EXHIBIT 99.2
CONSOLIDATED BALANCE SHEETS
December 31,
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2005 2004
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(In thousands, except for share and per share data)
ASSETS
Real estate properties........................................................ $ 943,585 845,139
Development................................................................... 77,483 39,330
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1,021,068 884,469
Less accumulated depreciation............................................. (206,427) (174,662)
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814,641 709,807
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Real estate held for sale..................................................... 773 2,637
Unconsolidated investment..................................................... 2,618 9,256
Mortgage loans receivable..................................................... - 7,550
Cash.......................................................................... 1,915 1,208
Other assets.................................................................. 43,591 38,206
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TOTAL ASSETS.............................................................. $ 863,538 768,664
===================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable........................................................ $ 346,961 303,674
Notes payable to banks........................................................ 116,764 86,431
Accounts payable & accrued expenses........................................... 22,941 16,181
Other liabilities............................................................. 10,306 8,688
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496,972 414,974
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Minority interest in joint venture.............................................. 1,702 1,884
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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;
22,030,682 shares issued and outstanding at December 31, 2005 and
21,059,164 at December 31, 2004............................................. 2 2
Excess shares; $.0001 par value; 30,000,000 shares authorized;
no shares issued............................................................ - -
Additional paid-in capital on common shares................................... 392,126 357,011
Distributions in excess of earnings........................................... (57,930) (35,207)
Accumulated other comprehensive income........................................ 311 14
Unearned compensation......................................................... (1,971) (2,340)
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364,864 351,806
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 863,538 768,664
===================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------------------
2005 2004 2003
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(In thousands, except per share data)
REVENUES
Income from real estate operations....................................... $ 123,139 111,626 104,501
Equity in earnings of unconsolidated investment.......................... 450 69 -
Gain on involuntary conversion........................................... 243 154 -
Other income............................................................. 264 289 227
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124,096 112,138 104,728
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EXPENSES
Expenses from real estate operations..................................... 34,944 31,230 30,562
Depreciation and amortization............................................ 38,512 32,068 30,591
General and administrative............................................... 6,874 6,711 4,966
Minority interest in joint venture....................................... 484 490 416
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80,814 70,499 66,535
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OPERATING INCOME........................................................... 43,282 41,639 38,193
OTHER INCOME (EXPENSE)
Gain on securities....................................................... - - 421
Interest income.......................................................... 247 121 22
Interest expense......................................................... (23,444) (20,349) (18,878)
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INCOME FROM CONTINUING OPERATIONS.......................................... 20,085 21,411 19,758
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DISCONTINUED OPERATIONS
Income from real estate operations....................................... 942 466 575
Gain on sale of real estate investments.................................. 1,164 1,450 112
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INCOME FROM DISCONTINUED OPERATIONS ....................................... 2,106 1,916 687
----------------------------------------------------
NET INCOME................................................................. 22,191 23,327 20,445
Preferred dividends-Series A............................................. - - 2,016
Preferred dividends-Series B............................................. - - 2,598
Preferred dividends-Series D............................................. 2,624 2,624 1,305
Costs on redemption of Series A preferred................................ - - 1,778
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NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................ $ 19,567 20,703 12,748
====================================================
BASIC PER COMMON SHARE DATA
Income from continuing operations........................................ $ .81 .91 .68
Income from discontinued operations...................................... .10 .09 .04
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Net income available to common stockholders.............................. $ .91 1.00 .72
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Weighted average shares outstanding...................................... 21,567 20,771 17,819
====================================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations........................................ $ .80 .89 .66
Income from discontinued operations...................................... .09 .09 .04
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Net income available to common stockholders.............................. $ .89 .98 .70
====================================================
Weighted average shares outstanding...................................... 21,892 21,088 18,194
====================================================
Dividends declared per common share........................................ $ 1.94 1.92 1.90
====================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Undistributed
Earnings Accumulated
Additional (Distributions Other
Preferred Common Paid-In Unearned in Excess of Comprehensive
Stock Stock Capital Compensation Earnings) Income (Loss) Total
----------------------------------------------------------------------------------
(In thousands, except for share and per share data)
BALANCE, DECEMBER 31, 2002........................ $108,535 2 243,562 (2,781) 7,109 58 356,485
Comprehensive income
Net income...................................... - - - - 20,445 - 20,445
Net unrealized change in investment securities.. - - - - - (355) (355)
Net unrealized change in cash flow hedge........ - - - - - 267 267
---------
Total comprehensive income.................... 20,357
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Common dividends declared - $1.90 per share....... - - - - (35,452) - (35,452)
Preferred stock dividends declared................ - - - - (5,919) - (5,919)
Redemption of 1,725,000 shares of Series A
preferred stock................................. (41,357) - - - (1,778) - (43,135)
Conversion of 2,800,000 shares of cumulative
convertible preferred stock into 3,181,920
shares of common stock.......................... (67,178) - 67,178 - - - -
Issuance of 1,320,000 shares of Series D
preferred stock, net of expenses................ 32,326 - - - - - 32,326
Issuance of 1,418,887 shares of common stock,
common stock offerings, net of expenses......... - - 38,974 - - - 38,974
Stock-based compensation, net of forfeitures...... - - 2,473 474 - - 2,947
Issuance of 12,925 shares of common stock,
dividend reinvestment plan...................... - - 362 - - - 362
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BALANCE, DECEMBER 31, 2003........................ 32,326 2 352,549 (2,307) (15,595) (30) 366,945
Comprehensive income
Net income...................................... - - - - 23,327 - 23,327
Net unrealized change in cash flow hedge........ - - - - - 44 44
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Total comprehensive income.................... 23,371
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Common dividends declared - $1.92 per share....... - - - - (40,315) - (40,315)
Preferred stock dividends declared................ - - - - (2,624) - (2,624)
Stock-based compensation, net of forfeitures ..... - - 4,114 (33) - - 4,081
Issuance of 10,247 shares of common stock,
dividend reinvestment plan...................... - - 357 - - - 357
Other............................................. - - (9) - - - (9)
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BALANCE, DECEMBER 31, 2004........................ 32,326 2 357,011 (2,340) (35,207) 14 351,806
Comprehensive income
Net income...................................... - - - - 22,191 - 22,191
Net unrealized change in cash flow hedge........ - - - - - 297 297
--------
Total comprehensive income.................... 22,488
--------
Common dividends declared - $1.94 per share....... - - - - (42,290) - (42,290)
Preferred stock dividends declared................ - - - - (2,624) - (2,624)
Issuance of 860,000 shares of common stock,
common stock offering, net of expenses.......... - - 31,597 - - - 31,597
Stock-based compensation, net of forfeitures ..... - - 3,211 369 - - 3,580
Issuance of 8,279 shares of common stock,
dividend reinvestment plan...................... - - 346 - - - 346
Other............................................. - - (39) - - - (39)
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BALANCE, DECEMBER 31, 2005........................ $ 32,326 2 392,126 (1,971) (57,930) 311 364,864
==================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
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2005 2004 2003
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(In thousands)
OPERATING ACTIVITIES
Net income......................................................................... $ 22,191 23,327 20,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization from continuing operations......................... 38,512 32,068 30,591
Depreciation and amortization from discontinued operations....................... 794 1,383 1,459
Minority interest depreciation and amortization.................................. (141) (143) (145)
Amortization of mortgage loan premiums........................................... (333) (24) -
Gain on sale of real estate investments from discontinued operations............. (1,164) (1,450) (112)
Gain on involuntary conversion................................................... (243) (154) -
Gain on real estate investment trust (REIT) shares............................... - - (421)
Stock-based compensation expense................................................. 2,048 1,256 620
Equity in earnings of unconsolidated investment net of distributions............. (20) (69) -
Changes in operating assets and liabilities:
Accrued income and other assets................................................ 579 (2,560) (1,139)
Accounts payable, accrued expenses and prepaid rent............................ 4,750 3,890 (1,000)
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NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 66,973 57,524 50,298
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INVESTING ACTIVITIES
Real estate development............................................................ (58,192) (19,196) (22,238)
Purchases of real estate........................................................... (46,507) (19,666) (19,034)
Real estate improvements........................................................... (11,262) (10,866) (10,929)
Purchase of unconsolidated investment.............................................. - (9,187) -
Distributions from unconsolidated investment....................................... 6,658 - -
Advances on mortgage loans receivable.............................................. - (7,550) -
Repayments on mortgage loans receivable............................................ 7,550 - 13
Proceeds from sale of real estate investments...................................... 6,034 5,340 841
Proceeds from sale and liquidation of REIT shares.................................. - - 1,729
Changes in other assets and other liabilities...................................... (3,249) (4,235) (4,907)
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NET CASH USED IN INVESTING ACTIVITIES................................................ (98,968) (65,360) (54,525)
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FINANCING ACTIVITIES
Proceeds from bank borrowings...................................................... 187,286 153,572 175,944
Repayments on bank borrowings...................................................... (156,953) (119,691) (197,351)
Proceeds from mortgage notes payable............................................... 39,000 30,300 45,500
Principal payments on mortgage notes payable....................................... (25,880) (14,416) (9,599)
Debt issuance costs................................................................ (664) (1,436) (716)
Distributions paid to stockholders................................................. (44,907) (42,550) (42,749)
Redemption of Series A preferred stock............................................. - - (43,135)
Proceeds from Series D preferred stock offering.................................... - - 32,326
Proceeds from common stock offerings............................................... 31,597 - 38,974
Proceeds from exercise of stock options............................................ 1,507 2,592 2,539
Proceeds from dividend reinvestment plan........................................... 346 357 362
Other.............................................................................. 1,370 (1,470) 2,535
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NET CASH PROVIDED BY FINANCING ACTIVITIES............................................ 32,702 7,258 4,630
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INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 707 (578) 403
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................................... 1,208 1,786 1,383
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CASH AND CASH EQUIVALENTS AT END OF YEAR........................................... $ 1,915 1,208 1,786
==============================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $2,485, $1,715 and $2,077
for 2005, 2004 and 2003, respectively............................................ $ 22,842 19,638 18,068
Conversion of cumulative preferred stock into common stock......................... - - 67,178
Fair value of debt assumed by the Company in the purchase of real estate........... 30,500 2,091 1,478
Common stock awards issued to employees and directors, net of forfeitures.......... 1,000 879 (73)
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of EastGroup
Properties, Inc. (the Company or EastGroup), its wholly-owned subsidiaries and
its investment in any joint ventures in which the Company has a controlling
interest. At December 31, 2005, 2004 and 2003, the Company had a controlling
interest in one joint venture: the 80% owned University Business Center. The
Company records 100% of the joint venture's assets, liabilities, revenues and
expenses with minority interest provided for in accordance with the joint
venture agreement. The equity method of accounting is used for the Company's 50%
undivided tenant-in-common interest in Industry Distribution Center II (see Note
3). All significant intercompany transactions and accounts have been eliminated
in consolidation.
(b) Income Taxes
EastGroup, a Maryland corporation, has qualified as a real estate
investment trust (REIT) under Sections 856-860 of the Internal Revenue Code and
intends to continue to qualify as such. To maintain its status as a REIT, the
Company is required to distribute 90% of its ordinary taxable income to its
stockholders. The Company has the option of (i) reinvesting the sales price of
properties sold through tax-deferred exchanges, allowing for a deferral of
capital gains on the sale, (ii) paying out capital gains to the stockholders
with no tax to the Company, or (iii) treating the capital gains as having been
distributed to the stockholders, paying the tax on the gain deemed distributed
and allocating the tax paid as a credit to the stockholders. The Company
distributed all of its 2005, 2004 and 2003 taxable income to its stockholders.
Accordingly, no provision for income taxes was necessary. The following table
summarizes the federal income tax treatment for all distributions by the Company
for the years ended 2005, 2004 and 2003.
Federal Income Tax Treatment of Share Distributions
Years Ended December 31,
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2005 2004 2003
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Common Share Distributions:
Ordinary income........................... $ 1.4816 1.4860 1.68388
Return of capital......................... .3724 .4060 .21612
Long-term 15% capital gain................ .0032 .0140 -
Long-term 25% capital gain................ .0828 .0140 -
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Total Common Distributions.................... $ 1.9400 1.9200 1.90000
=======================================
Series A Preferred Share Distributions:
Ordinary income........................... $ - - 1.08125
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Total Preferred A Distributions............... $ - - 1.08125
=======================================
Series B Preferred Share Distributions:
Ordinary income........................... $ - - 1.64100
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Total Preferred B Distributions............... $ - - 1.64100
=======================================
Series D Preferred Share Distributions:
Ordinary income........................... $ 1.8788 1.9512 .98830
Long-term 15% capital gain................ .0044 .0180 -
Long-term 25% capital gain................ .1044 .0184 -
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Total Preferred D Distributions............... $ 1.9876 1.9876 .98830
=======================================
The Company's income differs for tax and financial reporting purposes
principally because of (1) the timing of the deduction for the provision for
possible losses and losses on investments, (2) the timing of the recognition of
gains or losses from the sale of investments, (3) different depreciation methods
and lives, and (4) real estate properties having a different basis for tax and
financial reporting purposes.
(c) Income Recognition
Minimum rental income from real estate operations is recognized on a
straight-line basis. The straight-line rent calculation on leases includes the
effects of rent concessions and scheduled rent increases, and the calculated
straight-line rent income is recognized over the lives of the individual leases.
The Company maintains allowances for doubtful accounts receivables, including
deferred rent receivable, based upon estimates determined by management.
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.
Interest income on mortgage loans receivable is recognized based on the
accrual method unless a significant uncertainty of collection exists. If a
significant uncertainty exists, interest income is recognized as collected.
The Company recognizes gains on sales of real estate in accordance with the
principles set forth in Statement of Financial Accounting Standards (SFAS) No.
66, "Accounting for Sales of Real Estate." Upon closing of real estate
transactions, the provisions of SFAS No. 66 require
consideration for the transfer of rights of ownership to the purchaser, receipt
of an adequate cash down payment from the purchaser, adequate continuing
investment by the purchaser and no substantial continuing involvement by the
Company. If the requirements for recognizing gains have not been met, the sale
and related costs are recorded, but the gain is deferred and recognized by a
method other than the full accrual method.
(d) Real Estate Properties
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
$32,693,000, $29,249,000 and $28,128,000 for 2005, 2004 and 2003, respectively.
(e) Capitalized Development Costs
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. As the property becomes occupied, interest,
depreciation, property taxes and other costs for the percentage occupied only
are expensed as incurred. When the property becomes 80% occupied or one year
after completion of the shell construction, whichever comes first, the property
is no longer considered a development property and becomes an industrial
property. When the property becomes classified as an industrial property, the
entire property is depreciated accordingly, and all interest and property taxes
are expensed.
(f) 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 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. Interest expense is not
generally allocated to the properties that are held for sale or whose operations
are included under Discontinued Operations unless the mortgage is required to be
paid in full upon the sale of the property.
(g) Investment in Real Estate Investment Trusts
Marketable equity securities owned by the Company are categorized as
available-for-sale securities. Unrealized holding gains and losses are reflected
as a net amount in a separate component of stockholders' equity until realized.
The costs of these investments are adjusted to fair market value with an equity
adjustment to account for unrealized gains/losses as indicated above. At
December 31, 2005 and 2004, the Company had no investments in marketable equity
securities.
(h) Derivative Instruments and Hedging Activities
The Company applies SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires that all derivatives be recognized as
either assets or liabilities in the balance sheet and measured at fair value.
Changes in fair value are to be reported either in earnings or as a component of
stockholders' equity depending on the intended use of the derivative and the
resulting designation. Entities applying hedge accounting are required to
establish at the inception of the hedge the method used to assess the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. The Company has an interest
rate swap agreement, which is summarized in Note 6.
(i) Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
(j) Amortization
Debt origination costs are deferred and amortized using the straight-line
method over the term of the loan. Amortization of loan costs for continuing
operations was $801,000, $831,000 and $797,000 for 2005, 2004 and 2003,
respectively.
Leasing costs are deferred and amortized using the straight-line method
over the term of the lease. Leasing costs amortization expense for continuing
and discontinued operations was $3,863,000, $3,392,000 and $3,562,000 for 2005,
2004 and 2003, respectively. Amortization expense for in-place lease intangibles
is disclosed in Business Combinations and Acquired Intangibles.
(k) 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 $2,750,000, $810,000 and $360,000 for
2005, 2004 and 2003, respectively. Amortization of above and below market leases
was immaterial for all periods presented. Projected amortization of in-place
lease intangibles for the next five years as of December 31, 2005 is as follows:
Year (In thousands)
-------------------------------------------
2006........................ $2,480
2007........................ 1,540
2008........................ 900
2009........................ 604
2010........................ 256
Total cost of the properties acquired for 2005 was $76,786,000, of which
$70,882,000 was allocated to real estate properties. In accordance with SFAS No.
141, intangibles associated with the purchases of real estate were allocated as
follows: $5,882,000 to in-place lease intangibles and $337,000 to above market
leases (both included in Other Assets on the balance sheet) and $315,000 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 $46,286,000 for the
properties and intangibles acquired, assumed mortgages of $29,218,000 and
recorded premiums totaling $1,282,000 to adjust the mortgage loans assumed to
fair 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 December 31, 2005 and 2004.
(l) Stock-Based Compensation
The Company has a management incentive plan, which was adopted in 2004 (the
"2004 Plan"), under which employees of the Company are issued common stock in
the form of restricted stock and may, in the future, be issued other forms of
stock-based compensation. Vesting in the stock is dependent on the achievement
of goals and/or the passage of time. 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, while also aligning
participants' interests with shareholder interests. The 2004 Plan replaced a
previous plan adopted in 1994 (the "1994 Plan"), under which employees of the
Company were also granted stock option awards, restricted stock and other forms
of stock-based compensation.
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. 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.
Expected option lives for options granted to directors were eight years for
2003. The fair value of each stock option grant is estimated on the grant date
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for 2003: risk-free interest rate of 3.41%, dividend yield of
11.13%, and volatility factor of 18.8%. The weighted average fair value of each
option granted for 2003 was $.36. No stock options were granted during 2005 and
2004. Stock-based compensation expense for options was immaterial for 2004 and
2003, with an immaterial effect to pro forma net income available to common
stockholders and no effect to basic or diluted
earnings per share (EPS). The following table illustrates the effect on net
income and earnings per share if the fair value based method had been applied to
all outstanding and unvested awards in each period.
---------------------------------------
2005 2004 2003
---------------------------------------
(In thousands, except per share data)
Net income available to common stockholders as reported........... $ 19,567 20,703 12,748
Add: Stock options compensation expense
included in reported net income.......................... - 1 8
Deduct: Total stock options compensation
expense determined under fair value based
method for all awards.................................... - (1) (13)
---------------------------------------
Net income available to common stockholders pro forma............. $ 19,567 20,703 12,743
=======================================
Earnings per share:
Basic - as reported...................................... $ .91 1.00 .72
Basic - pro forma........................................ .91 1.00 .72
Diluted - as reported.................................... .89 .98 .70
Diluted - pro forma...................................... .89 .98 .70
(m) Earnings Per Share
Basic EPS represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting period. The
Company's basic EPS is calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding.
Diluted EPS represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of common shares
for all dilutive potential common shares outstanding during the reporting
period. The Company calculates diluted EPS by totaling net income available to
common stockholders plus dividends on dilutive convertible preferred shares and
dividing this numerator by the weighted average number of common shares
outstanding plus the dilutive effect of stock options, nonvested restricted
stock and convertible preferred stock, had the options or conversions been
exercised. The dilutive effect of stock options and 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. The
dilutive effect of convertible securities was determined using the if-converted
method.
(n) Involuntary Conversion
In 2005, the Company recognized a gain on an involuntary conversion of
$243,000 resulting from insurance proceeds exceeding the net book value of a
roof replaced due to hurricane damage. In 2004, the Company recognized a gain on
an involuntary conversion of $154,000 resulting from insurance proceeds
exceeding the net book value of two roofs replaced due to tornado damage.
(o) Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles (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.
(p) New Accounting Pronouncements
In December 2004, the 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. SFAS 153 amends APB Opinion No. 29 (Opinion 29), Accounting for
Nonmonetary Transactions, which was issued in 1973. The amendments made by SFAS
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 replaced 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 SFAS 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 periods presented nor does it expect to have
nonmonetary asset exchanges in the immediate future.
In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations-an interpretation of FASB Statement No.
143. This Interpretation clarifies that the term conditional asset retirement
obligation as used in SFAS 143, Accounting for Asset Retirement Obligations,
refers to a legal obligation to perform an asset retirement activity in which
the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of settlement.
Thus, the timing and (or) method of settlement may be conditional on a future
event. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when
incurred-generally upon acquisition, construction, or development and (or)
through the normal operation of the asset. Uncertainty about the timing and (or)
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. Statement 143 acknowledges that in some cases, sufficient information
may not be available to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The Company adopted this Interpretation on December 31,
2005 with no impact to its financial positions or results of operations.
(q) Reclassifications
Certain reclassifications have been made in the 2004 and 2003 consolidated
financial statements to conform to the 2005 presentation.
(2) REAL ESTATE OWNED
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 real estate properties at December 31, 2005 and 2004 were as follows:
December 31,
----------------------------
2005 2004
----------------------------
(In thousands)
Real estate properties:
Land................................................ $ 152,954 139,857
Buildings and building improvements................. 656,897 595,852
Tenant and other improvements....................... 133,734 109,430
Development............................................ 77,483 39,330
----------------------------
1,021,068 884,469
Less accumulated depreciation....................... (206,427) (174,662)
----------------------------
$ 814,641 709,807
============================
The Company is currently developing the properties detailed below. Costs
incurred include capitalization of interest costs during the period of
construction. The interest costs capitalized on real estate properties for 2005
were $2,485,000 compared to $1,715,000 for 2004 and $2,077,000 for 2003.
Total capital investment for development during 2005 was $58,192,000. In
addition to the costs incurred for the year as detailed in the table below,
development costs included $4,017,000 for improvements on developments during
the 12-month period following transfer to Real Estate Properties.
Costs Incurred
----------------------------------------------
Costs For the Year
Transferred Ended Cumulative Estimated
Size in 2005 12/31/05 as of 12/31/05 Total Costs
---------------------------------------------------------------------------
DEVELOPMENT (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Executive Airport CC II, Fort Lauderdale, FL..... 55,000 $ - 1,513 4,484 4,600
Southridge I, Orlando, FL........................ 41,000 - 2,087 2,931 3,900
Southridge V, Orlando, FL........................ 70,000 - 3,390 4,672 4,900
Palm River South II, Tampa, FL................... 82,000 1,457 2,578 4,035 4,500
Sunport Center VI, Orlando, FL................... 63,000 1,044 2,290 3,334 3,800
Techway SW III, Houston, TX...................... 100,000 1,150 3,246 4,396 5,700
---------------------------------------------------------------------------
Total Lease-up..................................... 411,000 3,651 15,104 23,852 27,400
---------------------------------------------------------------------------
UNDER CONSTRUCTION
World Houston 15, Houston, TX.................... 63,000 1,007 1,420 2,427 5,800
World Houston 21, Houston, TX.................... 68,000 569 1,523 2,092 3,800
Southridge IV, Orlando, FL....................... 70,000 1,905 1,525 3,430 4,700
Santan 10 II, Chandler, AZ....................... 85,000 1,383 1,490 2,873 4,900
Arion 14, San Antonio, TX........................ 66,000 517 1,134 1,651 3,700
Arion 17, San Antonio, TX........................ 40,000 710 618 1,328 3,500
Oak Creek III, Tampa, FL........................ 61,000 942 - 942 3,700
Southridge II, Orlando, FL....................... 41,000 1,456 - 1,456 4,700
Castilian Research Center, Santa Barbara, CA..... 35,000 - 4,191 4,191 5,800
---------------------------------------------------------------------------
Total Under Construction........................... 529,000 8,489 11,901 20,390 40,600
---------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Phoenix, AZ...................................... 129,000 (1,383) 348 1,161 6,500
Tucson, AZ....................................... 70,000 - - 326 3,500
Tampa, FL........................................ 464,000 (2,399) 5,813 4,871 25,300
Orlando, FL...................................... 814,000 (4,405) 5,824 8,585 59,100
West Palm Beach, FL.............................. 20,000 - 76 554 2,300
Fort Myers, FL................................... 126,000 - 2,081 2,081 8,800
El Paso, TX...................................... 251,000 - - 2,444 9,600
Houston, TX...................................... 1,317,000 (2,726) 8,336 11,514 69,300
San Antonio, TX.................................. 65,000 (1,227) 2,227 1,000 5,200
Jackson, MS...................................... 28,000 - 124 705 2,000
---------------------------------------------------------------------------
Total Prospective Development...................... 3,284,000 (12,140) 24,829 33,241 191,600
---------------------------------------------------------------------------
4,224,000 $ - 51,834 77,483 259,600
===========================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING THE
YEAR ENDED DECEMBER 31, 2005
Santan 10, Chandler, AZ.......................... 65,000 $ - 187 3,493
Sunport Center V, Orlando, FL.................... 63,000 - 5 3,259
Palm River South I, Tampa, FL.................... 79,000 - 650 3,842
World Houston 16, Houston, TX.................... 94,000 - 1,499 4,766
--------------------------------------------------------------
Total Transferred to Real Estate Properties........ 301,000 $ - 2,341 15,360 (1)
==============================================================
(1) Represents cumulative costs at the date of transfer.
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 8.26 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.
During the second quarter of 2005, Lamar Distribution Center II was transferred
to real estate held for sale and was subsequently sold during the quarter.
During the third quarter, the Company sold the Tampa land with a carrying amount
of $202,000. At December 31, 2005, the Houston land with a total carrying value
of $773,000 was held for sale. No loss is anticipated on the sale of the
properties that are held for sale.
In accordance with the guidelines established under 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.
Accordingly, Discontinued Operations includes interest expense of $64,000,
$132,000 and $137,000 for 2005, 2004 and 2003, respectively. A summary of gains
on sale of real estate investments for the years ended December 31, 2005, 2004
and 2003 follows:
Gains on Sale of Real Estate Investments
Date Net Recognized
Real Estate Properties Location Size Sold Sales Price Basis Gain
----------------------------------------------------------------------------------------------------------------------------
(In thousands)
2005
Delp Distribution Center II......... Memphis, TN 102,000 SF 02/23/05 $ 2,085 1,708 377
Lamar Distribution Center II........ Memphis, TN 151,000 SF 06/30/05 3,710 2,956 754
Sabal Land.......................... Tampa, FL 1.9 Acres 09/30/05 239 206 33
--------------------------------------
$ 6,034 4,870 1,164
======================================
2004
Getwell Distribution Center......... Memphis, TN 26,000 SF 06/30/04 $ 746 685 61
Sample 95 Business Park III......... Pompano Beach, FL 18,000 SF 07/01/04 1,994 711 1,283
Viscount Distribution Center........ Dallas, TX 104,000 SF 08/20/04 2,197 2,091 106
Sabal Land.......................... Tampa, FL 4.4 Acres 10/04/04 403 403 -
--------------------------------------
$ 5,340 3,890 1,450
======================================
2003
Air Park Distribution Center II..... Memphis, TN 17,000 SF 02/14/03 $ 445 339 106
Orlando Central Park Land........... Orlando, FL 2.6 Acres 07/30/03 396 390 6
--------------------------------------
$ 841 729 112
======================================
The following schedule indicates approximate future minimum rental receipts
under noncancelable leases for real estate properties by year as of December 31,
2005:
Future Minimum Rental Receipts Under Noncancelable Leases
Years Ended December 31, (In thousands)
--------------------------------------------------------------
2006...................................... $ 97,601
2007...................................... 80,650
2008...................................... 61,609
2009...................................... 44,313
2010...................................... 28,754
Thereafter................................ 53,772
---------------
Total minimum receipts................. $ 366,699
===============
Ground Leases
As of December 31, 2005, the Company owned two properties in Florida, two
properties in Texas, one property in Arizona and one property in Mississippi
that are subject to ground leases. These leases have terms of 40 to 75 years,
expiration dates of August 2031 to November 2076, and renewal options of 15 to
35 years, except for the one lease in Arizona which is automatically renewed
annually. Total lease expenditures for the years ended December 31, 2005, 2004
and 2003 were $686,000, $679,000 and $676,000, respectively. Payments on five of
the properties are subject to increases at 3 to 10 year intervals based upon the
agreed or appraised fair market value of the leased premises on the adjustment
date or the Consumer Price Index percentage increase since the base rent date.
The following schedule indicates approximate future minimum lease payments for
these properties by year as of December 31, 2005:
Future Minimum Ground Lease Payments
Years Ended December 31, (In thousands)
----------------------------------------------------------------
2006...................................... $ 688
2007...................................... 687
2008...................................... 687
2009...................................... 687
2010...................................... 687
Thereafter................................ 17,197
-----------------
Total minimum payments................. $ 20,633
=================
(3) 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 through December 2014 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 $2,618,000 at December 31, 2005, a decrease of $6,638,000 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. The co-owner's 50% share of the loan
proceeds ($6.65 million) were paid to EastGroup and reduced the Company's
mortgage loan receivable (see Note 4). EastGroup's 50% share of the loan
proceeds ($6.65 million) reduced the carrying value of the investment.
EastGroup's share of this mortgage was $6,585,000 at December 31, 2005.
(4) 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
3, 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 $800,000 note was repaid in full to EastGroup during
the last half of 2005. Mortgage interest income for these notes was $224,000 for
2005 and $65,000 for 2004.
(5) OTHER ASSETS
A summary of the Company's Other Assets follows:
December 31,
--------------------------
2005 2004
--------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization....... $ 13,630 12,003
Deferred rent receivable, net of allowance for doubtful accounts............... 12,773 10,832
Accounts receivable, net of allowance for doubtful accounts.................... 2,930 2,316
Acquired in-place lease intangibles, net of accumulated amortization
of $3,580 and $999 for 2005 and 2004, respectively........................... 6,062 2,931
Goodwill....................................................................... 990 990
Prepaid expenses and other assets.............................................. 7,206 9,134
--------------------------
$ 43,591 38,206
==========================
(6) NOTES PAYABLE TO BANKS
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 December 31,
2005, the weighted average interest rate was 5.15% on a balance of $113,000,000.
The interest rate on each tranche is currently reset on a monthly basis.
The Company has a one-year $20 million unsecured revolving credit facility
with PNC Bank, N.A. that matured in December 2005 and was renewed with a
maturity date of 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
1.10%. At December 31, 2005, the interest rate was 5.49% on $3,764,000.
Average bank borrowings were $100,504,000 in 2005 compared to $66,867,000
in 2004 with weighted average interest rates of 4.53% in 2005 compared to 2.76%
in 2004. Weighted average interest rates including amortization of loan costs
were 4.89% for 2005 and 3.36% for 2004. Amortization of bank loan costs was
$357,000, $404,000 and $409,000 for 2005, 2004 and 2003, respectively.
The Company's bank credit facilities have certain restrictive covenants,
and the Company was in compliance with all of its debt covenants at December 31,
2005.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $10,345,000 Tower Automotive Center
recourse mortgage (see Note 7). Under the swap agreement, the Company
effectively pays a fixed rate of interest over the term of the agreement without
the exchange of the underlying notional amount. This swap is designated as a
cash flow hedge and is considered to be fully effective in hedging the variable
rate risk associated with the Tower mortgage loan. Changes in the fair value of
the swap are
recognized in accumulated other comprehensive income (loss). The Company does
not hold or issue this type of derivative contract for trading or speculative
purposes. The interest rate swap agreement is summarized as follows:
Current Notional Fair Value Fair Value
Type of Hedge Amount Maturity Date Reference Rate Fixed Rate at 12/31/05 at 12/31/04
---------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,345(1) 12/31/10 1 month LIBOR 4.03% $311 $14
(1) This mortgage is backed by a letter of credit totaling $10,464,000 at
December 31, 2005. The letter of credit is renewable annually and expires on
January 15, 2011.
(7) MORTGAGE NOTES PAYABLE
A summary of mortgage notes payable follows:
Carrying Amount
Monthly of Securing Balance at December 31,
P&I Maturity Real Estate at ------------------------
Property Rate Payment Date December 31, 2005 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Westport Commerce Center............................. 8.000% $ 28,021 Repaid 03/05 $ - - 2,407
Lamar Distribution Center II......................... 6.900% 16,925 Repaid 06/05 - - 1,820
Exchange Distribution Center I....................... 8.375% 21,498 Repaid 07/05 - - 1,816
Lake Pointe Business Park............................ 8.125% 81,675 Repaid 07/05 - - 9,830
Jetport Commerce Park................................ 8.125% 33,769 Repaid 09/05 - - 2,913
Huntwood Distribution Center......................... 7.990% 100,250 08/22/06 15,292 10,761 11,089
Wiegman Distribution Center.......................... 7.990% 46,269 08/22/06 7,893 4,967 5,118
Arion Business Park(1)............................... 4.450% 102,329 12/01/06 33,063 20,784 -
World Houston 1 & 2.................................. 7.770% 33,019 04/15/07 5,053 4,122 4,195
E. University I & II, Broadway VI, 55th Avenue
and Ethan Allen.................................... 8.060% 96,974 06/26/07 20,711 10,653 10,945
Dominguez, Kingsview, Walnut, Washington,
Industry and Shaw.................................. 6.800% 358,770 03/01/09 54,530 37,532 39,222
Auburn Facility...................................... 8.875% 52,109 09/01/09 12,992 1,988 2,416
Tower Automotive Center (recourse)(2)................ 5.300% Semiannual 01/15/11 9,879 10,345 10,620
Interstate I, II & III, Venture, Stemmons Circle,
Glenmont I & II, West Loop I & II, Butterfield
Trail and Rojas.................................... 7.250% 325,263 05/01/11 44,521 41,529 42,388
America Plaza, Central Green and World Houston 3-9... 7.920% 191,519 05/10/11 26,834 24,958 25,266
University Business Center (120 & 130 Cremona)....... 6.430% 81,856 05/15/12 9,561 6,372 6,925
University Business Center (125 & 175 Cremona)....... 7.980% 88,607 06/01/12 13,123 10,499 10,715
Oak Creek Distribution Center IV..................... 5.680% 31,253 06/01/12 7,253 4,439 -
Airport Distribution, Southpointe, Broadway I, III
& IV, Southpark, 51st Avenue, Chestnut, Main
Street, Interchange Business Park,
North Stemmons I and World Houston 12 & 13......... 6.860% 279,149 09/01/12 43,146 37,801 38,531
Interstate Distribution Center - Jacksonville........ 5.640% 31,645 01/01/13 7,372 4,934 -
Broadway V, 35th Avenue, Sunbelt, Freeport,
Lockwood, Northwest Point, Techway Southwest I
and World Houston 10, 11 & 14...................... 4.750% 259,403 09/05/13 45,085 43,245 44,278
Kyrene Distribution Center I......................... 9.000% 11,246 07/01/14 2,406 805 865
World Houston 17, Kirby, Americas Ten I, Shady
Trail, Palm River North I, II & III and
Westlake I & II(3)................................. 5.680% 143,420 10/10/14 30,799 30,300 30,300
Chamberlain, Lake Pointe, Techway Southwest II
and World Houston 19 & 20.......................... 4.980% 256,952 12/05/15 23,853 39,000 -
Blue Heron Distribution Center II.................... 5.390% 16,176 02/29/20 5,832 1,927 2,015
-----------------------------------------
$ 419,198 346,961 303,674
=========================================
(1) Interest only is paid on this note until December 2006.
(2) The Tower Automotive mortgage 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%. Semiannual principal payments are made on this
note; interest is paid monthly. (See Note 6.) The principal amounts of these
payments increase incrementally as the loan approaches maturity.
(3) Interest only is paid on this note until November 2006.
The Company currently intends to repay its debt service obligations, both
in the short- and long-term, through its operating cash flows, borrowings under
its lines of credit, proceeds from new mortgage debt and/or proceeds from the
issuance of equity instruments. Principal payments due during the next five
years as of December 31, 2005 are as follows:
Year (In thousands)
---------------------------------------
2006................... $ 45,044
2007................... 23,398
2008................... 9,608
2009................... 39,596
2010................... 7,904
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
December 31,
--------------------------
2005 2004
--------------------------
(In thousands)
Property taxes payable............................ $ 8,224 6,689
Development costs payable......................... 2,777 921
Dividends payable................................. 2,363 2,355
Other payables and accrued expenses............... 9,577 6,216
---------------------------
$ 22,941 16,181
===========================
(9) COMMON STOCK ACTIVITY
The following table presents the common stock activity for the three years
ended December 31, 2005:
Years Ended December 31,
-------------------------------------------------
2005 2004 2003
-------------------------------------------------
Common Shares
Shares outstanding at beginning of year........... 21,059,164 20,853,780 16,104,356
Conversion of preferred into common stock......... - - 3,181,920
Common stock offerings............................ 860,000 - 1,418,887
Stock options exercised........................... 72,415 167,380 139,584
Dividend reinvestment plan........................ 8,279 10,247 12,925
Management incentive stock awarded................ - - 2,108
Incentive restricted stock granted................ 33,446 36,767 -
Incentive restricted stock forfeited.............. (3,396) (9,010) (6,000)
Director incentive restricted stock granted....... 481 - -
Director common stock awarded..................... 1,200 - -
Restricted stock withheld for tax obligations..... (907) - -
-------------------------------------------------
Shares outstanding at end of year................. 22,030,682 21,059,164 20,853,780
=================================================
Common Stock Issuances
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.
In May 2003, the Company completed a direct placement offering of 571,429
shares of its common stock at $26.25 per share. The proceeds of the offering
were approximately $14,461,000, net of all related expenses. In November 2003,
the Company completed a direct placement offering of 847,458 shares of its
common stock at $29.50 per share. The proceeds of the offering were
approximately $24,513,000, net of all related expenses.
Dividend Reinvestment Plan
The Company has a dividend reinvestment plan that allows stockholders to
reinvest cash distributions in new shares of the Company.
Common Stock Repurchase Plan
EastGroup's Board of Directors has authorized the repurchase of up to
1,500,000 shares of its outstanding common stock. The shares may be purchased
from time to time in the open market or in privately negotiated transactions.
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.
Shareholder Rights Plan
In December 1998, EastGroup adopted a Shareholder Rights Plan (the Plan)
designed to enhance the ability of all of the Company's stockholders to realize
the long-term value of their investment. Under the Plan, Shareholder Rights
(Rights) were distributed as a dividend on each share of Common Stock (one Right
for each share of Common Stock) held as of the close of business on December 28,
1998. A Right was also delivered with all shares of Common Stock issued after
December 28, 1998. The Rights will expire at the close of business on December
3, 2008.
Each whole Right will entitle the holder to buy one one-thousandth (1/1000)
of a newly issued share of EastGroup's Series C Preferred Stock at an exercise
price of $70.00. The Rights attach to and trade with the shares of the Company's
Common Stock. No separate Rights Certificates will be issued unless an event
triggering the Rights occurs. The Rights will detach from the Common Stock and
will initially become exercisable for shares of Series C Preferred Stock if a
person or group acquires beneficial ownership of, or commences a tender or
exchange offer which would result in such person or group beneficially owning,
15% or more of EastGroup's Common Stock, except through a tender or exchange
offer for all shares which the Board determines to be fair and otherwise in the
best interests of EastGroup and its shareholders. The Rights will also detach
from the Common Stock if the Board determines that a person holding at least
9.8% of EastGroup's Common Stock intends to cause EastGroup to take certain
actions adverse to it and its shareholders or that such holder's ownership would
have a material adverse effect on EastGroup.
On December 20, 2004, EastGroup amended the Plan to require a committee
comprised entirely of independent directors to review and evaluate the Plan to
consider whether the maintenance of the Plan continues to be in the interest of
the Company, its stockholders and other relevant constituencies of the Company
at least every three years.
If any person becomes the beneficial owner of 15% or more of EastGroup's
Common Stock and the Board of Directors does not within 10 days thereafter
redeem the Rights, or a 9.8% holder is determined by the Board to be an adverse
person, each Right not owned by such person or related parties will then enable
its holder to purchase, at the Right's then-current exercise price, EastGroup
Common Stock (or, in certain circumstances as determined by the Board, a
combination of cash, property, common stock or other securities) having a value
of twice the Right's exercise price.
Under certain circumstances, if EastGroup is acquired in a merger or
similar transaction with another person, or sells more than 50% of its assets,
earning power or cash flow to another entity, each Right that has not previously
been exercised will entitle its holder to purchase, at the Right's then-current
exercise price, common stock of such other entity having a value of twice the
Right's exercise price.
EastGroup will generally be entitled to redeem the Rights at $0.0001 per
Right at any time until the 10th day following public announcement that a 15%
position has been acquired, or until the Board has determined a 9.8% holder to
be an adverse person. Prior to such time, the Board of Directors may extend the
redemption period.
(10) STOCK-BASED COMPENSATION PLANS
The Company has a management incentive plan which was adopted in 2004 (the
2004 Plan), which authorizes the issuance of up to 1,900,000 shares of common
stock (not including shares granted in the 1994 Plan) to employees in the form
of options, stock appreciation rights, restricted stock, deferred stock units,
performance shares, stock bonuses, and stock in place of cash compensation. The
2004 Plan has replaced the 1994 Plan. Under the 1994 Plan, employees of the
Company were granted stock options (50% vested after one year and the other 50%
after two years), an annual incentive award and restricted stock awards. Shares
remaining for grant under the 1994 Plan were cancelled upon adoption of the 2004
Plan. Outstanding grants under the 1994 Plan will be fulfilled under that Plan.
Total shares available for grant were 1,865,572, 1,898,945 and 543,577 at
December 31, 2005, 2004 and 2003, respectively.
The following discussions and tables illustrate the Company's various forms
of stock-based compensation. Stock-based compensation expense for these plans
collectively was $2,048,000, $1,256,000 and $620,000 for 2005, 2004 and 2003,
respectively.
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. 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. 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. Vesting occurs from three
to ten years from the date of the grant. Following is a summary of the total
shares that will vest by year for the remainder of the vesting periods as of
December 31, 2005.
Remaining Shares Vesting Schedule Number of Shares
----------------------------------------------------------------
2006...................................... 56,757
2007...................................... 50,247
2008...................................... 35,220
2009...................................... 35,220
-----------------
Total Nonvested Shares.................... 177,444
=================
Following is a summary of the total restricted shares granted, forfeited
and delivered to officers and employees with related weighted average share
prices for 2005, 2004 and 2003. Of the shares that vested in 2005, 907 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.
Restricted Stock Activity: Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Share Price Shares Share Price Shares Share Price
--------------------------------------------------------------------------------
Nonvested at beginning of year...... 204,348 $ 22.249 183,100 $ 21.006 189,100 $ 21.010
Granted............................. 33,446 30.150 36,767 30.593 - -
Forfeited........................... (3,396) 22.936 (9,010) 27.308 (6,000) 21.096
Vested.............................. (56,954) 24.495 (6,509) 27.300 - -
----------- ----------- -----------
Nonvested at end of year............ 177,444 23.005 204,348 22.249 183,100 21.006
=========== =========== ===========
Following is a summary of the total officers and employees stock options
granted, exercised and expired with related weighted average share prices for
2005, 2004 and 2003.
Officers and Employees Stock Options
Stock Option Activity: Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------
Outstanding at beginning of year.... 286,740 $ 19.853 432,370 $ 18.394 567,704 $ 18.503
Granted............................. - - - - - -
Exercised........................... (34,665) 20.112 (145,630) 15.578 (134,334) 18.802
Expired............................. (1,000) 24.400 - - (1,000) 25.095
----------- ----------- -----------
Outstanding at end of year.......... 251,075 19.800 286,740 19.853 432,370 18.394
=========== =========== ===========
Exercisable at end of year.......... 251,075 $ 19.800 286,740 $ 19.853 427,695 $ 18.325
Officer and employee outstanding stock options at December 31, 2005, all exercisable:
------------------------------------------------------------------------------------------
Weighted Average Remaining Weighted Average
Exercise Price Range Number Contractual Life Exercise Price
------------------------------------------------------------------------------------------
$ 14.580-19.000 75,319 0.823 years $ 16.226
20.000-22.000 167,406 2.698 years 21.227
22.400-25.750 8,350 5.728 years 23.413
(11) DIRECTORS EQUITY INCENTIVE PLAN
The Company has a director incentive plan which was adopted in 2000 (the
2000 Plan), which authorizes the issuance of up to 150,000 shares of common
stock (not including shares granted in the 1994 Plan, as amended) upon exercise
of any options. Options granted to directors vest 100% at the grant date. The
2000 Plan replaced the 1994 Plan. Under the 2000 Plan, each Non-Employee
Director was granted an initial 7,500 options. Through the year 2003, 2,250
additional options were granted on the date of any Annual Meeting at which the
Director was reelected to the Board. In lieu of option grants in 2004, cash
awards totaling $34,000 were paid to the Non-Employee Directors.
At the Company's annual meeting in June 2005, the Company's shareholders
approved the 2005 Directors Equity Incentive Plan (the 2005 Plan), which
replaced the 2000 Plan. Shares remaining for grant under the 2000 Plan were
cancelled upon adoption of the 2005 Plan. Outstanding grants under the 1994 and
2000 Plans will be fulfilled under those Plans. The 2005 Plan authorizes the
issuance of up to 50,000 shares of common stock through awards of shares and
restricted shares granted to Non-Employee Directors of the Company. In 2005, the
Company granted 1,200 shares of common stock to directors under the 2005 Plan.
In addition, 481 shares of restricted stock at $41.57 were
granted during 2005, none of which was vested as of December 31, 2005. The
restricted stock vesting period is 25% per year for four years. There were
48,319 shares available for grant under the 2005 Plan at December 31, 2005.
Stock Option Activity: Years Ended December 31,
----------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------
Outstanding at beginning of year.... 91,500 $ 22.118 113,250 $ 20.726 107,250 $ 19.354
Granted............................. - - - - 13,500 26.600
Exercised........................... (37,750) 21.465 (21,750) 14.872 (7,500) 11.670
Expired............................. - - - - - -
----------- ---------- -----------
Outstanding at end of year.......... 53,750 22.576 91,500 22.118 113,250 20.726
=========== ========== ===========
Exercisable at end of year.......... 53,750 $ 22.576 91,500 $ 22.118 113,250 $ 20.726
Available for grant at end of year.. - - 88,500 - 88,500 -
Director outstanding stock options at December 31, 2005, all exercisable:
---------------------------------------------------------------------------------------------
Weighted Average Remaining Weighted Average
Exercise Price Range Number Contractual Life Exercise Price
---------------------------------------------------------------------------------------------
$ 14.580-14.580 2,250 0.463 years $ 14.580
19.375-21.750 27,000 3.672 years 20.829
24.020-26.600 24,500 6.709 years 25.234
(12) PREFERRED STOCK
Series A 9.00% Cumulative Redeemable Preferred Stock
In June 1998, EastGroup sold 1,725,000 shares of Series A 9.00% Cumulative
Redeemable Preferred Stock at $25.00 per share in a public offering. The
preferred stock was redeemable by the Company at $25.00 per share, plus accrued
and unpaid dividends, on or after June 19, 2003. The preferred stock had no
stated maturity, sinking fund or mandatory redemption and was not convertible
into any other securities of the Company.
On July 7, 2003, the Company redeemed all of the outstanding Series A
Preferred Stock. The redemption price of these shares (excluding accrued
dividends) was $43,125,000. The original issuance costs of $1,768,000 related to
Series A in 1998 were recorded as a preferred issuance cost and treated in a
manner similar to a preferred dividend in the third quarter of 2003. The
redemption cost was funded with the proceeds from the Company's common offering
in May 2003 and the 7.95% Series D Cumulative Redeemable Preferred Stock
offering in earlier July 2003.
The Company declared dividends of $1.08125 per share of Series A Preferred
for 2003.
Series B 8.75% Cumulative Convertible Preferred Stock
In December 1998 and September 1999, EastGroup sold $10,000,000 and
$60,000,000, respectively, of Series B 8.75% Cumulative Convertible Preferred
Stock at a net price of $24.50 per share to Five Arrows Realty Securities II,
L.L.C. (Five Arrows), an investment fund managed by Rothschild Realty, Inc., a
member of the Rothschild Group. The Series B Preferred Stock, which was
convertible into common stock at a conversion price of $22.00 per share
(3,181,920 common shares), was entitled to quarterly dividends in arrears equal
to the greater of $.547 per share or the dividend on the number of shares of
common stock into which a share of Series B Preferred Stock was convertible. In
connection with this offering, EastGroup entered into certain related agreements
with Five Arrows, providing, among other things, for certain registration rights
with respect to the Series B Preferred Stock. Also, the preferred stock was not
redeemable by the Company at its option prior to the fifth anniversary of the
original date of issuance of the Series B Preferred Stock, after which it was
redeemable at various redemption prices at certain dates and under certain
circumstances.
During 2003, all of the 2,800,000 shares of the Series B Preferred Stock
were converted into 3,181,920 common shares. Five Arrows began converting the
shares in April 2003 and completed the conversion in November 2003. Since it was
the policy of Five Arrows to not hold common stock, the common shares were sold
in the market throughout the year with the final shares being sold on December
15, 2003.
The Company declared dividends of $1.641 per share of Series B Preferred
for 2003.
Series D 7.95% Cumulative Redeemable Preferred Stock
In July 2003, EastGroup sold 1,320,000 shares of 7.95% Series D Cumulative
Redeemable Preferred Stock at $25.00 per share in a direct placement. The
preferred stock is redeemable by the Company at $25.00 per share, plus accrued
and unpaid dividends, on or after July 2, 2008. The preferred stock has no
stated maturity, sinking fund or mandatory redemption and is not convertible
into any other securities of the Company.
The Company declared dividends of $1.9876 per share for Series D Preferred
for both 2005 and 2004 and $.9883 per share for 2003.
(13) 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 2005, 2004 and 2003 are presented in the Company's
Consolidated Statements of Changes in Stockholders' Equity and are summarized
below.
---------------------------------------
2005 2004 2003
---------------------------------------
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year......................................... $ 14 (30) 58
Unrealized holding gains on REIT securities during the year...... - - 66
Less reclassification adjustment for gains on REIT
securities included in net income............................ - - (421)
Change in fair value of interest rate swap....................... 297 44 267
---------------------------------------
Balance at end of year............................................... $ 311 14 (30)
=======================================
(14) EARNINGS PER SHARE
The Company applies SFAS No. 128, "Earnings Per Share," which requires
companies to present basic EPS and diluted EPS. Reconciliation of the numerators
and denominators in the basic and diluted EPS computations is as follows:
Reconciliation of Numerators and Denominators
--------------------------------------------
2005 2004 2003
--------------------------------------------
(In thousands)
BASIC EPS COMPUTATION
Numerator-net income available to common stockholders........ $ 19,567 20,703 12,748
Denominator-weighted average shares outstanding.............. 21,567 20,771 17,819
DILUTED EPS COMPUTATION
Numerator-net income available to common stockholders........ $ 19,567 20,703 12,748
Denominator:
Weighted average shares outstanding........................ 21,567 20,771 17,819
Common stock options....................................... 171 193 189
Nonvested restricted stock................................. 154 124 186
--------------------------------------------
Total Shares............................................ 21,892 21,088 18,194
============================================
The Company's Series B Preferred Stock, which was convertible into common
stock at a conversion price of $22.00 per share, was not included in the
computation of diluted earnings per share for 2003 due to its antidilutive
effect. All of the Series B Preferred Stock was converted into common stock
during 2003.
(15) QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
2005 Quarter Ended 2004 Quarter Ended
---------------------------------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
---------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues............................... $ 29,888 30,891 31,404 32,160 26,901 27,431 28,721 29,206
Expenses............................... (25,073) (25,919) (25,870) (27,396) (21,984) (22,369) (22,793) (23,702)
---------------------------------------------------------------------------------
Income from continuing operations...... 4,815 4,972 5,534 4,764 4,917 5,062 5,928 5,504
Income from discontinued operations.... 721 916 313 156 95 219 1,481 121
---------------------------------------------------------------------------------
Net income............................. 5,536 5,888 5,847 4,920 5,012 5,281 7,409 5,625
Preferred dividends.................... (656) (656) (656) (656) (656) (656) (656) (656)
---------------------------------------------------------------------------------
Net income available to common
stockholders........................ $ 4,880 5,232 5,191 4,264 4,356 4,625 6,753 4,969
=================================================================================
BASIC PER SHARE DATA
Net income available to common
stockholders........................ $ .23 .24 .24 .20 .21 .22 .32 .24
=================================================================================
Weighted average shares outstanding.... 20,891 21,755 21,799 21,811 20,687 20,745 20,804 20,845
=================================================================================
DILUTED PER SHARE DATA
Net income available to common
stockholders........................ $ .23 .24 .23 .19 .21 .22 .32 .23
=================================================================================
Weighted average shares outstanding.... 21,196 22,073 22,130 22,147 21,114 21,142 21,179 21,157
=================================================================================
The above quarterly earnings per share calculations are based on the weighted
average number of common shares outstanding during each quarter for basic
earnings per share and the weighted average number of outstanding common shares
and common share equivalents during each quarter for diluted earnings per share.
The annual earnings per share calculations in the Consolidated Statements of
Income are based on the weighted average number of common shares outstanding
during each year for basic earnings per share and the weighted average number of
outstanding common shares and common share equivalents during each year for
diluted earnings per share.
(16) DEFINED CONTRIBUTION PLAN
EastGroup maintains a 401(k) plan for its employees. The Company makes
matching contributions of 50% of the employee's contribution (limited to 10% of
compensation as defined by the plan) and may also make annual discretionary
contributions. The Company's total expense for this plan was $387,000, $332,000
and $273,000 for 2005, 2004 and 2003, respectively.
(17) LEGAL MATTERS
The Company is not presently involved in any material litigation nor, to
its knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business or which is expected to be covered by the Company's liability
insurance.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 2005 and 2004. SFAS No.
107, Disclosures About Fair Value of Financial Instruments, defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
--------------------------------------------------------
2005 2004
--------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------
(In thousands)
Financial Assets
Mortgage loans receivable...... $ - - 7,550 7,550
Cash and cash equivalents...... 1,915 1,915 1,208 1,208
Interest rate swap............. 311 311 14 14
Financial Liabilities
Mortgage notes payable......... 346,961 357,034 303,674 325,241
Notes payable to banks......... 116,764 116,764 86,431 86,431
Carrying amounts shown in the table are included in the consolidated balance
sheets under the indicated captions, except as indicated in the notes below.
The following methods and assumptions were used to estimate fair value of
each class of financial instruments:
Mortgage Loans Receivable: The carrying amount at December 31, 2004 approximates
fair value due to the issuance of the loans in November 2004.
Cash and Cash Equivalents: The carrying amounts approximate fair value because
of the short maturity of those instruments.
Interest Rate Swap: The fair value of the interest rate swap is the amount at
which it could be settled, based on estimates obtained from the counterparty.
The interest rate swap is shown under Other Assets on the consolidated balance
sheets.
Mortgage Notes Payable: The fair value of the Company's mortgage notes payable
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.
Notes Payable to Banks: The carrying amounts approximate fair value because of
the variable rates of interest on the debt.
(19) SUBSEQUENT EVENTS
In January 2006, EastGroup sold its land investment in Madisonville,
Kentucky for $825,000, generating a gain of $773,000, of which $592,000 will be
recognized in the first quarter of 2006 and $181,000 will be deferred to future
periods. As part of the transaction, the Company took back a $185,000 note at
7.00% from the buyer, which is scheduled for repayment over the next six years,
beginning in February 2006. The remaining deferred gain will be recognized as
payments on this note are received from the buyer.
Also subsequent to December 31, 2005, the Company entered into a contract
to sell three of its Memphis properties (533,000 square feet) for a sales price
of approximately $15.2 million. These properties were sold in March of 2006,
generating a gain for financial reporting purposes of $404,000. The results of
operations for these properties have been reclassified as income from
discontinued operations for the years ended December 31, 2005, 2004 and 2003 in
the accompanying consolidated financial statements. There is no effect on the
previously reported net income available to common stockholders.
(20) RELATED PARTY TRANSACTIONS
EastGroup and Parkway Properties, Inc. equally share the services and
expenses of the Company's Chairman of the Board of Directors. These services and
expenses include rent for office and storage space, administrative costs,
insurance benefits, and entertainment and travel expenses. EastGroup and Parkway
each pay a separate salary to the Chairman.
EastGroup also leases 12,000 square feet of space for its executive offices
in Jackson, Mississippi in a building owned by Parkway.