U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 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 August
3, 2005 was 22,012,320.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 2005
Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets, June 30, 2005 (unaudited)
and December 31, 2004 3
Consolidated statements of income for the three and six months
ended June 30, 2005 and 2004 (unaudited) 4
Consolidated statement of changes in stockholders' equity for the
six months ended June 30, 2005 (unaudited) 5
Consolidated statements of cash flows for the six months
ended June 30, 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 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits 23
SIGNATURES
Authorized signatures 24
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
June 30, 2005 December 31, 2004
------------------------------------------------
(Unaudited)
ASSETS
Real estate properties......................................................... $ 905,877 845,139
Development.................................................................... 51,122 39,330
------------------------------------------------
956,999 884,469
Less accumulated depreciation................................................. (189,797) (174,662)
------------------------------------------------
767,202 709,807
------------------------------------------------
Real estate held for sale...................................................... 975 2,637
Unconsolidated investment...................................................... 2,570 9,256
Mortgage loans receivable...................................................... 800 7,550
Cash........................................................................... 1,030 1,208
Other assets................................................................... 42,486 38,206
------------------------------------------------
TOTAL ASSETS.................................................................. $ 815,063 768,664
================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable......................................................... $ 321,648 303,674
Notes payable to banks......................................................... 88,050 86,431
Accounts payable & accrued expenses............................................ 19,028 16,181
Other liabilities.............................................................. 9,410 8,688
-----------------------------------------------
438,136 414,974
-----------------------------------------------
-----------------------------------------------
Minority interest in joint venture.............................................. 1,850 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;
22,011,935 shares issued and outstanding at June 30, 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.................................... 391,198 357,011
Distributions in excess of earnings............................................ (45,982) (35,207)
Accumulated other comprehensive income......................................... 19 14
Unearned compensation.......................................................... (2,486) (2,340)
-----------------------------------------------
375,077 351,806
-----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 815,063 768,664
===============================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------
REVENUES
Income from real estate operations.................... $ 31,121 27,858 61,320 55,209
Equity in earnings of unconsolidated investment....... 127 - 289 -
Mortgage interest income.............................. 79 - 198 -
Other................................................. 106 79 181 111
----------------------------------------------------
31,433 27,937 61,988 55,320
----------------------------------------------------
EXPENSES
Operating expenses from real estate operations........ 8,778 7,916 17,201 15,499
Interest.............................................. 5,832 4,990 11,770 9,876
Depreciation and amortization......................... 9,751 8,225 18,786 16,388
General and administrative............................ 1,795 1,568 3,693 3,244
Minority interest in joint venture.................... 114 123 243 244
----------------------------------------------------
26,270 22,822 51,693 45,251
----------------------------------------------------
INCOME FROM CONTINUING OPERATIONS...................... 5,163 5,115 10,295 10,069
DISCONTINUED OPERATIONS
Income (loss) from real estate operations............. (29) 105 (2) 163
Gain on sale of real estate investments............... 754 61 1,131 61
----------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS ................... 725 166 1,129 224
----------------------------------------------------
NET INCOME............................................. 5,888 5,281 11,424 10,293
Preferred dividends-Series D......................... 656 656 1,312 1,312
----------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS............ $ 5,232 4,625 10,112 8,981
====================================================
BASIC PER COMMON SHARE DATA............................
Income from continuing operations..................... $ .21 .21 .42 .42
Income from discontinued operations................... .03 .01 .05 .01
----------------------------------------------------
Net income available to common stockholders........... $ .24 .22 .47 .43
====================================================
Weighted average shares outstanding................... 21,755 20,745 21,326 20,716
====================================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations..................... $ .21 .21 .42 .42
Income from discontinued operations................... .03 .01 .05 .01
----------------------------------------------------
Net income available to common stockholders........... $ .24 .22 .47 .43
====================================================
Weighted average shares outstanding................... 22,073 21,142 21,638 21,128
====================================================
Dividends declared per common share.................... $ .485 .480 .970 .960
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.................................. - - - - 11,424 - 11,424
Net unrealized change in cash flow hedge.... - - - - - 5 5
--------
Total comprehensive income................ 11,429
--------
Common dividends declared - $.97 per share.... - - - - (20,887) - (20,887)
Preferred stock dividends declared -
$.9938 per share............................. - - - - (1,312) - (1,312)
Issuance of 860,000 shares of common stock,
common stock offering........................ - - 31,597 - - - 31,597
Stock-based compensation, net of forfeitures.. - 2,417 (146) - - 2,271
Issuance of 4,600 shares of common stock,
dividend reinvestment plan................... - - 183 - - - 183
Other......................................... - - (10) - - - (10)
-----------------------------------------------------------------------------------
BALANCE, JUNE 30, 2005......................... $ 32,326 2 391,198 (2,486) (45,982) 19 375,077
===================================================================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
---------------------------------
2005 2004
---------------------------------
OPERATING ACTIVITIES
Net income.......................................................................... $ 11,424 10,293
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization from continuing operations........................... 18,786 16,388
Depreciation and amortization from discontinued operations......................... 72 197
Minority interest depreciation and amortization.................................... (70) (71)
Gain on sale of real estate investments from discontinued operations............... (1,131) (61)
Stock-based compensation expense................................................... 1,004 597
Equity in earnings of unconsolidated investment net of distributions............... 41 -
Changes in operating assets and liabilities:
Accrued income and other assets.................................................. (342) (2,232)
Accounts payable, accrued expenses and prepaid rent.............................. 2,185 3,397
---------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. 31,969 28,508
---------------------------------
INVESTING ACTIVITIES
Real estate development............................................................. (25,587) (6,386)
Purchases of real estate............................................................ (23,891) (8,140)
Repayments on mortgage loans receivable............................................. 6,750 -
Distributions from unconsolidated investment........................................ 6,645 -
Proceeds from sale of real estate investments....................................... 5,795 746
Real estate improvements............................................................ (5,077) (4,877)
Changes in other assets and other liabilities....................................... (94) (2,185)
---------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................................. (35,459) (20,842)
---------------------------------
FINANCING ACTIVITIES
Proceeds from bank borrowings....................................................... 71,417 65,476
Repayments on bank borrowings....................................................... (69,798) (42,529)
Principal payments on mortgage notes payable........................................ (7,935) (6,837)
Debt issuance costs................................................................. (85) (85)
Distributions paid to stockholders.................................................. (22,028) (21,227)
Proceeds from common stock offering................................................. 31,597 -
Proceeds from exercise of stock options............................................. 1,218 1,286
Proceeds from dividend reinvestment plan............................................ 183 173
Other............................................................................... (1,257) (3,601)
---------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................... 3,312 (7,344)
---------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (178) 322
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 1,208 1,786
---------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 1,030 2,108
=================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $1,069 and $910 for 2005
and 2004, respectively............................................................. $ 11,413 9,543
Fair value of debt assumed by the Company in the purchase of real estate............ 26,057 2,091
Common stock awards issued to employees and directors, net of forfeitures........... 1,007 1,047
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements of EastGroup Properties,
Inc. ("EastGroup" or "the Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America (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. 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. Real estate properties to be
held and used are reported at the lower of the carrying amount or fair value.
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
$8,205,000 and $15,969,000 for the three and six months ended June 30, 2005,
respectively, and $7,346,000 and $14,641,000 for the same periods in 2004. The
Company's real estate properties at June 30, 2005 and December 31, 2004 were as
follows:
---------------------------------------
June 30, 2005 December 31, 2004
---------------------------------------
(In thousands)
Real estate properties:
Land................................................ $ 148,372 139,857
Buildings and building improvements................. 633,656 595,852
Tenant and other improvements....................... 123,849 109,430
Development............................................ 51,122 39,330
---------------------------------------
956,999 884,469
Less accumulated depreciation....................... (189,797) (174,662)
---------------------------------------
$ 767,202 709,807
=======================================
(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." Under SFAS No. 144, 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. During the second quarter of 2005, Lamar
Distribution Center II was transferred to real estate held for sale and was
subsequently sold, generating a gain of $754,000. At June 30, 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 or whose
operations are included under Discontinued Operations except for Lamar
Distribution Center II, which mortgage was required to be paid in full upon the
sale of the property. Accordingly, Discontinued Operations includes interest
expense of $32,000 and $33,000 for the three months ended June 30, 2005 and
2004, respectively, and $64,000 and $66,000 for the six months ended June 30,
2005 and 2004, respectively.
(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 $565,000 and $1,000,000 for the three
and six months ended June 30, 2005, respectively, and $182,000 and $372,000 for
the same periods in 2004. Amortization of above and below market leases was
immaterial for all periods presented.
Total cost of the properties acquired for the six months ended June 30,
2005 was $49,727,000, of which $45,415,000 was allocated to real estate
properties. In accordance with SFAS No. 141, intangibles associated with the
purchases of real estate were allocated as follows: $4,235,000 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 $23,670,000 for the properties and intangibles
acquired, assumed mortgages of $25,142,000 and recorded premiums totaling
$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 June 30, 2005 and December 31, 2004.
(7) UNCONSOLIDATED INVESTMENT
In November 2004, the Company acquired a 50% undivided tenant-in-common
interest in Industry Distribution Center II, a 309,000 square foot warehouse
distribution building in the City of Industry (Los Angeles), California. The
building was constructed in 1998 and is 100% leased for ten years to a single
tenant who owns the other 50% interest in the property. This investment is
accounted for under the equity method of accounting and had a carrying value of
$2,570,000 at June 30, 2005, a decrease of $6,686,000 from $9,256,000 at
December 31, 2004. At the end of May 2005, EastGroup and the property co-owner
closed a nonrecourse first mortgage loan secured by Industry Distribution Center
II. The $13.3 million loan has a fixed interest rate of 5.31%, a ten-year term
and an amortization schedule of 25 years. EastGroup's 50% share of the loan
proceeds ($6.65 million) reduced the carrying value of the investment.
(8) MORTGAGE LOANS RECEIVABLE
In connection with the closing of the investment in Industry Distribution
Center II, EastGroup advanced a total of $7,550,000 in two separate notes to the
property co-owner, one for $6,750,000 and one for $800,000. As discussed in Note
7, the Company and the property co-owner secured permanent fixed-rate financing
on the investment in Industry Distribution Center II in May 2005. As part of
this transaction, the loan proceeds payable to the property co-owner ($6.65
million) were paid to EastGroup to reduce the $6.75 million note. Also at the
closing of the permanent financing, the co-owner repaid the remaining balance of
$100,000 on this note.
The interest rate on the $800,000 note is 9% and interest is due monthly by
the borrower. The principal amount of the $800,000 note is due in three equal
annual installments beginning in November of 2005 until maturity on November 14,
2007.
(9) OTHER ASSETS
A summary of the Company's Other Assets follows:
--------------------------------------
June 30, 2005 December 31, 2004
--------------------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization... $ 12,683 12,003
Deferred rent receivable, net of allowance for doubtful accounts........... 11,854 10,832
Accounts receivable, net of allowance for doubtful accounts................ 1,957 2,316
Acquired in-place lease intangibles, net of accumulated amortization....... 6,164 2,931
Goodwill................................................................... 990 990
Prepaid expenses and other assets.......................................... 8,838 9,134
--------------------------------------
$ 42,486 38,206
======================================
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
--------------------------------------
June 30, 2005 December 31, 2004
--------------------------------------
(In thousands)
Property taxes payable..................................................... $ 7,474 6,689
Development costs payable.................................................. 3,125 921
Dividends payable.......................................................... 2,527 2,355
Other payables and accrued expenses........................................ 5,902 6,216
--------------------------------------
$ 19,028 16,181
======================================
(11) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in
equity from nonowner sources. The components of accumulated other comprehensive
income (loss) for the six months ended June 30, 2005 are presented in the
Company's Consolidated Statement of Changes in Stockholders' Equity and for the
three and six months ended June 30, 2005 and 2004 are summarized below.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------
2005 2004 2005 2004
--------------------------------------------
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of period........................... $ 258 (294) 14 (30)
Change in fair value of interest rate swap........... (239) 548 5 284
--------------------------------------------
Balance at end of period................................. $ 19 254 19 254
============================================
(12) 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 Six Months Ended
June 30, June 30,
--------------------------------------------
2005 2004 2005 2004
--------------------------------------------
(In thousands)
BASIC EPS COMPUTATION
Numerator-net income available to common stockholders... $ 5,232 4,625 10,112 8,981
Denominator-weighted average shares outstanding......... 21,755 20,745 21,326 20,716
DILUTED EPS COMPUTATION
Numerator-net income available to common stockholders... $ 5,232 4,625 10,112 8,981
Denominator:
Weighted average shares outstanding................... 21,755 20,745 21,326 20,716
Common stock options.................................. 169 187 168 214
Nonvested restricted stock............................ 149 210 144 198
--------------------------------------------
Total Shares....................................... 22,073 21,142 21,638 21,128
============================================
(13) COMMON STOCK ISSUANCE
On March 31, 2005, EastGroup closed the sale of 800,000 shares of its
common stock. On May 2, 2005, the underwriter closed on the exercise of a
portion of its over-allotment option and purchased 60,000 additional shares.
Total net proceeds from the offering of the shares were approximately $31.6
million after deducting the underwriting discount and other offering expenses.
(14) 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 was $556,000 and $1,004,000 for the three and
six months ended June 30, 2005, respectively, and $294,000 and $597,000 for the
same periods in 2004. 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 six months ended June 30, 2005, the Company granted 33,446
shares of incentive restricted stock under these plans and 3,213 shares were
forfeited. In addition, 18,765 common shares were issued to employees upon the
exercise of stock options under the 1994 Plan.
Under the Directors Stock Option Plan, the Company granted 1,200 shares of
common stock and 481 shares of restricted stock to directors and issued 37,750
shares to directors upon the exercise of stock options under this plan.
(15) SUBSEQUENT EVENTS
On July 1, 2005, EastGroup repaid two mortgages totaling $11.5 million. The
weighted average interest rate for these mortgages was 8.163%.
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 the leading
provider in its markets 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 leasing space, rental
rates and tenant defaults. During the quarter ended June 30, 2005, leases on
862,000 square feet (4.1%) of EastGroup's total square footage of 21,187,000
expired, and the Company was successful in renewing or re-leasing 78% of that
total. In addition, EastGroup leased 267,000 square feet of other vacant space
during this period. During the second quarter of 2005, average rental rates on
new and renewal leases increased by 2.5%.
During the six months ended June 30, 2005, leases on 2,108,000 square feet
(10.0%) of EastGroup's total square footage of 21,187,000 expired, and the
Company was successful in renewing or re-leasing 62% of that total. In addition,
EastGroup leased 623,000 square feet of other vacant space during this period.
During the six months ended June 30, 2005, average rental rates on new and
renewal leases increased by 2.2%.
EastGroup's total leased percentage increased to 93.2% at June 30, 2005
from 92.6% at June 30, 2004. The expiring leases anticipated for the remainder
of 2005 were 7.2% of the portfolio at June 30, 2005. Property net operating
income from same properties increased 3.7% for the quarter ended June 30, 2005
and 3.4% for the six months as compared to the same periods in 2004. The second
quarter of 2005 was EastGroup's eighth consecutive quarter of positive same
property comparisons.
The Company generates new sources of leasing revenue through its
acquisition and development programs. During the six months ended June 30, 2005,
EastGroup purchased 113.5 acres of land for development and three properties
(749,000 square feet) for approximately $59 million. The Company transferred
three properties (207,000 square feet) with aggregate costs of $10.6 million at
the date of transfer from development to real estate properties. The Company
sold two properties during the first six months of 2005 for net proceeds of $5.8
million, generating combined gains of $1.1 million. These dispositions
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. 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. 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%.
In June 2005, EastGroup acquired Benan Distribution Center, a 44,000 square
foot business distribution building in Tucson, Arizona, for a purchase price of
$2.7 million.
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 six
months of 2005, the Company transferred three properties (two 100% and one 92%
leased) with an aggregate investment of approximately $10.6 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. 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 during the fourth
quarter of 2005.
At the end of May 2005, EastGroup and the property co-owner closed 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 has a fixed interest rate
of 5.31%, a ten-year term and an amortization schedule of 25 years. As part of
this transaction, the loan proceeds payable to the property co-owner ($6.65
million) were paid to EastGroup to reduce the $6.75 million note that the
Company advanced to the property co-owner in November 2004 related to the
property's acquisition. Also at the closing of the permanent financing, the
co-owner repaid the remaining balance of $100,000 on this note. The total
proceeds of $13.3 million were 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. On May 2, 2005, the underwriter closed on the exercise of a
portion of its over-allotment option and purchased 60,000 additional shares.
Total net proceeds from the offering of the shares were approximately $31.6
million after deducting the underwriting discount and other offering expenses.
Tower Automotive, Inc. (Tower) filed for Chapter 11 reorganization on
February 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 August 2005. EastGroup is obligated under a recourse mortgage
loan on the property for $10,485,000 as of June 30, 2005. Property net operating
income for 2004 was $1,369,000. 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 six months of 2005 was $686,000.
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, other operating costs and bad debt expense.
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 and six months ended June 30, 2005 and 2004 reconciliations of PNOI
and FFO Available to Common Stockholders to Net Income.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------
(In thousands, except per share data)
Income from real estate operations............................................ $ 31,121 27,858 61,320 55,209
Operating expenses from real estate operations................................ (8,778) (7,916) (17,201) (15,499)
---------------------------------------------------
PROPERTY NET OPERATING INCOME................................................. 22,343 19,942 44,119 39,710
Equity in earnings of unconsolidated investment (before depreciation)......... 164 - 363 -
Income from discontinued operations (before depreciation and amortization).... 7 202 70 360
Mortgage interest income...................................................... 79 - 198 -
Other income.................................................................. 106 79 181 111
Interest expense.............................................................. (5,832) (4,990) (11,770) (9,876)
General and administrative expense............................................ (1,795) (1,568) (3,693) (3,244)
Minority interest in earnings (before depreciation and amortization).......... (149) (159) (313) (315)
Dividends on Series D preferred shares........................................ (656) (656) (1,312) (1,312)
---------------------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS........................ 14,267 12,850 27,843 25,434
Depreciation and amortization from continuing operations...................... (9,751) (8,225) (18,786) (16,388)
Depreciation and amortization from discontinued operations.................... (36) (97) (72) (197)
Depreciation from unconsolidated investment................................... (37) - (74) -
Share of joint venture depreciation and amortization.......................... 35 36 70 71
Gain on sale of depreciable real estate investments........................... 754 61 1,131 61
---------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................... 5,232 4,625 10,112 8,981
Dividends on preferred shares................................................. 656 656 1,312 1,312
---------------------------------------------------
NET INCOME.................................................................... $ 5,888 5,281 11,424 10,293
===================================================
Net income available to common stockholders per diluted share................. $ .24 .22 .47 .43
Funds from operations available to common stockholders per diluted share...... .65 .61 1.29 1.20
Diluted shares for earnings per share and funds from operations............... 22,073 21,142 21,638 21,128
The Company analyzes the following performance trends in evaluating the progress
of the Company:
o The FFO change per share represents the increase or decrease in FFO per
share from the same quarter in the current year compared to the prior year.
FFO per share for the second quarter of 2005 was $.65 per share compared
with $.61 per share for the same period of 2004, an increase of 6.6%. The
increase in FFO for the second quarter was primarily due to higher PNOI of
$2,401,000, a 12.0% increase in PNOI. The increase in PNOI resulted from
$1,189,000 attributable to 2004 and 2005 acquisitions, $472,000 from newly
developed properties and $740,000 from same property growth. FFO per share
increased for the first quarter of 2005, both the third and fourth 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).
For the six months ended June 30, 2005, FFO was $1.29 per share compared
with $1.20 for the same period of 2004, an increase of 7.5%. The increase
in FFO for 2005 was primarily due to higher PNOI of $4,409,000 (an 11.1%
increase in PNOI). The increase in PNOI resulted from $2,301,000
attributable to 2004 and 2005 acquisitions, $770,000 from newly developed
properties and $1,338,000 from same property growth.
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 quarter ended June 30, 2005. The second quarter of 2005 was the
eighth consecutive quarter of positive results. For the six months ended
June 30, 2005, PNOI from same properties increased 3.4%. 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.
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 June 30, 2005 was 91.8%, an increase from March 31, 2005 occupancy of
91.2% and a decrease from December 31, 2004 occupancy of 93.2%, which
included several seasonal tenant leases. Occupancy has ranged from 90% to
93% for thirteen straight quarters.
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 2.5% for the quarter and 2.2% for the
six months ended June 30, 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 June 30, 2005 and December 31, 2004.)
EastGroup's assets were $815,063,000 at June 30, 2005, an increase of
$46,399,000 from December 31, 2004. Liabilities increased $23,162,000 to
$438,136,000 and stockholders' equity increased $23,271,000 to $375,077,000
during the same period. The paragraphs that follow explain these changes in
detail.
ASSETS
Real Estate Properties
Real estate properties increased $60,738,000 during the six months ended
June 30, 2005. This increase was primarily due to the purchase of three
properties for total costs of $45,415,000 and the transfer of three properties
from development with total costs of $10,594,000, as detailed below.
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
Benan Distribution Center.............. Tucson, AZ 44,000 06-15-05 2,549
------------ --------------
Total Acquisitions.............. 749,000 $ 45,415
============ ==============
(1) Total cost of the properties acquired was $49,727,000, of which $45,415,000
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: $4,235,000 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 $23,670,000 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 Date Cost at
Development in 2005 Location Size Transferred 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
Palm River South I..................... Tampa, FL 79,000 05-31-05 3,842
------------ -------------
Total Developments Transferred... 207,000 $ 10,594
============ =============
In addition to acquisitions and development in 2005, the Company made
capital improvements of $5,077,000 on existing and acquired properties (shown by
category in the Capital Expenditures table under Results of Operations). The
Company also acquired one parcel of land for additional parking at an existing
property for $221,000. Also, the Company incurred costs of $3,201,000 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.
Real estate properties decreased $3,770,000 for one property that
transferred to real estate held for sale during 2005, which was subsequently
sold.
Development
The investment in development at June 30, 2005 was $51,122,000 compared to
$39,330,000 at December 31, 2004. Total incremental capital investment for
development for the first six months of 2005 was $25,587,000. In addition to the
costs of $22,386,000 incurred for the six months ended June 30, 2005 as detailed
in the following table, the Company incurred costs of $3,201,000 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 three developments (two 100% and one 92% leased) to
real estate properties during the first six months of 2005 with a total
investment of $10,594,000 as of the date of transfer.
Costs Incurred
----------------------------------------------
For the
Costs Six Months Cumulative Estimated
Transferred Ended as of Total
DEVELOPMENT Size In 2005 6/30/05 6/30/05 Costs (1)
- ----------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
World Houston 16, Houston, TX.................... 94,000 $ - 1,111 4,378 5,100
Executive Airport CC II, Fort Lauderdale, FL..... 55,000 - 781 3,752 4,200
Southridge I, Orlando, FL........................ 41,000 - 1,366 2,210 3,900
Southridge V, Orlando, FL........................ 70,000 - 2,048 3,330 4,600
---------------------------------------------------------------------------
Total Lease-up..................................... 260,000 - 5,306 13,670 17,800
---------------------------------------------------------------------------
UNDER CONSTRUCTION
Techway SW III, Houston, TX...................... 100,000 1,150 1,616 2,766 5,700
Palm River South II, Tampa, FL................... 82,000 1,457 1,379 2,836 4,500
Sunport Center VI, Orlando, FL................... 63,000 1,044 1,523 2,567 3,800
World Houston 15, Houston, TX.................... 63,000 1,007 - 1,007 5,800
World Houston 21, Houston, TX.................... 68,000 569 - 569 3,800
---------------------------------------------------------------------------
Total Under Construction........................... 376,000 5,227 4,518 9,745 23,600
---------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Phoenix, AZ...................................... 213,000 - 162 2,358 11,400
Tucson, AZ....................................... 70,000 - - 326 3,500
Tampa, FL........................................ 600,000 (1,457) 5,124 5,124 29,000
Orlando, FL...................................... 925,000 (1,044) 3,816 9,938 68,500
West Palm Beach, FL.............................. 20,000 - 32 510 2,300
El Paso, TX...................................... 251,000 - - 2,444 9,600
Houston, TX...................................... 399,000 (2,726) 259 4,099 20,300
San Antonio, TX.................................. 171,000 - 2,203 2,203 12,400
Jackson, MS...................................... 28,000 - 124 705 2,000
---------------------------------------------------------------------------
Total Prospective Development...................... 2,677,000 (5,227) 11,720 27,707 159,000
---------------------------------------------------------------------------
3,313,000 $ - 21,544 51,122 200,400
===========================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING THE
SIX MONTHS ENDED JUNE 30, 2005
Palm River South I, Tampa, FL.................... 79,000 $ - 650 3,842
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........ 207,000 $ - 842 10,594 (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.
Accumulated depreciation on real estate properties increased $15,135,000
due to depreciation expense of $15,969,000 on real estate properties, offset by
accumulated depreciation of $834,000 on one property transferred to real estate
held for sale in 2005 as discussed below.
Real estate held for sale was $975,000 at June 30, 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. Lamar
Distribution Center II was transferred from the portfolio in the second quarter
of 2005 and was subsequently sold during the same period. The sale of Delp II
and Lamar 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 gains on the sale of these properties.
At the end of May 2005, EastGroup and the property co-owner closed 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 has a fixed interest rate
of 5.31%, a ten-year term and an amortization schedule of 25 years. As part of
this transaction, the loan proceeds payable to the property co-owner ($6.65
million) were paid to EastGroup to reduce the $6.75 million note that the
Company advanced to the property co-owner in November 2004 related to the
property's acquisition.
Also at the closing, the co-owner repaid the remaining balance of $100,000 on
this note. The total proceeds of $13.3 million were used to reduce EastGroup's
outstanding variable rate bank debt.
A summary of the changes in Other Assets is presented in Note 9 in the
Notes to the Consolidated Financial Statements.
LIABILITIES
Mortgage notes payable increased $17,974,000 during the six months ended
June 30, 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 value. These premiums are being amortized
over the remaining lives of the associated mortgages. These increases were
offset by regularly scheduled principal payments of $3,783,000, the repayments
of an 8.0% mortgage of $2,371,000 and a 6.9% mortgage of $1,781,000, and
mortgage loan premium amortization of $148,000.
Notes payable to banks increased $1,619,000 as a result of advances of
$71,417,000 exceeding repayments of $69,798,000. The Company's credit facilities
are described in greater detail under Liquidity and Capital Resources.
See Note 10 in the Notes to the Consolidated Financial Statements for a
summary of changes in Accounts Payable and Accrued Expenses. The increase of
$722,000 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 $10,775,000 as a result of
dividends on common and preferred stock of $22,199,000 exceeding net income for
financial reporting purposes of $11,424,000.
On March 31, 2005, EastGroup closed the sale of 800,000 shares of its
common stock. On May 2, 2005, the underwriter closed on the exercise of a
portion of its over-allotment option and purchased 60,000 additional shares.
Total net proceeds from the offering of the shares were $31,597,000 after
deducting the underwriting discount and other offering expenses.
RESULTS OF OPERATIONS
(Comments are for the three and six months ended June 30, 2005 compared to the
three and six months ended June 30, 2004.)
Net income available to common stockholders for the three and six months
ended June 30, 2005 was $5,232,000 ($.24 per basic and diluted share) and
$10,112,000 ($.47 per basic and diluted share) compared to $4,625,000 ($.22 per
basic and diluted share) and $8,981,000 ($.43 per basic and diluted share) for
the three and six months ended June 30, 2004. The primary contributor to the
increase in earnings per share for the three month period was higher PNOI of
$2,401,000, or 12.0%. This increase in PNOI resulted from $1,189,000
attributable to 2004 and 2005 acquisitions, $472,000 from newly developed
properties and $740,000 from same property growth. The increase in PNOI for the
six month period was $4,409,000, or 11.1%. The increase in PNOI resulted from
$2,301,000 attributable to 2004 and 2005 acquisitions, $770,000 from newly
developed properties and $1,338,000 from same property growth. These increases
in PNOI were offset by increased depreciation and amortization expense and other
costs as discussed below.
The Company's 50% undivided tenant-in-common interest in Industry
Distribution Center II generated equity in earnings of $127,000 and $289,000 for
the three and six months ended June 30, 2005 (PNOI of $199,000 and $398,000 for
the three and six month periods). EastGroup also earned $79,000 and $198,000 for
the three and six months ended June 30, 2005 in mortgage loan interest income on
the advances that the Company made to the property co-owner in connection with
the closing of this property. The $6,750,000 mortgage loan receivable was repaid
by the property co-owner at the end of May 2005; the $800,000 loan is scheduled
for repayment as discussed in Note 8 in the Notes to the Consolidated Financial
Statements.
Interest costs incurred during the period of construction of real estate
properties are capitalized and offset against interest expense. The increases in
mortgage interest expense in 2005 were primarily due to a $30,300,000 new
mortgage that the Company obtained in September 2004, the $20,500,000 loan
assumed on the acquisition of Arion Business Park in January 2005 and the
$4,642,000 mortgage assumed on the acquisition of Interstate Distribution Center
in March 2005. Mortgage principal payments were $3,607,000 and $7,935,000 for
the three and six months ended June 30, 2005 and $1,854,000 and $6,837,000 for
the same periods 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 from 6.89% at June
30, 2004 to 6.68% at June 30, 2005. 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.
The following table presents the components of interest expense for the
three and six months ended June 30, 2005 and 2004.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------------
Increase Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
----------------------------------------------------------------------
(In thousands, except rates of interest)
Average bank borrowings..................................... $ 87,922 67,554 20,368 96,087 62,640 33,447
Weighted average variable interest rates.................... 4.33% 2.40% 4.09% 2.39%
VARIABLE RATE INTEREST EXPENSE
Variable rate interest (excluding loan cost amortization)... 949 402 547 1,947 745 1,202
Amortization of bank loan costs............................. 89 102 (13) 178 204 (26)
----------------------------------------------------------------------
Total variable rate interest expense........................ 1,038 504 534 2,125 949 1,176
----------------------------------------------------------------------
FIXED RATE INTEREST EXPENSE (1)
Fixed rate interest (excluding loan cost amortization)...... 5,249 4,791 458 10,489 9,628 861
Amortization of mortgage loan costs......................... 113 105 8 225 209 16
----------------------------------------------------------------------
Total fixed rate interest expense........................... 5,362 4,896 466 10,714 9,837 877
----------------------------------------------------------------------
Total interest.............................................. 6,400 5,400 1,000 12,839 10,786 2,053
Less capitalized interest................................... (568) (410) (158) (1,069) (910) (159)
----------------------------------------------------------------------
TOTAL INTEREST EXPENSE...................................... $ 5,832 4,990 842 11,770 9,876 1,894
======================================================================
(1) Does not include interest expense for discontinued operations. See Note 5 in
the Notes to the Consolidated Financial Statements for this information.
Depreciation and amortization increased $1,526,000 and $2,398,000 for the
three and six months ended June 30, 2005, compared to the same periods in 2004.
These increases were primarily due to properties acquired and properties
transferred from development during 2004 and 2005.
The increases in general and administrative expenses of $227,000 and
$449,000 for the three and six months ended June 30, 2005 compared to the same
periods in 2004 were 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 stock-based incentive plans.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent increased
income by $574,000 and $1,031,000 for the three and six months ended June 30,
2005, compared to $879,000 and $1,782,000 for the same periods in 2004.
Capital Expenditures
Capital expenditures for the three and six months ended June 30, 2005 and
2004 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
Estimated -------------------------------------------------
Useful Life 2005 2004 2005 2004
----------------------------------------------------------------
(In thousands)
Upgrade on Acquisitions................... 40 yrs $ 37 15 54 38
Tenant Improvements:
New Tenants............................ Lease Life 1,278 1,145 2,121 2,205
New Tenants (first generation) (1)..... Lease Life 162 378 410 874
Renewal Tenants........................ Lease Life 498 417 633 549
Other:
Building Improvements.................. 5-40 yrs 509 450 764 544
Roofs.................................. 5-15 yrs 113 172 127 582
Parking Lots........................... 3-5 yrs 647 68 801 68
Other.................................. 5 yrs 141 2 167 17
-------------------------------------------------
Total capital expenditures.......... $ 3,385 2,647 5,077 4,877
=================================================
(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 six months ended June 30, 2005 and
2004 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
Estimated -------------------------------------------------
Useful Life 2005 2004 2005 2004
----------------------------------------------------------------
(In thousands)
Development............................... Lease Life $ 448 248 800 289
New Tenants............................... Lease Life 612 438 954 964
New Tenants (first generation) (1)........ Lease Life - - 49 81
Renewal Tenants........................... Lease Life 449 354 814 629
-------------------------------------------------
Total capitalized leasing costs..... $ 1,509 1,040 2,617 1,963
=================================================
Amortization of leasing costs (2)......... $ 1,017 794 1,889 1,572
=================================================
(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 Delp Distribution Center II (102,000
square feet) in Memphis for net proceeds of $2,085,000 and recognized a gain of
$377,000. In June 2005, the Company sold Lamar Distribution Center II (151,000
square feet), also in Memphis, for net proceeds of $3,710,000 and recognized a
gain of $754,000. The operations, including interest expense (if applicable),
and gains on the sale of these properties are recorded under Discontinued
Operations in accordance with SFAS No. 144 for both 2005 and 2004. Income from
discontinued operations for 2004 also includes the operations of the properties
that were sold during 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. The Company's adoption of this Statement in June 2005 had no impact on its
overall financial position or results of operation as the Company had no
nonmonetary asset exchanges during the second quarter nor does it expect to have
nonmonetary asset exchanges in the immediate future.
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 the 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 evaluated the
potential impact of the adoption of SFAS 123R in 2006 and expects such adoption
to have little or no impact on its overall financial position or results of
operation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $31,969,000 for the six
months ended June 30, 2005. The primary other sources of cash were from bank
borrowings, proceeds from a common stock offering, repayments on a mortgage loan
receivable, distributions
from an unconsolidated investment (primarily EastGroup's 50% share of loan
proceeds) and the sale of real estate properties. The Company distributed
$20,716,000 in common and $1,312,000 in preferred stock dividends during the six
months ended June 30, 2005. Other primary uses of cash were for bank debt
repayments, construction and development of properties, purchases of real estate
properties, mortgage note payments and capital improvements at various
properties.
Total debt at June 30, 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 June 30, 2005 and
December 31, 2004.
June 30, 2005 December 31, 2004
-------------------------------------
(In thousands)
Mortgage notes payable - fixed rate......... $ 321,648 303,674
Bank notes payable - floating rate.......... 88,050 86,431
-------------------------------------
Total debt............................... $ 409,698 390,105
=====================================
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 interest rate under this facility is LIBOR plus .95%, except
that it may be lower based upon the competitive bid option in the note (the
Company was first eligible under this facility to exercise its option to solicit
competitive bid offers in June 2005). The line of credit can be expanded by $100
million and has a one-year extension at EastGroup's option. At June 30, 2005,
the interest rate was 4.08% on a balance of $76,000,000. The interest rate on
each tranche is currently reset on a monthly basis two days before the effective
date. At August 5, 2005, the balance on this line was comprised of a $53 million
tranche at 4.46%, which was set on July 28, 2005, and $42 million in competitive
bid loans at a weighted average rate of 4.09%, which was set on August 3, 2005.
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 June 30, 2005, the interest rate was 4.44% on $12,050,000.
On March 31, 2005, EastGroup closed the sale of 800,000 shares of its
common stock. On May 2, 2005, the underwriter closed on the exercise of a
portion of its over-allotment option and purchased 60,000 additional shares.
Total net proceeds from the offering of the shares were approximately $31.6
million after deducting the underwriting discount and other offering expenses.
The Company used the net proceeds from this offering for general corporate
purposes, including acquisition and development of industrial properties and
repayment of fixed rate debt maturing in 2005.
At the end of May 2005, EastGroup and the property co-owner closed 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 has a fixed interest rate
of 5.31%, a ten-year term and an amortization schedule of 25 years. As part of
this transaction, the loan proceeds payable to the property co-owner ($6.65
million) were paid to EastGroup to reduce the $6.75 million note that the
Company advanced to the property co-owner in November 2004 related to the
property's acquisition. Also at the closing, the co-owner repaid the remaining
balance of $100,000 on this note. The total proceeds of $13.3 million were used
to reduce EastGroup's outstanding variable rate bank debt.
On July 1, 2005, EastGroup repaid two mortgages totaling $11.5 million. The
weighted average interest rate for these mortgages was 8.163%.
Contractual Obligations
EastGroup's fixed, noncancelable obligations as of December 31, 2004 did
not materially change during the six months ended June 30, 2005 except for the
purchase obligations which were fulfilled upon the closings of Arion Business
Park and the two parcels of land and the net increases in mortgage notes and
bank notes payable as 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.
Jul-Dec Fair
2005 2006 2007 2008 2009 Thereafter Total Value
------------------------------------------------------------------------------------
Fixed rate debt(1) (in thousands).... $ 18,101 43,777 22,035 8,175 38,089 191,471 321,648 342,608(2)
Weighted average interest rate....... 7.86% 6.82% 7.51% 6.65% 6.76% 6.43% 6.68%
Variable rate debt (in thousands).... 12,050 - - 76,000 - - 88,050 88,050
Weighted average interest rate....... 4.44% - - 4.08% - - 4.13%
(1) The fixed rate debt shown above includes the Tower Automotive mortgage,
which has a variable interest rate based on the one-month LIBOR. EastGroup has
an interest rate swap agreement that fixes the rate at 4.03% for the 8-year
term. Interest and related fees result in an annual effective interest rate of
5.3%.
(2) The fair value of the Company's fixed rate debt is estimated based on the
quoted market prices for similar issues or by discounting expected cash flows at
the rates currently offered to the Company for debt of the same remaining
maturities, as advised by the Company's bankers.
As the table above incorporates only those exposures that existed as of
June 30, 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 41 basis points, interest expense
and cash flows would increase or decrease by approximately $364,000 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.
Current Notional Maturity Fair Market Value Fair Market Value
Type of Hedge Amount Date Reference Rate Fixed Rate at 6/30/05 at 12/31/04
-------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,485 12/31/10 1 month LIBOR 4.03% $19 $14
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this report 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 June 30,
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 second fiscal quarter ended June 30, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 2, 2005, the Registrant held its Annual Meeting of Shareholders. At
the Annual Meeting, D. Pike Aloian, H.C. Bailey, Jr., Hayden C. Eaves III,
Fredric H. Gould, David H. Hoster II, David M. Osnos and Leland R. Speed were
elected directors of the Registrant, each to serve until the 2006 Annual
Meeting. The following is a summary of the voting for directors:
Common Stock
Nominee Vote For Vote Withheld
------------------------------------------------------------
D. Pike Aloian 19,947,233 213,921
H.C. Bailey, Jr. 19,878,827 282,327
Hayden C. Eaves III 19,966,671 194,483
Fredric H. Gould 19,952,278 208,876
David H. Hoster II 19,990,365 170,789
David M. Osnos 19,740,077 421,077
Leland R. Speed 19,976,913 184,241
At the same meeting, shareholders were asked to vote on a proposal to
ratify the adoption of the EastGroup Properties, Inc. 2005 Directors Equity
Incentive Plan. The Plan authorizes the issuance of up to 50,000 shares of
common stock pursuant to awards granted to directors of the Company. The
following is a summary of the voting:
Vote For Vote Against Abstain No Vote
-------------------------------------------------------------------------------------------
Ratification of 2005 Directors
Equity Incentive Plan: 10,975,447 5,395,296 134,488 3,663,812
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: August 5, 2005
EASTGROUP PROPERTIES, INC.
By: /s/ BRUCE CORKERN
---------------------------
Bruce Corkern, CPA
Senior Vice President, Chief Accounting Officer,
and Controller
By: /s/ N. KEITH MCKEY
---------------------------
N. Keith McKey, CPA
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer