U.S. SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2006 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one)
Large Accelerated Filer (x) Accelerated Filer ( ) Non-accelerated Filer ( )
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES ( ) NO (x)
The number of shares of common stock, $.0001 par value, outstanding as of May 8,
2006 was 22,188,793.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 2006
PART I. FINANCIAL INFORMATION Pages
Item 1. Financial Statements
Consolidated balance sheets, March 31, 2006 (unaudited) and
December 31, 2005 3
Consolidated statements of income for the three months ended
March 31, 2006 and 2005 (unaudited) 4
Consolidated statement of changes in stockholders' equity for the
three months ended March 31, 2006 (unaudited) 5
Consolidated statements of cash flows for the three months ended
March 31, 2006 and 2005 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 23
SIGNATURES
Authorized signatures 24
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
March 31, 2006 December 31, 2005
---------------------------------------
(Unaudited)
ASSETS
Real estate properties........................................................ $ 941,737 943,585
Development................................................................... 76,740 77,483
---------------------------------------
1,018,477 1,021,068
Less accumulated depreciation............................................... (209,693) (206,427)
---------------------------------------
808,784 814,641
---------------------------------------
Real estate held for sale..................................................... 773 773
Unconsolidated investment..................................................... 2,562 2,618
Cash.......................................................................... 1,267 1,915
Other assets.................................................................. 46,145 43,591
---------------------------------------
TOTAL ASSETS................................................................ $ 859,531 863,538
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable........................................................ $ 344,569 346,961
Notes payable to banks........................................................ 121,375 116,764
Accounts payable & accrued expenses........................................... 21,452 22,941
Other liabilities............................................................. 10,344 10,306
---------------------------------------
497,740 496,972
---------------------------------------
---------------------------------------
Minority interest in joint venture............................................ 1,725 1,702
---------------------------------------
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;
22,170,794 shares issued and outstanding at March 31, 2006 and
22,030,682 at December 31, 2005............................................. 2 2
Excess shares; $.0001 par value; 30,000,000 shares authorized;
no shares issued............................................................ - -
Additional paid-in capital on common shares................................... 391,109 390,155
Distributions in excess of earnings........................................... (63,823) (57,930)
Accumulated other comprehensive income........................................ 452 311
---------------------------------------
360,066 364,864
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 859,531 863,538
=======================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
---------------------------
2006 2005
---------------------------
REVENUES
Income from real estate operations......................................... $ 32,737 29,532
Equity in earnings of unconsolidated investment............................ 74 162
Other income............................................................... 19 70
---------------------------
32,830 29,764
---------------------------
EXPENSES
Expenses from real estate operations....................................... 9,058 8,241
Depreciation and amortization.............................................. 10,482 8,868
General and administrative................................................. 1,808 1,898
Minority interest in joint venture......................................... 137 129
---------------------------
21,485 19,136
---------------------------
OPERATING INCOME............................................................. 11,345 10,628
OTHER INCOME (EXPENSE)
Interest income............................................................ 22 124
Interest expense........................................................... (6,335) (5,937)
---------------------------
INCOME FROM CONTINUING OPERATIONS ........................................... 5,032 4,815
---------------------------
DISCONTINUED OPERATIONS
Income from real estate operations......................................... 61 344
Gain on sale of real estate investments.................................... 1,068 377
---------------------------
INCOME FROM DISCONTINUED OPERATIONS ......................................... 1,129 721
---------------------------
NET INCOME................................................................... 6,161 5,536
Preferred dividends-Series D............................................... 656 656
---------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS.................................. $ 5,505 4,880
===========================
BASIC PER COMMON SHARE DATA
Income from continuing operations.......................................... $ .20 .20
Income from discontinued operations........................................ .05 .03
---------------------------
Net income available to common stockholders................................ $ .25 .23
===========================
Weighted average shares outstanding........................................ 21,881 20,891
===========================
DILUTED PER COMMON SHARE DATA
Income from continuing operations.......................................... $ .20 .20
Income from discontinued operations........................................ .05 .03
---------------------------
Net income available to common stockholders................................ $ .25 .23
===========================
Weighted average shares outstanding........................................ 22,208 21,196
===========================
Dividends declared per common share.......................................... $ .490 .485
===========================
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 In Excess Comprehensive
Stock Stock Capital Of Earnings Income Total
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005............................... $ 32,326 2 390,155 (57,930) 311 364,864
Comprehensive income
Net income........................................... - - - 6,161 - 6,161
Net unrealized change in cash flow hedge............. - - - - 141 141
---------
Total comprehensive income......................... 6,302
---------
Common dividends declared, $.49 per share.............. - - - (11,398) - (11,398)
Preferred stock dividends declared, $.4969 per share... - - - (656) - (656)
Stock-based compensation, net of forfeitures........... - - 903 - - 903
Issuance of 1,659 shares of common stock,
dividend reinvestment plan........................... - - 78 - - 78
Other.................................................. - - (27) - - (27)
--------------------------------------------------------------------------
BALANCE, MARCH 31, 2006.................................. $ 32,326 2 391,109 (63,823) 452 360,066
==========================================================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
2006 2005
-------------------------
OPERATING ACTIVITIES
Net income........................................................................... $ 6,161 5,536
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization from continuing operations........................... 10,482 8,868
Depreciation and amortization from discontinued operations......................... 125 203
Minority interest depreciation and amortization.................................... (37) (35)
Amortization of mortgage loan premiums............................................. (110) (61)
Gain on sale of real estate investments from discontinued operations............... (1,068) (377)
Stock-based compensation expense................................................... 598 448
Equity in earnings of unconsolidated investment net of distributions............... 56 (12)
Changes in operating assets and liabilities:
Accrued income and other assets.................................................. (2,712) (1,389)
Accounts payable, accrued expenses and prepaid rent.............................. (3,727) (853)
-------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................................. 9,768 12,328
-------------------------
INVESTING ACTIVITIES
Purchases of real estate............................................................. - (20,964)
Real estate development.............................................................. (14,027) (17,122)
Real estate improvements............................................................. (3,125) (1,692)
Proceeds from sale of real estate investments........................................ 15,574 2,085
Changes in other assets and other liabilities........................................ 479 1,300
-------------------------
NET CASH USED IN INVESTING ACTIVITIES.................................................. (1,099) (36,393)
-------------------------
FINANCING ACTIVITIES
Proceeds from bank borrowings........................................................ 40,625 43,813
Repayments on bank borrowings........................................................ (36,014) (34,698)
Principal payments on mortgage notes payable......................................... (2,235) (4,328)
Debt issuance costs.................................................................. (72) (42)
Distributions paid to stockholders................................................... (11,500) (10,802)
Proceeds from common stock offering.................................................. - 29,439
Proceeds from exercise of stock options.............................................. 411 580
Proceeds from dividend reinvestment plan............................................. 78 94
Other................................................................................ (610) (227)
-------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................... (9,317) 23,829
-------------------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (648) (236)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................................... 1,915 1,208
-------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 1,267 972
=========================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $919 and $501
for 2006 and 2005, respectively.................................................... $ 6,317 5,743
Fair value of debt assumed by the Company in the purchase of real estate............. - 26,057
Common stock awards issued to employees and directors, net of forfeitures............ 3,134 865
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 U.S.
generally accepted accounting principles (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 GAAP 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 2005 annual report on Form 10-K 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 2005 financial statements
to conform to the 2006 presentation.
(4) REAL ESTATE PROPERTIES
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.
Geographically, the Company's investments are concentrated in major Sunbelt
markets of the United States, primarily in the states of Florida, Texas,
California and Arizona. The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Real estate properties held for
investment 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
$8,803,000 and $7,764,000 for the three months ended March 31, 2006 and 2005,
respectively. The Company's real estate properties at March 31, 2006 and
December 31, 2005 were as follows:
March 31, 2006 December 31, 2005
--------------------------------------
(In thousands)
Real estate properties:
Land................................................ $ 152,476 152,954
Buildings and building improvements................. 653,901 656,897
Tenant and other improvements....................... 135,360 133,734
Development........................................... 76,740 77,483
--------------------------------------
1,018,477 1,021,068
Less accumulated depreciation....................... (209,693) (206,427)
--------------------------------------
$ 808,784 814,641
======================================
(5) REAL ESTATE HELD FOR SALE
Real estate properties that are held for sale 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. In accordance with the guidelines
established under Statement of Financial Accounting Standards (SFAS) No. 144,
the results of operations for the properties sold or held for sale during the
reported periods are shown under Discontinued Operations on the consolidated
income statements. 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, the mortgage of which was required to
be paid in full upon the sale of the property in 2005. Accordingly, Discontinued
Operations
includes interest expense of $33,000 for the three months ended March
31, 2005. At December 31, 2005 and March 31, 2006, the Company was offering for
sale 6.4 acres of land in Houston with a carrying amount of $773,000; no loss is
anticipated on the sale of this land.
(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 Company determines
whether any financing assumed is above or below market based upon comparison to
similar financing terms for similar properties. The cost of the properties
acquired may be adjusted based on indebtedness assumed from the seller that is
determined to be above or below market rates. 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 $740,000 and $435,000 for the three
months ended March 31, 2006 and 2005, respectively. Amortization of above and
below market leases was immaterial for both periods presented.
The Company periodically reviews (at least annually) the recoverability of
goodwill and (on a quarterly basis) the recoverability of other intangibles for
possible impairment. In management's opinion, no material impairment of goodwill
and other intangibles existed at March 31, 2006 and December 31, 2005.
(7) OTHER ASSETS
A summary of the Company's Other Assets follows:
March 31, 2006 December 31, 2005
--------------------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization...... $ 13,858 13,630
Straight-line rent receivable, net of allowance for doubtful accounts......... 12,979 12,773
Accounts receivable, net of allowance for doubtful accounts................... 2,490 2,930
Acquired in-place lease intangibles, net of accumulated amortization
of $4,036 and $3,580 for 2006 and 2005, respectively ..................... 5,322 6,062
Goodwill...................................................................... 990 990
Prepaid expenses and other assets............................................. 10,506 7,206
--------------------------------------
$ 46,145 43,591
======================================
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
March 31, 2006 December 31, 2005
--------------------------------------
(In thousands)
Property taxes payable......................................... $ 4,953 8,224
Development costs payable...................................... 5,049 2,777
Dividends payable.............................................. 2,917 2,363
Other payables and accrued expenses............................ 8,533 9,577
--------------------------------------
$ 21,452 22,941
======================================
(9) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in
equity from nonowner sources. The components of accumulated other comprehensive
income for the three months ended March 31, 2006 are presented in the Company's
Consolidated Statement of Changes in Stockholders' Equity and for the three
months ended March 31, 2006 and 2005 are summarized below.
Three Months Ended
March 31,
------------------------
2006 2005
------------------------
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year................................... $ 311 14
Change in fair value of interest rate swap................. 141 244
------------------------
Balance at end of period....................................... $ 452 258
========================
(10) EARNINGS PER SHARE
Basic earnings per share (EPS) represents the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period. The Company's basic EPS is calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding.
Diluted EPS represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of common shares
for all dilutive potential common shares outstanding during the reporting
period. The Company calculates diluted EPS by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
plus the dilutive effect of nonvested restricted stock and stock options had the
options been exercised. The dilutive effect of stock options and their
equivalents (such as nonvested restricted stock) was determined using the
treasury stock method which assumes exercise of the options as of the beginning
of the period or when issued, if later, and assumes proceeds from the exercise
of options are used to purchase common stock at the average market price during
the period. Reconciliation of the numerators and denominators in the basic and
diluted EPS computations is as follows:
Three Months Ended
March 31,
------------------------
2006 2005
------------------------
(In thousands)
BASIC EPS COMPUTATION
Numerator-net income available to common stockholders........ $ 5,505 4,880
Denominator-weighted average shares outstanding.............. 21,881 20,891
DILUTED EPS COMPUTATION
Numerator-net income available to common stockholders........ $ 5,505 4,880
Denominator:
Weighted average shares outstanding........................ 21,881 20,891
Common stock options....................................... 170 166
Nonvested restricted stock................................. 157 139
------------------------
Total Shares............................................ 22,208 21,196
========================
(11) STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment, on
January 1, 2006. The new rule required that the compensation cost relating to
share-based payment transactions be recognized in the financial statements and
that the cost be measured based on the fair value of the equity or liability
instruments issued. The Company's adoption of SFAS 123R had an immaterial impact
on its overall financial position and results of operations. Prior to the
adoption of SFAS 123R, the Company had, effective January 1, 2002, 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.
Management Incentive Plan
The Company has a management incentive plan which was approved by the
shareholders and adopted in 2004 (the 2004 Plan), which authorizes the issuance
of up to 1,900,000 shares of common stock to employees in the form of options,
stock appreciation rights, restricted stock, deferred stock units, performance
shares, stock bonuses, and stock. Total shares available for grant were
1,747,674 at March 31, 2006. Typically, the Company issues new shares to fulfill
stock grants or upon the exercise of stock options.
Stock-based compensation expense was $584,000 and $448,000 for the three
months ended March 31, 2006 and 2005, respectively, of which $152,000 and
$93,000 were capitalized as part of the Company's development costs.
Restricted Stock
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. Vesting occurs from three to ten years from the date of the
grant for nonperformance based grants. Restricted stock is granted to executives
upon the satisfaction of annual and multi-year performance goals with vesting in
the three years following the performance period. The Company recognizes
compensation expense on a straight-line basis over the service period based upon
the fair market value of the shares on the grant date, adjusted for estimated
forfeitures. 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. As of March 31, 2006, there was $4,597,000 of unrecognized compensation
cost related to nonvested restricted stock compensation that is expected to be
recognized over a weighted average period of 2.74 years. Following is a summary
of the total shares that will vest by year for the remainder of the vesting
periods as of March 31, 2006.
Remaining Shares Vesting Schedule Number of Shares
- ---------------------------------------------------------------
Remainder of 2006......................... 63,539
2007...................................... 89,266
2008...................................... 74,310
2009...................................... 34,870
----------------
Total Nonvested Shares.................... 261,985
================
Following is a summary of the total restricted shares granted, issued,
forfeited and delivered to employees with the related weighted average grant
date fair value share prices for the three months ended March 31, 2006. Of the
shares that vested in the first quarter of 2006, 571 shares were withheld by the
Company to satisfy the tax obligations for those employees who elected this
option as permitted under the applicable equity plan. The fair value of shares
that were granted during the three months ended March 31, 2006 and 2005 was
$494,000 and zero, respectively. As of the vesting date, the fair value of
shares that vested during the three months ended March 31, 2006 and 2005 totaled
$1,472,000 and $829,000, respectively.
Restricted Stock Activity: Three Months Ended
March 31, 2006
------------------------------
Weighted
Average Grant
Shares Date Fair Value
------------------------------
Nonvested at beginning of period.... 177,444 $ 23.01
Issued(1)........................... 107,823 37.25
Granted............................. 10,511 47.01
Forfeited........................... (1,480) 22.04
Vested.............................. (32,313) 34.91
-----------
Nonvested at end of period.......... 261,985 28.50
===========
(1) Issued shares are shares granted in prior years that were awarded during the
period upon satisfaction of performance conditions.
Employee Stock Options
The Company has not granted stocked options to employees since 2002. As
employee stock options vest equally over a two-year period, all options are now
vested. The intrinsic value realized by employees from the exercise of options
during the three months ended March 31, 2006 and 2005 was $556,000 and $122,000,
respectively. Following is a summary of the total employee stock options
granted, exercised and expired with related weighted average exercise share
prices for the three months ended March 31, 2006.
Stock Option Activity: Three Months Ended
March 31, 2006
------------------------------
Weighted Average
Shares Exercise Price
------------------------------
Outstanding at beginning of period... 251,075 $ 19.80
Granted.............................. - -
Forfeited............................ - -
Exercised............................ (19,920) 18.97
Expired.............................. - -
-----------
Outstanding at end of period......... 231,155 19.87
===========
Exercisable at end of period......... 231,155 19.87
Employee outstanding stock options at March 31, 2006, all exercisable:
- --------------------------------------------------------------------------------------------------------
Weighted Average Remaining Weighted Average Intrinsic
Exercise Price Range Number Contractual Life Exercise Price Value
- --------------------------------------------------------------------------------------------------------
$ 14.58-25.75 231,155 2.00 years $ 19.87 $6,288,000
Directors Equity Incentive Plan
The Company has a director equity incentive plan that was approved by
shareholders and adopted in 2005 (the 2005 Plan), which authorizes the issuance
of up to 50,000 shares of common stock through awards of shares and restricted
shares granted to nonemployee directors of the Company. In 2005, 1,200 common
shares of stock were issued to directors. In addition, 481 shares of restricted
stock at $41.57 were granted, none of which were vested as of March 31, 2006.
The restricted stock vests 25% per year for four years. As of March 31, 2006,
there was $16,000 of unrecognized compensation cost related to nonvested
restricted stock compensation that is expected to be recognized over a weighted
average period of 3.25 years. There were 48,319 shares available for grant under
the 2005 Plan at March 31, 2006. Stock-based compensation expense for directors
totaled $14,000 and zero for the three months ended March 31, 2006 and 2005,
respectively. No stock options were granted to directors during 2005 or in the
three months ended March 31, 2006. The intrinsic value realized by directors
from the exercise of options during the three months ended March 31, 2006 and
2005 was $70,000 and $331,000, respectively.
Stock Option Activity: Three Months Ended
March 31, 2006
------------------------------
Weighted Average
Shares Exercise Price
------------------------------
Outstanding at beginning of period... 53,750 $ 22.58
Granted.............................. - -
Exercised............................ (2,250) 14.58
Expired.............................. - -
-----------
Outstanding at end of period......... 51,500 22.93
===========
Exercisable at end of period......... 51,500 22.93
Director outstanding stock options at March 31, 2006, all exercisable:
- --------------------------------------------------------------------------------------------------------
Weighted Average Remaining Weighted Average Intrinsic
Exercise Price Range Number Contractual Life Exercise Price Value
- --------------------------------------------------------------------------------------------------------
$ 19.375-26.60 51,500 4.87 years $ 22.93 $1,244,000
(12) SUBSEQUENT EVENTS
Subsequent to March 31, 2006, the Company entered into a contract to
purchase 18 acres of land for development in Phoenix for a price of $5,005,000.
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 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. During the quarter ended March 31, 2006, leases on
1,212,000 square feet (5.7%) of EastGroup's total square footage of 21,415,000
expired, and the Company was successful in renewing or re-leasing 81% of that
total. In addition, EastGroup leased 366,000 square feet of other vacant space
during the quarter. During the quarter, average rental rates on new and renewal
leases increased by 8.9%.
EastGroup's total leased percentage was 94.4% at March 31, 2006, a decrease
from 95.3% at December 31, 2005 mainly due to expiring seasonal leases. Leases
scheduled to expire for the remainder of 2006 were 9.8% of the portfolio on a
square foot basis at March 31, 2006. Since the end of the first quarter in 2006,
the Company has experienced positive leasing activity and reduced this
percentage to 8.4% as of May 8, 2006. Property net operating income from same
properties increased 3.8% for the quarter ended March 31, 2006 as compared to
the same period in 2005. The first quarter of 2006 was EastGroup's eleventh
consecutive quarter of positive same property comparisons.
The Company generates new sources of leasing revenue through its
acquisition and development programs. There were no acquisitions during the
first quarter of 2006; however, the Company has projected approximately $25
million in income producing acquisitions in 2006.
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 by
adjusting development start dates according to leasing activity. During the
first quarter of 2006, the Company transferred three properties (207,000 square
feet) with aggregate costs of $14.1 million at the date of transfer from
development to real estate properties. These properties are all 100% leased. The
Company expects to transfer an additional property to the portfolio during the
second quarter (also 100% leased) and several more properties later in the year.
The Company anticipates approximately $80 million in new development starts
during 2006.
The Company sold three properties in Memphis (a noncore market) and several
parcels of land during the first quarter of 2006 for net proceeds of $15.7
million, generating combined gains of $1.1 million. These dispositions
represented an opportunity to recycle capital into acquisitions and development
with greater upside potential. The Company anticipates approximately $21 million
of additional dispositions during the remainder of 2006.
The Company primarily funds its 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 March 2006, the Company signed an application on a $38 million,
nonrecourse first mortgage loan secured by two properties. The loan is expected
to close in August 2006 and will have a fixed interest rate of 5.68%, a ten-year
term and an amortization schedule of 20 years. The proceeds of the note will be
used to repay the maturing mortgages on these properties of approximately $15
million and to reduce variable rate bank borrowings. The Company plans to obtain
approximately $60-70 million of fixed rate debt during 2006, using the proceeds
of the borrowings to reduce variable rate bank line balances.
Tower Automotive, Inc. (Tower) filed for Chapter 11 reorganization in early
2005. Tower, which leases 210,000 square feet from EastGroup under a lease
expiring in December 2010, is current with their rental payments to EastGroup
through May 2006. EastGroup is obligated under a recourse mortgage loan on the
property for $10,195,000 as of March 31, 2006. Property net operating income for
2005 was $1,374,000 for the property occupied by Tower. Rental income due for
2006 is $1,389,000 with estimated property net operating income for 2006 of
$1,366,000. Property net operating income for the first three months of 2006 was
$343,000.
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 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, utilities, 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 months ended March 31, 2006 and 2005
reconciliations of PNOI and FFO Available to Common Stockholders to Net Income.
Three Months Ended March 31,
-------------------------------------------
2006 2005
-------------------------------------------
(In thousands, except per share data)
Income from real estate operations............................................ $ 32,737 29,532
Expenses from real estate operations.......................................... (9,058) (8,241)
-------------------------------------------
PROPERTY NET OPERATING INCOME................................................. 23,679 21,291
Equity in earnings of unconsolidated investment (before depreciation)......... 107 199
Income from discontinued operations (before depreciation and amortization).... 186 580
Interest income............................................................... 22 124
Other income.................................................................. 19 70
Interest expense.............................................................. (6,335) (5,970)
General and administrative expense............................................ (1,808) (1,898)
Minority interest in earnings (before depreciation and amortization).......... (174) (164)
Gain on sale of nondepreciable real estate investments........................ 649 -
Dividends on Series D preferred shares........................................ (656) (656)
-------------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS........................ 15,689 13,576
Depreciation and amortization from continuing operations...................... (10,482) (8,868)
Depreciation and amortization from discontinued operations.................... (125) (203)
Depreciation from unconsolidated investment................................... (33) (37)
Minority interest depreciation and amortization............................... 37 35
Gain on sale of depreciable real estate investments........................... 419 377
-------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................... 5,505 4,880
Dividends on preferred shares................................................. 656 656
-------------------------------------------
NET INCOME.................................................................... $ 6,161 5,536
===========================================
Net income available to common stockholders per diluted share................. $ .25 .23
Funds from operations available to common stockholders per diluted share...... .71 .64
Diluted shares for earnings per share and funds from operations............... 22,208 21,196
===========================================
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 first quarter of 2006 was $.71 per
share compared with $.64 per share for the same period of 2005, an
increase of 10.9%. The increase in FFO was mainly due to a PNOI
increase of $2,388,000, or 11.2%, and gains of $649,000 from sales of
land. The increase in PNOI was primarily attributable to $1,005,000
from 2005 acquisitions, $584,000 from newly developed properties and
$784,000 from same property growth. The first quarter of 2006 was the
seventh consecutive quarter of increased FFO as compared to the
previous year's quarter.
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 3.8% for the quarter ended March 31, 2006. The first quarter
of 2006 was the eleventh consecutive quarter of positive results.
o Occupancy is the percentage of total leasable square footage for which
the lease term has commenced as of the close of the reporting period.
Occupancy at March 31, 2006 was 93.8%; occupancy has ranged from 91.0%
to 94.3% for twelve consecutive quarters.
o Rental rate change represents the rental rate increase or decrease on
new and renewal leases compared to the prior leases on the same space.
Rental rate increases on new and renewal leases averaged 8.9% for the
first quarter of 2006.
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
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 2005 taxable income to its stockholders and expects to
distribute all of its taxable income in 2006. Accordingly, no provision for
income taxes was necessary in 2005, nor is it expected to be necessary for 2006.
FINANCIAL CONDITION
EastGroup's assets were $859,531,000 at March 31, 2006, a decrease of
$4,007,000 from December 31, 2005. Liabilities increased $768,000 to
$497,740,000 and stockholders' equity decreased $4,798,000 to $360,066,000
during the same period. The paragraphs that follow explain these changes in
detail.
ASSETS
Real Estate Properties
Real estate properties decreased $1,848,000 during the three months ended
March 31, 2006 primarily due to the transfer of three properties with total
costs of $19,613,000 to real estate held for sale, which were subsequently sold
during the quarter. This decrease was offset by the transfer of three properties
from development with total costs of $14,091,000, as detailed below.
Real Estate Properties Transferred from Date Cost at
Development in 2006 Location Size Transferred Transfer
-------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
Southridge V........................... Orlando, FL 70,000 01-01-06 $ 4,672
Executive Airport CC II................ Fort Lauderdale, FL 55,000 02-01-06 4,522
Palm River South II.................... Tampa, FL 82,000 03-31-06 4,897
------------- --------------
Total Developments Transferred... 207,000 $ 14,091
============= ==============
The Company made capital improvements of $3,123,000 on existing and
acquired properties (included in the Capital Expenditures table under Results of
Operations). Also, the Company incurred costs of $679,000 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.
Development
The investment in development at March 31, 2006 was $76,740,000 compared to
$77,483,000 at December 31, 2005. Total incremental capital investment for
development for the three months ended March 31, 2006 was $14,027,000. In
addition to the costs of $13,348,000 incurred for the three months ended March
31, 2006 as detailed in the development activity table, the Company incurred
costs of $679,000 on developments during the 12-month period following transfer
to real estate properties.
The Company transferred three developments (all 100% leased at the date of
transfer) to real estate properties during the first quarter of 2006 with a
total investment of $14,091,000 as of the date of transfer.
Costs Incurred
-------------------------------------------------
Costs For the Cumulative Estimated
Transferred Three Months as of Total
DEVELOPMENT Size in 2006(1) Ended 03/31/06 03/31/06 Costs(2)
- ------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Southridge I, Orlando, FL........................ 41,000 $ - 643 3,574 3,900
Sunport Center VI, Orlando, FL................... 63,000 - 88 3,422 3,800
Techway SW III, Houston, TX...................... 100,000 - 88 4,484 5,700
World Houston 15, Houston, TX.................... 63,000 - 974 3,401 5,800
World Houston 21, Houston, TX.................... 68,000 - 699 2,791 3,800
Southridge IV, Orlando, FL....................... 70,000 - 478 3,908 4,700
Santan 10 II, Chandler, AZ....................... 85,000 - 1,832 4,705 4,900
Arion 14, San Antonio, TX........................ 66,000 - 1,192 2,843 3,700
------------------------------------------------------------------------------
Total Lease-up..................................... 556,000 - 5,994 29,128 36,300
------------------------------------------------------------------------------
UNDER CONSTRUCTION
Arion 17, San Antonio, TX........................ 40,000 - 806 2,134 3,500
Oak Creek III, Tampa, FL........................ 61,000 - 1,554 2,496 3,700
Southridge II, Orlando, FL....................... 41,000 - 769 2,225 4,700
Castilian Research Center, Santa Barbara, CA..... 35,000 - 177 4,368 5,800
Oak Creek V, Tampa, FL.......................... 100,000 1,389 - 1,389 6,400
Southridge VI, Orlando, FL....................... 81,000 2,580 - 2,580 5,700
------------------------------------------------------------------------------
Total Under Construction........................... 358,000 3,969 3,306 15,192 29,800
------------------------------------------------------------------------------
Costs Incurred
-------------------------------------------------
Costs For the Cumulative Estimated
Transferred Three Months as of Total
DEVELOPMENT Size in 2006(1) Ended 03/31/06 03/31/06 Costs(2)
- ------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Phoenix, AZ...................................... 129,000 - 64 1,225 6,500
Tucson, AZ....................................... 70,000 - - 326 3,500
Tampa, FL........................................ 364,000 (1,389) 626 4,108 18,900
Orlando, FL...................................... 733,000 (2,580) 1,823 7,828 53,400
West Palm Beach, FL.............................. 20,000 - 33 587 2,300
Fort Myers, FL................................... 126,000 - 74 2,155 8,800
El Paso, TX...................................... 251,000 - - 2,444 9,600
Houston, TX...................................... 1,342,000 - 384 11,898 71,400
San Antonio, TX.................................. 65,000 - 144 1,144 5,200
Jackson, MS...................................... 28,000 - - 705 2,000
------------------------------------------------------------------------------
Total Prospective Development...................... 3,128,000 (3,969) 3,148 32,420 181,600
------------------------------------------------------------------------------
4,042,000 $ - 12,448 76,740 247,700
==============================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING THE
THREE MONTHS ENDED MARCH 31, 2006
Southridge V, Orlando, FL........................ 70,000 $ - - 4,672
Executive Airport CC II, Fort Lauderdale, FL..... 55,000 - 38 4,522
Palm River South II, Tampa, FL................... 82,000 - 862 4,897
-------------------------------------------------------------
Total Transferred to Real Estate Properties........ 207,000 $ - 900 14,091 (3)
=============================================================
(1) Represents costs transferred from Prospective Development (principally land)
to Under Construction during the year.
(2) 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.
(3) Represents cumulative costs at the date of transfer.
Accumulated depreciation on real estate properties increased $3,266,000
primarily due to depreciation expense of $8,803,000 on real estate properties,
offset by accumulated depreciation of $5,494,000 on three properties transferred
to real estate held for sale in 2006 as discussed below.
Real estate held for sale, consisting of two parcels of land in Houston,
Texas, was $773,000 at March 31, 2006 and December 31, 2005. Three Memphis
properties, Senator 1, Senator 2 and Southeast Crossing, were transferred to
real estate held for sale in the first quarter of 2006 and were subsequently
sold during the same period. The sale of these properties continues to reflect
the Company's plan 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.
A summary of the changes in Other Assets is presented in Note 7 in the
Notes to the Consolidated Financial Statements.
LIABILITIES
Mortgage notes payable decreased $2,392,000 during the three months ended
March 31, 2006, primarily due to regularly scheduled principal payments of
$2,235,000 and mortgage loan premium amortization of $110,000.
Notes payable to banks increased $4,611,000 as a result of advances of
$40,625,000 exceeding repayments of $36,014,000. The Company's credit facilities
are described in greater detail under Liquidity and Capital Resources.
See Note 8 in the Notes to the Consolidated Financial Statements for a
summary of changes in Accounts Payable and Accrued Expenses.
STOCKHOLDERS' EQUITY
Distributions in excess of earnings increased $5,893,000 as a result of
dividends on common and preferred stock of $12,054,000 exceeding net income for
financial reporting purposes of $6,161,000.
RESULTS OF OPERATIONS
(Comments are for the three months ended March 31, 2006 compared to the three
months ended March 31, 2005.)
Net income available to common stockholders for the three months ended
March 31, 2006 was $5,505,000 ($.25 per basic and diluted share) compared to
$4,880,000 ($.23 per basic and diluted share) for the same period in 2005.
Diluted EPS for the first quarter of 2006 included a $.05 per share gain on the
sale of real estate properties compared to $.02 per share for gains in 2005.
PNOI increased by $2,388,000, or 11.2%, due to increased average occupancy
and new acquisitions and developments. The Company's percentage leased and
occupied were 94.4% and 93.8%, respectively, at March 31, 2006 compared to 92.9%
and 91.2% at March 31, 2005.
The increase in PNOI was primarily attributable to $1,005,000 from 2005
acquisitions, $584,000 from newly developed properties and $784,000 from same
property growth. These increases in PNOI were offset by increased depreciation
and amortization expense and other costs as discussed below.
The following table presents the components of interest expense for the
three months ended March 31, 2006 and 2005:
Three Months Ended
March 31,
---------------------------- Increase
2006 2005 (Decrease)
------------------------------------------
(In thousands, except rates of interest)
Average bank borrowings....................................... $ 118,822 104,342 14,480
Weighted average variable interest rates...................... 5.61% 3.88%
VARIABLE RATE INTEREST EXPENSE
Variable rate interest (excluding loan cost amortization)..... 1,643 998 645
Amortization of bank loan costs............................... 89 89 -
------------------------------------------
Total variable rate interest expense.......................... 1,732 1,087 645
------------------------------------------
FIXED RATE INTEREST EXPENSE (1)
Fixed rate interest (excluding loan cost amortization)........ 5,412 5,240 172
Amortization of mortgage loan costs........................... 110 111 (1)
------------------------------------------
Total fixed rate interest expense............................. 5,522 5,351 171
------------------------------------------
Total interest................................................ 7,254 6,438 816
Less capitalized interest..................................... (919) (501) (418)
------------------------------------------
TOTAL INTEREST EXPENSE........................................ $ 6,335 5,937 398
==========================================
(1) Does not include interest expense of $33,000 for Lamar II which was sold in
2005 and the operations of which are included in discontinued operations for the
three months ended March 31, 2005. The mortgage for this property was required
to be repaid in full upon the sale of the property.
Interest costs incurred during the period of construction of real estate
properties are capitalized and offset against interest expense. Higher bank
borrowings were attributable to increased acquisition and development activity
during 2005 and 2006. The Company's weighted average variable interest rates for
the first quarter of 2006 were significantly higher than in the same period of
2005.
Mortgage interest expense for the three months ended March 31, 2006 showed
a small increase from the same period of 2005. Increases are primarily due to
the new mortgages and assumed mortgages on acquired properties in 2005 detailed
in the table below. The Company recorded premiums totaling $1,282,000 to adjust
the mortgage loans assumed to fair market value. These premiums are being
amortized over the lives of the assumed mortgages and reduce the contractual
interest expense on these loans. The interest rates shown below for the assumed
mortgages represent the fair market rates at the dates of assumption.
NEW AND ASSUMED MORTGAGES IN 2005 INTEREST RATE DATE AMOUNT
---------------------------------------------------------------------------------------------------------------------
Arion Business Park (assumed)................................ 4.450% 01/21/05 $ 20,500,000
Interstate Distribution Center - Jacksonville (assumed)...... 5.640% 03/31/05 4,642,000
Chamberlain, Lake Pointe, Techway Southwest II and
World Houston 19 & 20..................................... 4.980% 11/30/05 39,000,000
Oak Creek Distribution Center IV (assumed)................... 5.680% 12/07/05 4,076,000
------------- ---------------
Weighted Average/Total Amount.............................. 4.910% $ 68,218,000
============= ===============
These increases were offset by repayments of regularly scheduled principal
payments and the repayment of five mortgages totaling $18,435,000 during 2005 as
shown in the table below.
MORTGAGE LOANS REPAID IN 2005 INTEREST RATE DATE REPAID PAYOFF AMOUNT
-----------------------------------------------------------------------------------------------------------
Westport Commerce Center............................ 8.000% 03/31/05 $ 2,371,000
Lamar Distribution Center II........................ 6.900% 06/30/05 1,781,000
Exchange Distribution Center I...................... 8.375% 07/01/05 1,762,000
Lake Pointe Business Park........................... 8.125% 07/01/05 9,738,000
JetPort Commerce Park............................... 8.125% 09/30/05 2,783,000
------------- ---------------
Weighted Average/Total Amount..................... 8.014% $ 18,435,000
============= ===============
Depreciation and amortization for continuing operations increased
$1,614,000 for the three months ended March 31, 2006 compared to the same period
in 2005. This increase was primarily due to properties acquired in 2005 and
properties transferred from development during 2005 and 2006.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent for
continuing operations increased income by $361,000 in the first quarter of 2006
compared to $484,000 in the same period in 2005.
Capital Expenditures
Capital expenditures for the three months ended March 31, 2006 and 2005
were as follows:
Three Months Ended March 31,
Estimated ------------------------------
Useful Life 2006 2005
---------------------------------------------
(In thousands)
Upgrade on Acquisitions.................... 40 yrs $ 63 17
Tenant Improvements:
New Tenants............................. Lease Life 2,019 843
New Tenants (first generation) (1)...... Lease Life 152 248
Renewal Tenants......................... Lease Life 149 135
Other:
Building Improvements................... 5-40 yrs 515 255
Roofs................................... 5-15 yrs 134 14
Parking Lots............................ 3-5 yrs 63 154
Other................................... 5 yrs 30 26
------------------------------
Total capital expenditures........... $ 3,125 1,692
==============================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
Capitalized Leasing Costs
The Company's leasing costs (principally commissions) are capitalized and
included in Other Assets. The costs are amortized over the terms of the
associated leases and are included in depreciation and amortization expense.
Capitalized leasing costs for the three months ended March 31, 2006 and 2005
were as follows:
Three Months Ended March 31,
Estimated ------------------------------
Useful Life 2006 2005
---------------------------------------------
(In thousands)
Development................................ Lease Life $ 234 352
New Tenants................................ Lease Life 692 342
New Tenants (first generation) (1)......... Lease Life 40 49
Renewal Tenants............................ Lease Life 495 365
------------------------------
Total capitalized leasing costs...... $ 1,461 1,108
==============================
Amortization of leasing costs (2).......... $ 1,064 872
==============================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
(2) Includes discontinued operations.
Discontinued Operations
The results of operations, including interest expense (if applicable), for
the properties sold or held for sale during the periods reported are shown under
Discontinued Operations on the consolidated income statements. The following
tables present the components of revenue and expense for the properties sold
during the three months ended March 31, 2006 and 2005.
Three Months Ended March 31,
------------------------------
Discontinued Operations 2006 2005
-------------------------------------------------------------------------------------------
(In thousands)
Income from real estate operations...................... $ 374 812
Operating expenses from real estate operations.......... (188) (232)
Interest expense........................................ - (33)
Depreciation and amortization........................... (125) (203)
------------------------------
Income from real estate operations...................... 61 344
Gain on sale of real estate investments............. 1,068 377
------------------------------
Income from discontinued operations..................... $ 1,129 721
==============================
A summary of gains on sale of real estate investments for the three months
ended March 31, 2006 and 2005 follows:
Date Net Deferred Recognized
Real Estate Properties Location Size Sold Sales Price Basis Gain Gain
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
2006
Madisonville land................... Madisonville, KY 1.2 Acres 01/05/06 $ 804 27 181 596
Senator 1 & 2/Southeast Crossing.... Memphis, TN 534,000 SF 03/09/06 14,870 14,466 - 404
Dallas land......................... Dallas, TX 0.1 Acre 03/16/06 66 13 - 53
Deferred gain recognized from
previous sale..................... 15
---------------------------------------------
$ 15,740 14,506 181 1,068
=============================================
2005
Delp Distribution Center II......... Memphis, TN 102,000 SF 02/23/05 $ 2,085 1,708 - 377
=============================================
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment, on
January 1, 2006. The new rule required that the compensation cost relating to
share-based payment transactions be recognized in the financial statements and
that the cost be measured based on the fair value of the equity or liability
instruments issued. The Company's adoption of SFAS 123R had an immaterial impact
on its overall financial position and results of operations. See Note 11 in the
Notes to the Consolidated Financial Statements for more information related to
the Company's accounting for stock-based compensation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $9,768,000 for the three
months ended March 31, 2006. The primary other sources of cash were from bank
borrowings and the sale of real estate properties. The Company distributed
$10,844,000 in common and $656,000 in preferred stock dividends during the three
months ended March 31, 2006. Other primary uses of cash were for bank debt
repayments, construction and development of properties, capital improvements at
various properties and mortgage note payments.
Total debt at March 31, 2006 and December 31, 2005 is detailed below. The
Company's bank credit facilities have certain restrictive covenants, and the
Company was in compliance with all of its debt covenants at March 31, 2006 and
December 31, 2005.
March 31, 2006 December 31, 2005
-------------------------------------
(In thousands)
Mortgage notes payable - fixed rate......... $ 344,569 346,961
Bank notes payable - floating rate.......... 121,375 116,764
-------------------------------------
Total debt............................... $ 465,944 463,725
=====================================
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 basis
points; 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
March 31, 2006, the weighted average interest rate was 5.59% on a balance of
$109,700,000. The interest rate on each tranche is currently reset on a monthly
basis. At May 8, 2006, the balance on this line was comprised of a $76 million
tranche at 5.98% and $43.7 million in competitive bid loans at a weighted
average rate of 5.51%.
The Company has a one-year $20 million unsecured revolving credit facility
with PNC Bank, N.A. that matures in November 2006. This credit facility is
customarily used for working cash needs. The interest rate on the facility is
based on LIBOR and varies according to debt-to-total asset value ratios; it is
currently LIBOR plus 110 basis points. At March 31, 2006, the interest rate was
5.93% on $11,675,000.
In January 2006, EastGroup sold its land investment in Madisonville,
Kentucky for $825,000, generating a gain of $777,000, of which $596,000 was
recognized in the first quarter and $181,000 will be deferred to future periods.
In March 2006, EastGroup sold three of its Memphis properties containing a total
of 534,000 square feet for a price of $15,175,000, which generated a gain of
$404,000. The assets sold were Senator I, Senator II and Southeast Crossing. The
proceeds from these sales were used to reduce variable rate bank borrowings.
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.
On March 9, 2006, the Company signed an application on a $38 million,
nonrecourse first mortgage loan secured by two properties. The loan is expected
to close in August 2006 and will have a fixed interest rate of 5.68%, a ten-year
term and an amortization schedule of 20 years. The proceeds of the note will be
used to repay the maturing mortgages on these properties of approximately $15
million and to reduce variable rate bank borrowings.
Contractual Obligations
EastGroup's fixed, noncancelable obligations as of December 31, 2005 did
not materially change during the three months ended March 31, 2006.
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 past several 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.
Interest rates are rising, thereby increasing the costs the Company pays on
bank borrowings and potential new mortgages. Development costs, including the
costs of construction and construction materials, are increasing. The Company
has been able to increase rental rates in all of its development markets to
achieve acceptable yields on investments.
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.
Apr-Dec
2006 2007 2008 2009 2010 Thereafter Total Fair Value
--------------------------------------------------------------------------------------------
Fixed rate debt(1) (in thousands)... $ 42,693 23,398 9,609 39,596 7,904 221,369 344,569 346,571(2)
Weighted average interest rate...... 6.05% 7.36% 6.40% 6.69% 6.11% 6.18% 6.31%
Variable rate debt (in thousands)... $ 11,675 - 109,700 - - - 121,375 121,375
Weighted average interest rate...... 5.93% - 5.59% - - - 5.63%
(1) The fixed rate debt shown above includes the Tower Automotive mortgage,
which has a variable interest rate based on the one-month LIBOR. EastGroup has
an interest rate swap agreement that fixes the rate at 4.03% for the 8-year
term. Interest and related fees result in an annual effective interest rate of
5.3%.
(2) The fair value of the Company's fixed rate debt is estimated based on the
quoted market prices for similar issues or by discounting expected cash flows at
the rates currently offered to the Company for debt of the same remaining
maturities, as advised by the Company's bankers.
As the table above incorporates only those exposures that existed as of
March 31, 2006, 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 56 basis points, interest expense
and cash flows would increase or decrease by approximately $683,000 annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $10,195,000 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 Fair Value Fair Value
Type of Hedge Amount Maturity Date Reference Rate Fixed Rate at 03/31/06 at 12/31/05
---------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,195 12/31/10 1 month LIBOR 4.03% $452 $311
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 March 31,
2006, the Company's disclosure controls and procedures were effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
(ii) Changes in Internal Control Over Financial Reporting.
There was no change in the Company's internal control over financial
reporting during the Company's first fiscal quarter ended March 31, 2006 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in EastGroup's
Form 10-K for the year ended December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Total Number Total Number of Shares Purchased Maximum Number of Shares
of Shares Average Price as Part of Publicly Announced That May Yet Be Purchased
Period Purchased Paid Per Share Plans or Programs Under the Plans or Programs
-------------------------------------------------------------------------------------------------------------------------------
01/01/06 thru 01/31/06 164 (1) $45.04 - 672,300
02/01/06 thru 02/28/06 - - - 672,300
03/01/06 thru 03/31/06 407 (1) 47.01 - 672,300 (2)
---------------------------------------------------------------------
Total 571 $46.44 -
=====================================================================
(1) As permitted under the Company's equity compensation plans, these shares
were withheld by the Company to satisfy the tax withholding obligations for
those employees who elected this option in connection with the vesting of shares
of restricted stock. Shares withheld for tax withholding obligations do not
affect the total number of remaining shares available for repurchase under the
Company's common stock repurchase plan.
(2) EastGroup's Board of Directors has authorized the repurchase of up to
1,500,000 shares of its outstanding common stock. The shares may be purchased
from time to time in the open market or in privately negotiated transactions.
Under the common stock repurchase plan, the Company has purchased a total of
827,700 shares for $14,170,000 (an average of $17.12 per share) with 672,300
shares still authorized for repurchase. The Company has not repurchased any
shares under this plan since 2000.
ITEM 6. EXHIBITS.
(a) Form 10-Q Exhibits:
(31) Rule 13a-14(a)/15d-14(a) Certifications (pursuant to Section 302
of the Sarbanes-Oxley Act of 2002)
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
(32) Section 1350 Certifications (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002)
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: May 10, 2006
EASTGROUP PROPERTIES, INC.
By: /s/ BRUCE CORKERN
------------------------------
Bruce Corkern, CPA
Senior Vice President, Controller
and Chief Accounting Officer
By: /s/ N. KEITH MCKEY
------------------------------
N. Keith McKey, CPA
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer