 and
$100,000,000 bank lines with a new three-year $150,000,000 unsecured revolving
credit facility with a group of ten banks that is due to expire in January 2002.
The interest rate is based on the Eurodollar rate plus 1.25% and was 7.50% on
$77,000,000 and 7.44% on $8,000,000 at December 31, 1999. An unused line fee of
.25% is also assessed on this note.
Also on January 13, 1999, the Company obtained a one-year $10,000,000
unsecured revolving credit facility with Chase Bank of Texas that was due to
expire in January 2000. This loan was amended in January 2000 to reflect a new
maturity of January 2001. The interest rate is based on Chase Bank of Texas,
National Association's prime rate less .75% and was 7.75% at December 31, 1999.
The balance at December 31, 1999 was $10,000,000.
On November 29, 1999, the Company obtained a $15,000,000 unsecured
discretionary line of credit with Chase Bank of Texas. The interest rate and
maturity date for each loan proceeds are by agreement between the Company and
Chase. At December 31, 1999, the outstanding balance for this loan was zero.
On March 1, 1999, the Company closed a $47,000,000, nonrecourse first
mortgage loan with Metropolitan Life. The note has an interest rate of 6.8%,
20-year amortization and a 10-year maturity. It is secured by six industrial
properties in California: Industry Distribution Center, Shaw Commerce Center,
Kingsview Industrial Center, Dominguez Distribution Center, Walnut Business
Center and Washington Distribution Center. The proceeds were used to reduce bank
borrowings.
17
During the third quarter 1998, EastGroup's Board of Directors
authorized the repurchase of up to 500,000 shares of its outstanding common
stock. In September 1999, EastGroup's Board of Directors authorized the
repurchase of an additional 500,000 shares of its outstanding common stock and
an additional 500,000 shares in December 1999. The shares may be purchased from
time to time in the open market or in privately negotiated transactions. For the
year ended December 31, 1999, the Company repurchased 796,600 shares for
$13,621,000 and a total of 817,700 shares for $13,980,000 (an average of $17.10
per share) since September 30, 1998.
On December 30, 1998, EastGroup sold $10 million in the first closing
of our agreement to issue $70 million of Series B Preferred Stock to Five Arrows
Realty Securities II, L.L.C. In September 1999, the Company sold the remaining
$60 million to Five Arrows. Net proceeds from the sale of Series B Preferred
were used to reduce bank borrowings.
Budgeted capital expenditures and development for the year ending
December 31, 2000 follow:
Capital Improvements
---------------------------------------------------------
Industrial
Industrial Office Development Total
---------------- ---------- ---------------- ------------
(in thousands)
Upgrades on Acquisitions $1,108 - - 1,108
Major Renovation 764 - - 764
New Development - - 45,895 45,895
Tenant Improvements:
New Tenants 2,541 160 - 2,701
New Tenants-First Generation 170 - 480 650
Renewal Tenants 1,168 - - 1,168
Other 1,695 126 - 1,821
---------------- ---------- ---------------- ------------
$7,446 286 46,375 54,107
================ ========== ================ ============
The Company anticipates that its current cash balance, operating cash
flows, and borrowings under the working capital line of credit will be adequate
for the Company's (i) operating and administrative expenses, (ii) normal repair
and maintenance expenses at its properties, (iii) debt service obligations, (iv)
distributions to stockholders, (v) capital improvements, (vi) purchases of
properties, (vii) development, and (viii) common share repurchases.
Subsequent to December 31, 1999, EastGroup purchased the Wilson
Distribution Center (56,000 square feet) in Tempe, Arizona for $2,500,000.
Also, subsequent to December 31, 1999, the Company has entered into
contracts to purchase the following properties:
Approximate
Property Location Size Purchase Price
- ------------------------------------------------ ----------------------- ---------------------- --------------------
(In thousands)
Founders Business Center El Paso, Texas 77,000 sq. ft $2,360
Sunport Center Land for Development Orlando, Florida 19.65 acres 2,774
--------------------
$5,134
====================
18
In addition, EastGroup has a contract to sell the LeTourneau Center of
Commerce (88,000 square feet) in Tampa, Florida for approximately $1,650,000.
The proceeds of this sale are expected to be reinvested in industrial properties
through new acquisitions. This transaction is expected to generate a small gain
for financial reporting purposes.
On February 10, 2000, Franklin Select Realty Trust announced the closing of
the sale of all of the company's real estate assets for an aggregate purchase
price of $131.5 million, less existing project debt assumed by the buyer of
approximately $26.5 million. Pursuant to the plan of liquidation recently
approved by Franklin's shareholders, Franklin's board of directors declared an
initial liquidating distribution of $7.11 per share, which was paid to
shareholders and received by EastGroup on March 10, 2000. Thereafter, the
company will continue to wind up its affairs pursuant to the plan of
liquidation. It is expected that Franklin's shareholders will receive a final
liquidating distribution before the end of 2000, subject, however, to final
court approval of settlements of pending litigation. The total basis of
EastGroup's Franklin shares was used in computing the gain on the March 10, 2000
transaction. The amount of any final distributions paid to EastGroup, minus
certain transaction expenses, will be additional gain.
INFLATION
In the last five years, inflation has not had a significant impact on
the Company because of the relatively low inflation rate in the Company's
geographic areas of operation. Most of the leases require the tenants to pay
their pro rata share of operating expenses, including common area maintenance,
real estate taxes and insurance, thereby reducing the Company's exposure to
increases in operating expenses resulting from inflation. In addition, the
Company's leases typically have three to five year terms, which may enable the
Company to replace existing leases with new leases at a higher base if rents on
the existing leases are below the then-existing market rate.
YEAR 2000 ISSUE
During 1998 and 1999, the Company addressed the potential computer
program and other related problems resulting from the arrival of Year 2000
(Y2K). The Company established a Y2K compliance review process to assess the
impact on its internal financial and management information systems and property
mechanical operations systems, as well as the potential impact on the Company
from Y2K problems of significant tenants, vendors and suppliers of financial and
other services (collectively "independent third parties").
Regarding the Company's internal financial and management information
systems, as part of the Company's ongoing capital improvements process, during
the first quarter of 1999, the Company replaced the financial information and
reporting system (which the vendor has represented to us is Y2K compliant) with
a new, more efficient, information and reporting system designed to be Y2K
compliant and which is also being used by our major external property managers.
The cost of implementing this system was approximately $183,000. The total cost
has been capitalized and is being amortized over the estimated useful life of
the asset.
The Company also assessed the Y2K compliance of its individual property
engineering and mechanical systems through inquiry via questionnaire of its
respective property managers. This was designed to identify any systems that may
not be compliant early on to avert any major interruption in the provision of
services to our tenants.
The Company has not experienced any material Y2K problems. In addition
to the financial information and reporting system costs discussed above, the
Company incurred approximately $20,000 of Y2K-related costs through December 31,
1999 and does not expect any significant costs in 2000.
19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate changes primarily as a result of
its line of credit and long-term debt maturities. This debt is used to maintain
liquidity and fund capital expenditures and expansion of the Company's real
estate investment portfolio and operations. The Company's interest rate risk
management objective is to limit the impact of interest rate changes on earnings
and cash flows and to lower its overall borrowing costs. To achieve its
objectives, the Company borrows at fixed rates but also has a three-year
$150,000,000 unsecured revolving credit facility with a group of ten banks which
was arranged by Chase Securities, Inc. The interest rate is based on the
Eurodollar rate plus 1.25%. In addition, the Company has a one-year $10,000,000
unsecured revolving credit facility with Chase Bank of Texas. The interest rate
on the $10,000,000 note is based on Chase Bank of Texas, National Association's
Prime Rate less .75%. Also, the Company obtained a $15,000,000 unsecured
discretionary line of credit with Chase Bank of Texas in late 1999, but the
balance at December 31, 1999 was zero. The table below presents the principal
payments due and weighted average interest rates for both the fixed rate and
variable rate debt.
2000 2001 2002 2003 2004 Thereafter Total Fair Value
----------- ---------- ---------- --------- --------- --------------- ------------ -------------
Fixed rate debt $12,077 7,729 12,159 7,932 8,651 100,117 148,665 142,716
(in thousands)
Average interest rate 8.67% 7.77% 7.59% 8.34% 8.21% 7.77% 8.06%
Variable rate debt
(in thousands) 10,000 - 85,000 - - - 95,000 95,000
Average interest rate 7.75% - 7.49% - - - 7.52%
As the table above incorporates only those exposures that exist as of
December 31, 1999, it does not consider those exposures or positions that could
arise after that date. Moreover, because future commitments are not presented in
the table above, the information presented has limited predictive value. As a
result, the Company's ultimate economic impact with respect to interest rate
fluctuations will depend on the exposures that arise during the period and
interest rates.
Forward Looking Statements
In addition to historical information, certain sections of this Annual
Report contain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, such as those pertaining to the Company's hopes, expectations, intentions,
beliefs, strategies regarding the future, the anticipated performance of
development and acquisition properties, capital resources, profitability and
portfolio performance. Forward-looking statements involve numerous risks and
uncertainties. The following factors, among others discussed herein, could cause
actual results and future events to differ materially from those set forth or
contemplated in the forward-looking statements: defaults or non-renewal of
leases, increased interest rates and operating costs, failure to obtain
necessary outside financing, difficulties in identifying properties to acquire
and in effecting acquisitions, failure to qualify as a real estate investment
trust under the Internal Revenue Code of 1986, as amended, environmental
uncertainties, risks related to natural disasters, financial market
fluctuations, changes in real estate and zoning laws and increases in real
property tax rates. The success of the Company also depends upon the trends of
the economy, including interest rates, income tax laws, governmental regulation,
legislation, population changes and those risk factors discussed elsewhere in
this Form 10-K. Readers are cautioned not to place undue reliance on
forward-looking statements, which reflect management's analysis only as the date
hereof. The Company assumes no obligation to update forward-looking statements.
See also the Company's reports to be filed from time to time with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Registrant's Consolidated Balance Sheets as of December 31, 1999
and 1998, and its Consolidated Statements of Income, Changes in Stockholders'
Equity and Cash Flows and Notes to Consolidated Financial Statements for the
years ended December 31, 1999, 1998 and 1997 and the independent auditors'
report thereon are included under Item 14 of this report and are incorporated
herein by reference. Unaudited quarterly results of operations included in the
notes to the consolidated financial statements are also incorporated herein by
reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant's definitive proxy statement which will be filed with
the Securities and Exchange Commission (the "Commission") pursuant to Regulation
14A within 120 days of the end of Registrant's calendar year is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The Registrant's definitive proxy statement which will be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of
Registrant's calendar year is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN COMMON STOCK OWNERS AND MANAGEMENT.
The Registrant's definitive proxy statement which will be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of
Registrant's calendar year is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant's definitive proxy statement which will be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of
Registrant's calendar year is incorporated herein by reference.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Index to Financial Statements:
Page
(a) (1) Consolidated Financial Statements:
Independent Auditors' Report 24
Consolidated Balance Sheets - December 31, 1999 and 1998 25
Consolidated Statements of Income - Years ended December
31, 1999, 1998 and 1997 26
Consolidated Statements of Changes in Stockholders' Equity-
Years ended December 31, 1999, 1998 and 1997 27
Consolidated Statements of Cash Flows - Years ended December
31, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 29
(2) Consolidated Financial Statement Schedules:
Schedule III - Real Estate Properties and Accumulated
Depreciation 50
Schedule IV - Mortgage Loans on Real Estate 53
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted, or the required information is included in the notes to the
consolidated financial statements.
(3) Form 10-K Exhibits
(a) Articles of Incorporation (incorporated by reference to Appendix
B to the Registrant's Proxy Statement dated April 24, 1997).
(b) Bylaws of the Registrant (incorporated by reference to Appendix
C to the Registrant's Proxy Statement dated April 24, 1997).
(c) Articles Supplementary of the Company relating to the 9.00%
Series A Cumulative Redeemable Preferred Stock of the Company
(incorporated by reference to the Company's Form 8-A filed June
15, 1998).
(d) Articles Supplementary of the Company relating to the
Series B Cumulative Convertible Preferred Stock
(incorporated by reference to the Company's Form 8-K filed
on October 1, 1998).
(e) Articles Supplementary of the Company relating to the
Series C Preferred Stock (incorporated by reference to the
Company's Form 8-A filed December 9, 1998).
(f) Certificate of Correction to Articles Supplementary with
respect to Series B Cumulative Convertible Preferred Stock
(incorporated by reference to the Registrant's Form 10-K
for the year ended December 31, 1998).
(10) Material Contracts:
(a) EastGroup Properties 1994 Management Incentive Plan, As
Amended (incorporated by reference to Appendix A of the
Registrant's Proxy Statement for its Annual Meeting of
Shareholders held on June 2, 1999).
(b) EastGroup Properties 1991 Directors Stock Option Plan, As
Amended (incorporated by reference to Exhibit B of the
Registrant's proxy statement dated April 26, 1994).*
(c) Form of Change in Control Agreement that Registrant has entered
into with certain executive officers (Leland R. Speed, David H.
Hoster II and N. Keith McKey)(incorporated by reference to the
Registrant's 1996 Annual Report on Form 10-K).*
23
(d) Form of Change in Control Agreement that Registrant has
entered into with certain executive officers (Jann W. Puckett)
(incorporated by reference to the Registrant's 1996 Annual
Report on Form 10-K).*
(e) Purchase Agreement for Jacksonville and New Orleans
Properties (incorporated by reference to Exhibit 10(a) to the
Registrant's Current Report on Form 8-K dated September 24,
1997).
(f) Investment Agreement dated as of September 25, 1998 between
the Company and Five Arrows Realty Securities II, L.L.C.
(incorporated by reference to the Company's Form 8-K filed
October 1, 1998).
(g) Operating Agreement dated September 25, 1998 between the
Company and Five Arrows Realty Securities II, L.L.C.
(incorporated by reference to the Company's Form 8-K filed
October 1, 1998).
(h) Agreement and Waiver between the Company and Five Arrows Realty
Securities II, L.L.C. (incorporated by reference to the
Company's Form 8-K filed October 1, 1998).
(i) Credit Agreement dated January 13, 1999 among EastGroup
Properties, L.P.; EastGroup Properties, Inc.; Chase Bank of
Texas, National Association, as Arranger, Book Manager and
Administrative Agent; First Union National Bank, as Syndication
Agent; PNC Bank, National Association, as Documentation Agent;
First American National Bank, operating as Deposit Guaranty
National Bank, as Co-Agent; and the Lenders (incorporated
by reference to the Registrant's Form 10-K for the year
ended December 31, 1998).
(21) Subsidiaries of Registrant (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(27) Financial Data Schedule (filed herewith).
(28) Agreement of Registrant to furnish the Commission with copies
of instruments defining the rights of holders of long-term
debt (incorporated by reference to Exhibit 28(e) of the
Registrant's 1986 Annual Report on Form 10-K).
(99) Rights Agreement dated as of December 3, 1998 between the
Company and Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to the Company's Form 8-A filed
December 9, 1998).
(b) None
*Indicates management or compensatory agreement.
24
INDEPENDENT AUDITORS' REPORT
THE DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
We have audited the consolidated financial statements of EastGroup Properties,
Inc. and subsidiaries, as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EastGroup
Properties, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Jackson, Mississippi KPMG LLP
March 6, 2000
25
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
December 31, 1999 December 31, 1998
---------------------- ----------------------
ASSETS
Real estate properties:
Industrial $ 580,598 507,187
Industrial development 35,480 25,682
Other 6,919 15,762
---------------------- ----------------------
622,997 548,631
Less accumulated depreciation (46,829) (34,042)
---------------------- ----------------------
576,168 514,589
---------------------- ----------------------
Real estate held for sale 18,051 25,620
Less accumulated depreciation (4,750) (8,794)
---------------------- ----------------------
13,301 16,826
---------------------- ----------------------
Mortgage loans 8,706 8,814
Investment in real estate investment trusts 15,708 5,737
Cash 2,657 2,784
Other assets 15,611 18,798
---------------------- ----------------------
TOTAL ASSETS $ 632,151 567,548
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 148,665 122,494
Notes payable to banks 95,000 114,322
Accounts payable & accrued expenses 12,170 9,138
Other liabilities 4,664 2,867
---------------------- ----------------------
260,499 248,821
---------------------- ----------------------
Minority interest in joint ventures 1,690 2,053
Minority interest in operating partnership 650 650
---------------------- ----------------------
2,340 2,703
---------------------- ----------------------
STOCKHOLDERS' EQUITY
Series A 9.00% Cumulative Redeemable Preferred
Shares and additional paid-in capital; $.0001 par value;
1,725,000 authorized and issued; stated liquidation
preference of $43,125 41,357 41,357
Series B 8.75% Cumulative Convertible Preferred
Shares and additional paid-in capital; $.0001 par value;
2,800,000 shares authorized; 2,800,000 shares issued at
December 31, 1999 and 400,000 at December 31, 1998;
stated liquidation preference of $70,000 at December
31, 1999 and $10,000 at December 31, 1998 67,178 9,642
Series C Preferred Shares; $.0001 par value; 600,000
shares authorized; no shares issued - -
Common shares; $.0001 par value; 64,875,000
shares authorized; 15,555,505 shares issued at
December 31, 1999 and 16,307,681 at
December 31, 1998 2 2
Excess shares; $.0001 par value; 30,000,000 shares
authorized; no shares issued - -
Additional paid-in capital on common shares 233,453 246,340
Undistributed earnings 26,654 18,076
Accumulated other comprehensive income 668 607
---------------------- ----------------------
369,312 316,024
---------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 632,151 567,548
====================== ======================
See accompanying notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31,
---------------------------------------------
1999 1998 1997
REVENUES
Income from real estate operations $ 83,320 74,312 49,791
Interest:
Mortgage loans 1,123 1,704 2,013
Other interest 244 164 558
Other 1,549 548 1,260
------------ ----------- ------------
86,236 76,728 53,622
------------ ----------- ------------
EXPENSES
Operating expenses from real
estate operations 19,941 19,328 14,825
Interest 17,688 16,948 10,551
Depreciation and amortization 20,178 16,574 10,409
General and administrative 4,580 3,822 2,923
------------ ----------- ------------
62,387 56,672 38,708
------------ ----------- ------------
INCOME BEFORE MINORITY INTEREST
AND GAIN ON INVESTMENTS 23,849 20,056 14,914
Minority interest in joint ventures 433 433 512
------------ ----------- ------------
INCOME BEFORE GAIN ON
REAL ESTATE INVESTMENTS 23,416 19,623 14,402
Gain on real estate investments 15,357 9,713 6,377
------------ ----------- ------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 38,773 29,336 20,779
Cumulative effect of change in accounting
principle 418 - -
------------ ----------- ------------
NET INCOME 38,355 29,336 20,779
Preferred dividends-Series A 3,880 2,070 -
Preferred dividends-Series B 2,246 - -
------------ ----------- ------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 32,229 27,266 20,779
============ =========== ============
BASIC PER SHARE DATA
Net income available to
common shareholders $ 2.01 1.67 1.58
============ =========== ============
Weighted average shares outstanding 16,046 16,283 13,176
============ =========== ============
DILUTED PER SHARE DATA
Net income available to
common shareholders $ 1.99 1.66 1.56
============ =========== ============
Weighted average shares outstanding 17,362 16,432 13,338
============ =========== ============
See accompanying notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Shares Shares Shares Accumulated
of of of Additional Other
Preferred Common Beneficial Paid-In Undistributed Comprehensive
Stock Stock Interest Capital Earnings Income Total
---------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ - - 10,549 123,780 10,997 - 145,326
Comprehensive income
Net income - - - - 20,779 - 20,779
Net unrealized change in investment securities - - - - - (535) (535)
-------------
Total comprehensive income 20,244
-------------
Cash dividends declared, $1.34 per share - - - - (18,143) - (18,143)
Issuance of 2,100,000 shares of beneficial
interest - - 2,100 34,554 - - 36,654
Issuance of 23,800 shares of beneficial
interest and 31,142 shares of common
stock, options exercised - - 23 654 - - 677
Repurchase of 8,268 shares of beneficial
interest and 11,725 shares of common stock,
options exercised - - (8) (380) - - (388)
Issuance of 6,490 shares of beneficial interest,
incentive compensation - - 7 97 - - 104
Issuance of 3,441 shares of beneficial interest,
and 10,872 shares of common stock, dividend
reinvestment plan - - 3 288 - - 291
Purchase of 194 fractional shares of beneficial
interest - - - (5) - - (5)
Reduction of par value associated with
reorganization - 1 (12,674) 12,673 - - -
Issuance of 3,500,000 shares of common stock - 1 - 72,554 - - 72,555
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 - 2 - 244,215 13,633 (535) 257,315
Comprehensive income
Net income - - - - 29,336 - 29,336
Net unrealized change in investment securities - - - - - 1,142 1,142
-------------
Total comprehensive income 30,478
-------------
Cash dividends declared-common, $1.40 per share - - - - (22,823) - (22,823)
Preferred stock dividends declared - - - - (2,070) - (2,070)
Repurchase of 5,025 common shares,
options exercised - - - (75) - - (75)
Repurchase of 21,100 common shares,
stock repurchase plan - - - (359) - - (359)
Issuance of 5,007 shares of common stock,
incentive compensation - - - 102 - - 102
Issuance of 29,685 shares of common
stock, exercise options - - - 415 - - 415
Issuance of 79,353 shares of common
stock, Ensign merger - - - 1,746 - - 1,746
Issuance of 1,725,000 shares of
Series A preferred 41,357 - - - - - 41,357
Issuance of 400,000 shares of
Series B preferred 9,642 - - - - - 9,642
Issuance of 15,238 shares of common stock,
dividend reinvestment plan - - - 296 - - 296
---------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 50,999 2 - 246,340 18,076 607 316,024
Comprehensive income
Net income - - - - 38,355 - 38,355
Net unrealized change in investment securities - - - - - 61 61
-------------
Total comprehensive income 38,416
-------------
Cash dividends declared-common, $1.48 per share - - - - (23,651) - (23,651)
Preferred stock dividends declared - - - - (6,126) (6,126)
Issuance of 8,009 shares of common stock,
incentive compensation - - - 156 - - 156
Issuance of 16,275 shares of common stock,
dividend reinvestment plan - - - 295 - - 295
Issuance of 22,210 shares of common stock,
exercise options - - - 317 - - 317
Issuance of 2,400,000 shares of
Series B preferred 57,536 - - - - - 57,536
Repurchase of 2,070 common shares,
options exercised - - - (34) - - (34)
Repurchase of 796,600 common shares,
stock repurchase plan - - - (13,621) - - (13,621)
---------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $108,535 2 - 233,453 26,654 668 369,312
=======================================================================================
See accompanying notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
--------------- ------------ --------------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 38,355 29,336 20,779
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting principle 418 - -
Depreciation and amortization of deferred leasing costs 20,178 16,574 10,409
Gain on real estate investments, net (15,357) (9,713) (6,377)
Gain on sale of real estate investment trust shares (30) - -
Other (241) (324) (284)
Changes in operating assets and liabilities:
Accrued income and other assets 497 (13,403) (3,709)
Accounts payable, accrued expenses and prepaid rent 2,930 6,923 2,867
--------------- ------------ --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 46,750 29,393 23,685
--------------- ------------ --------------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable, net of
amortization of loan discounts 9,809 2,421 2,910
Advances on mortgage loans receivable (8,186) - (1,575)
Proceeds from sale of real estate investments 51,090 31,215 23,838
Real estate improvements (9,397) (7,543) (4,405)
Real estate development (45,846) (25,511) (14,936)
Purchases of real estate (56,569) (73,980) (71,569)
Acquisition of Meridian - (52,760) -
Purchases of real estate investment trust shares (10,172) (1,832) (16,119)
Proceeds from sale of real estate investment trust shares 292 - -
Merger expenses - (1,614) -
Changes in other assets and other liabilities 108 (106) 1,897
Cash balances of acquired companies - 6,118 -
--------------- ------------ --------------
NET CASH USED IN INVESTING ACTIVITIES (68,871) (123,592) (79,959)
--------------- ------------ --------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 297,226 202,560 122,962
Proceeds from mortgage notes payable 47,000 2,200 9,250
Principal payments on bank borrowings (316,548) (130,008) (95,154)
Principal payments on mortgage notes payable (21,932) (6,270) (71,565)
Distributions paid to shareholders (28,245) (24,073) (18,143)
Purchases of shares of beneficial interest and common stock (13,655) (434) (393)
Proceeds from exercise of stock options 317 415 677
Net proceeds from issuance of shares of beneficial
interest and common stock - - 109,209
Net proceeds from issuance of shares of preferred stock 57,536 50,999 -
Proceeds from dividend reinvestment plan 295 296 291
--------------- ------------ --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 21,994 95,685 57,134
--------------- ------------ --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (127) 1,486 860
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,784 1,298 438
--------------- ------------ --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,657 2,784 1,298
=============== ============ ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 17,236 15,505 10,474
Debt assumed by the Company in purchase of real estate 1,103 7,167 52,579
Operating partnership units issued in purchase of real estate - 650 -
Debt assumed by the Company in the Meridian acquisition - 33,422 -
Debt assumed by buyer of real estate - 19,405 -
Issuance of common stock to acquire Ensign - 1,746 -
See accompanying notes to consolidated financial statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of EastGroup
Properties, Inc. (the Company), its wholly-owned subsidiaries and its investment
in one joint venture. At December 31, 1999, the Company's only joint venture was
the 80% owned University Business Center. At December 31, 1998, the three
properties in the joint ventures included the 75% owned 56th Street Commerce
Park and JetPort Commerce Park, and the 80% owned University Business Center. At
December 31, 1997, the four properties in the joint ventures included the 75%
owned 56th Street Commerce Park, JetPort Commerce Park, and WestPort Commerce
Center, and the 80% owned University Business Center. The Company records 100%
of the joint ventures' assets, liabilities, revenues and expenses with minority
interests provided for the percentage not owned. All significant intercompany
transactions and accounts have been eliminated in consolidation. Prior to its
sale in 1997, the Company's investment in Cowesett Corners Shopping Center (a
50% owned joint venture) was not consolidated but accounted for using the equity
method of accounting.
(b) Federal Income Taxes
EastGroup Properties, 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. The Company distributed all of its 1999,
1998 and 1997 taxable income to its stockholders. Accordingly, no provision for
federal income taxes was necessary. Distributions paid per common share for
federal income tax purposes were:
Years Ended December 31,
1999 1998 1997
---- ---- ----
Ordinary Income $1.48 1.36 1.14
Long-term 20% Capital Gain - .04 -
Return of Capital - - .20
------------- ------------- ------------
$1.48 1.40 1.34
============= ============= ============
Distributions paid per share of Series A Preferred for federal income
tax purposes for the years ended December 31, 1999 and 1998 were $2.25 and
$.725, respectively, paid as ordinary income with no return of capital.
Distributions paid per share of Series B Convertible Preferred for
federal income tax purposes for the year ended December 31, 1999 were $1.641,
paid as ordinary income with no return of capital. No dividends were paid in
1998 on the Series B Preferred.
The Company's income differs for tax and financial reporting purposes
principally because of (1) the timing of the deduction for the provision for
possible losses and losses on investments, (2) the timing of the recognition of
gains or losses from the sale of investments, (3) different depreciation methods
and lives, and (4) mortgage loans having a different basis for tax and financial
reporting purposes, thereby producing different gains upon collection of these
loans.
30
(c) Income Recognition
Rental income from real estate operations is recognized on a
straight-line basis.
Interest income on mortgage loans is recognized based on the accrual
method unless a significant uncertainty of collection exists. If a significant
uncertainty exists, interest income is recognized as collected. Certain mortgage
loan discounts are amortized over the lives of the loans using a method that
does not differ materially from the interest method.
The Company recognizes gains on sales of real estate in accordance with
the principles set forth in Statement of Financial Accounting Standards No. 66
(SFAS 66), "Accounting for Sales of Real Estate." Upon closing of real estate
transactions, the provisions of SFAS 66 require consideration for the transfer
of rights of ownership to the purchaser, receipt of an adequate cash down
payment from the purchaser and adequate continuing investment by the purchaser.
If the requirements for recognizing gains have not been met, the sale and
related costs are recorded, but the gain is deferred and recognized by the
installment method as collections are received.
(d) Real Estate Properties
Real estate properties are carried at cost less accumulated
depreciation. Cost includes the carrying amount of the Company's investment plus
any additional consideration paid, liabilities assumed, costs of securing title
(not to exceed fair market value in the aggregate) and improvements made
subsequent to acquisition. Depreciation of buildings and other improvements,
including personal property, is computed using the straight-line method over
estimated useful lives of 25 to 40 years for buildings and 3 to 10 years for
other improvements and personal property. Building improvements are capitalized,
while maintenance and repair expenses are charged to expense as incurred.
Geographically, the Company's investments are concentrated in the major sunbelt
market areas of the southeastern and southwestern United States, primarily in
the states of California, Florida, Texas and Arizona.
(e) Real Estate Held for Sale
Real estate properties that are currently offered for sale or are under
contract to sell have been shown separately on the consolidated balance sheets
as "real estate held for sale." Such assets are carried at the lower of current
carrying amount or fair market value less estimated selling costs and are not
depreciated while they are held for sale.
(f) Investments in Real Estate Investment Trusts
The Company's marketable equity securities owned by the Company are
categorized as available-for-sale securities, as defined by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Unrealized
holding gains and losses are reflected as a net amount in a separate component
of stockholders' equity until realized.
At December 31, 1999, EastGroup's investments in real estate investment
trusts (REITs) included Franklin Select Realty Trust (Franklin) and other REITs.
At December 31, 1998, EastGroup's only investment in real estate investment
trusts was in Franklin. Since the Company did not exercise significant influence
over these REITs, these investments were accounted for under the cost method.
The costs of these investments were adjusted to fair market value with an equity
adjustment to account for unrealized gains/losses as indicated above. Although
the Company owned 21% of Meridian VIII at December 31, 1997, it did not exercise
significant influence over the investee and the investment was accounted for
under the cost method (the difference between applying the cost and equity
method would not be material to the 1997 consolidated financial statements).
Meridian VIII was acquired during 1998.
31
(g) Allowance for Possible Losses and Impairment Losses
The Company measures impaired and restructured loans at the present
value of expected future cash flows, discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's market price or the fair value
of collateral if the loan is collateral dependent.
The Company applies SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by the Company be reviewed for impairment of value whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. This statement requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less selling costs.
(h) Amortization
Debt origination costs are deferred and amortized using the
straight-line method over the term of the loan. Leasing commissions are deferred
and amortized using the straight-line method over the term of the lease.
(i) Goodwill
In March 1998, EastGroup acquired Ensign Properties, Inc., the largest
independent industrial developer in Orlando. A portion of the total acquisition
price for Ensign included goodwill, which represents the excess of the purchase
price and related costs over the fair value assigned to the net tangible assets.
The Company amortizes goodwill on a straight-line basis over 20 years. The
Company will periodically review the recoverability of goodwill. The measurement
of possible impairment is based primarily on the ability to recover the balance
of the unamortized basis. In management's opinion, no material impairment exists
at December 31, 1999 and 1998. Amortization expense for goodwill was $61,000 in
1999 and $51,000 in 1998.
(j) Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
(k) Reclassifications
Certain reclassifications have been made in the 1998 and 1997 financial
statements to conform to the 1999 presentation.
(l) Share Split
On March 20, 1997, the Company announced that its Board of Directors
approved a three-for-two share split in the form of a share dividend of one
share for every two shares outstanding. The share dividend was distributed on
April 7, 1997, to shareholders of record as of March 31, 1997. All share and per
share amounts in these financial statements have been retroactively restated to
account for the share split.
(m) Earnings Per Share
In December 1997, the Company adopted SFAS No. 128 "Earnings Per
Share," which requires companies to present basic earnings per share (EPS) and
diluted EPS.
32
Basic EPS represents the amount of earnings for the year available to
each share of common stock outstanding during the reporting period. The
Company's basic EPS is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted EPS represents the amount of earnings for the year available to
each share of common stock outstanding during the period and to each share that
would have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the reporting period. The
Company's diluted EPS is calculated by totaling net income available to common
shareholders plus convertible preferred dividends and limited partnership (LP)
dividends and dividing it by the weighted average number of common shares
outstanding plus the dilutive effect of stock options related to outstanding
employee stock options, LP units and convertible preferred stock, had the
options or conversions been exercised. The dilutive effect of stock options was
determined using the treasury stock method which assumes exercise of the options
as of the beginning of the period or when issued, if later, and assuming
proceeds from the exercise of options are used to purchase common stock at the
average market price during the period. The treasury stock method was also used
assuming conversion of the convertible preferred stock.
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
revenues and expenses during the reporting period, and to disclose material
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
(o) Stock Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard defines a fair value based method of accounting for
an employee stock option or similar equity instrument. Companies are given the
choice of either recognizing related compensation cost by adopting the fair
value method, or to continue to use the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees," while supplementally disclosing the pro forma effect on
net income and net income per share using the new measurement criteria. The
Company elected to continue to follow the requirements of APB No. 25, and
accordingly, there was no effect on the results of operations.
(p) Capitalized Developments Costs
During the industrial development stage, costs associated with development
(i.e., land, buildings scheduled for renovation, construction costs, interest
expense during construction, property taxes, etc.) are aggregated into the total
capitalization of the property. As the properties become occupied, interest,
depreciation and property taxes for the percentage occupied only is expensed as
incurred. When the property becomes 80% occupied or one year after completion of
the construction, whichever comes first, the property is no longer considered a
development property and becomes an industrial property. When the property
becomes classified as an industrial property, the entire property is depreciated
accordingly, and interest and property taxes are expensed.
(2) Real Estate Owned
At December 31, 1999, the Company is offering for sale the Nobel Business
Center in Hercules, California with a carrying amount of $2,382,000, the
LeTourneau Center of Commerce in Tampa, Florida with a carrying amount of
$1,585,000, the La Vista Apartment Complex in Atlanta, Georgia with a carrying
amount of $6,205,000, West Palm I and II in West Palm Beach, Florida with a
carrying amount of $2,700,000 and the Estelle land in Louisiana with a carrying
amount of $429,000. No loss is anticipated on the sale of these properties. The
results of operations for real estate held for sale at December 31, 1999,
amounted to $258,000, $293,000 and $55,000, respectively, for the years ended
December 31, 1999, 1998 and 1997. The results of operations for real estate held
for sale at December 31, 1998 amounted to $1,338,000 and $687,000 for the years
ended December 31, 1998 and 1997, respectively.
33
Costs incurred include capitalization of interest costs during the
period of construction. The interest costs capitalized on real estate properties
for 1999 was $1,834,000, compared to $822,000 for 1998, and $401,000 for 1997.
The Company is currently developing the following properties as detailed below:
Costs Incurred
-------------------------------------
Size at For the Twelve
Completion Months Cumulative As Estimated
(Square Feet) Ended 12/31/99 Of 12/31/99 Total Costs
- ------------------------------------------ ------------------ ------------------------------------- -------------------
(Unaudited) (In thousands) (Unaudited)
Lease-Up:
John Young II
Orlando, Florida 47,000 $ 1,897 2,562 2,938
Rampart Distribution Center III
Denver, Colorado 92,000 2,581 4,754 5,920
Sample 95 II
Pompano, Florida 70,000 2,490 3,501 3,779
Chestnut Business Center
City of Industry, California 75,000 2,680 4,354 5,487
Westlake I
Tampa, Florida 70,000 2,691 4,302 4,729
Palm River North I
Tampa, Florida 96,000 4,602 4,711 5,287
Glenmont I
Houston, Texas 108,000 2,738 3,674 4,065
Main Street
Carson, California 106,000 3,982 3,983 5,669
------------------ ------------------- ----------------- -------------------
Total Lease-up 664,000 23,661 31,841 37,874
------------------ ------------------- ----------------- -------------------
Under Construction:
World Houston 11
Houston, Texas 126,000 586 586 5,455
------------------ ------------------- ----------------- -------------------
Total Under Construction 126,000 586 586 5,455
------------------ ------------------- ----------------- -------------------
Prospective Development:
Phoenix, Arizona 123,000 960 960 6,200
Tampa, Florida 366,000 134 821 17,578
Orlando, Florida 116,000 1,272 1,272 5,568
Houston, Texas 110,000 - - 3,700
------------------ ------------------- ----------------- -------------------
Total Prospective Development 715,000 2,366 3,053 33,046
------------------ ------------------- ----------------- -------------------
1,505,000 $26,613 35,480 76,375
================== =================== ================= ===================
35
Completed Development and
Transferred to Industrial
Properties During Twelve
Months Ended December 31, 1999:
Airport Commerce Center
Tampa, Florida 108,000 $ 4,198 5,584
World Houston 9
Houston, Texas 155,000 4,144 5,160
Premier Beverage
Tampa, Florida 222,000 6,827 7,235
Westside Expansion
Jacksonville, Florida 35,000 673 673
World Houston 7 & 8
Houston, Texas 166,000 2,934 7,622
Walden Distribution Center II
Tampa, Florida 122,000 62 4,252
Sunbelt Distribution Center II
Orlando, Florida 61,000 113 2,325
John Young
Orlando, Florida 51,000 282 3,197
------------------ ------------------- -----------------
Total Transferred to Industrial 920,000 $19,233 36,048
================== =================== =================
A summary of gains (losses) on real estate investments for the years
ended December 31, 1999, 1998 and 1997 follows:
Net Recognized
Basis Sales Price Gain/(Loss)
------------- --------------- -------------
(In thousands)
1999
Real estate properties:
8150 Leesburg Pike Office Building $13,917 28,082 14,165
2020 Exchange 867 997 130
Waldenbooks 21,360 21,077 (283)
West Palm write-down 448 - (448)
Mortgage loans:
Country Club-deferred gain (1,127) - 1,127
Gainesville-deferred gain (388) - 388
Country Club land purchase-leaseback 500 500 -
Estelle land 137 367 230
LNH land 19 137 118
Other - (70) (70)
------------- --------------- -------------
$35,733 51,090 15,357
============= =============== =============
36
1998
Real estate properties:
Hampton House Apartments $ 5,977 6,611 634
Sutton House Apartments 7,696 9,448 1,752
Doral Club Apartments 5,900 9,046 3,146
Grande Pointe Apartments 5,857 7,104 1,247
401 Exchange Distribution Center 621 666 45
East Maricopa Distribution Center 625 625 -
Columbia Place Office Building 11,524 13,913 2,389
Park Ridge Distribution Center 3,154 3,154 -
LNH Land 9 53 44
Jacksonville - deferred gain (383) - 383
Other (73) - 73
------------- --------------- -------------
$40,907 50,620 9,713
============= =============== =============
1997
Real estate properties:
Santa Fe Energy Building $10,354 12,660 2,306
Liberty Corners Shopping Center 2,649 5,263 2,614
Cowesett Corners Shopping Center 4,253 5,929 1,676
Houston Land (98) - 98
Wellington Land (14) (14) -
Plus Park - deferred gain (62) - 62
Bell Road - deferred gain (96) - 96
Mortgage loan write-down 475 - (475)
------------- --------------- -------------
$17,461 23,838 6,377
============= =============== =============
The following schedule indicates approximate future minimum rental
receipts under noncancelable leases for the real estate properties by year as of
December 31, 1999 (in thousands):
YEAR ENDED
DECEMBER 31,
2000 $68,056
2001 59,284
2002 48,001
2003 34,487
2004 20,024
Later Years 39,773
----------------
Total Minimum Receipts $269,625
================
37
(3) Mortgage Loans Receivable
A summary of mortgage loans follows:
December 31,
1999 1998
---- ----
(In thousands)
First mortgage loans:
Industrial (2 loans in 1999) $ 6,722 -
Apartment (1 loan in 1998) - 3,010
Motels (2 loans in 1998) - 1,250
Undeveloped Land (1 loan in 1999, 2 in 1998) 1,965 4,405
Other (1 loan in 1999; 3 in 1998) 19 149
-------- -------
$ 8,706 8,814
======== =======
At December 31, 1998, the carrying value of two impaired motel mortgage
loans was $1,250,000. Interest income recorded on the motel mortgages was
$41,000 for 1999, $174,000 for 1998 and $364,000 for 1997. These loans were paid
off in February 1999. Deferred gains of $1,515,000 were recognized on the payoff
of mortgage notes receivable in 1999, $383,000 in 1998 and $158,000 in 1997.
(4) Investment in Real Estate Investment Trusts
The investment in real estate investment trusts ("REIT") consists of
the following:
December 31, 1999 December 31, 1998
----------------- -----------------
Estimated Estimated
Cost Fair Value Cost Fair Value
-------------- --------------- ----------- -------------
(In thousands)
Franklin Select Realty Trust $5,130 5,844 5,130 5,737
Other REITs 9,910 9,864 - -
-------------- --------------- ----------- -------------
$15,040 15,708 5,130 5,737
============== =============== =========== =============
(5) Notes Payable to Banks
At December 31, 1998, the Company had a line of credit from a
commercial bank in the amount of $50,000,000 that was secured by the outstanding
stock of two of the Company's wholly-owned subsidiaries and by the Company's
ownership interests in two partnerships. Borrowings under the credit line at
December 31, 1998 were $17,392,000 and the interest rate was LIBOR plus 1.40%
(6.96% at December 31, 1998). This line of credit expired January 31, 1999.
At December 31, 1998, the Company had $96,930,000 outstanding under a
$100,000,000 acquisition line of credit from a commercial bank. The acquisition
line had an interest rate of LIBOR plus 1.40% at December 31, 1998. The line was
secured by 11 properties of the Company with an aggregate carrying amount of
$129,754,000 at December 31, 1998 and was due to expire September 30, 2000.
On January 13, 1999, the Company replaced its $50,000,000 and
$100,000,000 bank lines with a new three-year $150,000,000 unsecured revolving
credit facility with a group of ten banks that is due to expire in January 2002.
The interest rate is based on the Eurodollar rate plus 1.25% and was 7.50% on
$77,000,000 and 7.44% on $8,000,000 at December 31, 1999. An unused line fee of
.25% is also assessed on this note.
Also on January 13, 1999, the Company obtained a one-year $10,000,000
unsecured revolving credit facility with Chase Bank of Texas that was due to
expire in January 2000. This loan was amended in January 2000 to reflect a new
maturity of January 2001. The interest rate is based on Chase Bank of Texas,
National Association's prime rate less .75% and was 7.75% at December 31, 1999.
The balance at December 31, 1999 was $10,000,000.
On November 29, 1999, the Company obtained a $15,000,000 unsecured
discretionary line of credit with Chase Bank of Texas. The interest rate and
maturity date for each loan proceeds are by agreement between the Company and
Chase. At December 31, 1999, the outstanding balance for this loan was zero.
Total loan commitment fees of $37,500 were paid in 1999, $136,500 in
1998 and $218,750 in 1997.
Average bank borrowings were $104,335,000 in 1999 compared to
$94,488,000 in 1998, with average interest rates of 6.82% in 1999 compared to
7.06% in 1998.
38
(6) MORTGAGE NOTES PAYABLE
A summary of mortgage notes payable follows:
Carrying Amount
P & I Maturity of Securing Real Balance at December 31,
Property Rate Payment Date Estate 1999 1998
------------ ------------- ----------- --------------- ------------ ------------
(in thousands)
University Business Center 9.060% $ 85,841 04/01/00 $ 15,113 8,477 8,727
West Palm Distribution Center 8.250% 7,700 09/01/00 - Repaid 01/99 981
Northwest Point Business Park 7.750% 32,857 03/01/01 6,229 3,930 4,016
University Business Center 7.450% 74,235 02/28/02 11,011 8,637 8,874
Estrella Distribution Center 9.250% 23,979 01/02/03 5,069 2,518 2,571
Deerwood Warehouse 8.375% 16,339 07/01/03 3,440 1,588 1,648
Eastlake 8.500% 57,115 07/05/04 9,496 4,480 4,771
56th Street Commerce Park 8.875% 21,816 08/01/04 3,866 2,069 2,143
Chamberlain Distribution Center 8.750% 21,376 01/01/05 3,820 2,423 2,462
8150 Leesburg Pike Office Building 8.500% 52,304 06/15/05 - Repaid 07/99 3,109
Exchange Distribution Warehouse 8.375% 21,498 08/01/05 3,120 2,247 2,314
Westport Commerce Center 8.000% 28,021 08/01/05 4,993 2,998 3,090
LaVista Apartments 8.688% 48,667 09/01/05 6,206 5,607 5,699
LakePointe Business Park 8.125% 81,675 10/01/05 9,360 10,563 10,680
Jetport, JetPort 515 & Jetport 516 8.125% 33,769 10/01/05 5,409 3,604 3,711
Huntwood Associates 7.990% 100,250 08/22/06 17,148 12,393 12,597
Wiegman Associates 7.990% 46,269 08/22/06 8,775 5,720 5,814
World Houston 1 & 2 7.770% 33,019 04/15/07 6,108 4,485 4,531
E. University, 7th Street, 55th Street,
Ethan Allen 8.060% 96,974 06/26/07 23,970 12,100 12,281
Waldenbooks Distribution Center 7.830% 98,877 09/15/07 - Repaid 12/99 12,779
Lamar II Distribution Center 6.900% 16,925 12/01/08 6,580 2,147 2,200
Dominguez, Kingsview, Walnut, Washington,
Industry and Shaw 6.800% 358,770 03/01/09 62,615 46,149 -
Interstate Distribution Center # 1 9.250% 10,827 06/01/09 - Repaid 03/99 758
Interstate Distribution Center # 2 9.250% 12,844 06/01/09 - Repaid 03/99 971
Auburn Facility 8.875% 64,885 09/01/09 15,474 5,041 5,357
Kyrene Distribution Center 9.000% 11,246 07/01/14 3,507 1,091 -
North Shore Improvement Bonds 6.3-7.75% Semi-Annual 09/02/16 2,380 398 410
--------------- ------------ ------------
$ 233,689 148,665 122,494
=============== ============ ============
Approximate principal payments due during the next five years as of
December 31, 1999 are as follows (in thousands):
2000 $12,077
2001 7,729
2002 12,159
2003 7,932
2004 8,651
39
(7) Stockholders' Equity
Management Incentive Plan-Stock Options/Incentive Award
In 1994, the Company adopted the 1994 Management Incentive Plan. The
Plan includes stock options (50% vested after one year and the other 50% after
two years) and an annual incentive award.
Stock option activity for the 1994 plan is as follows:
Years Ended December 31,
---------------------------------------
1999 1998 1997
------------------------- --------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
------------- ------------- ----------- ------------ ------------ ------------
Outstanding at beginning of year 645,633 $16.600 668,758 16.490 422,250 13.420
Granted 239,000 20.320 7,000 20.670 287,425 20.390
Exercised (22,210) 14.340 (22,935) 14.170 (37,692) 13.050
Expired (1,000) 22.000 (7,190) 18.010 (3,225) 14.970
------------ ------------ -----------
Outstanding at end of year 861,423 17.680 645,633 16.600 668,758 16.490
============ ============ ===========
Exercisable at end of year 618,923 $16.640 497,391 15.450 282,633 13.180
Available for grant at end of year 445,093 - 29,388 - 34,205 -
Price range of options:
Outstanding $12.000-22.375 $12.000-22.375 12.000-22.375
Exercised 12.000-18.170 12.670-17.920 12.000-14.920
Exercisable 12.000-22.375 12.000-22.375 12.000-14.830
The weighted average contractual life of the options outstanding as of
December 31, 1999 was 7.29 years.
The annual incentive award program began in 1995 and the Compensation
Committee determines awards based on actual funds from operations per share
("FFO") compared to goals set for the year. The 1999, 1998 and 1997 awards
approximated $435,000, $469,000 and $307,000, respectively, and were payable
two-thirds in cash and one-third in stock of the Company for 1998 and 1997 and
60% cash and 40% stock for 1999.
Directors Stock Option Plan
The Company has a Directors Stock Option Plan, as amended in 1994,
under which an aggregate of 150,000 shares of common stock were reserved for
issuance upon exercise of any options granted. Under the Directors plan, each
Non-Employee Director is granted an initial 7,500 options and 2,250 additional
options on the date of any Annual Meeting at which the Director is reelected to
the Board.
40
Stock option activity for the Director plan is as follows:
Years Ended December 31,
---------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
----------- ------------- ----------- ------------- ---------- --------------
Outstanding at beginning of year 78,000 $14.710 70,500 13.300 76,500 11.830
Granted 18,750 20.250 16,500 20.625 11,250 19.375
Exercised - - (6,750) 12.830 (17,250) 10.750
Expired - - (2,250) 19.375 - -
---------- ----------- -----------
Outstanding at end of year 96,750 15.780 78,000 14.710 70,500 13.300
========== =========== ===========
Exercisable at end of year 96,750 $15.780 78,000 14.710 70,500 13.300
Available for grant at end of year 6,750 - 25,500 - 39,750 -
Price range of options:
Outstanding $10.670-20.625 10.670-20.625 10.670-19.375
Exercised - 11.250-14.580 10.670-11.250
Exercisable 10.670-20.625 10.670-20.625 10.670-19.375
The weighted average contractual life of the options outstanding as of
December 31, 1999 was 6.42 years.
Series A 9.00% Cumulative Redeemable Preferred Stock
In June 1998, EastGroup sold 1,725,000 shares of Series A 9.00%
Cumulative Redeemable Preferred Stock at $25.00 per share in a public offering.
Net proceeds of approximately $41,357,000 were used to repay advances
outstanding on the Company's line of credit. The preferred stock, which may be
redeemed by the Company at $25.00 per share, plus accrued and unpaid dividends,
on or after June 19, 2003, has no stated maturity, sinking fund or mandatory
redemption and is not convertible into any other securities of the Company.
Series B 8.75% Cumulative Convertible Preferred Stock
In September 1998, EastGroup entered into an agreement with Five Arrows
Realty Securities II, L.L.C. (Five Arrows), an investment fund managed by
Rothschild Realty, Inc., a member of the Rothschild Group, providing for the
sale of 2,800,000 shares of Series B 8.75% Cumulative Convertible Preferred
Stock at a net price of $24.50 per share. Under the terms of this agreement,
EastGroup could sell 2,800,000 shares of Series B Preferred Stock to Five Arrows
at up to five closings, at EastGroup's option, through September 25, 1999. In
connection with this offering, EastGroup has entered into certain related
agreements with Five Arrows, providing, among other things, for certain
registration rights with respect to the Series B Preferred Stock and the right
to designate a member of the Board of Directors under certain circumstances.
The Series B Preferred Stock, which is convertible into common stock at
a conversion price of $22.00 per share, is entitled to quarterly dividends in
arrears equal to the greater of $0.547 per share or the dividend on the number
of shares of common stock into which a share of Series B Preferred Stock is
convertible.
In December 1998, EastGroup sold $10,000,000 of the Series B Preferred
Stock to Five Arrows. The Company sold the remaining $60,000,000 to Five Arrows
in September 1999.
41
Common Stock Issuances
In February 1997, the Company issued a total of 2,100,000 shares at
$17.56 per share (restated for effect of the three-for-two stock split discussed
below) under an existing shelf registration statement for net proceeds of
$36,654,000.
On March 20, 1997, the Company announced that its Board of Directors
approved a three-for-two share split in the form of a share dividend of one
share for every two shares outstanding. The share dividend was distributed on
April 7, 1997 to shareholders of record as of March 31, 1997. All share and per
share amounts in the Company's financial statements have been retroactively
restated for the share split.
On June 5, 1997, the Company's stockholders approved and the Company
subsequently completed the reorganization of the Trust into a Maryland
corporation. The purpose of the reorganization was to modernize EastGroup's
governance procedures and to provide EastGroup with a greater degree of
certainty and flexibility in planning and implementing corporate action by
adopting a form of organization used by many real estate investment trusts.
EastGroup will continue to qualify as a real estate investment trust for tax
purposes. Effective with the reorganization, the Company has the authority to
issue 100,000,000 shares consisting of 70,000,000 shares of common stock, $.0001
par value per share, and 30,000,000 shares of excess stock, $.0001 par value per
share. Effective June 5, 1997, all stock transactions reflect the new par value.
Stock transactions prior to the reorganization have not been restated to reflect
the new par value.
In October 1997, the Company completed an offering of 3,500,000 shares
at $22.00 per share of its common stock for net proceeds of approximately
$72,555,000.
Common Stock Repurchase Plan
During the third quarter 1998, EastGroup's Board of Directors
authorized the repurchase of up to 500,000 shares of its outstanding common
stock. In September 1999, EastGroup's Board of Directors authorized the
repurchase of an additional 500,000 shares of its outstanding common stock and
an additional 500,000 in December 1999. The shares may be purchased from time to
time in the open market or in privately negotiated transactions. For the year
ended December 31, 1999, the Company repurchased 796,600 shares for $13,621,000
and a total of 817,700 shares for $13,980,000 (an average of $17.10 per share)
since September 30, 1998.
Shareholder Rights Plan
In December 1998, EastGroup adopted a Shareholder Rights Plan designed
to enhance the ability of all of the Company's stockholders to realize the
long-term value of their investment. Under the Plan, Rights were distributed as
a dividend on each share of Common Stock (one Right for each share of Common
Stock) held as of the close of business on December 28, 1998. A Right will also
be delivered with all shares of Common Stock issued after December 28, 1998 and
1.1364 Rights will be delivered with all shares of EastGroup's Series B
Cumulative Convertible Preferred Stock issued after December 28, 1998. The
Rights will expire at the close of business on December 3, 2008.
Each whole Right will entitle the holder to buy one one-thousandth
(1/1000) of a newly issued share of EastGroup's Series C Preferred Stock at an
exercise price of $70.00. The Rights attach to and trade with the shares of the
Company's Common Stock and Series B Preferred Stock. No separate Rights
Certificates will be issued unless an event triggering the Rights occurs. The
Rights will detach from the Common Stock and Series B Preferred Stock and will
initially become exercisable for shares of Series C Preferred Stock if a person
or group acquires beneficial ownership of, or commences a tender or exchange
offer which would result in such person or group beneficially owning 15% or more
of EastGroup's Common Stock, except through a tender or exchange offer for all
shares which the Board determines to be fair and otherwise in the best interest
of EastGroup and its shareholders. The Rights will also detach from the Common
Stock and Series B Preferred Stock if the Board determines that a person holding
at least 9.8% of EastGroup's Common Stock intends to cause EastGroup to take
certain actions adverse to it and its shareholders or that such holder's
ownership would have a material adverse effect on EastGroup.
If any person becomes the beneficial owner of 15% or more of
EastGroup's Common Stock and the Board of Directors does not within 10 days
thereafter redeem the Rights, or a 9.8% holder is determined by the Board to be
an adverse person, each Right not owned by such person or related parties will
then enable its holder to purchase, at the Right's then-current exercise price,
EastGroup Common Stock (or, in certain circumstances as determined by the Board,
a combination of cash, property, common stock or other securities) having a
value of twice the Right's exercise price.
42
Under certain circumstances, if EastGroup is acquired in a merger or
similar transaction with another person, or sells more than 50 percent of its
assets, earning power or cash flow to another entity, each Right that has not
previously been exercised will entitle its holder to purchase, at the Right's
then-current exercise price, common stock of such other entity having a value of
twice the Right's exercise price.
EastGroup will generally be entitled to redeem the Rights at $0.0001
per Right at any time until the 10th day following public announcement that a
15% position has been acquired, or until the Board has determined a 9.8% holder
to be an adverse person. Prior to such time, the Board of Directors may extend
the redemption period.
Dividend Reinvestment Plan
The Company has a dividend reinvestment plan that allows stockholders
to reinvest cash distributions in new shares of the Company.
Fair Value of Stock Options
In accordance with SFAS No. 123, the following additional disclosures
are required related to options granted after January 1, 1995. The fair value of
each option grant is estimated on the grant date using the Black-Scholes option
pricing model with the following weighted-average assumptions used for 1999,
1998 and 1997, respectively: risk-free interest rates of 6.49%, 5.54%, and
6.09%; dividend yields of 9.75%, 7.64%, and 7.49%; volatility factors of 17.0%,
15.5%, and 13.0%, and expected option lives of 5 years for all years presented.
The Company applies APB No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option plans. Had compensation cost been determined based on fair
value at the grant dates for awards under the plan consistent with the method
prescribed by SFAS No. 123, the Company's net income and net income per basic
share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997
------ ------ ------
(In thousands, except per share data)
Net income available to common shareholders
as reported $32,229 27,266 20,779
Net income available to common shareholders
pro forma 32,058 27,056 20,642
Net income per basic share - as reported 2.01 1.67 1.58
Net income per basic share - pro forma 2.00 1.66 1.57
Weighted average fair value of options .97 1.20 1.10
granted during year
Earnings Per Share
In December 1997, the Company adopted SFAS No. 128, "Earnings Per
Share," which requires companies to present basic EPS and diluted EPS, instead
of the formerly required primary and fully diluted EPS. Reconciliation of the
numerators and denominators in the basic and diluted EPS computations are as
follows:
1999 1998 1997
----------- ------------ --------------
(In thousands)
Basic EPS Computation
Numerator-net income available to common shareholders $32,229 27,266 20,779
Denominator-weighted average shares outstanding 16,046 16,283 13,176
Diluted EPS Computation
Numerator-net income available to common shareholders
plus convertible preferred stock dividends ($2,246 in
1999) and limited partnership distributions ($48 in 1999) $34,523 27,266 20,779
Denominator:
Weighted average shares outstanding 16,046 16,283 13,176
Common stock options 112 140 162
Limited partnership units 32 9 -
Convertible preferred stock 1,172 - -
----------- ------------ --------------
Total Shares 17,362 16,432 13,338
=========== ============ ==============
43
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established new rules for the reporting of
comprehensive income and its components. Comprehensive income comprises net
income plus all other changes in equity from nonowner sources. The components of
comprehensive income for 1999, 1998 and 1997 are presented in the Company's
Consolidated Statements of Stockholders' Equity. The unrealized change in
investment securities in 1999 is net of the 1999 realized gain on real estate
investment trust securities included in net income as shown below:
(In thousands)
Other comprehensive income:
Unrealized holding gains during the period $91
Less reclassification adjustment for gains included in net income (30)
-------------------
Net unrealized change in investment securities $61
===================
(8) Acquisitions
Ensign Properties, Inc. Acquisition
In March 1998, EastGroup acquired Ensign Properties, Inc., an
independent industrial developer in Orlando. This acquisition, which was
accounted for under the purchase method of accounting, allowed EastGroup to
become self-managed in its Florida markets. The purchase price of the
acquisition amounting to approximately $1,800,000 was allocated primarily to
goodwill, development costs, leasing commissions and other prepaid costs. The
operating results of Ensign Properties, Inc. have been included in the
consolidated statements of income subsequent to the date of acquisition. The pro
forma impact related to the acquisition would be immaterial to the consolidated
financial statements.
Meridian VIII Acquisition
On June 1, 1998, the merger of Meridian VIII into a wholly-owned
subsidiary of EastGroup was completed, accounting for the acquisition by using
the purchase method of accounting. For financial reporting purposes, the
acquired assets of Meridian VIII were assigned new cost basis amounts based on
the allocation of the purchase price of the assets. In general, the purchase
price to the Company consisted of the cash paid for Meridian VIII and the
Company's previous investment in Meridian VIII. The shares of Meridian VIII
owned by the Company were retired at the merger date. The operating results of
Meridian VIII have been included in the consolidated statements of income
subsequent to the date of acquisition.
Pursuant to the terms of its merger agreement with Meridian VIII,
EastGroup's wholly-owned subsidiary exercised options to acquire a sufficient
number of common and preferred shares of Meridian VIII such that it owned 90% of
all outstanding common and preferred shares. Prior to the exercise of the
options, EastGroup's subsidiary beneficially owned approximately 83.2% of the
outstanding voting securities of Meridian VIII. Following the exercise of the
options, Meridian VIII was merged into EastGroup's wholly-owned subsidiary, with
all outstanding common shares of Meridian VIII not held by EastGroup receiving,
as a result of the merger, $8.50 per share in cash and all preferred shares of
Meridian VIII not held by EastGroup receiving $10.00 per share in cash. The
consideration paid to the remaining common and preferred shareholders of
Meridian VIII was equivalent to that paid by EastGroup in its tender offer for
Meridian VIII's common and preferred shares which was completed in April 1998.
The total purchase price to EastGroup was approximately $102,000,000 which
included the assumption of Meridian VIII's outstanding indebtedness. As a result
of the merger, Meridian VIII's common and preferred shares have been removed
from registration under the Securities Exchange Act of 1934 and ceased to be
listed on the American Stock Exchange effective as of June 1, 1998.
44
The increase in net assets at the acquisition date, based on estimated
relative fair values, resulting from the acquisition was as follows (in
thousands):
Real estate properties $96,366
Cash 6,118
Accrued interest and other receivables 119
Other assets 124
Mortgage notes and interest payable (33,422)
Accounts payable and other liabilities (871)
------------
Total $68,434
============
The purchase price of the net assets acquired consisted of the following
(in thousands):
Acquisition of Meridian Shares $52,760
Merger costs 1,569
Prior investment in Meridian 14,105
-------------
Total $68,434
=============
The following unaudited pro forma combined results of operations give
effect to the Meridian VIII merger as if it had occurred at the beginning of the
fiscal year for each of the years presented:
(In thousands, except per share amounts) 1998 1997
--------------------------------------------------------- -------------- ------------
Revenues $80,022 63,978
============== ============
Net income available to common shareholders $25,566 19,316
============== ============
Net income per basic share $ 1.57 1.47
============== ============
Shares used in computation 16,283 13,176
============== ============
Net income per diluted share $ 1.56 1.45
============== ============
Shares used in computation 16,432 13,338
============== ============
In management's opinion, the unaudited pro forma combined results of
operations are not necessarily indicative of the actual results that would have
occurred had the transaction been consummated at the beginning of 1998 and the
beginning of 1997 or of future operations of the combined companies under the
ownership and management of the Company.
45
(9) Quarterly Results of Operations - Unaudited
1999 1998
Quarter Ended Quarter Ended
----------------------------------------------- ------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
(In thousands, except per share data)
Revenues $ 20,885 21,098 21,504 22,749 16,041 18,681 20,753 21,253
Expenses (15,373) (15,469) (15,865) (16,113) (11,116) (14,150) (15,595) (16,244)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before gain (loss)
On investments 5,512 5,629 5,639 6,636 4,925 4,531 5,158 5,009
Gain (loss) on investments 1,451 224 13,978 (296) 73 1,017 4,996 3,627
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before cumulative
effect of change in
accounting principle 6,963 5,853 19,617 6,340 4,998 5,548 10,154 8,636
Cumulative effect of change
in accounting principle (418) - - - - - - -
----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
Net income 6,545 5,853 19,617 6,340 4,998 5,548 10,154 8,636
Preferred dividends (1,189) (1,189) (1,246) (2,502) - (129) (970) (971)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income available to
Common shareholders $ 5,356 4,664 18,371 3,838 4,998 5,419 9,184 7,665
=========== ============ =========== =========== =========== =========== ========== ===========
BASIC PER SHARE DATA
Net income 0.33 0.29 1.15 0.24 0.31 0.33 0.56 0.47
=========== =========== =========== =========== =========== =========== =========== ===========
Weighted average shares
Outstanding 16,303 16,076 16,006 15,805 16,223 16,299 16,308 16,300
=========== =========== =========== =========== =========== =========== =========== ===========
DILUTED PER SHARE DATA
Net income 0.33 0.29 1.11 0.24 0.30 0.33 0.56 0.47
=========== =========== =========== =========== =========== =========== =========== ===========
Weighted average shares
Outstanding 16,429 16,245 16,724 15,941 16,391 16,452 16,423 16,456
=========== =========== =========== =========== =========== =========== =========== ===========
The above quarterly earnings per share calculations are based on the weighted
average number of common shares outstanding during each quarter for earnings per
common share and the weighted average number of outstanding common shares and
common share equivalents during each quarter for the earnings per common share,
assuming dilution. The annual earnings per share calculations are based on the
weighted average number of common shares outstanding during each year for
earnings per common share and the weighted average number of outstanding common
shares and common share equivalents during each year for earnings per common
share, assuming dilution.
46
(10) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1999 and 1998.
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
(In thousands)
Financial Assets
Cash and cash equivalents $2,657 2,657 2,784 2,784
Investment in real estate
investment trusts 15,708 15,708 5,737 5,737
Mortgage loans receivable 8,706 8,604 8,814 8,946
Financial Liabilities
Mortgage notes payable 148,665 142,716 122,494 130,066
Notes payable to banks 95,000 95,000 114,322 114,322
Carrying amounts shown in the table are included in the balance sheet under the
indicated captions.
The following methods and assumptions were used to estimate fair value of each
class of financial instruments:
Cash and Cash Equivalents: The carrying amounts approximate fair value
because of the short maturity of those instruments.
Mortgage Loans: The fair value of performing mortgage loans is either
estimated using discounted cash flows at current interest rates for loans with
similar terms and maturities or based on the estimated value of the underlying
collateral adjusted for the borrower's payment history and financial strength.
The fair value for nonperforming loans is based on underlying collateral value.
Investment in Real Estate Investment Trusts: The fair value of this
equity investment is based on quoted market prices.
Mortgage Notes Payable: The fair value of the Company's mortgage notes
payable is estimated based on the quoted market prices for similar issues or by
discounting expected cash flows at the rates currently offered to the Company
for debt of the same remaining maturities, as advised by the Company's bankers.
Notes Payable to Banks: The carrying amounts approximate fair value
because of the variable rates of interest on the debt.
47
(11) SEGMENT REPORTING
The Company's reportable segments consist of industrial properties,
office buildings, and an other category that includes apartments and other real
estate. The Company's chief decision makers use two primary measures of
operating results in making decisions, such as allocating resources: property
net operating income (PNOI), defined as real estate operating revenues less real
estate operating expenses (before interest expense and depreciation), and funds
from operations (FFO), defined as net income (loss) (computed in accordance with
generally accepted accounting principles (GAAP)), excluding gains or losses from
debt restructuring and sales of property, plus real estate related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. The Company uses FFO as a measure of the performance of our
industry as an equity real estate investment trust. FFO is not considered as an
alternative to net income (determined in accordance with GAAP) as an indication
of the Company's financial performance or to cash flows from operating
activities (determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's cash
needs, including our ability to make distributions. The table below presents on
a comparative basis for the three fiscal years reported PNOI by operating
segment, followed by reconciliations of PNOI to FFO and FFO to net income before
cumulative effect of change in accounting principle.
1999 1998 1997
(In thousands)
----------------------------------------------
Property Revenues:
Industrial $77,677 61,417 33,338
Office 3,395 6,783 8,353
Other 2,248 6,112 8,100
------------ ------------- ------------
83,320 74,312 49,791
------------ ------------ -------------
Property Expenses:
Industrial (17,723) (14,414) (8,258)
Office (1,180) (1,927) (2,618)
Other (1,038) (2,987) (3,949)
------------ ------------ -------------
(19,941) (19,328) (14,825)
------------ ------------ -------------
Property Net Operating Income:
Industrial 59,954 47,003 25,080
Office 2,215 4,856 5,735
Other 1,210 3,125 4,151
------------ ------------ -------------
Total Property Net Operating Income 63,379 54,984 34,966
------------ ------------ -------------
Other income 2,916 2,416 3,831
Interest expense (17,688) (16,948) (10,551)
General and administrative (4,580) (3,822) (2,923)
Minority interest in earnings (674) (757) (796)
Dividends on Series A preferred shares (3,880) (2,070) -
Limited partnership unit distributions 48 - -
------------ ------------ -------------
Funds From Operations 39,521 33,803 24,527
Depreciation and amortization (20,178) (16,574) (10,409)
Share of joint venture depreciation and amortization 241 324 284
Gain on real estate investments 15,357 9,713 6,377
Limited partnership unit distributions (48) - -
Dividends on Series B convertible preferred shares (2,246) - -
Cumulative effect of change in accounting principle (418) - -
------------ ------------ -------------
Net Income Available to Common Shareholders 32,229 27,266 20,779
Dividends on preferred shares 6,126 2,070 -
------------ ------------ -------------
NET INCOME $38,355 29,336 20,779
============ ============ =============
Assets:
Industrial $616,078 532,869 330,639
Office 6,919 6,896 39,753
Other - 8,866 15,380
------------ ------------ -------------
622,997 548,631 385,772
Less accumulated depreciation (46,829) (34,042) (29,095)
------------ ------------ -------------
576,168 514,589 356,677
------------ ------------ -------------
Real estate for sale 18,051 25,620 23,233
Less accumulated depreciation (4,750) (8,794) (3,217)
------------ ------------ -------------
13,301 16,826 20,016
------------ ------------ -------------
Mortgage loans 8,706 8,814 10,852
Investment in real estate investment trusts 15,708 5,737 16,518
Cash 2,657 2,784 1,298
Other assets 15,611 18,798 7,766
------------ ------------ -------------
Total Assets $632,151 567,548 413,127
============ ============ =============
REAL ESTATE INVESTMENT CAPITAL EXPENDITURES
Acquisitions
Industrial $57,672 178,163 124,149
Office - - -
Other - - -
Developments
Industrial 45,846 25,511 14,936
Office - - -
Other - - -
48
(12) ACCOUNTING CHANGE
Organization Costs
In April 1998, Statement of Position (SOP) No. 98-5, "Reporting on the
Costs of Start-Up Activities," was issued. This SOP provides guidance on the
financial reporting of start-up costs and organization costs, and requires that
these costs be expensed as incurred effective for fiscal years beginning after
December 15, 1998. Unamortized organization costs of $418,000 were written off
in first quarter 1999 and accounted for as a cumulative effect of a change in
accounting principle. The accounting change reduced basic and diluted earnings
per share $.03 and $.02, respectively, in 1999.
(13) Subsequent Events
Subsequent to December 31, 1999, EastGroup purchased the Wilson
Distribution Center (56,000 square feet) in Tempe, Arizona for $2,500,000.
Also, subsequent to December 31, 1999, the Company has entered into
contracts to purchase the following properties:
Approximate
Property Location Size Purchase Price
- ------------------------------------------------ ----------------------- ---------------------- --------------------
(In thousands)
Founders Business Center El Paso, Texas 77,000 sq. ft $2,360
Sunport Center Land for Development Orlando, Florida 19.65 acres 2,774
--------------------
$5,134
====================
In addition, EastGroup has a contract to sell the LeTourneau Center of
Commerce (88,000 square feet) in Tampa, Florida for approximately $1,650,000.
The proceeds of this sale are expected to be reinvested in industrial properties
through new acquisitions. This transaction is expected to generate a small gain
for financial reporting purposes.
On February 10, 2000, Franklin Select Realty Trust announced the closing of
the sale of all of the company's real estate assets for an aggregate purchase
price of $131.5 million, less existing project debt assumed by the buyer of
approximately $26.5 million. Pursuant to the plan of liquidation recently
approved by Franklin's shareholders, Franklin's board of directors declared an
initial liquidating distribution of $7.11 per share, which was paid to
shareholders and received by EastGroup on March 10, 2000. Thereafter, the
company will continue to wind up its affairs pursuant to the plan of
liquidation. It is expected that Franklin's shareholders will receive a final
liquidating distribution before the end of 2000, subject, however, to final
court approval of settlements of pending litigation. The total basis of
EastGroup's Franklin shares was used in computing the gain on the March 10, 2000
transaction. The amount of any final distributions paid to EastGroup, minus
certain transaction expenses, will be additional gain.
(14) Related Party Transaction
EastGroup and Parkway Properties, Inc. ("Parkway") shared the same office
space at One Jackson Place in Jackson, Mississippi, until April 1997 when
Parkway moved to its own space. EastGroup and Parkway shared the rent with
respect to such space based upon the relative number of employees of each using
the space. EastGroup and Parkway currently share the services and expenses of
the Company's Chairman of the Board and his administrative assistant.
In July 1999, EastGroup acquired the remaining 25% ownership interests in
Jetport Commerce Park and 56th Street Commerce Park in Tampa from our partner,
an officer of the Company, Anthony J. Bruno, for $3,588,000 giving the Company
100% ownership of these two complexes.
49
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
THE DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
Under date of March 6, 2000, we reported on the consolidated balance sheets of
EastGroup Properties, Inc., and subsidiaries, as of December 31, 1999 and 1998,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999, which are included in the 1999 Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial statement
schedules as listed in Item 14 (a)(2) of Form 10-K. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Jackson, Mississippi KPMG LLP
March 6, 2000
50
REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(IN THOUSANDS)
Initial Cost
to the Company
------------------------------------------
Buildings
Description Encumbrances Land and Improvements
---------------------------
Real estate properties (c) and (d):
Industrial:
Interstate Warehouses -Texas $ - 1,757 4,941
Venture Warehouses -Texas - 1,452 3,762
Rampart-Colorado - 1,023 3,861
Sunbelt-Florida - 1,034 5,056
La Quinta-Florida - 191 575
Deerwood-Florida 1,588 1,147 1,799
56th Street - Florida 2,069 843 3,567
JetPort Commerce Park - Florida 3,604 1,034 4,416
Lake Pointe - Florida 10,563 3,442 6,450
Exchange Distribution - Florida 2,247 603 2,414
Phillips - Florida - 1,375 2,961
Northwest Point - Texas 3,930 1,243 5,640
Westport - Florida 2,998 980 3,800
Lakeside Distribution - Oklahoma - 120 1,154
Linpro Distribution - Florida - 613 2,243
Broadway Industrial Center - Arizona - 837 3,349
Dominguez Distribution - California (g) 7,529 2,006 8,025
Huntwood Associates - California 12,393 3,842 15,368
Kingsview Industrial - California (g) 2,242 643 2,573
Metro Business Park - Arizona - 1,927 7,708
Sample I-95 - Florida - 1,565 6,262
University Business Center - California 17,114 5,517 22,067
Wiegman Associates - California 5,720 2,197 8,788
Braniff Park West - Oklahoma - 1,066 4,641
Walnut Business Park - California (g) 5,715 2,885 5,274
Interchange Business Park - Mississippi - 343 5,007
Palm River I - Florida - 540 2,131
West Loop II - Texas - 440 2,511
Lockwood Distribution Center - Texas - 749 5,444
Lockhart Distribution Center - Texas - - 3,489
Cypress Creek - Florida - - 2,465
Senator Street - Tennessee - 540 2,187
Chamberlain - Arizona 2,423 506 3,564
35th Avenue - Arizona - 418 2,381
Washington - California (g) 4,669 1,636 4,900
San Clemente - California - 893 2,004
Ellis Dist. Center - Florida - 540 7,513
Westside Dist. Center - Florida - 1,170 12,400
Elmwood Business Park - Louisiana - 2,861 6,337
Riverbend Business Park - Louisiana - 2,592 17,623
Butterfield Trail Industrial - Texas - - 19,842
Eastlake Distribution Center - California 4,480 3,046 6,888
109th Street - Texas - 110 867
Benjamin I - Florida - 424 1,966
Chancellor Distribution - Florida - 291 1,711
Rampart II - Colorado - 230 2,977
Benjamin II - Florida - 419 1,997
Palm River II - Florida - 650 2,494
Estrella East - Arizona 2,518 628 4,694
51st Avenue - Arizona - 300 2,029
Stemmons Circle - Texas - 363 2,014
East University I and II - Arizona (h) 2,725 1,120 4,482
7th Street Dist. Center - Arizona (h) 908 373 1,490
55th Street Dist. Center - Arizona (h) 2,276 912 3,717
Ethan Allen - California (h) 6,191 2,544 10,175
Lamar - Tennessee 2,147 1,332 5,398
Auburn Facility - Michigan 5,041 3,230 12,922
World Houston 1 and 2 - Houston 4,485 660 5,893
Senator Street II - Tennessee - 435 1,742
Airpark Distribution - Tennessee - 250 1,916
Airport Distribution - Arizona - 1,103 4,672
World Houston 3,4,5 - Texas - 1,025 6,413
World Houston 6 - Texas - 425 2,423
America Plaza - Texas - 662 4,660
Shaw Commerce - California (g) 10,004 2,465 11,627
Industry Distribution - California (g) 15,990 10,230 12,373
Interstate Commerce - Florida - 485 2,652
Northpointe Commerce - Oklahoma - 777 3,113
Delp - Tennessee - 1,049 4,197
Airpark - Tennessee - 66 263
Getwell - Tennessee - 151 603
JC Penney - Tennessee - 486 1,946
Ambassador Row - Texas - 1,156 4,625
Carpenter - Texas - 208 833
Viscount - Texas - 395 1,578
Kyrene - Arizona 1,091 850 2,044
Interstate Commons - Arizona - 798 3,632
Fairmont - Arizona - 455 482
Central Green - Texas - 566 4,031
Rojas - Texas - 900 3,659
Jetport 517 & 518 - Florida - 541 2,175
Blue Heron - Florida - 975 3,626
Meadows - Florida - 407 1,503
Yosemite - California - 259 7,058
John Young Parkway - Florida - 497 2,444
Walden II- Florida - 465 -
Sunbelt II - Florida - 249 114
World Houston 7 & 8 - Texas - 680 4,584
Airport Commerce - Florida - 1,257 4,012
World Houston 9 - Texas - 800 4,355
Premier Beverage - Florida - 1,110 6,126
Altamonte - 1,518 2,661
Southeast Crossing - 1,802 10,267
Southpointe (McCulloch) - - 3,982
---------------- ------------ ------------
142,660 104,699 440,597
---------------- ------------ ------------
Industrial Development:
Rampart III - Colorado - 1,098 -
Walden I - Florida - 337 -
Sample I-95 II - Florida - 815 -
Westlake - Florida - 1,333 -
Sabal Sites - Florida - 351 -
Stone - Florida - 1,730 -
Chestnut St. - California - 1,674 -
John Young Parkway II - Florida - 512 -
Glenmont - Texas - 937 -
Main Street - California - 1,606 -
Sunport - Florida - 1,151 -
Interstate Commons - 320 -
Kyrene - 640 -
World Houston 11 - 586 -
--------------------------------------------------------------
- 13,090 -
--------------------------------------------------------------
Office Buildings:
Los Angeles Corporate Center - California - 1,363 5,453
--------------------------------------------------------------
- 1,363 5,453
--------------------------------------------------------------
Operating Properties Held For Sale:
Nobel Center - California 398 543 -
Letourneau - Florida - 291 1,319
LaVista-Georgia 5,607 1,526 2,886
West Palm I and II - Florida - 635 2,542
--------------------------------------------------------------
6,005 2,995 6,747
--------------------------------------------------------------
Land Held for Sale (e):
Jefferson Parish-Louisiana - 3,050 -
--------------------------------------------------------------
- 3,050 -
--------------------------------------------------------------
Total real estate owned $ 148,665 125,197 452,797
==============================================================
51
SCHEDULE III
(CONTINUED)
Costs Capitalized Gross Amount at which
Subsequent to Acquisition Carried at Close of Period
Buildings Accumulated
Capitalized and Depreciation Year Year
Costs Other Land Improvements Total Dec. 31, 1999 Acquired Constructed
- ------------------------- ---------------------------------------------------------------------------------------
790 - 1,757 5,731 7,488 2,050 1988 1978
826 - 1,452 4,588 6,040 1,602 1988 1979
395 - 1,023 4,256 5,279 1,320 1988 1987
686 - 1,034 5,742 6,776 1,683 1989 1987
177 - 191 752 943 234 1989 1974
1,157 - 1,147 2,956 4,103 663 1989 1978
1,155 - 843 4,722 5,565 880 1993 1981/86/97
1,275 - 1,034 5,691 6,725 1,314 1993/94/95 1974/79/85
1,738 - 3,442 8,188 11,630 2,269 1993 1986/87
772 - 603 3,186 3,789 669 1994 1975
1,920 - 1,375 4,881 6,256 980 1994 1984/95
293 - 1,243 5,933 7,176 947 1994 1984/85
941 - 980 4,741 5,721 728 1994 1983/87
109 - 120 1,263 1,383 183 1994 1986
386 2 615 2,629 3,244 331 1996 1986
277 - 837 3,626 4,463 541 1996 1971
774 - 2,006 8,799 10,805 869 1996 1977
126 - 3,842 15,494 19,336 2,188 1996 1988
1 - 643 2,574 3,217 293 1996 1980
463 - 1,927 8,171 10,098 1,063 1996 1977/79
169 - 1,565 6,431 7,996 1,162 1996 1990
967 3 5,520 23,034 28,554 2,430 1996 1987/88
273 - 2,197 9,061 11,258 901 1996 1986/87
450 - 1,066 5,091 6,157 689 1996 1974
42 - 2,885 5,316 8,201 640 1996 1966/90
313 - 343 5,320 5,663 515 1997 1981
108 - 540 2,239 2,779 180 1997 1990
195 - 440 2,706 3,146 226 1997 1980
102 - 749 5,546 6,295 375 1997 1968/69
596 - - 4,085 4,085 306 1997 1986
380 - - 2,845 2,845 243 1997 1986
104 - 540 2,291 2,831 146 1997 1982
10 - 506 3,574 4,080 259 1997 1994
68 - 418 2,449 2,867 160 1997 1967
164 - 1,636 5,064 6,700 387 1997 1996/97
- - 893 2,004 2,897 118 1997 1978
351 - 540 7,864 8,404 521 1997 1977
1,495 - 1,170 13,895 15,065 934 1997 1984
397 - 2,861 6,734 9,595 885 1997 1979
284 - 2,592 17,907 20,499 1,860 1997 1984
735 - - 20,577 20,577 1,612 1997 1995
68 - 3,046 6,956 10,002 507 1997 1989
54 - 110 921 1,031 63 1997 1970
18 40 464 1,984 2,448 281 1997 1996
15 - 291 1,726 2,017 188 1996/97 1996/97
85 - 230 3,062 3,292 380 1996/97 1996/97
22 - 419 2,019 2,438 66 1997/98 1997/98
164 - 650 2,658 3,308 319 1997/98 1997/98
20 - 628 4,714 5,342 273 1998 1988
5 - 300 2,034 2,334 158 1998 1987
111 - 363 2,125 2,488 243 1998 1977
39 - 1,120 4,521 5,641 250 1998 1989/87
16 - 373 1,506 1,879 81 1998 1987
80 5 917 3,797 4,714 200 1998 1987
94 - 2,544 10,269 12,813 542 1998 1980
148 - 1,332 5,546 6,878 298 1998 1978/80
4 - 3,230 12,926 16,156 682 1998 1986
38 - 660 5,931 6,591 483 1998 1996
94 - 435 1,836 2,271 89 1998 1968
2 - 250 1,918 2,168 107 1998 1975
8 - 1,103 4,680 5,783 248 1998 1995
76 - 1,025 6,489 7,514 464 1998 1998
37 - 425 2,460 2,885 163 1998 1998
- - 662 4,660 5,322 321 1998 1996
265 - 2,465 11,892 14,357 676 1998 1978/81/87
344 - 10,230 12,717 22,947 747 1998 1959
257 - 485 2,909 3,394 248 1998 1988
- - 777 3,113 3,890 114 1998 1996/1997
366 - 1,049 4,563 5,612 262 1998 1977
32 - 66 295 361 16 1998 1975
29 - 151 632 783 33 1998 1972
7 - 486 1,953 2,439 103 1998 1972
617 - 1,156 5,242 6,398 290 1998 1958/1965
74 - 208 907 1,115 49 1998 1958
25 - 395 1,603 1,998 83 1998 1965
8 - 850 2,052 2,902 35 1999 1981
14 - 798 3,646 4,444 54 1999 1988
11 - 455 493 948 11 1999 1971
10 - 566 4,041 4,607 207 1999 1998
456 - 900 4,115 5,015 145 1999 1986
112 - 541 2,287 2,828 61 1999 1981/1982
417 - 975 4,043 5,018 114 1999 1986
4 - 407 1,507 1,914 67 1999 1988
27 - 259 7,085 7,344 153 1999 1974/1987
277 - 497 2,721 3,218 122 1997/98 1997/98
3,789 - 465 3,789 4,254 123 1998 1998
1,981 - 249 2,095 2,344 60 1997/98 1997/98
3,034 - 680 7,618 8,298 452 1998 1998
313 - 1,257 4,325 5,582 58 1998 1998
20 - 800 4,375 5,175 68 1998 1998
101 - 1,110 6,227 7,337 85 1998 1998
- - 1,518 2,661 4,179 48 1999 1980/1982
- - 1,802 10,267 12,069 15 1999 1987/1997
- - - 3,982 3,982 - 1999 1989
- ----------------------------------------------------------------------------------------------
35,251 50 0 104,749 475,849 580,598 46,261
- ----------------------------------------------------------------------------------------------
3,650 - 1,098 3,655 4,753 - 1997/98 1997/98
- - 337 - 337 - 1997/98 1997/98
2,686 - 815 2,686 3,501 7 1998 1998
2,968 - 1,333 2,968 4,301 - 1998 1998
134 - 351 134 485 - 1998 1998
2,982 - 1,730 2,982 4,712 - 1998 1998
2,680 - 1,674 2,680 4,354 - 1998 1998
2,051 - 512 2,051 2,563 2 1998 1998
2,738 - 937 2,738 3,675 - 1998 1998
2,376 - 1,606 2,376 3,982 - 1999 1999
120 - 1,151 120 1,271 - 1999 1999
- - 320 - 320 - 1999 1999
- - 640 - 640 - 1999 1999
- - 586 - 586 - 1999 1999
- ----------------------------------------------------------------------------------------------
22,390 - 13,090 22,390 35,480 9
- ----------------------------------------------------------------------------------------------
Office Buildings:
103 - 1,363 5,556 6,919 559 1996 1986
- ----------------------------------------------------------------------------------------------
103 - 1,363 5,556 6,919 559
- ----------------------------------------------------------------------------------------------
Operating Properties Held For Sale:
3,727 - 543 3,727 4,270 1,888 1987 1986
10 - 291 1,329 1,620 35 1999 1972
4,570 1 1,527 7,456 8,983 2,778 1991 1968/96
(428) - 635 2,114 2,749 49 1998 1993
- ----------------------------------------------------------------------------------------------
7,879 1 2,996 14,626 17,622 4,750
- ----------------------------------------------------------------------------------------------
Land Held for Sale (e)-
57 (2,678)(f) 429 - 429 - 1978 n/a
- ----------------------------------------------------------------------------------------------
57 (2,678) 429 - 429 -
- ----------------------------------------------------------------------------------------------
65,680 (2,627) 0 122,627 518,421 641,048 51,579
==============================================================================================
(a)(b) (a)(b)
52
(a) Changes in Real Estate Properties follow:
Years Ended December 31,
------------------------
1999 1998 1997
(In thousands)
Balance at beginning of year $573,751 409,005 280,117
Real estate properties acquired - Meridian merger - 96,366 -
Improvements 55,243 32,559 19,341
Purchase of real estate properties 57,672 81,797 124,149
Carrying amount of investments sold (45,170) (45,976) (14,351)
Write-off of depreciated assets (448) - (251)
------------ ------------ ------------
Balance at end of year (1) (2) $641,048 573,751 409,005
============ ============ ============
(1) Includes a 20% minority interest in University Business Center totaling
$5,711,000 at December 31, 1999. Includes 25% minority interest in JetPort
Commerce Park and 56th Street Commerce Park and 20% minority interest in
University Business Center totaling $7,888,000 at December 31, 1998. Includes
25% minority interest in JetPort Commerce Park, 56th Street Commerce Park, and
Westport Commerce Center and 20% minority interest in University Business Center
totaling $8,947,000 at December 31, 1997.
(2) Does not include the $500,000 land purchase-leaseback held for sale
at December 31, 1998.
Changes in the accumulated depreciation on real estate properties follow:
Years Ended December 31,
------------------------
1999 1998 1997
(In thousands)
Balance at beginning of year $42,836 32,312 23,562
Depreciation expense 18,640 15,239 9,691
Accumulated depreciation on assets sold (9,897) (4,715) (859)
Write-off of fully depreciated assets - - (82)
------------ ------------ --------------
Balance at end of year $51,579 42,836 32,312
============ ============ ==============
(b) The aggregate cost for federal income tax purposes is approximately
$500,052,000. The federal income tax return for the year ended December 31, 1999
has not been filed and, accordingly, the income tax basis of real estate
properties as of December 31, 1999 is based on preliminary data.
(c) Reference is made to impairment losses on real estate investments in
the notes to consolidated financial statements.
(d) The Company computes depreciation using the straight-line method over the
estimated useful lives of the buildings (25 to 40 years) and other improvements
(3 to 10 years).
(e) The investment is not producing income to the Company as of December 31,
1999.
(f) Represents a write-down of $2,496,000, income received but deferred of
$45,000 and the sale of a portion of the land with a cost basis of $137,000.
(g) EastGroup has a $47,000,000, non-recourse first mortgage loan with
Metropolitan Life secured by six industrial properties in California:
Industry Distribution Center, Shaw Commerce Center, Kingsview Industrial Center,
Dominguez Distribution Center, Walnut Business Center and Washington
Distribution Center.
(h) The Company has a mortgage loan with Prudential Life secured by East
University I & II, 55th Avenue Distribution Center, 7th Street Distribution
Center and Ethan Allen Distribution Center.
53
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1999
(IN THOUSANDS)
Number of Interest Final Periodic
Loans Rate Maturity Date Payment Terms
------------ ---------------- --------------- -------------------
First mortgage loans (c):
INDUSTRIAL:
Wilson Street, Tempe, Arizona 1 9.82% 4/01 Interest monthly
World Houston 10, Houston, Texas 1 9.00% 2/03 Interest monthly
UNDEVELOPED LAND:
Baypointe, Houston, Texas 1 12.00% 10/00 P&I semi-annually
OTHER LOANS 1 8.50% 1/08 P&I monthly
------------
Total first mortgage loans 4
============
Principal
Face Amount Carrying Amount of Loans
of Mortgages Amount of Subject to Delinquent
Dec. 31, 1999 Mortgages Principal or Interest
(d)
----------------- ---------------- ------------------------
First mortgage loans (c):
INDUSTRIAL:
Wilson Street, Tempe, Arizona $2,100 2,100 -
World Houston 10, Houston, Texas 4,622 4,622 -
UNDEVELOPED LAND:
Baypointe, Houston, Texas 1,965 1,965 -
OTHER LOANS 19 19 -
----------------- ---------------- ------------------------
Total first mortgage loans $8,706 8,706(a)(b)
================= ================ ========================
Notes:
(a) Changes in mortgage loans follow:
Years Ended December 31,
1999 1998 1997
---- ---- ----
(In thousands)
--------------------------------------------------------
Balance at beginning of year $8,814 10,852 12,503
Advances on mortgage notes receivable 8,186 - 1,575
Payments on mortgage notes receivable (10,139) (3,042) (3,528)
Amortization of discount on loans, net 330 621 618
Deferred gains 1,515 383 159
Write-down of mortgage notes receivable - - (475)
------------------- ----------------- ------------------
Balance at end of year $8,706 8,814 10,852
=================== ================= ==================
(b) The aggregate cost for federal income tax purposes is approximately
$8,706,000. The federal income tax return for the year ended December 31,
1999 has not been filed and, accordingly, the income tax basis of mortgage
loans as of December 31, 1999 is based on preliminary data.
(c) Reference is made to allowance for possible losses on real estate
investments in the notes to consolidated financial
statements.
(d) Interest or principal in arrears for three months or less is disregarded in
computing principal amount of loans subject to delinquent principal or
interest.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EASTGROUP PROPERTIES, INC.
By: /s/ David H. Hoster II
-------------------------------
David H. Hoster II, Chief
Executive Officer, President
& Director
March 16, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
* *
- --------------------------------- ------------------------------
D. Pike Aloian, Director Alexander G. Anagnos, Director
March 9, 2000 March 9, 2000
* *
- --------------------------------- -------------------------------
H. C. Bailey, Jr., Director Fredric H. Gould, Director
March 9, 2000 March 9, 2000
* *
- --------------------------------- -------------------------------
David M. Osnos, Director John N. Palmer, Director
March 9, 2000 March 9, 2000
* /s/ N. Keith McKey
- --------------------------------- -------------------------------
Leland R. Speed, Chairman of the Board * By N. Keith McKey, Attorney in fact
(Principal Executive Officer)
March 9, 2000
/s/ Bruce Corkern
Bruce Corkern, Sr. Vice President & Controller
(Principal Accounting Officer)
March 16, 2000
/s/ N. Keith McKey
N. Keith McKey, Executive Vice-President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
March 16, 2000
55
EXHIBIT INDEX
The following exhibits are included in this Form 10-K or are incorporated by
reference as noted in the following table:
(3) Form 10-K Exhibits
(a) Articles of Incorporation (incorporated by reference to Appendix
B to the Registrant's Proxy Statement dated April 24, 1997).
(b) Bylaws of the Registrant (incorporated by reference to Appendix
C to the Registrant's Proxy Statement dated April 24, 1997).
(c) Articles Supplementary of the Company relating to the 9.00%
Series A Cumulative Redeemable Preferred Stock of the Company
(incorporated by reference to the Company's Form 8-A filed June
15, 1998).
(d) Articles Supplementary of the Company relating to the
Series B Cumulative Convertible Preferred Stock
(incorporated by reference to the Company's Form 8-K filed
on October 1, 1998).
(e) Articles Supplementary of the Company relating to the
Series C Preferred Stock (incorporated by reference to the
Company's Form 8-A filed December 9, 1998).
(f) Certificate of Correction to Articles Supplementary with
respect to Series B Cumulative Convertible Preferred Stock
(incorporated by reference to the Registrant's Form 10-K
for the year ended December 31, 1998).
(10) Material Contracts:
(a) EastGroup Properties 1994 Management Incentive Plan, As
Amended (incorporated by reference to Appendix A of the
Registrant's Proxy Statement for its Annual Meeting of
Shareholders held on June 2, 1999).
(b) EastGroup Properties 1991 Directors Stock Option Plan, As
Amended (incorporated by reference to Exhibit B of the
Registrant's proxy statement dated April 26, 1994).*
(c) Form of Change in Control Agreement that Registrant has entered
into with certain executive officers (Leland R. Speed, David H.
Hoster II and N. Keith McKey)(incorporated by reference to the
Registrant's 1996 Annual Report on Form 10-K).*
(d) Form of Change in Control Agreement that Registrant has
entered into with certain executive officers (Jann W. Puckett)
(incorporated by reference to the Registrant's 1996 Annual
Report on Form 10-K).*
(e) Purchase Agreement for Jacksonville and New Orleans
Properties (incorporated by reference to Exhibit 10(a) to the
Registrant's Current Report on Form 8-K dated September 24,
1997).
(f) Investment Agreement dated as of September 25, 1998 between
the Company and Five Arrows Realty Securities II, L.L.C.
(incorporated by reference to the Company's Form 8-K filed
October 1, 1998).
(g) Operating Agreement dated September 25, 1998 between the
Company and Five Arrows Realty Securities II, L.L.C.
(incorporated by reference to the Company's Form 8-K filed
October 1, 1998).
(h) Agreement and Waiver between the Company and Five Arrows Realty
Securities II, L.L.C. (incorporated by reference to the
Company's Form 8-K filed October 1, 1998).
(i) Credit Agreement dated January 13, 1999 among EastGroup
Properties, L.P.; EastGroup Properties, Inc.; Chase Bank of
Texas, National Association, as Arranger, Book Manager and
Administrative Agent; First Union National Bank, as Syndication
Agent; PNC Bank, National Association, as Documentation Agent;
First American National Bank, operating as Deposit Guaranty
National Bank, as Co-Agent; and the Lenders (incorporated
by reference to the Registrant's Form 10-K for the year
ended December 31, 1998).
(21) Subsidiaries of Registrant (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(27) Financial Data Schedule (filed herewith).
(28) Agreement of Registrant to furnish the Commission with copies
of instruments defining the rights of holders of long-term
debt (incorporated by reference to Exhibit 28(e) of the
Registrant's 1986 Annual Report on Form 10-K).
(99) Rights Agreement dated as of December 3, 1998 between the
Company and Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to the Company's Form 8-A filed
December 9, 1998).
(b) None
*Indicates management or compensatory agreement.