EXHIBIT 99.2
CONSOLIDATED BALANCE SHEETS
December 31,
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2008 2007
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(In thousands, except for share and per share data)
ASSETS
Real estate properties........................................................ $ 1,252,282 1,114,966
Development................................................................... 150,354 152,963
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1,402,636 1,267,929
Less accumulated depreciation............................................... (310,351) (269,132)
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1,092,285 998,797
Unconsolidated investment..................................................... 2,666 2,630
Cash.......................................................................... 293 724
Other assets.................................................................. 60,961 53,682
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TOTAL ASSETS................................................................ $ 1,156,205 1,055,833
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LIABILITIES AND EQUITY
LIABILITIES
Mortgage notes payable........................................................ $ 585,806 465,360
Notes payable to banks........................................................ 109,886 135,444
Accounts payable & accrued expenses........................................... 32,838 34,179
Other liabilities............................................................. 14,299 16,153
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Total Liabilities........................................................... 742,829 651,136
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EQUITY
Stockholders' Equity:
Series C Preferred Shares; $.0001 par value; no shares authorized at
December 31, 2008 and 600,000 shares authorized at December 31, 2007;
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
at December 31, 2007; stated liquidation preference of $33,000 at
December 31, 2007; redeemed July 2, 2008.................................... - 32,326
Common shares; $.0001 par value; 70,000,000 shares authorized at
December 31, 2008 and 68,080,000 at December 31, 2007;
25,070,401 shares issued and outstanding at December 31, 2008 and
23,808,768 at December 31, 2007............................................. 3 2
Excess shares; $.0001 par value; 30,000,000 shares authorized;
no shares issued............................................................ - -
Additional paid-in capital on common shares................................... 528,452 467,573
Distributions in excess of earnings........................................... (117,093) (97,460)
Accumulated other comprehensive loss.......................................... (522) (56)
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Total Stockholders' Equity.................................................. 410,840 402,385
Noncontrolling interest in joint ventures..................................... 2,536 2,312
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Total Equity................................................................ 413,376 404,697
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TOTAL LIABILITIES AND EQUITY................................................. $ 1,156,205 1,055,833
===================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
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2008 2007 2006
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(In thousands, except per share data)
REVENUES
Income from real estate operations........................................... $ 168,327 150,083 132,417
Other income................................................................. 248 92 182
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168,575 150,175 132,599
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EXPENSES
Expenses from real estate operations......................................... 47,374 40,926 37,014
Depreciation and amortization................................................ 51,221 47,738 41,198
General and administrative................................................... 8,547 8,295 7,401
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107,142 96,959 85,613
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OPERATING INCOME............................................................... 61,433 53,216 46,986
OTHER INCOME (EXPENSE)
Equity in earnings of unconsolidated investment.............................. 316 285 287
Gain on sales of non-operating real estate................................... 321 2,602 123
Gain on sales of securities.................................................. 435 - -
Interest income.............................................................. 293 306 142
Interest expense............................................................. (30,192) (27,314) (24,616)
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INCOME FROM CONTINUING OPERATIONS.............................................. 32,606 29,095 22,922
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DISCONTINUED OPERATIONS
Income from real estate operations........................................... 130 288 1,185
Gain on sales of real estate investments..................................... 2,032 960 5,727
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INCOME FROM DISCONTINUED OPERATIONS ........................................... 2,162 1,248 6,912
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NET INCOME..................................................................... 34,768 30,343 29,834
Net income attributable to noncontrolling interest in joint ventures......... (626) (609) (600)
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NET INCOME ATTRIBUTABLE TO
EASTGROUP PROPERTIES, INC.................................................... 34,142 29,734 29,234
Dividends on Series D preferred shares....................................... 1,326 2,624 2,624
Costs on redemption of Series D preferred shares............................. 682 - -
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NET INCOME AVAILABLE TO EASTGROUP PROPERTIES, INC.
COMMON STOCKHOLDERS.......................................................... $ 32,134 27,110 26,610
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BASIC PER COMMON SHARE DATA FOR INCOME
ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.
Income from continuing operations............................................ $ 1.22 1.10 .88
Income from discontinued operations.......................................... .09 .05 .31
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Net income available to common stockholders.................................. $ 1.31 1.15 1.19
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Weighted average shares outstanding.......................................... 24,503 23,562 22,372
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DILUTED PER COMMON SHARE DATA FOR INCOME
ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.
Income from continuing operations............................................ $ 1.21 1.09 .87
Income from discontinued operations.......................................... .09 .05 .30
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Net income available to common stockholders.................................. $ 1.30 1.14 1.17
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Weighted average shares outstanding.......................................... 24,653 23,781 22,692
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AMOUNTS ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.
COMMON STOCKHOLDERS
Income from continuing operations............................................ $ 29,972 25,862 19,698
Income from discontinued operations.......................................... 2,162 1,248 6,912
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Net income available to common stockholders.................................. $ 32,134 27,110 26,610
====================================================
Dividends declared per common share............................................ $ 2.08 2.00 1.96
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
EastGroup Properties, Inc.
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Accumulated Noncontrolling
Additional Distributions Other Interest in
Preferred Common Paid-In In Excess Comprehensive Joint
Stock Stock Capital Of Earnings Income (Loss) Ventures Total
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(In thousands, except for share and per share data)
BALANCE, DECEMBER 31, 2005.......................... $32,326 2 390,155 (57,930) 311 1,702 366,566
Comprehensive income
Net income......................................... - - - 29,234 - 600 29,834
Net unrealized change in fair value of interest
rate swap......................................... - - - - 3 - 3
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Total comprehensive income........................ 29,837
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Common dividends declared - $1.96 per share......... - - - (45,695) - - (45,695)
Preferred dividends declared - $1.9876 per share.... - - - (2,624) - - (2,624)
Issuance of 1,437,500 shares of common stock,
common stock offering, net of expenses............. - - 68,112 - - - 68,112
Stock-based compensation, net of forfeitures........ - - 2,943 - - - 2,943
Issuance of 118,269 shares of common stock,
options exercised.................................. - - 2,154 - - - 2,154
Issuance of 6,236 shares of common stock,
dividend reinvestment plan......................... - - 305 - - - 305
9,392 shares withheld to satisfy tax withholding
obligations in connection with the vesting of
restricted stock .................................. - - (499) - - - (499)
Noncontrolling interest capital contribution........ - - - - - 350 350
Distributions to noncontrolling interest............ - - - - - (504) (504)
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BALANCE, DECEMBER 31, 2006.......................... 32,326 2 463,170 (77,015) 314 2,148 420,945
Comprehensive income
Net income......................................... - - - 29,734 - 609 30,343
Net unrealized change in fair value of interest
rate swap......................................... - - - - (370) - (370)
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Total comprehensive income........................ 29,973
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Common dividends declared - $2.00 per share......... - - - (47,555) - - (47,555)
Preferred dividends declared - $1.9876 per share.... - - - (2,624) - - (2,624)
Stock-based compensation, net of forfeitures........ - - 3,198 - - - 3,198
Issuance of 67,150 shares of common stock,
options exercised.................................. - - 1,475 - - - 1,475
Issuance of 6,281 shares of common stock,
dividend reinvestment plan......................... - - 279 - - - 279
11,382 shares withheld to satisfy tax withholding
obligations in connection with the vesting of
restricted stock .................................. - - (549) - - - (549)
Distributions to noncontrolling interest ........... - - - - - (445) (445)
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BALANCE, DECEMBER 31, 2007.......................... 32,326 2 467,573 (97,460) (56) 2,312 404,697
Comprehensive income
Net income......................................... - - - 34,142 - 626 34,768
Net unrealized change in fair value of interest
rate swap........................................ - - - - (466) - (466)
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Total comprehensive income....................... 34,302
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Common dividends declared - $2.08 per share......... - - - (51,767) - - (51,767)
Preferred dividends declared - $1.0048 per share.... - - - (1,326) - - (1,326)
Redemption of 1,320,000 shares of Series D
preferred stock.................................... (32,326) - - (682) - - (33,008)
Stock-based compensation, net of forfeitures........ - - 3,176 - - - 3,176
Issuance of 1,198,700 shares of common stock,
common stock offering, net of expenses............. - 1 57,178 - - - 57,179
Issuance of 25,720 shares of common stock,
options exercised.................................. - - 526 - - - 526
Issuance of 6,627 shares of common stock,
dividend reinvestment plan......................... - - 281 - - - 281
7,150 shares withheld to satisfy tax withholding
obligations in connection with the vesting of
restricted stock .................................. - - (282) - - - (282)
Distributions to noncontrolling interest ........... - - - - - (402) (402)
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BALANCE, DECEMBER 31, 2008.......................... $ - 3 528,452 (117,093) (522) 2,536 413,376
================================================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
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2008 2007 2006
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(In thousands)
OPERATING ACTIVITIES
Net income attributable to EastGroup Properties, Inc................................. $ 34,142 29,734 29,234
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization from continuing operations........................... 51,221 47,738 41,198
Depreciation and amortization from discontinued operations......................... 71 320 1,019
Noncontrolling interest depreciation and amortization.............................. (201) (174) (151)
Amortization of mortgage loan premiums............................................. (120) (117) (403)
Gain on sales of land and real estate investments.................................. (2,353) (3,562) (5,850)
Gain on sales of securities........................................................ (435) - -
Amortization of discount on mortgage loan receivable............................... (117) - -
Stock-based compensation expense................................................... 2,265 2,220 2,125
Equity in earnings of unconsolidated investment, net of distributions.............. (36) (35) 23
Changes in operating assets and liabilities:
Accrued income and other assets.................................................. (787) 3,506 (4,603)
Accounts payable, accrued expenses and prepaid rent.............................. (40) 6,709 4,141
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NET CASH PROVIDED BY OPERATING ACTIVITIES.............................................. 83,610 86,339 66,733
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INVESTING ACTIVITIES
Real estate development.............................................................. (85,441) (112,960) (77,666)
Purchases of real estate............................................................. (46,282) (57,838) (19,539)
Real estate improvements............................................................. (15,210) (15,881) (13,470)
Proceeds from sales of land and real estate investments.............................. 11,728 6,357 38,412
Advances on mortgage loans receivable................................................ (4,994) - (185)
Repayments on mortgage loans receivable.............................................. 871 30 23
Purchases of securities.............................................................. (7,534) - -
Proceeds from sales of securities.................................................... 7,969 - -
Changes in other assets and other liabilities........................................ (13,289) (3,786) (2,792)
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NET CASH USED IN INVESTING ACTIVITIES.................................................. (152,182) (184,078) (75,217)
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FINANCING ACTIVITIES
Proceeds from bank borrowings........................................................ 331,644 332,544 191,689
Repayments on bank borrowings........................................................ (357,202) (226,166) (279,387)
Proceeds from mortgage notes payable................................................. 137,000 75,000 116,000
Principal payments on mortgage notes payable......................................... (16,434) (26,963) (45,071)
Debt issuance costs.................................................................. (2,372) (701) (1,048)
Distributions paid to stockholders................................................... (54,174) (50,680) (47,843)
Redemption of Series D preferred shares.............................................. (33,008) - -
Proceeds from common stock offerings................................................. 57,179 - 68,112
Proceeds from exercise of stock options.............................................. 526 1,475 2,154
Proceeds from dividend reinvestment plan............................................. 281 279 305
Other................................................................................ 4,701 (7,265) 2,598
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NET CASH PROVIDED BY FINANCING ACTIVITIES.............................................. 68,141 97,523 7,509
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DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (431) (216) (975)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................................... 724 940 1,915
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CASH AND CASH EQUIVALENTS AT END OF YEAR............................................. $ 293 724 940
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SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $6,946, $6,086 and $4,336
for 2008, 2007 and 2006, respectively.............................................. $ 29,573 25,838 23,870
Fair value of common stock awards issued to employees and directors, net of
forfeitures........................................................................ 1,255 1,443 3,234
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) 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, 2008,
2007 and 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 noncontrolling 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.
(b) Income Taxes
EastGroup, a Maryland corporation, has qualified as a real estate
investment trust (REIT) under Sections 856-860 of the Internal Revenue Code and
intends to continue to qualify as such. To maintain its status as a REIT, the
Company is required to distribute 90% of its ordinary taxable income to its
stockholders. The Company has the option of (i) reinvesting the sales price of
properties sold through tax-deferred exchanges, allowing for a deferral of
capital gains on the sale, (ii) paying out capital gains to the stockholders
with no tax to the Company, or (iii) treating the capital gains as having been
distributed to the stockholders, paying the tax on the gain deemed distributed
and allocating the tax paid as a credit to the stockholders. The Company
distributed all of its 2008, 2007 and 2006 taxable income to its stockholders.
Accordingly, no provision for income taxes was necessary. The following table
summarizes the federal income tax treatment for all distributions by the Company
for the years ended 2008, 2007 and 2006.
Federal Income Tax Treatment of Share Distributions
Years Ended December 31,
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2008 2007 2006
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Common Share Distributions:
Ordinary income........................................ $ 2.0758 1.7449 1.3660
Return of capital...................................... - .1273 -
Unrecaptured Section 1250 long-term capital gain....... .0042 .0236 .4160
Other long-term capital gain........................... - .1042 .1780
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Total Common Distributions............................... $ 2.0800 2.0000 1.9600
=========================================
Series D Preferred Share Distributions:
Ordinary income........................................ $ 1.0024 1.8608 1.3852
Unrecaptured Section 1250 long-term capital gain....... .0024 .0234 .4220
Other long-term capital gain........................... - .1034 .1804
-----------------------------------------
Total Preferred D Distributions.......................... $ 1.0048 1.9876 1.9876
=========================================
EastGroup adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109, on January 1, 2007. With few
exceptions, the Company's 2004 and earlier tax years are closed for examination
by U.S. federal, state and local tax authorities. In accordance with the
provisions of FIN 48, the Company had no significant uncertain tax positions as
of December 31, 2008 and 2007.
The Company's income may differ for tax and financial reporting purposes
principally because of (1) the timing of the deduction for the provision for
possible losses and losses on investments, (2) the timing of the recognition of
gains or losses from the sale of investments, (3) different depreciation methods
and lives, (4) real estate properties having a different basis for tax and
financial reporting purposes, (5) mortgage loans having a different basis for
tax and financial reporting purposes, thereby producing different gains upon
collection of these loans, and (6) differences in book and tax allowances and
timing for stock-based compensation expense.
(c) Income Recognition
Minimum rental income from real estate operations is recognized on a
straight-line basis. The straight-line rent calculation on leases includes the
effects of rent concessions and scheduled rent increases, and the calculated
straight-line rent income is recognized over the lives of the individual leases.
The Company maintains allowances for doubtful accounts receivable, including
straight-line rent receivable, based upon estimates determined by management.
Management specifically analyzes aged receivables, customer credit-worthiness,
historical bad debts and current economic trends when evaluating the adequacy of
the allowance for doubtful accounts.
Revenue is recognized on payments received from tenants for early
terminations after all criteria have been met in accordance with Statement of
Financial Accounting Standards (SFAS) No. 13, Accounting for Leases.
The Company recognizes gains on sales of real estate in accordance with the
principles set forth in SFAS No. 66, Accounting for Sales of Real Estate. Upon
closing of real estate transactions, the provisions of SFAS No. 66 require
consideration for the transfer of rights of ownership to the purchaser, receipt
of an adequate cash down payment from the purchaser, adequate continuing
investment by the purchaser and no substantial continuing involvement by the
Company. If the requirements for recognizing gains have not been met, the sale
and related costs are recorded, but the gain is deferred and recognized by a
method other than the full accrual method.
The Company recognizes interest income on mortgage loans on the accrual
method unless a significant uncertainty of collection exists. If a significant
uncertainty exists, interest income is recognized as collected. Discounts on
mortgage loans receivable are amortized over the lives of the loans using a
method that does not differ materially from the interest method. The Company
evaluates the collectability of both interest and principal on each of its loans
to determine whether the loans are impaired. A loan is considered to be impaired
when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the existing contractual
terms. When a loan is considered to be impaired, the amount of loss is
calculated by comparing the recorded investment to the value determined by
discounting the expected future cash flows at the loan's effective interest rate
or to the fair value of the underlying collateral (if the loan is
collateralized) less costs to sell. As of December 31, 2008 and 2007, there was
no significant uncertainty of collection; therefore, interest income was
recognized, and the discount on mortgage loans receivable was amortized. In
addition, the Company determined that no allowance for collectability of the
mortgage notes receivable was necessary.
(d) 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, Arizona and California, 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 (including
estimated future expenditures necessary to substantially complete the asset)
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. As of December 31, 2008 and 2007, the
Company determined that no impairment charges on the Company's real estate
properties were necessary. 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 $42,166,000, $39,688,000 and $35,428,000 for 2008, 2007 and 2006,
respectively.
(e) Development
During the period in which a property is under development, costs
associated with development (i.e., land, construction costs, interest expense,
property taxes and other direct and indirect costs associated with development)
are aggregated into the total capitalized costs 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, costs are
capitalized only for the portion of the building that remains vacant. When the
property becomes 80% occupied or one year after completion of the shell
construction (whichever comes first), capitalization of development costs
ceases. The properties are then transferred to real estate properties, and
depreciation commences on the entire property (excluding the land).
(f) Real Estate Held for Sale
The Company considers a real estate property to be held for sale when it
meets the criteria established under SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, including when it is probable that the
property will be sold within a year. A key indicator of probability of sale is
whether the buyer has a significant amount of earnest money at risk. Real estate
properties that are held for sale are reported at the lower of the carrying
amount or fair value less estimated costs to sell and are not depreciated while
they are held for sale. In accordance with the guidelines established under SFAS
No. 144, the results of operations for the operating properties sold or held for
sale during the reported periods are shown under Discontinued Operations on the
Consolidated Statements of Income. Interest expense is not generally allocated
to the properties that are held for sale or whose operations are included under
Discontinued Operations unless the mortgage is required to be paid in full upon
the sale of the property.
(g) Derivative Instruments and Hedging Activities
The Company applies SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which requires that all derivatives be recognized as either
assets or liabilities on the Consolidated Balance Sheets and measured at fair
value. Changes in fair value are to be reported either in earnings or as a
component of stockholders' equity depending on the intended use of the
derivative and the resulting designation. Entities applying hedge accounting are
required to establish, at the inception of the hedge, the method used to assess
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. The Company has an interest
rate swap agreement, which is summarized in Note 6.
(h) Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
(i) Amortization
Debt origination costs are deferred and amortized over the term of each
loan using the effective interest method. Amortization of loan costs for
continuing operations was $975,000, $911,000 and $819,000 for 2008, 2007 and
2006, respectively.
Leasing costs are deferred and amortized using the straight-line method
over the term of the lease. Leasing costs amortization expense for continuing
and discontinued operations was $5,882,000, $5,339,000 and $4,304,000 for 2008,
2007 and 2006, respectively. Amortization expense for in-place lease intangibles
is disclosed in Business Combinations and Acquired Intangibles.
(j) 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. Factors considered by management
in allocating the cost of the properties acquired include an estimate of
carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases. 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.
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 $3,244,000,
$3,031,000 and $2,485,000 for 2008, 2007 and 2006, respectively. Amortization of
above and below market leases was immaterial for all periods presented.
Projected amortization of in-place lease intangibles for the next five years as
of December 31, 2008 is as follows:
Years Ending December 31, (In thousands)
---------------------------------------------------------------
2009...................................... $ 1,990
2010...................................... 1,157
2011...................................... 614
2012...................................... 313
2013...................................... 150
During 2008, EastGroup purchased five operating properties, one property
for re-development, and 125 acres of developable land. The Company purchased
these real estate investments for a total cost of $58,202,000, of which
$39,018,000 was allocated to real estate properties and $17,144,000 to
development. In accordance with SFAS No. 141, intangibles associated with the
purchase of real estate were allocated as follows: $2,143,000 to in-place lease
intangibles, $252,000 to above market leases (both included in Other Assets on
the Consolidated Balance Sheets) and $355,000 to below market leases (included
in Other Liabilities on the Consolidated Balance Sheets). These costs are
amortized over the remaining lives of the associated leases in place at the time
of acquisition.
Also in 2008, EastGroup acquired one non-operating property as part of the
Orlando build-to-suit transaction with United Stationers. The Company purchased
and then sold this building through its taxable REIT subsidiary and recognized a
gain of $294,000.
The total cost of the seven operating properties acquired in 2007 was
$57,246,000, of which $53,952,000 was allocated to real estate properties. In
accordance with SFAS No. 141, intangibles associated with the purchases of real
estate were allocated as follows: $3,661,000 to in-place lease intangibles,
$246,000 to above market leases and $613,000 to below market leases. Also in
2007, EastGroup acquired one property for re-development and 140.6 acres of
developable land for $16,405,000.
The Company periodically reviews the recoverability of goodwill (at least
annually) and the recoverability of other intangibles (on a quarterly basis) for
possible impairment. In management's opinion, no material impairment of goodwill
and other intangibles existed at December 31, 2008 and 2007.
(k) Stock-Based Compensation
The Company has a management incentive plan that was approved by
shareholders and adopted in 2004, which authorizes the issuance of common stock
to employees in the form of options, stock appreciation rights, restricted
stock, deferred stock units, performance shares, stock bonuses, and stock.
Typically, the Company issues new shares to fulfill stock grants or upon the
exercise of stock options.
Under the modified prospective application method, the Company continues to
recognize compensation cost on a straight-line basis over the service period for
awards that precede the adoption of SFAS No. 123 (Revised 2004), Share-Based
Payment, on January 1, 2006. (Prior to the adoption of SFAS No. 123R, the
Company had adopted the fair value recognition provisions of SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of SFAS No. 123, Accounting for Stock-Based Compensation, prospectively to all
awards granted, modified, or settled after January 1, 2002.) The cost 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 cost 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 cost 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 are determined using a simulation pricing model developed to
specifically accommodate the unique features of the awards.
During the restricted period for awards not subject to contingencies, the
Company accrues dividends and holds the certificates for the shares; however,
the employee can vote the shares. For shares subject to contingencies, dividends
are accrued based upon the number of shares expected to vest. Share certificates
and dividends are delivered to the employee as they vest.
(l) 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.
(m) Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
revenues and expenses during the reporting period, and to disclose material
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
(n) Risks and Uncertainties
The state of the overall economy can significantly impact the Company's
operational performance and thus, impact its financial position. Should
EastGroup experience a significant decline in operational performance, it may
affect the Company's ability to make distributions to its shareholders and
service debt or meet other financial obligations.
(o) New Accounting Pronouncements
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. As required under SFAS No. 133, the Company
accounts for its interest rate swap cash flow hedge on the Tower Automotive
mortgage at fair value. The provisions of Statement 157, with the exception of
nonfinancial assets and liabilities, were effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The application of Statement 157 to the Company in
2008 had an immaterial impact on the Company's overall financial position and
results of operations.
The FASB deferred for one year Statement 157's fair value measurement
requirements for nonfinancial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis. These provisions
are included in FASB Staff Position (FSP) FAS 157-2 and are effective for fiscal
years beginning after November 15, 2008. The Company has determined that the
adoption of these provisions in 2009 had an immaterial impact on the Company's
overall financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations, which retains the fundamental requirements in SFAS No. 141 and
requires the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree be measured at fair value as of the
acquisition date. In addition, Statement 141R requires that any goodwill
acquired in the business combination be measured as a residual, and it provides
guidance in determining what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The Statement also requires that acquisition-related costs
be recognized as expenses in the periods in which the costs are incurred and the
services are received. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and may
not be applied before that date. The adoption of Statement 141R in 2009 had an
immaterial impact on the Company's overall financial position and results of
operations.
Also in December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, which is an amendment of
Accounting Research Bulletin (ARB) No. 51. Statement 160 provides guidance for
entities that prepare consolidated financial statements that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary and contains disclosure provisions which are required to be applied
retrospectively. Consequently, certain reclassifications have been made in the
financial statements and Notes to Consolidated Financial Statements contained
herein to reflect the Company's adoption of Statement 160. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, and may not be applied before that
date. The adoption of Statement 160 in 2009 had an immaterial impact on the
Company's overall financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, which is an amendment of FASB Statement No.
133. SFAS No. 161 requires all entities with derivative instruments to disclose
information regarding how and why the entity uses derivative instruments and how
derivative instruments and related hedged items affect the entity's financial
position, financial performance, and cash flows. The Statement is effective
prospectively for periods beginning on or after November 15, 2008.
During 2008, the FASB issued FSP FAS 142-3, which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 requires an entity
to disclose information that enables financial statement users to assess the
extent to which the expected future cash flows associated with the asset are
affected by the entity's intent and/or ability to renew or extend the
arrangement. The intent of this Staff Position is to improve the consistency
between the useful life of a recognized intangible asset under Statement 142 and
the period of expected cash flows used to measure the fair value of the asset
under Statement 141R and other U.S. generally accepted accounting principles.
FSP FAS 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The adoption of FSP FAS 142-3 in 2009 had an immaterial impact on the
Company's overall financial position and results of operations.
Also in 2008, the Emerging Issues Task Force (EITF) issued EITF 08-6,
Equity Method Investment Accounting Considerations, which applies to all
investments accounted for under the equity method and clarifies the accounting
for certain transactions and impairment considerations involving those
investments. EITF 08-6 is effective for financial statements issued for fiscal
years beginning on or after December 15, 2008, and interim periods within those
fiscal years. The adoption of EITF 08-6 in 2009 had an immaterial impact on the
Company's overall financial position and results of operations.
(p) Reclassifications
Certain reclassifications have been made in the 2007 and 2006 consolidated
financial statements to conform to the 2008 presentation.
(2) REAL ESTATE OWNED
The Company's real estate properties at December 31, 2008 and 2007 were as
follows:
December 31,
--------------------------
2008 2007
--------------------------
(In thousands)
Real estate properties:
Land................................................ $ 187,617 175,496
Buildings and building improvements................. 867,506 763,980
Tenant and other improvements....................... 197,159 175,490
Development............................................ 150,354 152,963
--------------------------
1,402,636 1,267,929
Less accumulated depreciation....................... (310,351) (269,132)
--------------------------
$ 1,092,285 998,797
==========================
The Company is currently developing the properties detailed below. Costs
incurred include capitalization of interest costs during the period of
construction. The interest costs capitalized on real estate properties for 2008
were $6,946,000 compared to $6,086,000 for 2007 and $4,336,000 for 2006.
Total capital investment for development during 2008 was $85,441,000, which
primarily consisted of costs of $81,642,000 as detailed in the development
activity table and costs of $4,116,000 for improvements on developments
transferred to Real Estate Properties during the 12-month period following
transfer.
Costs Incurred
-------------------------------------------
Costs For the Cumulative
Transferred Year Ended as of Estimated
Size in 2008 (1) 12/31/08 12/31/08 Total Costs (2)
----------------------------------------------------------------------------
DEVELOPMENT (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
40th Avenue Distribution Center, Phoenix, AZ........ 89,000 $ - 1,392 6,539 6,900
Wetmore II, Building B, San Antonio, TX............. 55,000 - 750 3,633 3,900
Beltway Crossing VI, Houston, TX.................... 128,000 - 2,084 5,607 6,700
Oak Creek VI, Tampa, FL............................ 89,000 - 1,682 5,587 6,100
Southridge VIII, Orlando, FL........................ 91,000 - 1,961 6,001 6,900
Techway SW IV, Houston, TX.......................... 94,000 - 2,875 4,843 6,100
SunCoast III, Fort Myers, FL........................ 93,000 - 2,543 6,718 8,400
Sky Harbor, Phoenix, AZ............................. 264,000 - 8,821 22,829 25,100
World Houston 26, Houston, TX....................... 59,000 1,110 1,708 2,818 3,300
12th Street Distribution Center, Jacksonville, FL... 150,000 - 4,850 4,850 4,900
----------------------------------------------------------------------------
Total Lease-up........................................ 1,112,000 1,110 28,666 69,425 78,300
----------------------------------------------------------------------------
Costs Incurred
-------------------------------------------
Costs For the Cumulative
Transferred Year Ended as of Estimated
Size in 2008 (1) 12/31/08 12/31/08 Total Costs (2)
----------------------------------------------------------------------------
DEVELOPMENT (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
UNDER CONSTRUCTION
Beltway Crossing VII, Houston, TX................... 95,000 2,123 2,090 4,213 5,900
Country Club III & IV, Tucson, AZ................... 138,000 2,552 5,495 8,047 11,200
Oak Creek IX, Tampa, FL............................. 86,000 1,369 2,831 4,200 5,500
Blue Heron III, West Palm Beach, FL................. 20,000 863 1,035 1,898 2,600
World Houston 28, Houston, TX....................... 59,000 733 1,647 2,380 4,800
World Houston 29, Houston, TX....................... 70,000 849 1,037 1,886 4,800
World Houston 30, Houston, TX....................... 88,000 1,591 - 1,591 5,800
----------------------------------------------------------------------------
Total Under Construction.............................. 556,000 10,080 14,135 24,215 40,600
----------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Tucson, AZ.......................................... 70,000 (2,552) 924 417 3,500
Tampa, FL........................................... 249,000 (1,369) 682 3,890 14,600
Orlando, FL......................................... 1,254,000 - 10,691 14,453 78,700
West Palm Beach, FL................................. - (863) 52 - -
Fort Myers, FL...................................... 659,000 - 2,195 15,014 48,100
Dallas, TX.......................................... 70,000 - 570 570 5,000
El Paso, TX......................................... 251,000 - - 2,444 9,600
Houston, TX......................................... 1,064,000 (6,406) 4,643 12,786 68,100
San Antonio, TX..................................... 595,000 - 2,873 5,439 37,500
Charlotte, NC....................................... 95,000 - 995 995 7,100
Jackson, MS......................................... 28,000 - 1 706 2,000
----------------------------------------------------------------------------
Total Prospective Development......................... 4,335,000 (11,190) 23,626 56,714 274,200
----------------------------------------------------------------------------
6,003,000 $ - 66,427 150,354 393,100
============================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING 2008
Beltway Crossing IV, Houston, TX.................... 55,000 $ - 5 3,365
Beltway Crossing III, Houston, TX................... 55,000 - 14 2,866
Southridge XII, Orlando, FL......................... 404,000 - 3,421 18,521
Arion 18, San Antonio, TX........................... 20,000 - 638 2,593
Southridge VII, Orlando, FL......................... 92,000 - 414 6,500
Wetmore II, Building C, San Antonio, TX............. 69,000 - 185 3,682
Interstate Commons III, Phoenix, AZ................. 38,000 - 45 3,093
SunCoast I, Fort Myers, FL.......................... 63,000 - 149 5,225
World Houston 27, Houston, TX....................... 92,000 - 1,765 4,248
Wetmore II, Building D, San Antonio, TX............. 124,000 - 4,965 7,950
World Houston 24, Houston, TX....................... 93,000 - 739 5,904
Centennial Park, Denver, CO......................... 68,000 - 690 5,437
World Houston 25, Houston, TX....................... 66,000 - 536 3,730
Beltway Crossing V, Houston, TX..................... 83,000 - 984 4,730
Wetmore II, Building A, San Antonio, TX............. 34,000 - 576 3,377
Oak Creek A & B, Tampa, FL.......................... 35,000 - 89 3,030
-----------------------------------------------------------
Total Transferred to Real Estate Properties........... 1,391,000 $ - 15,215 84,251 (3)
===========================================================
(1) Represents costs transferred from Prospective Development (primarily land)
to Under Construction (or subsequently to Lease-up) during the period.
(2) Included in these costs are development obligations of $11.1 million and
tenant improvement obligations of $2.0 million on properties under
development.
(3) Represents cumulative costs at the date of transfer.
In 2008, two operating properties, North Stemmons I in Dallas and Delp
Distribution Center III in Memphis, were transferred to real estate held for
sale and were then disposed of.
Also during 2008, EastGroup acquired one non-operating property (128,000
square feet) as part of the Orlando build-to-suit transaction with United
Stationers. The Company purchased and then sold the building through its taxable
REIT subsidiary and recognized a gain of $294,000. In addition, EastGroup sold
41 acres of residential land in San Antonio, Texas, for $841,000 with no gain or
loss. This property was acquired as part of the Company's Alamo Ridge industrial
land acquisition in September 2007.
In 2007, one Memphis property, Delp Distribution Center I, was transferred
to real estate held for sale and was subsequently sold. Also during 2007, the
Company received proceeds of $3,050,000 for the sale of land in lieu of
condemnation at Arion Business Park in San Antonio.
Real estate properties that are held for sale are reported at the lower of
the carrying amount or fair value less estimated costs to sell and are not
depreciated while they are held for sale. In accordance with the guidelines
established under SFAS No. 144, the results of operations for the properties
sold or held for sale during the reported periods are shown under Discontinued
Operations on the Consolidated Statements of Income. No interest expense was
allocated to the properties that are held for sale or whose operations are
included under Discontinued Operations. A summary of gain on sales of real
estate for the years ended December 31, 2008, 2007 and 2006 follows:
Gain on Sales of Real Estate
Discount on
Date Net Note Deferred Recognized
Real Estate Properties Location Size Sold Sales Price Basis Receivable Gain Gain
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
2008
North Stemmons I................... Dallas, TX 123,000 SF 05/12/08 $ 4,633 2,684 - - 1,949
United Stationers Tampa Building... Tampa, FL 128,000 SF 08/08/08 5,717 5,225 198 - 294
Delp Distribution Center III....... Memphis, TN 20,000 SF 08/20/08 589 506 - - 83
Alamo Ridge residential land....... San Antonio, TX 41.0 Acres 09/08/08 762 762 - - -
Deferred gain recognized from
previous sales................. 27
----------------------------------------------------
$ 11,701 9,177 198 - 2,353
====================================================
2007
Delp Distribution Center I......... Memphis, TN 152,000 SF 10/11/07 $ 3,080 2,477 - - 603
Arion Business Park land........... San Antonio, TX 13.1 Acres 10/11/07 2,890 318 - - 2,572
Deferred gain recognized from
previous sales................. 387
----------------------------------------------------
$ 5,970 2,795 - - 3,562
====================================================
2006
Madisonville land.................. Madisonville, KY 1.2 Acres 01/05/06 $ 804 27 - 162 615
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 2,980 2,951 - - 29
Crowfarn Distribution Center....... Memphis, TN 106,000 SF 12/14/06 2,650 2,263 - - 387
Auburn Facility.................... Auburn Hills, MI 114,000 SF 12/28/06 17,251 12,698 - 329 4,224
Fort Myers land.................... Fort Myers, FL 0.8 Acre 12/29/06 267 144 - - 123
Deferred gain recognized from
previous sale.................. 15
----------------------------------------------------
$ 38,888 32,562 - 491 5,850
====================================================
The following schedule indicates approximate future minimum rental receipts
under non-cancelable leases for real estate properties by year as of December
31, 2008:
Future Minimum Rental Receipts Under Non-cancelable Leases
Years Ending December 31, (In thousands)
--------------------------------------------------------------
2009...................................... $ 127,090
2010...................................... 102,816
2011...................................... 77,383
2012...................................... 56,227
2013...................................... 37,855
Thereafter................................ 67,833
---------------
Total minimum receipts................. $ 469,204
===============
Ground Leases
As of December 31, 2008, the Company owned two properties in Florida, two
properties in Texas and one property in Arizona that are subject to ground
leases. These leases have terms of 40 to 50 years, expiration dates of August
2031 to November 2037, and renewal options of 15 to 35 years, except for the one
lease in Arizona which is automatically and perpetually renewed annually. Total
lease expenditures for the years ended December 31, 2008, 2007 and 2006 were
$717,000, $708,000 and $707,000, respectively. Payments are subject to increases
at 3 to 10 year intervals based upon the agreed or appraised fair market value
of the leased premises on the adjustment
date or the Consumer Price Index percentage increase since the base rent date.
The following schedule indicates approximate future minimum lease payments for
these properties by year as of December 31, 2008:
Future Minimum Ground Lease Payments
Years Ending December 31, (In thousands)
--------------------------------------------------------------
2009...................................... $ 720
2010...................................... 720
2011...................................... 720
2012...................................... 720
2013...................................... 720
Thereafter................................ 15,832
---------------
Total minimum payments................. $ 19,432
===============
(3) UNCONSOLIDATED INVESTMENT
In November 2004, the Company acquired a 50% undivided tenant-in-common
interest in Industry Distribution Center II, a 309,000 square foot warehouse
distribution building in the City of Industry (Los Angeles), California. The
building was constructed in 1998 and is 100% leased through December 2014 to a
single tenant who owns the other 50% interest in the property. This investment
is accounted for under the equity method of accounting and had a carrying value
of $2,666,000 at December 31, 2008. At the end of May 2005, EastGroup and the
property co-owner closed a non-recourse first mortgage loan secured by Industry
Distribution Center II. The $13.3 million loan has a 25-year term and an
interest rate of 5.31% through June 30, 2015, when the rate will adjust on an
annual basis according to the "A" Moody's Daily Long-Term Corporate Bond Yield
Average. The lender has the option to call the note on June 30, 2015.
EastGroup's share of this mortgage was $6,159,000 at December 31, 2008 and
$6,309,000 at December 31, 2007.
(4) MORTGAGE LOANS RECEIVABLE
In connection with the sale of a property in 2008, EastGroup advanced the
buyer $4,994,000 in a first mortgage recourse loan. In September, EastGroup
received a principal payment of $844,000. The mortgage loan has a five-year term
and calls for monthly interest payments (interest accruals and payments begin
January 1, 2009) through the maturity date of August 8, 2013, when a balloon
payment for the remaining principal balance of $4,150,000 is due. At the
inception of the loan, EastGroup recognized a discount on the loan of $198,000
and recognized amortization of the discount of $117,000 during 2008. Mortgage
loans receivable, net of discount, are included in Other Assets on the
Consolidated Balance Sheets.
(5) OTHER ASSETS
A summary of the Company's Other Assets follows:
December 31,
------------------------
2008 2007
------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization..... $ 20,866 18,693
Straight-line rent receivable, net of allowance for doubtful accounts........ 14,914 14,016
Accounts receivable, net of allowance for doubtful accounts.................. 4,094 3,587
Acquired in-place lease intangibles, net of accumulated amortization
of $5,626 and $5,308 for 2008 and 2007, respectively....................... 4,369 5,303
Mortgage loans receivable, net of discount of $81 and $0 for 2008 and
2007, respectively......................................................... 4,174 132
Loan costs, net of accumulated amortization.................................. 4,246 2,848
Goodwill..................................................................... 990 990
Prepaid expenses and other assets............................................ 7,308 8,113
------------------------
$ 60,961 53,682
========================
(6) NOTES PAYABLE TO BANKS
The Company has a four-year, $200 million unsecured revolving credit
facility with a group of seven banks that matures in January 2012. The Company
customarily uses this line of credit for acquisitions and developments. The
interest rate on this facility is based on the LIBOR index and varies according
to total liability to total asset value ratios (as defined in the credit
agreement), with an annual facility fee of 15 to 20 basis points. The interest
rate on each tranche is usually reset on a monthly basis and is currently LIBOR
plus 70 basis points with an annual facility fee of 20 basis points. The line of
credit has an option for a one-year extension at the Company's request.
Additionally, there is a provision under which the line may be expanded by $100
million contingent upon obtaining increased commitments from existing lenders or
commitments from additional lenders. At December 31, 2008, the weighted average
interest rate was 1.23% on a balance of $107,000,000. The Company had an
additional $93,000,000 remaining on this line of credit at that date.
The Company also has a four-year, $25 million unsecured revolving credit
facility with PNC Bank, N.A. that matures in January 2012. This facility is
customarily used for working capital needs. The interest rate on this working
cash line is based on LIBOR and varies according to total liability to total
asset value ratios (as defined in the credit agreement). Under this facility,
the Company's current interest rate is LIBOR plus 75 basis points with no annual
facility fee. At December 31, 2008, the interest rate was 1.19% on a balance of
$2,886,000. The Company had an additional $22,114,000 remaining on this line of
credit at that date.
Average bank borrowings were $125,647,000 in 2008 compared to $96,513,000
in 2007 with weighted average interest rates of 3.94% in 2008 compared to 6.36%
in 2007. Weighted average interest rates including amortization of loan costs
were 4.17% for 2008 and 6.73% for 2007. Amortization of bank loan costs was
$295,000, $353,000 and $355,000 for 2008, 2007 and 2006, respectively.
The Company's bank credit facilities have certain restrictive covenants,
such as maintaining debt service coverage and leverage ratios, and the Company
was in compliance with all of its debt covenants at December 31, 2008.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $9,365,000 Tower Automotive Center
recourse mortgage (See Notes 7 and 19). Under the swap agreement, the Company
effectively pays a fixed rate of interest over the term of the agreement without
the exchange of the underlying notional amount. This swap is designated as a
cash flow hedge and is considered to be fully effective in hedging the variable
rate risk associated with the Tower mortgage loan. Changes in the fair value of
the swap are recognized in accumulated other comprehensive income (loss). The
Company does not hold or issue this type of derivative contract for trading or
speculative purposes. The interest rate swap agreement is summarized as follows:
Current Fair Value Fair Value
Type of Hedge Notional Amount Maturity Date Reference Rate Fixed Rate at 12/31/08 at 12/31/07
----------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $9,365 (1) 12/31/10 1 month LIBOR 4.03% ($522) ($56)
(1) This mortgage is backed by a letter of credit totaling $9,473,000 at
December 31, 2008. The letter of credit expired in January 2009 in
connection with the repayment of the variable rate demand note on the Tower
Automotive Center (See Note 19).
(7) MORTGAGE NOTES PAYABLE
A summary of Mortgage Notes Payable follows:
Carrying Amount Balance at
Monthly of Securing December 31,
P&I Maturity Real Estate at --------------------
Property Rate Payment Date December 31, 2008 2008 2007
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Dominguez, Kingsview, Walnut, Washington,
Industry Distribution Center I and Shaw.................... 6.800% $ 358,770 03/01/09 (1) $ 52,025 31,716 33,787
Oak Creek Distribution Center I............................. 8.875% 52,109 09/01/09 5,477 452 1,010
Tower Automotive Center (recourse) (2)...................... 6.030% Semiannual 01/15/11 8,897 9,365 9,710
Interstate I, II & III, Venture, Stemmons Circle,
Glenmont I & II, West Loop I & II, Butterfield Trail
and Rojas.................................................. 7.250% 325,263 05/01/11 40,687 38,549 39,615
America Plaza, Central Green and World Houston 3-9.......... 7.920% 191,519 05/10/11 24,568 23,873 24,264
University Business Center (120 & 130 Cremona).............. 6.430% 81,856 05/15/12 9,166 4,483 5,154
University Business Center (125 & 175 Cremona).............. 7.980% 88,607 06/01/12 12,581 9,738 10,012
Oak Creek Distribution Center IV............................ 5.680% 31,253 06/01/12 6,267 3,990 4,134
Airport Distribution, Southpointe, Broadway I, III &
IV, Southpark, 51st Avenue, Chestnut, Main Street,
Interchange Business Park, North Stemmons I land
and World Houston 12 & 13.................................. 6.860% 279,149 09/01/12 38,892 35,289 36,184
Interstate Distribution Center - Jacksonville............... 5.640% 31,645 01/01/13 6,213 4,612 4,724
Broadway V, 35th Avenue, Sunbelt, Beltway I,
Lockwood, Northwest Point, Techway Southwest I
and World Houston 10, 11 & 14.............................. 4.750% 259,403 09/05/13 42,350 39,839 41,028
Southridge XII, Airport Commerce Center I & II,
Interchange Park, Ridge Creek III, World Houston 24,
25 & 27 and Waterford Distribution Center (3).............. 5.750% 414,229 01/05/14 71,844 59,000 -
Kyrene Distribution Center I................................ 9.000% 11,246 07/01/14 2,209 591 669
World Houston 17, Kirby, Americas Ten I, Shady Trail,
Palm River North I, II & III and Westlake I & II (4)....... 5.680% 175,479 10/10/14 27,982 29,415 29,837
Beltway II, III & IV, Eastlake, Fairgrounds I-IV, Nations
Ford I-IV, Techway Southwest III, Westinghouse,
Wetmore I-IV and World Houston 15 & 22..................... 5.500% 536,552 04/05/15 76,133 76,544 -
Country Club I, Lake Pointe, Techway Southwest II and
World Houston 19 & 20...................................... 4.980% 256,952 12/05/15 21,784 35,316 36,605
Huntwood and Wiegman Distribution Centers................... 5.680% 265,275 09/05/16 22,730 35,546 36,676
Alamo Downs, Arion 1-15 & 17, Rampart I, II & III,
Santan 10 and World Houston 16............................. 5.970% 557,467 11/05/16 58,999 73,502 75,731
Broadway VI, World Houston 1 & 2, 21 & 23, Arion
16, Ethan Allen, Northpark I-IV, South 55th Avenue,
East University I & II and Santan 10 II.................... 5.570% 518,885 09/05/17 60,118 72,354 74,485
Blue Heron Distribution Center II........................... 5.390% 16,176 02/29/20 5,172 1,632 1,735
-----------------------------------
$ 594,094 585,806 465,360
===================================
(1) This mortgage was repaid on February 13, 2009.
(2) The Tower Automotive mortgage has a variable interest rate based on the
one-month LIBOR. EastGroup has an interest rate swap agreement that fixes
the rate at 4.03% for the 8-year term. Interest and related fees resulted
in an effective interest rate of 5.30% until the fourth quarter of 2008
when the weighted average rate was 8.02% (See Note 19). Semiannual
principal payments are made on this note; interest is paid monthly (See
Note 6). The principal amounts of these payments increase incrementally as
the loan approaches maturity.
(3) This mortgage has a recourse liability of $5 million which will be released
based on the secured properties generating certain base rent amounts
subsequent to January 1, 2011.
(4) Interest only was paid on this note until November 2006.
The Company's mortgage notes payable have certain restrictive covenants,
such as maintaining debt service coverage and leverage ratios and maintaining
insurance coverage, and the Company was in compliance with all of its debt
covenants at December 31, 2008.
The Company currently intends to repay its debt obligations, both in the
short- and long-term, through its operating cash flows, borrowings under its
lines of credit, proceeds from new mortgage debt and/or proceeds from the
issuance of equity instruments. Principal payments due during the next five
years as of December 31, 2008 are as follows:
Years Ending December 31, (In thousands)
---------------------------------------------------------------
2009...................................... $ 49,168
2010...................................... 18,185
2011...................................... 84,786
2012...................................... 62,117
2013...................................... 53,232
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
December 31,
-------------------------
2008 2007
-------------------------
(In thousands)
Property taxes payable............................ $ 11,136 9,744
Development costs payable......................... 7,127 13,022
Interest payable.................................. 2,453 2,689
Dividends payable................................. 1,257 2,337
Other payables and accrued expenses............... 10,865 6,387
-------------------------
$ 32,838 34,179
=========================
(9) OTHER LIABILITIES
A summary of the Company's Other Liabilities follows:
December 31,
-------------------------
2008 2007
-------------------------
(In thousands)
Security deposits................................. $ 7,560 7,529
Prepaid rent and other deferred income............ 5,430 6,911
Other liabilities................................. 1,309 1,713
-------------------------
$ 14,299 16,153
=========================
(10) COMMON STOCK ACTIVITY
The following table presents the common stock activity for the three years
ended December 31, 2008:
Years Ended December 31,
-------------------------------------------------
2008 2007 2006
-------------------------------------------------
Common Shares
Shares outstanding at beginning of year........... 23,808,768 23,701,275 22,030,682
Common stock offerings............................ 1,198,700 - 1,437,500
Stock options exercised........................... 25,720 67,150 118,269
Dividend reinvestment plan........................ 6,627 6,281 6,236
Incentive restricted stock granted................ 35,222 44,646 118,334
Incentive restricted stock forfeited.............. (2,520) (2,250) (3,756)
Director common stock awarded..................... 5,034 3,048 3,402
Restricted stock withheld for tax obligations..... (7,150) (11,382) (9,392)
-------------------------------------------------
Shares outstanding at end of year................. 25,070,401 23,808,768 23,701,275
=================================================
Common Stock Issuances
During the second quarter of 2008, EastGroup sold 1,198,700 shares of its
common stock to Merrill Lynch, Pierce, Fenner & Smith Incorporated. The net
proceeds were $57.2 million after deducting the underwriting discount and other
offering expenses. The Company used the proceeds to repay indebtedness
outstanding under its revolving credit facility and for other general corporate
purposes.
During the third quarter of 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 $68.1 million after deducting the underwriting discount and other offering
expenses.
Dividend Reinvestment Plan
The Company has a dividend reinvestment plan that allows stockholders to
reinvest cash distributions in new shares of the Company.
Common Stock Repurchase Plan
EastGroup's Board of Directors has authorized the repurchase of up to
1,500,000 shares of its outstanding common stock. The shares may be purchased
from time to time in the open market or in privately negotiated transactions.
Under the common stock repurchase plan, the Company has purchased a total of
827,700 shares for $14,170,000 (an average of $17.12 per share) with 672,300
shares still authorized for repurchase. The Company has not repurchased any
shares under this plan since 2000.
Shareholder Rights Plan
In December 1998, EastGroup adopted a Shareholder Rights Plan. The Plan
expired on December 3, 2008.
(11) STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123R on January 1, 2006. The rule requires
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 No. 123R had no material impact on its overall financial position or
results of operations. Prior to the adoption of SFAS No. 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. This plan 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 1,686,723; 1,715,523; and 1,751,796 at December 31, 2008, 2007
and 2006, respectively. Typically, the Company issues new shares to fulfill
stock grants or upon the exercise of stock options.
Stock-based compensation was $2,931,000, $3,043,000 and $2,788,000 for
2008, 2007 and 2006, respectively, of which $866,000, $978,000 and $768,000 were
capitalized as part of the Company's development costs for the respective years.
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 generally occurs from 2 1/2 years to nine
years from the date of grant for awards subject to service only. Restricted
stock is granted to executive officers subject to the satisfaction of certain
annual performance goals and multi-year market conditions as determined by the
Compensation Committee. Restricted stock is granted to non-executive officers
and other employees subject only to continued service. Under the modified
prospective application method, the Company continues to recognize compensation
cost on a straight-line basis over the service period for awards that precede
the adoption of SFAS No. 123R. The cost for performance-based awards after
January 1, 2006 is amortized 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 cost for
market-based awards after January 1, 2006 and awards that only require service
is amortized 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 (total shareholder return) was determined using a simulation
pricing model developed to specifically accommodate the unique features of the
awards.
In the second quarter of 2008, the Company granted shares to executive
officers contingent upon the attainment of certain annual performance goals.
These goals are for the period ended December 31, 2008, and any shares to be
issued upon attainment of these goals will be determined by the Compensation
Committee in the first quarter of 2009. The number of shares to be issued could
range from zero to 44,802. These shares will vest 20% on the date shares are
determined and awarded and 20% per year on each January 1 for the subsequent
four years. The weighted average grant date fair value for these shares is
$47.65.
In March 2008, 34,668 shares were awarded based on the attainment of the
2007 annual performance goals at a weighted average grant date fair value of
$49.14 per share. These shares vested 20% on March 6, 2008, and will vest 20%
per year on January 1, 2009, 2010, 2011 and
2012. Also during 2008, an additional 554 shares were awarded to non-executive
officers at a weighted average grant date fair value of $29.73. These shares are
subject only to continued service as of the vesting date and vest 50% per year
on January 1, 2009 and 2010.
In the second quarter of 2006, the Company granted shares to executive
officers contingent upon the attainment of certain annual performance goals and
multi-year market conditions. The weighted average grant date fair value for
shares to be awarded under the multi-year market conditions was $26.34 per share
with a total cost of approximately $2.1 million. The number of shares to be
issued could range from zero to 40,314. These shares will vest over four years
following evaluation of the three-year performance measurement period ended
December 31, 2008.
During 2008, the Compensation Committee approved the full vesting of the
restricted shares of the Company's President and CEO, David H. Hoster II, upon
his retirement on or after January 1, 2012, to the extent the performance period
has been completed as of such retirement date.
During the restricted period for awards no longer subject to contingencies,
the Company accrues dividends and holds the certificates for the shares;
however, the employee can vote the shares. For shares subject to contingencies,
dividends are accrued based upon the number of shares expected to be awarded.
Share certificates and dividends are delivered to the employee as they vest. As
of December 31, 2008, there was $3,462,000 of unrecognized compensation cost
related to nonvested restricted stock compensation that is expected to be
recognized over a weighted average period of 3.06 years.
Following is a summary of the total restricted shares granted, forfeited
and delivered (vested) to employees with the related weighted average grant date
fair value share prices for 2008, 2007 and 2006. The table does not include the
shares granted in 2008 or 2006 that are contingent on performance goals or
market conditions. Of the shares that vested in 2008, 2007 and 2006, 7,150
shares, 11,382 shares and 9,392 shares, respectively, were withheld by the
Company to satisfy the tax obligations for those employees who elected this
option as permitted under the applicable equity plan. As shown in the table
below, the fair value of shares that were granted during 2008, 2007 and 2006 was
$1,720,000, $1,961,000 and $4,511,000 respectively. As of the vesting date, the
fair value of shares that vested during 2008, 2007 and 2006 was $3,343,000,
$4,350,000, and $4,849,000, respectively.
Restricted Stock Activity: Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
2008 2007 2006
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Grant Date Shares Grant Date Shares Grant Date
Fair Value Fair Value Fair Value
-------------------------------------------------------------------------------
Nonvested at beginning of year.... 144,089 $ 31.65 196,671 $ 28.66 177,444 $ 23.01
Granted (1)....................... 35,222 48.83 44,646 43.93 118,334 38.12
Forfeited......................... (2,520) 26.51 (2,250) 23.52 (3,756) 22.07
Vested............................ (89,106) 33.37 (94,978) 31.42 (95,351) 30.15
----------- ----------- -----------
Nonvested at end of year.......... 87,685 36.95 144,089 31.65 196,671 28.66
=========== =========== ===========
(1) Includes shares granted in prior years for which performance conditions
have been satisfied and the number of shares have been determined.
Following is a vesting schedule of the total nonvested shares as of December 31,
2008:
Nonvested Shares Vesting Schedule Number of Shares
- -----------------------------------------------------------------
2009...................................... 49,629
2010...................................... 16,957
2011...................................... 14,169
2012...................................... 6,930
------------------
Total Nonvested Shares.................... 87,685
==================
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 during 2008, 2007 and 2006 was $585,000,
$1,492,000 and $3,641,000, respectively. There were no employee stock options
granted or forfeited during the years presented. Following is a summary of the
total employee stock options exercised and expired with related weighted average
exercise share prices for 2008, 2007 and 2006.
Stock Option Activity: Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
2008 2007 2006
--------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
--------------------------------------------------------------------------------
Outstanding at beginning of year... 76,656 $ 20.49 135,056 $ 21.10 251,075 $ 19.80
Exercised.......................... (21,220) 20.43 (58,400) 21.89 (116,019) 18.29
------------ ----------- -------------
Outstanding at end of year......... 55,436 20.51 76,656 20.49 135,056 21.10
============ =========== =============
Exercisable at end of year......... 55,436 $ 20.51 76,656 $ 20.49 135,056 $ 21.10
Employee outstanding stock options at December 31, 2008, all exercisable:
- -----------------------------------------------------------------------------------------------
Weighted Average
Remaining Weighted Average Intrinsic
Exercise Price Range Number Contractual Life Exercise Price Value
- -----------------------------------------------------------------------------------------------
$ 18.50-25.30 55,436 0.7 years $ 20.51 $835,000
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.
Directors were issued 5,034 shares, 3,048 shares and 3,402 shares of common
stock for 2008, 2007 and 2006, respectively. In addition, in 2005, 481 shares of
restricted stock at $41.57 were granted, of which 360 shares were vested as of
December 31, 2008. The restricted stock vests 25% per year for four years. As of
December 31, 2008, there was $2,500 of unrecognized compensation cost related to
nonvested restricted stock compensation that is expected to be recognized over a
weighted average period of 0.50 years. There were 36,835 shares available for
grant under the 2005 Plan at December 31, 2008.
Stock-based compensation expense for directors was $200,000, $155,000 and
$105,000 for 2008, 2007 and 2006, respectively. The intrinsic value realized by
directors from the exercise of options was $120,000, $218,000 and $70,000 for
2008, 2007 and 2006, respectively.
There were no director stock options granted or expired during the years
presented below. Following is a summary of the total director stock options
exercised with related weighted average exercise share prices for 2008, 2007 and
2006.
Stock Option Activity: Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
2008 2007 2006
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
-------------------------------------------------------------------------------
Outstanding at beginning of year.. 42,750 $ 23.01 51,500 $ 22.93 53,750 $ 22.58
Exercised......................... (4,500) 20.63 (8,750) 22.49 (2,250) 14.58
------------ ----------- -------------
Outstanding at end of year........ 38,250 23.29 42,750 23.01 51,500 22.93
============ =========== =============
Exercisable at end of year........ 38,250 $ 23.29 42,750 $ 23.01 51,500 $ 22.93
Director outstanding stock options at December 31, 2008, all exercisable:
- -----------------------------------------------------------------------------------------------
Weighted Average
Remaining Weighted Average Intrinsic
Exercise Price Range Number Contractual Life Exercise Price Value
- -----------------------------------------------------------------------------------------------
$ 20.25-26.60 38,250 2.7 years $ 23.29 $470,000
(12) REDEMPTION OF SERIES D PREFERRED SHARES
On July 2, 2008, EastGroup redeemed all 1,320,000 shares of its 7.95%
Series D Cumulative Redeemable Preferred Stock at a redemption price of $25.00
per share ($33,000,000) plus accrued and unpaid dividends of $.011 per share for
the period from July 1, 2008, through and including the redemption date, for an
aggregated redemption price of $25.011 per Series D Preferred Share. Original
issuance costs of $674,000 and additional redemption costs of $8,000 were
charged against net income available to common stockholders in conjunction with
the redemption of these shares.
The Company declared dividends of $1.0048 per Series D Preferred share for
2008 and $1.9876 per share for the years 2007 and 2006.
(13) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in
equity from non-owner sources. The components of accumulated other comprehensive
income (loss) for 2008, 2007 and 2006 are presented in the Company's
Consolidated Statements of Changes in Equity and are summarized below.
------------------------------------------
2008 2007 2006
------------------------------------------
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year..................................... $ (56) 314 311
Change in fair value of interest rate swap................... (466) (370) 3
------------------------------------------
Balance at end of year........................................... $ (522) (56) 314
==========================================
(14) EARNINGS PER SHARE
The Company applies SFAS No. 128, Earnings Per Share, which requires
companies to present basic EPS and diluted EPS. Reconciliation of the numerators
and denominators in the basic and diluted EPS computations is as follows:
Reconciliation of Numerators and Denominators
--------------------------------------------
2008 2007 2006
--------------------------------------------
(In thousands)
BASIC EPS COMPUTATION FOR INCOME ATTRIBUTABLE TO
EASTGROUP PROPERTIES, INC.
Numerator-net income available to common stockholders.......... $ 32,134 27,110 26,610
Denominator-weighted average shares outstanding................ 24,503 23,562 22,372
DILUTED EPS COMPUTATION FOR INCOME ATTRIBUTABLE TO
EASTGROUP PROPERTIES, INC.
Numerator-net income available to common stockholders.......... $ 32,134 27,110 26,610
Denominator:
Weighted average shares outstanding.......................... 24,503 23,562 22,372
Common stock options......................................... 54 87 143
Nonvested restricted stock................................... 96 132 177
--------------------------------------------
Total Shares.............................................. 24,653 23,781 22,692
============================================
(15) QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
2008 Quarter Ended (1) 2007 Quarter Ended (1)
--------------------------------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
--------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues..................................... $ 40,833 41,564 43,426 44,117 35,977 37,078 39,137 41,176
Expenses..................................... (32,668) (33,671) (35,475) (35,520) (29,317) (30,834) (31,678) (32,444)
--------------------------------------------------------------------------------
Income from continuing operations............ 8,165 7,893 7,951 8,597 6,660 6,244 7,459 8,732
Income from discontinued operations.......... 82 1,990 90 - 77 46 388 737
--------------------------------------------------------------------------------
Net income................................... 8,247 9,883 8,041 8,597 6,737 6,290 7,847 9,469
Net income attributable to noncontrolling
interest in joint ventures................. (156) (137) (169) (164) (150) (158) (133) (168)
--------------------------------------------------------------------------------
Net income attributable to EastGroup
Properties, Inc............................ 8,091 9,746 7,872 8,433 6,587 6,132 7,714 9,301
Dividends on Series D preferred shares....... (656) (656) (14) - (656) (656) (656) (656)
Costs on redemption of Series D
preferred shares........................... - - (682) - - - - -
--------------------------------------------------------------------------------
Net income available to EastGroup
Properties, Inc. common stockholders....... $ 7,435 9,090 7,176 8,433 5,931 5,476 7,058 8,645
================================================================================
BASIC PER COMMON SHARE DATA FOR INCOME
ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.(2)
Net income available to common
stockholders............................... $ .31 .37 .29 .34 .25 .23 .30 .37
================================================================================
Weighted average shares outstanding.......... 23,684 24,488 24,908 24,923 23,531 23,550 23,562 23,605
================================================================================
DILUTED PER COMMON SHARE DATA FOR INCOME
ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.(2)
Net income available to common
stockholders............................... $ .31 .37 .29 .34 .25 .23 .30 .36
================================================================================
Weighted average shares outstanding.......... 23,829 24,647 25,069 25,059 23,769 23,776 23,778 23,819
================================================================================
(1) Certain reclassifications have been made to the quarterly data previously
disclosed due to: (1) the disposal of properties in 2008 and 2007 whose
results of operations were reclassified to discontinued operations in the
consolidated financial statements and (2) the adoption of SFAS No. 160 on
January 1, 2009.
(2) The above quarterly earnings per share calculations are based on the
weighted average number of common shares outstanding during each quarter
for basic earnings per share and the weighted average number of outstanding
common shares and common share equivalents during each quarter for diluted
earnings per share. The annual earnings per share calculations in the
Consolidated Statements of Income are based on the weighted average number
of common shares outstanding during each year for basic earnings per share
and the weighted average number of outstanding common shares and common
share equivalents during each year for diluted earnings per share. The sum
of quarterly financial data may vary from the annual data due to rounding.
(16) DEFINED CONTRIBUTION PLAN
EastGroup maintains a 401(k) plan for its employees. The Company makes
matching contributions of 50% of the employee's contribution (limited to 10% of
compensation as defined by the plan) and may also make annual discretionary
contributions. The Company's total expense for this plan was $467,000, $429,000
and $378,000 for 2008, 2007 and 2006, respectively.
(17) LEGAL MATTERS
The Company is not presently involved in any material litigation nor, to
its knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business or which is expected to be covered by the Company's liability
insurance.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 157, Fair Value Measurements, defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. SFAS No. 157
also provides guidance for using fair value to measure financial assets and
liabilities. The Statement requires disclosure of the level within the fair
value hierarchy in which the fair value measurements fall, including
measurements using quoted prices in active markets for identical assets or
liabilities (Level 1), quoted prices for similar instruments in active markets
or quoted prices for identical or similar instruments in markets that are not
active (Level 2), and significant valuation assumptions that are not readily
observable in the market (Level 3). The Company's interest rate swap is reported
at fair value and is shown on the Consolidated Balance Sheets under Other
Liabilities. The fair value of the interest rate swap is determined by
estimating the expected cash flows over the life of the swap using the
mid-market rate and price environment as of the last trading day of the year.
This market information is considered a Level 2 input as defined by SFAS No.
157.
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments in accordance with SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, at December 31, 2008 and
2007.
---------------------------------------------------------
2008 2007
---------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
(In thousands)
Financial Assets
Cash and cash equivalents...... $ 293 293 724 724
Mortgage loans receivable,
net of discount.............. 4,174 4,189 132 133
Financial Liabilities
Mortgage notes payable......... 585,806 555,096 465,360 470,335
Notes payable to banks......... 109,886 101,484 135,444 135,444
Carrying amounts shown in the table are included in the Consolidated Balance
Sheets under the indicated captions, except as indicated in the notes below.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents: The carrying amounts approximate fair value because
of the short maturity of those instruments.
Mortgage loans receivable, net of discount: The fair value is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Mortgage notes payable: The fair value of the Company's mortgage notes payable
is estimated based on the quoted market prices for similar issues or by
discounting expected cash flows at the rates currently offered to the Company
for debt of the same remaining maturities, as advised by the Company's bankers.
Notes payable to banks: For 2008, the fair value of the Company's notes payable
to banks is estimated by discounting expected cash flows at current market
rates. For 2007, the carrying amounts approximate fair value because the
associated credit spread approximates market.
(19) SUBSEQUENT EVENTS
On January 2, 2009, the mortgage note payable of $9,365,000 on the Tower
Automotive Center was repaid and replaced with another mortgage note payable for
the same amount. The previous recourse mortgage was a variable rate demand note,
and EastGroup had entered into a swap agreement to fix the LIBOR rate. In the
fourth quarter of 2008, the bond spread over LIBOR required to re-market the
notes increased from a historical range of 3 to 25 basis points to a range of
100 to 500 basis points. Due to the volatility of the bond spread costs,
EastGroup redeemed the note and replaced it with a recourse mortgage with a bank
on the same payment terms except for the interest rate. The effective interest
rate on the previous note was 5.30% until the fourth quarter of 2008 when the
weighted average rate was 8.02%. The effective rate on the new note, including
the swap, is 6.03%.
In March 2009, EastGroup executed an application on a $67 million, limited
recourse first mortgage loan secured by properties containing 1.7 million square
feet. The loan has a recourse liability of $5 million which may be released
based on the secured properties obtaining certain
base rent amounts. The loan closed on May 5, 2009, and has a fixed interest rate
of 7.5%, a 10-year term and a 20-year amortization schedule. The Company used
the proceeds of this mortgage loan to reduce variable rate bank borrowings.
During the fourth quarter of 2008, EastGroup acquired 94.3 acres of
developable land in Orlando for $9.1 million. The Company is currently under
contract to purchase an additional 36.0 acres in a second phase of this
acquisition for $5 million. This transaction is expected to close during the
fourth quarter of 2009.