U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2003 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 ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). YES (x) NO ( )
The number of shares of common stock, $.0001 par value, outstanding as of
November 11, 2003 was 19,998,741.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
Pages
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated balance sheets, September 30, 2003 (unaudited) and
December 31, 2002 3
Consolidated statements of income for the three and nine months
ended September 30, 2003 and 2002 (unaudited) 4
Consolidated statements of changes in stockholders' equity for
the nine months ended September 30, 2003 (unaudited) 5
Consolidated statements of cash flows for the nine months ended
September 30, 2003 and 2002 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
Authorized signatures 21
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
September 30, 2003 December 31, 2002
----------------------------------------------
(Unaudited)
ASSETS
Real estate properties $ 778,680 750,578
Development 45,654 39,718
----------------------------------------------
824,334 790,296
Less accumulated depreciation (139,822) (118,977)
----------------------------------------------
684,512 671,319
----------------------------------------------
Real estate held for sale 1,375 1,375
Investment in real estate investment trusts 15 1,663
Cash 2,357 1,383
Other assets 28,934 27,997
----------------------------------------------
TOTAL ASSETS $ 717,193 703,737
==============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 287,604 248,343
Notes payable to banks 55,852 73,957
Accounts payable & accrued expenses 16,583 15,571
Other liabilities 7,631 7,622
----------------------------------------------
367,670 345,493
----------------------------------------------
----------------------------------------------
Minority interest in joint ventures 1,800 1,759
----------------------------------------------
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 at
December 31, 2002; stated liquidation preference of $43,125 at
December 31, 2002 - 41,357
Series B 8.75% Cumulative Convertible Preferred Shares and additional paid-in
capital; $.0001 par value; 2,800,000 shares authorized; 550,000 shares
issued at September 30, 2003 and 2,800,000 at December 31, 2002; stated
liquidation preference of $13,750 at September 30, 2003 and $70,000 at
December 31, 2002 13,196 67,178
Series C Preferred Shares; $.0001 par value; 600,000 shares authorized; no
shares issued - -
Series D 7.95% Cumulative Redeemable Preferred Shares and additional paid-in
capital; $.0001 par value; 1,320,000 shares authorized and issued; stated
liquidation preference of $33,000 32,329 -
Common shares; $.0001 par value; 65,280,000 shares authorized; 19,369,471
shares issued and outstanding at September 30, 2003 and 16,104,356 at
December 31, 2002 2 2
Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares
issued - -
Additional paid-in capital on common shares 314,584 243,562
Undistributed earnings (Distributions in excess of earnings) (9,795) 7,109
Accumulated other comprehensive income (loss) (190) 58
Unearned compensation (2,403) (2,781)
----------------------------------------------
347,723 356,485
----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 717,193 703,737
==============================================
See accompanying notes to consolidated financial statements.
Page 3
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------
REVENUES
Income from real estate operations $ 27,302 25,906 80,320 75,872
Interest 7 26 17 304
Gain on securities - 365 389 1,836
Other 58 54 160 535
----------------------------------------------------
27,367 26,351 80,886 78,547
----------------------------------------------------
EXPENSES
Operating expenses from real estate operations 8,083 7,686 23,698 21,806
Interest 4,796 4,363 14,137 12,703
Depreciation and amortization 7,978 7,848 23,409 22,275
General and administrative 1,246 1,102 3,746 3,279
Minority interest in joint ventures 107 103 320 286
----------------------------------------------------
22,210 21,102 65,310 60,349
----------------------------------------------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE INVESTMENTS 5,157 5,249 15,576 18,198
Gain on sale of real estate investments - - - 93
----------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 5,157 5,249 15,576 18,291
----------------------------------------------------
DISCONTINUED OPERATIONS
Loss from real estate operations - (10) (2) (14)
Gain (loss) on sale of real estate investments 6 (66) 112 (66)
----------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 6 (76) 110 (80)
----------------------------------------------------
NET INCOME 5,163 5,173 15,686 18,211
Preferred dividends-Series A 76 970 2,016 2,910
Preferred dividends-Series B 300 1,532 2,598 4,596
Preferred dividends-Series D 649 - 649 -
Costs on redemption of Series A preferred 1,778 - 1,778 -
----------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 2,360 2,671 8,645 10,705
====================================================
BASIC PER COMMON SHARE DATA
Income from continuing operations $ 0.13 0.17 0.50 0.68
Income (loss) from discontinued operations 0.00 0.00 0.01 0.00
----------------------------------------------------
Net income available to common stockholders $ 0.13 0.17 0.51 0.68
====================================================
Weighted average shares outstanding 18,451 15,901 17,089 15,856
====================================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations $ 0.13 0.16 0.49 0.66
Income (loss) from discontinued operations 0.00 0.00 0.01 0.00
----------------------------------------------------
Net income available to common stockholders $ 0.13 0.16 0.50 0.66
====================================================
Weighted average shares outstanding 18,818 16,264 17,453 16,228
====================================================
See accompanying notes to consolidated financial statements.
Page 4
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
Undistributed
Earnings Accumulated
Additional (Distributions Other
Preferred Common Paid-In Unearned in Excess of Comprehensive
Stock Stock Capital Compensation Earnings) Income (Loss) Total
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $108,535 2 243,562 (2,781) 7,109 58 356,485
Comprehensive income
Net income - - - - 15,686 - 15,686
Net change in investment securities - - - - - (340) (340)
Net unrealized change in cash flow hedge - - - - - 92 92
-----------
Total comprehensive income 15,438
-----------
Cash dividends declared-common, $1.425 per share - - - - (25,549) - (25,549)
Preferred stock dividends declared - - - - (5,263) - (5,263)
Redemption of 1,725,000 shares of Series A
preferred stock (41,357) - - - (1,778) - (43,135)
Conversion of 2,250,000 shares of cumulative
convertible preferred stock into 2,556,900
shares of common stock (53,982) - 53,982 - - - -
Issuance of 1,320,000 share of Series D preferred
stock 32,329 - - - - - 32,329
Issuance of 571,429 shares of common stock, common
stock offering - - 14,464 - - - 14,464
Issuance of 2,108 shares of common stock incentive
compensation - - 53 - - - 53
Issuance of 10,194 shares of common stock, dividend
reinvestment plan - - 272 - - - 272
Issuance of 130,484 shares of common stock, exercise
options - - 2,370 - - - 2,370
Forfeiture of 6,000 shares of common stock, incentive
restricted stock - - (127) 86 - - (41)
Amortization of unearned compensation, incentive
restricted stock - - - 292 - - 292
Issuance of common stock options - - 8 - - - 8
-----------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 $ 45,525 2 314,584 (2,403) (9,795) (190) 347,723
=============================================================================
See accompanying notes to consolidated financial statements.
Page 5
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------
2003 2002
-------------------------------
OPERATING ACTIVITIES:
Net income $ 15,686 18,211
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization from continuing operations 23,409 22,275
Depreciation and amortization from discontinued operations - 46
Gain on sale of real estate investments - (93)
(Gain) loss on sale of real estate investments from discontinued
operations (112) 66
Gain on real estate investment trust (REIT) shares (389) (1,836)
Amortization of unearned compensation 251 347
Minority interest depreciation and amortization (110) (129)
Changes in operating assets and liabilities:
Accrued income and other assets 1,491 2,643
Accounts payable, accrued expenses and prepaid rent 4,640 4,602
-------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 44,866 46,132
-------------------------------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable - 5,501
Proceeds from sale of real estate investments 841 2,917
Real estate improvements (7,170) (5,811)
Real estate development (17,732) (27,085)
Purchases of real estate (9,445) (12,935)
Purchases of real estate investment trust shares - (1,308)
Proceeds from sale and liquidation of REIT shares 1,697 7,095
Changes in other assets and other liabilities (4,135) (1,172)
-------------------------------
NET CASH USED IN INVESTING ACTIVITIES (35,944) (32,798)
-------------------------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 125,971 163,782
Principal payments on bank borrowings (144,076) (184,767)
Proceeds from mortgage notes payable 45,500 48,200
Principal payments on mortgage notes payable (7,717) (11,974)
Debt issuance costs (629) (1,473)
Distributions paid to stockholders (31,984) (29,903)
Redemption of Series A preferred stock (43,135) -
Proceeds from Series D preferred stock offering 32,329 -
Proceeds from common stock offering 14,464 -
Proceeds from exercise of stock options 2,370 2,438
Proceeds from dividend reinvestment plan 272 276
Other (1,313) (208)
-------------------------------
NET CASH USED IN FINANCING ACTIVITIES (7,948) (13,629)
-------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 974 (295)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,383 1,767
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,357 1,472
===============================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 13,234 12,046
Conversion of cumulative convertible preferred stock into common stock 53,982 -
Debt assumed by the Company in purchase of real estate 1,478 -
Issuance of incentive restricted stock - 437
Forfeiture of incentive restricted stock (127) (189)
See accompanying notes to consolidated financial statements.
Page 6
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 accounting
principles generally accepted in the United States of America 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
2002 annual report and the notes thereto.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the 2002 financial statements to
conform to the 2003 presentation.
(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." The Company applies Statement of Financial Accounting
Standards (SFAS) No. 144, which requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less estimated costs
to sell and are not depreciated while they are held for sale.
At September 30, 2003 and December 31, 2002, the Company had three parcels
of land held for sale. There can be no assurances that the properties that are
held for sale will be sold.
In accordance with the guidelines established under SFAS No. 144,
operations and gains and losses on sale from the properties placed in the
category "held for sale" subsequent to December 31, 2001 have been classified as
income (loss) from discontinued operations for the three and nine months ended
September 30, 2003 and 2002. No interest expense was allocated to the properties
that are held for sale.
(4) BUSINESS COMBINATIONS AND GOODWILL
The Company applies SFAS No. 141, "Business Combinations," which 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. The Company also applies SFAS No. 142, "Goodwill
and Other Intangible Assets," which addresses financial accounting and reporting
for the impairment of goodwill and other intangibles. Upon the acquisition of
real estate properties, the Company applies the principles of SFAS No. 141 to
determine the allocation of the purchase price among the individual components
of both the tangible and intangible assets, including in-place leases. The
Company periodically reviews, at least annually, the recoverability of goodwill
and other intangibles for possible impairment. In management's opinion, no
material impairment of goodwill and other intangibles existed at September 30,
2003 and December 31, 2002.
(5) OTHER ASSETS
A summary of the Company's other assets follows:
September 30, 2003 December 31, 2002
------------------------------------------------
(In thousands)
Leasing costs, net of accumulated amortization $ 11,414 10,537
Receivables, net of allowance for doubtful accounts 9,468 9,363
Prepaid expenses and other assets 8,052 8,097
------------------------------------------------
$ 28,934 27,997
================================================
Page 7
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's accounts payable and accrued expenses follows:
September 30, 2003 December 31, 2002
------------------------------------------------
(In thousands)
Property taxes payable $ 9,625 5,814
Dividends payable 2,174 3,346
Other payables and accrued expenses 4,784 6,411
------------------------------------------------
$ 16,583 15,571
================================================
(7) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in equity
from nonowner sources. The components of accumulated other comprehensive income
(loss) for the nine months ended September 30, 2003 and 2002 are summarized
below:
Accumulated Other Comprehensive Income (Loss)
Nine Months Ended
September 30,
-----------------------------------
2003 2002
-----------------------------------
Balance at beginning of period $ 58 1,193
Unrealized holding gains on REIT securities during the period 49 942
Less reclassification adjustment for realized gains on
REIT securities included in net income (389) (1,836)
Change in fair value of interest rate swap 92 -
-----------------------------------
Balance at end of period $ (190) 299
===================================
(8) 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 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 calculates diluted EPS by totaling net income available to
common stockholders plus dividends on dilutive convertible preferred shares and
dividing this numerator 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 assumes proceeds from the exercise of
options are used to purchase common stock at the average market price during the
Page 8
period. The dilutive effect of convertible securities was determined using the
if-converted method. Reconciliation of the numerators and denominators in the
basic and diluted EPS computations is as follows:
Reconciliation of Numerators and Denominators
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
2003 2002 2003 2002
----------------------------------------------
(In thousands)
Basic EPS Computation
Numerator-net income available to common stockholders $ 2,360 2,671 8,645 10,705
Denominator-weighted average shares outstanding 18,451 15,901 17,089 15,856
Diluted EPS Computation
Numerator-net income available to common stockholders $ 2,360 2,671 8,645 10,705
Denominator:
Weighted average shares outstanding 18,451 15,901 17,089 15,856
Common stock options 182 176 177 187
Nonvested restricted stock 185 187 187 185
----------------------------------------------
Total shares 18,818 16,264 17,453 16,228
==============================================
The Company's 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 periods presented due to its
antidilutive 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 income from real estate operations (REO) less property operating
expenses (before interest expense and depreciation and amortization), and funds
from operations (FFO), defined as net income (loss) (computed in accordance with
accounting principles generally accepted in the United States of America
(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.
PNOI is a supplemental industry reporting measurement used to evaluate the
performance of the Company's investments in real estate assets. The Company
believes that the exclusion of depreciation and amortization in the industry's
calculation of PNOI provides a supplemental indicator of the property's
performance since real estate values have historically risen or fallen with
market conditions. PNOI as calculated by the Company may not be comparable to
similarly titled but differently calculated measures for other REITs. The major
factors that influence PNOI are occupancy levels, acquisitions and sales,
development properties that achieve stabilized operations, rental rate increases
or decreases, and the recoverability of operating expenses. The Company's
success depends largely upon its ability to lease warehouse space and to recover
from tenants the operating costs associated with those leases.
REO income is comprised of rental income including straight-line rent
adjustments, pass-through income and other REO income, which includes
termination fees. Property operating expenses are comprised of insurance,
property taxes, repair and maintenance expenses, management fees and other
operating costs. Generally, the Company's most significant operating expenses
are insurance and property taxes. Tenant leases may be net leases in which the
total operating expenses are recoverable, modified gross leases in which some of
the operating expenses are recoverable, or gross leases in which no expenses are
Page 9
recoverable (gross leases represent a small portion of the Company's total
leases). Increases in property operating expenses are fully recoverable under
net leases and recoverable to a high degree under modified gross leases.
Modified gross leases often include base year amounts and expense increases over
these amounts are recoverable. The Company's exposure to property operating
expenses is primarily due to vacancies and leases for occupied space that limit
the amount of expenses that can be recoverable.
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 provide for the Company's cash needs,
including its ability to make distributions. The following table presents on a
comparative basis for the three and nine months ended September 30, 2003 and
2002 reported PNOI by operating segment, followed by reconciliations of PNOI to
FFO Available to Common Stockholders and FFO Available to Common Stockholders to
Net Income.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------
(In thousands)
PROPERTY REVENUES:
Industrial $ 26,871 25,518 79,023 74,676
Other 431 388 1,297 1,196
----------------------------------------------------
27,302 25,906 80,320 75,872
----------------------------------------------------
PROPERTY EXPENSES:
Industrial (7,949) (7,564) (23,285) (21,424)
Other (134) (122) (413) (382)
----------------------------------------------------
(8,083) (7,686) (23,698) (21,806)
----------------------------------------------------
PROPERTY NET OPERATING INCOME:
Industrial 18,922 17,954 55,738 53,252
Other 297 266 884 814
----------------------------------------------------
TOTAL PROPERTY NET OPERATING INCOME 19,219 18,220 56,622 54,066
----------------------------------------------------
Income (loss) from discontinued operations (before
depreciation and amortization) - (5) (2) 32
Gain on securities - 365 389 1,836
Other income 65 80 177 839
Interest expense (4,796) (4,363) (14,137) (12,703)
General and administrative expense (1,246) (1,102) (3,746) (3,279)
Minority interest in earnings (before depreciation and amortization) (141) (140) (430) (415)
Gain on sale of nondepreciable real estate investments 6 - 6 -
Dividends on Series A preferred shares (76) (970) (2,016) (2,910)
Dividends on Series D preferred shares (649) - (649) -
Redemption of Series A preferred stock (1,778) - (1,778) -
----------------------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS 10,604 12,085 34,436 37,466
Depreciation and amortization from continuing operations (7,978) (7,848) (23,409) (22,275)
Depreciation and amortization from discontinued operations - (5) - (46)
Share of joint venture depreciation and amortization 34 37 110 129
Gain (loss) on sale of depreciable real estate investments - (66) 106 27
Dividends on Series B convertible preferred shares (300) (1,532) (2,598) (4,596)
----------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 2,360 2,671 8,645 10,705
Dividends on preferred shares 1,025 2,502 5,263 7,506
Redemption of Series A preferred stock 1,778 - 1,778 -
----------------------------------------------------
NET INCOME $ 5,163 5,173 15,686 18,211
====================================================
Page 10
(10) STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment of SFAS No. 123, 'Accounting for Stock-Based Compensation' " to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated financial
statements.
Effective January 1, 2002, the Company adopted the fair value recognition
provisions of SFAS No. 148, prospectively to all employee awards granted,
modified, or settled after January 1, 2002. Stock-based compensation expense was
immaterial for both the three and nine months ended September 30, 2003 and 2002.
There was an immaterial effect to pro forma net income available to common
stockholders for all periods and no effect to basic or diluted earnings per
share for either period.
The Company accounts for restricted stock in accordance with Accounting
Principles Board No. 25, and accordingly, compensation expense is recognized
over the expected vesting period using the straight-line method.
(11) NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. SFAS No. 150 requires certain financial instruments with characteristics
of both liabilities and equity to be classified as liabilities. The Company
adopted this Statement on July 1, 2003 with no impact on its overall financial
position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created or
obtained after January 31, 2003. For public enterprises with a variable interest
in a variable interest entity created after February 1, 2003, the Interpretation
applies to that enterprise no later than the beginning of the first interim or
annual reporting period beginning after June 15, 2003. The Interpretation
requires certain disclosures in financial statements issued after January 31,
2003 if it is reasonably possible that the Company will consolidate or disclose
information about variable interest entities when the Interpretation becomes
effective. The application of this Interpretation had no impact on the Company's
overall financial position or results of operations.
(12) SUBSEQUENT EVENTS
In October 2003, EastGroup announced that it is developing a 66,000 square foot
warehouse/distribution building for Devon Energy Production Company, LP. The
facility, which has a projected total cost of approximately $3.4 million, will
be located on 4.22 acres in the Company's World Houston International Business
Center development in north Houston between Beltway 8 and George Bush
Intercontinental Airport. The initial term of the lease is 15 years.
In October 2003, the Company purchased Expressway Commerce Center II
(72,000 square feet) in Tampa, Florida for a price of $4,850,000. The building
was constructed in 2001 and is located in the Tampa International Airport
submarket. The property is 100% leased to five tenants.
The Company is currently under contract to purchase two additional
properties in Florida totaling 227,000 square feet for approximately
$10,450,000. These properties are expected to close during the fourth quarter of
2003; however, there can be no assurance that these potential acquisitions will
actually occur.
Page 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION
(Comments are for the balance sheet dated September 30, 2003 compared to
December 31, 2002.)
Assets of EastGroup were $717,193,000 at September 30, 2003, an increase of
$13,456,000 from December 31, 2002. Liabilities (excluding minority interests)
increased $22,177,000 to $367,670,000 and stockholders' equity decreased
$8,762,000 to $347,723,000 during the same period. Book value per common share
increased from $15.11 at December 31, 2002 to $15.54 at September 30, 2003. The
paragraphs that follow explain these changes in detail.
Real estate properties increased $28,102,000 during the nine months ended
September 30, 2003. This increase was due to the transfer of four properties and
two parcels of land from development with total costs of $10,171,000, the
purchase of three properties for $9,920,000, capital improvements of $7,170,000,
and improvements on development properties transferred to real estate properties
in the 12-month period following transfer of $1,625,000. These increases were
offset by the transfer of one property and one parcel of land to real estate
held for sale with costs of $784,000.
Real Estate Properties
Real Estate Properties Date
Acquired in 2003 Location Size Acquired Cost (1)
- -------------------------------------------------------------------------------------------------------------
(In thousands)
Altamonte Commerce Center II Orlando, Florida 62,000 sq. ft. 05-20-03 $ 3,336
Airport Commons Phoenix, Arizona 63,000 sq. ft. 05-28-03 2,447
Shady Trail Distribution Center Dallas, Texas 118,000 sq. ft. 09-16-03 4,137
---------------
Total Acquisitions $ 9,920
===============
(1) Total costs of the properties acquired was $10,923,000, of which $9,920,000
was allocated to the real estate properties as indicated above and
$1,003,000 was allocated to in-place leases. The Company paid cash of
$9,445,000 for the properties and in-place leases acquired and assumed a
mortgage of $1,478,000, which is included in Mortgage Notes Payable on the
balance sheet. The amount assigned to in-place leases, which is included in
Other Assets on the balance sheet, will be amortized over the remaining
lives of the associated leases in place at the time of acquisition in
accordance with SFAS No. 141, "Business Combinations."
Development increased $5,936,000 during the nine months ended September 30,
2003. This increase was due to development costs of $16,107,000 on existing and
completed development, as detailed in the table below, exceeding decreases due
to the transfer of four development properties with total costs of $9,537,000
and the transfer of two parcels of land with costs of $634,000 to real estate
properties.
Total cash outflows for development for the nine months ended September 30,
2003 were $17,732,000. In addition to the costs incurred for the nine months
ended September 30, 2003 as detailed in the table below, development costs
included $1,625,000 for improvements on properties transferred to real estate
properties during the 12-month period following transfer. These costs are
included in Real Estate Properties on the balance sheet.
Page 12
Development
Costs Incurred
------------------------------------
For the 9 Months Cumulative as Estimated
Size Ended 9/30/03 of 9/30/03 Total Costs (1)
---------------------------------------------------------------------
(Square feet) (In thousands)
Lease-Up:
World Houston 19, Houston, TX 66,000 $ 466 2,447 3,100
World Houston 20, Houston, TX 62,000 192 2,150 2,800
Executive Airport CC I & III, Fort Lauderdale, FL 85,000 959 5,710 6,000
Expressway Commerce Center, Tampa, FL 103,000 1,817 5,438 6,000
Sunport Center IV, Orlando, FL 63,000 1,993 3,019 3,500
Techway Southwest II, Houston, TX 94,000 2,880 3,849 4,800
---------------------------------------------------------------------
Total Lease-up 473,000 8,307 22,613 26,200
---------------------------------------------------------------------
Under Construction:
Santan 10, Chandler, AZ 65,000 1,430 1,430 3,800
---------------------------------------------------------------------
Total Under Construction 65,000 1,430 1,430 3,800
---------------------------------------------------------------------
Prospective Development (Principally Land):
Phoenix, Arizona 40,000 (1,010) 366 2,000
Tucson, Arizona 70,000 - 326 3,500
Tampa, Florida 140,000 76 1,904 7,700
Orlando, Florida 892,000 5,474 7,359 49,600
Fort Lauderdale, Florida 55,000 173 1,776 3,800
El Paso, Texas 251,000 120 2,344 7,600
Houston, Texas 858,000 1,410 6,982 41,500
Jackson, Mississippi 32,000 23 554 1,700
---------------------------------------------------------------------
Total Prospective Development 2,338,000 6,266 21,611 117,400
---------------------------------------------------------------------
2,876,000 $ 16,003 45,654 147,400
=====================================================================
Completed Development and Transferred
To Real Estate Properties During the
Nine Months Ended September 30, 2003:
Metro Airport Commerce Center I, Jackson, MS 32,000 $ 55 1,782
World Houston 14, Houston, TX 77,000 32 3,106
Americas 10 Business Center I, El Paso, TX 98,000 17 3,304
Chamberlain Expansion, Tucson, AZ 34,000 - 1,345
----------------------------------------------------
Total Transferred to Real Estate Properties 241,000 $ 104 9,537
====================================================
(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 was $1,375,000 at September 30, 2003 and December
31, 2002; however, one property and one parcel of land with total costs of
$784,000 were transferred from real estate properties and subsequently sold.
Accumulated depreciation on real estate properties and real estate held for
sale increased $20,845,000 due to depreciation expense of $20,900,000 on real
estate properties, offset by the sale of one property with accumulated
depreciation of $55,000.
Investment in REITs decreased from $1,663,000 at December 31, 2002 to
$15,000 at September 30, 2003 primarily as a result of the sale of REIT shares
with a cost of $1,308,000. Unrealized gains decreased $340,000 as a result of
realized gains of $389,000 on REIT shares, offset by unrealized gains of $49,000
during the period.
Page 13
Mortgage notes payable increased $39,261,000 during the nine months ended
September 30, 2003 primarily due to a new $45,500,000 mortgage. This note is a
nonrecourse first mortgage loan secured by ten properties and has a fixed
interest rate of 4.75%, a ten-year term, and an amortization schedule of 25
years. The proceeds were used to reduce floating rate bank borrowings. The
Company also assumed a $1,478,000 mortgage on the purchase of Airport Commons.
These increases were offset by the repayment of two mortgages totaling
$2,813,000 (including the Airport Commons mortgage) and regularly scheduled
principal payments of $4,904,000.
Notes payable to banks decreased $18,105,000 as a result of payments of
$144,076,000 exceeding advances of $125,971,000. The Company's credit facilities
are described in greater detail under Liquidity and Capital Resources.
On July 7, 2003, EastGroup redeemed all of its outstanding 9.00% Series A
Cumulative Redeemable Preferred Stock. The redemption price of these shares
(excluding accrued dividends) was $43,125,000. Costs of $1,768,000 related to
the original issuance of the Series A stock in 1998 were recorded in the third
quarter as a preferred issuance cost and treated in a manner similar to a
preferred dividend.
During the nine months ended September 30, 2003, the holder of the 8.75%
Series B Cumulative Convertible Preferred Stock elected to convert 2,250,000
shares into 2,556,900 shares of common stock.
On July 2, 2003, EastGroup closed a public offering of 1,320,000 shares of
7.95% Series D Cumulative Redeemable Preferred Stock with a liquidation
preference of $25 per share. The offering resulted in $32,329,000 of net
proceeds.
On May 20, 2003, EastGroup closed on the sale of 571,429 shares of its
common stock at $26.25 per share. The shares were sold to an institutional buyer
and EastGroup received proceeds of $14,464,000, net of related issuance costs.
Accumulated other comprehensive income (loss) decreased $248,000 as a
result of realized gains of $389,000 on REIT shares offset by unrealized gains
of $49,000 on REIT shares during the period and an unrealized gain of $92,000
due to the fair value adjustment of the Company's interest rate swap.
Undistributed earnings (distributions in excess of earnings) decreased
$16,904,000 as a result of dividends on common and preferred stock of
$30,812,000 and write-off of original issuance costs and other costs of
redemption totaling $1,778,000 on the redemption of the Series A preferred stock
exceeding net income for financial reporting purposes of $15,686,000.
RESULTS OF OPERATIONS
(Comments are for the three and nine months ended September 30, 2003, compared
to the three and nine months ended September 30, 2002.)
Net income available to common stockholders for the three and nine months ended
September 30, 2003 was $2,360,000 ($.13 per basic and diluted share) and
$8,645,000 ($.51 per basic share and $.50 per diluted share) compared to net
income available to common stockholders for the three and nine months ended
September 30, 2002 of $2,671,000 ($.17 per basic share and $.16 per diluted
share) and $10,705,000 ($.68 per basic share and $.66 per diluted share). Income
before gain on sale of real estate investments was $5,157,000 and $15,576,000
for the three and nine months ended September 30, 2003 compared to $5,249,000
and $18,198,000 for the same periods of 2002. The Company had a gain of $93,000
on the sale of real estate investments from continuing operations for the nine
months ended September 30, 2002. In accordance with the guidelines under SFAS
No. 144, gains and losses on the sale of properties placed in the category "held
for sale" subsequent to December 31, 2001 are included in Discontinued
Operations. There were gains of $6,000 and $112,000 from discontinued operations
for the three and nine months ended September 30, 2003 compared to a loss of
$66,000 for the three and nine months ended September 30, 2002. The paragraphs
that follow describe the results of operations in detail.
Page 14
PNOI from continuing operations, as defined and discussed in Note 9 in the
Notes to the Consolidated Financial Statements, increased by $999,000 or 5.5%
for the three months ended September 30, 2003 compared to the three months ended
September 30, 2002. For the nine months ended September 30, 2003, PNOI increased
by $2,556,000 or 4.7% compared to the nine months ended September 30, 2002. PNOI
by property type and total percentage leased were as follows:
Property Net Operating Income
Three Months Ended Nine Months Ended Percent
September 30, September 30, Leased
---------------------------------------------------------------------------
2003 2002 2003 2002 9-30-03 9-30-02
---------------------------------------------------------------------------
(In thousands)
Industrial $ 18,922 17,954 55,738 53,252
Other 297 266 884 814
------------------------------------------------
Total PNOI $ 19,219 18,220 56,622 54,066 91.6% 91.7%
================================================
PNOI from industrial properties increased $968,000 (5.4%) and $2,486,000
(4.7%) for the three and nine months ended September 30, 2003, compared to
September 30, 2002. Industrial properties held throughout the three and nine
months ended September 30, 2003 compared to the same periods in 2002 showed an
increase in PNOI of 1.5% for the three months and no change for the nine months.
Bank interest expense before amortization of loan costs and capitalized
interest was $367,000 for the three months ended September 30, 2003, a decrease
of $307,000 from the three months ended September 30, 2002. Bank interest
expense before amortization of loan costs and capitalized interest was
$1,349,000 for the nine months ended September 30, 2003, a decrease of $717,000
from the nine months ended September 30, 2002. Average bank borrowings were
$60,844,000 and $75,598,000 for the three and nine months ended September 30,
2003 compared to $85,301,000 and $87,225,000 for the same periods in 2002 with
average bank interest rates of 2.39% for both the three months and nine months
ended September 30, 2003 compared to 3.13% and 3.17% for the same periods in
2002. 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 and nine
months ended September 30, 2003 were $518,000 and $1,520,000 compared to
$532,000 and $1,620,000 for the same periods in 2002. Amortization of bank loan
costs was $102,000 and $307,000 for the three and nine months ended September
30, 2003 compared to $100,000 and $309,000 for the same periods in 2002.
Mortgage interest expense on real estate properties was $4,749,000 for the
three months ended September 30, 2003, an increase of $675,000 from the three
months ended September 30, 2002. Mortgage interest expense on real estate
properties was $13,717,000 for the nine months ended September 30, 2003, an
increase of $1,913,000 from the nine months ended September 30, 2002. The
increase in interest for the three and nine months was primarily due to several
new mortgages--a $40,000,000 loan obtained in the third quarter of 2002, an
$11,000,000 loan in the fourth quarter of 2002 and a $45,500,000 loan in the
third quarter of 2003. Amortization of mortgage loan costs was $96,000 and
$284,000 for the three and nine months ended September 30, 2003 compared to
$47,000 and $144,000 for the same periods in 2002.
Depreciation and amortization increased $130,000 for the three months and
$1,134,000 for the nine months ended September 30, 2003 compared to the same
periods in 2002 primarily due to properties acquired and transferred from
development during 2002 and 2003.
During the nine months ended September 30, 2003, the Company sold one
parcel of land and Air Park Distribution Center II and recognized total gains of
$112,000, which are recorded under Discontinued Operations in accordance with
SFAS No. 144 (see Note 3 in the Notes to Consolidated Financial Statements). In
the same period of 2002, the Company recognized a gain of $93,000 from the sale
of Carpenter Duplex, which is reported in Income From Continuing Operations on
Page 15
the income statement. The $66,000 loss on 7th Street is recorded under
Discontinued Operations in accordance with SFAS No. 144. A summary of these
sales follows:
Gain (Loss) on Real Estate Investments
Net Recognized
Sales Price Basis Gain (Loss)
--------------------------------------------
(In thousands)
2003
Real estate properties:
Air Park Distribution Center II, Memphis, TN $ 445 339 106
Orlando Central Park Land, Orlando, FL 396 390 6
--------------------------------------------
$ 841 729 112
============================================
2002
Real estate properties:
Carpenter Duplex, Dallas, TX $ 1,111 1,018 93
7th Street Service Center, Phoenix, AZ 1,806 1,872 (66)
--------------------------------------------
$ 2,917 2,890 27
============================================
The increase in general and administrative expenses of $144,000 and
$467,000 for the three and nine months ended September 30, 2003 compared to the
same periods in 2002 is primarily due to increased employee costs.
The National Association of Real Estate Investment Trusts has recommended
supplemental disclosures concerning straight-line rent, capital expenditures and
leasing costs. Straight-lining of rent increased income by $745,000 and
$1,648,000 for the three and nine months ended September 30, 2003 compared to
$450,000 and $958,000 for the same periods in 2002. Capital expenditures for the
three and nine months ended September 30, 2003 and 2002 were as follows:
Capital Expenditures
Three Months Ended Nine Months Ended
September 30, September 30,
Estimated --------------------------------------------------------
Useful Life 2003 2002 2003 2002
------------------------------------------------------------------------
(In thousands)
Upgrade on Acquisitions 40 yrs $ 10 8 51 8
Major Renovation/Redevelopment 40 yrs - - - 53
Tenant Improvements:
New Tenants Lease Life 963 1,380 2,763 2,847
New Tenants - First Generation(1) Lease Life 62 4 734 417
Renewal Tenants Lease Life 371 103 1,636 524
Other:
Building Improvements 5-40 yrs 150 155 586 621
Roofs 5-15 yrs 522 765 1,250 1,275
Parking Lots 5 yrs 10 10 95 30
Other 5 yrs 1 5 55 36
------------------------------------------------------
Total Capital Expenditures $ 2,089 2,430 7,170 5,811
======================================================
(1) First generation refers to space that has never been occupied.
Page 16
The Company's leasing costs are capitalized and included in other assets. The
costs are amortized over the terms of the associated leases and are included in
depreciation and amortization expense. Capitalized leasing costs for the three
months and nine months ended September 30, 2003 and 2002 were as follows:
Capitalized Leasing Costs
Three Months Ended Nine Months Ended
September 30, September 30,
Estimated ------------------------------------------------------
Useful Life 2003 2002 2003 2002
------------------------------------------------------------------------
(In thousands)
Development Lease Life $ 366 56 694 986
New Tenants Lease Life 916 825 1,641 1,311
New Tenants - First Generation(1) Lease Life - - 88 133
Renewal Tenants Lease Life 325 282 829 749
------------------------------------------------------
Total Capitalized Leasing Costs $ 1,607 1,163 3,252 3,179
======================================================
Amortization of Leasing Costs $ 874 895 2,375 2,228
======================================================
(1) First generation refers to space that has never been occupied.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $44,866,000 for the nine months
ended September 30, 2003. Other sources of cash were primarily from bank
borrowings, proceeds from mortgage notes payable, the Series D preferred stock
offering, a common stock offering, proceeds from exercise of stock options and
sales and liquidation of REIT shares. The Company distributed $25,319,000 in
common and $6,665,000 in preferred stock dividends during the nine months ended
September 30, 2003. Other primary uses of cash were for bank debt payments,
redemption of the Series A preferred stock, construction and development of
properties, purchases of real estate properties, mortgage note payments and
capital improvements at the various properties.
Total debt at September 30, 2003 and December 31, 2002 is detailed below.
The Company's bank credit facilities have certain restrictive covenants, and the
Company was in compliance with all of its debt covenants at September 30, 2003
and December 31, 2002.
September 30, 2003 December 31, 2002
-------------------------------------------------
(In thousands)
Mortgage notes payable - fixed rate $ 287,604 248,343
Bank notes payable - floating rate 55,852 73,957
-------------------------------------------------
Total debt $ 343,456 322,300
=================================================
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. EastGroup's current interest rate for this
facility is the Eurodollar rate plus 1.25%. At September 30, 2003, the interest
rate was 2.37% on $51,000,000. The interest rate on each tranche is currently
reset on a monthly basis. A $16,000,000 tranche was last reset on October 29,
2003 at 2.37% and a $42,000,000 tranche was last reset on November 12, 2003 at
2.37%. An unused facility fee is also assessed on this loan. This fee varies
according to debt-to-total asset value ratios and is currently .20%.
The Company has a one-year $12,500,000 unsecured revolving credit facility
with PNC Bank, N.A. that matures in January 2004. The interest rate on this
facility is based on LIBOR and varies according to debt-to-total asset value
ratios; it is currently LIBOR plus 1.175%. At September 30, 2003, the interest
rate was 2.295% on $4,852,000.
The Company anticipates that its current cash balance, operating cash
flows, and borrowings under its lines of credit will be adequate for (i)
operating and administrative expenses, (ii) normal repair and maintenance
Page 17
expenses at its properties, (iii) debt service obligations, (iv) distributions
to stockholders, (v) capital improvements, (vi) purchases of properties, (vii)
development, and (viii) any other normal business activities of the Company.
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.
Oct-Dec Fair
2003 2004 2005 2006 2007 Thereafter Total Value
------------------------------------------------------------------------------------------
Fixed rate debt (in thousands) $ 1,875 12,218 26,186 22,797 21,524 203,004(2) 287,604 311,856(1)
Weighted average interest rate 7.20% 7.64% 7.84% 7.61% 7.56% 6.61% 6.92%
Variable rate debt (in thousands) $ - 4,852 51,000 - - - 55,852 55,852
Weighted average interest rate - 2.30% 2.37% - - - 2.36%
(1) The fair value of the Company's fixed rate debt is estimated based on the
quoted market prices for similar issues or by discounting expected cash
flows at the rates currently offered to the Company for debt of the same
remaining maturities, as advised by the Company's bankers.
(2) The fixed rate debt shown above includes the Tower Automotive mortgage,
which has a variable interest rate based on the one-month LIBOR. EastGroup
has an interest rate swap agreement that fixes the rate at 4.03% for the
8-year term. Interest and related fees result in an annual effective
interest rate of 5.3%.
As the table above incorporates only those exposures that exist as of
September 30, 2003, it does not consider those exposures or positions that could
arise after that date. The ultimate impact on the Company of 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 24 basis points, interest
expense and cash flows would increase or decrease by approximately $132,000
annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $10,880,000 Tower Automotive Center
recourse mortgage, which is summarized in the table below. Under the swap
agreement, the Company effectively pays a fixed rate of interest over the term
of the agreement without the exchange of the underlying notional amount. This
swap is designated as a cash flow hedge and is considered to be fully effective
in hedging the variable rate risk associated with the Tower mortgage loan.
Changes in the fair value of the swap are recognized in accumulated other
comprehensive income. The Company does not hold or issue this type of derivative
contract for trading or speculative purposes.
Current
Type of Notional Maturity Fixed Fair Market Value Fair Market Value
Hedge Amount Date Reference Rate Rate at 9/30/03 at 12/31/02
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,880 12/31/10 1 month LIBOR 4.03% ($205) ($297)
Page 18
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 nonrenewal 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 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 and the
effects to the economy from possible terrorism and related world events, 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.
ITEM 4. CONTROLS AND PROCEDURES.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that as of the end of
the Company's most recent fiscal quarter the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
In addition, the Company reviewed its internal controls, and there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
Page 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Form 10-Q Exhibits:
3(a) Articles of Incorporation (incorporated by reference to Appendix
B to the Registrant's Proxy Statement dated April 24, 1997).
3(b) Bylaws of the Registrant (incorporated by reference to Appendix C
to the Registrant's Proxy Statement dated April 24, 1997).
3(c) Articles Supplementary of the Company relating to the 9.00%
Series A Cumulative Redeemable Preferred Stock of the Company
(incorporated by reference to the Company's Form 8-A filed June
15, 1998).
3(d) Articles Supplementary of the Company relating to the Series B
Cumulative Convertible Preferred Stock (incorporated by reference
to the Company's Form 8-K filed on October 1, 1998).
3(e) Articles Supplementary of the Company relating to the Series C
Preferred Stock (incorporated by reference to the Company's Form
8-A filed December 9, 1998).
3(f) Certificate of Correction to Articles Supplementary with respect
to Series B Cumulative Convertible Preferred Stock (incorporated
by reference to the Registrant's Form 10-K for the year ended
December 31, 1998).
3(g) Articles Supplementary of the Company relating to the 7.95%
Series D Cumulative Redeemable Preferred Stock (incorporated by
reference to the Company's Form 8-A filed June 6, 2003).
3(h) Articles Supplementary of the Company relating to the
reclassification of the Series A Cumulative Redeemable Preferred
Stock of the Company to the Company's common stock (filed
herewith).
31(a)Certification of David H. Hoster II, Chief Executive Officer.
31(b) Certification of N. Keith McKey, Chief Financial Officer.
32(a)Certification of David H. Hoster II, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350.
32(b)Certification of N. Keith McKey, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K during the quarter ended September 30, 2003:
1. A Form 8-K was filed on July 17, 2003 (a) reporting under Item 5
thereof the issuance of the Company's 7.95% Series D Cumulative
Redeemable Preferred Stock, and (b) filing as exhibits under Item
7 thereof, Articles Supplementary creating the Series D Preferred
Stock and opinions of counsel.
2. A Form 8-K was filed on July 22, 2003 under Item 12,
incorporating by reference EastGroup's July 21, 2003 press
release, setting forth the Company's second quarter 2003
earnings.
Page 20
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.
DATE: November 12, 2003
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
Page 21