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, 2002 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 39201-2195 (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 9, 2002 was 16,088,083. EASTGROUP PROPERTIES, INC. FORM 10-Q TABLE OF CONTENTS FOR THE QUARTER ENDED JUNE 30, 2002 Pages PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated balance sheets, June 30, 2002 (unaudited) and December 31, 2001 3 Consolidated statements of income for the three and six months ended June 30, 2002 and 2001 (unaudited) 4 Consolidated statement of changes in stockholders' equity for the six months ended June 30, 2002 (unaudited) 5 Consolidated statements of cash flows for the six months ended June 30, 2002 and 2001 (unaudited) 6 Notes to consolidated financial statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 19 SIGNATURES Authorized signatures 20 EASTGROUP PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) June 30, 2002 December 31, 2001 ---------------------------------------------------- (Unaudited) ASSETS Real estate properties $ 719,377 696,829 Development 39,434 37,504 ---------------------------------------------------- 758,811 734,333 Less accumulated depreciation (104,966) (92,060) ---------------------------------------------------- 653,845 642,273 ---------------------------------------------------- Real estate held for sale 2,795 1,907 Less accumulated depreciation (230) (141) ---------------------------------------------------- 2,565 1,766 ---------------------------------------------------- Mortgage loans 5,515 5,515 Investment in real estate investment trusts 487 6,452 Cash 1,408 1,767 Other assets 23,775 26,009 ---------------------------------------------------- TOTAL ASSETS $ 687,595 683,782 ==================================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Mortgage notes payable $ 202,623 205,014 Notes payable to banks 96,525 86,058 Accounts payable & accrued expenses 14,645 12,801 Other liabilities 6,181 7,460 ---------------------------------------------------- 319,974 311,333 ---------------------------------------------------- Minority interest in joint ventures 1,745 1,739 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; 16,087,333 shares issued at June 30, 2002 and 15,912,060 at December 31, 2001 2 2 Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares issued - - Additional paid-in capital on common shares 243,153 240,197 Undistributed earnings 16,657 23,753 Accumulated other comprehensive income 487 1,193 Unearned compensation (2,958) (2,970) ---------------------------------------------------- 365,876 370,710 ---------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 687,595 683,782 ==================================================== See accompanying notes to consolidated financial statements. EASTGROUP PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------------------- 2002 2001 2002 2001 ---------------------------------------------------- REVENUES Income from real estate operations $ 25,094 24,819 49,983 49,214 Interest: Mortgage loans 127 135 250 244 Other interest 15 466 28 486 Gain on securities 1,050 706 1,471 706 Other 337 188 481 388 ---------------------------------------------------- 26,623 26,314 52,213 51,038 ---------------------------------------------------- EXPENSES Operating expenses from real estate operations 7,019 6,055 14,131 12,049 Interest 4,165 4,623 8,340 9,132 Depreciation and amortization 7,325 6,660 14,434 12,889 General and administrative 1,090 1,179 2,177 2,282 Minority interest in joint ventures 90 89 183 174 ---------------------------------------------------- 19,689 18,606 39,265 36,526 ---------------------------------------------------- INCOME BEFORE GAIN ON REAL ESTATE INVESTMENTS 6,934 7,708 12,948 14,512 Gain on real estate investments - 3,455 93 3,455 ---------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 6,934 11,163 13,041 17,967 Income (loss) from discontinued operations (6) 3 (3) 12 ---------------------------------------------------- NET INCOME 6,928 11,166 13,038 17,979 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 $ 4,426 8,664 8,034 12,975 ==================================================== BASIC PER COMMON SHARE DATA Income from continuing operations $ 0.28 0.55 0.51 0.83 Income (loss) from discontinued operations 0.00 0.00 0.00 0.00 ---------------------------------------------------- Net income available to common stockholders $ 0.28 0.55 0.51 0.83 ==================================================== Weighted average shares outstanding 15,892 15,692 15,833 15,682 ==================================================== DILUTED PER COMMON SHARE DATA Income from continuing operations $ 0.27 0.53 0.50 0.81 Income (loss) from discontinued operations 0.00 0.00 0.00 0.00 ---------------------------------------------------- Net income available to common stockholders $ 0.27 0.53 0.50 0.81 ==================================================== Weighted average shares outstanding 16,254 19,208 16,210 16,028 ==================================================== See accompanying notes to consolidated financial statements. EASTGROUP PROPERTIES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) Accumulated Additional Other Preferred Common Paid-In Unearned Undistributed Comprehensive Stock Stock Capital Compensation Earnings Income Total ----------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 $ 108,535 2 240,197 (2,970) 23,753 1,193 370,710 Comprehensive income Net income - - - - 13,038 - 13,038 Net unrealized change in investment securities - - - - - (706) (706) -------- Total comprehensive income 12,332 -------- Cash dividends declared-common, $.94 per share - - - - (15,130) - (15,130) Preferred stock dividends declared - - - - (5,004) - (5,004) Issuance of 6,822 shares of common stock, incentive compensation - - 151 - - - 151 Issuance of 7,182 shares of common stock, dividend reinvestment plan - - 184 - - - 184 Issuance of 152,569 shares of common stock, exercise options - - 2,390 - - - 2,390 Issuance of 17,950 shares of common stock, incentive restricted stock - - 420 (420) - - - Forfeiture of 9,250 shares of common stock, incentive restricted stock - - (189) 149 - - (40) Amortization of unearned compensation, incentive restricted stock - - - 283 - - 283 ----------------------------------------------------------------------------------- BALANCE, JUNE 30, 2002 $ 108,535 2 243,153 (2,958) 16,657 487 365,876 =================================================================================== See accompanying notes to consolidated financial statements. EASTGROUP PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Six Months Ended June 30, -------------------------------------------- 2002 2001 -------------------------------------------- OPERATING ACTIVITIES: Net income $ 13,038 17,979 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization from continuing operations 14,434 12,889 Depreciation and amortization from discontinued operations 35 31 Gain on real estate investments, net (93) (3,455) Gain on real estate investment trust shares (1,471) (706) Amortization of unearned compensation 243 185 Minority interest depreciation and amortization (93) (81) Changes in operating assets and liabilities: Accrued income and other assets 1,957 (1,478) Accounts payable, accrued expenses and prepaid rent 1,137 729 -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 29,187 26,093 -------------------------------------------- INVESTING ACTIVITIES: Payments on mortgage loans receivable - 4,990 Advances on mortgage loans receivable - (919) Proceeds from sale of real estate investments 1,111 7,832 Real estate improvements (3,381) (3,011) Real estate development (19,157) (16,262) Purchases of real estate (3,962) (10,148) Purchases of real estate investment trust shares - (2,930) Proceeds from sale of real estate investment trust shares 6,730 3,293 Changes in other assets and other liabilities 56 (1,984) -------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (18,603) (19,139) -------------------------------------------- FINANCING ACTIVITIES: Proceeds from bank borrowings 139,631 68,824 Principal payments on bank borrowings (129,164) (96,013) Proceeds from mortgage notes payable 8,200 45,000 Principal payments on mortgage notes payable (10,591) (5,865) Debt issuance costs (1,137) (472) Distributions paid to stockholders (19,928) (19,125) Proceeds from exercise of stock options 2,390 242 Proceeds from dividend reinvestment plan 184 179 Other (528) (558) -------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (10,943) (7,788) -------------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (359) (834) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,767 2,861 -------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,408 2,027 ============================================ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of amount capitalized $ 7,608 8,583 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 of EastGroup Properties, Inc. ("EastGroup" or "The Company") 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 2001 annual report and the notes thereto. (2) RECLASSIFICATIONS Certain reclassifications have been made in the 2001 financial statements to conform to the 2002 presentation. (3) NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 143, "Accounting for Asset Retirement Obligations," effective for financial statements issued for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company has evaluated the effect of adopting this statement and believes the effect of adoption will have no impact on its financial position or results of operation. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company plans to adopt this statement on January 1, 2003 and believes that the effect of adoption will have no significant impact on its overall financial condition or results of operations. (4) REAL ESTATE HELD FOR SALE The Company applies SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. 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, 2002, the Company had one industrial property and two parcels of land held for sale. There can be no assurances that such properties will be sold. In accordance with the guidelines established under SFAS No. 144, operations from the properties placed in the category "held for sale" subsequent to December 31, 2001 have been classified as income from discontinued operations for the three and six months ended June 30, 2002 and 2001. No interest expense was allocated to the properties that are held for sale. (5) GOODWILL The Company applies SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for by using the purchase method of accounting and addresses accounting for purchased goodwill and other intangibles. SFAS No. 142 addresses financial accounting and reporting for the impairment of goodwill and other intangibles and is effective for fiscal years beginning after December 15, 2001. The Company had no business combinations after June 30, 2001. At June 30, 2002 and December 31, 2001, the Company had unamortized goodwill of $990,000 resulting from the acquisition of Ensign Properties in 1998. Amortization of goodwill expense for 2001 was $61,000. Upon adoption of SFAS No. 142 on January 1, 2002, amortization of goodwill ceased. The Company periodically reviews the recoverability of goodwill for possible impairment and will continue to do so under the new statement. In management's opinion, no material impairment of goodwill existed at June 30, 2002. (6) OTHER ASSETS A summary of the Company's other assets follows: June 30, 2002 December 31, 2001 --------------------------------------- (In thousands) Leasing commissions, net of accumulated amortization $ 9,982 9,313 Receivables, net of allowance for doubtful accounts 6,607 8,473 Section 1031 tax deferred exchange cash escrows - 2,074 Prepaid expenses and other assets 7,186 6,149 ---------------------------------------- $ 23,775 26,009 ======================================== (7) COMPREHENSIVE INCOME Comprehensive income is comprised of net income plus all other changes in equity from nonowner sources. The components of comprehensive income for the six months ended June 30, 2002 are presented in the Company's Consolidated Statement of Changes in Stockholders' Equity. The unrealized change in investment securities is net of realized gains on real estate investment trust securities included in net income as shown below: (In thousands) ------------------ Other comprehensive income: Unrealized holding gains during the period $ 765 Less reclassification adjustment for gains included in net income (1,471) ------------------ Net unrealized change in investment securities $ (706) ================== (8) EARNINGS PER SHARE Basic earnings per share (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 reporting 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 dividing it by the weighted average number of common shares outstanding plus the dilutive effect of stock options related to outstanding employee stock options, nonvested restricted stock and convertible preferred stock, had the options or conversions been exercised. The dilutive effect of stock options and nonvested restricted stock 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. 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, --------------------------------------------- 2002 2001 2002 2001 --------------------------------------------- (In thousands) Basic EPS Computation Numerator-net income available to common stockholders $ 4,426 8,664 8,034 12,975 Denominator-weighted average shares outstanding 15,892 15,692 15,833 15,682 Diluted EPS Computation Numerator-net income available to common stockholders $ 4,426 10,196 8,034 12,975 plus convertible preferred stock dividends Denominator: Weighted average shares outstanding 15,892 15,692 15,833 15,682 Common stock options 175 153 192 165 Nonvested restricted stock 187 181 185 181 Convertible preferred stock - 3,182 - - --------------------------------------------- Total shares 16,254 19,208 16,210 16,028 ============================================= The Series B Preferred Stock, which is convertible into common stock at a conversion price of $22.00 per share, was included in the computation of diluted earnings per share for the three months ended June 30, 2001 due to its dilutive effect. (9) SEGMENT REPORTING The Company applies SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the reporting of information about operating segments in annual and interim financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. EastGroup has one reportable segment--industrial properties. These properties are concentrated in major Sunbelt regions of the United States, have similar economic characteristics and also meet the other criteria that permit the properties to be aggregated into one reportable segment. The Company's chief decision makers use two primary measures of operating results in making decisions, 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 FFO is an appropriate measure of performance for 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) 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 and six months ended June 30, 2002 and 2001 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, ------------------------------------------------ 2002 2001 2002 2001 ------------------------------------------------ (In thousands) Property Revenues: Industrial $24,704 24,449 49,175 48,473 Other 390 370 808 741 ------------------------------------------------ 25,094 24,819 49,983 49,214 ------------------------------------------------ Property Expenses: Industrial (6,884) (5,949) (13,848) (11,851) Other (135) (106) (283) (198) ------------------------------------------------ (7,019) (6,055) (14,131) (12,049) ------------------------------------------------ Property Net Operating Income: Industrial 17,820 18,500 35,327 36,622 Other 255 264 525 543 ------------------------------------------------ Total Property Net Operating Income 18,075 18,764 35,852 37,165 ------------------------------------------------ Income from discontinued operations (excluding depreciation) 13 19 32 43 Gain on securities 1,050 706 1,471 706 Other income 479 789 759 1,118 Interest expense (4,165) (4,623) (8,340) (9,132) General and administrative expense (1,090) (1,179) (2,177) (2,282) Minority interest in earnings (140) (130) (276) (255) Dividends on Series A preferred shares (970) (970) (1,940) (1,940) ------------------------------------------------ Funds From Operations 13,252 13,376 25,381 25,423 Depreciation and amortization from continuing operations (7,325) (6,660) (14,434) (12,889) Depreciation and amortization from discontinued operations (19) (16) (35) (31) Share of joint venture depreciation and amortization 50 41 93 81 Gain on depreciable real estate investments - 3,455 93 3,455 Dividends on Series B convertible preferred shares (1,532) (1,532) (3,064) (3,064) ------------------------------------------------ Net Income Available to Common Stockholders 4,426 8,664 8,034 12,975 Dividends on preferred shares 2,502 2,502 5,004 5,004 ------------------------------------------------ NET INCOME $ 6,928 11,166 13,038 17,979 ================================================ (10) SUBSEQUENT EVENTS In July 2002, the Company acquired Freeport Tech Center (188,000 square feet) in Houston, Texas for a price of $6,340,000. In 2000, EastGroup made a construction loan for the development of Freeport with a related option to purchase the property after completion. As part of EastGroup's purchase, the seller repaid the principal amount of $5,500,000 and all accrued interest on the outstanding mortgage loan receivable. 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, 2002 compared to December 31, 2001.) Assets of EastGroup were $687,595,000 at June 30, 2002, an increase of $3,813,000 from December 31, 2001. Liabilities (excluding minority interests) increased $8,641,000 to $319,974,000 and stockholders' equity decreased $4,834,000 to $365,876,000 during the same period. Book value per common share decreased from $16.19 at December 31, 2001 to $15.71 at June 30, 2002. The paragraphs that follow explain these changes in detail. Real estate properties increased $22,548,000 during the six months ended June 30, 2002. This increase was due to the acquisition of two properties for a total of $3,962,000; the transfer of five properties from development with total costs of $16,808,000 and capital improvements of $4,981,000 made on properties. These increases were partially offset by the transfer of one property to the category "held for sale" with costs of $2,022,000 and the transfer of land into development with costs of $1,181,000. During the six months ended June 30, 2002, another property was transferred to "held for sale;" however, this property was subsequently transferred back to the portfolio as a result of a change in plans by the Company due to market conditions. Upon the reclassification of this property, depreciation was adjusted to reflect the carrying amount of this property as if it had never been classified as "held for sale." Development increased $1,930,000 during the six months ended June 30, 2002. This increase resulted from year-to-date development costs of $17,557,000 on existing and completed development properties and the transfer of land from the portfolio to development with costs of $1,181,000, offset by development properties transferred to real estate properties with costs of $16,808,000, as detailed in the table below. Total cash outflows for development for the six months ended June 30, 2002 were $19,157,000. In addition to the costs incurred for the six months ended June 30, 2002 as detailed in the table below, development costs included $1,600,000 for improvements on properties transferred to the portfolio in the 12-month period following transfer. These costs are reported in Real Estate Properties on the balance sheet. Development Costs Incurred -------------------------------------- Size at For the 6 Months Cumulative as Estimated Completion Ended 6/30/02 of 6/30/02 Total Costs (1) - ----------------------------------------------------------------------------------------------------------------- (Square feet) (In thousands) Lease-Up: Sunport Center III Orlando, Florida 66,000 $ 280 3,505 4,000 World Houston XIV Houston, Texas 77,000 697 3,030 3,600 Americas 10 Business Center I El Paso, Texas 97,000 713 3,000 3,300 ------------------------------------------------------------------------ Total Lease-up 240,000 1,690 9,535 10,900 ------------------------------------------------------------------------ Under Construction: Metro Airport Commerce Center I Jackson, Mississippi 32,000 943 1,269 1,700 Tower Automotive Jackson, Mississippi 200,000 6,995 7,379 11,700 Executive Airport Commerce Center I & III Fort Lauderdale, Florida 85,000 550 1,996 7,900 World Houston XIX Houston, Texas 66,000 635 635 3,100 World Houston XX Houston, Texas 62,000 515 515 2,800 Chamberlain Expansion Tucson, Arizona 34,000 75 75 1,600 Expressway Commerce Center Tampa, Florida 108,000 1,129 1,129 4,300 ------------------------------------------------------------------------ Total Under Construction 587,000 10,842 12,998 33,100 ------------------------------------------------------------------------ Prospective Development: Phoenix, Arizona 103,000 68 1,322 6,000 Tucson, Arizona 70,000 10 336 3,500 Tampa, Florida 230,000 75 2,346 9,200 Orlando, Florida 249,000 327 3,151 14,900 Fort Lauderdale, Florida 55,000 271 1,199 1,400 El Paso, Texas 251,000 225 2,148 7,600 Houston, Texas 929,000 (245) 5,980 46,200 Jackson, Mississippi 32,000 116 419 1,700 ---------------------------------------------------------------------- Total Prospective Development 1,919,000 847 16,901 90,500 ---------------------------------------------------------------------- 2,746,000 $ 13,379 39,434 134,500 ====================================================================== Completed Development and Transferred To Real Estate Properties During the Six Months Ended June 30, 2002: Walden Distribution Center I Tampa, Florida 90,000 $ 115 3,655 Techway Southwest I Houston, Texas 126,000 284 4,494 World Houston XII Houston, Texas 59,000 2,227 2,759 Kyrene II Tempe, Arizona 60,000 - 3,049 World Houston XIII Houston, Texas 51,000 1,552 2,851 ----------------------------------------------------- Total Transferred to Real Estate Properties 386,000 $ 4,178 16,808 ===================================================== (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. Real estate held for sale increased $888,000 due to the transfer of two properties from the portfolio with total costs of $8,599,000, offset by the sale of one property with costs of $1,134,000 and the transfer of one property from held for sale back to the portfolio with costs of $6,577,000. Accumulated depreciation on real estate properties and real estate held for sale increased $12,995,000 due to depreciation expense of $13,136,000 on real estate properties, offset by the sale of one property with accumulated depreciation of $141,000. Investment in real estate investment trusts (REITs) decreased from $6,452,000 at December 31, 2001 to $487,000 at June 30, 2002 as a result of the sale of REIT shares with a carrying value of $5,259,000. Unrealized gains decreased $706,000 as a result of realized gains of $1,471,000 on REIT shares, offset by unrealized holding gains of $765,000. Mortgage notes payable decreased $2,391,000 during the six months ended June 30, 2002 primarily due to regularly scheduled principal payments of $2,583,000. In addition, the Company repaid an $8,008,000 mortgage loan upon its maturity in April and obtained a new mortgage in May for $8,200,000. Notes payable to banks increased $10,467,000 as a result of borrowings of $139,631,000, offset by payments of $129,164,000. The Company's credit facilities are described in greater detail under Liquidity and Capital Resources. Accumulated other comprehensive income decreased $706,000 as a result of realized gains of $1,471,000 on REIT shares, offset by unrealized holding gains of $765,000. Undistributed earnings decreased from $23,753,000 at December 31, 2001 to $16,657,000 at June 30, 2002, as a result of dividends on common and preferred stock of $20,134,000 exceeding net income for financial reporting purposes of $13,038,000. RESULTS OF OPERATIONS (Comments are for the three months and six months ended June 30, 2002, compared to the three months and six months ended June 30, 2001.) Net income available to common stockholders for the three months and six months ended June 30, 2002 was $4,426,000 ($.28 per basic share and $.27 per diluted share) and $8,034,000 ($.51 per basic share and $.50 per diluted share), compared to net income available to common stockholders for the three months and six months ended June 30, 2001 of $8,664,000 ($.55 per basic share and $.53 per diluted share) and $12,975,000 ($.83 per basic share and $.81 per diluted share). Income before gain on real estate investments was $6,934,000 and $12,948,000 for the three months and six months ended June 30, 2002, compared to $7,708,000 and $14,512,000 for the three months and six months ended June 30, 2001. There was no gain on real estate investments for the three months ended June 30, 2002 and a gain of $93,000 for the six months ended June 30, 2002, compared to $3,455,000 for the three months and six months ended June 30, 2001. The paragraphs that follow describe the results of operations in 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), decreased by $689,000 or 3.7% for the three months ended June 30, 2002 compared to the three months ended June 30, 2001. For the six months ended June 30, 2002, PNOI decreased by $1,313,000 or 3.5% compared to the six months ended June 30, 2001. 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 ------------------------------------------------------------------------ 2002 2001 2002 2001 6-30-02 6-30-01 ------------------------------------------------------------------------ (In thousands) Industrial $ 17,820 18,500 35,327 36,622 91.0% 94.6% Other 255 264 525 543 -------------------------------------------------- Total PNOI $ 18,075 18,764 35,852 37,165 ================================================== PNOI from industrial properties decreased $680,000 (3.7%) and $1,295,000 (3.5%) for the three months and six months ended June 30, 2002, compared to June 30, 2001. Industrial properties held throughout the three months and six months ended June 30, 2002 compared to the same periods in 2001 showed a decrease in PNOI of 4.5% and 4.1%, respectively. The decrease in PNOI results primarily from a decrease in the Company's portfolio occupancy level from 93.7% at June 30, 2001 to 89.7% at June 30, 2002. This decrease is primarily due to a continued slowing in the economy and the unusually high percentage of leases that expired last year (over 20%). In addition, real estate operating expenses increased $964,000 (15.9%) and $2,082,000 (17.3%) for the three months and six months ended June 30, 2002. This increase was primarily due to increases in insurance and property taxes. Because of the lower occupancy, the Company was not able to pass through to tenants as large a percent of this expense increase in 2002 as it would have been able to do in 2001. Gain on REIT securities was $1,050,000 for the three months and $1,471,000 for the six months ended June 30, 2002. Gain on REIT securities was $706,000 for the three months and six months ended June 30, 2001. Bank interest expense before amortization of loan costs and capitalized interest was $737,000 for the three months ended June 30, 2002, a decrease of $481,000 from the three months ended June 30, 2001. Bank interest expense before amortization of loan costs and capitalized interest was $1,403,000 for the six months ended June 30, 2002, a decrease of $1,690,000 from the six months ended June 30, 2001. Average bank borrowings were $89,624,000 and $88,203,000 for the three months and six months ended June 30, 2002 compared to $78,035,000 and $91,904,000 for the same periods in 2001. Average bank interest rates were 3.25% and 3.16% for the three months and six months ended June 30, 2002 compared to 6.25% and 6.71% for the same periods in 2001. 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, 2002 were $556,000 and $1,088,000 compared to $609,000 and $1,284,000 for the same periods in 2001. Amortization of bank loan costs was $92,000 and $198,000 for the three months and six months ended June 30, 2002 compared to $66,000 and $132,000 for the same periods in 2001. Mortgage interest expense on real estate properties was $3,848,000 for the three months ended June 30, 2002, a decrease of $58,000 from the three months ended June 30, 2001. Mortgage interest expense on real estate properties was $7,730,000 for the six months ended June 30, 2002, an increase of $624,000 from the six months ended June 30, 2001. The increase in interest for the six months was primarily due to a $45,000,000 mortgage loan obtained in April 2001. Amortization of mortgage loan costs was $44,000 and $97,000 for the three months and six months ended June 30, 2002 compared to $42,000 and $85,000 for the same periods in 2001. Depreciation and amortization increased $665,000 and $1,545,000 for the three months and six months ended June 30, 2002 compared to the same periods in 2001. These increases were primarily due to the industrial properties acquired and development properties that achieved stabilized operations in both 2001 and 2002. These increases were offset by the sale of several properties in 2001 and 2002 and the transfer of several properties to real estate held for sale (depreciation is not taken on those properties in the category "real estate held for sale"). A summary of the gains on real estate investments for the six months ended June 30, 2002 and 2001 is detailed below. Gain on Real Estate Investments Net Recognized Basis Sales Price Gain -------------------------------------------- (In thousands) 2002 Real estate properties: Carpenter Duplex, Dallas, TX $ 1,018 1,111 93 --------------------------------------------- $ 1,018 1,111 93 ============================================= 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 ============================================= NAREIT has recommended supplemental disclosures concerning straight-line rent, capital expenditures and leasing costs. Straight-lining of rent increased rent income $296,000 and $533,000 for the three months and six months ended June 30, 2002 compared to $442,000 and $966,000 for the same periods in 2001. The decreases in 2002 are primarily due to lease terminations, lease amendments and vacancies. Capital expenditures for the three months and six months ended June 30, 2002 and 2001 are as follows: Capital Expenditures Three Months Ended Six Months Ended June 30, June 30, Estimated ----------------------------------------------------- Useful Life 2002 2001 2002 2001 -------------------------------------------------------------------- (In thousands) Upgrade on Acquisitions 40 yrs $ - 268 - 438 Major Renovation/Redevelopment 40 yrs 3 - 53 - Tenant Improvements: New Tenants Lease Life 1,029 711 1,880 1,135 Renewal Tenants Lease Life 63 315 421 358 Other: Building Improvements 5-40 yrs 145 344 466 638 Roofs 5-15 yrs 316 134 510 343 Parking Lots 5 yrs 15 9 20 9 Other 5 yrs 21 44 31 90 ----------------------------------------------------- Total capital expenditures $ 1,592 1,825 3,381 3,011 ===================================================== The Company's leasing costs are capitalized and included in other assets. The costs are amortized over the terms of the leases and are included in depreciation and amortization expense. Capitalized leasing costs for the three months and six months ended June 30, 2002 and 2001 are as follows: Capitalized Leasing Costs Three Months Ended Six Months Ended June 30, June 30, Estimated ----------------------------------------------------- Useful Life 2002 2001 2002 2001 -------------------------------------------------------------------- (In thousands) Development Lease Life $ 290 454 930 711 New Tenants Lease Life 395 373 619 439 Renewal Tenants Lease Life 371 230 467 622 --------------------------- -------------------------- Total capitalized leasing costs $ 1,056 1,057 2,016 1,772 ------------------------------------------------------- Amortization of leasing costs $ 716 604 1,333 1,172 ======================================================= LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $29,187,000 for the six months ended June 30, 2002. Other sources of cash were primarily from bank borrowings, proceeds from mortgage notes payable, sales of REIT shares, proceeds from exercise of stock options and sales of real estate investments. The Company distributed $14,924,000 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, mortgage note payments, purchases of real estate investments, capital improvements at the various properties, and debt issuance costs. Total debt at June 30, 2002 and 2001 was as follows: As of June 30, ---------------------------- 2002 2001 ---------------------------- (In thousands) Mortgage notes payable - fixed rate $ 202,623 207,466 Bank notes payable - floating rate 96,525 74,811 ----------------------------- Total debt $ 299,148 282,277 ============================= The Company has a three-year, $175,000,000 unsecured revolving credit facility with a group of ten banks that matures in January 2005. The interest rate on the facility is based on the Eurodollar rate and varies according to debt-to-total asset value ratios. At June 30, 2002, the interest rate was 3.24% on $50,000,000 and 3.09% on $43,000,000. The interest rate on each tranche is currently reset on a monthly basis. The Company has a one-year $12,500,000 unsecured revolving credit facility with PNC Bank, N.A. that matures in January 2003. The interest rate on this facility is based on the LIBOR rate and varies according to debt-to-total asset value ratios. The interest rate was 3.0137% on a balance of $3,525,000 at June 30, 2002. As part of its financial management activities and in order to reduce exposure to floating rate bank debt, during the quarter ended June 30, 2002, EastGroup signed an application with Metropolitan Life for a $40 million nonrecourse mortgage secured by 15 properties. The note will have an interest rate of 6.86%, a maturity date of 10 years, and an amortization period of 25 years. The loan is expected to close during the third quarter. 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, 2002. 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. EastGroup owns 487,100 shares of Pacific Gulf Properties (PAG) with a carrying amount of $487,000 (estimated remaining distributions from PAG) at June 30, 2002. PAG is in the final stage of liquidating its assets and made liquidating distributions of $22.00 per share in 2000 and a total of $5.275 per share in 2001. In July 2002, the Company acquired Freeport Tech Center (188,000 square feet) in Houston, Texas for a price of $6,340,000. In 2000, EastGroup made a construction loan for the development of Freeport with a related option to purchase the property after completion. As part of EastGroup's purchase, the seller repaid the principal amount of $5,500,000 and all accrued interest on the outstanding mortgage loan receivable. 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 Fair 2002 2003 2004 2005 2006 Thereafter Total Value ---------- --------- -------- --------- --------- ------------ ---------- ---------- Fixed rate debt (in thousands) $ 2,786 9,462 10,293 24,149 20,629 135,304 202,623 211,868 Weighted average interest rate 7.65% 8.14% 8.03% 8.03% 7.83% 7.37% 7.57% Variable rate debt (in thousands) - 3,525 - 93,000 - - 96,525 96,525 Weighted average interest rate - 3.01% - 3.17% - - 3.16% As the table above incorporates only those exposures that exist as of June 30, 2002, 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 32 basis points, interest expense and cash flows would increase or decrease by approximately $305,000 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. 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. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 29, 2002, the Registrant held its Annual Meeting of Shareholders. At the Annual Meeting, D. Pike Aloian, Alexander G. Anagnos, H.C. Bailey, Jr., Hayden C. Eaves III, Fredric H. Gould, David H. Hoster II, David M. Osnos and Leland R. Speed were elected directors of the Registrant, each to serve until the 2003 Annual Meeting. The following is a summary of the voting for directors: Common Stock Series B Convertible Nominee Vote For Vote Withheld Vote For Vote Withheld -------------------------------------------------------------------------------------------------- D. Pike Aloian 14,486,118 100,204 3,181,817 - Alexander G. Anagnos 14,515,934 70,388 3,181,817 - H.C. Bailey, Jr. 14,542,993 43,329 3,181,817 - Hayden C. Eaves III 14,531,567 54,755 3,181,817 - Fredric H. Gould 12,912,145 1,674,177 3,181,817 - David H. Hoster II 14,539,729 46,593 3,181,817 - David M. Osnos 14,531,750 54,572 3,181,817 - Leland R. Speed 14,536,882 49,440 3,181,817 - SIGNATURE 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, 2002 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