U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NUMBER 1-07094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 ONE JACKSON PLACE
188 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (601) 354-3555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SHARES OF COMMON STOCK, $.0001 PAR VALUE,
SHARES OF SERIES D 7.95% CUMULATIVE REDEEMABLE PREFERRED STOCK, $.0001 PAR VALUE
NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES (x) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. YES (x) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES (x) NO ( )
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter: $495,531,000.
The number of shares of common stock, $.0001 par value, outstanding as of
March 10, 2004 was 20,886,230.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of
Shareholders are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS.
Organization
EastGroup Properties, Inc. (the Company or EastGroup) is an equity real
estate investment trust (REIT) organized in 1969. The Company has elected to be
taxed as a REIT under Sections 856-860 of the Internal Revenue Code (the Code),
as amended, and intends to continue to qualify to be so taxed.
Available Information
The Company maintains a website at www.eastgroup.net. The Company posts its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after it electronically files or furnishes such materials to the
Securities and Exchange Commission (SEC). In addition, the Company's website
includes items related to corporate governance matters, including, among other
things, the Company's corporate governance guidelines, charters of various
committees of the Board of Directors, and the Company's code of business conduct
and ethics applicable to all employees, officers and directors. The Company
intends to disclose on its website any amendment to, or waiver of, any provision
of this code of business conduct and ethics applicable to the Company's
directors and executive officers that would otherwise be required to be
disclosed under the rules of the SEC or the New York Stock Exchange. Copies of
these reports and corporate governance documents may be obtained, free of
charge, from the Company's website. Any shareholder also may obtain copies of
these documents, free of charge, by sending a request in writing to: Investor
Relations, EastGroup Properties, Inc., 300 One Jackson Place, 188 East Capitol
Street, Jackson, MS 39201-2195.
Administration
EastGroup maintains its principal executive office and headquarters in
Jackson, Mississippi. The Company has regional offices in Phoenix, Orlando and
Houston and property management offices in Jacksonville, Tampa and Fort
Lauderdale. Offices at these locations allow the Company to manage all of its
Mississippi, Arizona, Florida and Houston properties, which together account for
54% of the Company's total portfolio on a square foot basis. In addition, the
Company provides property administration (accounting of operations) for 77% of
its total portfolio. The Company uses third-party management groups for the
remainder of its portfolio, but continues to increase the number of self-managed
properties. The regional offices in Arizona, Florida and Texas also provide
development capability and oversight in those states. As of March 10, 2004,
EastGroup had 53 full-time and four part-time employees.
Operations
EastGroup is focused on the acquisition, operation and development of
industrial properties in major Sunbelt markets throughout the United States with
a special emphasis in the states of Arizona, California, Florida and Texas. The
Company's goal is to maximize shareholder value by being a leading provider of
functional, flexible, and quality business distribution space for location
sensitive tenants primarily in the 5,000 to 50,000 square foot range.
EastGroup's strategy for growth is based on ownership of premier distribution
facilities generally clustered near major transportation features in supply
constrained submarkets.
During 2003, EastGroup expanded its holdings principally through the
acquisition of five properties (442,000 square feet) and 82 acres of land for
future development and by the transfer of three properties and one expansion
(241,000 square feet) from development to real estate properties. The Company's
current portfolio includes 19.4 million square feet with an additional 746,000
square feet under development.
EastGroup may invest in other real estate investment trusts that may be a
potential candidate for a combination with EastGroup. At December 31, 2003, the
Company had no investments in other REITs.
EastGroup incurs short-term floating rate debt in connection with the
acquisition of real estate and payment of costs of development projects and, as
market conditions permit, replaces floating rate debt with equity, including
preferred equity, and/or fixed-rate term loans secured by real property.
EastGroup also may, in appropriate circumstances, acquire one or more properties
in exchange for EastGroup's securities.
EastGroup holds its properties as long-term investments, but may determine
to sell certain properties that no longer meet its investment criteria. The
Company may provide financing in connection with such sales of property if
market conditions require, but it does not presently intend to make loans other
than in connection with such transactions.
The Company intends to continue to qualify as a REIT under the Code. To
maintain its status as a REIT, the Company is required to distribute 90% of its
ordinary taxable income to its shareholders. The Company has the option of (i)
reinvesting the sales price of properties sold through tax-deferred exchanges,
allowing for a deferral of capital gains on the sale, (ii) paying out capital
gains to the stockholders with no tax to the Company, or (iii) treating the
capital gains as having been distributed to the stockholders, paying the tax on
the gain deemed distributed and allocating the tax paid as a credit to the
stockholders.
EastGroup has no present intentions of underwriting securities of other
issuers. The strategies and policies set forth above were determined and are
subject to review by EastGroup's Board of Directors, which may change such
strategies or policies based upon its evaluation of the state of the real estate
market, the performance of EastGroup's assets, capital and credit market
conditions, and other relevant factors. EastGroup provides annual reports to its
stockholders, which contain financial statements audited by the Company's
independent public accountants.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an
owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. Many such laws
impose liability without regard to whether the owner knows of, or was
responsible for, the presence of such hazardous or toxic substances. The
presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to use such property as collateral in its borrowings. All of
EastGroup's properties have been subjected to environmental audits by
independent environmental consultants. These reports have not revealed any
potential significant environmental liability. Management of EastGroup is not
aware of any environmental liability that would have a material adverse effect
on EastGroup's business, assets, financial position or results of operations.
ITEM 2. PROPERTIES.
EastGroup owned 166 industrial properties and one office building at
December 31, 2003. These properties are located throughout the United States,
primarily in the Sunbelt states of Arizona, California, Florida and Texas, the
majority of which are clustered around major transportation features in supply
constrained submarkets. The Company has developed over 20% of its total
portfolio. The Company's focus is the ownership of business distribution space
(75% of the total portfolio) with the remainder in bulk distribution space (21%)
and business service space (4%). Business distribution space properties are
typically multi-tenant buildings with a building depth of 200 feet or less,
clear height of 20-24 feet, office finish of 10-25% and truck courts with a
depth of 100-120 feet. See Consolidated Financial Statement Schedule III - Real
Estate Properties and Accumulated Depreciation for a detailed listing of the
Company's properties.
At December 31, 2003, EastGroup did not own any single property that was
10% or more of total book value or 10% or more of total gross revenues and thus
is not subject to the requirements of Items 14 and 15 of Form S-11.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material litigation nor, to
its knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business or which is expected to be covered by the Company's liability
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II. OTHER INFORMATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
SHARES OF COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's shares of Common Stock are presently listed for trading on
the New York Stock Exchange under the symbol "EGP." The following table shows
the high and low share prices for each quarter reported by the New York Stock
Exchange during the past two years and per share distributions paid for each
quarter.
Calendar 2003 Calendar 2002
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Quarter High Low Distributions High Low Distributions
-------------------------------------------------------------------------------------------------
First $26.12 23.64 $ .475 $26.30 22.09 $ .470
Second 27.65 25.45 .475 26.30 23.48 .470
Third 28.70 26.33 .475 26.50 22.10 .470
Fourth 33.10 27.81 .475 25.99 22.55 .470
------------ ------------
$1.900 $1.880
============ ============
As of March 10, 2004, there were approximately 1,100 holders of record of
the Company's 20,886,230 outstanding shares of common stock. Of the $1.90 per
common share total distributions paid in 2003, $1.68388 per share was taxable as
ordinary income for federal income tax purposes and $.21612 per share
represented a return of capital. Of the $1.88 per share distributions paid in
2002, $1.8348 per share was taxable as ordinary income for federal income tax
purposes and $.0452 per share represented a long-term 20% capital gain.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth selected consolidated financial data for the
Company and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report.
Years Ended December 31,
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2003 2002 2001 2000 1999
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(In thousands, except per share data)
OPERATING DATA:
Revenues
Income from real estate operations $ 107,771 103,031 100,310 93,642 82,969
Interest 22 309 1,041 975 1,367
Gain on securities 421 1,836 2,967 2,154 30
Other 227 617 727 1,068 1,519
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108,441 105,793 105,045 97,839 85,885
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Expenses
Operating expenses from real estate operations 31,659 29,902 25,518 22,198 19,796
Interest 19,015 17,387 17,823 18,570 17,688
Depreciation and amortization 32,050 30,318 26,963 23,370 20,169
General and administrative 4,966 4,179 4,573 5,607 4,519
Minority interest in joint ventures 416 375 350 377 433
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88,106 82,161 75,227 70,122 62,605
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Income before gain on sale of real estate investments 20,335 23,632 29,818 27,717 23,280
Gain on sale of real estate investments - 93 4,311 8,771 15,357
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Income before cumulative effect of change in accounting principle 20,335 23,725 34,129 36,488 38,637
Cumulative effect of change in accounting principle (1) - - - - (418)
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Income from continuing operations 20,335 23,725 34,129 36,488 38,219
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Discontinued operations
Income (loss) from real estate operations (2) (33) 53 24 136
Gain (loss) on sale of real estate investments 112 (66) - - -
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Income (loss) from discontinued operations 110 (99) 53 24 136
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Net income 20,445 23,626 34,182 36,512 38,355
Preferred dividends-Series A 2,016 3,880 3,880 3,880 3,880
Preferred dividends-Series B 2,598 6,128 6,128 6,128 2,246
Preferred dividends-Series D 1,305 - - - -
Costs on redemption of Series A preferred 1,778 - - - -
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Net income available to common stockholders $ 12,748 13,618 24,174 26,504 32,229
=================================================================
BASIC PER SHARE DATA:
Income from continuing operations $ 0.71 0.87 1.54 1.70 2.00
Income (loss) from discontinued operations 0.01 (0.01) 0.00 0.00 0.01
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Net income available to common stockholders $ 0.72 0.86 1.54 1.70 2.01
=================================================================
Weighted average shares outstanding 17,819 15,868 15,697 15,623 16,046
DILUTED PER SHARE DATA:
Income from continuing operations $ 0.69 0.85 1.51 1.68 1.98
Income (loss) from discontinued operations 0.01 (0.01) 0.00 0.00 0.01
-----------------------------------------------------------------
Net income available to common stockholders $ 0.70 0.84 1.51 1.68 1.99
=================================================================
Weighted average shares outstanding 18,194 16,237 16,046 15,798 17,362
OTHER PER SHARE DATA:
Book value (at end of year) $ 16.01 15.11 16.19 16.55 16.47
Common distributions declared 1.90 1.88 1.80 1.58 1.48
Common distributions paid 1.90 1.88 1.80 1.58 1.48
BALANCE SHEET DATA (AT END OF YEAR):
Real estate investments, at cost $ 842,577 791,684 741,755 703,846 649,754
Real estate investments, net of accumulated depreciation 695,643 672,707 649,554 633,726 598,175
Total assets 729,267 703,737 684,062 666,414 632,151
Mortgage, bond and bank loans payable 338,272 322,300 291,072 270,709 243,665
Total liabilities 360,518 345,493 311,613 289,325 260,499
Minority interest in joint ventures and operating partnership 1,804 1,759 1,739 1,697 2,340
Total stockholders' equity 366,945 356,485 370,710 375,392 369,312
(1) Represents previously capitalized start-up and organizational costs that
were expensed on January 1, 1999 in accordance with the requirements of
Statement of Position 98-5.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
EastGroup's goal is to maximize shareholder value by being a leading
provider of functional, flexible, and quality business distribution space for
location sensitive tenants primarily in the 5,000 to 50,000 square foot range.
The Company develops, owns and operates distribution facilities, the majority of
which are clustered around major transportation features in supply constrained
submarkets in major Sunbelt markets. The Company's core markets are primarily in
the states of California, Florida, Texas and Arizona.
The Company primarily generates its revenues by leasing space at its real
estate properties. As such, EastGroup's greatest challenge is leasing space at
competitive market rates. The Company's primary risks are lease expirations and
rental decreases resulting from deteriorating market conditions. During 2003,
leases on 24.0% of EastGroup's portfolio square footage expired, and the Company
was successful in renewing or re-leasing 70% of that total. In addition,
EastGroup leased 1.5 million square feet of space that was vacant at December
31, 2002. EastGroup's total leased percentage increased to 94.0% at December 31,
2003 from 93.2% in the prior year. Due to sluggishness in the economy, the
Company experienced average rental decreases of 4.0% for 2003. The expiring
leases for 2004 were 14.5% of the portfolio at December 31, 2003. Since the end
of 2003, the Company has experienced positive leasing activity and reduced this
percentage to 10.9% as of March 10, 2004.
The Company generates new revenues through its acquisition and development
programs. During 2003, the Company purchased five properties and transferred
three properties and one expansion from development. For 2004, the Company has
projected $10 million in new acquisitions and has identified approximately $34
million of development opportunities.
EastGroup continues to see targeted development as a major contributor to
the Company's growth. The Company mitigates risks associated with development by
maintaining a Board approved maximum level of land held for development and
adjusting development start dates according to leasing activity.
The Company primarily funds its acquisition and development programs
through a $175 million line of credit (as discussed in Liquidity and Capital
Resources below). As market conditions permit, EastGroup issues equity,
including preferred equity, and/or employs fixed-rate, nonrecourse first
mortgage debt to replace the short-term bank borrowings. The Company has no
off-balance sheet arrangements.
During 2003, the Company took advantage of the attractive capital markets
and strengthened its balance sheet with two direct placements of common stock, a
direct placement of perpetual preferred stock and the closing of a nonrecourse
first mortgage. EastGroup used the proceeds from the sale of the 7.95% Series D
preferred offering and a portion of a common stock offering to redeem all of the
Company's 9.00% Series A preferred, resulting in a lower cost of capital. During
2004, the Company plans to obtain $25-30 million of additional fixed rate debt,
using the proceeds to reduce variable rate bank line balances.
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 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. The Company continues to calculate FFO based on the National
Association of Real Estate Investment Trust's (NAREIT's) definition, which
excludes gains on depreciable real estate. See Note 11 in the Notes to the
Consolidated Financial Statements for reconciliations of PNOI and FFO Available
to Common Stockholders to Net Income.
PNOI is a supplemental industry reporting measurement used to evaluate the
performance of the Company's real estate investments. The Company believes that
the exclusion of depreciation and amortization in the industry's calculation of
PNOI provides a supplemental indicator of the properties' performance since real
estate values have historically risen or fallen with market conditions. PNOI as
calculated by the Company may not be comparable to similarly titled but
differently calculated measures for other 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. Real
estate income is comprised of rental income including straight-line rent
adjustments, pass-through income and other real estate income including
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
recoverable (gross leases represent only a small portion of the Company's total
leases). Increases in property operating expenses are fully recoverable under
net leases and recoverable to a high degree under modified gross leases.
Modified gross leases often include base year amounts and expense increases over
these amounts are recoverable. The Company's exposure to property operating
expenses is primarily due to vacancies and leases for occupied space that limit
the amount of expenses that can be recoverable.
The Company believes FFO is an appropriate measure of performance for
equity real estate investment trusts. The Company believes that excluding
depreciation and amortization in the calculation of FFO is appropriate since
real estate values have historically increased or decreased based on market
conditions. FFO is not considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance,
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 Company's key drivers affecting FFO are changes in PNOI (as
discussed above) and interest rates, and the amount of leverage the Company
employs.
The Company analyzes the following performance trends in evaluating the
progress of the Company:
o The FFO change represents the increase or decrease in FFO from the same
quarter this year compared to last year. The change was negative (FFO
decreased) for the last seven quarters ended December 31, 2003. The fourth
quarter of 2003 showed a decrease of 3.1%. The Company is budgeting an
increase for 2004, primarily due to acquisitions and developments.
o Same property NOI change represents the PNOI increase or decrease for
operating properties owned during the entire current period and prior year
reporting period. The change was negative for the last seven quarters ended
June 30, 2003, caused by decreasing rental rates and occupancy. The third
and fourth quarters of 2003 showed small increases and the Company is
budgeting a small increase for 2004.
o Occupancy is the percentage of total leasable square footage for which the
lease term has commenced as of the close of the reporting period. For the
last seven quarters ended December 31, 2003, occupancy has been in the
range of 90% to 92%. For 2004, occupancy is budgeted to be in a range of
89% to 91%.
o Rental rate change represents the rental rate increase or decrease on new
leases compared to expiring leases on the same space. Rental rates
decreased on expiring leases in the last five quarters ended December 31,
2003. The Company is budgeting a decrease in rental rates for 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's management considers the following accounting policies and
estimates to be critical to the reported operations of the Company.
Real Estate Properties
In accordance with Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," the Company allocates the purchase price of
acquired properties to net tangible and identified intangible assets based on
their respective fair values. The allocation to tangible assets (land, building
and improvements) is based upon management's determination of the value of the
property as if it were vacant using discounted cash flow models. Factors
considered by management include an estimate of carrying costs during the
expected lease-up periods considering current market conditions and costs to
execute similar leases. The remaining purchase price is allocated among three
categories of intangible assets consisting of the above or below market
component of in-place leases, the value of in-place leases and the value of
customer relationships. The value allocable to the above or below market
component of an acquired in-place lease is determined based upon the present
value (using a discount rate which reflects the risks associated with the
acquired leases) of the difference between (i) the contractual amounts to be
paid pursuant to the lease over its remaining term, and (ii) management's
estimate of the amounts that would be paid using fair market rates over the
remaining term of the lease. The amounts allocated to favorable and unfavorable
in-place leases are included in Other Assets and Other Liabilities,
respectively, on the consolidated balance sheet and are amortized to rental
income over the remaining terms of the respective leases. The total amount of
intangible assets is further allocated to in-place lease values and to customer
relationship values based upon management's assessment of their respective
values. These intangible assets are included in Other Assets on the consolidated
balance sheet and are amortized over the remaining term of the existing lease,
or the anticipated life of the customer relationship, as applicable.
During the industrial development stage, costs associated with development
(i.e., land, construction costs, interest expense during construction and
lease-up, property taxes and other direct and indirect costs associated with
development) are aggregated into the total capitalization of the property.
Included in these costs are management's estimates for the portions of internal
costs (primarily personnel costs) that are deemed directly or indirectly related
to such development activities. Because the estimation of capitalizable internal
costs requires management's judgment, the Company believes internal cost
capitalization is a critical accounting estimate.
The Company reviews its real estate investments for impairment of value
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If any real estate investment is considered
permanently impaired, a loss is recorded to reduce the carrying value of the
property to its estimated fair value. Real estate assets to be sold are reported
at the lower of the carrying amount or fair value less selling costs. The
evaluation of real estate investments involves many subjective assumptions
dependent upon future economic events that affect the ultimate value of the
property. Currently, the Company's management is not aware of any impairment
issues nor has it experienced any significant impairment issues in recent years.
In the event of an impairment, the property's basis would be reduced and the
impairment would be recognized as a current period charge in the income
statement.
Valuation of Receivables
The Company is subject to tenant defaults and bankruptcies that could
affect the collection of outstanding receivables. In order to mitigate these
risks, the Company performs credit reviews and analyses on prospective tenants
before significant leases are executed. The Company quarterly evaluates
outstanding receivables and estimates the allowance for uncollectible accounts.
Management specifically analyzes aged receivables, customer credit-worthiness,
historical bad debts and current economic trends when evaluating the adequacy of
the allowance for doubtful accounts. The Company believes that its allowance for
uncollectible accounts is adequate for its outstanding receivables at December
31, 2003 and 2002. In the event that the allowance for uncollectible accounts is
insufficient for an account that is subsequently written off, additional bad
debt would be recognized as a current period charge in the income statement.
Tax Status
EastGroup, a Maryland corporation, has qualified as a real estate
investment trust under Sections 856-860 of the Internal Revenue Code and intends
to continue to qualify as such. To maintain its status as a REIT, the Company is
required to distribute 90% of its ordinary taxable income to its stockholders.
The Company has the option of (i) reinvesting the sales price of properties sold
through tax-deferred exchanges, allowing for a deferral of capital gains on the
sale, (ii) paying out capital gains to the stockholders with no tax to the
Company, or (iii) treating the capital gains as having been distributed to the
stockholders, paying the tax on the gain deemed distributed and allocating the
tax paid as a credit to the stockholders. The Company distributed all of its
2003, 2002 and 2001 taxable income to its stockholders. Accordingly, no
provision for income taxes was necessary.
FINANCIAL CONDITION
EastGroup's assets were $729,267,000 at December 31, 2003, an increase of
$25,530,000 from December 31, 2002. Liabilities increased $15,025,000 to
$360,518,000 and stockholders' equity increased $10,460,000 to $366,945,000
during the same period. Book value per common share increased from $15.11 at
December 31, 2002 to $16.01 at December 31, 2003. The paragraphs that follow
explain these changes in detail.
Assets
Real Estate Properties
Real estate properties increased $40,587,000 during the year ended December
31, 2003. This increase was due to the purchase of five properties, all located
in the Company's core markets, for a total of $18,639,000, as detailed below;
the transfer of three properties, one expansion and two parcels of land from
development with total costs of $10,171,000; capital improvements of $10,929,000
and improvements of $1,748,000 on development properties transferred to real
estate properties in the 12-month period following transfer. 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 and the write-off of tenant
improvements of $116,000.
Real Estate Properties
Acquired in 2003 Location Size Date Acquired Cost (1)
- ----------------------------------------------------------------------------------------------------------------
(In thousands)
Altamonte Commerce Center II Orlando, FL 62,000 sq. ft. 05-20-03 $ 3,363
Airport Commons Distribution Center Phoenix, AZ 63,000 sq. ft. 05-28-03 2,510
Shady Trail Distribution Center Dallas, TX 118,000 sq. ft. 09-16-03 4,256
Expressway Commerce Center II Tampa, FL 72,000 sq. ft. 10-17-03 4,260
Oak Creek Distribution Center Tampa, FL 127,000 sq. ft. 11-12-03 4,250
----------------
Total Acquisitions $ 18,639
================
(1) Total cost of the properties acquired was $20,512,000, of which $18,639,000
was allocated to real estate properties as indicated above. In accordance with
SFAS No. 141, "Business Combinations," intangibles associated with the purchases
of real estate were allocated as follows: $1,571,000 to in-place lease
intangibles, $342,000 to customer relationship intangibles and $84,000 to
favorable in-place leases (all included in Other Assets on the balance sheet);
$124,000 to unfavorable in-place leases (included in Other Liabilities on the
balance sheet). All of these costs will be amortized over the remaining lives of
the associated leases in place at the time of acquisition except for the
customer relationship intangibles, which will be amortized over the expected
useful lives of the related intangibles. The Company paid cash of $19,034,000
for the properties and intangibles acquired and assumed a mortgage of
$1,478,000, which was repaid in 2003.
Development
EastGroup's development program continues to be a major contributor to the
Company's growth. Development increased $10,319,000 during the year ended
December 31, 2003. This increase was due to development costs of $20,490,000 on
existing and completed development properties exceeding decreases due to the
transfer of three development properties and one expansion with total costs of
$9,537,000 and the transfer of two parcels of land with total costs of $634,000
to real estate properties.
Increases in development during 2003 included a 72-acre land acquisition in
Orlando, which is in the planning stages to become SouthRidge Commerce Park.
This proposed development is strategically located at the intersection of the
Beeline Expressway and John Young Parkway in south central Orlando and is
projected to eventually contain ten buildings with a total of 760,000 square
feet of industrial space. Construction of the first two buildings is presently
scheduled to begin in the second quarter of 2004.
The Company has identified approximately $34 million of development
opportunities for 2004. The timing of these potential development starts will
depend on specific submarket conditions. Other than the new SouthRidge Commerce
Park development in Orlando, all of the projected building starts represent
additional phases of existing developments in Tampa, Fort Lauderdale, Orlando
and Houston.
Total capital investment for development for the year ended December 31,
2003 was $22,238,000. In addition to the costs incurred for the year ended
December 31, 2003 as detailed in the table below, development costs included
$1,748,000 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.
Costs Incurred
------------------------------------
For the Year Cumulative as Estimated
Size Ended 12/31/03 of 12/31/03 Total Costs (1)
-----------------------------------------------------------------------
(Square feet) (In thousands)
Lease-Up:
World Houston 19, Houston, TX 66,000 $ 542 2,523 3,100
World Houston 20, Houston, TX 62,000 264 2,222 2,800
Executive Airport CC I & III, Ft. Lauderdale, FL 85,000 1,200 5,951 6,400
Expressway Commerce Center, Tampa, FL 103,000 2,536 6,157 6,400
Sunport Center IV, Orlando, FL 63,000 2,056 3,082 3,400
Techway Southwest II, Houston, TX 94,000 3,116 4,085 4,800
-----------------------------------------------------------------------
Total Lease-up 473,000 9,714 24,020 26,900
-----------------------------------------------------------------------
Under Construction:
Santan 10, Chandler, AZ 65,000 2,612 2,612 3,800
World Houston 17, Houston, TX 66,000 1,465 1,465 3,400
-----------------------------------------------------------------------
Total Under Construction 131,000 4,077 4,077 7,200
-----------------------------------------------------------------------
Prospective Development (Principally Land):
Phoenix, AZ (2) 40,000 (1,002) 374 2,000
Tucson, AZ 70,000 - 326 3,500
Tampa, FL 140,000 125 1,953 7,700
Orlando, FL 892,000 5,826 7,711 49,600
Fort Lauderdale, FL 55,000 243 1,846 3,800
El Paso, TX 251,000 220 2,444 7,600
Houston, TX 792,000 1,150 6,722 38,500
Jackson, MS 32,000 33 564 1,900
-----------------------------------------------------------------------
Total Prospective Development 2,272,000 6,595 21,940 114,600
-----------------------------------------------------------------------
2,876,000 $ 20,386 50,037 148,700
=======================================================================
Completed Development and Transferred
To Real Estate Properties During the
Year Ended December 31, 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.
(2) Development costs that existed prior to 2003 for Santan 10 were moved from
Prospective Development upon commencement of construction in 2003.
Real estate held for sale was $1,375,000 at December 31, 2003 and 2002;
however, one property and one parcel of land with total costs of $784,000 were
transferred to real estate held for sale and subsequently sold in 2003.
Accumulated depreciation on real estate properties and real estate held for
sale increased $27,957,000 due to depreciation expense of $28,128,000 on real
estate properties, offset by the sale of one property with accumulated
depreciation of $55,000 and the write-off of tenant improvements of $116,000.
LIABILITIES
Mortgage notes payable increased $37,379,000 during the year ended December
31, 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 based on 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 note) and regularly scheduled principal payments
of $6,786,000. The weighted average interest rate on the repaid mortgages was
8.24%. A detail of the Company's mortgages is provided in Note 5 in the Notes to
the Consolidated Financial Statements.
Notes payable to banks decreased $21,407,000 as a result of repayments of
$197,351,000 exceeding advances of $175,944,000. The Company's credit facilities
are described in greater detail under Liquidity and Capital Resources.
STOCKHOLDERS' EQUITY
In May 2003, the Company completed a direct placement offering of 571,429
shares of its common stock at $26.25 per share. The proceeds of the offering
were approximately $14,461,000, net of all related expenses.
In July 2003, EastGroup sold 1,320,000 shares of Series D 7.95% Cumulative
Redeemable Preferred Stock at $25.00 per share in a direct placement for net
proceeds of $32,326,000. The preferred stock is redeemable by the Company at
$25.00 per share, plus accrued and unpaid dividends, on or after July 2, 2008.
The preferred stock has no stated maturity, sinking fund or mandatory redemption
and is not convertible into any other securities of the Company.
Also in July 2003, the Company redeemed all of the outstanding Series A
9.00% Cumulative Redeemable Preferred Stock. The redemption price of these
shares (excluding accrued dividends) was $43,125,000. Costs on redemption of
$1,778,000, which included the original issuance costs of $1,768,000 related to
these shares in 1998, were recorded as a preferred issuance cost and treated in
a manner similar to a preferred dividend in the third quarter of 2003. The
redemption cost was funded with the proceeds from the Company's common offering
in May 2003 and the 7.95% Series D Cumulative Redeemable Preferred Stock
offering in earlier July 2003.
During 2003, all of the Company's 2,800,000 shares of the Series B 8.75%
Cumulative Convertible Preferred Stock were converted into 3,181,920 common
shares. The holder, Five Arrows Realty Securities II, L.L.C. (Five Arrows),
began converting the shares in April 2003 and completed the conversion in
November 2003. Since it was the policy of Five Arrows to not hold common stock,
the common shares were sold in the open market throughout the year with the
final shares being sold on December 15, 2003.
In November 2003, the Company completed a direct placement offering of
847,458 shares of its common stock at $29.50 per share. The proceeds of the
offering were approximately $24,513,000, net of all related expenses.
For the year 2003, total outstanding common stock increased by 4,749,424
shares primarily due to the two common share offerings totaling 1,418,887 shares
and the conversion of the convertible preferred shares to 3,181,920 common
shares. The market value of the Company's total outstanding common stock
increased $264,584,000, or 64%, during 2003. Total market capitalization (equity
plus debt) is currently in excess of $1 billion, and the market liquidity of the
Company's common stock has increased. Additionally, in August 2003, the Company
received an investment grade issuer rating (BBB-) from Fitch Ratings.
Undistributed earnings decreased $22,704,000 in 2003, resulting in a
balance of distributions in excess of earnings of $15,595,000. The decrease was
a result of dividends on common and preferred stock of $41,371,000 and the
write-off of original issuance costs and other costs of redemption of the Series
A Preferred stock of $1,778,000 exceeding net income for financial reporting
purposes of $20,445,000.
RESULTS OF OPERATIONS
2003 Compared to 2002
Net income available to common stockholders for 2003 was $12,748,000 ($.72
per basic share and $.70 per diluted share) compared to $13,618,000 ($.86 per
basic share and $.84 per diluted share) in 2002. Diluted earnings per share
(EPS) for 2003 was $.10 lower in 2003 due to the write-off of the original
issuance costs of the Series A Preferred Stock which was redeemed in July 2003.
The increase in depreciation and amortization of $.11 per share was primarily
due to acquisitions and properties transferred to real estate operations from
development. Also, gains on securities were $.02 per share in 2003 compared with
$.11 per share in 2002. There was a positive effect on the EPS calculation in
2003 of $.15 per share due to the conversion of the convertible preferred stock
during 2003.
PNOI from continuing operations increased by $2,983,000 or 4.1% for 2003
compared to 2002. PNOI by property type and percentage leased were as follows:
Property Net Operating Income
Years Ended Percent
December 31, Leased
----------------------------------------------------
2003 2002 12-31-03 12-31-02
----------------------------------------------------
(In thousands)
Industrial $ 74,945 72,050
Other 1,167 1,079
-------------------------
Total PNOI $ 76,112 73,129 94.0% 93.2%
=========================
PNOI from industrial properties increased $2,895,000 (4.0%) for 2003
compared to 2002 primarily due to increased average occupancy. Expense to
revenue ratios were basically flat for the two periods. Industrial properties
held throughout 2003 and 2002 showed a slight decrease in PNOI of 0.2%.
Bank interest expense before amortization of loan costs and capitalized
interest was $1,651,000 for 2003, a decrease of $934,000 from 2002. This
decrease was due to lower average bank borrowings and lower average bank
interest rates in 2003. Average bank borrowings were $65,399,000 in 2003
compared to $83,039,000 in 2002 with average bank interest rates of 2.53% in
2003 compared to 3.11% in 2002. During 2003, the Company obtained a new
$45,500,000 nonrecourse first mortgage loan and used the proceeds to reduce bank
borrowings. Interest costs incurred during the period of construction of real
estate properties are capitalized and offset against interest expense. The
interest costs capitalized on real estate properties for 2003 were $2,077,000
compared to $2,061,000 in 2002. Amortization of bank loan costs was $409,000 in
2003 compared to $407,000 in 2002. See Note 4 in the Notes to the Consolidated
Financial Statements for disclosure relating to the Company's notes payable to
banks.
Mortgage interest expense on real estate properties was $18,641,000 for
2003, an increase of $2,388,000 from 2002. Amortization of mortgage loan costs
was $391,000 in 2003 compared to $203,000 in 2002. The increases in 2003 were
primarily due to several new mortgages in 2002 and 2003. The Company has taken
advantage of the lower available interest rates in the market during the past
two years and fixed several new large mortgages at attractive rates, thereby
lowering the weighted average interest rates on mortgage debt from 7.3% in 2002
to 6.9% in 2003. This strategy has also reduced the Company's exposure to
changes in variable floating bank rates as the proceeds from the mortgages were
used to reduce short-term bank borrowings. Management believes EastGroup is in a
position to take advantage of future opportunities for new acquisitions and
development in an improving economy. See Note 5 in the Notes to the Consolidated
Financial Statements for a summary of the Company's mortgage notes payable.
Depreciation and amortization increased $1,732,000 in 2003 compared to
2002. This increase was primarily due to properties acquired and transferred
from development during 2002 and 2003.
The increase in general and administrative expenses of $787,000 for 2003
compared to 2002 is primarily due to growth of the Company and increased
management bonuses for 2003.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent increased
income by $2,326,000 for 2003 compared to $1,953,000 in 2002. Capital
expenditures for the years ended December 31, 2003 and 2002 were as follows:
Capital Expenditures
Years Ended
December 31,
Estimated -------------------------
Useful Life 2003 2002
-------------------------------------------
(In thousands)
Upgrade on Acquisitions 40 yrs $ 173 61
Major Renovation/Redevelopment 40 yrs - 53
Tenant Improvements:
New Tenants Lease Life 4,222 5,118
New Tenants (first generation) (1) Lease Life 874 630
Renewal Tenants Lease Life 2,095 1,150
Other:
Building Improvements 5-40 yrs 960 853
Roofs 5-15 yrs 2,383 1,588
Parking Lots 3-5 yrs 133 179
Other 5 yrs 89 54
-------------------------
Total capital expenditures $ 10,929 9,686
=========================
(1) First generation refers to space that has never been occupied.
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
years ended December 31, 2003 and 2002 were as follows:
Capitalized Leasing Costs
Years Ended
December 31,
Estimated -------------------------
Useful Life 2003 2002
-------------------------------------------
(In thousands)
Development Lease Life $ 919 1,290
New Tenants Lease Life 2,102 1,671
New Tenants (first generation) (1) Lease Life 123 179
Renewal Tenants Lease Life 1,166 1,431
-------------------------
Total capitalized leasing costs $ 4,310 4,571
=========================
Amortization of leasing costs $ 3,562 3,319
=========================
(1) First generation refers to space that has never been occupied.
2002 Compared to 2001
Net income available to common stockholders for 2002 was $13,618,000 ($.86
per basic share and $.84 per diluted share) compared to $24,174,000 ($1.54 per
basic share and $1.51 per diluted share) in 2001. Income before gain on sale of
real estate investments was $23,632,000 in 2002 compared to $29,818,000 in 2001.
Gain on sale of real estate investments from continuing operations for 2002 was
$93,000 compared to $4,311,000 in 2001. 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 was a loss of $66,000 in 2002.
The decrease in diluted EPS for 2002 was primarily due to higher vacancies
in 2002, gains on sale of real estate of $.27 and gains on securities of $.18 in
2001 compared to minimal gains on sale of real estate (less than $.01 per share)
and $.11 on gains on securities in 2002, decreased termination fees of $.06 per
share, increased depreciation expense of $.19 per share and increased bad debt
expense of $.05 per share in 2002. Properties added to the portfolio in 2001 and
2002 were the main contributors to the increased depreciation. The paragraphs
that follow describe the results of operations in detail.
PNOI from continuing operations decreased by $1,663,000 or 2.2% for 2002
compared to 2001. PNOI by property type and percentage leased were as follows:
Property Net Operating Income
Years Ended Percent
December 31, Leased
--------------------------------------------------------
2002 2001 12-31-02 12-31-01
--------------------------------------------------------
(In thousands)
Industrial $ 72,050 73,733
Other 1,079 1,059
-------------------------
Total PNOI $ 73,129 74,792 93.2% 91.7%
=========================
PNOI from industrial properties decreased $1,683,000 (2.3%) for 2002
compared to 2001. Industrial properties held throughout 2002 and 2001 showed a
decrease in PNOI of 5.5%. The decrease in PNOI resulted mainly from a decrease
in the Company's portfolio average occupancy during 2002 primarily due to a
continued slowing of the economy and the unusually high percentage of leases
that expired during 2002 and 2001. Also, lease termination fees were only
$345,000 in 2002 compared to $1,341,000 in 2001. In addition, real estate
operating expenses increased $4,384,000 (17.2%) in 2002 compared to 2001. This
increase was primarily due to increases in insurance, property taxes and bad
debt expense. Because of the lower occupancy, the Company had to absorb a
greater percentage of operating expenses in 2002.
Gain on REIT securities was $1,836,000 for 2002 compared to $2,967,000 in
2001. In 2002, the Company received liquidating distributions of $365,000 from
Pacific Gulf Properties compared to $2,569,000 in 2001. Gain on sales of other
REIT securities was $1,471,000 in 2002 compared to $398,000 in 2001.
Bank interest expense before amortization of loan costs and capitalized
interest was $2,585,000 for 2002, a decrease of $2,165,000 from 2001. The
decrease in interest was primarily due to lower average bank interest rates in
2002. Average bank borrowings were $83,039,000 in 2002 compared to $82,898,000
in 2001 with average bank interest rates of 3.11% in 2002 compared to 5.72% in
2001. Interest costs incurred during the period of construction of real estate
properties are capitalized and offset against interest expense. The interest
costs capitalized on real estate properties for 2002 were $2,061,000 compared to
$2,329,000 in 2001. Amortization of bank loan costs was $407,000 in 2002
compared to $264,000 in 2001. See Note 4 in the Notes to the Consolidated
Financial Statements for disclosure relating to the Company's notes payable to
banks.
Mortgage interest expense on real estate properties was $16,253,000 for
2002, an increase of $1,303,000 from 2001. The increase in 2002 was primarily
due to an increase in mortgage loans payable of $43,329,000 from 2001. The
Company obtained three new mortgage loans totaling $59,200,000 in 2002 while
paying off maturing loans of $10,350,000 and regularly scheduled principal
payments of $5,521,000. Amortization of mortgage loan costs was $203,000 in 2002
compared to $188,000 in 2001. See Note 5 in the Notes to the Consolidated
Financial Statements for a summary of the Company's mortgage notes payable.
Depreciation and amortization increased $3,355,000 in 2002 compared to
2001. This increase was primarily due to properties acquired and transferred
from development during 2001 and 2002. The increase was 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").
The decrease in general and administrative expenses of $394,000 for the
year ended December 31, 2002 compared to 2001 is primarily due to lower
compensation expense. This reduction was mainly attributable to lower bonuses
paid to senior management since the Company did not meet the funds from
operations goals for the year.
In 2002, the Company recognized a gain of $93,000 from the sale of
Carpenter Duplex, which is reported in Income From Continuing Operations on the
income statement. The Company recognized a loss of $66,000 on the sale of 7th
Street Service Center, which is recorded under Discontinued Operations in
accordance with SFAS No. 144. (SFAS 144 requires that the operations and gain
(loss) on disposal for properties classified to the category "held for sale"
subsequent to December 31, 2001 be recorded in Discontinued Operations.) In
2001, the Company recognized gains of $4,311,000 primarily from the sale of five
properties. See Note 2 in the Notes to the Consolidated Financial Statements for
a summary of these transactions.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent increased
income by $1,953,000 for 2002 compared to $1,741,000 in 2001. Capital
expenditures for the years ended December 31, 2002 and 2001 were as follows:
Capital Expenditures
Years Ended
December 31,
Estimated -----------------------
Useful Life 2002 2001
-----------------------------------------
(In thousands)
Upgrade on Acquisitions 40 yrs $ 61 270
Major Renovation/Redevelopment 40 yrs 53 63
Tenant Improvements:
New Tenants Lease Life 5,118 3,416
New Tenants (first generation) (1) Lease Life 630 371
Renewal Tenants Lease Life 1,150 581
Other:
Building Improvements 5-40 yrs 853 1,188
Roofs 5-15 yrs 1,588 412
Parking Lots 3-5 yrs 179 219
Other 5 yrs 54 102
-----------------------
Total capital expenditures $ 9,686 6,622
=======================
(1) First generation refers to space that has never been occupied.
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
years ended December 31, 2002 and 2001 were as follows:
Capitalized Leasing Costs
Years Ended
December 31,
Estimated -------------------------
Usefull Life 2002 2001
-------------------------------------------
(In thousands)
Development Lease Life $ 1,290 1,605
New Tenants Lease Life 1,671 1,127
New Tenants (first generation) (1) Lease Life 179 (14)
Renewal Tenants Lease Life 1,431 1,042
-------------------------
Total capitalized leasing costs $ 4,571 3,760
=========================
Amortization of leasing costs $ 3,319 2,541
=========================
(1) First generation refers to space that has never been occupied.
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 effective date has been deferred indefinitely for certain types of
mandatorily redeemable financial instruments. 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." In December 2003,
the FASB published a revision to Interpretation 46 (46R) to clarify some of the
provisions of the original Interpretation and to exempt certain entities from
its requirements. This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation.
Under the new guidance, special effective date provisions apply to enterprises
that have fully or partially applied Interpretation 46 prior to issuance of this
revised Interpretation. Otherwise, application of Interpretation 46R is required
in financial statements of public entities that have interests in structures
that are commonly referred to as special-purpose entities for periods ending
after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The adoption of
the provisions related to 2003 of this Interpretation had no effect on the
Company's consolidated financial statements. The Company believes the effect of
adoption of this Statement in 2004 will have little or no impact on its overall
financial position or results of operation.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation enhances the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees issued.
The Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation were applicable to guarantees issued or modified after December
31, 2002, and the disclosure requirements were effective for financial
statements of interim and annual periods ending after December 15, 2002. The
adoption of this Statement had no impact on the Company's overall financial
position or results of operation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." 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 were effective
for exit or disposal activities that were initiated after December 31, 2002. The
Company adopted this Statement on January 1, 2003 with no impact on its overall
financial position or results of operation.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13, "Accounting for Leases," to require sale-leaseback accounting for
certain lease modifications that have economic effects similar to sale-leaseback
transactions. The provisions of the Statement related to the rescission of SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," were effective
for fiscal years beginning after May 15, 2002. The provisions of the Statement
related to SFAS No. 13 were effective for transactions occurring after May 15,
2002. The adoption of this Statement had no impact on the Company's overall
financial position or results of operation.
In June 2001, the FASB issued 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 adopted
this Statement on January 1, 2003 with no impact on its overall financial
position or results of operation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $50,642,000 for the year
ended December 31, 2003. Other sources of cash were primarily from bank
borrowings, proceeds from stock offerings and proceeds from new mortgage notes.
The Company distributed $35,135,000 in common and $7,614,000 in preferred stock
dividends. Other primary uses of cash were for bank debt repayments, redemption
of the Series A preferred stock, construction and development of properties,
purchases of real estate properties, capital improvements at various properties,
and mortgage note payments.
Total debt at December 31, 2003 and 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 December 31, 2003 and 2002.
December 31,
------------------------------
2003 2002
------------------------------
(In thousands)
Mortgage notes payable - fixed rate $ 285,722 248,343
Bank notes payable - floating rate 52,550 73,957
------------------------------
Total debt $ 338,272 322,300
==============================
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 December 31, 2003, the interest
rate was 2.40% on $32,000,000 and 2.42% on $19,000,000. The interest rate on
each tranche is currently reset on a monthly basis. A $32,000,000 tranche was
last reset on February 26, 2004 at 2.35% and a $21,000,000 tranche was last
reset on March 11, 2004 at 2.34%. 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 matured in January 2004. The loan was amended in
January 2004 to reflect a new maturity date of December 31, 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 December 31, 2003, the
interest rate was 2.295% on $1,550,000.
As market conditions permit, EastGroup employs fixed-rate, nonrecourse
first mortgage debt to replace the short-term bank borrowings. During 2004, the
Company plans to obtain $25-30 million of additional fixed rate debt, using the
proceeds to reduce variable rate bank line balances. Based on current interest
rates, this will, as in past years, be detrimental to earnings in the short-run
but is likely to enhance balance sheet stability and flexibility over the longer
term.
Contractual Obligations
EastGroup's fixed, noncancelable obligations as of December 31, 2003 were
as follows:
Payments Due by Period
-----------------------------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
-----------------------------------------------------------------------------
(In thousands)
Debt Obligations (1) $ 338,272 13,762 99,983 30,633 193,894
Operating Lease Obligations:
Office Leases 1,599 299 522 519 259
Ground Leases 21,469 677 1,354 1,352 18,086
Other 77 62 15 - -
Development Obligations (2) 1,595 1,595 - - -
Tenant Improvements (3) 4,387 4,387 - - -
Purchase Obligations (4) 6,100 6,100 - - -
-----------------------------------------------------------------------------
Total $ 373,499 26,882 101,874 32,504 212,239
=============================================================================
(1) These amounts are included on the Consolidated Balance Sheet. A portion of
this debt is backed by a letter of credit totaling $11,005,000 at December
31, 2003. This letter of credit is renewable annually and expires on
January 15, 2011.
(2) Represents commitments on properties under development, except for tenant
improvement obligations.
(3) Represents tenant improvement allowance obligations.
(4) At December 31, 2003, EastGroup was under contract to purchase one property
and an adjoining parcel of land. The acquisition was completed in January
2004.
Subsequent to December 31, 2003, EastGroup purchased Blue Heron
Distribution Center II (100,000 square feet) and an adjoining 1.56 acres of land
for future development in West Palm Beach, Florida for $6,100,000. Blue Heron II
was built in 1988 and is adjacent to Blue Heron I (110,000 square feet), which
the Company has owned since 1999.
Also, subsequent to December 31, 2003, the Company entered into a contract
to purchase a 125,000 square foot building in Houston for approximately
$4,200,000.
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
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,
both in the short- and long-term.
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 7A. 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 objective for interest
rate risk management 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.
Fair
2004 2005 2006 2007 2008 Thereafter Total Value
---------------------------------------------------------------------------------------
Fixed rate debt(2) (in thousands) $12,212 26,186 22,797 21,524 9,109 193,894 285,722 304,317(1)
Weighted average interest rate 7.64% 7.84% 7.61% 7.56% 6.75% 6.61% 6.92%
Variable rate debt (in thousands) 1,550 51,000 - - - - 52,550 52,550
Weighted average interest rate 2.30% 2.41% - - - - 2.40%
(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 existed as of
December 31, 2003, it does not consider those exposures or positions that could
arise after that date. The ultimate impact of interest rate fluctuations on the
Company 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 $126,000 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 (loss). The Company does not hold or issue this type of
derivative contract for trading or speculative purposes.
Current Fair Market Fair Market
Type of Notional Maturity Fixed Value at Value at
Hedge Amount Date Reference Rate Rate 12/31/03 12/31/02
- -----------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,880 12/31/10 1 month LIBOR 4.03% ($30) ($297)
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-K
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, budgets, 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Registrant's Consolidated Balance Sheets as of December 31, 2003 and
2002, and its Consolidated Statements of Income, Changes in Stockholders' Equity
and Cash Flows and Notes to Consolidated Financial Statements for the years
ended December 31, 2003, 2002 and 2001 and the Independent Auditors' Report
thereon are included under Item 15 of this report and are incorporated herein by
reference. Unaudited quarterly results of operations included in the notes to
the consolidated financial statements are also incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 December 31,
2003 the Company's disclosure controls and procedures were 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant's definitive proxy statement which will be filed with the
Securities and Exchange Commission (the Commission) pursuant to Regulation 14A
within 120 days of the end of Registrant's calendar year is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The Registrant's definitive proxy statement which will be filed with the
Commission pursuant to Regulation 14A within 120 days of the end of Registrant's
calendar year is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The Registrant's definitive proxy statement which will be filed with the
Commission pursuant to Regulation 14A within 120 days of the end of Registrant's
calendar year is incorporated herein by reference. The following table provides
information required by Item 201(d) of Regulation S-K.
Equity Compensation Plan Information
(a) (b) (c)
Plan category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options, outstanding options, under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected
in column (a))
Equity compensation
plans approved by
security holders 543,620 $18.880 638,327
Equity compensation
plans not approved
by security holders - - -
-------------------------------------------------------------------------------------
Total 543,620 $18.880 638,327
=====================================================================================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant's definitive proxy statement which will be filed with the
Commission pursuant to Regulation 14A within 120 days of the end of Registrant's
calendar year is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Registrant's definitive proxy statement which will be filed with the
Commission pursuant to Regulation 14A within 120 days of the end of Registrant's
calendar year is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Index to Financial Statements:
Page
------
(a) (1) Consolidated Financial Statements:
Independent Auditors' Report 25
Consolidated Balance Sheets - December 31, 2003 and 2002 26
Consolidated Statements of Income - Years ended
December 31, 2003, 2002 and 2001 27
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2003, 2002 and 2001 28
Consolidated Statements of Cash Flows - Years ended
December 31, 2003, 2002 and 2001 29
Notes to Consolidated Financial Statements 30
(2) Consolidated Financial Statement Schedule:
Schedule III - Real Estate Properties and Accumulated Depreciation 52
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted, or the required information is included in the notes to the
consolidated financial statements.
(3) Exhibits required by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation (incorporated by reference to
Appendix B to the Company's Proxy Statement dated April 24,
1997).
(b) Bylaws of the Company (incorporated by reference to Appendix
C to the Company's Proxy Statement dated April 24, 1997).
(c) 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).
(d) 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).
(e) Articles Supplementary of the Company relating to the
reclassification of the Series B Cumulative Convertible
Preferred Stock of the Company to the Company's common stock
(filed herewith).
(10) Material Contracts:
(a) EastGroup Properties 1994 Management Incentive Plan, As
Amended (incorporated by reference to Appendix A of the
Company's Proxy Statement for its Annual Meeting of
Shareholders held on June 2, 1999).*
(b) EastGroup Properties 1991 Directors Stock Option Plan, As
Amended (incorporated by reference to Exhibit B to the
Company's Proxy Statement dated April 26, 1994).*
(c) EastGroup Properties 2000 Directors Stock Option Plan
(incorporated by reference to Appendix A to the Company's
Proxy Statement for its Annual Meeting of Shareholders held
on June 1, 2000).*
(d) Form of Change in Control Agreement that the Company has
entered into with certain executive officers (Leland R.
Speed, David H. Hoster II and N. Keith McKey) (incorporated
by reference to Exhibit 10(e) to the Company's Form 10-K for
the year ended December 31, 1996).*
(e) Form of Amendment to Change in Control Agreement that the
Company has entered into with certain executive officers
(incorporated by reference to Exhibit 10(e) to the Company's
Form 10-K for the year ended December 31, 2002).*
(f) Credit Agreement dated January 8, 2002 among EastGroup
Properties, L.P.; EastGroup Properties, Inc.; PNC Bank,
National Association, as Administrative Agent; Commerzbank
Aktiengesellschaft, New York Branch, as Syndication Agent;
SouthTrust Bank, as Co-Syndication Agent; U.S. Bank,
National Association, as Documentation Agent; Wells Fargo
Bank, National Association, as Co-Documentation Agent;
AmSouth Bank, as Managing Agent; PNC Capital Market, Inc.,
as Lead Arranger and Lead Agent; and the Lenders
(incorporated by reference to the Company's Form 10-K/A for
the year ended December 31, 2001).
(21) Subsidiaries of EastGroup Properties, Inc. (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(31) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002: (a) David H. Hoster II, Chief Executive Officer (b) N.
Keith McKey, Chief Financial Officer
(32) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002: (a) David H. Hoster II, Chief Executive Officer (b) N.
Keith McKey, Chief Financial Officer
(99) Rights Agreement dated as of December 3, 1998 between the Company
and EquiServe Trust Company, N.A., which replaced Harris Trust
and Savings Bank, as Rights Agent (incorporated by reference to
the Company's Form 8-A filed December 9, 1998).
(b) Reports on Form 8-K during the quarter ended December 31, 2003:
(1) A Form 8-K was filed on October 22, 2003 under Item 12,
furnishing EastGroup's October 1, 2003 press release, setting
forth the Company's third quarter 2003 earnings.
(2) A Form 8-K was filed on November 19, 2003 (a) reporting under
Item 5 thereof the issuance of 847,458 shares of common stock,
and (b) filing as exhibits under Item 7 thereof, the Placement
Agency Agreement with A.G. Edwards & Sons, Inc. and opinions of
counsel.
*Indicates management or compensatory agreement.
INDEPENDENT AUDITORS' REPORT
THE DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
We have audited the accompanying consolidated balance sheets of EastGroup
Properties, Inc. and subsidiaries, as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EastGroup
Properties, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
Jackson, Mississippi KPMG LLP
March 3, 2004
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
December 31, 2003 December 31, 2002
--------------------------------------------
ASSETS
Real estate properties $ 791,165 750,578
Development 50,037 39,718
---------------------------------------------
841,202 790,296
Less accumulated depreciation (146,934) (118,977)
---------------------------------------------
694,268 671,319
---------------------------------------------
Real estate held for sale 1,375 1,375
Cash 1,786 1,383
Other assets 31,838 29,660
---------------------------------------------
TOTAL ASSETS $ 729,267 703,737
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 285,722 248,343
Notes payable to banks 52,550 73,957
Accounts payable & accrued expenses 14,266 15,571
Other liabilities 7,980 7,622
---------------------------------------------
360,518 345,493
---------------------------------------------
---------------------------------------------
Minority interest in joint venture 1,804 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 and issued at December 31, 2002; stated
liquidation preference of $70,000 at December 31, 2002 - 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 at December 31, 2003; stated
liquidation preference of $33,000 at December 31, 2003 32,326 -
Common shares; $.0001 par value; 68,080,000 shares
authorized; 20,853,780 shares issued and outstanding at
December 31, 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 352,549 243,562
Undistributed earnings (distributions in excess of earnings) (15,595) 7,109
Accumulated other comprehensive income (loss) (30) 58
Unearned compensation (2,307) (2,781)
---------------------------------------------
366,945 356,485
---------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 729,267 703,737
=============================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31,
-------------------------------------------
2003 2002 2001
-------------------------------------------
REVENUES
Income from real estate operations $ 107,771 103,031 100,310
Interest 22 309 1,041
Gain on securities 421 1,836 2,967
Other 227 617 727
-------------------------------------------
108,441 105,793 105,045
-------------------------------------------
EXPENSES
Operating expenses from real estate operations 31,659 29,902 25,518
Interest 19,015 17,387 17,823
Depreciation and amortization 32,050 30,318 26,963
General and administrative 4,966 4,179 4,573
Minority interest in joint ventures 416 375 350
-------------------------------------------
88,106 82,161 75,227
-------------------------------------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE INVESTMENTS 20,335 23,632 29,818
Gain on sale of real estate investments - 93 4,311
-------------------------------------------
INCOME FROM CONTINUING OPERATIONS 20,335 23,725 34,129
-------------------------------------------
DISCONTINUED OPERATIONS
Income (loss) from real estate operations (2) (33) 53
Gain (loss) on sale of real estate investments 112 (66) -
-------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 110 (99) 53
-------------------------------------------
NET INCOME 20,445 23,626 34,182
Preferred dividends-Series A 2,016 3,880 3,880
Preferred dividends-Series B 2,598 6,128 6,128
Preferred dividends-Series D 1,305 - -
Costs on redemption of Series A preferred 1,778 - -
-------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 12,748 13,618 24,174
===========================================
BASIC PER COMMON SHARE DATA
Income from continuing operations $ 0.71 0.87 1.54
Income (loss) from discontinued operations 0.01 (0.01) 0.00
-------------------------------------------
Net income available to common stockholders $ 0.72 0.86 1.54
===========================================
Weighted average shares outstanding 17,819 15,868 15,697
===========================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations $ 0.69 0.85 1.51
Income (loss) from discontinued operations 0.01 (0.01) 0.00
-------------------------------------------
Net income available to common stockholders $ 0.70 0.84 1.51
===========================================
Weighted average shares outstanding 18,194 16,237 16,046
===========================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES,INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Undistributed Accumulated
Additional Earnings Other
Preferred Common Paid-In Unearned (Distributions in Comprehensive
Stock Stock Capital Compensation Excess of Earnings) Income (Loss) Total
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $108,535 2 238,910 (3,344) 28,185 3,104 375,392
Comprehensive income
Net income - - - - 34,182 - 34,182
Net unrealized change in investment
securities - - - - - (1,911) (1,911)
----------
Total comprehensive income 32,271
----------
Cash dividends declared-common, $1.80 per share - - - - (28,606) - (28,606)
Preferred stock dividends declared - - - - (10,008) - (10,008)
Issuance of 8,204 shares of common stock,
incentive compensation - - 179 - - - 179
Issuance of 15,788 shares of common stock,
dividend reinvestment plan - - 357 - - - 357
Issuance of 40,750 shares of common stock,
exercise options - - 753 - - - 753
Issuance of 15,000 shares of common stock,
incentive restricted stock - - 346 (346) - - -
Forfeiture of 17,000 shares of common stock,
incentive restricted stock - - (348) 281 - - (67)
Amortization of unearned compensation,
incentive restricted stock - - - 439 - - 439
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 108,535 2 240,197 (2,970) 23,753 1,193 370,710
Comprehensive income
Net income - - - - 23,626 - 23,626
Net unrealized change in investment securities - - - - - (838) (838)
Net unrealized change in cash flow hedge - - - - - (297) (297)
----------
Total comprehensive income 22,491
----------
Cash dividends declared-common, $1.88 per share - - - - (30,262) - (30,262)
Preferred stock dividends declared - - - - (10,008) - (10,008)
Issuance of 6,822 shares of common stock,
incentive compensation - - 153 - - - 153
Issuance of 14,305 shares of common stock,
dividend reinvestment plan - - 364 - - - 364
Issuance of 161,319 shares of common stock,
exercise options - - 2,582 - - - 2,582
Issuance of 19,100 shares of common stock,
incentive restricted stock - - 449 (449) - - -
Forfeiture of 9,250 shares of common stock,
incentive restricted stock - - (189) 149 - - (40)
Amortization of unearned compensation,
incentive restricted stock - - - 489 - - 489
Issuance of common stock options - - 6 - - - 6
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 108,535 2 243,562 (2,781) 7,109 58 356,485
Comprehensive income
Net income - - - - 20,445 - 20,445
Net unrealized change in investment securities - - - - - (355) (355)
Net unrealized change in cash flow hedge - - - - - 267 267
----------
Total comprehensive income 20,357
----------
Cash dividends declared-common, $1.90 per share - - - - (35,452) - (35,452)
Preferred stock dividends declared - - - - (5,919) - (5,919)
Redemption of 1,725,000 shares of Series A
preferred stock (41,357) - - - (1,778) - (43,135)
Conversion of 2,800,000 shares of cumulative
convertible preferred stock into 3,181,920
shares of common stock (67,178) - 67,178 - - - -
Issuance of 1,320,000 shares of Series D
preferred stock 32,326 - - - - - 32,326
Issuance of 1,418,887 shares of common stock,
common stock offerings - - 38,974 - - - 38,974
Issuance of 2,108 shares of common stock,
incentive compensation - - 53 - - - 53
Issuance of 12,925 shares of common stock,
dividend reinvestment plan - - 362 - - - 362
Issuance of 139,584 shares of common stock,
exercise options - - 2,539 - - - 2,539
Forfeiture of 6,000 shares of common stock,
incentive restricted stock - - (127) 86 - - (41)
Amortization of unearned compensation,
incentive restricted stock - - - 388 - - 388
Issuance of common stock options - - 8 - - - 8
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $ 32,326 2 352,549 (2,307) (15,595) (30) 366,945
==================================================================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES,INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
----------------------------------------------------
2003 2002 2001
----------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 20,445 23,626 34,182
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization from continuing operations 32,050 30,318 26,963
Depreciation and amortization from discontinued operations - 51 78
Gain on sale of real estate investments - (93) (4,311)
(Gain) loss on sale of real estate investments from
discontinued operations (112) 66 -
Gain on real estate investment trust (REIT) shares (421) (1,836) (2,967)
Amortization of unearned compensation 347 449 372
Minority interest depreciation and amortization (145) (170) (161)
Changes in operating assets and liabilities:
Accrued income and other assets (795) (139) (5,075)
Accounts payable, accrued expenses and prepaid rent (727) 1,514 1,667
----------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,642 53,786 50,748
----------------------------------------------------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable - 5,502 4,740
Advances on mortgage loans receivable - - (1,064)
Proceeds from sale of real estate investments 841 2,917 11,316
Real estate improvements (10,929) (9,686) (6,622)
Real estate development (22,238) (35,600) (30,735)
Purchases of real estate (19,034) (13,667) (13,804)
Purchases of REIT shares - (1,308) (5,258)
Proceeds from sale and liquidation of REIT shares 1,729 7,095 7,931
Changes in other assets and other liabilities (5,238) (2,667) (1,675)
----------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (54,869) (47,414) (35,171)
----------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 175,944 195,586 144,776
Repayments on bank borrowings (197,351) (207,687) (160,718)
Proceeds from mortgage notes payable 45,500 59,200 45,000
Principal payments on mortgage notes payable (9,599) (15,871) (8,317)
Debt issuance costs (716) (1,842) (486)
Distributions paid to stockholders (42,749) (39,881) (38,279)
Redemption of Series A preferred stock (43,135) - -
Proceeds from Series D preferred stock offering 32,326 - -
Proceeds from common stock offerings 38,974 - -
Proceeds from exercise of stock options 2,539 2,582 753
Proceeds from dividend reinvestment plan 362 364 357
Other 2,535 793 243
----------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,630 (6,756) (16,671)
----------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 403 (384) (1,094)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,383 1,767 2,861
----------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,786 1,383 1,767
====================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 18,068 16,571 17,222
Conversion of cumulative convertible preferred stock into common stock 67,178 - -
Debt assumed by the Company in the purchase of real estate 1,478 - -
Debt assumed by buyer of real estate - - 378
Issuance of incentive restricted stock - 449 346
Forfeiture of incentive restricted stock (127) (189) (348)
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of EastGroup
Properties, Inc. (the Company or EastGroup), its wholly-owned subsidiaries and
its investment in any joint ventures in which the Company has a controlling
interest. At December 31, 2003, 2002 and 2001, the Company had a controlling
interest in one joint venture: the 80% owned University Business Center. The
Company records 100% of the joint ventures' assets, liabilities, revenues and
expenses with minority interests provided for in accordance with the joint
venture agreements. All significant intercompany transactions and accounts have
been eliminated in consolidation.
(b) Income Taxes
EastGroup, a Maryland corporation, has qualified as a real estate
investment trust (REIT) under Sections 856-860 of the Internal Revenue Code and
intends to continue to qualify as such. To maintain its status as a REIT, the
Company is required to distribute 90% of its ordinary taxable income to its
stockholders. The Company has the option of (i) reinvesting the sales price of
properties sold through tax deferred exchanges, allowing for a deferral of
capital gains on the sale, (ii) paying out capital gains to the stockholders
with no tax to the Company, or (iii) treating the capital gains as having been
distributed to the stockholders, paying the tax on the gain deemed distributed
and allocating the tax paid as a credit to the stockholders. The Company
distributed all of its 2003, 2002 and 2001 taxable income to its stockholders.
Accordingly, no provision for income taxes was necessary. The following table
summarizes the federal income tax treatment for all distributions by the Company
for the years 2003, 2002 and 2001.
Federal Income Tax Treatment of Share Distributions
Years Ended December 31,
----------------------------------------
2003 2002 2001
----------------------------------------
Common Share Distributions:
Ordinary Income $1.68388 1.8348 1.7044
Return of capital .21612 - -
Long-term 20% capital gain - .0452 .0956
----------------------------------------
Total Common Distributions $1.90000 1.8800 1.8000
========================================
Series A Preferred Share Distributions:
Ordinary Income $1.08125 2.1960 2.1308
Long-term 20% capital gain - .0540 .1192
----------------------------------------
Total Preferred A Distributions $1.08125 2.2500 2.2500
========================================
Series B Preferred Share Distributions:
Ordinary Income $1.64100 2.1355 2.0721
Long-term 20% capital gain - .0525 .1159
----------------------------------------
Total Preferred B Distributions $1.64100 2.1880 2.1880
========================================
Series D Preferred Share Distributions:
Ordinary Income $ .98830 - -
----------------------------------------
Total Preferred D Distributions $ .98830 - -
========================================
The Company's income differs for tax and financial reporting purposes
principally because of (1) the timing of the deduction for the provision for
possible losses and losses on investments, (2) the timing of the recognition of
gains or losses from the sale of investments, (3) different depreciation methods
and lives, and (4) real estate properties having a different basis for tax and
financial reporting purposes.
(c) Income Recognition
Minimum rental income from real estate operations is recognized on a
straight-line basis.
Interest income on mortgage loans is recognized based on the accrual method
unless a significant uncertainty of collection exists. If a significant
uncertainty exists, interest income is recognized as collected.
The Company recognizes gains on sales of real estate in accordance with the
principles set forth in Statement of Financial Accounting Standards (SFAS) No.
66, "Accounting for Sales of Real Estate." Upon closing of real estate
transactions, the provisions of SFAS No. 66 require consideration for the
transfer of rights of ownership to the purchaser, receipt of an adequate cash
down payment from the purchaser and adequate continuing investment by the
purchaser. If the requirements for recognizing gains have not been met, the sale
and related costs are recorded, but the gain is deferred and recognized by the
installment method as collections are received.
(d) Real Estate Properties
Real estate properties are carried at cost less accumulated depreciation.
Cost includes the carrying amount of the Company's investment plus any
additional consideration paid, liabilities assumed, costs of securing title (not
to exceed fair market value in the aggregate) and improvements made subsequent
to acquisition. Depreciation of buildings and other improvements, including
personal property, is computed using the straight-line method over estimated
useful lives of generally 40 years for buildings and 3 to 15 years for
improvements and personal property. Building improvements are capitalized, while
maintenance and repair expenses are charged to expense as incurred. Significant
renovations and improvements that extend the useful life of or improve the
assets are capitalized. Geographically, the Company's investments are
concentrated in the major Sunbelt market areas of the southeastern and
southwestern United States, primarily in the states of California, Florida,
Texas and Arizona.
(e) Capitalized Development Costs
During the industrial development stage, costs associated with development
(i.e., land, construction costs, interest expense during construction and
lease-up, property taxes, and other direct and indirect costs associated with
development) are aggregated into the total capitalization of the property. As
the property becomes occupied, interest, depreciation, property taxes and other
costs for the percentage occupied only are expensed as incurred. When the
property becomes 80% occupied or one year after completion of the shell
construction, whichever comes first, the property is no longer considered a
development property and becomes an industrial property. When the property
becomes classified as an industrial property, the entire property is depreciated
accordingly, and all interest and property taxes are expensed.
(f) Asset Impairment
Prior to January 1, 2002, the Company applied SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." Both of these
pronouncements require 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. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less estimated costs
to sell.
(g) 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 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 December 31, 2003 and 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. During 2003, one property and one parcel of land were transferred
to real estate held for sale and subsequently sold in 2003. During 2002, three
properties were transferred to "held for sale;" however, these properties were
subsequently transferred back to the portfolio as a result of a change in plans
by the Company due to market conditions. As noted above, depreciation is not
recorded for those properties while held for sale. As such, upon the
reclassification of these properties, depreciation was adjusted to reflect the
carrying amount of these properties as if they had never been classified as
"held for sale."
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 2003, 2002 and 2001. No interest
expense was allocated to the properties that are held for sale.
(h) Investment in Real Estate Investment Trusts
Marketable equity securities owned by the Company are categorized as
available-for-sale securities, as defined by SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Unrealized holding gains and
losses are reflected as a net amount in a separate component of stockholders'
equity until realized. Since the Company did not exercise significant influence
over any of its investments in REITs, these investments were accounted for under
the cost method. The costs of these investments were adjusted to fair market
value with an equity adjustment to account for unrealized gains/losses as
indicated above.
(i) Derivative Instruments and Hedging Activities
The Company applies SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires that all derivatives be
recognized as either assets or liabilities in the balance sheet and measured at
fair value. Changes in fair value are to be reported either in earnings or
outside of earnings depending on the intended use of the derivative and the
resulting designation. Entities applying hedge accounting are required to
establish at the inception of the hedge the method used to assess the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. The Company entered into an
interest rate swap agreement in 2002, which is summarized in Note 4.
(j) Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
(k) Amortization
Debt origination costs are deferred and amortized using the straight-line
method over the term of the loan. Leasing costs are deferred and amortized using
the straight-line method over the term of the lease.
(l) 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 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 based
on their respective fair values. The allocation to tangible assets (land,
building and improvements) is based upon management's determination of the value
of the property as if it were vacant using discounted cash flow models. Factors
considered by management include an estimate of carrying costs during the
expected lease-up periods considering current market conditions and costs to
execute similar leases. The remaining purchase price is allocated among three
categories of intangible assets consisting of the above or below market
component of in-place leases, the value of in-place leases and the value of
customer relationships. The value allocable to the above or below market
component of an acquired in-place lease is determined based upon the present
value (using a discount rate which reflects the risks associated with the
acquired leases) of the difference between (i) the contractual amounts to be
paid pursuant to the lease over its remaining term, and (ii) management's
estimate of the amounts that would be paid using fair market rates over the
remaining term of the lease. The amounts allocated to favorable and unfavorable
in-place leases are included in Other Assets and Other Liabilities,
respectively, on the consolidated balance sheet and are amortized to rental
income over the remaining terms of the respective leases. The total amount of
intangible assets is further allocated to in-place lease values and to customer
relationship values based upon management's assessment of their respective
values. These intangible assets are included in Other Assets on the consolidated
balance sheet and are amortized over the remaining term of the existing lease,
or the anticipated life of the customer relationship, as applicable.
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 December 31,
2003 and 2002.
(m) 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 year available to each
share of common stock outstanding during the reporting period. The Company's
basic EPS is calculated by dividing net income available to common stockholders
by the weighted average number of common shares outstanding.
Diluted EPS represents the amount of earnings for the year available to
each share of common stock outstanding during the 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 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 assumes proceeds from the exercise of options are used to purchase
common stock at the average market price during the period. The dilutive effect
of convertible securities was determined using the if-converted method.
(n) Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) 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.
The Company has a management incentive plan, which was adopted in 1994 and
is described more fully in Note 7, under which employees and directors of the
Company are granted stock option awards. The Company applies SFAS No. 123,
"Accounting for Stock-Based Compensation." This standard defines a fair value
based method of accounting for an employee stock option or similar equity
instrument. Companies are given the choice of either recognizing related
compensation cost by adopting the fair value method, or continuing to use the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting for Stock Issued to Employees," while supplementally
disclosing the pro forma effect on net income and net income per share using the
new measurement criteria. The Company elected to continue to follow the
requirements of APB No. 25 during all years prior to 2002 and, accordingly,
there was no effect on the results of operations.
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. The following table illustrates the
effect on net income and earnings per share if the fair value based method had
been applied to all outstanding and unvested awards in each period.
---------------------------------------
2003 2002 2001
---------------------------------------
(In thousands, except per share data)
Net income available to common stockholders as reported $ 12,748 13,618 24,174
Add: Stock-based employee compensation expense
included in reported net income 8 6 -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (13) (20) (67)
---------------------------------------
Net income available to common stockholders pro forma $ 12,743 13,604 24,107
=======================================
Earnings per share:
Basic - as reported $ .72 .86 1.54
Basic - pro forma .72 .86 1.54
Diluted - as reported .70 .84 1.51
Diluted - pro forma .70 .84 1.50
In accordance with SFAS No. 123, the following additional disclosures are
required related to options granted after January 1, 1995. The fair value of
each option grant is estimated on the grant date using the Black-Scholes option
pricing model with the following weighted-average assumptions used for 2003,
2002 and 2001, respectively: risk-free interest rates of 3.41%, 3.60%, and
4.31%; dividend yields of 11.13%, 11.97%, and 11.42%; volatility factors of
18.8%, 19.0%, and 20.0%. Expected option lives for employees were five years for
all years presented. For directors, expected option lives were eight years for
2003 and 2002 and five years for 2001. The weighted average fair value of each
option granted for 2003, 2002 and 2001 was $.36, $.35, and $.68, respectively.
The Company accounts for restricted stock in accordance with SFAS No. 123,
and accordingly, compensation expense is recognized over the expected vesting
period using the straight-line method.
(o) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and revenues and expenses during the reporting period,
and to disclose material contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
(p) 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 effective date has been deferred indefinitely for certain types of
mandatorily redeemable financial instruments. 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." In December 2003,
the FASB published a revision to Interpretation 46 (46R) to clarify some of the
provisions of the original Interpretation and to exempt certain entities from
its requirements. This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation.
Under the new guidance, special effective date provisions apply to enterprises
that have fully or partially applied Interpretation 46 prior to issuance of this
revised Interpretation. Otherwise, application of Interpretation 46R is required
in financial statements of public entities that have interests in structures
that are commonly referred to as special-purpose entities for periods ending
after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The adoption of
the provisions related to 2003 of this Interpretation had no effect on the
Company's consolidated financial statements. The Company believes the effect of
adoption of this Statement in 2004 will have little or no impact on its overall
financial position or results of operation.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation enhances the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees issued.
The Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation were applicable to guarantees issued or modified after December
31, 2002, and the disclosure requirements were effective for financial
statements of interim and annual periods ending after December 15, 2002. The
adoption of this Statement had no impact on the Company's overall financial
position or results of operation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." 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 were effective
for exit or disposal activities that were initiated after December 31, 2002. The
Company adopted this Statement on January 1, 2003 with no impact on its overall
financial position or results of operation.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13, "Accounting for Leases," to require sale-leaseback accounting for
certain lease modifications that have economic effects similar to sale-leaseback
transactions. The provisions of the Statement related to the rescission of SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," were effective
for fiscal years beginning after May 15, 2002. The provisions of the Statement
related to SFAS No. 13 were effective for transactions occurring after May 15,
2002. The adoption of this Statement had no impact on the Company's overall
financial position or results of operation.
In June 2001, the FASB issued 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 adopted
this Statement on January 1, 2003 with no impact on its overall financial
position or results of operation.
(q) Reclassifications
Certain reclassifications have been made in the 2002 and 2001 financial
statements to conform to the 2003 presentation.
(2) REAL ESTATE OWNED
The Company's real estate properties at December 31, 2003 and 2002 were as
follows:
December 31,
----------------------------------
2003 2002
----------------------------------
(In thousands)
Real estate properties:
Land $ 132,900 127,374
Buildings and building improvements 563,538 539,493
Tenant and other improvements 94,727 83,711
Development 50,037 39,718
----------------------------------
841,202 790,296
Less accumulated depreciation (146,934) (118,977)
----------------------------------
$ 694,268 671,319
==================================
At December 31, 2003 and 2002, the Company was offering 11.3 acres of land
in Houston, Texas and Tampa, Florida for sale with a carrying amount of
$1,375,000. No loss is anticipated on the sale of these parcels of land. These
properties are investment properties, not operating properties, thus a
comparative for results of operations is not presented.
The Company is currently developing the properties detailed below. Costs
incurred include capitalization of interest costs during the period of
construction. The interest costs capitalized on real estate properties for 2003
were $2,077,000 compared to $2,061,000 for 2002 and $2,329,000 for 2001.
Total capital investment for development for the year ended December 31,
2003 was $22,238,000. In addition to the costs incurred for the year ended
December 31, 2003 as detailed in the table below, development costs included
$1,748,000 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.
Development
Costs Incurred
-------------------------------------
For the Year Cumulative as Estimated
Size Ended 12/31/03 of 12/31/03 Total Costs
---------------------------------------------------------------------
(Unaudited) (Unaudited)
---------------------------------------------------------------------
(Square feet) (In thousands)
Lease-Up:
World Houston 19, Houston, TX 66,000 $ 542 2,523 3,100
World Houston 20, Houston, TX 62,000 264 2,222 2,800
Executive Airport CC I & III, Fort Lauderdale, FL 85,000 1,200 5,951 6,400
Expressway Commerce Center, Tampa, FL 103,000 2,536 6,157 6,400
Sunport Center IV, Orlando, FL 63,000 2,056 3,082 3,400
Techway Southwest II, Houston, TX 94,000 3,116 4,085 4,800
---------------------------------------------------------------------
Total Lease-up 473,000 9,714 24,020 26,900
---------------------------------------------------------------------
Under Construction:
Santan 10, Chandler, AZ 65,000 2,612 2,612 3,800
World Houston 17, Houston, TX 66,000 1,465 1,465 3,400
---------------------------------------------------------------------
Total Under Construction 131,000 4,077 4,077 7,200
---------------------------------------------------------------------
Prospective Development (Principally Land):
Phoenix, AZ (1) 40,000 (1,002) 374 2,000
Tucson, AZ 70,000 - 326 3,500
Tampa, FL 140,000 125 1,953 7,700
Orlando, FL 892,000 5,826 7,711 49,600
Fort Lauderdale, FL 55,000 243 1,846 3,800
El Paso, TX 251,000 220 2,444 7,600
Houston, TX 792,000 1,150 6,722 38,500
Jackson, MS 32,000 33 564 1,900
---------------------------------------------------------------------
Total Prospective Development 2,272,000 6,595 21,940 114,600
---------------------------------------------------------------------
2,876,000 $ 20,386 50,037 148,700
=====================================================================
Completed Development and Transferred
To Real Estate Properties During the
Year Ended December 31, 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) Development costs that existed prior to 2003 for Santan 10 were moved from
Prospective Development upon commencement of construction in 2003.
A summary of gains (losses) on real estate investments for the years ended
December 31, 2003, 2002 and 2001 follows:
Gains (Losses) 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
==============================================
2001
Real estate properties:
Nobel Business Center, Hercules, CA $ 5,250 2,113 3,137
West Palm II, West Palm Beach, FL 1,350 1,274 76
109th Street Distribution Center, Dallas, TX 1,232 990 242
West Palm I, West Palm Beach, FL 1,428 1,463 (35)
Lakeside Distribution Center, Oklahoma City, OK 2,079 1,165 914
Other (23) - (23)
----------------------------------------------
$ 11,316 7,005 4,311
==============================================
The following schedule indicates approximate future minimum rental receipts
under noncancelable leases for real estate properties by year as of December 31,
2003:
Future Minimum Rental Receipts Under Noncancelable Leases
Years Ended December 31, (In thousands)
----------------------------------------------------
2004 $ 79,875
2005 68,518
2006 56,999
2007 43,508
2008 29,546
Thereafter 58,797
--------------
Total minimum receipts $ 337,243
==============
Ground Leases
As of December 31, 2003, the Company owned two properties in Florida, two
properties in Texas, and one property in Mississippi that are subject to ground
leases. These leases have terms of 40 to 75 years, expiration dates of August
2031 to November 2076, and renewal options of 15 to 35 years. Total lease
expenditures for the years ended December 31, 2003, 2002 and 2001 were $676,000,
$610,000 and $594,000, respectively. Payments on four of the properties are
subject to increases at 3 to 10 year intervals based upon the agreed or
appraised fair market value of the leased premises on the adjustment date or the
Consumer Price Index percentage increase since the base rent date. The following
schedule indicates approximate future minimum lease payments for these
properties by year as of December 31, 2003:
Future Minimum Ground Lease Payments
Years Ended December 31, (In thousands)
----------------------------------------------------
2004 $ 677
2005 677
2006 677
2007 676
2008 676
Thereafter 18,086
--------------
Total minimum payments $ 21,469
==============
(3) OTHER ASSETS
A summary of the Company's other assets follows:
December 31,
-------------------------------
2003 2002
-------------------------------
(In thousands)
Leasing costs, net of accumulated amortization $ 11,286 10,537
Receivables, net of allowance for doubtful accounts 10,725 9,363
Prepaid expenses and other assets 9,827 9,760
-------------------------------
$ 31,838 29,660
===============================
(4) NOTES PAYABLE TO BANKS
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 December 31, 2003, the interest
rate was 2.40% on $32,000,000 and 2.42% on $19,000,000. The interest rate on
each tranche is currently reset on a monthly basis. A $32,000,000 tranche was
last reset on February 26, 2004 at 2.35% and a $21,000,000 tranche was last
reset on March 11, 2004 at 2.34%. 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 matured in January 2004. The loan was amended in
January 2004 to reflect a new maturity date of December 31, 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 December 31, 2003, the
interest rate was 2.295% on $1,550,000.
Loan commitment fees were $44,000 in 2003, $43,000 in 2002 and $37,500 in
2001.
Average bank borrowings were $65,399,000 in 2003 compared to $83,039,000 in
2002 with average interest rates of 2.53% in 2003 compared to 3.11% in 2002.
Amortization of bank loan costs was $409,000 in 2003 and $407,000 in 2002.
Average interest rates including amortization of loan costs were 3.15% for 2003
and 3.60% for 2002.
The Company's bank credit facilities have certain restrictive covenants,
and the Company was in compliance with all of its debt covenants at December 31,
2003 and 2002.
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 (loss). The Company does not hold or issue this type of
derivative contract for trading or speculative purposes.
Current Fair Market Fair Market
Type of Notional Maturity Fixed Value at Value at
Hedge Amount Date Reference Rate Rate 12/31/03 12/31/02
- -----------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,880 12/31/10 1 month LIBOR 4.03% ($30) ($297)
(5) MORTGAGE NOTES PAYABLE
A summary of mortgage notes payable follows:
Carrying Amount
Monthly Of Securing Balance at December 31,
P&I Maturity Real Estate at -----------------------
Property Rate Payment Date December 31, 2003 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Deerwood Distribution Center 8.375% $ 16,339 Repaid 05/03 $ - - 1,373
Eastlake Distribution Center (recourse) 8.500% 57,115 07/05/04 8,820 3,035 3,444
56th Street Commerce Park 8.875% 21,816 08/01/04 4,088 1,695 1,801
Chamberlain Distribution Center 8.750% 21,376 01/01/05 4,935 2,210 2,270
Exchange Distribution Center I 8.375% 21,498 08/01/05 2,844 1,917 2,010
Westport Commerce Center 8.000% 28,021 08/01/05 4,827 2,545 2,672
Lake Pointe Business Park 8.125% 81,675 10/01/05 8,955 10,004 10,164
Jetport Commerce Park 8.125% 33,769 10/01/05 4,759 3,074 3,223
Huntwood Associates 7.990% 100,250 08/22/06 15,812 11,393 11,674
Wiegman Associates 7.990% 46,269 08/22/06 8,363 5,258 5,388
World Houston 1 & 2 7.770% 33,019 04/15/07 5,044 4,262 4,325
E. University I & II, Broadway VI, 55th Avenue 8.060% 96,974 06/26/07 22,195 11,215 11,463
and Ethan Allen
Lamar II Distribution Center 6.900% 16,925 12/01/08 5,879 1,895 1,964
Dominguez, Kingsview, Walnut, Washington, 6.800% 358,770 03/01/09 57,128 40,801 42,277
Industry and Shaw
Auburn Facility 8.875% 64,885 09/01/09 13,861 3,049 3,706
Tower Automotive Center (recourse)(1) 5.300% Semiannual 01/15/11 10,628 10,880 11,000
Interstate Warehouses, Venture, Stemmons Circle,
Glenmont I & II, West Loop I & II,
Butterfield Trail and Rojas 7.250% 325,263 05/01/11 48,124 43,187 43,929
America Plaza, Central Green and World Houston 3-9 7.920% 191,519 05/10/11 27,629 25,551 25,814
University Business Center (120 & 130 Cremona) 6.430% 81,856 05/15/12 10,033 7,444 7,930
University Business Center (125 & 175 Cremona) 7.980% 88,607 06/01/12 13,770 10,914 11,099
Airport Distribution, Southpointe, Broadway I,
III & IV, Southpark, 51st Avenue, Chestnut,
Main Street, Interchange Business Park,
North Stemmons I and World Houston 12 & 13 6.860% 279,149 09/01/12 45,870 39,212 39,848
Broadway V, 35th Avenue, Sunbelt, Freeport,
Lockwood, Northwest Point, Techway Southwest I 4.750% 259,403 09/05/13 47,708 45,262 -
and World Houston 10, 11 & 14
Kyrene Distribution Center 9.000% 11,246 07/01/14 2,658 919 969
-----------------------------------------
$ 373,930 285,722 248,343
=========================================
(1) The Tower Automotive mortgage 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%. Semi-annual principal payments are made on this
note; interest is paid monthly. The principal amounts of these payments increase
incrementally as the loan approaches maturity.
Principal payments due during the next five years as of December 31, 2003
are as follows:
Year (In thousands)
---------------------------------
2004 $ 12,212
2005 26,186
2006 22,797
2007 21,524
2008 9,109
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's accounts payable and accrued expenses follows:
December 31,
-------------------------
2003 2002
-------------------------
(In thousands)
Property taxes payable $ 6,457 5,814
Dividends payable 1,967 3,346
Other payables and accrued expenses 5,842 6,411
-------------------------
$ 14,266 15,571
=========================
(7) STOCKHOLDERS' EQUITY
Management Incentive Plan-Stock Options/Incentive Awards
In 1994, the Company adopted the 1994 Management Incentive Plan, and the
Plan was amended in 1999. As amended, the Plan includes stock options (50%
vested after one year and the other 50% after two years), an annual incentive
award and restricted stock awards.
Stock option activity for the 1994 plan is as follows:
Years Ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------
Outstanding at beginning of year 565,704 $18.503 696,423 $17.921 714,923 $17.801
Granted - - 11,350 24.651 24,500 22.591
Exercised (134,334) 18.802 (138,069) 15.966 (40,750) 18.487
Expired (1,000) 25.095 (4,000) 22.078 (2,250) 20.542
---------- ------------ -----------
Outstanding at end of year 430,370 18.394 565,704 18.503 696,423 17.921
========== ============ ===========
Exercisable at end of year 425,695 $18.325 543,104 $18.287 647,923 $17.634
Available for grant at end of year 543,077 - 164,360 - 187,095 -
Following is a summary of the status of the officers and employees options at
December 31, 2003:
Outstanding Options Exercisable Options
----------------------------------------------------- ----------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Price Range Number Contractual Life Exercise Price Number Exercise Price
--------------------------------------------------------------------------------- ----------------------------------
$ 12.670-19.000 192,770 2.013 years $14.706 192,770 $14.706
20.000-22.780 215,050 4.894 years 21.147 215,050 21.147
23.000-26.350 22,550 7.921 years 23.675 17,875 23.397
Under the incentive award program, the Company's Compensation Committee
determines awards based on actual results compared to performance goals set for
the year. The stock-based compensation portion of the incentive awards granted
for 2002 and 2001 were expensed in those years and approximated $53,000 and
$153,000, respectively, for the three senior executives. In 2003, the incentive
award program was expanded to provide stock-based compensation incentives to
certain of the Company's executive officers. The stock-based compensation award
expensed for 2003 was $273,000.
On December 5, 2000, under the 1994 Management Incentive Plan, the
Compensation Committee granted a total of 181,250 shares of restricted stock to
all employees, effective January 1, 2000. The purpose of the plan is to act as a
retention device since it allows participants to benefit from dividends as well
as potential stock appreciation. The stock price on the grant date was $20.50.
The restricted period for the stock is 10 years and vesting is 20% at the end of
the sixth year through the tenth year. The Company recorded $3,716,000 as
additional paid-in capital when the shares were granted, offset by unearned
compensation of the same amount. The unearned compensation was deducted from
stockholders' equity and is being amortized 10% each year over the restricted
period. In 2001, 15,000 additional shares were granted and 17,000 shares were
forfeited. In 2002, 19,100 additional shares were granted and 9,250 shares were
forfeited. In 2003, no additional shares were granted and 6,000 shares were
forfeited. Compensation expense for the restricted stock was $347,000, $449,000
and $372,000 for 2003, 2002 and 2001, respectively. During the restricted
period, the Company accrues dividends and holds the certificates for the shares;
however, the employee can vote the shares. Share certificates and dividends will
be delivered to the employee as they vest.
Directors Stock Option Plan
The Company has a Directors Stock Option Plan, as amended in 1994, under
which an aggregate of 150,000 shares of common stock were reserved for issuance
upon exercise of any options granted. An additional 150,000 shares were reserved
in 2000. Under the Directors plan, each Non-Employee Director is granted an
initial 7,500 options and 2,250 additional options on the date of any Annual
Meeting at which the Director is reelected to the Board.
Stock option activity for the Director plan is as follows:
Years Ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------
Outstanding at beginning of year 107,250 $19.354 109,500 $17.744 96,000 $17.231
Granted 13,500 26.600 21,000 24.331 13,500 21.400
Exercised (7,500) 11.670 (23,250) 16.273 - -
Expired - - - - - -
----------- ---------- ----------
Outstanding at end of year 113,250 20.726 107,250 19.354 109,500 17.744
=========== ========== ==========
Exercisable at end of year 113,250 $20.726 107,250 $19.354 109,500 $17.744
Available for grant at end of year 95,250 - 108,750 - 129,750 -
Following is a summary of the status of the director's options at December 31,
2003:
Outstanding Options Exercisable Options
----------------------------------------------------- ---------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Price Range Number Contractual Life Exercise Price Number Exercise Price
--------------------------------------------------------------------------------- ---------------------------------
$ 11.250-14.580 18,750 1.440 years $12.422 18,750 $12.422
19.375-21.750 60,000 5.527 years 20.738 60,000 20.738
24.020-26.600 34,500 8.758 years 25.219 34,500 25.219
Series A 9.00% Cumulative Redeemable Preferred Stock
In June 1998, EastGroup sold 1,725,000 shares of Series A 9.00% Cumulative
Redeemable Preferred Stock at $25.00 per share in a public offering. The
preferred stock was redeemable by the Company at $25.00 per share, plus accrued
and unpaid dividends, on or after June 19, 2003. The preferred stock had no
stated maturity, sinking fund or mandatory redemption and was not convertible
into any other securities of the Company.
On July 7, 2003, the Company redeemed all of the outstanding Series A
Preferred Stock. The redemption price of these shares (excluding accrued
dividends) was $43,125,000. The original issuance costs of $1,768,000 related to
Series A in 1998 were recorded as a preferred issuance cost and treated in a
manner similar to a preferred dividend in the third quarter of 2003. The
redemption cost was funded with the proceeds from the Company's common offering
in May 2003 and the 7.95% Series D Cumulative Redeemable Preferred Stock
offering in earlier July 2003.
The Company declared dividends of $1.08125 per share of Series A Preferred
in 2003 and $2.25 per share for each year in 2002 and 2001.
Series B 8.75% Cumulative Convertible Preferred Stock
In December 1998 and September 1999, EastGroup sold $10,000,000 and
$60,000,000, respectively, of Series B 8.75% Cumulative Convertible Preferred
Stock at a net price of $24.50 per share to Five Arrows Realty Securities II,
L.L.C. (Five Arrows), an investment fund managed by Rothschild Realty, Inc., a
member of the Rothschild Group. The Series B Preferred Stock, which was
convertible into common stock at a conversion price of $22.00 per share
(3,181,920 common shares), was entitled to quarterly dividends in arrears equal
to the greater of $0.547 per share or the dividend on the number of shares of
common stock into which a share of Series B Preferred Stock was convertible. In
connection with this offering, EastGroup entered into certain related agreements
with Five Arrows, providing, among other things, for certain registration rights
with respect to the Series B Preferred Stock. Also, the preferred stock was not
redeemable by the Company at its option prior to the fifth anniversary of the
original date of issuance of the Series B Preferred Stock, after which it was
redeemable at various redemption prices at certain dates and under certain
circumstances.
During 2003, all of the 2,800,000 shares of the Series B Preferred Stock
were converted into 3,181,920 common shares. Five Arrows began converting the
shares in April 2003 and completed the conversion in November 2003. Since it was
the policy of Five Arrows to not hold common stock, the common shares were sold
in the market throughout the year with the final shares being sold on December
15, 2003.
The Company declared dividends of $1.641 per share of Series B Preferred
for 2003 and $2.188 per share for each year in 2002 and 2001.
Series D 7.95% Cumulative Redeemable Preferred Stock
In July 2003, EastGroup sold 1,320,000 shares of 7.95% Series D Cumulative
Redeemable Preferred Stock at $25.00 per share in a direct placement. The
preferred stock is redeemable by the Company at $25.00 per share, plus accrued
and unpaid dividends, on or after July 2, 2008. The preferred stock has no
stated maturity, sinking fund or mandatory redemption and is not convertible
into any other securities of the Company.
The Company declared dividends of $.9883 per share of Series D Preferred
for 2003.
Common Stock Issuances
In May 2003, the Company completed a direct placement offering of 571,429
shares of its common stock at $26.25 per share. The proceeds of the offering
were approximately $14,461,000, net of all related expenses. In November 2003,
the Company completed a direct placement offering of 847,458 shares of its
common stock at $29.50 per share. The proceeds of the offering were
approximately $24,513,000, net of all related expenses.
Common Stock Repurchase Plan
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 2003 or 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.
Shareholder Rights Plan
In December 1998, EastGroup adopted a Shareholder Rights Plan (the Plan)
designed to enhance the ability of all of the Company's stockholders to realize
the long-term value of their investment. Under the Plan, Rights were distributed
as a dividend on each share of Common Stock (one Right for each share of Common
Stock) held as of the close of business on December 28, 1998. A Right was also
delivered with all shares of Common Stock issued after December 28, 1998. The
Rights will expire at the close of business on December 3, 2008.
Each whole Right will entitle the holder to buy one one-thousandth (1/1000)
of a newly issued share of EastGroup's Series C Preferred Stock at an exercise
price of $70.00. The Rights attach to and trade with the shares of the Company's
Common Stock. No separate Rights Certificates will be issued unless an event
triggering the Rights occurs. The Rights will detach from the Common Stock and
will initially become exercisable for shares of Series C Preferred Stock if a
person or group acquires beneficial ownership of, or commences a tender or
exchange offer which would result in such person or group beneficially owning
15% or more of EastGroup's Common Stock, except through a tender or exchange
offer for all shares which the Board determines to be fair and otherwise in the
best interests of EastGroup and its shareholders. The Rights will also detach
from the Common Stock if the Board determines that a person holding at least
9.8% of EastGroup's Common Stock intends to cause EastGroup to take certain
actions adverse to it and its shareholders or that such holder's ownership would
have a material adverse effect on EastGroup.
If any person becomes the beneficial owner of 15% or more of EastGroup's
Common Stock and the Board of Directors does not within 10 days thereafter
redeem the Rights, or a 9.8% holder is determined by the Board to be an adverse
person, each Right not owned by such person or related parties will then enable
its holder to purchase, at the Right's then-current exercise price, EastGroup
Common Stock (or, in certain circumstances as determined by the Board, a
combination of cash, property, common stock or other securities) having a value
of twice the Right's exercise price.
Under certain circumstances, if EastGroup is acquired in a merger or
similar transaction with another person, or sells more than 50% of its assets,
earning power or cash flow to another entity, each Right that has not previously
been exercised will entitle its holder to purchase, at the Right's then-current
exercise price, common stock of such other entity having a value of twice the
Right's exercise price.
EastGroup will generally be entitled to redeem the Rights at $0.0001 per
Right at any time until the 10th day following public announcement that a 15%
position has been acquired, or until the Board has determined a 9.8% holder to
be an adverse person. Prior to such time, the Board of Directors may extend the
redemption period.
Dividend Reinvestment Plan
The Company has a dividend reinvestment plan that allows stockholders to
reinvest cash distributions in new shares of the Company.
Earnings Per Share
The Company applies SFAS No. 128, "Earnings Per Share," which requires
companies to present basic EPS and diluted EPS. Reconciliation of the numerators
and denominators in the basic and diluted EPS computations is as follows:
Reconciliation of Numerators and Denominators
----------------------------------------
2003 2002 2001
----------------------------------------
(In thousands)
Basic EPS Computation
Numerator-net income available to common stockholders $ 12,748 13,618 24,174
Denominator-weighted average shares outstanding 17,819 15,868 15,697
Diluted EPS Computation
Numerator-net income available to common stockholders $ 12,748 13,618 24,174
Denominator:
Weighted average shares outstanding 17,819 15,868 15,697
Common stock options 189 182 164
Nonvested restricted stock 186 187 185
----------------------------------------
Total Shares 18,194 16,237 16,046
========================================
The Company's Series B Preferred Stock, which was 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. All of the Series B Preferred Stock was converted into
common stock during 2003.
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 2003, 2002 and 2001 are presented in the Company's
Consolidated Statements of Changes in Stockholders' Equity and are summarized
below.
2003 2002 2001
---------------------------------------
Accumulated Other Comprehensive Income (Loss): (In thousands)
Balance at beginning of year $ 58 1,193 3,104
Unrealized holding gains on REIT securities during the period 66 998 1,056
Less reclassification adjustment for gains on REIT
securities included in net income (421) (1,836) (2,967)
Change in fair value of interest rate swap 267 (297) -
----------------------------------------
Balance at end of year $ (30) 58 1,193
========================================
(8) DEFINED CONTRIBUTION PLAN
EastGroup maintains a 401(k) plan for its employees. The Company makes
matching contributions of 50% of the employee's contribution (limited to 10% of
compensation as defined by the plan) and may also make annual discretionary
contributions. The Company's total expense for this plan was $273,000, $251,000
and $220,000 for 2003, 2002 and 2001, respectively.
(9) QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
2003 Quarter Ended 2002 Quarter Ended
-----------------------------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
(In thousands, except per share data)
-----------------------------------------------------------------------------
Revenues $ 26,843 26,676 27,367 27,555 25,573 26,623 26,351 27,246
Expenses (21,683) (21,417) (22,210) (22,796) (19,568) (19,679) (21,102) (21,812)
-----------------------------------------------------------------------------
Income before gain on sale of 5,160 5,259 5,157 4,759 6,005 6,944 5,249 5,434
real estate investments
Gain on sale of real estate investments - - - - 93 - - -
-----------------------------------------------------------------------------
Income from continuing operations 5,160 5,259 5,157 4,759 6,098 6,944 5,249 5,434
Income (loss) from discontinued operations 104 - 6 - 12 (16) (76) (19)
-----------------------------------------------------------------------------
Net income 5,264 5,259 5,163 4,759 6,110 6,928 5,173 5,415
Preferred dividends (2,502) (1,736) (1,025) (656) (2,502) (2,502) (2,502) (2,502)
Costs on redemption of Series A preferred - - (1,778) - - - - -
-----------------------------------------------------------------------------
Net income available to common stockholders $ 2,762 3,523 2,360 4,103 3,608 4,426 2,671 2,913
=============================================================================
BASIC PER SHARE DATA
Net income available to common stockholders $ 0.17 0.21 0.13 0.21 0.23 0.28 0.17 0.18
=============================================================================
Weighted average shares outstanding 15,924 16,864 18,451 19,986 15,772 15,892 15,901 15,906
=============================================================================
DILUTED PER SHARE DATA
Net income available to common stockholders $ 0.17 0.20 0.13 0.20 0.22 0.27 0.16 0.18
=============================================================================
Weighted average shares outstanding 16,282 17,225 18,818 20,608 16,166 16,254 16,264 16,264
=============================================================================
The above quarterly earnings per share calculations are based on the weighted
average number of common shares outstanding during each quarter for basic
earnings per share and the weighted average number of outstanding common shares
and common share equivalents during each quarter for diluted earnings per share.
The annual earnings per share calculations in the Consolidated Statements of
Income are based on the weighted average number of common shares outstanding
during each year for basic earnings per share and the weighted average number of
outstanding common shares and common share equivalents during each year for
diluted earnings per share.
The Series B Preferred Stock, which was convertible into common stock, was
included in the computation of diluted earnings per share for the quarter ended
December 31, 2003 due to its dilutive effect in such quarter.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 2003 and 2002. SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
--------------------------------------------------------
2003 2002
--------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------
(In thousands)
Financial Assets
Cash and cash equivalents $ 1,786 1,786 1,383 1,383
Investment in real estate
investment trusts - - 1,663 1,663
Financial Liabilities
Mortgage notes payable 285,722 304,317 248,343 263,971
Notes payable to banks 52,550 52,550 73,957 73,957
Interest rate swap 30 30 297 297
Carrying amounts shown in the table are included in the balance sheet under the
indicated captions, except as indicated in the notes below.
The following methods and assumptions were used to estimate fair value of
each class of financial instruments:
Cash and Cash Equivalents: The carrying amounts approximate fair value because
of the short maturity of those instruments.
Investment in Real Estate Investment Trusts: The carrying amount is the fair
value of this equity investment based on quoted market prices. The investment in
real estate investment trusts is shown under Other Assets on the balance sheet.
Mortgage Notes Payable: The fair value of the Company's mortgage notes payable
is estimated based on the quoted market prices for similar issues or by
discounting expected cash flows at the rates currently offered to the Company
for debt of the same remaining maturities, as advised by the Company's bankers.
Notes Payable to Banks: The carrying amounts approximate fair value because of
the variable rates of interest on the debt.
Interest Rate Swap: The fair value of the interest rate swap is the amount at
which it could be settled, based on estimates obtained from the counterparty.
The interest rate swap is shown under Other Liabilities on the balance sheet.
(11) 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 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 real estate investments. 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.
Real estate income is comprised of rental income including straight-line
rent adjustments, pass-through income and other real estate income including
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
recoverable (gross leases represent only a small portion of the Company's total
leases). Increases in property operating expenses are fully recoverable under
net leases and recoverable to a high degree under modified gross leases.
Modified gross leases often include base year amounts and expense increases over
these amounts are recoverable. The Company's exposure to property operating
expenses is primarily due to vacancies and leases for occupied space that limit
the amount of expenses that can be 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 fiscal years reported PNOI by operating segment,
followed by reconciliations of PNOI and FFO Available to Common Stockholders to
Net Income.
--------------------------------------
2003 2002 2001
--------------------------------------
(In thousands)
PROPERTY REVENUES:
Industrial $ 106,036 101,447 98,797
Other 1,735 1,584 1,513
--------------------------------------
107,771 103,031 100,310
--------------------------------------
PROPERTY EXPENSES:
Industrial (31,091) (29,397) (25,064)
Other (568) (505) (454)
--------------------------------------
(31,659) (29,902) (25,518)
--------------------------------------
PROPERTY NET OPERATING INCOME:
Industrial 74,945 72,050 73,733
Other 1,167 1,079 1,059
--------------------------------------
TOTAL PROPERTY NET OPERATING INCOME: 76,112 73,129 74,792
--------------------------------------
Income (loss) from discontinued operations (before
depreciation and amortization) (2) 18 131
Gain on securities 421 1,836 2,967
Other income 249 926 1,768
Interest expense (19,015) (17,387) (17,823)
General and administrative expense (4,966) (4,179) (4,573)
Minority interest in earnings (before depreciation and amortization) (561) (545) (511)
Gain on sale of nondepreciable real estate investments 6 - -
Dividends on Series A preferred shares (2,016) (3,880) (3,880)
Dividends on Series D preferred shares (1,305) - -
Costs on redemption of Series A preferred (1,778) - -
--------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS 47,145 49,918 52,871
Depreciation and amortization from continuing operations (32,050) (30,318) (26,963)
Depreciation and amortization from discontinued operations - (51) (78)
Share of joint venture depreciation and amortization 145 170 161
Gain on sale of depreciable real estate investments 106 27 4,311
Dividends on Series B convertible preferred shares (2,598) (6,128) (6,128)
--------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 12,748 13,618 24,174
Dividends on preferred shares 5,919 10,008 10,008
Costs on redemption of Series A preferred 1,778 - -
--------------------------------------
NET INCOME $ 20,445 23,626 34,182
======================================
ASSETS:
Industrial $ 833,254 782,807 727,264
Other 7,948 7,489 7,069
--------------------------------------
841,202 790,296 734,333
Less accumulated depreciation (146,934) (118,977) (92,060)
--------------------------------------
694,268 671,319 642,273
--------------------------------------
Real estate held for sale 1,375 1,375 1,907
Less accumulated depreciation - - (141)
--------------------------------------
1,375 1,375 1,766
--------------------------------------
Cash 1,786 1,383 1,767
Other assets 31,838 29,660 38,256
--------------------------------------
TOTAL ASSETS $ 729,267 703,737 684,062
======================================
REAL ESTATE INVESTMENT CAPITAL EXPENDITURES
Acquisitions $ 19,034 13,667 13,804
Developments 22,238 35,600 30,735
(12) SUBSEQUENT EVENTS
Subsequent to December 31, 2003, EastGroup purchased Blue Heron
Distribution Center II (100,000 square feet) and an adjoining 1.56 acres of land
for future development in West Palm Beach, Florida for $6,100,000. Blue Heron II
was built in 1988 and is adjacent to Blue Heron I (110,000 square feet), which
the Company has owned since 1999.
Also, subsequent to December 31, 2003, the Company entered into a contract
to purchase a 125,000 square foot building in Houston for approximately
$4,200,000.
(13) RELATED PARTY TRANSACTIONS
EastGroup and Parkway Properties, Inc. share the services and expenses of
the Company's Chairman of the Board and his administrative assistant.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
THE DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
Under date of March 3, 2004, we reported on the consolidated balance sheets
of EastGroup Properties, Inc. and subsidiaries, as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2003, which are included in the 2003 Annual Report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related consolidated financial
statement schedule as listed in Item 15(a)(2) of Form 10-K. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Jackson, Mississippi KPMG LLP
March 3, 2004
SCHEDULE III
REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003 (In thousands)
Gross Amount at
Initial Cost which Carried at
to the Company Close of Period
-------------------- Costs -------------------------
Capitalized Accumulated
Buildings and Subsequent to Buildings and Depreciation Year Year
Description Encumbrances Land Improvements Acquisition Land Improvements Total Dec. 31, 2003 Acquired Constructed
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate
Properties (c):
Industrial:
FLORIDA
Jacksonville
Deerwood $ - 1,147 1,799 1,232 1,147 3,031 4,178 1,032 1989 1978
Phillips - 1,375 2,961 2,309 1,375 5,270 6,645 1,800 1994 1984/95
Lake Pointe 10,004 3,442 6,450 2,913 3,442 9,363 12,805 3,850 1993 1986/87
Ellis - 540 7,513 471 540 7,984 8,524 1,554 1997 1977
Westside - 1,170 12,400 3,252 1,170 15,652 16,822 2,963 1997 1984
Beach - 476 1,899 442 476 2,341 2,817 234 2000 2000
Orlando
Chancellor - 291 1,711 58 291 1,769 2,060 513 1996/97 1996/97
Exchange I 1,917 603 2,414 949 603 3,363 3,966 1,122 1994 1975
Exchange II - 300 945 18 300 963 1,263 94 2002 1976
Exchange III - 320 997 4 320 1,001 1,321 99 2002 1980
Sunbelt
Center (j) 8,219 1,474 5,745 3,039 1,475 8,783 10,258 3,299 1989/97/98 1974/87/97/98
John Young I - 497 2,444 311 497 2,755 3,252 582 1997/98 1997/98
John Young II - 512 3,613 (267) 512 3,346 3,858 886 1998 1999
Altamonte I - 1,518 2,661 564 1,518 3,225 4,743 1,025 1999 1980/82
Altamonte II 745 2,618 163 745 2,781 3,526 73 2003 1975
Sunport I - 555 1,977 474 555 2,451 3,006 360 1999 1999
Sunport II - 597 3,271 598 597 3,869 4,466 813 1999 2001
Sunport III - 642 3,121 182 642 3,303 3,945 230 1999 2002
Tampa
56th Street 1,695 843 3,567 1,855 843 5,422 6,265 2,177 1993 1981/86/97
Jetport 3,074 1,034 4,416 1,770 1,034 6,186 7,220 2,461 1993/94/95 1974/79/85
Jetport
517 & 518 - 541 2,175 280 541 2,455 2,996 707 1999 1981/82
Westport 2,545 980 3,800 1,729 980 5,529 6,509 1,682 1994 1983/87
Benjamin I & II - 843 3,963 107 883 4,030 4,913 1,083 1997 1996
Benjamin III - 407 1,503 144 407 1,647 2,054 740 1999 1988
Palm River
Center - 1,190 4,625 593 1,190 5,218 6,408 1,669 1997/98 1990/97/98
Palm River
North I & III - 1,005 4,688 1,374 1,005 6,062 7,067 634 1998 2000
Palm River
North II - 724 4,418 (28) 634 4,480 5,114 655 1997/98 1999
Walden I - 337 3,318 61 337 3,379 3,716 417 1997/98 2001
Walden II - 465 3,738 308 465 4,046 4,511 974 1998 1998
Premier - 1,110 6,126 137 1,110 6,263 7,373 1,120 1998 1998
Airport - 1,257 4,012 483 1,257 4,495 5,752 893 1998 1998
Westlake - 1,333 6,998 911 1,333 7,909 9,242 1,716 1998 1998/99
Expressway II - 1,013 3,247 - 1,013 3,247 4,260 30 2003 2001
Oak Creek - 647 3,603 12 647 3,615 4,262 25 2003 2001
Fort Lauderdale/
Pompano Beach area
Linpro - 613 2,243 915 616 3,155 3,771 874 1996 1986
Cypress Creek - - 2,465 775 - 3,240 3,240 790 1997 1986
Lockhart - - 3,489 1,076 - 4,565 4,565 1,091 1997 1986
Interstate - 485 2,652 314 485 2,966 3,451 899 1998 1988
Sample 95 - 2,381 9,504 504 2,381 10,008 12,389 2,506 1996/98 1990/99
Blue Heron - 975 3,626 825 975 4,451 5,426 917 1999 1986
CALIFORNIA
San Francisco area
Wiegman 5,258 2,197 8,788 870 2,308 9,547 11,855 1,984 1996 1986/87
Huntwood 11,393 3,842 15,368 342 3,842 15,710 19,552 3,740 1996 1988
San Clemente - 893 2,004 - 893 2,004 2,897 319 1997 1978
Yosemite - 259 7,058 115 259 7,173 7,432 1,379 1999 1974/87
Los Angeles area
Kingsview (e) 1,942 643 2,573 1 643 2,574 3,217 543 1996 1980
Dominguez (e) 6,734 2,006 8,025 1,122 2,006 9,147 11,153 2,109 1996 1977
Main Street (i) 4,196 1,606 4,103 146 1,606 4,249 5,855 764 1999 1999
Walnut (e) 5,049 2,885 5,274 203 2,885 5,477 8,362 1,323 1996 1966/90
Washington (e) 4,110 1,636 4,900 271 1,636 5,171 6,807 1,047 1997 1996/97
Ethan Allen (f) 5,541 2,544 10,175 94 2,544 10,269 12,813 1,907 1998 1980
Industry (e) 14,090 10,230 12,373 733 10,230 13,106 23,336 2,734 1998 1959
Chestnut (i) 3,704 1,674 3,465 30 1,674 3,495 5,169 543 1998 1999
Los Angeles
Corporate Center - 1,363 5,453 1,132 1,363 6,585 7,948 1,265 1996 1986
Santa Barbara
University Bus.
Center 18,358 5,517 22,067 1,751 5,520 23,815 29,335 5,532 1996 1987/88
Fresno
Shaw (e) 8,876 2,465 11,627 609 2,465 12,236 14,701 2,692 1998 1978/81/87
San Diego
Eastlake 3,035 3,046 6,888 400 3,046 7,288 10,334 1,514 1997 1989
TEXAS
Dallas
Interstate
I & II (h) 5,413 1,757 4,941 1,399 1,757 6,340 8,097 3,038 1988 1978
Interstate III (h) 1,969 520 2,008 418 520 2,426 2,946 342 2000 1979
Venture (h) 4,169 1,452 3,762 1,023 1,452 4,785 6,237 2,289 1988 1979
Stemmons
Circle (h) 1,710 363 2,014 181 363 2,195 2,558 778 1998 1977
Ambassador Row - 1,156 4,625 1,261 1,156 5,886 7,042 1,726 1998 1958/65
Viscount Row - 395 1,578 521 395 2,099 2,494 532 1998 1965
North
Stemmons I (i) 2,905 619 3,264 171 619 3,435 4,054 449 2001 1979
North
Stemmons II - 150 583 168 150 751 901 53 2002 1971
Shady Trail - 635 3,621 18 635 3,639 4,274 36 2003 1998
Houston
Northwest
Point (j) 6,815 1,243 5,640 1,623 1,243 7,263 8,506 1,969 1994 1984/85
Lockwood (j) 5,592 749 5,444 786 749 6,230 6,979 1,107 1997 1968/69
West Loop (h) 4,167 905 4,383 946 905 5,329 6,234 1,143 1997/2000 1980
World Houston
1 & 2 4,262 660 5,893 243 660 6,136 6,796 1,752 1998 1996
World Houston
3, 4 & 5 (g) 5,149 1,025 6,413 173 1,025 6,586 7,611 1,954 1998 1998
World
Houston 6 (g) 2,332 425 2,423 38 425 2,461 2,886 673 1998 1998
World
Houston 7 & 8 (g) 5,926 680 4,584 3,041 680 7,625 8,305 2,181 1998 1998
World
Houston 9 (g) 5,149 800 4,355 1,422 800 5,777 6,577 755 1998 1998
World
Houston 10 (j) 4,582 933 4,779 6 933 4,785 5,718 556 2001 1999
World
Houston 11 (j) 3,940 638 3,764 515 638 4,279 4,917 479 1999 1999
World
Houston 12 (i) 2,107 340 2,419 181 340 2,600 2,940 197 2000 2002
World
Houston 13 (i) 2,060 282 2,569 23 282 2,592 2,874 429 2000 2002
World
Houston 14 (j) 2,792 722 2,629 133 722 2,762 3,484 229 2000 2003
America Plaza (g) 3,692 662 4,660 32 662 4,692 5,354 1,116 1998 1996
Central Green (g) 3,303 566 4,031 13 566 4,044 4,610 1,035 1999 1998
Glenmont (h) 5,393 936 6,161 970 936 7,131 8,067 1,264 1998 1999/2000
Techway S.W. I (j) 4,490 729 3,765 1,110 729 4,875 5,604 217 2000 2001
Freeport (j) 5,353 458 5,712 511 458 6,223 6,681 363 2002 2001
El Paso
Butterfield
Trail (h) 16,409 - 22,144 2,403 - 24,547 24,547 5,924 1997/2000 1987/95
Rojas (h) 3,957 900 3,659 1,361 900 5,020 5,920 1,704 1999 1986
Americas Ten I - 526 2,778 8 526 2,786 3,312 92 2001 2003
ARIZONA
Phoenix area
Broadway I (i) 3,286 837 3,349 399 837 3,748 4,585 1,152 1996 1971
Broadway II - 455 482 125 455 607 1,062 169 1999 1971
Broadway III (i) 1,823 775 1,742 27 775 1,769 2,544 440 2000 1983
Broadway IV (i) 1,608 380 1,652 212 380 1,864 2,244 306 2000 1986
Broadway V (j) 1,164 353 1,090 10 353 1,100 1,453 110 2002 1980
Broadway VI (f) 1,073 599 1,855 28 599 1,883 2,482 187 2002 1979
Kyrene I 919 850 2,044 345 850 2,389 3,239 581 1999 1981
Kyrene II - 640 2,409 263 640 2,672 3,312 385 1999 2001
Metro - 1,927 7,708 877 1,927 8,585 10,512 2,139 1996 1977/79
35th Avenue (j) 2,315 418 2,381 90 418 2,471 2,889 452 1997 1967
Estrella - 628 4,694 143 628 4,837 5,465 887 1998 1988
51st Avenue (i) 1,861 300 2,029 268 300 2,297 2,597 504 1998 1987
E. University
I and II (f) 2,468 1,120 4,482 105 1,120 4,587 5,707 892 1998 1987/89
55th Avenue (f) 2,133 912 3,717 303 917 4,015 4,932 753 1998 1987
Interstate
Commons I - 798 3,632 189 798 3,821 4,619 836 1999 1988
Interstate
Commons II - 320 2,448 216 320 2,664 2,984 242 1999 2000
Southpark (i) 3,029 918 2,738 571 918 3,309 4,227 281 2001 2000
Airport Commons - 1,000 1,510 9 1,000 1,519 2,519 45 2003 1971
Tucson
Chamberlain 2,210 506 3,564 1,547 506 5,111 5,617 682 1997/2003 1994/2003
Airport (i) 4,144 1,103 4,672 8 1,103 4,680 5,783 778 1998 1995
Southpointe (i) 4,111 - 3,982 1,754 - 5,736 5,736 1,432 1999 1989
TENNESSEE
Memphis
Senator
Street I - 540 2,187 343 540 2,530 3,070 554 1997 1982
Senator
Street II - 435 1,742 143 435 1,885 2,320 348 1998 1968
Air Park I - 250 1,916 175 250 2,091 2,341 392 1998 1975
Lamar I & II 1,895 1,332 5,398 328 1,332 5,726 7,058 1,179 1998 1978/80
Delp I, II,
& III - 1,049 4,197 445 1,049 4,642 5,691 1,024 1998 1977
Penney - 486 1,946 1 486 1,947 2,433 360 1998 1972
Getwell - 151 603 109 151 712 863 166 1998 1972
Southeast
Crossing - 1,802 10,267 1,294 1,802 11,561 13,363 2,851 1999 1987/97
LOUISIANA
New Orleans
Elmwood - 2,861 6,337 1,914 2,861 8,251 11,112 2,736 1997 1979
Riverbend - 2,592 17,623 1,286 2,592 18,909 21,501 4,941 1997 1984
COLORADO
Denver
Rampart I - 1,023 3,861 518 1,023 4,379 5,402 1,902 1988 1987
Rampart II - 230 2,977 743 230 3,720 3,950 1,114 1996/97 1996/97
Rampart III - 1,098 3,884 1,169 1,098 5,053 6,151 901 1997/98 1999
OKLAHOMA
Oklahoma City
Northpointe - 777 3,113 2 777 3,115 3,892 456 1998 1996/97
Tulsa
Braniff - 1,066 4,641 1,149 1,066 5,790 6,856 1,725 1996 1974
MISSISSIPPI
Interchange (i) 4,378 343 5,007 759 343 5,766 6,109 1,572 1997 1981
Tower 10,880 - 9,958 1,196 - 11,154 11,154 526 2001 2002
Metro Airport I - 303 1,479 76 303 1,555 1,858 24 2001 2003
MICHIGAN
Auburn 3,049 3,230 12,922 131 3,231 13,052 16,283 2,422 1998 1986
---------------------------------------------------------------------------------------
285,722 132,826 579,695 78,644 132,900 658,265 791,165 146,812
---------------------------------------------------------------------------------------
Industrial Development:
FLORIDA
Expressway - 915 - 5,242 915 5,242 6,157 10 2002 n/a
Palm River South - 1,310 - 643 1,310 643 1,953 - 2000 n/a
Executive Airport
I & III - 1,210 - 4,741 1,210 4,741 5,951 43 2001 n/a
Executive
Airport II - 781 - 1,065 781 1,065 1,846 - 2001 n/a
Sunport IV - 642 - 2,440 642 2,440 3,082 - 1999 n/a
Sunport V - 772 - 333 772 333 1,105 - 2001 n/a
Sunport VI - 650 - 275 650 275 925 - 2001 n/a
SouthRidge - 5,272 - 409 5,272 409 5,681 - 2003 n/a
TEXAS
Techway S.W. II - 550 - 3,535 550 3,535 4,085 46 2000 n/a
Techway S.W. III - 535 - 451 535 451 986 - 1999 n/a
Techway S.W. IV - 597 - 478 597 478 1,075 - 1999 n/a
World Houston
Land - 2,654 - 578 2,673 559 3,232 - 2000 n/a
World Houston
Land - 1,147 - 282 1,181 248 1,429 - 2000 n/a
Americas Ten II - 708 - 562 708 562 1,270 - 2001 n/a
Americas Ten III - 656 - 518 656 518 1,174 - 2001 n/a
World Houston 19 - 211 - 2,312 373 2,150 2,523 23 2000 n/a
World Houston 17 - 373 - 1,092 373 1,092 1,465 - 2000 n/a
World Houston 20 - 197 - 2,025 346 1,876 2,222 - 2000 n/a
ARIZONA
Airport II - 299 - 27 300 26 326 - 2000 n/a
Interstate
Commons III - 237 - 137 242 132 374 - 2000 n/a
SanTan 10 - 820 - 1,792 846 1,766 2,612 - 2001 n/a
MISSISSIPPI
Metro Airport II - 280 - 284 280 284 564 - 2001 n/a
---------------------------------------------------------------------------------------
- 20,816 - 29,221 21,212 28,825 50,037 122
---------------------------------------------------------------------------------------
Real Estate Properties
Held For Sale:
TEXAS
World Houston
Land (d) - 765 - 8 773 - 773 - 2000 n/a
FLORIDA
Sabal Park Land (d) - 351 - 251 602 - 602 - 1998 n/a
---------------------------------------------------------------------------------------
- 1,116 - 259 1,375 - 1,375 -
---------------------------------------------------------------------------------------
Total real estate
owned (a)(b) $285,722 154,758 579,695 108,124 155,487 687,090 842,577 146,934
=======================================================================================
(a) Changes in Real Estate Properties follow:
Years Ended December 31,
--------------------------------------
2003 2002 2001
--------------------------------------
(In thousands)
Balance at beginning of year $791,671 736,240 694,655
Improvements 33,167 45,286 37,357
Purchase of real estate properties 18,639 13,363 13,804
Carrying amount of investments sold (784) (3,218) (9,576)
Write-off of tenant improvements (116) - -
--------------------------------------
Balance at end of year (1) $842,577 791,671 736,240
======================================
(1) Includes 20% minority interest in University Business Center totaling
$5,867,000 at December 31, 2003 and $5,802,000 at December 31, 2002.
Changes in the accumulated depreciation on real estate properties follow:
Years Ended December 31,
--------------------------------------
2003 2002 2001
--------------------------------------
(In thousands)
Balance at beginning of year $118,977 92,201 70,120
Depreciation expense 28,128 27,050 24,439
Accumulated depreciation on assets sold (55) (371) (2,352)
Other (116) 97 (6)
--------------------------------------
Balance at end of year $146,934 118,977 92,201
======================================
(b) The estimated aggregate cost of real estate properties at December 31, 2003
for federal income tax purposes was approximately $771,200,000. The federal
income tax return for the year ended December 31, 2003 has not been filed and,
accordingly, this estimate is based on preliminary data.
(c) The Company computes depreciation using the straight-line method over the
estimated useful lives of the buildings (generally 40 years) and improvements
(generally 3 to 15 years).
(d) The investment was not producing income to the Company as of December 31,
2003 and 2002.
(e) EastGroup has a $40,801,000 nonrecourse first mortgage loan with
Metropolitan Life secured by Dominguez, Kingsview, Walnut, Washington, Industry
and Shaw.
(f) EastGroup has an $11,215,000 nonrecourse first mortgage loan with Prudential
Life secured by East University I & II, Broadway VI, 55th Avenue and Ethan
Allen.
(g) EastGroup has a $25,551,000 nonrecourse first mortgage loan with New York
Life secured by America Plaza, Central Green and World Houston 3-9.
(h) EastGroup has a $43,187,000 nonrecourse first mortgage loan with
Metropolitan Life secured by Interstate Warehouses, Venture, Stemmons Circle,
Glenmont I & II, West Loop I & II, Butterfield Trail and Rojas.
(i) EastGroup has a $39,212,000 nonrecourse first mortgage loan with
Metropolitan Life secured by Airport Distribution, Southpointe, Broadway I, III
& IV, Southpark, 51st Avenue, Chestnut, Main Street, Interchange Business Park,
North Stemmons I and World Houston 12 & 13.
(j) EastGroup has a $45,262,000 nonrecourse first mortgage loan with Prudential
Life secured by Broadway V, 35th Avenue, Sunbelt, Freeport, Lockwood, Northwest
Point, Techway Southwest I and World Houston 10, 11 & 14.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EASTGROUP PROPERTIES, INC.
By: /s/ DAVID H. HOSTER II
David H. Hoster II, Chief Executive Officer,
President & Director
March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
* *
D. Pike Aloian, Director Alexander G. Anagnos, Director
March 11, 2004 March 11, 2004
* *
H. C. Bailey, Jr., Director Hayden C. Eaves III, Director
March 11, 2004 March 11, 2004
* *
Fredric H. Gould, Director David M. Osnos, Director
March 11, 2004 March 11, 2004
* * /s/ N. KEITH MCKEY
Leland R. Speed, Chairman of the Board By N. Keith McKey, Attorney-in-fact
(Principal Executive Officer) March 15, 2004
March 11, 2004
/s/ BRUCE CORKERN
Bruce Corkern, Sr. Vice President & Controller
(Principal Accounting Officer)
March 15, 2004
/s/ N. KEITH MCKEY
N. Keith McKey, Executive Vice-President, Chief Financial Officer, Treasurer and
Secretary
(Principal Financial Officer)
March 15, 2004
EXHIBIT INDEX
The following exhibits are included in this Form 10-K or are incorporated by
reference as noted in the following table:
(3) Exhibits required by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation (incorporated by reference to
Appendix B to the Company's Proxy Statement dated April 24,
1997).
(b) Bylaws of the Company (incorporated by reference to Appendix
C to the Company's Proxy Statement dated April 24, 1997).
(c) 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).
(d) 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).
(e) Articles Supplementary of the Company relating to the
reclassification of the Series B Cumulative Convertible
Preferred Stock of the Company to the Company's common stock
(filed herewith).
(10) Material Contracts:
(a) EastGroup Properties 1994 Management Incentive Plan, As
Amended (incorporated by reference to Appendix A of the
Company's Proxy Statement for its Annual Meeting of
Shareholders held on June 2, 1999).*
(b) EastGroup Properties 1991 Directors Stock Option Plan, As
Amended (incorporated by reference to Exhibit B to the
Company's Proxy Statement dated April 26, 1994).*
(c) EastGroup Properties 2000 Directors Stock Option Plan
(incorporated by reference to Appendix A to the Company's
Proxy Statement for its Annual Meeting of Shareholders held
on June 1, 2000).*
(d) Form of Change in Control Agreement that the Company has
entered into with certain executive officers (Leland R.
Speed, David H. Hoster II and N. Keith McKey) (incorporated
by reference to Exhibit 10(e) to the Company's Form 10-K for
the year ended December 31, 1996).*
(e) Form of Amendment to Change in Control Agreement that the
Company has entered into with certain executive officers
(incorporated by reference to Exhibit 10(e) to the Company's
Form 10-K for the year ended December 31, 2002).*
(f) Credit Agreement dated January 8, 2002 among EastGroup
Properties, L.P.; EastGroup Properties, Inc.; PNC Bank,
National Association, as Administrative Agent; Commerzbank
Aktiengesellschaft, New York Branch, as Syndication Agent;
SouthTrust Bank, as Co-Syndication Agent; U.S. Bank,
National Association, as Documentation Agent; Wells Fargo
Bank, National Association, as Co-Documentation Agent;
AmSouth Bank, as Managing Agent; PNC Capital Market, Inc.,
as Lead Arranger and Lead Agent; and the Lenders
(incorporated by reference to the Company's Form 10-K/A for
the year ended December 31, 2001).
(21) Subsidiaries of EastGroup Properties, Inc. (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(31) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002:
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
(32) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002:
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
(99) Rights Agreement dated as of December 3, 1998 between the Company
and EquiServe Trust Company, N.A., which replaced Harris Trust
and Savings Bank, as Rights Agent (incorporated by reference to
the Company's Form 8-A filed December 9, 1998).
(b) Reports on Form 8-K during the quarter ended December 31, 2003:
(1) A Form 8-K was filed on October 22, 2003 under Item 12,
furnishing EastGroup's October 1, 2003 press release, setting
forth the Company's third quarter 2003 earnings.
(2) A Form 8-K was filed on November 19, 2003 (a) reporting under
Item 5 thereof the issuance of 847,458 shares of common stock,
and (b) filing as exhibits under Item 7 thereof, the Placement
Agency Agreement with A.G. Edwards & Sons, Inc. and opinions of
counsel.
*Indicates management or compensatory agreement.