FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2001 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
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 ( )
The number of shares of common stock, $.0001 par value, outstanding as of
August 10, 2001 was 15,880,777.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 2001
Pages
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated balance sheets, June 30, 2001 (unaudited)
and December 31, 2000 3
Consolidated statements of income for the three and six
months ended June 30, 2001 and 2000 (unaudited) 4
Consolidated statement of changes in stockholders' equity
for the six months ended June 30, 2001 (unaudited) 5
Consolidated statements of cash flows for the six months
ended June 30, 2001 and 2000 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
SIGNATURES
Authorized signatures 19
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
June 30, 2001 December 31, 2000
------------------------ -------------------------
(Unaudited)
ASSETS
Real estate properties:
Industrial $ 667,623 630,860
Industrial development 38,995 37,193
Other 7,069 -
------------------------ ------------------------
713,687 668,053
Less accumulated depreciation (79,486) (66,492)
------------------------ ------------------------
634,201 601,561
------------------------ ------------------------
Real estate held for sale 3,587 26,602
Less accumulated depreciation (310) (3,628)
------------------------ ------------------------
3,277 22,974
------------------------ ------------------------
Mortgage loans 5,120 9,191
Investment in real estate investment trusts 8,189 8,068
Cash 2,027 2,861
Other assets 24,349 21,550
------------------------ ------------------------
TOTAL ASSETS $ 677,163 666,205
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 207,466 168,709
Notes payable to banks 74,811 102,000
Accounts payable & accrued expenses 13,435 13,792
Other liabilities 5,102 4,615
------------------------ ------------------------
300,814 289,116
------------------------ ------------------------
Minority interest in joint ventures 1,717 1,697
------------------------ ------------------------
1,717 1,697
------------------------ ------------------------
STOCKHOLDERS' EQUITY
Series A 9.00% Cumulative Redeemable Preferred
Shares and additional paid-in capital; $.0001 par value;
1,725,000 shares 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 and issued; stated
liquidation preference of $70,000 67,178 67,178
Series C Preferred Shares; $.0001 par value; 600,000
shares authorized; no shares issued - -
Common shares; $.0001 par value; 64,875,000
shares authorized; 15,878,777 shares issued at
June 30, 2001 and 15,849,318 at December 31, 2000 2 2
Excess shares; $.0001 par value; 30,000,000 shares
authorized; no shares issued - -
Additional paid-in capital on common shares 239,500 238,910
Undistributed earnings 26,862 28,185
Accumulated other comprehensive income 2,882 3,104
Unearned compensation (3,149) (3,344)
----------------------- ------------------------
374,632 375,392
----------------------- ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 677,163 666,205
======================= ========================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
2001 2000 2001 2000
---------------------------- --------------------------
REVENUES
Income from real estate operations $ 24,862 23,053 49,307 45,035
Interest:
Mortgage loans 135 185 244 383
Other interest 466 76 486 103
Gain on sale of securities 706 - 706 555
Other 188 292 388 671
---------------------------- -------------------------
26,357 23,606 51,131 46,747
---------------------------- -------------------------
EXPENSES
Operating expenses from real estate operations 6,079 5,325 12,099 10,521
Interest 4,623 4,585 9,132 8,719
Depreciation and amortization 6,676 5,911 12,920 11,440
General and administrative 1,179 1,269 2,282 2,488
Minority interest in joint ventures 89 121 174 220
---------------------------- -------------------------
18,646 17,211 36,607 33,388
---------------------------- -------------------------
INCOME BEFORE GAIN ON
REAL ESTATE INVESTMENTS 7,711 6,395 14,524 13,359
Gain on real estate investments 3,455 620 3,455 621
---------------------------- -------------------------
NET INCOME 11,166 7,015 17,979 13,980
Preferred dividends-Series A 970 970 1,940 1,940
Preferred dividends-Series B 1,532 1,532 3,064 3,064
---------------------------- -------------------------
NET INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ 8,664 4,513 12,975 8,976
============================ =========================
BASIC PER SHARE DATA
Net income available to common stockholders $ 0.55 0.29 0.83 0.58
============================ =========================
Weighted average shares outstanding 15,692 15,624 15,682 15,597
============================ =========================
DILUTED PER SHARE DATA
Net income available to common stockholders $ 0.53 0.29 0.81 0.57
============================ =========================
Weighted average shares outstanding 19,208 15,785 16,028 15,760
============================ =========================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
Accumulated
Additional Other
Preferred Common Paid-In Unearned Undistributed Comprehensive
Stock Stock Capital Compensation Earnings Income Total
---------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 108,535 2 238,910 (3,344) 28,185 3,104 375,392
Comprehensive income
Net income - - - - 17,979 - 17,979
Net unrealized change in investment
securities - - - - - (222) (222)
----------
Total comprehensive income 17,757
----------
Cash dividends declared-common, $.90/share - - - - (14,298) - (14,298)
Preferred stock dividends declared - - - - (5,004) - (5,004)
Issuance of 8,204 shares of common stock,
incentive compensation - - 179 - - - 179
Issuance of 7,830 shares of common stock,
dividend reinvestment plan - - 179 - - - 179
Issuance of 13,925 shares of common stock,
exercise options - - 242 - - - 242
Forfeiture of 500 shares of common stock,
incentive restricted stock - - (10) 10 - - -
Amortization of unearned compensation,
incentive restricted stock - - - 185 - - 185
--------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 $ 108,535 2 239,500 (3,149) 26,862 2,882 374,632
======================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
------------------------------------------
2001 2000
------------------------------------------
OPERATING ACTIVITIES:
Net income $ 17,979 13,980
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 12,920 11,440
Gain on real estate investments, net (3,455) (621)
Gain on real estate investment trust shares (706) (555)
Amortization of unearned compensation 185 -
Minority interest depreciation and amortization (81) (78)
Changes in operating assets and liabilities:
Accrued income and other assets (1,478) (511)
Accounts payable, accrued expenses and prepaid rent 729 2,100
-----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,093 25,755
-----------------------------------------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable 4,990 2,158
Advances on mortgage loans receivable (919) (494)
Proceeds from sale of real estate investments 7,832 2,642
Real estate improvements (3,011) (6,046)
Real estate development (16,262) (18,242)
Purchases of real estate (10,148) (7,347)
Purchases of real estate investment trust shares (2,930) -
Proceeds from sale of real estate investment trust shares 3,293 5,826
Changes in other assets and other liabilities (1,984) (1,970)
-----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (19,139) (23,473)
-----------------------------------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 68,824 92,849
Principal payments on bank borrowings (96,013) (76,002)
Proceeds from mortgage notes payable 45,000 11,500
Principal payments on mortgage notes payable (5,865) (10,286)
Debt issuance costs (472) (76)
Distributions paid to stockholders (19,125) (16,872)
Purchase of limited partnership units - (335)
Purchases of shares of common stock - (430)
Proceeds from exercise of stock options 242 1,161
Proceeds from dividend reinvestment plan 179 145
Other (558) (2,903)
-----------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (7,788) (1,249)
-----------------------------------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (834) 1,033
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,861 2,657
-----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,027 3,690
=========================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 8,583 8,555
Debt assumed by buyer of real estate 378 -
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In management's opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The financial statements should be read in conjunction with the 2000
annual report and the notes thereto.
(2) SUBSEQUENT EVENTS
EastGroup is currently under contract to sell West Palm I (14,000 square
feet) in West Palm Beach, Florida for approximately $1.5 million. This
transaction is expected to generate a small gain for financial reporting
purposes.
EastGroup is also under contract to purchase Southpark Industrial (70,000
square feet) in Chandler, Arizona for approximately $3.7 million and four
parcels of land (28 acres) in Florida and Mississippi for approximately $4.4
million. A portion of the land purchases will be funded with Section 1031 tax
deferred cash escrows.
(3) 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. At June 30, 2001, the Company had two
industrial properties and one parcel of land held for sale. There can be no
assurances that such properties will be sold.
(4) COMPREHENSIVE INCOME
The Company applies Statement of Financial Accounting Standards (SFAS) No.
130 which requires the disclosure of comprehensive income. The Company's
comprehensive income includes, in addition to net income, other income
consisting of unrealized gains and losses on the Company's investment in real
estate investment (REIT) shares, which is recorded directly into a separate
section of stockholders' equity on the balance sheet.
(In thousands)
----------------
Other comprehensive income:
Unrealized holding gains during the period $ 484
Less reclassification adjustment for gains included in net income (706)
----------------
Net unrealized change in investment securities $ (222)
================
(5) EARNINGS PER SHARE
The Company applies SFAS No. 128 "Earnings Per Share", which requires
companies to present basic earnings per share (EPS) and diluted EPS.
Basic EPS represents the amount of earnings for the period 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
stockholders by the weighted average number of common shares outstanding.
Diluted EPS represents the amount of earnings for the period 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
stockholders plus dividends on dilutive convertible preferred shares and limited
partnership (LP) distributions 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, nonvested restricted stock
and convertible preferred stock, had the options or conversions been exercised.
Reconciliation of the numerators and denominators in the basic and diluted EPS
computations is as follows:
Reconciliation of Numerators and Denominators
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------
2001 2000 2001 2000
-----------------------------------------------
(In thousands)
Basic EPS Computation
Numerator-net income available to common stockholders $ 8,664 4,513 12,975 8,976
Denominator-weighted average shares outstanding 15,692 15,624 15,682 15,597
Diluted EPS Computation
Numerator-net income available to common stockholders
plus convertible preferred stock dividends ($1,532 for the
three months ended June 30, 2001) and limited partnership
distributions ($6 and $18 for the three months and six
months ended June 30, 2000) $ 10,196 4,519 12,975 8,994
Denominator:
Weighted average shares outstanding 15,692 15,624 15,682 15,597
Common stock options 153 143 165 138
Nonvested restricted stock 181 - 181 -
Limited partnership units - 18 - 25
Convertible preferred stock 3,182 - - -
-----------------------------------------------
Total Shares 19,208 15,785 16,028 15,760
===============================================
The Series B Preferred Stock, which is convertible into common stock at a
conversion price of $22.00 per share, was not included in the computation of
diluted earnings per share for the quarter ended June 30, 2000 and the six
months ended June 30, 2001 and 2000 due to its antidilutive effect.
(6) BUSINESS SEGMENTS
The Company's reportable segments consist of industrial properties and an
"other" category that includes office buildings 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 sales of
depreciable real estate property, plus real estate related depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that FFO is an appropriate measure to evaluate
the Company's performance and also uses FFO as a comparative measure to other
equity real estate investment trusts. 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) or 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. The table below presents on a
comparative basis for the three months and six months ended June 30, 2001 and
2000 reported PNOI by operating segment, followed by reconciliations of PNOI to
FFO and FFO to net income.
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ------------- --------------- --------------
2001 2000 2001 2000
---------------- ------------- --------------- --------------
(In thousands)
PROPERTY REVENUES:
Industrial $ 24,497 22,115 48,583 43,169
Other 365 938 724 1,866
---------------- ------------- --------------- --------------
24,862 23,053 49,307 45,035
---------------- ------------- --------------- --------------
PROPERTY EXPENSES:
Industrial (5,974) (4,984) (11,890) (9,869)
Other (105) (341) (209) (652)
---------------- ------------- --------------- --------------
(6,079) (5,325) (12,099) (10,521)
---------------- ------------- --------------- --------------
PROPERTY NET OPERATING INCOME:
Industrial 18,523 17,131 36,693 33,300
Other 260 597 515 1,214
---------------- ------------- --------------- --------------
TOTAL PROPERTY NET OPERATING INCOME 18,783 17,728 37,208 34,514
---------------- ------------- --------------- --------------
Gain on securities 706 - 706 555
Gain on nondepreciable real estate investments - 620 - 620
Other income 789 553 1,118 1,157
Interest expense (4,623) (4,585) (9,132) (8,719)
General and administrative expense (1,179) (1,269) (2,282) (2,488)
Minority interest in earnings (130) (160) (255) (298)
Dividends on Series A preferred shares (970) (970) (1,940) (1,940)
Limited partnership unit distributions - 6 - 18
---------------- ------------- --------------- --------------
FUNDS FROM OPERATIONS 13,376 11,923 25,423 23,419
Depreciation and amortization (6,676) (5,911) (12,920) (11,440)
Share of joint venture depreciation and amortization 41 39 81 78
Gain on depreciable real estate investments 3,455 - 3,455 1
Limited partnership unit distributions - (6) - (18)
Dividends on Series B convertible preferred shares (1,532) (1,532) (3,064) (3,064)
---------------- ------------- --------------- --------------
NET INCOME AVAILABLE TO
COMMON STOCKHOLDERS 8,664 4,513 12,975 8,976
Dividends on preferred shares 2,502 2,502 5,004 5,004
---------------- ------------- --------------- --------------
NET INCOME $ 11,166 7,015 17,979 13,980
================ ============= =============== ==============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
(Comments are for the balance sheet dated June 30, 2001 compared to December 31,
2000.)
Assets of EastGroup were $677,163,000 at June 30, 2001, an increase of
$10,958,000 from December 31, 2000. Liabilities (excluding minority interests)
increased $11,698,000 to $300,814,000 and stockholders' equity decreased
$760,000 to $374,632,000 during the same period. Book value per common share
decreased from $16.55 at December 31, 2000 to $16.47 at June 30, 2001. The
paragraphs that follow explain these changes in greater detail.
Industrial properties increased $36,763,000 during the six months ended
June 30, 2001. This increase was primarily due to the acquisition of two
industrial properties and the remaining 20% minority interest in Wiegman
Associates for a total of $10,148,000, as detailed below; the transfer of four
properties from development with total costs of $14,445,000; the transfer of two
properties from the category "held for sale" with total costs of $13,519,000 and
capital improvements of $2,988,000 made on existing and acquired properties.
These increases were offset by the transfer of three properties to the category
"held for sale" with costs of $4,220,000.
Industrial Properties Acquired Cost
in 2001 Location Size Date Acquired (In thousands)
- ---------------------------------- ------------------------- ----------------- ----------------- -------------------
World Houston 10 Houston, Texas 107,000 sq. ft. 01-04-01 $5,712
North Stemmons Dallas, Texas 123,000 sq. ft. 03-15-01 3,883
Wiegman Associates (20% Interest) Hayward, California 262,000 sq. ft. 05-30-01 553
-------------------
Total Industrial Acquisitions $10,148
===================
Industrial development increased $1,802,000 during the six months ended
June 30, 2001. This increase resulted from year-to-date development costs of
$16,247,000 on existing and completed development properties, offset by
development properties transferred to industrial properties with costs of
$14,445,000, as detailed below.
Industrial Development
Costs Incurred
---------------------------------------
Size at For the 6 Months Cumulative as Estimated
Completion Ended 6/30/01 of 6/30/01 Total Costs (1)
- ----------------------------------------- ----------------- ---------------------------------------------------------
(Square feet) (In thousands)
Lease-Up:
Palm River North I & III
Tampa, Florida 116,000 $ 542 5,470 6,290
Westlake II
Tampa, Florida 70,000 64 3,407 4,270
Beach Commerce Center
Jacksonville, Florida 46,000 284 2,313 2,800
Interstate Commons II
Phoenix, Arizona 59,000 475 2,684 2,900
Kyrene II
Tempe, Arizona 60,000 1,108 2,917 3,710
Walden Distribution Center I
Tampa, Florida 90,000 2,810 3,589 4,240
Techway Southwest I
Houston, Texas 126,000 1,832 3,720 5,040
----------------- --------------------- ----------------- -----------------
Total Lease-up 567,000 7,115 24,100 29,250
----------------- --------------------- ----------------- -----------------
Under Construction:
World Houston XIV
Houston, Texas 77,000 482 482 3,575
Americas 10 Business Center I
El Paso, Texas 97,000 695 695 3,320
Sunport Center III
Orlando, Florida 66,000 844 844 4,000
World Houston XIII
Houston, Texas 51,000 285 285 2,795
----------------- --------------------- ----------------- -----------------
Total Under Construction 291,000 2,306 2,306 13,690
----------------- --------------------- ----------------- -----------------
Prospective Development(Principally Land):
Phoenix, Arizona 104,000 905 1,142 5,700
Tucson, Arizona 70,000 17 316 3,500
Tampa, Florida 230,000 218 2,053 9,200
Orlando, Florida 248,000 778 2,502 14,900
El Paso, Texas 251,000 1,417 1,417 7,580
Houston, Texas 989,000 (433) 5,159 38,930
----------------- --------------------- ----------------- -----------------
Total Prospective Development 1,892,000 2,902 12,589 79,810
----------------- --------------------- ----------------- -----------------
2,750,000 $ 12,323 38,995 122,750
================= ===================== ================= =================
Completed Development and
Transferred to Industrial
Properties During the Six
Months Ended June 30, 2001:
Sunport Center II
Orlando, Florida 60,000 $ 3,106 3,868
World Houston XI
Houston, Texas 129,000 681 4,402
Glenmont II
Houston, Texas 104,000 233 3,149
Sunport Center I
Orlando, Florida 56,000 (96) 3,026
----------------- --------------------- -----------------
Total Transferred to Industrial 349,000 $ 3,924 14,445
================= ===================== =================
(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 or other natural occurrence,
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 increased by $7,069,000 as a result of the
transfer of an office building from the category "held for sale."
Real estate held for sale decreased $23,015,000 primarily due to the
transfer of three properties from held for sale to real estate properties with
total costs of $20,588,000 and the sale of three properties with total costs of
$6,685,000. These decreases were offset by the transfer of three properties from
the portfolio to real estate held for sale with total costs of $4,220,000.
Accumulated depreciation on real estate properties and real estate held for
sale increased $9,676,000 due to depreciation expense of $11,718,000, offset by
the sale of three properties with total accumulated depreciation of $2,042,000.
Mortgage loans receivable decreased $4,071,000 during the first six months
of 2001 as a result of repayments of $4,990,000 that included the payoff of the
World Houston 10 loan, offset by advances of $919,000.
Investments in real estate investment trusts (REITs) increased from
$8,068,000 at December 31, 2000 to $8,189,000 at June 30, 2001, primarily as a
result of the purchase of real estate investment trust shares for $2,930,000,
offset by the sale of REIT shares with a cost basis of $2,587,000. These amounts
were further offset by unrealized holding losses of $222,000.
Other assets increased $2,799,000 during the six months ended June 30, 2001
compared to December 31, 2000 primarily as a result of net increases in
receivables, unamortized leasing commissions and loan costs, and other prepaid
assets. These increases were offset by a net decrease in cash escrows for
Section 1031 tax deferred exchange transactions.
Mortgage notes payable increased $38,757,000 during the six months ended
June 30, 2001 primarily as a result of the closing of the Company's new
$45,000,000 nonrecourse mortgage loan on April 6, 2001. This note has an
interest rate of 7.25%, a 25-year amortization and a 10-year maturity and is
secured by eight properties in Dallas, Houston and El Paso. The proceeds of this
note were used to pay down existing bank debt. This increase was offset by the
payoff of the Northwest Point mortgage loan of $3,829,000 in March, regularly
scheduled principal payments of $2,036,000 and the assumption of bonds payable
of $378,000 by the buyer of Nobel Business Center.
Notes payable to banks decreased $27,189,000 as a result of borrowings of
$68,824,000 offset by payments of $96,013,000. Bank debt was paid down with
funds from the Company's new $45 million nonrecourse mortgage loan as discussed
above. The Company's credit facilities are described in greater detail under
Liquidity and Capital Resources.
Accumulated other comprehensive income decreased $222,000 as a result of
unrealized holding gains of $484,000 recorded in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," offset by
realized gains of $706,000 on REIT shares.
Unearned compensation on the incentive restricted stock compensation plan
decreased $195,000 for the six months ended June 30, 2001 as a result of
amortization expense of $185,000 and plan forfeitures of $10,000.
Undistributed earnings decreased from $28,185,000 at December 31, 2000 to
$26,862,000 at June 30, 2001 as a result of dividends on common and preferred
stock of $19,302,000 exceeding net income for financial reporting purposes of
$17,979,000.
Results of Operations
(Comments are for the three months and six months ended June 30, 2001 compared
to the three months and six months ended June 30, 2000.)
Net income available to common stockholders for the three months and six
months ended June 30, 2001 was $8,664,000 ($.55 per basic share and $.53 per
diluted share) and $12,975,000 ($.83 per basic share and $.81 per diluted
share), compared to net income available to common stockholders for the three
months and six months ended June 30, 2000 of $4,513,000 ($.29 per basic and
diluted share) and $8,976,000 ($.58 per basic share and $.57 per diluted share).
Income before gain on real estate investments was $7,711,000 and $14,524,000 for
the three months and six months ended June 30, 2001, compared to $6,395,000 and
$13,359,000 for the three months and six months ended June 30, 2000. Gain on
real estate investments was $3,455,000 for the three months and six months ended
June 30, 2001, compared to $620,000 and $621,000 for the three months and six
months ended June 30, 2000. 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 $1,055,000 or 6.0% for the
three months ended June 30, 2001 compared to the three months ended June 30,
2000. For the six months ended June 30, 2001, PNOI increased by $2,694,000 or
7.8% compared to the six months ended June 30, 2000. PNOI by property type and
percentage leased for industrial were as follows:
Property Net Operating Income
Three Months Ended Six Months Ended Percent
June 30, June 30, Leased
------------- ------------ ----------- ------------- ----------- ----------
2001 2000 2001 2000 6-30-01 6-30-00
------------- ------------ ----------- ------------- ----------- ----------
(In thousands)
Industrial $ 18,523 17,131 36,693 33,300 94.6% 97.3%
Other 260 597 515 1,214
------------- ------------ ----------- -------------
Total PNOI $ 18,783 17,728 37,208 34,514
============= ============ =========== =============
PNOI from industrial properties increased $1,392,000 and $3,393,000 for the
three months and six months ended June 30, 2001, compared to June 30, 2000,
primarily due to acquisitions, rental rate increases and development properties
that achieved stabilized operations in 2001 and 2000. PNOI from industrial
properties held throughout the three months and six months ended June 30, 2001
compared to the same periods in 2000 was basically flat for both periods in 2001
due primarily to increased vacancy levels.
PNOI from other properties decreased $337,000 and $699,000 for the three
months and six months ended June 30, 2001 compared to June 30, 2000. These
decreases were primarily the result of the sale of the La Vista Crossing
Apartments in December 2000.
Other interest income increased $390,000 and $383,000 for the three months
and six months ended June 30, 2001 compared to June 30, 2000. These increases
were primarily the result of interest received from the final accounting of an
escrow account established for the redemption of shares in the Company's 1998
acquisition of Meridian Point Realty Trust VIII.
Gain on sale of securities increased $706,000 and $151,000 for the three
months and six months ended June 30, 2001, compared to June 30, 2000 as a result
of gains of $706,000 realized on the sale of REIT shares and on liquidating
distributions from Pacific Gulf Properties (PAG) in 2001 compared to gains of
$555,000 on liquidating distributions from Franklin Select Realty Trust in 2000.
Bank interest expense (excluding amortization of loan costs) decreased
$908,000 from $2,126,000 for the three months ended June 30, 2000 to $1,218,000
for the same three months in 2001. Bank interest expense (excluding amortization
of loan costs) decreased $852,000 from $3,945,000 for the six months ended June
30, 2000 to $3,093,000 for the six months ended June 30, 2001. Amortization of
loan costs was $66,000 and $132,000 for both of the three months and six months
ended June 30, 2001 and 2000. Average bank borrowings were $78,035,000 and
$91,904,000 for the three months and six months ended June 30, 2001 compared to
$106,045,000 and $102,349,000 for the same periods of 2000. Average bank
interest rates were 6.25% and 6.71% for the three months and six months ended
June 30, 2001 compared to 8.02% and 7.71% for the same periods of 2000. 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 the three months and six months ended
June 30, 2001 were $609,000 and $1,284,000 compared to $388,000 and $1,032,000
for the three months and six months ended June 30, 2000.
Interest expense on real estate properties (excluding amortization of loan
costs) increased $1,152,000 from $2,754,000 for the three months ended June 30,
2000 to $3,906,000 for the three months ended June 30, 2001. Interest expense
(excluding amortization of loan costs) increased $1,493,000 from $5,613,000 for
the six months ended June 30, 2000 to $7,106,000 for the six months ended June
30, 2001. Amortization of loan costs was $42,000 and $85,000 for the three
months and six months ended June 30, 2001 and $27,000 and $61,000 for the three
months and six months ended June 30, 2000. These increases were primarily the
result of the issuance of two mortgage loans in 2000 and one mortgage loan in
2001, offset by the payoff of several smaller loans in 2000 and 2001.
Depreciation and amortization increased $765,000 and $1,480,000 for the
three months and six months ended June 30, 2001 compared to 2000. This increase
was primarily due to the industrial properties acquired and development
properties that achieved stabilized operations in both 2000 and 2001. These
increases were offset by the sales of several properties in 2000 and 2001 and
the transfer of several properties to real estate held for sale (depreciation
not taken on those properties held in the category "real estate held for sale").
A summary of gains on real estate investments for the six months ended June
30, 2001 and 2000 is detailed below.
Gains on Real Estate Investments
Net Recognized
Basis Sales Price Gain
------------------------------------------------------
(In thousands)
2001
Real estate properties:
Nobel Business Center $ 2,113 5,250 3,137
West Palm II 1,274 1,350 76
109th Street Distribution Center 990 1,232 242
------------------------------------------------------
$ 4,377 7,832 3,455
======================================================
2000
Real estate properties:
LeTourneau Center of Commerce $ 1,592 1,593 1
Estelle land 429 1,049 620
------------------------------------------------------
$ 2,021 2,642 621
======================================================
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-line rent for the three
months and six months ended June 30, 2001 was $442,000 and $966,000 compared to
$343,000 and $766,000 for the same periods in 2000. Capital expenditures for the
six months ended June 30, 2001 (by category) and for the six months ended June
30, 2000 are as follows:
Capital Expenditures
2001
---------------------------------------------
2000
Industrial Other Total Total
---------------- ----------- -------------- ----------
(In thousands)
Upgrade on Acquisitions $ 438 - 438 2,814
Tenant improvements:
New Tenants 1,089 - 1,089 1,204
New Tenants (first generation) 46 - 46 521
Renewal Tenants 358 - 358 487
Other 1,048 32 1,080 1,020
---------------- ----------- -------------- ----------
Total capital expenditures $ 2,979 32 3,011 6,046
================ =========== ============== ==========
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 six
months ended June 30, 2001 (by category) and for the six months ended June 30,
2000 is as follows:
Capitalized Leasing Costs
2001
------------------------------------------------------------
Industrial 2000
Industrial Other Development Total Total
------------- ------------- ---------------- --------------- -----------
(In thousands)
Capitalized leasing costs:
New Tenants $ 478 - - 478 287
New Tenants (first generation) (39) - 711 672 1,350
Renewal Tenants 584 38 - 622 563
------------- ------------- ---------------- --------------- -----------
Total capitalized leasing costs $ 1,023 38 711 1,772 2,200
============= ============= ================ =============== ===========
Amortization of leasing costs $ 1,172 989
=============== ===========
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $26,093,000 for the six
months ended June 30, 2001. Other sources of cash were primarily from bank
borrowings, proceeds from mortgage notes payable, sales of real estate
investments, collections on mortgage loans receivable and liquidation of real
estate investment trust shares. The Company distributed $14,121,000 in common
and $5,004,000 in preferred stock dividends. Other primary uses of cash were for
bank debt payments, construction and development of properties, purchases of
real estate investments, mortgage note payments, capital improvements at the
various properties, purchase of REIT shares and advances on mortgage loans
receivable. Total debt at June 30, 2001 and 2000 was as follows:
As of June 30,
----------------------------------
2001 2000
---------------- -----------------
(In thousands)
Mortgage notes payable - fixed rate $ 207,466 149,879
Bank notes payable - floating rate 74,811 111,847
---------------- -----------------
Total debt $ 282,277 261,726
================ =================
The Company has a three-year $150,000,000 unsecured revolving credit
facility with a group of ten banks that matures in January 2002. The interest
rate is based on the Eurodollar rate plus 1.25% and was 5.25% on $47,000,000 and
6.75% on $25,000,000 at June 30, 2001. An unused facility fee of .25% is also
assessed on this note.
The Company has a one-year $10,000,000 unsecured revolving credit facility
with Chase Bank of Texas that matures in January 2002. The interest rate is
based on Chase Bank of Texas, National Association's prime rate less .75% and
was 6.00% on $2,811,000 at June 30, 2001.
The Company has 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 negotiated at the time of any advances. At June 30, 2001, the outstanding
balance for this loan was zero.
EastGroup's Board of Directors has authorized the repurchase of up to
1,500,000 shares of its outstanding common stock. The shares may be purchased
from time to time in the open market or in privately negotiated transactions.
The Company did not repurchase any shares during the six months ended June 30,
2001. Since September 30, 1998, a total of 827,700 shares have been repurchased
for $14,170,000 (an average of $17.12 per share) with 672,300 shares still
available for repurchase.
On June 20, 2000, Pacific Gulf Properties announced that it entered into an
agreement to sell all of its industrial properties and to market its
multi-family assets with the disposition of its senior housing assets to be
determined at a future date. EastGroup owns 487,100 shares of PAG. In December
2000, upon receipt of the initial liquidating distribution of $22.00 per PAG
share, the Company reduced its basis in PAG shares to zero and recorded a gain
of $807,000. During second quarter 2001, the Company received additional
liquidating distributions of $1.15 per PAG share and recorded a gain of
$560,000.
The Company anticipates that its current cash balance, operating cash
flows, and borrowings under its lines 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 stock repurchases.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate changes primarily as a result of
its lines 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 several variable
rate bank lines as discussed under Liquidity and Capital Resources. The table
below presents the principal payments due and weighted average interest rates
for both the fixed rate and variable rate debt.
Jul-Dec
2001 2002 2003 2004 2005 Thereafter Total Fair Value
----------- ---------- ------- -------- --------- ------------ ---------- -----------
Fixed rate debt (in thousands) $ 2,433 13,126 8,975 9,775 23,596 149,561 207,466 211,908
Weighted average interest rate 7.71% 7.57% 8.23% 8.12% 8.06% 7.48% 7.61%
Variable rate debt (in thousands) - 74,811 - - - - 74,811 74,811
Weighted average interest rate - 5.78% - - - - 5.78%
As the table above incorporates only those exposures that exist as of June
30, 2001, it does not consider those exposures or positions that could arise
after that date. 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. If the weighted average interest rate on the variable rate bank
debt as shown above changes by 10% or approximately 58 basis points, interest
expense and cash flows would increase or decrease by approximately $434,000
annually.
Forward Looking Statements
In addition to historical information, certain sections of this Form 10-Q
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 and the costs of insurance to
protect from such 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-Q. 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.
EASTGROUP PROPERTIES, INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 4, 2001, the Registrant held its Annual Meeting of Shareholders. At
the Annual Meeting, D. Pike Aloian, Alexander G. Anagnos, H.C. Bailey, Jr.,
Fredric H. Gould, David H. Hoster II, David M. Osnos, John N. Palmer and Leland
R. Speed were elected directors of the Registrant, each to serve until the 2002
Annual Meeting. The following is a summary of the voting for directors:
Vote
Nominee Vote For Withheld
-------------------- -------------- ---------------
D. Pike Aloian 17,303,119 57,035
Alexander G. Anagnos 17,290,335 69,819
H.C. Bailey, Jr. 17,302,969 57,185
Fredric H. Gould 17,304,076 56,078
David H. Hoster II 16,359,328 1,000,826
David M. Osnos 17,251,647 108,507
John N. Palmer 17,297,428 62,726
Leland R. Speed 16,718,296 641,858
SIGNATURES
Pursuant to the requirements 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.
DATED: August 13, 2001
EASTGROUP PROPERTIES, INC.
/s/ BRUCE CORKERN
Bruce Corkern, CPA
Senior Vice President and Controller
/s/ N. KEITH MCKEY
N. Keith McKey, CPA
Executive Vice President, Chief
Financial Officer and Secretary