1
FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER 1-7094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 ONE JACKSON PLACE
188 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (601) 354-3555
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES (x) NO ( )
The number of shares of common stock, $.0001 par value, outstanding as of
November 10, 1999 was 15,917,917.
2
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Pages
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated balance sheets, September 30, 1999 (unaudited)
and December 31, 1998 3
Consolidated statements of income for the three and nine months
ended September 30, 1999 and 1998 (unaudited) 4
Consolidated statements of cash flows for the nine months
ended September 30, 1999 and 1998 (unaudited) 5
Consolidated statements of changes in stockholders' equity for
the nine months ended September 30, 1999 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES
Authorized signatures 22
3
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
September 30, 1999 December 31, 1998
---------------------- ----------------------
(Unaudited)
ASSETS
Real estate properties:
Industrial $ 555,191 507,187
Industrial development 33,347 25,682
Other 15,843 15,762
---------------------- ----------------------
604,381 548,631
Less accumulated depreciation (46,625) (34,042)
---------------------- ----------------------
557,756 514,589
---------------------- ----------------------
Real estate held for sale 25,326 25,620
Less accumulated depreciation (837) (8,794)
---------------------- ----------------------
24,489 16,826
---------------------- ----------------------
Mortgage loans 8,221 8,814
Investment in real estate investment trusts 15,233 5,737
Cash 3,679 2,784
Other assets 17,329 18,798
---------------------- ----------------------
TOTAL ASSETS $ 626,707 567,548
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 162,143 122,494
Notes payable to banks 67,343 114,322
Accounts payable & accrued expenses 12,770 9,138
Other liabilities 4,338 2,867
---------------------- ----------------------
246,594 248,821
---------------------- ----------------------
Minority interest in joint ventures 1,859 2,053
Minority interest in operating partnership 650 650
---------------------- ----------------------
2,509 2,703
---------------------- ----------------------
STOCKHOLDERS' EQUITY
Series A 9.00% Cumulative Redeemable Preferred
Shares and additional paid-in capital; $.0001 par value;
1,725,000 authorized and issued; stated liquidation
preference of $43,125 41,357 41,357
Series B 8.75% Cumulative Convertible Preferred
Shares and additional paid-in capital; $.0001 par value;
2,800,000 shares authorized; 2,800,000 shares issued at
September 30, 1999 and 400,000 at December 31, 1998;
stated liquidation preference of $70,000 at September
30, 1999 and $10,000 at December 31, 1998 67,276 9,642
Series C Preferred Shares; $.0001 par value; 600,000
shares authorized; no shares issued - -
Common shares; $.0001 par value; 65,475,000
shares authorized; 15,944,017 shares issued at
September 30, 1999 and 16,307,681 at
December 31, 1998 2 2
Excess shares; $.0001 par value; 30,000,000 shares
authorized; no shares issued - -
Additional paid-in capital on common shares 240,081 246,340
Undistributed earnings 28,694 18,076
Accumulated other comprehensive income 194 607
---------------------- ----------------------
377,604 316,024
---------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 626,707 567,548
====================== ======================
See accompanying notes to consolidated financial statements.
4
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------------- -----------------------------
1999 1998 1999 1998
REVENUES
Income from real estate operations $ 20,784 20,191 61,245 53,606
Interest:
Mortgage loans 233 427 916 1,293
Other interest 99 28 178 139
Other 388 107 1,148 437
--------------------------- -----------------------------
21,504 20,753 63,487 55,475
--------------------------- -----------------------------
EXPENSES
Operating expenses from real
estate operations 4,771 5,158 14,666 13,881
Interest 4,677 4,874 13,662 12,162
Depreciation and amortization 5,162 4,582 14,846 11,806
General and administrative 1,149 883 3,221 2,659
--------------------------- -----------------------------
15,759 15,497 46,395 40,508
--------------------------- -----------------------------
INCOME BEFORE MINORITY INTEREST
AND GAIN ON INVESTMENTS 5,745 5,256 17,092 14,967
Minority interest in joint ventures 106 98 312 353
--------------------------- -----------------------------
INCOME BEFORE GAIN ON
REAL ESTATE INVESTMENTS 5,639 5,158 16,780 14,614
Gain on real estate investments 13,978 4,996 15,653 6,086
--------------------------- -----------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 19,617 10,154 32,433 20,700
--------------------------- -----------------------------
Cumulative effect of change in
accounting principle - - 418 -
--------------------------- -----------------------------
NET INCOME 19,617 10,154 32,015 20,700
Preferred dividends-Series A 970 970 2,910 1,099
Preferred dividends-Series B 276 - 714 -
--------------------------- -----------------------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 18,371 9,184 28,391 19,601
=========================== =============================
BASIC PER SHARE DATA
Net income available to
common shareholders $ 1.15 0.56 1.76 1.20
=========================== =============================
Weighted average shares outstanding 16,006 16,308 16,127 16,277
=========================== =============================
DILUTED PER SHARE DATA (A)
Net income available to
common shareholders $ 1.11 0.56 1.74 1.19
=========================== =============================
Weighted average shares outstanding 16,724 16,423 16,768 16,423
=========================== =============================
(A) Assumes conversion of all limited partnership units and convertible
preferred shares.
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
September 30, September 30,
1999 1998
--------------- ---------------
OPERATING ACTIVITIES:
Net income $ 32,015 20,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of deferred
leasing costs 14,846 11,806
Gains on investments, net (15,653) (6,086)
Gain on sale of real estate investment trust shares (30) -
Other (202) (253)
Changes in operating assets and liabilities:
Accrued income and other assets 162 (2,248)
Accounts payable, accrued expenses and prepaid rent 4,486 3,418
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 35,624 27,337
--------------- ---------------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable, net of
amortization of loan discounts 9,808 2,512
Advances on mortgage loans receivable (7,700) -
Proceeds from sale of real estate investments 30,028 16,608
Real estate improvements (6,225) (5,398)
Real estate development (35,771) (21,439)
Purchases of real estate (36,326) (73,948)
Acquisition of Meridian - (52,760)
Purchases of real estate investment trust shares (10,171) (1,801)
Proceeds from sale of real estate investment trust shares 292 -
Merger expenses - (1,609)
Changes in other assets and other liabilities (432) 26
Cash balances of acquired company - 6,046
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (56,497) (131,763)
--------------- ---------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 238,215 178,822
Proceeds from mortgage notes payable 47,000 -
Principal payments on bank borrowings (285,194) (94,444)
Principal payments on mortgage notes payable (8,454) (3,851)
Distributions paid to shareholders (21,122) (17,230)
Purchases of shares of common stock (6,849) (194)
Proceeds from exercise of stock options 317 254
Net proceeds from issuance of preferred stock 57,634 41,357
Proceeds from dividend reinvestment plan 221 220
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 21,768 104,934
--------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS 895 508
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,784 1,298
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,679 1,806
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 13,258 10,954
Debt assumed by the Company in purchase of real estate 1,103 7,167
Operating partnership units issued in purchase of real estate - 650
Debt assumed by the Company in the Meridian acquisition - 33,422
Debt assumed by buyer of real estate - 9,855
Issuance of common stock to acquire Ensign - 1,746
See accompanying notes to consolidated financial statements
6
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Shares Shares Accumulated
of of Additional Other
Preferred Common Paid-In Undistributed Comprehensive
Stock Stock Capital Earnings Income Total
-------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 50,999 2 246,340 18,076 607 316,024
Comprehensive income
Net income - - - 32,015 - 32,015
Net unrealized change in investment
securities - - - - (413) (413)
------------
Total comprehensive income 31,602
------------
Cash dividends declared-common, $1.10
per share - - - (17,773) - (17,773)
Preferred stock dividends declared - - - (3,624) - (3,624)
Preferred stock issuance costs (1,166) - - - - (1,166)
Issuance of 8,009 shares of common stock,
incentive compensation - - 52 - - 52
Issuance of 12,287 shares of common stock,
dividend reinvestment plan - - 221 - - 221
Issuance of 22,210 shares of common stock,
exercise options - - 317 - - 317
Issuance of 2,400,000 shares of Series
B preferred 58,800 - - - - 58,800
Repurchase of 2,070 common shares,
options exercised - - (34) - - (34)
Repurchase of 404,100 common shares,
stock repurchase plan - - (6,815) - - (6,815)
-------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 $108,633 2 240,081 28,694 194 377,604
===============================================================================
See accompanying notes to consolidated financial statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In management's opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The financial statements should be read in conjunction with the 1998
annual report and the notes thereto.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the 1998 financial statements
to conform to the 1999 presentation.
(3) SUBSEQUENT EVENTS
Subsequent to September 30, 1999, EastGroup purchased the Altamonte
Commerce Center (123,000 square feet) in Orlando for $4,165,000. Altamonte was
constructed in 1980 and 1982 and consists of six buildings that are currently
96% leased to 42 tenants. This purchase was partially funded from the proceeds
of the sale of the 8150 Leesburg Pike Office Building that was sold in third
quarter 1999.
The Company also purchased World Houston 11 land for development consisting
of 7.34 acres for approximately $500,000.
Also, subsequent to September 30, 1999, the Company has entered into
contracts to purchase the following properties:
Approximate
Property Location Size Purchase Price
- -------------------------------------- --------------------------- ---------------------------- --------------------
(In thousands)
Southeast Crossing Business Center Memphis, Tennessee 348,000 sq. ft. $12,010
Land for Development Tampa, Florida 19.0 acres 400
Land for Development Orlando, Florida 10.2 acres 1,395
--------------------
$13,805
====================
The Company has entered into a contract to sell the Borders property in
Nashville, Tennessee for $21,514,000. This transaction would generate no
significant gain or loss for financial reporting purposes. We anticipate the
sale of this property to close in the fourth quarter of 1999; however, there can
be no assurance that the sale will actually be completed.
The Company has also entered into a contract to sell the 610 acres of
Estelle land located in Jefferson Parish, Louisiana for $1,129,000. This
transaction would generate a gain for financial reporting purposes of
approximately $629,000. We anticipate the sale of this property to close in mid-
2000; however, there can be no assurance that the sale will actually be
completed.
(4) NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, Statement of Position (SOP) No. 98-5, "Reporting on the
Costs of Start-Up Activities," was issued. This SOP provides guidance on the
financial reporting of start-up costs and organization costs, and requires that
these costs be expensed as incurred effective for fiscal years beginning after
December 15, 1998. As of January 1, 1999, the unamortized organization costs
were written off and accounted for as a cumulative effect of a change in
accounting principle. This change did not have a material effect on prior
periods.
8
The table below presents on a comparative basis the cumulative effect of
the change in accounting principle:
Three Months Nine Months
Ended September 30, Ended September 30,
Consolidated Statements of Income 1999 1998 1999 1998
- ------------------------------------------------------------------------ ---------- ---------- ----------- ---------
(In thousands)
Income before cumulative effect of change in accounting principle $19,617 10,154 32,433 20,700
Cumulative effect of change in accounting principle - - (418) -
---------- ---------- ----------- ---------
Net income 19,617 10,154 32,015 20,700
Preferred dividends (1,246) (970) (3,624) (1,099)
---------- ---------- ----------- ---------
Net income available to common shareholders $18,371 9,184 28,391 19,601
========== ========== =========== =========
Basic earnings per common share:
Before cumulative effect of change in accounting principle $1.15 .56 1.79 1.20
Accounting change - - (.03) -
---------- ---------- ----------- ---------
Basic earnings per common share $1.15 .56 1.76 1.20
========== ========== =========== =========
Diluted earnings per common share:
Before cumulative effect of change in accounting principle $1.11 .56 1.76 1.19
Accounting change - - (.02) -
---------- ---------- ----------- ---------
Diluted earnings per common share $1.11 .56 1.74 1.19
========== ========== =========== =========
(5) BUSINESS SEGMENTS
The Company's reportable segments consist of industrial properties, office
buildings, and an other category that includes apartments and other real estate.
The Company's chief decision makers use two primary measures of operating
results in making decisions, such as allocating resources: property net
operating income (PNOI) and funds from operations (FFO), defined as net income
(loss) (computed in accordance with generally accepted accounting principles
(GAAP)), excluding gains or losses from debt restructuring and sales of
property, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. The Company uses
FFO as a measure of the performance of our industry as an equity real estate
investment trust because, along with cash flows from operating activities,
financing and investing activities, it provides a measure of our ability to
incur and service debt and to make capital expenditures. FFO is not considered
as an alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including our ability to make distributions. The table
below presents on a comparative basis for the three and nine months ended
September 30, 1999 and 1998 reported PNOI by operating segment, followed by
reconciliations of PNOI to FFO and FFO to net income before cumulative effect of
change in accounting principle:
9
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(In thousands)
-------------------------------------------------------------
Property Revenues:
Industrial $19,767 16,929 56,521 43,210
Office 438 1,736 3,057 5,094
Other 579 1,526 1,667 5,302
---------------- ------------- --------------- --------------
20,784 20,191 61,245 53,606
---------------- ------------- --------------- --------------
Property Expenses:
Industrial (4,338) (3,733) (12,864) (9,783)
Office (160) (505) (1,028) (1,472)
Other (273) (920) (774) (2,626)
---------------- ------------- --------------- --------------
(4,771) (5,158) (14,666) (13,881)
---------------- ------------- --------------- --------------
Property Net Operating Income:
Industrial 15,429 13,196 43,657 33,427
Office 278 1,231 2,029 3,622
Other 306 606 893 2,676
---------------- ------------ --------------- --------------
Total Property Net Operating Income 16,013 15,033 46,579 39,725
---------------- ------------- --------------- --------------
Other income 720 562 2,242 1,869
Interest expense (4,677) (4,874) (13,662) (12,162)
General and administrative expenses (1,149) (883) (3,221) (2,659)
Minority interest in earnings (145) (166) (514) (606)
Dividends on Series A preferred shares (970) (970) (2,910) (1,099)
---------------- ------------- --------------- --------------
Funds From Operations 9,792 8,702 28,514 25,068
Depreciation and amortization (5,162) (4,582) (14,846) (11,806)
Share of joint venture depreciation and amortization 39 68 202 253
Gains from property sales/investment in REITs 13,978 4,996 15,653 6,086
Dividends on Series B convertible preferred shares (276) - (714) -
Cumulative effect of change in accounting principle - - (418) -
---------------- ------------- --------------- --------------
Net Income Available to Common Shareholders 18,371 9,184 28,391 19,601
Dividends on preferred shares 1,246 970 3,624 1,099
Cumulative effect of change in accounting principle - - 418 -
---------------- ------------- --------------- --------------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $19,617 10,154 32,433 20,700
================ ============= =============== ==============
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION:
(Comments are for the balance sheet dated September 30, 1999 compared to
December 31, 1998.)
Assets of EastGroup were $626,707,000 at September 30, 1999, an increase of
$59,159,000 from December 31, 1998. Liabilities decreased $2,227,000 to
$246,594,000; minority interests decreased $194,000 to $2,509,000 and
stockholders' equity increased $61,580,000 to $377,604,000 during the same
period. The paragraphs that follow explain these changes in greater detail.
Industrial properties increased $48,004,000 during the nine months ended
September 30, 1999. This increase was due to the acquisition of 11 industrial
properties for $37,429,000 (as detailed below), capital improvements of
$5,834,000 made on existing and acquired properties, the transfer of seven
industrial properties from industrial development with total costs of
$28,106,000, and the transfer of two industrial properties to real estate held
for sale with costs of $23,365,000.
Industrial Properties Acquired Size Date Acquired Cost
in 1999 Location (In thousands)
- ---------------------------------- ------------------------- ----------------- ----------------- -------------------
Central Green Houston, Texas 84,000 sq.ft. 01-07-99 $4,600
Blue Heron West Palm Beach, Florida 110,000 sq.ft. 01-15-99 4,617
Rojas Commerce Park El Paso, Texas 172,000 sq.ft. 06-11-99 4,561
Yosemite Distribution Center Milpitas, California 102,000 sq.ft. 07-09-99 7,329
Jetport Commerce Center and
56th Street (25% interest) Tampa, Florida 401,000 sq.ft. 07-09-99 1,803
Interstate Commons Center Phoenix, Arizona 136,000 sq.ft. 07-20-99 4,430
Meadows Industrial Tampa, Florida 30,000 sq.ft. 08-06-99 1,913
Jetport 517 & 518 Tampa, Florida 64,000 sq.ft. 08-06-99 2,718
LeTourneau Center of Commerce Tampa, Florida 88,000 sq.ft. 08-06-99 1,612
Fairmont Distribution Center Tempe, Arizona 19,000 sq.ft. 08-23-99 948
Kyrene Distribution Center Tempe, Arizona 70,000 sq.ft. 09-16-99 2,898
-------------------
Total Industrial Acquisitions $37,429
===================
Industrial development increased $7,665,000 during the nine months ended
September 30, 1999. This increase resulted from year-to-date development costs
of $35,771,000 on existing and completed development properties, offset by costs
of $28,106,000 on completed development properties transferred to industrial
properties, as detailed below.
11
Costs Incurred
---------------------------------------
Size at For the Nine
Completion Months Cumulative As Estimated
(Square Feet) Ended 9/30/99 of 9/30/99 Total costs
-----------------------------------------------------------------------------
Lease-up:
John Young II
Orlando, Florida 47,000 $ 1,743 2,408 2,828
Rampart Distribution Center III
Denver, Colorado 92,000 2,482 4,655 5,550
Sample 95 II
Pompano, Florida 70,000 2,061 3,072 3,438
Airport Commerce Center
Tampa, Florida 108,000 4,012 5,397 5,427
Chestnut Business Center
City of Industry, California 75,000 2,256 3,930 5,207
Westlake I
Tampa, Florida 70,000 2,245 3,856 4,072
-----------------------------------------------------------------------------
Total Lease-up 462,000 14,799 23,318 26,522
-----------------------------------------------------------------------------
Under Construction:
Palm River North
Tampa, Florida 96,000 3,110 3,219 4,908
Glenmont I
Houston, Texas 108,000 773 1,709 3,862
Main Street
Carson, California 106,000 2,174 2,175 5,548
-----------------------------------------------------------------------------
Total Under Construction 310,000 6,057 7,103 14,318
-----------------------------------------------------------------------------
Prospective Development:
Phoenix, Arizona 123,000 960 960 6,200
Tampa, Florida 310,000 114 801 14,880
Orlando, Florida 116,000 1,164 1,164 5,568
Houston, Texas 110,000 - - 3,900
-----------------------------------------------------------------------------
Total Prospective Development 659,000 2,238 2,925 30,548
-----------------------------------------------------------------------------
1,431,000 $ 23,094 33,346 71,388
=============================================================================
Completed Development and
Transferred to Industrial Properties
During Nine Months Ended 9/30/99:
World Houston 9
Houston, Texas 155,000 $ 4,144 5,160 7,200
Premier Beverage
Tampa, Florida 222,000 6,827 7,235 7,777
Westside Expansion
Jacksonville, Florida 35,000 673 673 1,200
World Houston 7 & 8
Houston, Texas 166,000 576 5,264 7,600
Walden Distribution Center II
Tampa, Florida 122,000 62 4,252 4,300
Sunbelt Distribution Center II
Orlando, Florida 61,000 113 2,325 2,300
John Young
Orlando, Florida 51,000 282 3,197 3,200
-----------------------------------------------------------------------------
Total Transferred to Industrial 812,000 $ 12,677 28,106 33,577
=============================================================================
12
(1) The information provided above includes forward-looking data based on
current construction schedules, the status of lease negotiations with potential
tenants and other relevant factors currently available to the Company. There can
be no assurance that any of these factors will not change or that any change
will not affect the accuracy of such forward-looking data. Among the factors
that could affect the accuracy of the forward-looking statements are weather,
default or other failure of performance by contractors, increases in the price
of construction materials or the unavailability of such materials, failure to
obtain necessary permits or approval from governmental entities, changes in
local and/or national economic conditions, increased competition for tenants or
other occurrences that could depress rental rates, and other factors not within
the control of the Company.
Accumulated depreciation on real estate properties and real estate held for
sale increased $4,626,000 primarily due to depreciation expense recognized for
the nine months ended September 30, 1999, offset by the sales of the 8150
Leesburg Pike Office Building and the 2020 Exchange Distribution Center.
Mortgage loans receivable decreased $593,000 during the first nine months
of 1999 as a result of amortization of loan discounts of $330,000, recognition
of deferred gains of $1,515,000 on the payoff of the Country Club and
Gainesville mortgage notes receivable, and the issuance of three new notes
receivable for a total of $7,700,000. These increases were offset by principal
payments of $2,000 and the repayment of $10,136,000 on seven mortgage loans
receivable.
Investments in real estate investment trusts increased from $5,737,000 at
December 31, 1998 to $15,233,000 at September 30, 1999 as a result of purchases
of other real estate investment trust shares for $10,171,000, sales of other
real estate investment trust shares with a cost basis of $262,000 and unrealized
losses of $413,000.
Mortgage notes payable increased $39,649,000 during the nine months ended
September 30, 1999, as a result of the Company's new $47,000,000, nonrecourse
first mortgage loan with Metropolitan Life and $1,103,000 assumed on Kyrene
Distribution Center; loan payoffs of $5,612,000 on the Interstate Distribution
Center, West Palm Distribution Centers, and 8150 Leesburg Pike Office Building,
mortgages, and regularly scheduled principal payments of $2,842,000.
Notes payable to banks decreased from $114,322,000 at December 31, 1998 to
$67,343,000 at September 30, 1999, as a result of payments of $285,194,000 and
borrowings of $238,215,000. The Company's new credit facilities, which replaced
the $100,000,000 acquisition line and the $50,000,000 working capital line at
December 31, 1998, are described in greater detail under Liquidity and Capital
Resources.
Undistributed earnings increased from $18,076,000 at December 31, 1998 to
$28,694,000 at September 30, 1999, as a result of $32,015,000 net income less
dividends on preferred stock of $3,624,000 and dividends on common stock of
$17,773,000.
13
Results of Operations
(Comments are for the three months and nine months ended September 30, 1999,
compared to the three months and nine months ended September 30, 1998.)
Net income available to common shareholders for the three months and nine
months ended September 30, 1999 was $18,371,000 ($1.15 per basic share and $1.11
per diluted share) and $28,391,000 ($1.76 per basic share and $1.74 per diluted
share), compared to net income for the three months and nine months ended
September 30, 1998 of $9,184,000 ($.56 per basic and diluted share) and
$19,601,000 ($1.20 per basic share and $1.19 per diluted share). Income before
gain on investments was $5,639,000 and $16,780,000 for the three months and nine
months ended September 30, 1999, compared to $5,158,000 and $14,614,000 for the
three months and nine months ended September 30, 1998. Gains on investments were
$13,978,000 and $15,653,000 for the three months and nine months ended September
30, 1999, compared to $4,996,000 and $6,086,000 for the three months and nine
months ended September 30, 1998. Income before cumulative effect of change in
accounting principle was $19,617,000 and $32,433,000 for the three months and
nine months ended September 30, 1999, compared to $10,154,000 and $20,700,000
for the three months and nine months ended September 30, 1998. The paragraphs
that follow describe the results of operations in greater detail.
Property net operating income (PNOI) from real estate properties, defined
as income from real estate operations less property operating expenses (before
interest expense and depreciation) increased by $980,000 or 7% for the three
months ended September 30, 1999, compared to the three months ended September
30, 1998. For the nine months ended September 30, 1999, PNOI increased by
$6,854,000 or 17% compared to the nine months ended September 30, 1998.
PNOI and percentage leased by property type were as follows:
Property Net Operating Income (PNOI)
Three Months Ended Nine Months Ended Percentage
September 30 September 30, Leased
1999 1998 1999 1998 9-30-99
(In thousands)
------------ --------------- ------------- ---------------
Industrial $15,429 13,196 43,657 33,427 97%
Other 584 1,837 2,922 6,298
------------ --------------- ------------- ---------------
Total PNOI $16,013 15,033 46,579 39,725
============ =============== ============= ===============
PNOI from industrial properties increased $2,233,000 and $10,230,000 for
the three months and nine months ended September 30, 1999, compared to September
30, 1998. Industrial properties held throughout the three months and nine months
ended September 30, 1999 compared to the same period in 1998 showed an increase
in PNOI of 4.1% for the three months ended September 30, 1999 and 4.7% for the
nine months ended September 30, 1999. The increase in PNOI from industrial
properties resulted primarily from the 1998 and 1999 acquisitions, from an
increase in same store property operations and from stabilized operations of 12
industrial development properties.
14
PNOI from other properties decreased $1,253,000 and $3,376,000 for the
three months and nine months ended September 30, 1999, compared to September 30,
1998. These decreases were primarily the result of the sale of the Columbia
Place Office Building in December 1998, the sales of four apartment complexes in
1998 and the sale of the 8150 Leesburg Pike Office Building in July 1999.
Total interest expense decreased $197,000 for the three months ended
September 30, 1999 and increased $1,500,000 for the nine months ended September
30, 1999 compared to 1998. Average bank borrowings were $121,420,000 and
$113,342,000 for the three months and nine months ended September 30, 1999,
compared to $115,806,000 and $84,063,000 for the same period of 1998. Average
bank borrowings increased primarily as a result of the Meridian acquisition in
1998, the acquisition of other industrial properties in 1999 and 1998 and
increased new development costs. Bank interest rates at September 30, 1999 were
6.625% on $67,000,000, and 7.50% on $343,000. The bank interest rate at
September 30, 1998 was 7.045% (LIBOR plus 1.40%). Interest costs incurred during
the period of construction of real estate properties are capitalized. The
interest costs capitalized on real estate properties for the three months and
nine months ended September 30, 1999 were $531,000 and $1,265,000 compared to
$272,000 and $560,000 for the three months and nine months ended September 30,
1998. Interest expense on real estate properties increased primarily as a result
of mortgages assumed in 1998 on Estrella and World Houston 1 & 2 and other
mortgages assumed in the Meridian VIII merger, and from the issuance of the
$47,000,000 mortgage loan with Metropolitan Life (discussed in Liquidity and
Capital Resources)and assumption of the Kyrene Distribution Center mortgage.
These increases were offset by the sales of Columbia Place Office Building, the
Sutton House and Doral Club Apartments and the 8150 Leesburg Pike Office
Building.
Depreciation and amortization increased $580,000 and $3,040,000 for the
three months and nine months ended September 30, 1999 compared to 1998. This
increase was primarily due to the industrial properties acquired in both 1998
and 1999, offset by the sales of East Maricopa, 401 Exchange, four apartment
complexes and Columbia Place Office Building during 1998; the sales of the 8150
Leesburg Pike Office Building and 2020 Exchange in 1999; and the transfer of
several properties to real estate held for sale (depreciation not taken on those
properties held in real estate held for sale).
The increase in general and administrative expenses of $266,000 and
$562,000 for the three months and nine months ended September 30, 1999 is
primarily due to an increase in general and administrative costs due to growth
of the Company.
15
A summary of gains (losses) on real estate investments for the nine months
ended September 30, 1999 and 1998 is detailed below.
Recognized
Basis Net Sales Price Gain (Loss)
(In thousands)
1999
Mortgage loans:
Country Club-deferred gain $ (1,127) - 1,127
Gainesville-deferred gain (388) (65) 323
Country Club land purchase-leaseback 500 500 -
Estelle land 137 368 231
LNH land 19 137 118
8150 Leesburg Pike Office Building 13,919 28,095 14,176
2020 Exchange 867 999 132
West Palm writedown 448 - (448)
Other - (6) (6)
---------------- ------------------ -----------------
Total $ 14,375 30,028 15,653
================ ================== =================
Recognized
Basis Net Sales Price Gain (Loss)
(In thousands)
1998
Real estate properties:
Hampton House Apartments $ 5,977 6,611 634
Sutton House Apartments 7,696 9,453 1,757
Doral Club Apartments 5,900 9,051 3,151
401 Exchange 621 666 45
East Maricopa 630 630 -
LNH land 9 52 43
Jacksonville - deferred gain (383) - 383
Other (73) - 73
--------------- ------------------ -------------------
$ 20,377 26,463 6,086
=============== ================== ===================
NAREIT has recommended supplemental disclosures concerning capital
expenditures and leasing costs. The Company expenses apartment unit turnover
costs such as carpet, painting and small appliances.
Capital expenditures for the nine months ended September 30, 1999 (by
category) and September 30, 1998 are as follows:
1999 1998
-------------------------------------------------------- ------------------
Industrial
Industrial Other Total Development Total
(In thousands)
------------- --------- ---------- ------------------- ------------------
Upgrade on Acquisitions $ 804 - 804 - 1,785
Major Renovation 49 - 49 - 318
New Development 426 - 426 35,405 20,989
Tenant Improvements:
New Tenants 2,097 273 2,370 - 1,845
New Tenants (first generation) 312 - 312 366 685
Renewal Tenants 381 9 390 - 748
Other 1,765 109 1,874 467
-
------------- --------- ---------- ---------------- ------------------
Total Capital Expenditures $ 5,834 391 6,225 35,771 26,837
============= ========= ========== ================ ==================
16
The Company's leasing costs are capitalized and included in other assets.
The costs are amortized over the lives of the leases and are included in
depreciation and amortization expense. A summary of these costs for the nine
months ended September 30, 1999 (by category) and September 30, 1998 is as
follows:
1999 1998
------------- --------- ---------- ----------------- -----------------
Industrial
Industrial Other Total Development Total
(In thousands)
------------- --------- ---------- ----------------- -----------------
Capitalized Leasing Costs:
New Tenants $ 706 9 715 31 852
New Tenants (first generation) 91 - 91 550 374
Renewal Tenants 571 5 576 - 907
------------- --------- ---------- ----------------- -----------------
Total Capitalized Leasing Costs $1,368 14 1,382 581 2,133
============= ========= ========== ================= =================
Amortization of Leasing Costs: $1,110 778
========== =================
Liquidity and Capital Resources
Net cash provided by operating activities was $35,624,000 for the nine
months ended September 30,1999. The Company distributed $17,773,000 in common
stock dividends and $3,349,000 in preferred stock dividends. Other sources of
cash were collections on mortgage loan receivables, sales of properties,
mortgage borrowings, bank borrowings and proceeds from the Series B preferred
stock offering. Primary uses of cash were for capital improvements at the
various properties, construction and development of properties, purchases of
real estate investments, bank debt payments, mortgage note payments, purchases
of real estate investment trust shares and repurchase of common shares.
Total debt at September 30, 1999 and 1998 was as follows:
As of September 30,
1999 1998
(In thousands)
------------------------- ----------------------
Mortgage Notes Payable - Fixed Rate $162,143 132,263
Bank Notes Payable - Floating Rate 67,343 126,148
------------------------- ----------------------
Total Debt $229,486 258,411
========================= =====================
17
At December 31, 1998, the Company had a line of credit from a commercial
bank in the amount of $50,000,000 that was secured by the outstanding stock of
two of the Company's wholly-owned subsidiaries and by the Company's ownership
interests in two partnerships. Borrowings under the credit line at December 31,
1998 were $17,392,000 and the interest rate was LIBOR plus 1.40% (6.96% at
December 31, 1998). This line of credit expired January 31, 1999.
At December 31, 1998, the Company had $96,930,000 outstanding under a
$100,000,000 acquisition line of credit from a commercial bank. The acquisition
line had an interest rate of LIBOR plus 1.40% at December 31, 1998. The line was
secured by 11 properties of the Company with an aggregate carrying amount of
$129,754,000 at December 31, 1998 and was due to expire September 30, 2000.
On January 13, 1999, the Company replaced the $50,000,000 and $100,000,000
bank lines with a new three-year $150,000,000 unsecured revolving credit
facility with a group of ten banks. The interest rate is based on the Eurodollar
rate and was 6.625% on September 30, 1999.
Also on January 13, 1999, the Company obtained a one-year $10,000,000
unsecured revolving credit facility with Chase Bank of Texas. The interest rate
is based on Chase Bank of Texas, National Association's Prime Rate less .75%.
On March 1, 1999, the Company closed a $47,000,000, non-recourse first
mortgage loan with Metropolitan Life. The note has an interest rate of 6.8%,
20-year amortization and a 10-year maturity. It is secured by six industrial
properties in California: Industry Distribution Center, Shaw Commerce Center,
Kingsview Industrial Center, Dominguez Distribution Center, Walnut Business
Center and Washington Distribution Center. The proceeds were used to reduce bank
borrowings.
During the third quarter 1998, EastGroup's Board of Directors authorized
the repurchase of up to 500,000 shares of its outstanding common stock. In
September 1999, EastGroup's Board of Directors authorized the repurchase of an
additional 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. For the nine months ended September 30, 1999, the Company
repurchased 404,100 shares for $6,815,000 and a total of 425,200 shares for
$7,175,000 since September 30, 1998.
On December 30, 1998, EastGroup sold $10 million in the first closing of
our agreement to issue $70 million of Series B Preferred Stock to Five Arrows
Realty Securities II, L.L.C. In September 1999, the Company sold the remaining
$60 million to Five Arrows. Net proceeds from the sale of Series B Preferred
were used to reduce bank borrowings.
18
Budgeted capital expenditures and development for the year ending December
31, 1999 follow:
Capital Improvements Development
Industrial Other Total Total
-------------- ------------ ------------ -------------------
Upgrades on Acquisitions $ 954 - 954 -
Major Renovation 49 - 49 -
New Development 1,091 - 1,091 36,726
Tenant Improvements:
New Tenants 2,287 273 2,560 -
New Tenants-First Generation 312 - 312 366
Renewal Tenants 428 9 437
Other 1,837 109 1,946 -
-------------- ------------ ------------ -------------------
$6,958 391 7,349 37,092
============== ============ ============ ===================
The Company anticipates that its current cash balance, operating cash flows
and borrowings under the working capital line of credit will be adequate for the
Company's (i) operating and administrative expenses, (ii) normal repair and
maintenance expenses at its properties, (iii) debt service obligations, (iv)
distributions to stockholders, (v) capital improvements, (vi) purchases of
properties, (vii) development, and (viii) common share repurchases.
Subsequent to September 30, 1999, EastGroup purchased the Altamonte
Commerce Center (123,000 square feet) in Orlando for $4,165,000. Altamonte was
constructed in 1980 and 1982 and consists of six buildings that are currently
96% leased to 42 tenants. This purchase was partially funded from the proceeds
of the sale of the 8150 Leesburg Pike Office Building that was sold in third
quarter 1999.
The Company also purchased World Houston 11 land for development consisting
of 7.34 acres for approximately $500,000.
Also, subsequent to September 30, 1999, the Company has entered into
contracts to purchase the following properties:
Approximate
Property Location Size Purchase Price
- -------------------------------------- --------------------------- ---------------------------- --------------------
(In thousands)
Southeast Crossing Business Center Memphis, Tennessee 348,000 sq. ft. $12,010
Land for Development Tampa, Florida 19.0 acres 400
Land for Development Orlando, Florida 10.2 acres 1,395
--------------------
$13,805
====================
The Company has entered into a contract to sell the Borders property in
Nashville, Tennessee for $21,514,000. This transaction would generate no
significant gain or loss for financial reporting purposes. The Company plans to
reinvest the sales proceeds in industrial properties. We anticipate the sale of
this property to close in the fourth quarter of 1999; however, there can be no
assurance that the sale will actually be completed.
The Company has also entered into a contract to sell the 610 acres of
Estelle land located in Jefferson Parish, Louisiana for $1,129,000. This
transaction would generate a gain for financial reporting purposes of
approximately $629,000. We anticipate the sale of this property to close in mid
2000; however, there can be no assurance that the sale will actually be
completed.
In the last five years, inflation has not had a significant impact on
the Company because of the relatively low inflation rate in the Company's
geographic areas of operation. Most of the leases require the tenants to pay
their pro rata share of operating expenses, including common area maintenance,
real estate taxes and insurance, thereby reducing the Company's exposure to
increases in operating expenses resulting from inflation. In addition, the
Company's leases typically have three to five year terms, which may enable the
Company to replace existing leases with new leases at a higher base if rents on
the existing leases are below the then-existing market rate.
19
Year 2000 Issue
The Company has been addressing the potential computer program and
other related problems resulting from the arrival of Year 2000 (Y2K). The
Company has established a Y2K compliance review process to assess the impact on
its internal financial and management information systems and property
mechanical operations systems, as well as the potential impact on the Company
from Y2K problems of significant tenants, vendors and suppliers of financial and
other services (collectively "independent third parties").
Regarding the Company's internal financial and management information
systems, as part of the Company's ongoing capital improvements process, during
the first quarter of 1999, the Company replaced the financial information and
reporting system (which the vendor has represented to us is Y2K compliant) with
a new, more efficient, information and reporting system designed to be Y2K
compliant and which is also being used by our major external property managers.
The cost of implementing this system was approximately $183,000, including some
1998 costs. The total cost has been capitalized and is being amortized over the
estimated useful life of the asset.
The Company has assessed Y2K compliance of its individual property
engineering and mechanical systems through inquiry via questionnaire of its
respective property managers. This was designed to identify any systems that may
not be compliant early on to avert any major interruption in the provision of
services to our tenants. Our questionnaire results indicated no material
problems at our properties. In addition, during fourth quarter 1998, the Company
sent correspondence to all tenants to determine how the Y2K issue is being
addressed at the tenant level in an attempt to determine the impact on revenue,
if any. Follow-up correspondence was sent during the third quarter of 1999. The
response to this corespondence has indicated no material Y2K problems expected
by our tenants.
Additionally, the Company's compliance plan included the process of
conducting inquiries of independent third party vendors and suppliers in order
to determine if these third parties have Y2K problems and what contingency plans
they have developed to deal with identified exposure. Based on the results of
these inquiries and those of our property managers and tenants, we have
identified no material unresolved Y2K issues. Nonetheless, we have formulated
appropriate contingency plans to take necessary and feasible precautions against
problems not within our control. These plans include short-term manual
processing of transactions, the use of our property managers' information
systems, and the use of alternative communication service providers.
The Company is also continuing the process of reviewing its own internal
systems to ensure that they are Y2K compliant and to make necessary and timely
corrections of identified Y2K problems under its direct control. This overall
process should be completed by November 1999 depending upon the timeliness of
activities of independent third parties.
The Company anticipates that total costs relating to Y2K compliance will
have an immaterial impact on the Company's overall financial statements. In
addition to the financial information and reporting system costs discussed
above, the Company has incurred approximately $20,000 of Y2K-related costs
through September 30, 1999.
20
Forward Looking Statements
In addition to historical information, certain sections of this Quarterly
Report on Form 10-Q contain forward-looking statements (those written in the
future tense or statements that relate to the Company's expectations) within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, such as those pertaining to the Company's
capital resources, profitability and portfolio performance. Forward-looking
statements involve numerous risks and uncertainties. The following factors,
among others discussed herein, could cause actual results and future events to
differ materially from those set forth or contemplated in the forward-looking
statements: defaults or non-renewal of leases, increased interest rates and
operating costs, failure to obtain necessary outside financing, difficulties in
identifying properties to acquire and in effecting acquisitions, failure to
qualify as a real estate investment trust under the Internal Revenue Code of
1986, as amended, environmental uncertainties, risks related to natural
disasters, financial market fluctuations, changes in real estate and zoning laws
and increases in real property tax rates. The success of the Company also
depends upon the trends of the economy, including interest rates, income tax
laws, governmental regulation, legislation, population changes and those risk
factors discussed elsewhere in this Quarterly Report. Readers are cautioned not
to place undue reliance on forward-looking statements, which reflect
management's analysis only as the date hereof. The Company assumes no obligation
to update forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result of
its line of credit and long-term debt used to maintain liquidity and fund
capital expenditures and expansion of the Company's real estate investment
portfolio and operations. The Company's interest rate risk management objective
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve its objectives, the Company
borrows at fixed rates but also has a three-year $150,000,000 unsecured
revolving credit facility with a group of ten banks which was arranged by Chase
Securities, Inc. The interest rate is based on the Eurodollar rate plus 1.25%.
In addition, the Company has a one-year $10,000,000 unsecured revolving credit
facility with Chase Bank of Texas. The interest rate on the $10,000,000 note is
based on Chase Bank of Texas, National Association's Prime Rate less .75%. The
table below presents the principal payments due and weighted average interest
rates for both the fixed rate and variable rate debt.
Oct-Dec
1999 2000 2001 2002 2003 Thereafter Total Fair Value
----------- ---------- --------- ----------- --------- -------------- ----------- ------------
Fixed rate debt $ 839 12,339 7,954 12,402 8,195 120,414 162,143 162,031
(in thousands)
Average interest rate 7.93% 8.66% 7.77% 7.59% 8.33% 7.90% 8.03%
Variable rate debt
(in thousands) - 343 - 67,000 - - 67,343 67,343
Average interest rate - 7.50% - 6.625% - - 6.63%
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - 1999 Financial Data Schedule attached hereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: November 15, 1999
EASTGROUP PROPERTIES, INC.
/s/ N. Keith McKey
N. Keith McKey, CPA
Executive Vice President, Chief
Financial Officer and Secretary