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 MARCH 31, 2005 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 May 3,
2005 was 21,980,822.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 2005
Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets, March 31, 2005 (unaudited)
and December 31, 2004 3
Consolidated statements of income for the three months ended
March 31, 2005 and 2004 (unaudited) 4
Consolidated statement of changes in stockholders' equity for
the three months ended March 31, 2005 (unaudited) 5
Consolidated statements of cash flows for the three months
ended March 31, 2005 and 2004 (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 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 6. Exhibits 21
SIGNATURES
Authorized signatures 22
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
March 31, 2005 December 31, 2004
------------------------------------------
(Unaudited)
ASSETS
Real estate properties....................................................... $ 898,847 845,139
Development.................................................................. 47,302 39,330
------------------------------------------
946,149 884,469
Less accumulated depreciation............................................ (182,426) (174,662)
------------------------------------------
763,723 709,807
------------------------------------------
Real estate held for sale.................................................... 975 2,637
Unconsolidated investment.................................................... 9,268 9,256
Mortgage loans receivable.................................................... 7,550 7,550
Cash......................................................................... 972 1,208
Other assets................................................................. 43,407 38,206
------------------------------------------
TOTAL ASSETS............................................................. $ 825,895 768,664
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable....................................................... $ 325,342 303,674
Notes payable to banks....................................................... 95,546 86,431
Accounts payable & accrued expenses.......................................... 16,392 16,181
Other liabilities............................................................ 9,526 8,688
------------------------------------------
446,806 414,974
------------------------------------------
------------------------------------------
Minority interest in joint venture............................................. 1,834 1,884
------------------------------------------
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;
21,920,822 shares issued and outstanding at March 31, 2005 and
21,059,164 at December 31, 2004............................................ 2 2
Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares
issued..................................................................... - -
Additional paid-in capital on common shares.................................. 387,957 357,011
Distributions in excess of earnings.......................................... (40,553) (35,207)
Accumulated other comprehensive income....................................... 258 14
Unearned compensation........................................................ (2,735) (2,340)
------------------------------------------
377,255 351,806
------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $ 825,895 768,664
==========================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
------------------------------------
2005 2004
------------------------------------
REVENUES
Income from real estate operations........................ $ 30,298 27,416
Equity in earnings of unconsolidated investment........... 162 -
Mortgage interest income.................................. 119 -
Other..................................................... 75 32
------------------------------------
30,654 27,448
------------------------------------
EXPENSES
Operating expenses from real estate operations............ 8,461 7,616
Interest.................................................. 5,970 4,919
Depreciation and amortization............................. 9,070 8,198
General and administrative................................ 1,898 1,676
Minority interest in joint venture........................ 129 121
------------------------------------
25,528 22,530
------------------------------------
INCOME FROM CONTINUING OPERATIONS........................... 5,126 4,918
DISCONTINUED OPERATIONS
Income from real estate operations........................ 33 94
Gain on sale of real estate investments................... 377 -
------------------------------------
INCOME FROM DISCONTINUED OPERATIONS ........................ 410 94
------------------------------------
NET INCOME.................................................. 5,536 5,012
Preferred dividends-Series D.............................. 656 656
------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................. $ 4,880 4,356
====================================
BASIC PER COMMON SHARE DATA.................................
Income from continuing operations......................... $ .21 .21
Income from discontinued operations....................... .02 -
------------------------------------
Net income available to common stockholders............... $ .23 .21
====================================
Weighted average shares outstanding....................... 20,891 20,687
====================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations......................... $ .21 .20
Income from discontinued operations....................... .02 .01
------------------------------------
Net income available to common stockholders............... $ .23 .21
====================================
Weighted average shares outstanding....................... 21,196 21,114
====================================
Dividends declared per common share......................... $ .485 .480
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 Total
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004..................... $ 32,326 2 357,011 (2,340) (35,207) 14 351,806
Comprehensive income
Net income................................... - - - - 5,536 - 5,536
Net unrealized change in cash flow hedge..... - - - - - 244 244
--------
Total comprehensive income................. 5,780
--------
Common dividends declared, $.485 per share.... - - - - (10,226) - (10,226)
Preferred stock dividends declared, $.4969
per share.................................... - - - - (656) - (656)
Issuance of 800,000 shares of common stock,
common stock offering........................ - - 29,439 - - - 29,439
Stock-based compensation, net of forfeitures.. - - 1,423 (395) - - 1,028
Issuance of 2,495 shares of common stock,
dividend reinvestment plan................... - - 94 - - - 94
Other......................................... - - (10) - - - (10)
------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2005........................ $ 32,326 2 387,957 (2,735) (40,553) 258 377,255
====================================================================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------------
2005 2004
-------------------------------------
OPERATING ACTIVITIES
Net income........................................................................... $ 5,536 5,012
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization from continuing operations........................... 9,070 8,198
Depreciation and amortization from discontinued operations......................... 1 65
Minority interest depreciation and amortization.................................... (35) (35)
Gain on sale of real estate investments from discontinued operations............... (377) -
Stock-based compensation expense................................................... 448 303
Equity in earnings of unconsolidated investment net of distributions............... (12) -
Changes in operating assets and liabilities:
Accrued income and other assets.................................................. (1,389) 687
Accounts payable, accrued expenses and prepaid rent.............................. 25 (544)
-------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................................. 13,267 13,686
-------------------------------------
INVESTING ACTIVITIES
Purchases of real estate............................................................. (20,964) (8,140)
Real estate development.............................................................. (17,122) (3,016)
Real estate improvements............................................................. (1,692) (2,230)
Proceeds from sale of real estate investments........................................ 2,085 -
Changes in other assets and other liabilities........................................ 1,300 (1,404)
-------------------------------------
NET CASH USED IN INVESTING ACTIVITIES.................................................. (36,393) (14,790)
-------------------------------------
FINANCING ACTIVITIES
Proceeds from bank borrowings........................................................ 43,813 36,730
Repayments on bank borrowings........................................................ (34,698) (17,888)
Principal payments on mortgage notes payable......................................... (4,328) (4,987)
Debt issuance costs.................................................................. (42) (50)
Distributions paid to stockholders................................................... (10,802) (10,610)
Proceeds from common stock offering.................................................. 29,439 -
Proceeds from exercise of stock options.............................................. 580 990
Proceeds from dividend reinvestment plan............................................. 94 86
Other................................................................................ (1,166) (2,835)
-------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............................................. 22,890 1,436
-------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... (236) 332
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................................... 1,208 1,786
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 972 2,118
=====================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $501 and $500 for 2005
and 2004, respectively............................................................. $ 5,743 4,731
Fair value of debt assumed by the Company in the purchase of real estate............. 26,057 2,091
Incentive compensation issuance of common stock, net of forfeitures.................. 865 1,027
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 (GAAP)
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 2004 annual report and the notes thereto.
(2) USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP 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 2004 financial statements
to conform to the 2005 presentation.
(4) REAL ESTATE PROPERTIES
Geographically, the Company's investments are concentrated in major Sunbelt
market areas of the United States, primarily in the states of Florida, Texas,
California and Arizona. 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. Depreciation expense for continuing
and discontinued operations was $7,764,000 and $7,295,000 for the three months
ended March 31, 2005 and 2004, respectively. The Company's real estate
properties at March 31, 2005 and December 31, 2004 were as follows:
--------------------------------------
March 31, 2005 December 31, 2004
--------------------------------------
(In thousands)
Real estate properties:
Land................................................ $ 147,466 139,857
Buildings and building improvements................. 631,650 595,852
Tenant and other improvements....................... 119,731 109,430
Development............................................ 47,302 39,330
--------------------------------------
946,149 884,469
Less accumulated depreciation....................... (182,426) (174,662)
--------------------------------------
$ 763,723 709,807
======================================
(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 December 31, 2004, the Company was offering for sale the Delp
Distribution Center II in Memphis, Tennessee with a carrying value of $1,662,000
and 6.87 acres of land in Houston, Texas and Tampa, Florida with a carrying
amount of $975,000. During the first quarter of 2005, the Company sold Delp II
and generated a gain of $377,000. At March 31, 2005, the Houston and Tampa land
with a total carrying value of $975,000 was held for sale. No loss is
anticipated on the sale of the properties that are held for sale. The results of
operations for the properties sold or held for sale during the periods reported
are shown under
Discontinued Operations on the consolidated income statement. No interest
expense was allocated to the properties that are held for sale.
(6) BUSINESS COMBINATIONS AND ACQUIRED INTANGIBLES
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 sheets 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
sheets and are amortized over the remaining term of the existing lease, or the
anticipated life of the customer relationship, as applicable. Amortization
expense for in-place lease intangibles was $435,000 and $190,000 for the three
months ended March 31, 2005 and 2004, respectively. Amortization of above and
below market leases was immaterial for all periods presented.
Total cost of the properties acquired for the three months ended March 31,
2005 was $47,021,000, of which $42,866,000 was allocated to real estate
properties. In accordance with SFAS No. 141, intangibles associated with the
purchases of real estate were allocated as follows: $4,078,000 to in-place lease
intangibles and $222,000 to above market leases (both included in Other Assets
on the balance sheet) and $145,000 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 $20,964,000 for the properties and intangibles
acquired, assumed mortgages of $25,142,000 and recorded premiums of $915,000 to
adjust the mortgage loans assumed to fair market value.
The Company periodically reviews (at least annually) the recoverability of
goodwill and (on a quarterly basis) the recoverability of other intangibles for
possible impairment. In management's opinion, no material impairment of goodwill
and other intangibles existed at March 31, 2005 and December 31, 2004.
(7) OTHER ASSETS
A summary of the Company's Other Assets follows:
---------------------------------------
March 31, 2005 December 31, 2004
---------------------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization.... $ 12,191 12,003
Deferred rent receivable, net of allowance for doubtful accounts............ 11,289 10,832
Accounts receivable, net of allowance for doubtful accounts................. 2,347 2,316
Acquired in-place lease intangibles, net of accumulated amortization........ 6,572 2,931
Goodwill.................................................................... 990 990
Prepaid expenses and other assets........................................... 10,018 9,134
---------------------------------------
$ 43,407 38,206
=======================================
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
---------------------------------------
March 31, 2005 December 31, 2004
---------------------------------------
(In thousands)
Property taxes payable........................................... $ 5,707 6,689
Dividends payable................................................ 2,435 2,355
Other payables and accrued expenses.............................. 8,250 7,137
---------------------------------------
$ 16,392 16,181
=======================================
(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 three months ended March 31, 2005 are presented in the
Company's Consolidated Statement of Changes in Stockholders' Equity and for the
three months ended March 31, 2005 and 2004 are summarized below.
Three Months Ended
March 31,
---------------------------
2005 2004
---------------------------
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year.............................. $ 14 (30)
Change in fair value of interest rate swap.............. 244 (264)
---------------------------
Balance at end of period.................................. $ 258 (294)
===========================
(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 dividing net income available to
common stockholders by the weighted average number of common shares outstanding
plus the dilutive effect of nonvested restricted stock and stock options had the
options been exercised. The dilutive effect of stock options and their
equivalents (such as 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. Reconciliation of the numerators and denominators in the basic and
diluted EPS computations is as follows:
Three Months Ended
March 31,
---------------------------
2005 2004
---------------------------
(In thousands)
BASIC EPS COMPUTATION
Numerator-net income available to common stockholders... $ 4,880 4,356
Denominator-weighted average shares outstanding......... 20,891 20,687
DILUTED EPS COMPUTATION
Numerator-net income available to common stockholders... $ 4,880 4,356
Denominator:
Weighted average shares outstanding................... 20,891 20,687
Common stock options.................................. 166 240
Nonvested restricted stock............................ 139 187
---------------------------
Total Shares........................................ 21,196 21,114
===========================
(11) COMMON STOCK ISSUANCE
On March 31, 2005, EastGroup closed the sale of 800,000 shares of its
common stock to Citigroup Global Markets Inc. The net proceeds from the offering
of the shares were approximately $29.4 million after deducting the underwriting
discount and other offering expenses. The Company intends to use the net
proceeds from this offering for general corporate purposes, including possible
acquisition or development of industrial properties and repayment of fixed rate
debt maturing in 2005. Pending such transactions, the Company used the proceeds
to reduce its outstanding variable rate debt. In May, the underwriter closed on
the exercise of a portion of its over-allotment option and purchased 60,000
additional shares for net proceeds of approximately $2.2 million.
(12) STOCK-BASED COMPENSATION
The Company has a management incentive plan which was adopted in 2004 (the
"2004 Plan"), under which employees of the Company currently are issued common
stock in the form of restricted stock and may, in the future, be issued other
forms of stock-based compensation. The purpose of the restricted stock plan is
to act as a retention device since it allows participants to benefit from
dividends as well as potential stock appreciation. The 2004 Plan replaced the
1994 Plan, under which employees of the Company were also granted stock option
awards, restricted stock and other forms of stock-based compensation. No further
grants will be made under the 1994 Plan.
The Company accounts for restricted stock in accordance with SFAS No. 148,
Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment
of SFAS No. 123, Accounting for Stock-Based Compensation, and accordingly,
compensation expense is recognized over the expected vesting period using the
straight-line method. The Company records the fair market value of the
restricted stock to additional paid-in capital when the shares are granted and
offsets unearned compensation by the same amount. The unearned compensation is
amortized over the restricted period into compensation expense. Previously
expensed stock-based compensation related to forfeited shares reduces
compensation expense during the period in which the shares are forfeited.
Stock-based compensation expense for the three months ended March 31, 2005 and
2004 was $448,000 and $303,000, respectively. During the restricted period, the
Company accrues dividends and holds the certificates for the shares; however,
the employee can vote the shares. Share certificates and dividends are delivered
to the employee as they vest.
During the three months ended March 31, 2005, the Company granted 33,446
shares of common stock under these plans and 1,890 shares were forfeited. In
addition, 6,865 common shares were issued to employees upon the exercise of
stock options under the 1994 Plan and 21,000 shares were issued to directors
under the Directors Stock Option Plan.
(13) SUBSEQUENT EVENTS
The Company has signed an application for a nonrecourse first mortgage loan
secured by Industry Distribution Center II in Los Angeles. The Company has a 50%
undivided tenant-in-common interest in the 309,000 square foot warehouse. The
$13.3 million loan is expected to close at the end of May and will have a fixed
interest rate of 5.31%, a ten-year term and an amortization schedule of 25
years. As part of this transaction, the expected loan proceeds payable to the
co-owner ($6.65 million) will be paid to EastGroup to reduce the $6.75 million
note that EastGroup advanced to the co-owner in November 2004 as part of the
acquisition. Accordingly, the total proceeds of $13.3 million will be paid to
EastGroup and will be used to reduce EastGroup's outstanding variable rate bank
debt.
In May, the underwriter for the common stock offering disclosed in Note 11
closed on the exercise of the option to purchase additional shares to cover
over-allotments and purchased 60,000 additional shares for net proceeds of
approximately $2.2 million.
Also subsequent to March 31, 2005, the Company entered into two contracts
to purchase land in Florida and Texas for approximately $6.2 million. These
acquisitions are expected to close later in 2005.
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 Florida, Texas, California 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 quarter ended March 31, 2005,
leases on 1,246,000 square feet (5.9%) of EastGroup's total square feet of
21,215,000 expired, and the Company was successful in renewing or re-leasing 51%
of that total. In addition, EastGroup leased 356,000 square feet of other vacant
space during the quarter. During the first quarter of 2005, average rental rates
on new and renewal leases increased by 1.8%.
EastGroup's total leased percentage decreased to 92.9% at March 31, 2005
from 93.5% at March 31, 2004. The expiring leases anticipated for the remainder
of 2005 were 10.3% of the portfolio at March 31, 2005. Since the end of the
first quarter in 2005, the Company has experienced positive leasing activity and
reduced this percentage to 8.4% as of May 3, 2005. Property net operating income
from same properties increased 3.7% for the quarter ended March 31, 2005 as
compared to the same period in 2004. The first quarter of 2005 was EastGroup's
seventh consecutive quarter of positive same property comparisons.
The Company generates new sources of leasing revenue through its
acquisition and development programs. During the first three months of 2005, the
Company purchased 113.5 acres of land for development and two properties
(705,000 square feet) for approximately $56 million. The Company sold one
property during the first quarter for net proceeds of approximately $2.1
million, generating a gain of $377,000. This disposition represented an
opportunity to recycle capital into acquisitions and targeted development with
greater upside potential. For 2005, the Company has projected $25-30 million in
new acquisitions (net of dispositions) and has identified approximately $45-50
million of development opportunities.
In January 2005, EastGroup acquired Arion Business Park in San Antonio,
Texas for a purchase price of $40 million. Arion is a master-planned business
park containing 524,000 square feet in 14 existing industrial buildings and 15.5
acres of land for the future development of approximately another 170,000 square
feet. The buildings were constructed between 1988 and 2000 and are currently
91.2% leased to 25 customers. As part of the acquisition price, EastGroup
assumed the outstanding first mortgage balance of $20.5 million. This interest
only, nonrecourse mortgage has a fixed rate of 5.99% and matures in December
2006. In applying purchase accounting to this assumed mortgage, the Company
recorded a premium to reflect the fair market interest rate of 4.45%
In March 2005, EastGroup acquired Interstate Distribution Center in
Jacksonville, Florida for a purchase price of $7.9 million. Interstate contains
181,000 square feet in two multi-tenant business distribution buildings. Built
in 1990, the property is 100% leased to seven customers. As part of the
acquisition price, EastGroup assumed the outstanding first mortgage balance of
$4.6 million. This nonrecourse mortgage has a fixed interest rate of 6.91% and
matures in 2013. In applying purchase accounting to this assumed mortgage, the
Company recorded a premium to reflect the fair market interest rate of 5.64%.
EastGroup continues to see targeted development as a major contributor to
the Company's growth. The Company mitigates risks associated with development
through a Board-approved maximum level of land held for development and
adjusting development start dates according to leasing activity. In addition to
the 15.5 acres of development land acquired with Arion, in January 2005,
EastGroup purchased 32.2 acres adjacent to its Southridge development in Orlando
for $1.9 million, which is expected to increase the eventual build-out of
Southridge by 275,000 square feet to a total of over one million square feet. In
February 2005, the Company acquired 65.8 acres in Tampa for $5.0 million. This
represents all the remaining undeveloped industrial land in Oak Creek Business
Park in which EastGroup currently owns two buildings. During the first quarter
of 2005, the Company transferred two properties (both 100% leased) with an
aggregate investment of approximately $6.8 million from development to the
operating portfolio.
The Company primarily funds its initial acquisition and development
programs through a $175 million line of credit (as discussed in Liquidity and
Capital Resources). As market conditions permit, EastGroup issues equity,
including preferred equity, and/or employs fixed-rate, nonrecourse first
mortgage debt to replace the short-term bank borrowings. The Company has no
off-balance sheet arrangements. In addition to the mortgage loan assumptions on
the purchases discussed above, the Company plans to obtain new fixed rate debt
of approximately $25 million in mid-2005.
The Company has signed an application for a nonrecourse first mortgage loan
secured by Industry Distribution Center II in Los Angeles. The Company has a 50%
undivided tenant-in-common interest in the 309,000 square foot warehouse. The
$13.3 million loan is expected to close at the end of May and will have a fixed
interest rate of 5.31%, a ten-year term and an amortization schedule of 25
years. As part of this transaction, the expected loan proceeds payable to the
co-owner ($6.65 million) will be paid to EastGroup to reduce the $6.75 million
note that EastGroup advanced to the co-owner in November 2004 as part of the
acquisition. Accordingly, the total proceeds of $13.3 million will be paid to
EastGroup and will be used to reduce EastGroup's outstanding variable rate bank
debt.
On March 31, 2005, EastGroup closed the sale of 800,000 shares of its
common stock to Citigroup Global Markets Inc. The net proceeds from the offering
of the shares were approximately $29.4 million after deducting the underwriting
discount and other
offering expenses. The Company intends to use the net proceeds from this
offering for general corporate purposes, including possible acquisition or
development of industrial properties and repayment of fixed rate debt maturing
in 2005. Pending such transactions, the Company used the proceeds to reduce its
outstanding variable rate debt. In May, the underwriter closed on the exercise
of a portion of its over-allotment option and purchased 60,000 additional shares
for net proceeds of approximately $2.2 million.
Tower Automotive, Inc. (Tower) filed for Chapter 11 reorganization on
Feburary 2, 2005. Tower, which leases 210,000 square feet from EastGroup under a
lease expiring in December 2010, is current with their rental payments to
EastGroup through May 2005. EastGroup is obligated under a recourse mortgage
loan on the property for $10,485,000 as of March 31, 2005. Property net
operating income for 2004 was $1,369,000, 2003 was $1,374,000 and 2002 was
$420,000 (lease commenced in September 2002). Rental income due for 2005 is
$1,389,000 with estimated property net operating income budgeted for 2005 of
$1,372,000. Property net operating income for the first quarter of 2005 was
$341,000.
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: 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 available to
common stockholders (FFO), defined as net income (loss) computed in accordance
with 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.
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, 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
recovered.
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), interest rates, the amount of leverage the Company employs and
general and
administrative expense. The following table presents on a comparative basis for
the three months ended March 31, 2005 and 2004 reconciliations of PNOI and FFO
Available to Common Stockholders to Net Income.
Three Months Ended
March 31,
----------------------------
2005 2004
----------------------------
(In thousands)
Income from real estate operations.............................................. $ 30,298 27,416
Operating expenses from real estate operations.................................. (8,461) (7,616)
----------------------------
PROPERTY NET OPERATING INCOME................................................... 21,837 19,800
Equity in earnings of unconsolidated investment (before depreciation)........... 199 -
Income from discontinued operations (before depreciation and amortization)...... 34 159
Mortgage interest income........................................................ 119 -
Other income.................................................................... 75 32
Interest expense................................................................ (5,970) (4,919)
General and administrative expense.............................................. (1,898) (1,676)
Minority interest in earnings (before depreciation and amortization)............ (164) (156)
Dividends on Series D preferred shares.......................................... (656) (656)
----------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS.......................... 13,576 12,584
Depreciation and amortization from continuing operations........................ (9,070) (8,198)
Depreciation and amortization from discontinued operations...................... (1) (65)
Depreciation from unconsolidated investment..................................... (37) -
Share of joint venture depreciation and amortization............................ 35 35
Gain on sale of depreciable real estate investments............................. 377 -
----------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS..................................... 4,880 4,356
Dividends on preferred shares................................................... 656 656
----------------------------
NET INCOME...................................................................... $ 5,536 5,012
============================
Net income available to common stockholders per diluted share................... $ .23 .21
Funds from operations available to common stockholders per diluted share........ $ .64 .60
Diluted shares for earnings per share and funds from operations................. 21,196 21,114
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 increased 6.7% for the first quarter of 2005 primarily due to
higher PNOI of $2,037,000 (a 10.3% increase in PNOI). The increase in PNOI
resulted from $1,011,000 attributable to 2004 and 2005 acquisitions,
$298,000 from newly developed properties and $728,000 from internal growth.
FFO per share increased for both the 3rd and 4th quarters of 2004 and for
the year 2004. The second quarter of 2004 was the same as the prior year's
second quarter. These results are a key improvement over the previous eight
quarters ended March 31, 2004 in which the change was negative (FFO per
share decreased). The Company anticipates an increase in FFO per share for
2005 compared to 2004, primarily due to same property operations and
operations resulting from 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. PNOI from same properties increased 3.7%
for the first quarter. The first quarter of 2005 was the seventh
consecutive quarter of positive results. The Company is continuing to see
improvement which results from increases in occupancy more than offsetting
the decrease in rental rates on lease renewals and new leasing. The Company
budgeted an increase in same property PNOI for 2005.
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. Occupancy
at March 31, 2005 was 91.2%, a decrease from December 31, 2004 occupancy of
93.2%, which included several seasonal tenant leases. Occupancy has ranged
from 90% to 93% for twelve straight quarters. Average occupancy is expected
to continue to be in the 90-92.5% range during 2005.
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 1.8% for the first quarter of 2005.
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 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 sheets 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 sheets 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 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 2004 taxable income to its stockholders and expects to
distribute all of its taxable income in 2005. Accordingly, no provision for
income taxes was necessary in 2004, nor is it expected to be necessary for 2005.
FINANCIAL CONDITION
(Comments are for the balance sheets dated March 31, 2005 and December 31,
2004.)
EastGroup's assets were $825,895,000 at March 31, 2005, an increase of
$57,231,000 from December 31, 2004. Liabilities increased $31,832,000 to
$446,806,000 and stockholders' equity increased $25,449,000 to $377,255,000
during the same period. The paragraphs that follow explain these changes in
detail.
ASSETS
Real Estate Properties
Real estate properties increased $53,708,000 during the three months ended
March 31, 2005. This increase was primarily due to the purchase of two
properties for total costs of $42,866,000 and the transfer of two properties
from development with total costs of $6,752,000, as detailed below. One of the
properties acquired is located in Jacksonville, an existing core market, and the
other is in San Antonio, a market that EastGroup entered in 2004. 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. EastGroup
increased its ownership in San Antonio to 777,000 square feet with the purchase
of Arion Business Park, which contains 524,000 square feet in 14 industrial
buildings and 15.5 acres of land for the future development of approximately
another 170,000 square feet.
Real Estate Properties Acquired in 2005 Location Size Date Acquired Cost (1)
-----------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
Arion Business Park ................... San Antonio, TX 524,000 01-21-05 $ 35,288
Interstate Distribution Center......... Jacksonville, FL 181,000 03-31-05 7,578
---------- --------------
Total Acquisitions............... 705,000 $ 42,866
========== ==============
(1) Total cost of the properties acquired was $47,021,000, of which $42,866,000
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: $4,078,000 to in-place
lease intangibles and $222,000 to above market leases (both included in
Other Assets on the consolidated balance sheet) and $145,000 to below
market leases (included in Other Liabilities on the consolidated 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 $20,964,000 for the properties and intangibles acquired, assumed
mortgages totaling $25,142,000 and recorded premiums totaling $915,000 to
adjust the mortgage loans assumed to fair market value.
Real Estate Properties Transferred from
Development in 2005 Location Size Date Transferred Cost at Transfer
----------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
Santan 10.............................. Chandler, AZ 65,000 01-31-05 $ 3,493
Sunport Center V....................... Orlando, FL 63,000 01-31-05 3,259
------------- ----------------
Total Developments Transferred... 128,000 $ 6,752
============= ================
In addition to acquisitions and development in 2005, the Company made
capital improvements of $1,692,000 on existing and acquired properties (shown by
category in the Capital Expenditures table under Results of Operations). Also,
the Company incurred costs of $2,398,000 on development properties that had
transferred to real estate properties; the Company records these expenditures as
development costs during the 12-month period following transfer.
Accumulated depreciation on real estate properties increased $7,764,000 due
to depreciation expense on real estate properties.
Development
The investment in development at March 31, 2005 was $47,302,000 compared to
$39,330,000 at December 31, 2004. Total incremental capital investment for
development for the first quarter of 2005 was $17,122,000. In addition to the
costs of $14,724,000 incurred for the three months ended March 31, 2005 as
detailed in the following table, the Company incurred costs of $2,398,000 on
developments during the 12-month period following transfer to real estate
properties.
In January, EastGroup acquired 15.5 acres of development land ($2.1
million) as part of the Arion Business Park purchase. Also in January, EastGroup
purchased 32.2 acres adjacent to its Southridge development in Orlando for $1.9
million, which is expected to increase the eventual build-out of Southridge by
275,000 square feet to a total of over one million square feet. In February
2005, the Company acquired 65.8 acres in Tampa for $5.0 million. This represents
all the remaining undeveloped industrial land in Oak Creek Business Park in
which EastGroup currently owns two buildings. Costs associated with these land
acquisitions are all included in the respective markets below.
The Company transferred two developments (both 100% leased) to real estate
properties during the quarter with a total investment of $6,752,000 as of the
date of transfer.
Costs Incurred
---------------------------------------------
Costs For the
Transferred Three Months Cumulative Estimated
DEVELOPMENT Size In 2005 Ended 3/31/05 as of 3/31/05 Total Costs (1)
-------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Palm River South I, Tampa, FL.................. 79,000 $ - 628 3,820 4,300
World Houston 16, Houston, TX.................. 94,000 - 360 3,627 5,100
----------------------------------------------------------------------------
Total Lease-up................................... 173,000 - 988 7,447 9,400
----------------------------------------------------------------------------
UNDER CONSTRUCTION
Executive Airport CC II, Fort Lauderdale, FL... 55,000 - 620 3,591 4,200
Southridge I, Orlando, FL...................... 41,000 - 865 1,709 3,900
Southridge V, Orlando, FL...................... 70,000 - 1,146 2,428 4,600
Techway SW III, Houston, TX.................... 100,000 1,150 407 1,557 5,700
Palm River South II, Tampa, FL................. 82,000 1,457 64 1,521 4,500
Sunport Center VI, Orlando, FL................. 63,000 1,044 291 1,335 3,800
----------------------------------------------------------------------------
Total Under Construction......................... 411,000 3,651 3,393 12,141 26,700
----------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Phoenix, AZ.................................... 213,000 - 124 2,320 11,400
Tucson, AZ..................................... 70,000 - - 326 3,500
Tampa, FL...................................... 525,000 (1,457) 4,978 4,978 29,000
Orlando, FL.................................... 925,000 (1,044) 2,709 8,831 68,500
West Palm Beach, FL............................ 20,000 - 11 489 2,300
El Paso, TX.................................... 251,000 - - 2,444 9,600
Houston, TX.................................... 583,000 (1,150) 87 5,503 31,000
San Antonio, TX................................ 171,000 - 2,119 2,119 12,400
Jackson, MS.................................... 28,000 - 123 704 2,000
----------------------------------------------------------------------------
Total Prospective Development.................... 2,786,000 (3,651) 10,151 27,714 169,700
----------------------------------------------------------------------------
3,370,000 $ - 14,532 47,302 205,800
============================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING THE
THREE MONTHS ENDED MARCH 31, 2005
Santan 10, Chandler, AZ........................ 65,000 $ - 187 3,493
Sunport Center V, Orlando, FL.................. 63,000 - 5 3,259
--------------------------------------------------------------
Total Transferred to Real Estate Properties...... 128,000 $ - 192 6,752 (2)
==============================================================
(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) Represents cumulative costs at the date of transfer.
Real estate held for sale was $975,000 at March 31, 2005 and $2,637,000 at
December 31, 2004. Delp Distribution Center II that was transferred to real
estate held for sale in 2004 was sold at the end of February 2005. The sale of
Delp II reflects the Company's strategy of reducing ownership in Memphis, a
noncore market, as market conditions permit. See Results of Operations for a
summary of the gain on the sale of this property.
A summary of the changes in Other Assets is presented in Note 7 in the
Notes to the Consolidated Financial Statements.
LIABILITIES
Mortgage notes payable increased $21,668,000 during the three months ended
March 31, 2005 primarily due to the assumption of two mortgages totaling
$25,142,000 on the acquisitions of Arion Business Park and Interstate
Distribution Center. The Company recorded premiums totaling $915,000 to adjust
the mortgage loans assumed to fair market value. These premiums
are being amortized over the remaining lives of the associated mortgages. These
increases were offset by the repayment of an 8.0% mortgage of $2,371,000 and
regularly scheduled principal payments of $1,957,000.
Notes payable to banks increased $9,115,000 as a result of advances of
$43,813,000 exceeding repayments of $34,698,000. 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 and Accrued Expenses. The increase of
$838,000 in Other Liabilities was primarily due to recording tenant security
deposits and other liabilities for acquired properties.
STOCKHOLDERS' EQUITY
Distributions in excess of earnings increased $5,346,000 as a result of
dividends on common and preferred stock of $10,882,000 exceeding net income for
financial reporting purposes of $5,536,000.
On March 31, 2005, EastGroup closed the sale of 800,000 shares of its
common stock to Citigroup Global Markets Inc. The net proceeds from the offering
of the shares were approximately $29,439,000 after deducting the underwriting
discount and other offering expenses. The Company intends to use the net
proceeds from this offering for general corporate purposes, including possible
acquisition or development of industrial properties and repayment of fixed rate
debt maturing in 2005. Pending such transactions, the Company used the proceeds
to reduce its outstanding variable rate debt.
RESULTS OF OPERATIONS
(Comments are for the three months ended March 31, 2005 compared to the three
months ended March 31, 2004.)
Net income available to common stockholders for the three months ended
March 31, 2005 was $4,880,000 ($.23 per basic and diluted share) compared to
$4,356,000 ($.21 per basic and diluted share) for the three months ended March
31, 2004. The primary contributor to the increase in earnings per share was
higher PNOI of $2,037,000, or 10.3%. The increase in PNOI resulted from
$1,011,000 attributable to 2004 and 2005 acquisitions, $298,000 from newly
developed properties and $728,000 from internal growth.
In November 2004, the Company acquired a 50% undivided tenant-in-common
interest in Industry Distribution Center II and accounts for this investment
under the equity method of accounting. The Company recognized $162,000 of equity
in earnings from this unconsolidated investment in the three months ended March
31, 2005 (PNOI of $199,000 included above). EastGroup also earned $119,000 in
mortgage loan interest income on the advances that the Company made to the
co-owner in connection with the closing of this property.
Bank interest expense before amortization of loan costs and capitalized
interest was $998,000 for the three months ended March 31, 2005, an increase of
$655,000 from the three months ended March 31, 2004. The increase for the
quarter was due to higher average bank borrowings at higher average interest
rates. Average bank borrowings for the three months ended March 31, 2005 were
$104,342,000 at 3.88% compared with $57,726,000 at 2.39% for the same period of
2004. 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 months ended March 31,
2005 were $501,000 compared to $500,000 for the same period in 2004.
Amortization of bank loan costs was $89,000 for the three months ended March 31,
2005 compared to $102,000 for the same period in 2004.
Mortgage interest expense on real estate properties was $5,272,000 for the
three months ended March 31, 2005, an increase of $403,000 from the three months
ended March 31, 2004. Amortization of mortgage loan costs was $112,000 for the
three months ended March 31, 2005, compared to $105,000 for the same period in
2004. The increases in 2005 were primarily due to a $30,300,000 new mortgage
that the Company obtained in September 2004 and to the $20,500,000 loan assumed
on the acquisition of Arion Business Park in January 2005. Mortgage principal
payments were $4,328,000 for the three months ended March 31, 2005 and
$4,987,000 for the same period of 2004. 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 $872,000 for the three months ended
March 31, 2005, compared to the same period in 2004. This increase was primarily
due to properties acquired and properties transferred from development during
2004 and 2005.
The increase in general and administrative expenses of $222,000 for three
months ended March 31, 2005 compared to the same period in 2004 was primarily
from increased accounting costs associated with compliance of the Sarbanes-Oxley
Act of 2002 and increased compensation costs, mainly due to the Company
achieving goals in its incentive plans.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent increased
income by $457,000 for the three months ended March 31, 2005, compared to
$903,000 for the same period in 2004.
Capital Expenditures
Capital expenditures for the three months ended March 31, 2005 and 2004
were as follows:
Three Months Ended
March 31,
Estimated ----------------------------
Useful Life 2005 2004
---------------------------------------------
(In thousands)
Upgrade on Acquisitions................ 40 yrs $ 17 23
Tenant Improvements:
New Tenants......................... Lease Life 843 1,060
New Tenants (first generation) (1).. Lease Life 248 496
Renewal Tenants..................... Lease Life 135 132
Other:
Building Improvements............... 5-40 yrs 255 94
Roofs............................... 5-15 yrs 14 410
Parking Lots........................ 3-5 yrs 154 -
Other............................... 5 yrs 26 15
----------------------------
Total capital expenditures....... $ 1,692 2,230
============================
(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 months ended March 31, 2005 and 2004
were as follows:
Three Months Ended
March 31,
Estimated ----------------------------
Useful Life 2005 2004
---------------------------------------------
(In thousands)
Development............................ Lease Life $ 352 41
New Tenants............................ Lease Life 342 526
New Tenants (first generation) (1)..... Lease Life 49 81
Renewal Tenants........................ Lease Life 365 275
----------------------------
Total capitalized leasing costs.. $ 1,108 923
============================
Amortization of leasing costs (2)...... $ 872 778
============================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
(2) Includes discontinued operations.
Discontinued Operations
In February 2005, the Company sold the Delp Distribution Center II (102,000
square feet) in Memphis for net proceeds of $2,085,000 and recognized a gain of
$377,000. The operations and gain on the sale of Delp II are recorded under
Discontinued Operations in accordance with SFAS No. 144 for both the three
months ended March 31, 2005 and 2004. There were no property sales in the first
quarter of 2004. Income from discontinued operations for the three months ended
March 31, 2004 also includes the operations of the properties that were sold
during the remainder of 2004.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No.
29. This new standard is the result of a broader effort by the FASB to improve
financial reporting by eliminating differences between GAAP in the United States
and GAAP developed by the International Accounting Standards Board (IASB). As
part of this effort, the FASB and the IASB identified opportunities to improve
financial reporting by eliminating certain narrow differences between their
existing accounting standards. Statement 153 amends APB Opinion No. 29,
Accounting for Nonmonetary Transactions, which was issued in 1973. The
amendments made by Statement 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have "commercial
substance." Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. The provisions in Statement 153 are effective for
nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early
application is permitted and companies must apply the standard prospectively.
The Company believes the adoption of this Statement in 2005 will have little or
no impact on its overall financial position or results of operation.
The FASB has issued SFAS No. 123 (Revised 2004), Share-Based Payment. The
new FASB rule requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued.
Statement 123R represents the culmination of a two-year effort to respond to
requests from investors and many others that the FASB improve the accounting for
share-based payment arrangements with employees. Public entities (other than
those filing as small business issuers) will be required to apply Statement 123R
as of the first annual reporting period that begins after June 15, 2005, or
January 1, 2006 for EastGroup. Early adoption of the Statement is encouraged.
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. The Company has not yet determined the impact of the adoption
of SFAS 123R on its overall financial position or results of operation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $13,267,000 for the three
months ended March 31, 2005. The primary other sources of cash for the first
quarter were from bank borrowings, proceeds from a common stock offering and the
sale of a real estate property. The Company distributed $10,146,000 in common
and $656,000 in preferred stock dividends during the three months ended March
31, 2005. Other primary uses of cash were for bank debt repayments, purchases of
real estate properties, construction and development of properties, mortgage
note payments and capital improvements at various properties.
Total debt at March 31, 2005 and December 31, 2004 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 March 31, 2005 and
December 31, 2004.
March 31, 2005 December 31, 2004
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(In thousands)
Mortgage notes payable - fixed rate......... $ 325,342 303,674
Bank notes payable - floating rate.......... 95,546 86,431
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Total debt............................... $ 420,888 390,105
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The Company has a three-year, $175 million unsecured revolving credit
facility with a group of nine banks that matures in January 2008. The Company
customarily uses this line of credit for acquisitions and developments. The
interest rate on the facility is based on the LIBOR index and varies according
to debt-to-total asset value ratios, with an annual facility fee of 20 basis
points. EastGroup's current interest rate is LIBOR plus .95%. The line of credit
can be expanded by $100 million and has a one-year extension at EastGroup's
option. At March 31, 2005, the interest rate was 3.97% on a balance of
$94,000,000. The interest rate on each tranche is currently reset on a monthly
basis. At May 3, 2005, the balance on this line was comprised of an $89 million
tranche at 4.04%.
The Company has a one-year $20 million unsecured revolving credit facility
with PNC Bank, N.A. that matures in December 2005, which the Company customarily
uses for working cash needs. 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 1.10%. At March 31, 2005, the interest rate was 3.80% on $1,546,000.
On March 31, 2005, EastGroup closed the sale of 800,000 shares of its
common stock to Citigroup Global Markets Inc. The net proceeds from the offering
of the shares were approximately $29.4 million after deducting the underwriting
discount and other offering expenses. The Company intends to use the net
proceeds from this offering for general corporate purposes, including possible
acquisition or development of industrial properties and repayment of fixed rate
debt maturing in 2005. Pending such transactions, the Company used the proceeds
to reduce its outstanding variable rate debt. In May, the underwriter closed on
the exercise of a portion of its over-allotment option and purchased 60,000
additional shares for net proceeds of approximately $2.2 million.
The Company has signed an application for a nonrecourse first mortgage loan
secured by Industry Distribution Center II in Los Angeles. The Company has a 50%
undivided tenant-in-common interest in the 309,000 square foot warehouse. The
$13.3 million loan is expected to close at the end of May and will have a fixed
interest rate of 5.31%, a ten-year term and an amortization schedule of 25
years. As part of this transaction, the expected loan proceeds payable to the
co-owner ($6.65 million) will be paid to EastGroup to reduce the $6.75 million
note that EastGroup advanced to the co-owner in November 2004 as part of the
acquisition. Accordingly, the total proceeds of $13.3 million will be paid to
EastGroup and will be used to reduce EastGroup's outstanding variable rate bank
debt.
Also subsequent to March 31, 2005, the Company entered into two contracts
to purchase land in Florida and Texas for approximately $6.2 million. These
acquisitions are expected to close later in 2005.
Contractual Obligations
EastGroup's fixed, noncancelable obligations as of December 31, 2004 did
not materially change during the three months ended March 31, 2005 except for
the purchase obligations which were fulfilled upon the closings of Arion
Business Park and the two parcels of land and the increase in mortgage notes and
bank 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.
2005 2006 2007 2008 2009 Thereafter Total Fair Value
---------------------------------------------------------------------------------------
Fixed rate debt(1) (in thousands).. $ 20,048 43,862 22,126 9,745 38,089 191,472 325,342 340,177(2)
Weighted average interest rate..... 7.77% 6.82% 7.51% 6.69% 6.76% 6.43% 6.68%
Variable rate debt (in thousands).. 1,546 - - 94,000 - - 95,546 95,546
Weighted average interest rate..... 3.80% - - 3.97% - - 3.97%
(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
March 31, 2005, 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 40 basis points, interest expense
and cash flows would increase or decrease by approximately $379,000 annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $10,485,000 Tower Automotive Center
recourse mortgage, which is summarized in the table below. Under the swap
agreement, the Company effectively pays a fixed rate of interest over the term
of the agreement without the exchange of the underlying notional amount. This
swap is designated as a cash flow hedge and is considered to be fully effective
in hedging the variable rate risk associated with the Tower mortgage loan.
Changes in the fair value of the swap are recognized in accumulated other
comprehensive income. The Company does not hold or issue this type of derivative
contract for trading or speculative purposes.
Fair Market
Current Maturity Fair Market Value Value
Type of Hedge Notional Amount Date Reference Rate Fixed Rate at 3/31/05 at 12/31/04
----------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,485 12/31/10 1 month LIBOR 4.03% $258 $14
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-K
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as those pertaining to the Company's hopes, expectations, 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.
(i) Disclosure Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of March 31,
2005, 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.
(ii) Changes in internal control over financial reporting.
There was no change in the Company's internal control over financial
reporting during the Company's first fiscal quarter ended March 31, 2005 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.
(a) Form 10-Q Exhibits:
(31) Rule 13a-14(a)/15d-14(a) Certifications (pursuant to Section 302
of the Sarbanes-Oxley Act of 2002)
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
(32) Section 1350 Certifications (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002)
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
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: May 6, 2005
EASTGROUP PROPERTIES, INC.
By: /s/ BRUCE CORKERN
-----------------------------
Bruce Corkern, CPA
Senior Vice President and Controller
By: /s/ N. KEITH MCKEY
------------------------------
N. Keith McKey, CPA
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer