U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 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
November 7, 2006 was 23,669,066.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets, September 30, 2006 (unaudited) and
December 31, 2005 3
Consolidated statements of income for the three and nine months ended
September 30, 2006 and 2005 (unaudited) 4
Consolidated statement of changes in stockholders' equity for the nine
months ended September 30, 2006 (unaudited) 5
Consolidated statements of cash flows for the nine months ended
September 30, 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1A. Risk Factors 24
Item 6. Exhibits 24
SIGNATURES
Authorized signatures 25
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
September 30, 2006 December 31, 2005
-----------------------------------------------
(Unaudited)
ASSETS
Real estate properties......................................................... $ 957,657 943,585
Development.................................................................... 98,375 77,483
-----------------------------------------------
1,056,032 1,021,068
Less accumulated depreciation................................................ (226,333) (206,427)
-----------------------------------------------
829,699 814,641
Real estate held for sale...................................................... - 773
Unconsolidated investment...................................................... 2,550 2,618
Cash........................................................................... 2,486 1,915
Other assets................................................................... 45,528 43,591
-----------------------------------------------
TOTAL ASSETS................................................................. $ 880,263 863,538
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable......................................................... $ 362,575 346,961
Notes payable to banks......................................................... 55,700 116,764
Accounts payable & accrued expenses............................................ 30,260 22,941
Other liabilities.............................................................. 11,130 10,306
-----------------------------------------------
459,665 496,972
-----------------------------------------------
-----------------------------------------------
Minority interest in joint ventures............................................. 2,122 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;
23,669,116 shares issued and outstanding at September 30, 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.................................... 461,938 390,155
Distributions in excess of earnings............................................ (76,114) (57,930)
Accumulated other comprehensive income......................................... 324 311
-----------------------------------------------
418,476 364,864
-----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 880,263 863,538
===============================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
2006 2005 2006 2005
----------------------------------------------------
REVENUES
Income from real estate operations.................................. $ 34,168 31,128 99,976 91,010
Equity in earnings of unconsolidated investment..................... 74 88 213 377
Other income........................................................ 221 28 255 144
----------------------------------------------------
34,463 31,244 100,444 91,531
----------------------------------------------------
EXPENSES
Expenses from real estate operations................................ 9,576 8,987 27,897 25,787
Depreciation and amortization....................................... 10,559 9,400 31,319 27,770
General and administrative.......................................... 1,990 1,573 5,434 5,266
Minority interest in joint ventures................................. 179 115 452 358
----------------------------------------------------
22,304 20,075 65,102 59,181
----------------------------------------------------
OPERATING INCOME..................................................... 12,159 11,169 35,342 32,350
OTHER INCOME (EXPENSE)
Interest income..................................................... 68 26 111 235
Interest expense.................................................... (6,314) (5,738) (19,046) (17,508)
----------------------------------------------------
INCOME FROM CONTINUING OPERATIONS ................................... 5,913 5,457 16,407 15,077
----------------------------------------------------
DISCONTINUED OPERATIONS
Income from real estate operations.................................. - 357 159 1,030
Gain on sale of real estate investments............................. 7 33 1,091 1,164
----------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS ................................. 7 390 1,250 2,194
----------------------------------------------------
NET INCOME........................................................... 5,920 5,847 17,657 17,271
Preferred dividends-Series D........................................ 656 656 1,968 1,968
----------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS.......................... $ 5,264 5,191 15,689 15,303
====================================================
BASIC PER COMMON SHARE DATA
Income from continuing operations................................... $ .24 .22 .65 .61
Income from discontinued operations................................. - .02 .06 .10
----------------------------------------------------
Net income available to common stockholders......................... $ .24 .24 .71 .71
====================================================
Weighted average shares outstanding................................. 22,235 21,799 22,017 21,485
====================================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations................................... $ .23 .21 .65 .60
Income from discontinued operations................................. - .02 .05 .10
----------------------------------------------------
Net income available to common stockholders......................... $ .23 .23 .70 .70
====================================================
Weighted average shares outstanding................................. 22,553 22,130 22,334 21,805
====================================================
Dividends declared per common share.................................. $ .490 .485 1.470 1.455
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........................................ - - - 17,657 - 17,657
Net unrealized change in fair value of
interest rate swap............................... - - - - 13 13
-----------
Total comprehensive income....................... 17,670
-----------
Common dividends declared, $1.47 per share........ - - - (33,873) - (33,873)
Preferred stock dividends declared, $1.4907 per
share............................................ - - - (1,968) - (1,968)
Issuance of 1,437,500 shares of common stock,
common stock offering, net of expenses........... - - 68,138 - - 68,138
Stock-based compensation, net of forfeitures...... - - 3,436 - - 3,436
Issuance of 4,950 shares of common stock,
dividend reinvestment plan....................... - - 236 - - 236
Other............................................. - - (27) - - (27)
------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2006......................... $ 32,326 2 461,938 (76,114) 324 418,476
==============================================================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------------
2006 2005
-------------------------------------
OPERATING ACTIVITIES
Net income........................................................................... $ 17,657 17,271
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization from continuing operations............................ 31,319 27,770
Depreciation and amortization from discontinued operations.......................... 182 693
Minority interest depreciation and amortization..................................... (113) (105)
Amortization of mortgage loan premiums.............................................. (322) (239)
Gain on sale of real estate investments from discontinued operations................ (1,091) (1,164)
Stock-based compensation expense.................................................... 1,461 1,205
Equity in earnings of unconsolidated investment net of distributions................ 67 53
Changes in operating assets and liabilities:
Accrued income and other assets.................................................... (1,824) (445)
Accounts payable, accrued expenses and prepaid rent................................ 5,393 6,483
-------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. 52,729 51,522
-------------------------------------
INVESTING ACTIVITIES
Real estate development.............................................................. (48,176) (38,209)
Purchases of real estate............................................................. - (23,891)
Real estate improvements............................................................. (9,645) (6,975)
Proceeds from sale of real estate investments........................................ 18,548 6,034
Repayments on mortgage loans receivable.............................................. - 7,017
Distributions from unconsolidated investment......................................... - 6,657
Changes in other assets and other liabilities........................................ (2,660) (3,201)
-------------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................................. (41,933) (52,568)
-------------------------------------
FINANCING ACTIVITIES
Proceeds from bank borrowings........................................................ 120,169 120,439
Repayments on bank borrowings........................................................ (181,233) (93,157)
Proceeds from mortgage note payable.................................................. 38,000 -
Principal payments on mortgage notes payable......................................... (22,016) (24,125)
Debt issuance costs.................................................................. (335) (122)
Distributions paid to stockholders................................................... (35,030) (33,282)
Proceeds from common stock offerings................................................. 68,138 31,597
Proceeds from exercise of stock options.............................................. 1,317 1,254
Proceeds from dividend reinvestment plan............................................. 236 268
Other................................................................................ 529 (1,639)
-------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................... (10,225) 1,233
-------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS................................................. 571 187
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 1,915 1,208
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 2,486 1,395
=====================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $3,096 and $1,679 for 2006 and
2005, respectively.................................................................. $ 18,664 17,231
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............ 3,283 1,004
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 financial statements contained in the 2005 annual report on
Form 10-K and the notes thereto.
(2) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EastGroup
Properties, Inc., its wholly-owned subsidiaries and its investment in any joint
ventures in which the Company has a controlling interest. At December 31, 2005,
the Company had a controlling interest in one joint venture: the 80% owned
University Business Center. At September 30, 2006, the Company had a controlling
interest in two joint ventures: the 80% owned University Business Center and the
80% owned Castilian Research Center. The Company records 100% of the joint
ventures' assets, liabilities, revenues and expenses with minority interests
provided for in accordance with the joint venture agreements. The equity method
of accounting is used for the Company's 50% undivided tenant-in-common interest
in Industry Distribution Center II. All significant intercompany transactions
and accounts have been eliminated in consolidation.
(3) 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.
(4) RECLASSIFICATIONS
Certain reclassifications have been made in the 2005 financial statements
to conform to the 2006 presentation. These amounts include reclassifications in
the accompanying consolidated statements of cash flows. These reclassifications,
which were $304,000 for the nine months ended September 30, 2005, resulted in a
decrease in cash flows from operating activities, an increase of $330,000 in
investing activities and a decrease of $26,000 in financing activities. These
reclassifications were immaterial to the prior period presented.
(5) REAL ESTATE PROPERTIES
EastGroup has one reportable segment--industrial properties. These
properties are concentrated in major Sunbelt markets of the United States,
primarily in the states of Florida, Texas, California and Arizona, have similar
economic characteristics and also meet the other criteria that permit the
properties to be aggregated into one reportable segment. 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 $8,858,000 and $26,364,000 for the three and nine months ended September 30,
2006, respectively and $8,174,000 and $24,143,000 for the same periods in 2005.
The Company's real estate properties at September 30, 2006 and December 31, 2005
were as follows:
September 30, 2006 December 31, 2005
--------------------------------------------
(In thousands)
Real estate properties:
Land................................................ $ 153,733 152,954
Buildings and building improvements................. 661,618 656,897
Tenant and other improvements....................... 142,306 133,734
Development............................................ 98,375 77,483
--------------------------------------------
1,056,032 1,021,068
Less accumulated depreciation....................... (226,333) (206,427)
--------------------------------------------
$ 829,699 814,641
============================================
(6) DEVELOPMENT
During the period when a property is under development, 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 capitalized cost 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.
(7) 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 June 2005. Accordingly,
Discontinued Operations includes interest expense of zero and $64,000 for the
three and nine months ended September 30, 2005. At December 31, 2005, the
Company was offering for sale 6.4 acres of land in Houston with a carrying
amount of $773,000. As a result of a change in plans by management, this land
was transferred into the development portfolio during 2006.
(8) 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 $551,000 and $1,925,000 for the three
and nine months ended September 30, 2006, respectively and $549,000 and
$1,549,000 for the same periods in 2005. Amortization of above and below market
leases was immaterial for all 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 September 30, 2006 and December 31, 2005.
(9) OTHER ASSETS
A summary of the Company's Other Assets follows:
September 30, 2006 December 31, 2005
------------------------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization........ $ 15,168 13,630
Straight-line rent receivable, net of allowance for doubtful accounts........... 13,417 12,773
Accounts receivable, net of allowance for doubtful accounts..................... 2,911 2,930
Acquired in-place lease intangibles, net of accumulated amortization
of $3,938 and $3,580 for 2006 and 2005, respectively ......................... 4,137 6,062
Goodwill........................................................................ 990 990
Prepaid expenses and other assets............................................... 8,905 7,206
------------------------------------------
$ 45,528 43,591
==========================================
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
September 30, 2006 December 31, 2005
--------------------------------------------
(In thousands)
Property taxes payable......................................... $ 12,598 8,224
Development costs payable...................................... 4,694 2,777
Dividends payable.............................................. 3,174 2,363
Other payables and accrued expenses............................ 9,794 9,577
--------------------------------------------
$ 30,260 22,941
============================================
(11) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in
equity from nonowner sources. The components of accumulated other comprehensive
income for the nine months ended September 30, 2006 are presented in the
Company's Consolidated Statement of Changes in Stockholders' Equity and for the
three and nine months ended September 30, 2006 and 2005 are summarized below.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
2006 2005 2006 2005
-------------------------------------------
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of period........................... $ 546 19 311 14
Change in fair value of interest rate swap........... (222) 211 13 216
-------------------------------------------
Balance at end of period................................. $ 324 230 324 230
===========================================
(12) COMMON STOCK ISSUANCE
On September 13, 2006, EastGroup closed on the sale of 1,437,500 shares of
its common stock. The net proceeds from the offering of the shares were
approximately $68.1 million after deducting the underwriting discount and other
offering expenses.
(13) 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 Nine Months Ended
September 30, September 30,
-------------------------------------------
2006 2005 2006 2005
-------------------------------------------
(In thousands)
BASIC EPS COMPUTATION
Numerator-net income available to common stockholders... $ 5,264 5,191 15,689 15,303
Denominator-weighted average shares outstanding......... 22,235 21,799 22,017 21,485
DILUTED EPS COMPUTATION
Numerator-net income available to common stockholders... $ 5,264 5,191 15,689 15,303
Denominator:
Weighted average shares outstanding................... 22,235 21,799 22,017 21,485
Common stock options.................................. 136 172 148 170
Nonvested restricted stock............................ 182 159 169 150
-------------------------------------------
Total Shares....................................... 22,553 22,130 22,334 21,805
===========================================
(14) STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123 (Revised 2004)(SFAS 123R), 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 on the fair value of the equity or
liability instruments issued. The Company's adoption of SFAS 123R had no
material impact on its overall financial position or results of operations.
Prior to the adoption of SFAS 123R, the Company adopted the fair value
recognition provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of SFAS No. 123,
'Accounting for Stock-Based Compensation'," prospectively to all awards granted,
modified, or settled after January 1, 2002.
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 (limited to 570,000 shares),
deferred stock units, performance shares, stock bonuses, and stock. Total shares
available for grant were 1,747,700 at September 30, 2006. Typically, the Company
issues new shares to fulfill stock grants or upon the exercise of stock options.
Stock-based compensation expense was $865,000 and $1,954,000 for the three
and nine months ended September 30, 2006, respectively, of which $209,000 and
$559,000 were capitalized as part of the Company's development costs. For the
three and nine months ended September 30, 2005, stock-based compensation expense
was $517,000 and $1,521,000, respectively, of which $135,000 and $330,000 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 on shares as well as
potential stock appreciation. Vesting occurs over three to ten years from the
date of the grant for grants subject to service only. Restricted stock is
granted to executives upon the satisfaction of annual performance goals and
multi-year market goals with vesting over three to five years. Under the
modified prospective application method, the Company continues to recognize
compensation expense on a straight-line basis over the service period for awards
that precede the adoption of SFAS 123R. The expense for performance-based awards
after January 1, 2006 is determined using the graded vesting attribution method
which recognizes each separate vesting portion of the award as a separate award
on a straight-line basis over the requisite service period. This method
accelerates the expensing of the award compared to the straight-line method. The
expense for market-based awards after January 1, 2006 and awards that only
require service are expensed on a straight-line basis over the requisite service
periods.
The total compensation expense for service and performance based awards is
based upon the fair market value of the shares on the grant date, adjusted for
estimated forfeitures. The grant date fair value for awards that are subject to
a market condition was determined using a simulation pricing model developed to
specifically accommodate the unique features of the awards.
In the second quarter of 2006, the Company granted shares contingent upon
the attainment of certain annual performance goals and multi-year market
conditions. At September 30, 2006, the estimated number of shares to be awarded
under the annual performance goals was 37,258 at a weighted average grant date
fair value of $43.83 per share to be vested over five years. The weighted
average grant date fair value for shares to be awarded under the multi-year
market conditions was $26.34 per target share with a total cost of approximately
$2.1 million. These shares will vest over four years following the performance
measurement period which ends on December 31, 2008. Compensation costs related
to these grants are included in stock-based compensation expense for the three
and nine months ended September 30, 2006.
During the restricted period for awards subject to service only, 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 September 30,
2006, there was $3,575,000 of unrecognized compensation cost related to
nonvested restricted stock compensation that is expected to be recognized over a
weighted average period of 2.37 years.
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 and nine months ended September 30,
2006. The table does not include the shares granted in 2006 that are contingent
on performance goals or market conditions. Of the shares that vested in 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 nine months ended
September 30, 2006 was $494,000; there were no grants for the three months ended
September 30, 2006 or for either period in 2005. As of the vesting date, the
fair value of shares that vested during the nine months ended September 30, 2006
and 2005 was $1,472,000 and $829,000, respectively; no shares vested for either
three-month period ended September 30, 2006 or 2005.
Restricted Stock Activity: Three Months Ended Nine Months Ended
September 30, 2006 September 30, 2006
-----------------------------------------------------
Weighted Weighted
Average Average
Shares Grant Date Shares Grant Date
Fair Value Fair Value
-----------------------------------------------------
Nonvested at beginning of period....... 261,985 $ 28.50 177,444 $ 23.01
Issued (1)............................. - - 107,823 37.25
Granted................................ - - 10,511 47.01
Forfeited.............................. (40) 32.42 (1,520) 22.31
Vested................................. - - (32,313) 34.91
--------- ---------
Nonvested at end of period............. 261,945 28.50 261,945 28.50
========= =========
(1) Issued shares are shares granted in prior years that were awarded during the
period upon satisfaction of performance conditions.
Following is a summary of the total shares that will vest by year for the
remainder of the vesting periods as of September 30, 2006.
Remaining Shares Vesting Schedule Number of Shares
- -------------------------------------------------------------------
Remainder of 2006......................... 63,538
2007...................................... 89,225
2008...................................... 74,312
2009...................................... 34,870
----------------
Total Nonvested Shares.................... 261,945
================
Employee Stock Options
The Company has not granted stock options to employees since 2002.
Outstanding employee stock options vested equally over a two-year period;
accordingly, all options are now vested. The intrinsic value realized by
employees from the exercise of options was $440,000 and $2,171,000 for the three
and nine months ended September 30, 2006, respectively and $36,000 and $383,000
for the same periods in 2005. Following is a summary of the total employee stock
options granted, forfeited, exercised and expired with related weighted average
exercise share prices for the three and nine months ended September 30, 2006.
Stock Option Activity: Three Months Ended Nine Months Ended
September 30, 2006 September 30, 2006
--------------------------------------------------------
Weighted Weighted
Shares Average Shares Average
Exercise Price Exercise Price
--------------------------------------------------------
Outstanding at beginning of period.... 192,656 $ 20.93 251,075 $ 19.80
Granted............................... - - - -
Forfeited............................. - - - -
Exercised............................. (15,670) 22.00 (74,089) 17.33
Expired............................... - - - -
--------- ---------
Outstanding at end of period.......... 176,986 20.83 176,986 20.83
========= =========
Exercisable at end of period.......... 176,986 20.83 176,986 20.83
Employee outstanding stock options at September 30, 2006, all exercisable:
- ---------------------------------------------------------------------------------------------
Weighted Average
Remaining Weighted Average Intrinsic
Exercise Price Range Number Contractual Life Exercise Price Value
- ---------------------------------------------------------------------------------------------
$ 17.92-25.30 176,986 1.90 years $ 20.83 $5,145,000
DIRECTORS EQUITY PLAN
The Company has a directors equity 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. The 2005 Plan replaced prior
plans under which directors were granted stock option awards. Outstanding grants
under prior plans will be fulfilled under those plans. In 2005, 1,200 common
shares of stock were issued to directors. In addition, 481 shares of restricted
stock at $41.57 were granted, of which 120 shares were vested as of September
30, 2006. The restricted stock vests 25% per year for four years. As of
September 30, 2006, there was $14,000 of unrecognized compensation cost related
to nonvested restricted stock compensation that is expected to be recognized
over a weighted average period of 2.75 years. In 2006, 3,402 common shares of
stock were issued to directors. There were 44,917 shares available for grant
under the 2005 Plan at September 30, 2006.
Stock-based compensation expense for directors was $39,000 and $66,000 for
the three and nine months ended September 30, 2006, respectively and $14,000 for
the three and nine months in 2005. The intrinsic value realized by directors
from the exercise of options was zero and $70,000 for the three and nine months
ended September 30, 2006, respectively and zero and $669,000 for the same
periods in 2005.
Following is a summary of the total director stock options granted,
exercised and expired with related weighted average exercise share prices for
the three and nine months ended September 30, 2006.
Stock Option Activity: Three Months Ended Nine Months Ended
September 30, 2006 September 30, 2006
--------------------------------------------------------
Weighted Weighted
Shares Average Shares Average
Exercise Price Exercise Price
--------------------------------------------------------
Outstanding at beginning of period.... 51,500 $ 22.93 53,750 $ 22.58
Granted............................... - - - -
Exercised............................. - - (2,250) 14.58
Expired............................... - - - -
--------- ---------
Outstanding at end of period.......... 51,500 22.93 51,500 22.93
========= =========
Exercisable at end of period.......... 51,500 22.93 51,500 22.93
Director outstanding stock options at September 30, 2006, all exercisable:
- ---------------------------------------------------------------------------------------------
Weighted Average
Remaining Weighted Average Intrinsic
Exercise Price Range Number Contractual Life Exercise Price Value
- ---------------------------------------------------------------------------------------------
$ 19.375-26.60 51,500 4.37 years $ 22.93 $1,389,000
(15) SUBSEQUENT EVENTS
Subsequent to September 30, 2006, EastGroup entered into a contract to
acquire three buildings (181,000 square feet) in Charlotte, North Carolina for a
total purchase price of $9.3 million. Charlotte is a new market for EastGroup
and is the third new market for the Company over the past three years.
In October 2006, the Company closed on a $78 million, nonrecourse first
mortgage loan secured by properties containing 1,316,000 square feet. The loan
has a fixed interest rate of 5.97%, a ten-year term and an amortization schedule
of 20 years. The proceeds of the note were used to repay a maturing $20.5
million mortgage and to reduce floating rate bank borrowings.
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's primary revenue is rental income; as such, EastGroup's
greatest challenge is leasing space. During the nine months ended September 30,
2006, leases on 3,115,000 square feet (14.5%) of EastGroup's total square
footage of 21,472,000 expired, and the Company was successful in renewing or
re-leasing 86% of that total. In addition, EastGroup leased 977,000 square feet
of other vacant space during this period. During the nine months ended September
30, 2006, average rental rates on new and renewal leases increased by 11.3%.
EastGroup's total leased percentage increased to 96.3% at September 30,
2006 from 94.8% at September 30, 2005. Leases scheduled to expire for the
remainder of 2006 were 2.2% of the portfolio on a square foot basis at September
30, 2006, and this figure was reduced to .9% as of November 7, 2006. Property
net operating income from same properties increased 5.4% for the quarter and
4.0% for the nine months ended September 30, 2006 as compared to the same
periods in 2005. The third quarter of 2006 was EastGroup's thirteenth
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 of income
producing properties during the first nine months of 2006. However, EastGroup is
currently under contract to acquire three buildings (181,000 square feet) in
Charlotte, North Carolina for a total purchase price of $9.3 million. Charlotte
is a new market for EastGroup and is the third new market for the Company over
the past three years.
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 2006,
EastGroup acquired 17.7 acres of development land in Phoenix for $5.8 million
and 17.5 acres in San Antonio for $2.5 million.
During the nine months ended September 30, 2006, the Company transferred
six properties (381,000 square feet) with aggregate costs of $26.2 million at
the date of transfer from development to real estate properties. These
properties are all 100% leased. The Company transferred two properties (one 100%
and one 23% leased) to the portfolio in October and expects to transfer one
additional property during the remainder of the year. The Company anticipates
approximately $75-80 million in new development starts during 2006.
The Company sold four properties in Memphis (a noncore market) and several
parcels of land during the nine months ended September 30, 2006 for a net sales
price of $18.7 million, generating combined gains of $1.3 million, of which
approximately $200,000 was deferred. These dispositions represented an
opportunity to recycle capital into acquisitions and development with greater
upside potential.
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.
On September 13, 2006, the Company closed on the sale of 1,437,500 shares
of its common stock. The net proceeds from the offering of the shares were
approximately $68.1 million after deducting the underwriting discount and other
offering expenses. EastGroup used the proceeds to repay borrowings under its
credit facilities.
In August 2006, the Company closed on a $38 million, nonrecourse first
mortgage loan secured by properties containing 778,000 square feet. The loan has
a fixed interest rate of 5.68%, a ten-year term and an amortization schedule of
20 years. The proceeds of the note were used to repay the maturing mortgages on
these properties of $15.4 million and to reduce floating rate bank borrowings.
In October 2006, the Company closed on a $78 million, nonrecourse first
mortgage loan secured by properties containing 1,316,000 square feet. The loan
has a fixed interest rate of 5.97%, a ten-year term and an amortization schedule
of 20 years. The proceeds of the note were used to repay a maturing $20.5
million mortgage and to reduce floating rate bank borrowings.
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 November 2006. EastGroup is obligated under a recourse mortgage loan on
the property for $10,040,000 as of September 30, 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 nine months ended September
30, 2006 was $1,029,000.
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,
nor is it a measure of the Company's liquidity or indicative of funds available
to provide for the Company's cash needs, including its ability to make
distributions. The Company's key drivers affecting FFO are changes in PNOI (as
discussed above), interest rates, the amount of leverage the Company employs and
general and administrative expense. The following table presents on a
comparative basis for the three and nine months ended September 30, 2006 and
2005 reconciliations of PNOI and FFO Available to Common Stockholders to Net
Income.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
2006 2005 2006 2005
------------------------------------------------
(In thousands, except per share data)
Income from real estate operations............................................ $ 34,168 31,128 99,976 91,010
Expenses from real estate operations.......................................... (9,576) (8,987) (27,897) (25,787)
------------------------------------------------
PROPERTY NET OPERATING INCOME................................................. 24,592 22,141 72,079 65,223
Equity in earnings of unconsolidated investment (before depreciation)......... 107 113 312 476
Income from discontinued operations (before depreciation and amortization).... - 562 341 1,723
Interest income............................................................... 68 26 111 235
Other income.................................................................. 221 28 255 144
Interest expense.............................................................. (6,314) (5,738) (19,046) (17,508)
General and administrative expense............................................ (1,990) (1,573) (5,434) (5,266)
Minority interest in earnings (before depreciation and amortization).......... (217) (150) (565) (463)
Gain on sale of nondepreciable real estate investments........................ 7 33 662 33
Dividends on Series D preferred shares........................................ (656) (656) (1,968) (1,968)
------------------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS........................ 15,818 14,786 46,747 42,629
Depreciation and amortization from continuing operations...................... (10,559) (9,400) (31,319) (27,770)
Depreciation and amortization from discontinued operations.................... - (205) (182) (693)
Depreciation from unconsolidated investment................................... (33) (25) (99) (99)
Minority interest depreciation and amortization............................... 38 35 113 105
Gain on sale of depreciable real estate investments........................... - - 429 1,131
------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................... 5,264 5,191 15,689 15,303
Dividends on preferred shares................................................. 656 656 1,968 1,968
------------------------------------------------
NET INCOME.................................................................... $ 5,920 5,847 17,657 17,271
================================================
Net income available to common stockholders per diluted share................. $ .23 .23 .70 .70
Funds from operations available to common stockholders per diluted share...... .70 .67 2.09 1.96
Diluted shares for earnings per share and funds from operations............... 22,553 22,130 22,334 21,805
The Company analyzes the following performance trends in evaluating the progress
of the Company:
o The FFO change per share represents the increase or decrease in FFO per
share from the same quarter in the current year compared to the prior year.
FFO per share for the third quarter of 2006 was $.70 per share compared
with $.67 per share for the same period of 2005, an increase of 4.5%. The
increase in FFO was mainly due to a PNOI increase of $2,451,000, or 11.1%.
The increase in PNOI was primarily attributable to $448,000 from 2005
acquisitions, $789,000 from newly developed properties and $1,189,000 from
same property growth. The third quarter of 2006 was the ninth consecutive
quarter of increased FFO as compared to the previous year's quarter.
For the nine months ended September 30, 2006, FFO was $2.09 per share
compared with $1.96 per share for the same period in 2005, an increase of
6.6%. The increase in FFO for 2006 was mainly due to a PNOI increase of
$6,856,000, or 10.5%. The increase in PNOI was primarily attributable to
$2,148,000 from 2005 acquisitions, $2,157,000 from newly developed
properties and $2,464,000 from same property growth.
o Same property net operating income change represents the PNOI increase or
decrease for operating properties owned during the entire current period
and prior year reporting period. PNOI from same properties increased 5.4%
for the quarter ended September 30, 2006. The third quarter of 2006 was the
thirteenth consecutive quarter of improved same property operations. For
the nine months ended September 30, 2006, PNOI from same properties
increased 4.0%.
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 September 30, 2006 was 95.6%, the highest level since the fourth quarter
of 2000, and an increase from June 30, 2006 of 94.0% and March 31, 2006 of
93.8%. Occupancy has ranged from 91.0% to 95.6% for fourteen 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 14.1% for the third
quarter of 2006; for the nine months, rental rate increases averaged 11.3%.
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 $880,263,000 at September 30, 2006, an increase of
$16,725,000 from December 31, 2005. Liabilities decreased $37,307,000 to
$459,665,000 and stockholders' equity increased $53,612,000 to $418,476,000
during the same period. The paragraphs that follow explain these changes in
detail.
ASSETS
Real Estate Properties
Real estate properties increased $14,072,000 during the nine months ended
September 30, 2006 primarily due to the transfer of six properties from
development with total costs of $26,208,000, as detailed below. These increases
were offset by the transfer of four properties with costs of $23,281,000 to real
estate held for sale, which were subsequently sold.
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 $ 4,458
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
Southridge I............................ Orlando, FL 41,000 04/01/06 3,666
Southridge IV........................... Orlando, FL 70,000 08/15/06 4,727
Sunport Center VI....................... Orlando, FL 63,000 09/15/06 3,938
----------- -------------
Total Developments Transferred. 381,000 $ 26,208
=========== =============
The Company made capital improvements of $9,593,000 on existing and
acquired properties (included in the Capital Expenditures table under Results of
Operations). Also, the Company incurred costs of $1,849,000 on development
properties that had transferred to real estate properties; the Company records
these expenditures as development costs on the consolidated statements of cash
flows during the 12-month period following transfer.
Development
The investment in development at September 30, 2006 was $98,375,000
compared to $77,483,000 at December 31, 2005. Total capital invested for
development in the first nine months of 2006 was $48,176,000. In addition to the
costs of $46,327,000 incurred for the nine months ended September 30, 2006 as
detailed in the development activity table, the Company incurred costs of
$1,849,000 on developments during the 12-month period following transfer to real
estate properties.
During 2006, EastGroup acquired 17.7 acres of development land in Phoenix
for $5,828,000 and 17.5 acres of development land in San Antonio for $2,499,000,
both of which are included in the development activity table below under
Prospective Development.
In the fourth quarter of 2005, 55 Castilian, LLC, a wholly-owned subsidiary
of EastGroup, acquired Castilian Research Center in Goleta (Santa Barbara),
California for $4,129,000. As originally contemplated, during the second quarter
of 2006, 55 Castilian sold (at cost) a 20% ownership interest to an entity
controlled by its co-developer partner who is also a 20% co-owner of the
Company's University Business Center complex in the same submarket. The partner
contributed $350,000 and EastGroup contributed $1,400,000 as capital to 55
Castilian. EastGroup will loan 55 Castilian the remaining acquisition and
construction funds. Castilian, which contains 35,000 square feet and is
currently vacant, is being redeveloped into a state-of-the-art incubator R&D
facility with a projected additional investment of approximately $3.2 million
for a total investment of over $7 million.
The Company transferred six developments (all currently 100% leased) to
real estate properties during the first nine months of 2006 with a total
investment of $26,208,000 as of the date of transfer. The Company transferred
into development two parcels of land formerly held for sale with costs of
$773,000.
Costs Incurred
-------------------------------------------------
Costs For the Cumulative
Transferred Nine Months as of Estimated
DEVELOPMENT Size in 2006(1) Ended 9/30/06 9/30/06 TotalCosts(2)
- ------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Techway SW III, Houston, TX....................... 100,000 $ - 248 4,644 5,700
Arion 14, San Antonio, TX......................... 66,000 - 1,997 3,648 3,700
World Houston 21, Houston, TX..................... 68,000 - 1,573 3,665 3,800
Santan 10 II, Chandler, AZ........................ 85,000 - 2,427 5,300 5,600
Southridge II, Orlando, FL........................ 41,000 - 1,886 3,342 4,700
World Houston 15, Houston, TX..................... 63,000 - 2,022 4,449 5,800
Oak Creek III, Tampa, FL......................... 61,000 - 2,488 3,430 3,900
Arion 17, San Antonio, TX......................... 40,000 - 1,336 2,664 3,500
------------------------------------------------------------------------------
Total Lease-up..................................... 524,000 - 13,977 31,142 36,700
------------------------------------------------------------------------------
Costs Incurred
--------------------------------------------------
Costs For the Cumulative
Transferred Nine Months as of Estimated
DEVELOPMENT Size in 2006(1) Ended 9/30/06 9/30/06 Total Costs(2)
- ------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
UNDER CONSTRUCTION
Southridge VI, Orlando, FL....................... 81,000 2,580 1,785 4,365 5,700
Oak Creek V, Tampa, FL.......................... 100,000 1,389 2,567 3,956 6,400
Beltway Crossing II, III & IV, Houston, TX....... 160,000 2,388 2,978 5,366 9,300
Castilian Research Center, Santa Barbara, CA..... 35,000 - 584 4,775 7,300
Southridge III, Orlando, FL...................... 81,000 1,532 1,673 3,205 5,900
SunCoast I & II, Fort Myers, FL.................. 126,000 3,392 - 3,392 10,900
Arion 16, San Antonio, TX........................ 64,000 758 - 758 4,200
World Houston 22, Houston, TX.................... 68,000 1,926 - 1,926 4,000
World Houston 23, Houston, TX.................... 125,000 1,274 921 2,195 8,400
------------------------------------------------------------------------------
Total Under Construction........................... 840,000 15,239 10,508 29,938 62,100
------------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Phoenix, AZ...................................... 398,000 - 6,312 7,473 32,100
Tucson, AZ....................................... 70,000 - - 326 3,500
Tampa, FL........................................ 364,000 (1,389) 1,590 5,072 18,900
Orlando, FL...................................... 652,000 (4,112) 2,968 7,441 47,500
West Palm Beach, FL.............................. 20,000 - 106 660 2,300
Fort Myers, FL................................... - (3,392) 1,311 - -
El Paso, TX...................................... 251,000 - - 2,444 9,600
Houston, TX...................................... 1,018,000 (4,815) 3,235 9,934 54,700
San Antonio, TX.................................. 303,000 (758) 2,998 3,240 20,600
Jackson, MS...................................... 28,000 - - 705 2,000
------------------------------------------------------------------------------
Total Prospective Development...................... 3,104,000 (14,466) 18,520 37,295 191,200
------------------------------------------------------------------------------
4,468,000 $ 773 43,005 98,375 290,000
==============================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING THE
NINE MONTHS ENDED SEPTEMBER 30, 2006
Southridge V, Orlando, FL........................ 70,000 $ - (214) 4,458
Executive Airport CC II, Fort Lauderdale, FL..... 55,000 - 38 4,522
Palm River South II, Tampa, FL................... 82,000 - 862 4,897
Southridge I, Orlando, FL........................ 41,000 - 735 3,666
Southridge IV, Orlando, FL....................... 70,000 - 1,297 4,727
Sunport Center VI, Orlando, FL................... 63,000 - 604 3,938
--------------------------------------------------------------
Total Transferred to Real Estate Properties........ 381,000 $ - 3,322 26,208 (3)
==============================================================
(1) Represents costs transferred from Prospective Development (principally land)
to Under Construction during the year and $773,000 that was transferred from the
category "held for sale."
(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 $19,906,000
primarily due to depreciation expense of $26,364,000 on real estate properties,
offset by accumulated depreciation of $6,340,000 on four 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 December 31, 2005. As a result of a change in plans by
management, this land was transferred into the development portfolio during
2006. Four Memphis properties, Senator 1, Senator 2, Southeast Crossing and
Lamar 1, were transferred to real estate held for sale in the first nine months
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 Other Assets is presented in Note 9 in the Notes to the
Consolidated Financial Statements.
LIABILITIES
Mortgage notes payable increased $15,614,000 during the nine months ended
September 30, 2006. In August, the Company closed a new $38,000,000, nonrecourse
first mortgage loan secured by two properties. The loan has a fixed interest
rate of 5.68%, a ten-year term and an amortization schedule of 20 years. The
proceeds of this note were used to repay maturing mortgages of approximately
$15,429,000 and to reduce variable rate bank borrowings. Other decreases were
regularly scheduled principal payments of $6,587,000 and mortgage loan premium
amortization of $322,000.
Notes payable to banks decreased $61,064,000 as a result of repayments of
$181,233,000 exceeding advances of $120,169,000. The Company's credit facilities
are described in greater detail under Liquidity and Capital Resources.
See Note 10 in the Notes to the Consolidated Financial Statements for a
summary of Accounts Payable and Accrued Expenses.
STOCKHOLDERS' EQUITY
Additional paid-in capital on common shares increased $71,783,000 during
the nine months ended September 30, 2006. On September 13, 2006, EastGroup
closed the sale of 1,437,500 shares of its common stock. Total net proceeds from
the offering of the shares were approximately $68.1 million after deducting the
underwriting discount and other offering expenses. Additionally, see Note 14 in
the Notes to the Consolidated Financial Statements for information related to
the changes in additional paid-in capital resulting from stock-based
compensation.
Distributions in excess of earnings increased $18,184,000 as a result of
dividends on common and preferred stock of $35,841,000 exceeding net income for
financial reporting purposes of $17,657,000.
RESULTS OF OPERATIONS
(Comments are for the three and nine months ended September 30, 2006 compared to
the same periods in 2005.)
Net income available to common stockholders for the three and nine months
ended September 30, 2006 was $5,264,000 ($.24 per basic and $.23 per diluted
share) and $15,689,000 ($.71 per basic and $.70 per diluted share) compared to
$5,191,000 ($.24 per basic and $.23 per diluted share) and $15,303,000 ($.71 per
basic and $.70 per diluted share) for the three and nine months ended September
30, 2005.
PNOI for the three months increased by $2,451,000, or 11.1%, due to
increased average occupancy and new acquisitions and developments. The Company's
percentage leased and occupied were 96.3% and 95.6%, respectively, at September
30, 2006 compared to 94.8% and 93.6% at September 30, 2005. The increase in PNOI
was primarily attributable to $448,000 from 2005 acquisitions, $789,000 from
newly developed properties and $1,189,000 from same property growth.
For the nine months, PNOI increased $6,856,000, or 10.5%, which resulted
mainly from $2,148,000 attributable to 2005 acquisitions, $2,157,000 from newly
developed properties and $2,464,000 from same property growth.
The following table presents the components of interest expense for the
three and nine months ended September 30, 2006 and 2005:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------
Increase Increase
2006 2005 (Decrease) 2006 2005 (Decrease)
----------------------------------------------------------------
(In thousands, except rates of interest)
Average bank borrowings...................................... $107,145 97,833 9,312 116,352 96,675 19,677
Weighted average variable interest rates..................... 6.47% 4.65% 6.04% 4.28%
VARIABLE RATE INTEREST EXPENSE
Variable rate interest (excluding loan cost amortization).... $ 1,747 1,148 599 5,256 3,095 2,161
Amortization of bank loan costs.............................. 88 89 (1) 266 267 (1)
----------------------------------------------------------------
Total variable rate interest expense......................... 1,835 1,237 598 5,522 3,362 2,160
----------------------------------------------------------------
FIXED RATE INTEREST EXPENSE (1)
Fixed rate interest (excluding loan cost amortization)....... 5,484 4,998 486 16,277 15,487 790
Amortization of mortgage loan costs.......................... 115 113 2 343 338 5
----------------------------------------------------------------
Total fixed rate interest expense............................ 5,599 5,111 488 16,620 15,825 795
----------------------------------------------------------------
Total interest............................................... 7,434 6,348 1,086 22,142 19,187 2,955
Less capitalized interest.................................... (1,120) (610) (510) (3,096) (1,679) (1,417)
----------------------------------------------------------------
TOTAL INTEREST EXPENSE....................................... $ 6,314 5,738 576 19,046 17,508 1,538
================================================================
(1) Does not include interest expense of zero and $64,000 for the three and nine
months ended September 30, 2005 for Lamar II which was sold in June 2005 and the
operations of which are included in discontinued operations for the same
periods. 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 three and nine-month periods of 2006 were significantly higher than in the
same periods of 2005 due to increases in short-term rates.
Mortgage interest expense for the three and nine months ended September 30,
2006 increased primarily due to the new $38 million new mortgage in August 2006
and new mortgages and assumed mortgages on acquired properties in 2005, all
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 and amounts
shown below for the assumed mortgages represent the fair market rates and
values, respectively, at the dates of assumption.
NEW AND ASSUMED MORTGAGES IN 2005 AND 2006 INTEREST RATE DATE AMOUNT
----------------------------------------------------------------------------------------------------------------------
Arion Business Park (assumed).............................. 4.450% 01/21/05 $ 21,060,000
Interstate Distribution Center - Jacksonville (assumed).... 5.640% 03/31/05 4,997,000
Chamberlain, LakePointe, 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 4,443,000
Huntwood and Wiegman Distribution Centers.................. 5.680% 08/08/06 38,000,000
------------- ---------------
Weighted Average/Total Amount............................ 5.183% $ 107,500,000
============= ===============
These increases were offset by regularly scheduled principal payments and
the repayment of seven mortgages totaling $33,864,000 during 2005 and 2006 as
shown in the table below.
MORTGAGE LOANS REPAID IN 2005 AND 2006 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
LakePointe Business Park..................... 8.125% 07/01/05 9,738,000
JetPort Commerce Park........................ 8.125% 09/30/05 2,783,000
Huntwood Distribution Center................. 7.990% 08/08/06 10,557,000
Wiegman Distribution Center.................. 7.990% 08/08/06 4,872,000
------------- ---------------
Weighted Average/Total Amount.............. 8.003% $ 33,864,000
============= ===============
Depreciation and amortization for continuing operations increased
$1,159,000 and $3,549,000 for the three and nine months ended September 30, 2006
compared to the same periods 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 $97,000 and $814,000 for the three and
nine months ended September 30, 2006, compared to $416,000 and $1,486,000 in the
same periods in 2005.
Capital Expenditures
Capital expenditures for the three and nine months ended September 30, 2006
and 2005 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Estimated -----------------------------------------------------
Useful Life 2006 2005 2006 2005
-------------------------------------------------------------------
(In thousands)
Upgrade on Acquisitions.................. 40 yrs $ 231 187 339 241
Tenant Improvements:
New Tenants........................... Lease Life 1,353 1,100 5,214 3,221
New Tenants (first generation) (1).... Lease Life 396 134 676 544
Renewal Tenants....................... Lease Life 130 110 523 743
Other:
Building Improvements................. 5-40 yrs 441 256 1,297 1,020
Roofs................................. 5-15 yrs 682 20 1,169 147
Parking Lots.......................... 3-5 yrs 204 64 299 865
Other................................. 5 yrs 83 27 128 194
-----------------------------------------------------
Total capital expenditures......... $ 3,520 1,898 9,645 6,975
=====================================================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
Capitalized Leasing Costs
The Company's leasing costs (principally commissions) are capitalized and
included in Other Assets. The costs are amortized over the terms of the
associated leases and are included in depreciation and amortization expense.
Capitalized leasing costs for the three and nine months ended September 30, 2006
and 2005 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Estimated -----------------------------------------------------
Useful Life 2006 2005 2006 2005
-------------------------------------------------------------------
(In thousands)
Development.......................... Lease Life $ 771 308 1,530 1,108
New Tenants.......................... Lease Life 583 509 1,953 1,463
New Tenants (first generation) (1)... Lease Life 37 67 112 116
Renewal Tenants...................... Lease Life 420 384 1,362 1,198
-----------------------------------------------------
Total capitalized leasing costs $ 1,811 1,268 4,957 3,885
=====================================================
Amortization of leasing costs (2).... $ 1,150 882 3,212 2,771
=====================================================
(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 and nine months ended September 30, 2006 and 2005.
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------
Discontinued Operations 2006 2005 2006 2005
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Income from real estate operations.............................. $ - 761 587 2,417
Expenses from real estate operations............................ - (217) (246) (702)
-----------------------------------------------
Property net operating income from discontinued operations.... - 544 341 1,715
Other income.................................................... - 18 - 72
Interest expense................................................ - - - (64)
Depreciation and amortization................................... - (205) (182) (693)
-----------------------------------------------
Income from real estate operations.............................. - 357 159 1,030
Gain on sale of real estate investments..................... 7 33 1,091 1,164
-----------------------------------------------
Income from discontinued operations............................. $ 7 390 1,250 2,194
===============================================
A summary of gains on sale of real estate investments for the nine months
ended September 30, 2006 and 2005 follows:
Date Net Deferred Recognized
Real Estate Properties Location Size Sold Sales Price Basis Gain Gain
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
2006
Madisonville land.................... Madisonvil1e, KY 1.2 Acres 01/05/06 $ 804 27 168 609
Senator I & II/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
Lamar Distribution Center I.......... Memphis, TN 125,000 SF 06/30/06 2,979 2,951 18 10
Deferred gain recognized from
previous sale.................... 15
----------------------------------------------
$18,719 17,457 186 1,091
==============================================
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
==============================================
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 no material impact
on its overall financial position or results of operations. See Note 14 in the
Notes to the Consolidated Financial Statements for more information related to
the Company's accounting for stock-based compensation.
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a company's financial
statements and prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 becomes effective on January 1,
2007. The Company expects that the adoption of FIN 48 in 2007 will have little
or no impact on its overall financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which provides guidance for using fair value to measure assets and liabilities.
SFAS No. 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value but does not expand the use of fair
value in any new circumstances. The provisions of Statement 157 are effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. EastGroup accounts for its
stock-based compensation costs at fair value on the dates of grant as required
under SFAS 123R. Also, as required under SFAS 133, the Company accounts for its
interest rate swap cash flow hedge on the Tower Automotive mortgage at fair
value. The Company expects that the adoption of Statement 157 in 2008 will have
little or no impact on its overall financial position or results of operations.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements, (SAB 108)
which provides guidance on quantifying and evaluating the materiality of
unrecorded misstatements. SAB 108 is effective for annual financial statements
covering the first fiscal year ending after November 15, 2006. The Company
expects that the adoption of SAB 108 in 2007 will have little or no impact on
its overall financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $52,729,000 for the nine
months ended September 30, 2006. The primary other sources of cash were from
bank borrowings, proceeds from a common stock offering and new mortgage note,
and the sale of real estate properties. The Company distributed $33,062,000 in
common and $1,968,000 in preferred stock dividends during the nine months ended
September 30, 2006. Other primary uses of cash were for bank debt repayments,
construction and development of properties, mortgage note payments and capital
improvements at various properties.
Total debt at September 30, 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 September 30, 2006
and December 31, 2005.
September 30, 2006 December 31, 2005
-----------------------------------------
(In thousands)
Mortgage notes payable - fixed rate........... $ 362,575 346,961
Bank notes payable - floating rate............ 55,700 116,764
-----------------------------------------
Total debt................................. $ 418,275 463,725
=========================================
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
September 30, 2006, the weighted average interest rate was 5.92% on a balance of
$55,700,000. 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 matures in November 2006, which the Company customarily
uses for working cash needs. EastGroup currently intends to renew this facility
upon maturity. 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 September 30, 2006, the balance on this line was zero.
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 September 13, 2006, EastGroup closed on the sale of 1,437,500 shares of
its common stock. The net proceeds from the offering of the shares were
approximately $68.1 million after deducting the underwriting discount and other
offering expenses. EastGroup used the proceeds to repay borrowings under its
credit facilities.
In August 2006, the Company closed on a $38 million, nonrecourse first
mortgage loan secured by properties containing 778,000 square feet. The loan has
a fixed interest rate of 5.68%, a ten-year term and an amortization schedule of
20 years. The proceeds of the note were used to repay the maturing mortgages on
these properties of $15.4 million and to reduce floating rate bank borrowings.
In October 2006, the Company closed on a $78 million, nonrecourse first
mortgage loan secured by properties containing 1,316,000 square feet. The loan
has a fixed interest rate of 5.97%, a ten-year term and an amortization schedule
of 20 years. The proceeds of the note were used to repay a maturing $20.5
million mortgage and to reduce floating rate bank borrowings.
Contractual Obligations
EastGroup's fixed, noncancelable obligations as of December 31, 2005 did
not materially change during the nine months ended September 30, 2006 except for
the increase in mortgage loan borrowings and the decrease in bank borrowings
discussed above.
The Company anticipates that its current cash balance, operating cash
flows, and borrowings under its lines of credit will be adequate for (i)
operating and administrative expenses, (ii) normal repair and maintenance
expenses at its properties, (iii) debt service obligations, (iv) distributions
to stockholders, (v) capital improvements, (vi) purchases of properties, (vii)
development, and (viii) any other normal business activities of the Company,
both in the short- and long-term.
INFLATION
Most of the Company's leases include scheduled rent increases.
Additionally, most of the Company's leases require the tenants to pay their pro
rata share of operating expenses, including common area maintenance, real estate
taxes and insurance, thereby reducing the Company's exposure to increases in
operating expenses resulting from inflation. In addition, the Company's leases
typically have three to five year terms, which may enable the Company to replace
existing leases with new leases at a higher base if rents on the existing leases
are below the then-existing market rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate changes primarily as a result of
its lines of credit and long-term debt maturities. This debt is used to maintain
liquidity and fund capital expenditures and expansion of the Company's real
estate investment portfolio and operations. The Company's objective for interest
rate risk management is to limit the impact of interest rate changes on earnings
and cash flows and to lower its overall borrowing costs. To achieve its
objectives, the Company borrows at fixed rates but also has several variable
rate bank lines as discussed under Liquidity and Capital Resources. The table
below presents the principal payments due and weighted average interest rates
for both the fixed rate and variable rate debt.
Oct-Dec
2006 2007 2008 2009 2010 Thereafter Total Fair Value
--------------------------------------------------------------------------------------
Fixed rate debt(1) (in thousands)........ $ 22,957 24,465 10,738 40,791 9,169 254,455 362,575 370,694(2)
Weighted average interest rate........... 4.66% 7.29% 6.32% 6.66% 6.05% 6.12% 6.17%
Variable rate debt (in thousands)........ $ - - 55,700 - - - 55,700 55,700
Weighted average interest rate........... - - 5.92% - - - 5.92%
(1) The fixed rate debt shown above includes the Tower Automotive mortgage,
which has a variable interest rate based on the one-month LIBOR. EastGroup has
an interest rate swap agreement that fixes the rate at 4.03% for the 8-year
term. Interest and related fees result in an annual effective interest rate of
5.3%.
(2) The fair value of the Company's fixed rate debt is estimated based on the
quoted market prices for similar issues or by discounting expected cash flows at
the rates currently offered to the Company for debt of the same remaining
maturities, as advised by the Company's bankers.
As the table above incorporates only those exposures that existed as of
September 30, 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 59 basis points, interest expense
and cash flows would increase or decrease by approximately $330,000 annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $10,040,000 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 9/30/06 at 12/31/05
---------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,040 12/31/10 1 month LIBOR 4.03% $324 $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 acquire, develop or sell
properties as and when anticipated; 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 September
30, 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 third fiscal quarter ended September 30, 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 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: November 8, 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