U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2004 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
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES (x) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES (x) NO ( )
The number of shares of common stock, $.0001 par value, outstanding as of August
5, 2004 was 21,033,640.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 2004
Pages
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated balance sheets, June 30, 2004 (unaudited)
and December 31, 2003 3
Consolidated statements of income for the three and six months ended
June 30, 2004 and 2003 (unaudited) 4
Consolidated statement of changes in stockholders' equity for the six
months ended June 30, 2004 (unaudited) 5
Consolidated statements of cash flows for the six months
ended June 30, 2004 and 2003 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
Authorized signatures 19
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
June 30, 2004 December 31, 2003
-----------------------------------------
(Unaudited)
ASSETS
Real estate properties.................................................... $ 821,756 791,165
Development............................................................... 35,739 50,037
-----------------------------------------
857,495 841,202
Less accumulated depreciation......................................... (160,607) (146,934)
-----------------------------------------
696,888 694,268
-----------------------------------------
Real estate held for sale................................................. 3,988 1,375
Cash...................................................................... 2,108 1,786
Other assets.............................................................. 35,429 31,838
-----------------------------------------
TOTAL ASSETS.......................................................... $ 738,413 729,267
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable.................................................... $ 280,965 285,722
Notes payable to banks.................................................... 75,497 52,550
Accounts payable & accrued expenses....................................... 13,598 14,266
Other liabilities......................................................... 8,160 7,980
-----------------------------------------
378,220 360,518
-----------------------------------------
-----------------------------------------
Minority interest in joint venture.......................................... 1,823 1,804
-----------------------------------------
STOCKHOLDERS' EQUITY
Series C Preferred Shares; $.0001 par value; 600,000 shares authorized;
no shares issued........................................................ - -
Series D 7.95% Cumulative Redeemable Preferred Shares and additional
paid-in capital; $.0001 par value; 1,320,000 shares authorized and
issued; stated liquidation preference of $33,000........................ 32,326 32,326
Common shares; $.0001 par value; 68,080,000 shares authorized;
20,967,889 shares issued and outstanding at June 30, 2004 and
20,853,780 at December 31, 2003......................................... 2 2
Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares
issued.................................................................. - -
Additional paid-in capital on common shares............................... 355,321 352,549
Distributions in excess of earnings....................................... (26,732) (15,595)
Accumulated other comprehensive income (loss)............................. 254 (30)
Unearned compensation..................................................... (2,801) (2,307)
-----------------------------------------
358,370 366,945
-----------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $ 738,413 729,267
=========================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
REVENUES
Income from real estate operations....................................... $ 28,034 26,382 55,517 52,736
Other.................................................................... 79 145 111 501
----------------------------------------------------
28,113 26,527 55,628 53,237
----------------------------------------------------
EXPENSES
Operating expenses from real estate operations........................... 7,968 7,614 15,602 15,536
Interest................................................................. 5,023 4,643 9,942 9,341
Depreciation and amortization............................................ 8,277 7,696 16,492 15,334
General and administrative............................................... 1,568 1,261 3,244 2,500
Minority interest in joint venture....................................... 123 114 244 213
----------------------------------------------------
22,959 21,328 45,524 42,924
----------------------------------------------------
INCOME FROM CONTINUING OPERATIONS.......................................... 5,154 5,199 10,104 10,313
DISCONTINUED OPERATIONS
Income from real estate operations....................................... 66 60 128 104
Gain on sale of real estate investments.................................. 61 - 61 106
----------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS ....................................... 127 60 189 210
----------------------------------------------------
NET INCOME................................................................. 5,281 5,259 10,293 10,523
Preferred dividends-Series A............................................. - 970 - 1,940
Preferred dividends-Series B............................................. - 766 - 2,298
Preferred dividends-Series D............................................. 656 - 1,312 -
----------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................ $ 4,625 3,523 8,981 6,285
====================================================
BASIC PER COMMON SHARE DATA................................................
Income from continuing operations........................................ $ 0.21 0.21 0.42 0.37
Income from discontinued operations...................................... 0.01 - 0.01 0.01
----------------------------------------------------
Net income available to common stockholders.............................. $ 0.22 0.21 0.43 0.38
====================================================
Weighted average shares outstanding...................................... 20,745 16,864 20,716 16,397
====================================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations........................................ $ 0.21 0.20 0.42 0.37
Income from discontinued operations...................................... 0.01 - 0.01 0.01
----------------------------------------------------
Net income available to common stockholders.............................. $ 0.22 0.20 0.43 0.38
====================================================
Weighted average shares outstanding...................................... 21,142 17,225 21,128 16,758
====================================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
Accumulated
Additional Distributions Other
Preferred Common Paid-In Unearned In Excess Comprehensive
Stock Stock Capital Compensation Of Earnings Income/(Loss) Total
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003.................... $ 32,326 2 352,549 (2,307) (15,595) (30) 366,945
Comprehensive income
Net income................................ - - - - 10,293 - 10,293
Net unrealized change in cash flow hedge.. - - - - - 284 284
------------
Total comprehensive income.......... 10,577
------------
Common dividends declared - $.96 per share.. - - - - (20,118) - (20,118)
Preferred stock dividends declared - $.9938
per share.................................. - - - - (1,312) - (1,312)
Stock-based compensation, net of forfeitures - - 2,608 (494) - - 2,114
Issuance of 5,048 shares of common stock,
dividend reinvestment plan................. - - 173 - - - 173
Other....................................... - - (9) - - - (9)
------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2004........................ $ 32,326 2 355,321 (2,801) (26,732) 254 358,370
====================================================================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
----------------------------------
2004 2003
----------------------------------
OPERATING ACTIVITIES
Net income......................................................................... $ 10,293 10,523
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization from continuing operations......................... 16,492 15,334
Depreciation and amortization from discontinued operations....................... 93 97
Gain on sale of real estate investments.......................................... (61) (106)
Gain on real estate investment trust (REIT) shares............................... - (389)
Stock-based compensation expense................................................. 597 316
Minority interest depreciation and amortization.................................. (71) (76)
Changes in operating assets and liabilities:
Accrued income and other assets................................................ (2,232) 153
Accounts payable, accrued expenses and prepaid rent............................ 3,397 1,642
----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 28,508 27,494
----------------------------------
INVESTING ACTIVITIES
Purchases of real estate........................................................... (8,140) (4,980)
Real estate development............................................................ (6,386) (9,557)
Real estate improvements........................................................... (4,877) (5,081)
Proceeds from sale of real estate investments...................................... 746 445
Proceeds from sale and liquidation of REIT shares.................................. - 1,697
Changes in other assets and other liabilities...................................... (2,185) (2,069)
----------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................................ (20,842) (19,545)
----------------------------------
FINANCING ACTIVITIES
Proceeds from bank borrowings...................................................... 65,476 55,746
Repayments on bank borrowings...................................................... (42,529) (52,757)
Principal payments on mortgage notes payable....................................... (6,837) (4,510)
Debt issuance costs................................................................ (85) (91)
Distributions paid to stockholders................................................. (21,227) (21,211)
Proceeds from common stock offering................................................ - 14,573
Proceeds from exercise of stock options............................................ 1,286 1,297
Proceeds from dividend reinvestment plan........................................... 173 179
Other.............................................................................. (3,601) (1,101)
----------------------------------
NET CASH USED IN FINANCING ACTIVITIES................................................ (7,344) (7,875)
----------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS................................................ 322 74
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 1,786 1,383
----------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 2,108 1,457
==================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $910 and $1,002 for 2004
and 2003, respectively.......................................................... $ 9,543 8,953
Conversion of cumulative preferred stock into common stock......................... - 33,589
Fair value of debt assumed by the Company in the purchase of real estate........... 2,091 1,478
Issuance of common stock, incentive compensation, net of forfeitures............... 1,047 -
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements of EastGroup Properties, Inc.
("EastGroup" or "the Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In management's opinion, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The financial statements should be read in conjunction with the
2003 annual report and the notes thereto.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the 2003 financial statements to
conform to the 2004 presentation.
(3) REAL ESTATE PROPERTIES
The Company's real estate properties at June 30, 2004 and December 31, 2003 were
as follows:
-----------------------------------------
June 30, 2004 December 31, 2003
-----------------------------------------
(In thousands)
Real estate properties:
Land................................................ $ 137,307 132,900
Buildings and building improvements................. 583,116 563,538
Tenant and other improvements....................... 101,333 94,727
Development............................................ 35,739 50,037
-----------------------------------------
857,495 841,202
Less accumulated depreciation....................... (160,607) (146,934)
-----------------------------------------
$ 696,888 694,268
=========================================
(4) REAL ESTATE HELD FOR SALE
Real estate properties that are currently offered for sale or are under contract
to sell have been shown separately on the consolidated balance sheets as "real
estate held for sale." The Company applies Statement of Financial Accounting
Standards (SFAS) No. 144, which requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less estimated costs
to sell and are not depreciated while they are held for sale.
At June 30, 2004, the Company was offering two properties and several
parcels of land for sale with a total carrying amount of $3,988,000. At December
31, 2003, the Company was offering several parcels of land for sale with a total
carrying amount of $1,375,000. Subsequent to June 30, 2004, the Company sold
Sample 95 Business Park III (18,000 square feet) in Pompano Beach, Florida for a
price of $2,000,000, generating a gain of approximately $1,280,000. No loss is
anticipated on the sale of the remaining property or parcels of land. There can
be no assurances that the properties that are held for sale will be sold.
In accordance with the guidelines established under SFAS No. 144,
operations and gains and losses on sale from the properties placed in the
category "held for sale" have been classified as income from discontinued
operations. No interest expense was allocated to the properties that are held
for sale.
(5) BUSINESS COMBINATIONS AND GOODWILL
Upon acquisition of real estate properties, the Company applies the principles
of SFAS No. 141, "Business Combinations," 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 above and below market
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.
Total cost of the properties acquired during the first six months of 2004
was $10,231,000, of which $9,290,000 was allocated to real estate properties. In
accordance with SFAS No. 141, intangibles associated with the purchases of real
estate were allocated as follows: $928,000 to in-place lease intangibles and
$36,000 to above market leases (both included in Other Assets on the balance
sheet); $23,000 to below market leases (included in Other Liabilities on the
balance sheet). All of these costs are amortized over the remaining lives of the
associated leases in place at the time of acquisition. The Company paid cash of
$8,140,000 for the properties and intangibles acquired, assumed a mortgage of
$1,778,000 and recorded a premium of $313,000 to adjust the mortgage loan
assumed to fair market value.
The Company periodically reviews, at least annually in the fourth quarter,
the recoverability of goodwill and other intangibles for possible impairment. In
management's opinion, no material impairment of goodwill and other intangibles
existed at June 30, 2004 and December 31, 2003.
(6) OTHER ASSETS
A summary of the Company's Other Assets follows:
June 30, 2004 December 31, 2003
----------------------------------------
(In thousands)
Leasing costs, net of accumulated amortization............ $ 11,677 11,286
Receivables, net of allowance for doubtful accounts....... 11,387 10,725
Prepaid expenses and other assets......................... 12,365 9,827
----------------------------------------
$ 35,429 31,838
========================================
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
June 30, 2004 December 31, 2003
----------------------------------------
(In thousands)
Property taxes payable.................................... $ 6,732 6,457
Dividends payable......................................... 2,171 1,967
Other payables and accrued expenses....................... 4,695 5,842
----------------------------------------
$ 13,598 14,266
========================================
(8) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in equity
from nonowner sources. The components of accumulated other comprehensive income
(loss) for the six months ended June 30, 2004 are presented in the Company's
Consolidated Statement of Changes in Stockholders' Equity and for the six months
ended June 30, 2004 and 2003 are summarized below.
Accumulated Other Comprehensive Income (Loss)
Six Months Ended
June 30,
-----------------------------------
2004 2003
-----------------------------------
(In thousands)
Balance at beginning of period.................................... $ (30) 58
Unrealized holding gains on REIT securities during the period... - 49
Less reclassification adjustment for gains on
REIT securities included in net income...................... - (389)
Change in fair value of interest rate swap...................... 284 (194)
-----------------------------------
Balance at end of period.......................................... $ 254 (476)
===================================
(9) EARNINGS PER SHARE
The Company applies SFAS No. 128, "Earnings Per Share," which requires companies
to present basic earnings per share (EPS) and diluted EPS. Basic EPS represents
the amount of earnings for the period available to each share of common stock
outstanding during the reporting period. The Company's basic EPS is calculated
by dividing net income available to common stockholders by the weighted average
number of common shares outstanding.
Diluted EPS represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of common shares
for all dilutive potential common shares outstanding during the reporting
period. The Company calculates diluted EPS by totaling net income available to
common stockholders plus dividends on dilutive convertible preferred shares and
dividing this numerator by the weighted average number of common shares
outstanding plus the dilutive effect of stock options, 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. Reconciliation of the
numerators and denominators in the basic and diluted EPS computations is as
follows:
Reconciliation of Numerators and Denominators
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
(In thousands)
BASIC EPS COMPUTATION
Numerator-net income available to common stockholders........... $ 4,625 3,523 8,981 6,285
Denominator-weighted average shares outstanding................. 20,745 16,864 20,716 16,397
DILUTED EPS COMPUTATION
Numerator-net income available to common stockholders........... $ 4,625 3,523 8,981 6,285
Denominator:
Weighted average shares outstanding........................... 20,745 16,864 20,716 16,397
Common stock options.......................................... 187 174 214 173
Nonvested restricted stock.................................... 210 187 198 188
----------------------------------------------------
Total Shares............................................... 21,142 17,225 21,128 16,758
====================================================
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 three and six months ended
June 30, 2003 due to its antidilutive effect. All of the Series B Preferred
Stock was converted into common stock during 2003.
(10) STOCK-BASED COMPENSATION
The Company had a management incentive plan, which was adopted in 1994 (the
"1994 Plan"), under which employees of the Company were granted stock option
awards. Effective January 1, 2002, the Company adopted the fair value
recognition provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of SFAS No. 123,
`Accounting for Stock-Based Compensation'," prospectively to all awards granted,
modified, or settled after January 1, 2002. Stock-based compensation expense was
immaterial for the three and six months ended June 30, 2004 and 2003, with an
immaterial effect to pro forma net income available to common stockholders and
no effect to basic or diluted earnings per share. The Company elected to
continue to follow the requirements of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," during all years prior to 2002
and, accordingly, there was no effect on the results of operations. 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.
At the Company's annual meeting on May 27, 2004, the Company's shareholders
approved the EastGroup Properties, Inc. 2004 Equity Incentive Plan (the "2004
Plan"), which authorizes the issuance of up to 1,900,000 shares of common stock
to employees in the form of options, stock appreciation rights, restricted
stock, deferred stock units, performance shares, stock bonuses, and stock in
place of cash compensation. The 2004 Plan has replaced the 1994 Plan and no
further grants will be made under the 1994 Plan.
During the six months ended June 30, 2004, the Company issued 35,582 shares
of common stock under these plans and 2,000 shares were forfeited. In addition,
53,729 common shares were issued upon the exercise of stock options under the
1994 Plan and 21,750 shares under the Directors Stock Option Plan.
(11) SUBSEQUENT EVENTS
Subsequent to June 30, 2004, the Company purchased Interstate Distribution
Center IV, a 46,000 square foot, multi-tenant business distribution building in
Dallas, Texas for a price of approximately $3 million.
The Company is currently under contract to purchase the Alamo Downs
Distribution Center in San Antonio, Texas for a price of approximately $8.4
million.
ITEM 2. 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, acquires 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 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 the
second quarter of 2004, leases on 5.3% of EastGroup's portfolio square footage
expired, and the Company was successful in renewing or re-leasing 69% of that
total. In addition, during the second quarter of 2004, EastGroup leased 353,000
square feet of space that was vacant at March 31, 2004.
For the six month period ended June 30, 2004, leases on 10.9% of
EastGroup's portfolio square footage expired, and the Company was successful in
renewing or re-leasing 68% of that total. During the first six months of 2004,
EastGroup leased 829,000 square feet of space that was vacant at December 31,
2003.
EastGroup's total leased percentage increased to 92.6% at June 30, 2004
from 92.4% at June 30, 2003. Due to continued sluggishness in the economy, the
Company experienced average rental decreases of .4% for the three months ended
June 30, 2004 and 1.5% for the six month period. The anticipated expiring leases
for the remainder of 2004 were 6.04% of the portfolio at June 30, 2004. The
second quarter of 2004 was the fourth consecutive quarter of positive leasing
results when compared to the previous year's quarter. This continuing
improvement is the result of an increase in occupancy more than offsetting the
decrease in rental rates experienced with lease renewals and new leasing.
The Company generates new revenues through its acquisition and development
programs. During the first six months of 2004, the Company purchased two
properties and one parcel of land for development. Since June 30, 2004, the
Company has purchased one property in Dallas for approximately $3 million and is
under contract to purchase an additional property in San Antonio for
approximately $8.4 million. San Antonio is a new market for EastGroup with
potential for becoming a core market and which would complement the Company's
operations in Houston, Dallas and El Paso. For 2004, the Company has also
identified approximately $34 million of development opportunities. The Company
sold one property during the second quarter of 2004 and one property in July for
a combined total of approximately $2.8 million. These dispositions represented
opportunities to recycle capital into acquisitions and targeted development with
greater upside potential.
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. During the
second quarter, EastGroup transferred five properties with costs of
approximately $19.6 million from development to real estate properties. The
Company began construction of an estimated $5.1 million development property in
May 2004 and an estimated $4.2 million development property in July.
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. In May 2004, the
Company signed an application on a $30.3 million, nonrecourse first mortgage
loan to be secured by six properties. The note is expected to close in September
and will have a fixed interest rate of 5.68%, a ten-year term, and an
amortization schedule of 30 years. The proceeds of the note will be used to
reduce floating rate bank borrowings. The Company has no off-balance sheet
arrangements.
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. 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.
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
lease termination fees. Property operating expenses are comprised of property
taxes, insurance, repair and maintenance expenses, management fees and other
operating costs. Generally, the Company's most significant operating expenses
are property taxes and insurance. 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 following table presents on a comparative basis for the three and
six months ended June 30, 2004 and 2003, reconciliations of PNOI and FFO
Available to Common Stockholders to Net Income.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
(In thousands)
Income from real estate operations.......................................... $ 28,034 26,382 55,517 52,736
Operating expenses from real estate operations.............................. (7,968) (7,614) (15,602) (15,536)
----------------------------------------------------
PROPERTY NET OPERATING INCOME............................................... 20,066 18,768 39,915 37,200
Income from discontinued operations (before depreciation and amortization).. 111 108 221 201
Other income................................................................ 79 145 111 501
Interest expense............................................................ (5,023) (4,643) (9,942) (9,341)
General and administrative expense.......................................... (1,568) (1,261) (3,244) (2,500)
Minority interest in earnings (before depreciation and amortization)........ (159) (150) (315) (289)
Dividends on Series A preferred shares...................................... - (970) - (1,940)
Dividends on Series D preferred shares...................................... (656) - (1,312) -
----------------------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS...................... 12,850 11,997 25,434 23,832
Depreciation and amortization from continuing operations.................... (8,277) (7,696) (16,492) (15,334)
Depreciation and amortization from discontinued operations.................. (45) (48) (93) (97)
Share of joint venture depreciation and amortization........................ 36 36 71 76
Gain on sale of depreciable real estate investments......................... 61 - 61 106
Dividends on Series B convertible preferred shares.......................... - (766) - (2,298)
----------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................. 4,625 3,523 8,981 6,285
Dividends on preferred shares............................................... 656 1,736 1,312 4,238
----------------------------------------------------
NET INCOME.................................................................. $ 5,281 5,259 10,293 10,523
====================================================
Net income available to common stockholders per diluted share............... $ .22 .20 .43 .38
Funds from operations available to common stockholders per diluted share(1). .61 .61 1.20 1.21
Diluted shares for earnings per share................................... 21,142 17,225 21,128 16,758
Convertible preferred stock............................................. - 2,572 - 2,876
----------------------------------------------------
(1) Diluted shares for funds from operations................................ 21,142 19,797 21,128 19,634
====================================================
The Company analyzes the following performance trends in evaluating the progress
of the Company:
o The FFO change per share represents the increase or decrease in FFO per
share from the same quarter in the current year compared to the prior year.
FFO per share for the second quarter of 2004 was the same as last year's
second quarter which was an improvement over the prior eight quarters in
which the change was negative (FFO per share decreased). The Company is
budgeting an increase for 2004, primarily due to acquisitions and
developments.
o Same property net operating income 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 and the first and second
quarters of 2004 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 nine quarters ended June 30, 2004, occupancy has been in the range of
90% to 92%. For 2004, occupancy is expected to continue to be in this
range.
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 new and renewal leases in the last seven quarters ended June
30, 2004; however, the decrease for the second quarter of 2004 was only
.4%. The Company is anticipating a decrease in rental rates on expiring
leases 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 above and below market
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.
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 for the
periods presented. In the event that the allowance for uncollectible accounts is
insufficient for an account that is subsequently written off, additional bad
debt expense 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 taxable income to its stockholders and expects to distribute all of its
taxable income in 2004. Accordingly, no provision for income taxes was necessary
in 2003, nor is it expected to be necessary for 2004.
FINANCIAL CONDITION
(Comments are for the balance sheets dated June 30, 2004 and December 31, 2003.)
EastGroup's assets were $738,413,000 at June 30, 2004, an increase of $9,146,000
from December 31, 2003. Liabilities increased $17,702,000 to $378,220,000 and
stockholders' equity decreased $8,575,000 to $358,370,000 during the same
period. Book value per common share decreased to $15.52 at June 30, 2004 from
$16.01 at December 31, 2003. The paragraphs that follow explain these changes in
detail.
ASSETS
Real Estate Properties
Real estate properties increased $30,591,000 during the six months ended June
30, 2004. This increase was due to the transfer of five properties from
development with total costs of $19,569,000; the purchase of two properties,
both located in the Company's core markets, for total costs of $9,290,000, as
detailed below; capital improvements of $4,877,000; and improvements of
$1,115,000 on development properties transferred to real estate properties in
the 12-month period following transfer. These increases were offset by the
transfer of three properties to real estate held for sale with costs of
$4,260,000.
Real Estate Properties Acquired in 2004 Location Size Date Acquired Cost (1)
------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
Blue Heron Distribution Center II ..... West Palm Beach, FL 100,000 01-15-04 $ 5,607
Kirby Business Center.................. Houston, TX 125,000 03-17-04 3,683
---------------
Total Acquisitions............... $ 9,290
===============
(1) Total cost of the properties acquired was $10,231,000, of which $9,290,000
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: $928,000 to in-place
lease intangibles and $36,000 to above market leases (both included in
Other Assets on the balance sheet); $23,000 to below market leases
(included in Other Liabilities on the balance sheet). All of these costs
are amortized over the remaining lives of the associated leases in place at
the time of acquisition. The Company paid cash of $8,140,000 for the
properties and intangibles acquired, assumed a mortgage of $1,778,000 and
recorded a premium of $313,000 to adjust the mortgage loan assumed to fair
market value.
Development
Development costs at June 30, 2004 were $35,739,000 compared to $50,037,000 at
December 31, 2003. During the six months ended June 30, 2004, the Company
incurred costs of $5,271,000 on existing and completed developments and
transferred five properties with total costs of $19,569,000 to real estate
properties.
Total capital investment for development for the six months ended June 30,
2004 was $6,386,000. In addition to the costs incurred for the six months ended
June 30, 2004 as detailed in the table below, development costs included
$1,115,000 for improvements on developments 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 6 Months Cumulative as of Estimated
Size Ended 6/30/04 6/30/04 Total Costs (1)
----------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Sunport Center IV, Orlando, FL...................... 63,000 $ 470 3,552 3,600
Techway Southwest II, Houston, TX................... 94,000 97 4,182 4,800
Santan 10, Chandler, AZ............................. 65,000 341 2,953 3,800
----------------------------------------------------------------------
Total Lease-up........................................ 222,000 908 10,687 12,200
----------------------------------------------------------------------
UNDER CONSTRUCTION
Palm River South I, Tampa, FL(2).................... 79,000 1,912 1,912 4,300
Sunport Center V, Orlando, FL(2).................... 63,000 1,381 1,381 3,800
World Houston 16, Houston, TX(2).................... 94,000 851 851 5,100
----------------------------------------------------------------------
Total Under Construction.............................. 236,000 4,144 4,144 13,200
----------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRINCIPALLY LAND):
Phoenix, AZ......................................... 40,000 10 384 2,000
Tucson, AZ.......................................... 70,000 - 326 3,500
Tampa, FL(2)........................................ 80,000 (759) 1,194 4,500
Orlando, FL(2)...................................... 839,000 (389) 7,322 45,800
Fort Lauderdale, FL................................. 80,000 529 2,375 6,500
El Paso, TX......................................... 251,000 - 2,444 7,600
Houston, TX(2)...................................... 692,000 (440) 6,282 35,800
Jackson, MS......................................... 32,000 17 581 1,900
----------------------------------------------------------------------
Total Prospective Development......................... 2,084,000 (1,032) 20,908 107,600
----------------------------------------------------------------------
2,542,000 $ 4,020 35,739 133,000
----------------------------------------------------------------------
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING THE
SIX MONTHS ENDED JUNE 30, 2004:
Executive Airport CC I & III, Fort Lauderdale, FL... 85,000 $ 116 6,067
Expressway Commerce Center, Tampa, FL............... 103,000 104 6,261
World Houston 17, Houston, TX....................... 66,000 853 2,318
World Houston 19, Houston, TX....................... 66,000 106 2,629
World Houston 20, Houston, TX....................... 62,000 72 2,294
-------------------------------------------------
Total Transferred to Real Estate Properties........... 382,000 $ 1,251 19,569
=================================================
(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 of $979,000 for Palm River South I, $925,000 for Sunport
Center V and $782,000 for World Houston 16 were moved from Prospective
Development upon commencement of construction in 2004.
Real estate held for sale increased $2,613,000 due to the transfer of three
properties with total costs of $4,260,000 from real estate properties and
accumulated depreciation of $968,000. Getwell Distribution Center with a
carrying value of $679,000 was sold at the end of June 2004. The sale of Getwell
reflects the Company's strategy of reducing ownership in Memphis, a noncore
market, as market conditions permit.
Accumulated depreciation on real estate properties increased $13,673,000
due to depreciation expense of $14,641,000 on real estate properties, offset by
accumulated depreciation of $968,000 on properties transferred to real estate
held for sale as mentioned above.
LIABILITIES
Mortgage notes payable decreased $4,757,000 during the six months ended June 30,
2004 primarily due to the repayment of an 8.5% mortgage of $2,999,000 and
regularly scheduled principal payments of $3,838,000. The Company assumed a
mortgage of $1,778,000 on the acquisition of Blue Heron II and recorded a
premium of $313,000 to adjust the mortgage loan assumed to fair market value.
This premium is being amortized over the remaining life of the mortgage.
Notes payable to banks increased $22,947,000 as a result of advances of
$65,476,000 exceeding repayments of $42,529,000. The Company's credit facilities
are described in greater detail under Liquidity and Capital Resources.
STOCKHOLDERS' EQUITY
Distributions in excess of earnings increased $11,137,000 as a result of
dividends on common and preferred stock of $21,430,000 exceeding net income for
financial reporting purposes of $10,293,000.
RESULTS OF OPERATIONS
(Comments are for the three and six months ended June 30, 2004 compared to the
three and six months ended June 30, 2003.)
Net income available to common stockholders for the three and six months ended
June 30, 2004 was $4,625,000 ($.22 per basic and diluted share) and $8,981,000
($.43 per basic and diluted share) compared to net income available to common
stockholders for the three and six months ended June 30, 2003 of $3,523,000
($.21 per basic and $.20 per diluted share) and $6,285,000 ($.38 per basic and
diluted share). The primary contributor to the increase in earnings per share
was higher PNOI.
PNOI from continuing operations increased by $1,298,000 or 6.9% for the
three months ended June 30, 2004 compared to the same period in 2003. For the
six months ended June 30, 2004, PNOI increased by $2,715,000 or 7.3% compared to
the six months ended June 30, 2003. The Company's percentage leased was 92.6% at
June 30, 2004 compared to 92.4% at June 30, 2003. PNOI from real estate
properties held throughout the three and six months ended June 30, 2004
increased $462,000 or 2.5% and $922,000 or 2.5%, respectively, compared to the
same periods in 2003. These increases were primarily due to increased average
occupancies.
Bank interest expense before amortization of loan costs and capitalized
interest was $402,000 for the three months ended June 30, 2004, a decrease of
$89,000 from the three months ended June 30, 2003. Bank interest expense before
amortization of loan costs and capitalized interest was $745,000 for the six
months ended June 30, 2004, a decrease of $237,000 from the six months ended
June 30, 2003. These decreases were due to lower average bank borrowings and
lower average bank interest rates in 2004. Average bank borrowings were
$67,554,000 and $62,640,000 for the three and six months ended June 30, 2004
compared to $75,919,000 and $75,598,000 for the same periods in 2003 with
average bank interest rates of 2.40% and 2.39% for the three and six months
ended June 30, 2004 compared to 2.59% and 2.62% for the same periods in 2003.
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 the three and six months ended
June 30, 2004 were $410,000 and $910,000 compared to $516,000 and $1,002,000 for
the same periods in 2003. Amortization of bank loan costs was $102,000 and
$204,000 for the three and six months ended June 30, 2004 compared to $102,000
and $205,000 for the same periods in 2003.
Mortgage interest expense on real estate properties was $4,823,000 for the
three months ended June 30, 2004, an increase of $351,000 from the three months
ended June 30, 2003. Mortgage interest expense on real estate properties was
$9,692,000 for the six months ended June 30, 2004, an increase of $724,000 from
the six months ended June 30, 2003. Amortization of mortgage loan costs was
$106,000 and $211,000 for the three and six months ended June 30, 2004 compared
to $94,000 and $188,000 for the same periods in 2003. The increase in 2004 was
primarily due to a new $45,500,000 mortgage that the Company obtained in August
2003. The Company has taken advantage of the lower available interest rates in
the market during the past several years and has fixed several new large
mortgages at rates deemed by management to be attractive, thereby lowering the
weighted average interest rates on mortgage debt. 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.
Depreciation and amortization increased $581,000 for the three months and
$1,158,000 for the six months ended June 30, 2004 compared to the same periods
in 2003. This increase was primarily due to properties acquired and transferred
from development during 2003 and 2004.
The increase in general and administrative expenses of $307,000 for the
three months and $744,000 for the six months ended June 30, 2004 compared to the
same periods in 2003 is primarily due to increased employee costs.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent increased
income by $879,000 and $1,782,000 for the three and six months ended June 30,
2004 compared to $464,000 and $903,000 for the same periods in 2003. Capital
expenditures for the three and six months ended June 30, 2004 and 2003 were as
follows:
Capital Expenditures
Three Months Ended Six Months Ended
June 30, June 30,
Estimated --------------------------------------------------------
Useful Life 2004 2003 2004 2003
-----------------------------------------------------------------------
(In thousands)
Upgrade on Acquisitions................ 40 yrs $ 15 21 38 41
Tenant Improvements:
New Tenants......................... Lease Life 1,145 746 2,205 1,800
New Tenants (first generation) (1).. Lease Life 378 230 874 672
Renewal Tenants..................... Lease Life 417 455 549 1,265
Other:
Building Improvements............... 5-40 yrs 450 279 544 436
Roofs............................... 5-15 yrs 172 681 582 728
Parking Lots........................ 3-5 yrs 68 46 68 85
Other............................... 5 yrs 2 29 17 54
--------------------------------------------------------
Total capital expenditures....... $ 2,647 2,487 4,877 5,081
========================================================
(1) First generation refers to space that has never been occupied.
The Company's leasing costs (principally commissions) are capitalized and
included in other assets. The costs are amortized over the terms of the
associated leases and are included in depreciation and amortization expense.
Capitalized leasing costs for the three and six months ended June 30, 2004 and
2003 were as follows:
Capitalized Leasing Costs
Three Months Ended Six Months Ended
June 30, June 30,
Estimated --------------------------------------------------------
Useful Life 2004 2003 2004 2003
-----------------------------------------------------------------------
(In thousands)
Development............................ Lease Life $ 248 94 289 328
New Tenants............................ Lease Life 438 514 964 725
New Tenants (first generation) (1)..... Lease Life - 6 81 88
Renewal Tenants........................ Lease Life 354 229 629 504
--------------------------------------------------------
Total capitalized leasing costs.. $ 1,040 843 1,963 1,645
========================================================
Amortization of leasing costs.......... $ 792 770 1,570 1,608
========================================================
(1) First generation refers to space that has never been occupied.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $28,508,000 for the six months
ended June 30, 2004. The primary other sources of cash were from bank borrowings
and proceeds from the exercise of stock options and the sale of real estate
properties. The Company distributed $19,915,000 in common and $1,312,000 in
preferred stock dividends during the six months ended June 30, 2004. Other
primary uses of cash were for bank debt repayments, purchases of real estate
properties, mortgage note payments, construction and development of properties,
and capital improvements at various properties.
Total debt at June 30, 2004 and December 31, 2003 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 June 30, 2004 and
December 31, 2003.
June 30, 2004 December 31, 2003
------------------------------------
(In thousands)
Mortgage notes payable - fixed rate......... $ 280,965 285,722
Bank notes payable - floating rate.......... 75,497 52,550
------------------------------------
Total debt............................... $ 356,462 338,272
====================================
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 Company
currently intends to renew this credit facility upon maturity. 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 June 30, 2004, the interest rate
was 2.59% on $48,000,000 and 2.49% on $22,000,000. The interest rate on each
tranche is currently reset on a monthly basis. A $48,000,000 tranche was last
reset on July 28, 2004 at 2.73% and a $26,000,000 tranche was last reset on July
13, 2004 at 2.63%. 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 had 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 Company
currently intends to renew this credit facility upon maturity. 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 June 30, 2004, the interest
rate was 2.544% on $5,497,000.
As market conditions permit, EastGroup employs fixed-rate, nonrecourse
first mortgage debt to replace the short-term bank borrowings. In May 2004, the
Company signed an application on a $30.3 million, nonrecourse first mortgage
loan to be secured by six properties. The note is expected to close in September
and will have a fixed interest rate of 5.68%, a ten-year term, and an
amortization schedule of 30 years. The proceeds of the note will be used to
reduce floating rate bank borrowings. Based on current interest rates, this
will, as in past years, reduce earnings in the short-run but, in management's
judgment, 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 did
not materially change during the six months ended June 30, 2004 except for the
purchase obligations which were fulfilled upon the closing of Blue Heron II and
Blue Heron III land. Additionally, the Company was under contract to purchase
two properties at June 30, 2004. The details of these purchase obligations are
discussed in Note 11 in the Notes to Consolidated Financial Statements.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate changes primarily as a result of its
lines of credit and long-term debt maturities. This debt is used to maintain
liquidity and fund capital expenditures and expansion of the Company's real
estate investment portfolio and operations. The Company's 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.
Jul-Dec
2004 2005 2006 2007 2008 Thereafter Total Fair Value
------------------------------------------------------------------------------------------
Fixed rate debt(1) (in thousands)... $ 7,585 24,129 22,889 21,622 9,212 195,528 280,965 293,323(2)
Weighted average interest rate...... 7.89% 7.75% 7.60% 7.55% 6.74% 6.60% 6.89%
Variable rate debt (in thousands)... $ 5,497 70,000 - - - - 75,497 75,497
Weighted average interest rate...... 2.54% 2.56% - - - - 2.56%
(1) 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%.
(2) 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.
As the table above incorporates only those exposures that existed as of
June 30, 2004, 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 26 basis points, interest expense
and cash flows would increase or decrease by approximately $193,000 annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $10,750,000 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 Notional Fair Market Value Fair Market Value
Type of Hedge Amount Maturity Date Reference Rate Fixed Rate at 6/30/04 at 12/31/03
------------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,750 12/31/10 1 month LIBOR 4.03% $254 ($30)
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-Q
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as those pertaining to the Company's hopes, expectations, intentions,
beliefs, 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 4. CONTROLS AND PROCEDURES.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that at the end of the
Company's most recent fiscal quarter 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 II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
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 has
not repurchased any shares since 2000. Under the Plan, the Company has purchased
a total of 827,700 shares for $14,170,000 (an average of $17.12 per share) with
672,300 shares still authorized for repurchase.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 27, 2004, the Registrant held its Annual Meeting of Shareholders. At the
Annual Meeting, D. Pike Aloian, Alexander G. Anagnos, H.C. Bailey, Jr., Hayden
C. Eaves III, Fredric H. Gould, David H. Hoster II, David M. Osnos and Leland R.
Speed were elected directors of the Registrant, each to serve until the 2005
Annual Meeting. The following is a summary of the voting for directors:
Common Stock
Nominee Vote For Vote Withheld
-------------------------------------------------------------
D. Pike Aloian 19,073,851 199,130
Alexander G. Anagnos 19,144,115 128,866
H.C. Bailey, Jr. 19,145,963 127,018
Hayden C. Eaves III 19,154,436 118,545
Fredric H. Gould 19,075,986 196,995
David H. Hoster II 19,147,750 125,231
David M. Osnos 19,042,773 230,208
Leland R. Speed 19,138,411 134,570
At the same meeting, shareholders were asked to vote on a proposal to
ratify the adoption of the EastGroup Properties, Inc. 2004 Equity Incentive
Plan. The Plan replaces the 1994 Management Incentive Plan and authorizes the
issuance of up to 1,900,000 shares of common stock pursuant to awards granted to
employees of the Company. The following is a summary of the voting:
Vote For Vote Against Abstain No Vote
-------------------------------------------------------------------------------------------
Ratification of 2004 Equity
Incentive Plan: 14,462,869 765,216 117,598 3,927,298
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Form 10-Q Exhibits:
10 Material Contracts: EastGroup Properties, Inc. 2004 Equity
Incentive Plan (incorporated by reference to Appendix D to
the proxy material for the 2004 Annual Meeting of
Stockholders).
31(a)Certification of David H. Hoster II, Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31(b)Certification of N. Keith McKey, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a)Certification of David H. Hoster II, Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32(b)Certification of N. Keith McKey, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K during the quarter ended June 30, 2004: A
Form 8-K was furnished on April 20, 2004 under Item 12,
incorporating by reference EastGroup's April 19, 2004 press
release, setting forth the Company's first quarter 2004 earnings.
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.
Date: August 6, 2004
EASTGROUP PROPERTIES, INC.
/s/ BRUCE CORKERN
-----------------------------
Bruce Corkern, CPA
Senior Vice President and Controller
/s/ N. KEITH MCKEY
------------------------------
N. Keith McKey, CPA
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer