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 SEPTEMBER 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
November 5, 2004 was 21,046,520.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
PART I. FINANCIAL INFORMATION Pages
Item 1. Consolidated Financial Statements
Consolidated balance sheets, September 30, 2004 (unaudited) and
December 31, 2003 3
Consolidated statements of income for the three and nine months ended
September 30, 2004 and 2003 (unaudited) 4
Consolidated statement of changes in stockholders' equity for the nine
months ended September 30, 2004 (unaudited) 5
Consolidated statements of cash flows for the nine months ended
September 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 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
Authorized signatures 21
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
September 30, 2004 December 31, 2003
-----------------------------------------------
(Unaudited)
ASSETS
Real estate properties.................................................... $ 844,142 791,165
Development............................................................... 33,244 50,037
-----------------------------------------------
877,386 841,202
Less accumulated depreciation......................................... (167,650) (146,934)
-----------------------------------------------
709,736 694,268
-----------------------------------------------
Real estate held for sale................................................. 1,375 1,375
Cash...................................................................... 857 1,786
Other assets.............................................................. 34,943 31,838
-----------------------------------------------
TOTAL ASSETS.......................................................... $ 746,911 729,267
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable.................................................... $ 305,471 285,722
Notes payable to banks.................................................... 56,952 52,550
Accounts payable & accrued expenses....................................... 18,335 14,266
Other liabilities......................................................... 8,143 7,980
----------------------------------------------
388,901 360,518
----------------------------------------------
----------------------------------------------
Minority interest in joint venture.......................................... 1,853 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;
21,045,520 shares issued and outstanding at September 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............................... 356,468 352,549
Distributions in excess of earnings....................................... (30,068) (15,595)
Accumulated other comprehensive loss...................................... (60) (30)
Unearned compensation..................................................... (2,511) (2,307)
----------------------------------------------
356,157 366,945
----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $ 746,911 729,267
==============================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------
2004 2003 2004 2003
------------------------------------------------------
REVENUES
Income from real estate operations.................... $ 29,163 27,154 84,680 79,890
Gain on involuntary conversion........................ 154 - 154 -
Gain on securities.................................... - - - 389
Other................................................. 120 65 231 177
------------------------------------------------------
29,437 27,219 85,065 80,456
------------------------------------------------------
EXPENSES
Operating expenses from real estate operations........ 8,273 8,043 23,874 23,579
Interest.............................................. 5,115 4,796 15,057 14,137
Depreciation and amortization......................... 8,245 7,931 24,737 23,265
General and administrative............................ 1,686 1,246 4,930 3,746
Minority interest in joint venture.................... 122 107 366 320
------------------------------------------------------
23,441 22,123 68,964 65,047
------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS....................... 5,996 5,096 16,101 15,409
DISCONTINUED OPERATIONS
Income from real estate operations.................... 24 61 152 165
Gain on sale of real estate investments............... 1,389 6 1,450 112
------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS .................... 1,413 67 1,602 277
------------------------------------------------------
NET INCOME.............................................. 7,409 5,163 17,703 15,686
Preferred dividends-Series A.......................... - 76 - 2,016
Preferred dividends-Series B.......................... - 300 - 2,598
Preferred dividends-Series D.......................... 656 649 1,968 649
Costs on redemption of Series A preferred ............ - 1,778 - 1,778
------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS............. $ 6,753 2,360 15,735 8,645
======================================================
BASIC PER COMMON SHARE DATA
Income from continuing operations..................... $ 0.25 0.12 0.68 0.49
Income from discontinued operations................... 0.07 0.01 0.08 0.02
------------------------------------------------------
Net income available to common stockholders........... $ 0.32 0.13 0.76 0.51
======================================================
Weighted average shares outstanding................... 20,804 18,451 20,746 17,089
======================================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations..................... $ 0.25 0.12 0.67 0.48
Income from discontinued operations................... 0.07 0.01 0.07 0.02
------------------------------------------------------
Net income available to common stockholders........... $ 0.32 0.13 0.74 0.50
======================================================
Weighted average shares outstanding................... 21,179 18,818 21,145 17,453
======================================================
Dividends declared per common share..................... $ 0.48 0.475 1.44 1.425
======================================================
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 Loss Total
-----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003...................... $ 32,326 2 352,549 (2,307) (15,595) (30) 366,945
Comprehensive income
Net income.................................. - - - - 17,703 - 17,703
Net unrealized change in cash flow hedge.... - - - - - (30) (30)
----------
Total comprehensive income................ 17,673
----------
Common dividends declared-$1.44 per share..... - - - - (30,208) - (30,208)
Preferred stock dividends declared -
$1.4907 per share........................... - - - - (1,968) - (1,968)
Stock-based compensation, net of forfeitures.. - - 3,664 (204) - - 3,460
Issuance of 7,823 shares of common stock,
dividend reinvestment plan.................. - - 264 - - - 264
Other......................................... - - (9) - - - (9)
-----------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004..................... $ 32,326 2 356,468 (2,511) (30,068) (60) 356,157
===================================================================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------------------
2004 2003
---------------------------------------
OPERATING ACTIVITIES
Net income.................................................................... $ 17,703 15,686
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization from continuing operations.................... 24,737 23,265
Depreciation and amortization from discontinued operations.................. 94 144
Gain on sale of real estate investments..................................... (1,450) (112)
Gain on involuntary conversion.............................................. (154) -
Gain on securities.......................................................... - (389)
Stock-based compensation expense............................................ 883 454
Minority interest depreciation and amortization............................. (107) (110)
Changes in operating assets and liabilities:
Accrued income and other assets........................................... (968) 1,172
Accounts payable, accrued expenses and prepaid rent....................... 7,177 4,756
---------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... 47,915 44,866
---------------------------------------
INVESTING ACTIVITIES
Purchases of real estate...................................................... (19,666) (9,445)
Real estate development....................................................... (12,585) (17,732)
Real estate improvements...................................................... (8,309) (7,170)
Proceeds from sale of real estate investments................................. 4,941 841
Proceeds from sale and liquidation of securities.............................. - 1,697
Changes in other assets and other liabilities................................. (2,620) (4,135)
---------------------------------------
NET CASH USED IN INVESTING ACTIVITIES........................................... (38,239) (35,944)
---------------------------------------
FINANCING ACTIVITIES
Proceeds from bank borrowings................................................. 106,267 125,971
Repayments on bank borrowings................................................. (101,865) (144,076)
Proceeds from mortgage notes payable.......................................... 30,300 45,500
Principal payments on mortgage notes payable.................................. (12,626) (7,717)
Debt issuance costs........................................................... (453) (629)
Distributions paid to stockholders............................................ (31,886) (31,984)
Redemption of Series A preferred stock........................................ - (43,135)
Proceeds from Series D preferred stock offering............................... - 32,329
Proceeds from common stock offering........................................... - 14,464
Proceeds from exercise of stock options....................................... 2,344 2,370
Proceeds from dividend reinvestment plan...................................... 264 272
Other......................................................................... (2,950) (1,313)
---------------------------------------
NET CASH USED IN FINANCING ACTIVITIES........................................... (10,605) (7,948)
---------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (929) 974
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............................. 1,786 1,383
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 857 2,357
=======================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $1,275 and $1,520 for
2004 and 2003, respectively................................................. 14,469 13,234
Conversion of cumulative preferred stock into common stock.................... - 53,982
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.......... 871 (74)
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) 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.
(3) RECLASSIFICATIONS
Certain reclassifications have been made in the 2003 financial statements to
conform to the 2004 presentation.
(4) 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. The Company's real estate properties at September 30, 2004
and December 31, 2003 were as follows:
September 30, 2004 December 31, 2003
---------------------------------------------
(In thousands)
Real estate properties:
Land................................................ $ 140,257 132,900
Buildings and building improvements................. 596,789 563,538
Tenant and other improvements....................... 107,096 94,727
Development............................................ 33,244 50,037
---------------------------------------------
877,386 841,202
Less accumulated depreciation....................... (167,650) (146,934)
---------------------------------------------
$ 709,736 694,268
=============================================
(5) REAL ESTATE HELD FOR SALE
Real estate properties that are currently offered for sale or are under contract
to sell have been shown separately on the consolidated balance sheets as "real
estate held for sale." The Company applies Statement of Financial Accounting
Standards (SFAS) No. 144, which requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less estimated costs
to sell and are not depreciated while they are held for sale.
At September 30, 2004 and December 31, 2003, the Company was offering
several parcels of land for sale with a total carrying amount of $1,375,000.
Subsequent to September 30, 2004, the Company sold one parcel of land in Tampa,
Florida generating a small gain. No loss is anticipated on the sale of the
remaining 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.
(6) 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 nine months of 2004
was $21,757,000, of which $19,867,000 was allocated to real estate properties.
In accordance with SFAS No. 141, intangibles associated with the purchases of
real estate were allocated as follows: $1,883,000 to in-place lease intangibles
and $86,000 to above market leases (both included in Other Assets on the balance
sheet); $79,000 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
$19,666,000 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 September 30, 2004 and December 31, 2003.
(7) OTHER ASSETS
A summary of the Company's Other Assets follows:
September 30, 2004 December 31, 2003
----------------------------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization... $ 11,605 11,286
Deferred rent receivable, net of allowance for doubtful accounts........... 10,378 8,029
Accounts receivable, net of allowance for doubtful accounts................ 2,324 2,696
Acquired in-place lease intangibles, net of accumulated amortization....... 3,155 1,857
Prepaid expenses and other assets.......................................... 7,481 7,970
----------------------------------------------
$ 34,943 31,838
==============================================
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
September 30, 2004 December 31, 2003
----------------------------------------------
(In thousands)
Property taxes payable..................................................... $ 10,389 6,457
Dividends payable.......................................................... 2,257 1,967
Other payables and accrued expenses........................................ 5,689 5,842
----------------------------------------------
$ 18,335 14,266
==============================================
(9) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in equity
from nonowner sources. The components of accumulated other comprehensive income
(loss) for the nine months ended September 30, 2004 are presented in the
Company's Consolidated Statement of Changes in Stockholders' Equity and for the
three and nine months ended September 30, 2004 and 2003 are summarized below.
Accumulated Other Comprehensive Income (Loss)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
(In thousands)
Balance at beginning of period...................................... $ 254 (476) (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......................... (314) 286 (30) 92
----------------------------------------------------
Balance at end of period........................................... $ (60) (190) (60) (190)
====================================================
(10) 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 Nine Months Ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
(In thousands)
BASIC EPS COMPUTATION
Numerator-net income available to common stockholders.............. $ 6,753 2,360 15,735 8,645
Denominator-weighted average shares outstanding.................... 20,804 18,451 20,746 17,089
DILUTED EPS COMPUTATION
Numerator-net income available to common stockholders.............. $ 6,753 2,360 15,735 8,645
Denominator:
Weighted average shares outstanding............................... 20,804 18,451 20,746 17,089
Common stock options.............................................. 170 182 198 177
Nonvested restricted stock........................................ 205 185 201 187
----------------------------------------------------
Total Shares................................................... 21,179 18,818 21,145 17,453
====================================================
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 EPS for the three and nine months ended September 30,
2003 due to its antidilutive effect. All of the Series B Preferred Stock was
converted into common stock during 2003.
(11) 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 for
options was immaterial for the three and nine months ended September 30, 2004
and 2003, with an immaterial effect to pro forma net income available to common
stockholders and no effect to basic or diluted EPS. 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 nine months ended September 30, 2004, the Company issued 36,187
shares of common stock under these plans and 8,650 shares were forfeited. In
addition, 134,630 common shares were issued upon the exercise of stock options
under the 1994 Plan and 21,750 shares under the Directors Stock Option Plan.
(12) INVOLUNTARY CONVERSION
During the three and nine months ended September 30, 2004, the Company
recognized a gain on involuntary conversion of $154,000 resulting from insurance
proceeds exceeding the net book value of two roofs replaced due to tornado
damage. This transaction was recorded in accordance with the Financial
Accounting Standards Board Interpretation No. 30.
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 high 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 regions. The Company's core markets are in the
states of California, Florida, Texas and Arizona.
The Company primarily generates revenue 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,
rental decreases and tenant defaults. During the third quarter of 2004, leases
on 3.8% of EastGroup's portfolio square footage expired, and the Company was
successful in renewing or re-leasing 84% of that total. In addition, during the
third quarter of 2004, EastGroup leased 386,000 square feet of space that was
vacant at June 30, 2004.
For the nine month period ended September 30, 2004, leases on 14.5% of
EastGroup's portfolio square footage expired, and the Company was successful in
renewing or re-leasing 72% of that total. During the first nine months of 2004,
EastGroup leased 1,215,000 square feet of space that was vacant at December 31,
2003. The anticipated expiring leases for the remainder of 2004 were 3.1% of the
portfolio at September 30, 2004.
EastGroup's total leased percentage increased to 93.5% at September 30,
2004 from 91.6% at September 30, 2003. The Company experienced average rental
increases on new and renewal leases of 1.5% for the three months ended September
30, 2004 and a slight decrease (.5%) for the nine month period. The third
quarter of 2004 results represent the fifth consecutive quarter of improvement
in same property operations. This continuing improvement is the result of the
increase in occupancy more than offsetting the net decrease in rental rates
experienced with lease renewals and new leasing.
The Company generates new sources of leasing revenue through its
acquisition and development programs. During the first nine months of 2004, the
Company purchased two parcels of land for development and four properties for
approximately $23 million. The Company sold three properties during the first
nine months of 2004 for a combined total of approximately $5 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
first nine months of 2004, the Company transferred seven properties with
aggregate costs of approximately $27.4 million from development to the operating
portfolio. The Company began construction of an estimated $5.1 million
development property at its World Houston complex in May 2004. In July,
EastGroup began construction on the third and final building of Executive
Airport Commerce Center in Fort Lauderdale with estimated costs of $4.2 million.
And, in late August, the Company began construction of infrastructure and the
first two buildings at its Southridge development in Orlando with a combined
projected investment of approximately $8.5 million. These four properties plus
three more properties (construction began in late 2003 and early 2004 with
estimated combined costs of $11.9 million) are expected to transfer to the
Company's operating portfolio during 2005 and early 2006.
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 late September 2004,
the Company closed a $30.3 million, nonrecourse first mortgage loan secured by
six properties. The note has a fixed interest rate of 5.68%, a ten-year term,
and an amortization schedule of 30 years. The proceeds of the note were 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 primarily located 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
calculates FFO based on the National Association of Real Estate Investment
Trust's (NAREIT's) definition, which excludes gains or losses from sales of
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
nine months ended September 30, 2004 and 2003, reconciliations of PNOI and FFO
Available to Common Stockholders to Net Income.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
(In thousands)
Income from real estate operations............................................ $ 29,163 27,154 84,680 79,890
Operating expenses from real estate operations................................ (8,273) (8,043) (23,874) (23,579)
----------------------------------------------------
PROPERTY NET OPERATING INCOME................................................. 20,890 19,111 60,806 56,311
Income from discontinued operations (before depreciation and amortization).... 25 108 246 309
Gain on involuntary conversion................................................ 154 - 154 -
Gain on securities............................................................ - - - 389
Other income.................................................................. 120 65 231 177
Interest expense.............................................................. (5,115) (4,796) (15,057) (14,137)
General and administrative expense............................................ (1,686) (1,246) (4,930) (3,746)
Minority interest in earnings (before depreciation and amortization).......... (158) (141) (473) (430)
Gain on sale of nondepreciable real estate.................................... - 6 - 6
Dividends on Series A preferred shares........................................ - (76) - (2,016)
Dividends on Series D preferred shares........................................ (656) (649) (1,968) (649)
Costs on redemption of Series A preferred..................................... - (1,778) - (1,778)
----------------------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS........................ 13,574 10,604 39,009 34,436
Depreciation and amortization from continuing operations...................... (8,245) (7,931) (24,737) (23,265)
Depreciation and amortization from discontinued operations.................... (1) (47) (94) (144)
Share of joint venture depreciation and amortization.......................... 36 34 107 110
Gain on sale of depreciable real estate investments........................... 1,389 - 1,450 106
Dividends on Series B convertible preferred shares............................ - (300) - (2,598)
----------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................... 6,753 2,360 15,735 8,645
Dividends on preferred shares................................................. 656 1,025 1,968 5,263
Costs on redemption of Series A preferred..................................... - 1,778 - 1,778
----------------------------------------------------
NET INCOME.................................................................... $ 7,409 5,163 17,703 15,686
====================================================
Net income available to common stockholders per diluted share................. $ .32 .13 .74 .50
Funds from operations available to common stockholders per diluted share(1)... .64 .53 1.84 1.74
Diluted shares for earnings per share..................................... 21,179 18,818 21,145 17,453
Convertible preferred stock............................................... - 1,315 - 2,350
----------------------------------------------------
(1) Diluted shares for funds from operations.................................. 21,179 20,133 21,145 19,803
====================================================
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 third quarter of 2004 was $.64 per share compared
with $.53 per share for the same period of 2003, which included a $.09 per
share charge due to the write-off of the original issuance costs of the
Series A preferred stock redeemed in July 2003. The increase for third
quarter 2004 was an improvement over second quarter 2004 (which was the
same as last year's second quarter) and over the prior eight quarters in
which the change was negative (FFO per share decreased). For the nine
months ended September 30, 2004, FFO per share was $1.84 compared with
$1.74 for the same period of 2003. The Company anticipates an increase in
FFO for 2004 compared to 2003, 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. For the third quarter of 2004, PNOI from
same properties increased 4.5%, an improvement over the past four quarters
which showed only slight increases and the prior seven quarters in which
the change was negative. The Company is continuing to see improvement which
results from increases in occupancy more than offsetting the decrease in
rental rates experienced with lease renewals and new leasing. For the nine
months ended September 30, 2004, PNOI from same properties increased 2.9%.
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 ten quarters ended September 30, 2004, occupancy has been in the range
of 90% to 92%. For the remainder of 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 rate increases
on new and renewal leases averaged 1.5%. Prior to the third quarter, rental
rates decreased on new and renewal leases in the previous seven quarters;
the decrease for the second quarter of 2004 was .4%. For the nine months
ended September 30, 2004, rental rate decreases averaged .5%. The Company
anticipates a small 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. On a quarterly basis, the Company evaluates
outstanding receivables and estimates the allowance for doubtful 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
doubtful accounts is adequate for its outstanding receivables for the periods
presented. In the event that the allowance for doubtful 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 at least 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 September 30, 2004 and December 31,
2003.)
EastGroup's assets were $746,911,000 at September 30, 2004, an increase of
$17,644,000 from December 31, 2003. Liabilities increased $28,383,000 to
$388,901,000 and stockholders' equity decreased $10,788,000 to $356,157,000
during the same period. The paragraphs that follow explain these changes in
detail.
ASSETS
Real Estate Properties
Real estate properties increased $52,977,000 during the nine months ended
September 30, 2004. This increase was primarily due to the transfer of seven
properties from development with total costs of $27,367,000 and the purchase of
four properties for total costs of $19,867,000, as detailed below. Three of the
acquired properties are located in the Company's existing core markets and one
is in San Antonio, a new market for EastGroup. The Company views the San Antonio
market as having potential for growing EastGroup's ownership to over one million
square feet and that the investment there will complement existing operations in
Houston, Dallas and El Paso. Additionally, the Company made capital improvements
of $8,309,000 on existing and acquired properties and improvements of $2,011,000
on developments during the 12-month period following transfer to real estate
properties. 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
Interstate Distribution Center IV...... Dallas, TX 46,000 07-01-04 2,897
Alamo Downs Distribution Center........ San Antonio, TX 253,000 08-10-04 7,680
-------------
Total Acquisitions............... $ 19,867
=============
(1) Total cost of the properties acquired was $21,757,000, of which $19,867,000
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: $1,883,000 to in-place
lease intangibles and $86,000 to above market leases (both included in
Other Assets on the balance sheet); $79,000 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 $19,666,000 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 September 30, 2004 were $33,244,000 compared to $50,037,000
at December 31, 2003. During the nine months ended September 30, 2004, the
Company incurred costs of $10,574,000 on existing and completed developments and
transferred seven properties with total costs of $27,367,000 to real estate
properties.
Total capital investment for development for the nine months ended
September 30, 2004 was $12,585,000. In addition to the costs incurred for the
nine months ended September 30, 2004 as detailed in the table below, development
costs included $2,011,000 for improvements on developments during the 12-month
period following transfer to real estate properties. These costs are included in
Real Estate Properties on the balance sheet.
Costs Incurred
-----------------------------------------
2004 Costs For the 9
Transferred Months Cumulative Estimated
To/From Ended as of Total
Size Prospective 9/30/04 9/30/04 Costs (1)
----------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Santan 10, Chandler, AZ............................ 65,000 $ - 503 3,115 3,800
----------------------------------------------------------------------
Total Lease-up....................................... 65,000 - 503 3,115 3,800
----------------------------------------------------------------------
UNDER CONSTRUCTION
Palm River South I, Tampa, FL...................... 79,000 979 1,741 2,720 4,300
Sunport Center V, Orlando, FL...................... 63,000 925 1,541 2,466 3,800
World Houston 16, Houston, TX...................... 94,000 782 1,380 2,162 5,100
Executive Airport CC II, Fort Lauderdale, FL....... 55,000 1,925 133 2,058 4,200
Southridge I, Orlando, FL.......................... 41,000 409 68 477 3,900
Southridge V, Orlando, FL.......................... 70,000 390 123 513 4,600
----------------------------------------------------------------------
Total Under Construction............................. 402,000 5,410 4,986 10,396 25,900
----------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRINCIPALLY LAND):
Phoenix, AZ........................................ 123,000 - 1,093 1,467 6,900
Tucson, AZ......................................... 70,000 - - 326 3,500
Tampa, FL.......................................... 80,000 (979) 319 1,293 4,500
Orlando, FL........................................ 729,000 (1,724) 777 6,764 56,800
Fort Lauderdale, FL................................ 25,000 (1,925) 543 464 2,300
El Paso, TX........................................ 251,000 - - 2,444 7,600
Houston, TX........................................ 692,000 (782) 454 6,394 35,800
Jackson, MS........................................ 32,000 - 17 581 1,900
----------------------------------------------------------------------
Total Prospective Development........................ 2,002,000 (5,410) 3,203 19,733 119,300
----------------------------------------------------------------------
2,469,000 $ - 8,692 33,244 149,000
----------------------------------------------------------------------
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING THE
NINE MONTHS ENDED SEPTEMBER 30, 2004:
Sunport Center IV, Orlando, FL..................... 63,000 $ - 477 3,559
Techway Southwest II, Houston, TX.................. 94,000 - 154 4,239
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.......... 539,000 $ - 1,882 27,367
=========================================================
(1) The information provided above includes forward-looking data based on
current construction schedules, the status of lease negotiations with potential
tenants and other relevant factors currently available to the Company. There can
be no assurance that any of these factors will not change or that any change
will not affect the accuracy of such forward-looking data. Among the factors
that could affect the accuracy of the forward-looking statements are weather or
other natural occurrence, default or other failure of performance by
contractors, increases in the price of construction materials or the
unavailability of such materials, failure to obtain necessary permits or
approvals from government entities, changes in local and/or national economic
conditions, increased competition for tenants or other occurrences that could
depress rental rates, and other factors not within the control of the Company.
Real estate held for sale was $1,375,000 at September 30, 2004 and December
31, 2003; however, three properties with costs of $4,260,000 were transferred to
real estate held for sale and subsequently sold during the first nine months
ended September 30, 2004. Getwell Distribution Center 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. In July,
the Company sold Sample 95 Business Park III in Pompano Beach, Florida. The
Sample 95 disposition represented an opportunity to recycle capital on a highly
favorable basis into investments with greater anticipated upside. In August,
Viscount Row Distribution Center, a 43-year old manufacturing type building in
the Brookhollow submarket of Dallas, was sold. See Results of Operations for a
summary of the gains on the sale of these properties.
Accumulated depreciation on real estate properties increased $20,716,000
primarily due to depreciation expense of $21,812,000 on real estate properties,
offset by accumulated depreciation of $968,000 on properties transferred to real
estate held for sale as mentioned above.
See Note 7 in the Notes to the Consolidated Financial Statements for a
summary of changes in Other Assets.
LIABILITIES
Mortgage notes payable increased $19,749,000 during the nine months ended
September 30, 2004 primarily due to a new $30,300,000, nonrecourse first
mortgage loan that has a fixed interest rate of 5.68%, a ten-year term, and an
amortization schedule of 30 years. The Company used the proceeds of this note to
reduce floating rate bank borrowings. Additionally, 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. These
increases were offset by the repayment of three mortgage loans totaling
$6,801,000 and regularly scheduled principal payments of $5,825,000. The repaid
mortgages had interest rates of 8.5% to 8.875%.
Notes payable to banks increased $4,402,000 as a result of advances of
$106,267,000 exceeding repayments of $101,865,000. The Company's credit
facilities are described in greater detail under Liquidity and Capital
Resources.
See Note 8 in the Notes to the Consolidated Financial Statements for a
summary of changes in Accounts Payable/Accrued Expenses.
STOCKHOLDERS' EQUITY
Distributions in excess of earnings increased $14,473,000 as a result of
dividends on common and preferred stock of $32,176,000 exceeding net income for
financial reporting purposes of $17,703,000.
RESULTS OF OPERATIONS
(Comments are for the three and nine months ended September 30, 2004 compared to
the three and nine months ended September 30, 2003.)
Net income available to common stockholders for the three and nine months ended
September 30, 2004 was $6,753,000 ($.32 per basic and diluted share) and
$15,735,000 ($.76 per basic and $.74 per diluted share) compared to net income
available to common stockholders for the three and nine months ended September
30, 2003 of $2,360,000 ($.13 per basic and diluted share) and $8,645,000 ($.51
per basic and $.50 per diluted share). Diluted EPS for the current quarter
included a $.07 per share gain on sale of real estate properties and a $.007 per
share gain on involuntary conversion resulting from insurance proceeds exceeding
the net book value of two roofs replaced due to tornado damage. For the same
quarter of 2003, diluted EPS was reduced by $.09 per share due to the write-off
of the original issuance costs of the Series A Preferred Stock, which was
redeemed on July 7, 2003. Diluted EPS for the nine months ended September 30,
2004 included a $.07 per share gain on sale of real estate properties ($.01 for
the same period of 2003) and a $.007 per share gain on involuntary conversion.
The nine months ended September 30, 2003 also included a $.02 per share gain on
securities and a $.10 per share reduction of EPS due to the write-off of the
original issuance costs on the Series A Preferred Stock redemption.
PNOI from continuing operations increased by $1,779,000 or 9.3% for the
three months ended September 30, 2004 compared to the same period in 2003. For
the nine months ended September 30, 2004, PNOI increased by $4,495,000 or 8.0%
compared to the same period in 2003. The Company's percentage leased was 93.5%
at September 30, 2004 compared to 91.6% at September 30, 2003. PNOI from real
estate properties held throughout the three and nine months ended September 30,
2004 increased $857,000 or 4.5% and $1,603,000 or 2.9%, 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 $548,000 for the three months ended September 30, 2004, an increase
of $181,000 from the three months ended September 30, 2003. The increase for the
quarter was due to higher average bank borrowings at a higher average bank
interest rate. Average bank borrowings were $77,854,000 at 2.79% for the three
months ended September 30, 2004 compared with $60,844,000 at 2.39% for the same
period of 2003. Bank interest expense before amortization of loan costs and
capitalized interest was $1,293,000 for the nine months ended September 30,
2004, a decrease of $56,000 from the nine months ended September 30, 2003. The
decrease for the nine months was due to lower average bank borrowings at the
same interest rate. Average bank borrowings for the nine months ended September
30, 2004 were $67,748,000 at 2.55% compared with $70,626,000 at 2.55% for the
same period of 2003. Interest costs incurred during the development phase of
real estate properties are capitalized and offset against interest expense. The
interest costs capitalized on real estate properties for the three and nine
months ended September 30, 2004 were $365,000 and $1,275,000 compared to
$518,000 and $1,520,000 for the same periods in 2003. Amortization of bank loan
costs was $102,000 and $306,000 for the three and nine months ended September
30, 2004 compared to $102,000 and $307,000 for the same periods in 2003.
Mortgage interest expense on real estate properties was $4,726,000 for the
three months ended September 30, 2004, a decrease of $23,000 from the three
months ended September 30, 2003. Mortgage interest expense on real estate
properties was $14,418,000 for the nine months ended September 30, 2004, an
increase of $701,000 from the nine months ended September 30, 2003. Amortization
of mortgage loan costs was $104,000 and $315,000 for the three and nine months
ended September 30, 2004 compared to $96,000 and $284,000 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 $314,000 for the three months and
$1,472,000 for the nine months ended September 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 $440,000 for the
three months and $1,184,000 for the nine months ended September 30, 2004
compared to the same periods in 2003 is primarily due to increased employee
costs and compliance costs associated with the Sarbanes-Oxley Act of 2002.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent increased
income by $689,000 and $2,471,000 for the three and nine months ended September
30, 2004 compared to $745,000 and $1,648,000 for the same periods in 2003.
Capital Expenditures
Capital expenditures for the three and nine months ended September 30, 2004 and
2003 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Estimated --------------------------------------------------------
Useful Life 2004 2003 2004 2003
-----------------------------------------------------------------------
(In thousands)
Upgrade on Acquisitions................ 40 yrs $ 140 10 178 51
Tenant Improvements:
New Tenants......................... Lease Life 1,361 963 3,566 2,763
New Tenants (first generation) (1).. Lease Life 88 62 962 734
Renewal Tenants..................... Lease Life 455 371 1,004 1,636
Other:
Building Improvements............... 5-40 yrs 464 150 1,008 586
Roofs............................... 5-15 yrs 863 522 1,445 1,250
Parking Lots........................ 3-5 yrs 47 10 115 95
Other............................... 5 yrs 14 1 31 55
--------------------------------------------------------
Total capital expenditures....... $ 3,432 2,089 8,309 7,170
========================================================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
Capitalized Leasing Costs
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 nine months ended September 30, 2004
and 2003 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Estimated --------------------------------------------------------
Useful Life 2004 2003 2004 2003
-----------------------------------------------------------------------
(In thousands)
Development............................ Lease Life $ 77 366 366 694
New Tenants............................ Lease Life 366 916 1,330 1,641
New Tenants (first generation) (1)..... Lease Life 87 - 168 88
Renewal Tenants........................ Lease Life 333 325 962 829
--------------------------------------------------------
Total capitalized leasing costs.. $ 863 1,607 2,826 3,252
========================================================
Amortization of leasing costs.......... $ 861 874 2,433 2,375
========================================================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
Discontinued Operations
During the nine months ended September 30, 2004, the Company sold three
properties and recognized total gains of $1,450,000. In the same period of 2003,
the Company sold one property and one parcel of land and recognized total gains
of $112,000. The operations and gains on sale of these properties are recorded
under Discontinued Operations in accordance with SFAS No. 144. A summary of
these sales follows:
Net Recognized
Sales Price Basis Gain
-----------------------------------------------
(In thousands)
2004
Real estate properties:
Getwell Distribution Center, Memphis, TN........... $ 746 685 61
Sample 95 Business Park III, Pompano Beach, FL.... 1,994 711 1,283
Viscount Row Distribution Center, Dallas, TX....... 2,204 2,098 106
-----------------------------------------------
$ 4,944 3,494 1,450
===============================================
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
===============================================
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $47,915,000 for the nine months
ended September 30, 2004. The primary other sources of cash were from bank
borrowings, proceeds from a new mortgage note, the sale of real estate
properties and proceeds from the exercise of stock options. The Company
distributed $29,918,000 in common and $1,968,000 in preferred stock dividends
during the nine months ended September 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 September 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 September 30, 2004
and December 31, 2003.
September 30, 2004 December 31, 2003
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(In thousands)
Mortgage notes payable - fixed rate......... $ 305,471 285,722
Bank notes payable - floating rate.......... 56,952 52,550
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Total debt............................... $ 362,423 338,272
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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. The interest rate on the
facility is based on the Eurodollar rate and varies according to debt-to-total
asset value ratios. EastGroup's current interest rate for this facility is the
Eurodollar rate plus 1.25%. At September 30, 2004, the interest rate was 3.09%
on $27,000,000 and 3.03% on $25,000,000. The interest rate on each tranche is
currently reset on a monthly basis. A $27,000,000 tranche was last reset on
October 27, 2004 at 3.21% and a $25,000,000 tranche was last reset on October
13, 2004 at 3.12%. An unused facility fee is also assessed on this loan. This
fee varies according to debt-to-total asset value ratios and is currently .20%.
The Company has a one-year $12,500,000 unsecured revolving credit facility
with PNC Bank, N.A. that matures in December 2004. The Company currently intends
to renew this credit facility. The interest rate on this facility is based on
LIBOR and varies according to debt-to-total asset value ratios; it is currently
LIBOR plus 1.175%. At September 30, 2004, the interest rate was 3.015% on
$4,952,000.
As market conditions permit, EastGroup employs fixed-rate, nonrecourse
first mortgage debt to replace the short-term bank borrowings. In late September
2004, the Company closed a $30.3 million, nonrecourse first mortgage loan
secured by six properties. The note has a fixed interest rate of 5.68%, a
ten-year term, and an amortization schedule of 30 years. The proceeds of the
note were 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 nine months ended September 30, 2004 except for the
purchase obligations which were fulfilled upon the closing of Blue Heron II and
Blue Heron III land and the increase in mortgage notes payable described above.
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.
Oct-Dec
2004 2005 2006 2007 2008 Thereafter Total Fair Value
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Fixed rate debt(1) (in thousands).. $ 1,791 24,128 22,954 22,020 9,634 224,944 305,471 324,501(2)
Weighted average interest rate..... 6.99% 7.74% 7.59% 7.52% 6.69% 6.48% 6.74%
Variable rate debt (in thousands).. $ 4,952 52,000 - - - - 56,952 56,952
Weighted average interest rate..... 3.02% 3.06% - - - - 3.06%
(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
September 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 31 basis points, interest expense
and cash flows would increase or decrease by approximately $174,000 annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $10,620,000 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 loss. The Company does not hold or issue this type of derivative
contract for trading or speculative purposes.
Fair Market
Current Maturity Fair Market Value Value
Type of Hedge Notional Amount Date Reference Rate Fixed Rate at 9/30/04 at 12/31/03
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(In thousands) (In thousands)
Swap $10,620 12/31/10 1 month LIBOR 4.03% ($60) ($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, anticipations,
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Form 10-Q Exhibits:
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 September 30, 2004:
None.
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: November 8, 2004
EASTGROUP PROPERTIES, INC.
/s/ BRUCE CORKERN
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Bruce Corkern, CPA
Senior Vice President and Controller
/s/ N. KEITH MCKEY
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N. Keith McKey, CPA
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer