1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED: SEPTEMBER 30, 1997
COMMISSION FILE NUMBER: 1 - 7094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 ONE JACKSON PLACE
188 EAST CAPITOL STREET
P.O. BOX 22728
JACKSON, MISSISSIPPI 39201-2195
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE (601) 354-3555
EASTGROUP PROPERTIES
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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
--- ---
16,190,984 SHARES OF COMMON STOCK ($.0001 PAR VALUE) WERE OUTSTANDING AT
NOVEMBER 10, 1997.
2
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PAGES
-----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated financial statements
Consolidated balance sheets, September 30, 1997
and December 31, 1996 3
Consolidated statements of income for the three months and
nine months ended September 30, 1997 and 1996 4
Consolidated statements of cash flow for the nine months ended
September 30, 1997 and 1996 5
Consolidated statements of changes in stockholders' equity for
the nine months ended September 30, 1997 and 1996 6-7
Notes to consolidated financial statements 8
Item 2. Management's discussion and analysis of financial condition and
results of operations 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
Authorized signatures 19
3
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
ASSETS
Real estate properties:
Industrial $281,093 186,908
Industrial Development 10,768 1,925
Office Buildings 39,556 38,912
Apartments 15,335 37,494
-------- --------
346,752 265,239
Less accumulated depreciation (26,242) (22,703)
-------- --------
320,510 242,536
Real estate held for sale:
Land 585 585
Operating properties 22,594 14,293
less accumulated depreciation (3,217) (859)
Investment in joint venture - 4,367
-------- --------
19,962 18,386
Mortgage loans 11,893 12,503
Land purchase-leasebacks 527 527
Investment in real estate investment trusts 16,612 934
Cash and cash equivalents 604 438
Other assets 6,678 6,131
-------- --------
$376,786 281,455
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $146,842 115,116
Notes payable to banks 35,044 13,962
Accounts payable and accrued expenses 4,781 2,893
Minority interests 2,451 3,141
Other liabilities 1,749 1,017
-------- --------
190,867 136,129
-------- --------
STOCKHOLDERS' EQUITY
Shares of common stock, par value $0.0001 per share;
authorized 70,000,000 shares; issued 12,690,984
shares in 1997 1 -
Shares of beneficial interest, $1.00 par value per
share; authorized 20,000,000 shares; issued
10,548,965 in 1996 - 10,549
Additional paid-in-capital 171,459 123,780
Undistributed earnings 14,900 10,997
Unrealized loss on securities (441) -
-------- --------
185,919 145,326
-------- --------
$376,786 281,455
======== ========
See accompanying notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------- ------- ------- ------
REVENUES
Income from real estate operations $12,431 11,356 35,416 25,723
Interest:
Mortgage loans 530 556 1,534 1,114
Other interest 53 30 239 42
Other 532 162 1,011 748
------- ------- ------- ------
13,546 12,104 38,200 27,627
------- ------- ------- ------
EXPENSES
Operating expenses from real
estate operations 3,770 3,788 10,763 9,454
Interest expense 2,623 2,862 7,334 6,047
Depreciation and amortization 2,620 2,164 7,342 5,166
Minority interests in joint
ventures 115 105 414 187
General and administrative expense 813 650 2,214 1,684
------- ------- ------- ------
9,941 9,569 28,067 22,538
------- ------- ------- ------
INCOME BEFORE GAIN (LOSS) ON
INVESTMENTS 3,605 2,535 10,133 5,089
------- ------- ------- ------
GAIN (LOSS) ON INVESTMENTS
Real estate 6,300 159 6,407 2,155
Real estate investment trust
securities - (7) - 6
------- ------- ------- ------
6,300 152 6,407 2,161
------- ------- ------- ------
NET INCOME $ 9,905 2,687 16,540 7,250
======= ======= ======= ======
NET INCOME PER SHARE OF COMMON
STOCK $ .78 .26 1.34 .90
======= ======= ======= ======
Weighted average shares outstanding 12,685 10,535 12,364 8,051
======= ======= ======= ======
See accompanying notes to consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
---- ----
OPERATING ACTIVITIES
Net Income $ 16,540 7,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,342 5,166
Gain on investments, net (6,407) (2,161)
Other (210) (62)
Changes in operating assets and liabilities:
Accrued income and other assets (2,547) (31)
Accounts payable, accrued expenses and other
liabilities 2,985 (534)
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,703 9,628
------- --------
INVESTING ACTIVITIES
Payments on mortgage loans receivable, net of
amortization of loan discounts 1,853 (122)
Advances on mortgage loans receivable (1,575) -
Sale of real estate investments 24,138 9,780
Sale of real estate investments trust securities - 1,056
Real estate development (7,706) -
Purchases of real estate (45,827) (13,850)
Purchase of real estate investment trusts shares (16,119) -
Real estate improvements (3,194) (5,106)
Change in other investment assets 1,213 (211)
------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (47,217) (8,453)
------- --------
FINANCING ACTIVITIES
Proceeds from bank borrowings 79,017 54,726
Proceeds from mortgage notes payable 9,250 19,000
Principal payments on bank borrowings (57,935) (41,305)
Principal payments on mortgage notes payable (25,042) (24,999)
Distributions paid to shareholders (12,637) (7,725)
Purchases of shares of beneficial interest and
common stock (393) -
Net proceeds from issuance of shares of
beneficial interest 36,654 -
Proceeds from exercise of stock options 553 140
Proceeds from dividend reinvestment plan 213 63
Proceeds from merger of LNH, net - 903
Proceeds from merger of Copley, net - (1,392)
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 29,680 (589)
-------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 166 586
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 438 26
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 604 612
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Debt assumed by the Company in purchase of real estate 47,519 -
Cash paid for interest 6,695 5,511
Fair value of shares issued in Copley merger - 47,658
Fair value of shares issued in LNH merger - 13,640
See accompanying notes to consolidated financial statements
6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
SHARES OF ADDITIONAL UNREALIZED
BENEFICIAL SHARES OF PAID-IN UNDISTRIBUTED GAIN ON
INTEREST COMMON STOCK CAPITAL EARNINGS SECURITIES TOTAL
-------- ------------ ------- -------- ---------- -----
Balance, December 31, 1995 $ 6,348 -- 66,228 9,657 667 82,900
Net income -- -- -- 7,250 -- 7,250
Cash dividends declared -- -- -- (7,725) -- (7,725)
Issuance of 23,250 shares of
beneficial interest from exercise
of options 23 -- 265 -- -- 288
Purchase and retirement of 9,750
shares of beneficial interest (10) -- (138) -- -- (148)
Issuance of 9,640 shares of
beneficial interest, incentive
compensation 10 -- 118 -- -- 128
Issuance of 927,366 shares of
beneficial interest, LNH Merger 927 -- 12,713 -- -- 13,640
Issuance of 3,238,343 shares of
beneficial interest, Copley Merger 3,238 -- 44,420 -- -- 47,658
Issuance of 3,964 shares of beneficial
interest, dividend reinvestment
plan 4 -- 59 -- -- 63
Change in unrealized gain on
securities -- -- -- -- (667) (667)
-------- -------- -------- ------ ----- -------
Balance, September 30, 1996 $ 10,540 -- 123,665 9,182 -- 143,387
========= ======== ======== ====== ===== =======
7
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
SHARES OF ADDITIONAL UNREALIZED
BENEFICIAL SHARES OF PAID-IN UNDISTRIBUTED GAIN (LOSS)
INTEREST COMMON STOCK CAPITAL EARNINGS ON SECURITIES TOTAL
-------- ------------ ------- -------- ------------- -----
Balance, December 31, 1996 $ 10,549 -- 123,780 10,997 -- 145,326
Net income -- -- -- 16,540 -- 16,540
Cash dividends declared -- -- -- (12,637) -- (12,637)
Issuance of 2,100,000 shares
of beneficial interest 2,100 -- 34,554 -- -- 36,654
Issuance of 23,800 shares of
beneficial interest from
exercise of options 23 -- 245 -- -- 268
Purchase and retirement of
8,268 shares of beneficial
interest (8) -- (142) -- -- (150)
Issuance of 6,490 shares of
beneficial interest, incentive
compensation 7 -- 97 -- -- 104
Issuance of 3,441 shares of
beneficial interest, dividend
reinvestment plan 3 -- 60 -- -- 63
Purchase of 194 fractional shares
of beneficial interest -- -- (5) -- -- (5)
Change in unrealized gain (loss)
on securities -- -- -- -- (441) (441)
Reduction of par value associated
with reorganization (12,674) 1 12,673 -- -- --
Issuance of 21,250 shares of
common stock from exercise of
options -- -- 285 -- -- 285
Purchase and retirement of 11,725
shares of common stock -- -- (238) -- -- (238)
Issuance of 7,225 shares of common
stock, dividend reinvestment
plan -- -- 150 -- -- 150
-------- ------- -------- ------- ----- --------
Balance, September 30, 1997 $ -- 1 171,459 14,900 (441) 185,919
======== ======= ======== ======== ======= ========
See accompanying notes to consolidated financial statements
8
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 the opinion of management, 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 1996
annual report and the notes thereto.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the 1996 financial
statements to conform to the 1997 classifications.
(3) SHARE SPLIT
On March 20, 1997, the Company announced that its Board of Directors
approved a three-for-two share split in the form of a share dividend of one
share for every two shares outstanding. The share dividend was distributed on
April 7, 1997 to shareholders of record as of March 31, 1997. All share and per
share amounts have been restated to recognize the split.
(4) CORPORATE REORGANIZATION
On June 5, 1997, the Company's shareholders approved and the Company
subsequently completed the reorganization of the Trust into a Maryland
corporation. The purpose of the reorganization was to modernize EastGroup's
governance procedures and to provide EastGroup with a greater degree of
certainty and flexibility in planning and implementing corporate action by
adopting a form of organization used by many real estate investment trusts.
EastGroup will continue to qualify as a real estate investment trust for tax
purposes. Effective with the reorganization, the Company now has the authority
to issue 100,000,000 shares consisting of 70,000,000 shares of common stock,
$.0001 par value per share, and 30,000,000 shares of excess stock, $.0001 par
value per share. Effective June 5, 1997, all stock transactions reflect the new
par value. Stock transactions prior to the reorganization have not been
restated to reflect the new par value.
(5) SUBSEQUENT EVENTS
In October 1997, the Company completed the offering of 3,500,000 shares
of its common stock for net proceeds of approximately $72,500,000. Approximately
$35,500,000 was used to repay all outstanding indebtedness under the Company's
revolving credit facilities, and the remainder will be used to purchase
industrial properties and/or to repay additional indebtedness.
The Company has entered into contracts to purchase five additional
industrial properties, aggregating approximately 1,189,000 square feet of
leasable space, for a total cost of approximately $38,496,000.
On November 12, 1997, the Company acquired Interchange B, a 27,000
square foot industrial complex in Jackson, Mississippi, for a total cost of
approximately $1,210,000.
9
(6) ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, "Earnings per Share". SFAS No. 128 establishes standards
for computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. This statement replaces
the presentation of primary earnings per share with a presentation of basic
earnings per share. It also requires dual presentation of basic and diluted
earnings per share on the face of the statement of income for all entities with
complex capital structures and requires a reconciliation between basic and
diluted earnings per share. SFAS No. 128 is effective for fiscal years ending
after December 15, 1997, and the adoption of this statement is not expected to
have a material impact on the Company's consolidated financial statements.
Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure". This statement establishes standards for
disclosing information about an entity's capital structure. This statement is
effective for fiscal years ending after December 15, 1997. The adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses).
This statement is effective for fiscal years beginning after December 15, 1997.
The adoption of this statement will not have a material impact on the Company's
consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of this statement will have no impact on the 1997
consolidated financial statements, but could require expanded disclosure in
subsequent periods.
(7) FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may be deemed to be
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Factors that could cause
actual results to differ materially from the Company's current expectations
include general economic conditions, local real estate conditions, the
performance of properties that the Company has acquired or may acquire and other
risks, detailed from time to time in the Company's past and future SEC reports.
10
EASTGROUP PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION:
On March 20, 1997, the Company announced that its Board of Directors
approved a three-for-two share split in the form of a share dividend of one
share for every two shares outstanding. The share dividend was distributed on
April 7, 1997 to stockholders of record as of March 31, 1997. All shares and per
share amounts have been restated to recognize the split.
(Comments are for the balance sheet dated September 30 1997, compared to
December 31, 1996.)
Assets of EastGroup Properties, Inc. ("EastGroup" or the "Company")
were $376,786,000 at September 30, 1997, an increase of $95,331,000 from
December 31, 1996. Liabilities increased $54,738,000 to $190,867,000 during the
same period. Book value per share increased from $13.78 at December 31, 1996 to
$14.65 at September 30, 1997.
Real estate properties and real estate held for sale (excluding
accumulated depreciation) increased $85,447,000 during the nine months ended
September 30, 1997 primarily as a result of the acquisition of 16 industrial
properties for $92,311,000 (as detailed below) and one parcel of land for future
development for $1,035,000, capital improvements on existing properties of
$3,194,000, and the investment of $7,706,000 in seven industrial developments
(as detailed below).
INDUSTRIAL
PROPERTIES SIZE DATE COST
ACQUIRED LOCATION (SQUARE FEET) ACQUIRED (IN THOUSANDS)
- ---------- -------- ------------- -------- --------------
Interchange A and D Jackson, MS 100,000 3-20-97 $ 4,148
6-13-97
Palm River Distribution Center I Tampa, FL 72,000 4-30-97 2,671
West Loop II Business Park II Houston, TX 77,000 5-02-97 2,951
Lockwood Distribution Center Houston, TX 392,000 5-09-97 6,188
Yankee Boulevard Industrial Park Fort Lauderdale, FL 118,000 6-23-97 3,489
Cypress Creek Business Park Fort Lauderdale, FL 56,000 6-23-97 2,457
Senator Street Distribution Center Memphis, TN 80,000 7-16-97 2,726
Chamberlain Distribution Center Tucson, AZ 120,000 7-22-97 4,070
35th Avenue Distribution Center Phoenix, AZ 124,000 7-31-97 2,799
Washington Distribution Center Santa Fe Springs, CA 141,000 8-19-97 6,533
San Clemente Distribution Center Hayward, CA 81,000 8-22-97 2,894
Elmwood Business Park New Orleans, LA 262,000 9-24-97 9,171
Riverbend Business Park New Orleans, LA 591,000 9-24-97 20,395
Ellis Distribution Center Jacksonville, FL 337,000 9-24-97 8,052
Westside Distribution Center Jacksonville, FL 502,000 9-24-97 12,881
56th Street Commerce Park Tampa, FL 25,000 9-30-97 886
-------
$92,311
=======
11
TOTAL
COSTS TOTAL
INCURRED COSTS
FOR THE INCURRED ESTIMATED
NINE MONTHS FOR THE TOTAL
INDUSTRIAL SIZE AT ENDED YEAR ENDED DEVELOPMENT
DEVELOPMENT COMPLETION 9-30-97 12-31-96 COSTS
- ----------- ---------- ------- -------- -----
(IN THOUSANDS)
Rampart
Distribution II-Denver 66,000 sq. ft. $1,716 673 2,389
Chancellor Center-Orlando 51,000 sq. ft. 681 1,021 1,702
Deerwood expansion-Jacksonville 29,000 sq. ft. 455 - 455
Walden Distribution- Tampa 122,000 sq. ft. 1,328 - 3,352
Sunbelt II-Orlando 61,000 sq. ft. 123 - 1,631
Benjamin Distribution
I & II-Tampa 93,000 sq. ft. 2,663 - 3,676
Palm River II - Tampa 72,000 sq. ft. 740 - 2,391
------ ----- ------
$7,706 1,694 15,596
====== ===== ======
These increases were offset by the sale of the Santa Fe Energy Office Building
with a cost of $10,908,000 and the Liberty Corners Shopping Center with a cost
of $3,443,000 and the Cowesett Corners Shopping Center with a cost of
$4,310,000.
Accumulated depreciation on real estate properties increased primarily
due to depreciation expense of $6,839,000, offset by the sale of properties with
accumulated depreciation of $859,000 consisting of the Santa Fe Office Building
with $803,000 and Liberty Corners Shopping Center with $56,000.
Mortgage loans receivable decreased $610,000 during the nine months
ended September 30, 1997. Decreases resulted from regularly scheduled principal
payments received of $224,000 and the payoff of the Baygreen mortgage note
receivable (acquired in the Copley merger) of $700,000, the payoff of the Bell
Road mortgage note receivable of $935,000, and the paydown on the Plus Park
mortgage note receivable of $444,000. Increases resulted from the $1,575,000
mortgage note receivable on the acquisition of the Palm River Center and the
amortization of loan discounts of $450,000. The terms of the note receivable are
an interest rate of 8.5%, monthly interest only payments and a maturity of April
30, 1998.
Investments in real estate investment trusts increased from $934,000 at
December 31, 1996 to $16,612,000 at September 30, 1997. This increase was due to
the acquisition of 1,449,956 shares of Meridian Point Realty Trust VIII for
$13,755,000 and the purchase of stock in other real estate investment trusts of
$2,364,000. Also, the Company recognized an unrealized loss of $441,000 on the
Company's available-for-sale securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
Mortgage notes payable increased $31,726,000 during the nine months of
1997, as a result of the placement of a $9,250,000 mortgage on the University
Business Center with an interest rate of 7.45%, monthly principal and interest
of $74,235 and a maturity date of February 28, 2002. Also, the Company assumed
debt of $2,519,000 on the acquisition of the Chamberlain Distribution Center and
$45,000,000 on the purchase of the four industrial properties in Jacksonville
and New Orleans. The terms of the Chamberlain mortgage note payable are 8.75%
interest, monthly principal and interest of $21,376 and a maturity date of
January 1, 2005. The terms of the Jacksonville and New Orleans mortgage note
payable are 9.25% interest, with interest only payments due monthly and
principal and interest due on December 31, 1997. These increases were offset by
regularly scheduled principal payments of $1,655,000 and the repayment of the
following mortgages: $2,524,000 on the Nobel Center mortgage, $5,138,000 on the
Dominguez Distribution Center mortgage, $3,373,000 on the Metro Business Park
mortgage, $8,250,000 on the University Business Center mortgage and $4,103,000
on the Sunbelt Distribution Center mortgage.
Notes payable to banks increased from $13,962,000 at December 31, 1996
to $35,044,000 at September 30, 1997, as a result of borrowings of $79,017,000
and payments of $57,935,000. As of September 30, 1997, the acquisition line had
a balance of $18,338,000 and the working capital line had a balance of
$16,706,000. These lines of credit are described in detail under Liquidity and
Capital Resources.
12
Unrealized loss on securities increased $441,000 as a result of
unrealized loss recorded on the Company's investment in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Undistributed earnings increased from $10,997,000 at December 31, 1996
to $14,900,000 at September 30, 1997, as a result of net income for financial
reporting purposes of $16,540,000 exceeding dividends of $12,637,000.
On June 5, 1997, the Company's shareholders approved and the Company
subsequently completed the reorganization from a Maryland trust into a Maryland
corporation. Effective with the reorganization, the Company now has the
authority to issue 100,000,000 shares consisting of 70,000,000 shares of common
stock, $0.0001 par value per share, and 30,000,000 shares of excess stock,
$0.0001 par value per share. Effective June 5, 1997 all stock transactions
reflect the new par value. Stock transactions prior to the reorganization have
not been restated to reflect the new par value. Refer to the Consolidated
Statements of Stockholders' Equity in the consolidated financial statements
for a complete summary of changes in stockholders' equity.
In February 1997, the Company issued a total of 2,100,000 shares under
an existing shelf registration statement. The net proceeds of the offering
(approximately $36,654,000, net of underwriting commissions and expenses) were
used for the repayment of approximately $30,000,000 of outstanding indebtedness
and to fund working capital requirements, including the acquisition of
industrial properties.
13
RESULTS OF OPERATIONS:
(Comments are for the three months and nine months ended September 30,1997,
compared to the three months and nine months ended September 30, 1996.)
Net income for the three months and nine months ended September 30,
1997 was $9,905,000 ($.78 per share) and $16,540,000 ($1.34 per share), compared
to net income for the three months and nine months ended September 30, 1996 of
$2,687,000 ($.26 per share) and $7,250,000 ($.90 per share). Income before gains
on investments was $3,605,000 and $10,133,000 for the three months and nine
months ended September 30, 1997, compared to $2,535,000 and $5,089,000 for the
three months and nine months ended September 30, 1996. Gains on investments were
$6,300,000 and $6,407,000 for the three months and nine months ended September
30, 1997, compared to $152,000 and $2,161,000 for the three months and nine
months ended September 30, 1996.
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 $1,093,000 or 14.4% for
the three months ended September 30, 1997, compared to the three months ended
September 30, 1996. For the nine months ended September 30, 1997, PNOI increased
by $8,384,000 or 51.5% compared to the nine months ended September 30, 1996.
Property net operating income and percentage leased by property type
were as follows:
PNOI PNOI
---- ---- PERCENT
THREE MONTHS ENDED NINE MONTHS ENDED LEASED
1997 1996 1997 1996 9-30-97
---- ---- ---- ---- -------
(IN THOUSANDS)
Industrial 6,315 4,786 17,131 9,425 95%
Office Buildings 1,378 1,477 4,382 3,065 93%
Apartments 884 1,194 2,680 3,632 97%
Other 84 111 460 147
---- ----- ------ -----
Total PNOI 8,661 7,568 24,653 16,269
===== ===== ====== ======
PNOI from industrial properties increased $1,529,000 and $7,706,000 for
the three months and nine months ended September 30, 1997, compared to September
30, 1996. Industrial properties held throughout the three months and nine months
ended September 30, 1997 and 1996, showed an increase in PNOI of 6.3% for the
three months ended September 30, 1997 and 1.6% for the nine months ended
September 30, 1997. PNOI from industrial properties increased $ 5,261,000 for
the nine months ended September 30, 1997, compared to September 30, 1996, as a
result of the industrial properties received in the mergers with LNH and Copley.
Also contributing to this increase in PNOI from industrial properties were the
1997 industrial acquisitions discussed previously, and the acquisition of Walnut
Business Center, a 234,070 square foot industrial complex in Fullerton,
California, in August 1996 and Braniff Park West, a 259,352 square foot
industrial complex in Tulsa, Oklahoma, in September 1996. These acquisitions
contributed $1,214,000 and $2,307,000 to the increase in PNOI from industrial
properties for the three months and nine months ended September 30, 1997,
compared to September 30, 1996.
PNOI from the Company's office buildings decreased $99,000 and
increased $1,317,000 for the three months and nine months ended September 30,
1997, compared to September 30, 1996. The decrease for the three months ended
September 30, 1997 compared to September 30, 1996 is the result of the sale of
the Santa Fe Office Building in July 1997, offset by improvement in operations
from office properties held throughout the three months ended September 30, 1997
and 1996. The office buildings acquired in the mergers with LNH and Copley
contributed $1,236,000 to the increase in PNOI for office buildings for the nine
months ended September 30, 1997, compared to September 30, 1996. Also, office
buildings held throughout the three months and nine months ended September 30,
1997 and 1996, showed an increase in PNOI of 9.1% for the three months ended
September 30, 1997 and an increase of 18.2% for the nine months ended September
30, 1997.
PNOI from the Company's apartment properties decreased $310,000 and
$952,000 for the three months and nine months ended September 30, 1997, compared
to September
14
30, 1996. This decrease is primarily attributable to the sale of the Garden
Villa Apartments in January 1996, the Pin Oaks and EastGate Apartments in
November 1996 and the Plantation Apartments in December 1996. Apartment
properties held throughout the three months and nine months ended September 30,
1997 and 1996 showed a decrease in PNOI of 11.5% and 4.5%, respectively.
Interest income on mortgage loans decreased $26,000 and increased
$420,000 for the three months and nine months ended September 30, 1997 compared
to 1996. The following is a breakdown of interest income for the three months
and nine months ended September 30, 1997 compared to 1996:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
(IN THOUSANDS)
Interest income from mortgage loans:
Land 223 280 676 337
Apartments 134 132 398 392
Motel 130 82 301 285
Other 43 62 159 100
------ ------ ------ ------
530 556 1,534 1,114
====== ====== ====== ======
Interest income from land mortgage loans increased as a result of
interest income on loans received in the merger with LNH Reit, Inc. ("LNH").
The LNH loans were discounted to fair value at the merger date. This discount
of $101,000 and $303,000 for the three months and nine months ended September
30, 1997 is being amortized over the life of the loans and is included in
interest income. Due to uncertainty of collection, interest income from the
motel mortgage loans is recorded as received, and the notes have been written
down to their net realizable value. Interest income on other mortgage loans
increased primarily as a result of interest income on loans received in the
mergers with LNH and Copley Properties, Inc. ("Copley").
Interest expense decreased $239,000 and increased $1,287,000 for the
three months and nine months ended September 30, 1997 compared to 1996. Average
bank borrowings were $24,526,000 and $12,586,000 for the three months and nine
months ended September 30, 1997, compared to $21,377,000 and $10,726,000 for
the same period of 1996. Bank interest rates at September 30, 1997 and 1996
were 7.4375%(LIBOR plus 1.75%) and 7.35% (LIBOR plus 1.85%), respectively.
Interest cost incurred during the period of construction of real estate
properties is capitalized. The interest cost capitalized on real estate
properties for the three months and nine months ended September 30, 1997 was
$144,000 and $246,000, compared to $0 for 1996. Interest expense on real estate
properties increased primarily as a result of the new University Business
Center mortgage, the mortgages assumed in the Copley merger, the mortgage
assumed on the acquisition of Chamberlain and the mortgage on the purchase of
the four industrial properties in Jacksonville and New Orleans. This increase
in interest expense was offset by the payoff of the Nobel Center mortgage, and
the sale of the Garden Villa Apartments and the Plantations Apartments in 1996.
Depreciation and amortization increased $456,000 and $2,176,000 for the
three months and nine months ended September 30, 1997 compared to 1996. This
increase was primarily due to the properties acquired in the Copley and LNH
mergers and the industrial properties acquired in 1997. This increase in
depreciation and amortization was offset by the sale of the Garden Villa
Apartments, the Pin Oaks Apartments, Plantations Apartments, the EastGate
Apartments, the Santa Fe Office Building and the Liberty Corners Shopping
Center.
The increase in general and administrative expenses of $163,000 and
$530,000 for the three months and nine months ended September 30, 1997 is
primarily due to an increase in costs as a result of the Copley and LNH mergers
and the property acquisitions.
15
In 1997, the Company recognized deferred gains of $257,000 from
previous sales. Gains on investments for the nine month periods ended September
30, 1997 and 1996 resulted from the following sales:
SEPTEMBER 30, 1997
- ------------------
DISCOUNTED
DATE NET SALES RECOGNIZED
SOLD BASIS PRICE GAIN (LOSS)
- ----- ----- ----------- -----------
(In thousands)
REAL ESTATE PROPERTIES:
7-97 Santa Fe Energy Office Building $ 10,354 12,660 2,306
8-97 Liberty Corners Shopping Center 2,650 5,275 2,625
9-97 Cowesett Corners Shopping Center 4,237 5,946 1,709
9-97 MORTGAGE LOANS:
Writedown Citrus Center 490 - (490)
9-97 OTHER - 257 257
------- ------ -------
$17,731 24,138 6,407
======= ====== =======
SEPTEMBER 30, 1996
- ------------------
DISCOUNTED
DATE NET SALES RECOGNIZED
SOLD BASIS PRICE GAIN (LOSS)
- ----- ----- ----------- -----------
(In thousands)
REAL ESTATE PROPERTIES:
1-96 Garden Villa Apartments $ 2,715 4,068 1,353
9-96 BayGreen Industrial Park 1,051 1,000 (51)
LAND PURCHASE-LEASEBACKS:
4-96 Bellevue - 472 472
5-96 Taco Bell 12 143 131
LAND:
6-96 Southwyck parcel 111 149 38
7-96 Sample I-95 land 3,275 3,267 (8)
9-96 Wellington parcel 383 603 220
SECURITIES:
Various Liberte' stock 1,050 1,056 6
------- ------ -----
$ 8,597 10,758 2,161
======= ====== =====
The gain on the sale of the Liberte' stock and the Southwyck parcel are
gains on investments received in the LNH merger on May 14, 1996.
16
NAREIT has recommended supplemental disclosures concerning capital
expenditures and leasing costs. The Company expenses apartment unit turnover
cost such as carpet, painting and small appliances. Capital expenditures for the
nine months ended September 30, 1997 and 1996 by category are as follows:
SEPTEMBER 30,
-------------
1997 1996
---- ----
(IN THOUSANDS)
Upgrades on acquisitions $ 465 90
Major renovation 80 --
New development 7,706 3,037
Tenant improvements:
New tenants (first generation) 307 --
New tenants 1,209 976
Renewal tenants 288 391
Other 845 612
------ -----
$10,900 5,106
======= =====
The Company's leasing costs are capitalized and included in other
assets. The costs are amortized over the life of the lease and are included in
depreciation and amortization expense. A summary of these costs is as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
(IN THOUSANDS)
Capitalized leasing costs:
New tenants $ 563 211 948 431
New tenants (first generation) (4) - 82 -
Renewal Tenants 189 79 444 226
----- ---- ---- ----
$ 748 290 1,474 657
===== ==== ===== ====
Amortization of Leasing cost $ 179 154 503 389
===== ==== ===== ====
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $17,703,000 for the nine
months ended September 30, 1997. The Company distributed $12,637,000 in
dividends. Other sources of cash were collections on mortgage loan receivables,
sales of real estate investments, mortgage borrowings, bank borrowings and
proceeds from the 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 and purchases of real estate investment trust shares. Total debt
at September 30, 1997 is as follows:
SEPTEMBER 30,
-------------
1997 1996
---- ----
(IN THOUSANDS)
Mortgage notes payable - fixed rate $146,842 120,885
Bank notes payable - floating rate 35,044 17,780
-------- --------
Total debt $181,886 138,665
======== ========
On September 30, 1997, the Company had a working capital line of
credit of $20,000,000 and an acquisition line of credit of $20,000,000
available for the acquisition of properties and other working capital
requirements. The interest rate on both the working capital line and the
acquisition line at September 30, 1997 was LIBOR plus 1.75% (or 7.4375%). There
is also a .125% fee on the unused amount of the $20 million credit line and the
$20 million acquisition credit line. As of September 30, 1997, the acquisition
line had a balance of $18,338,000 and the working capital line had a balance of
$16,706,000.
17
Effective October 1, 1997, the maximum principal amount of the
Acquisition Facility increased to $65.0 million through March 31, 1998 and
then will be $50.0 million from April 1, 1998 through September 30, 2000.
Through March 31, 1998, the first $48.75 million advanced under the
Acquisition Facility will bear interest at LIBOR plus 1.50% and any advances in
excess of $48.75 million will bear interest at LIBOR plus 1.75%. Effective
April 1, 1998, all advances under the Acquisition Facility will bear interest
at LIBOR plus 1.50%.
Effective October 1, 1997, the maximum principal amount of the
Working Capital Facility was increased to $35.0 million through March 31,
1998 and then will be $25.0 million from April 1, 1998 through September 30,
1998. Through March 31, 1998, the first $26.25 million advanced under the
Working Capital Facility will bear interest at LIBOR plus 1.50% and any
advances in excess of $26.25 million will bear interest at LIBOR plus 1.75%.
Effective April 1, 1998, all advances under the Working Capital Facility will
bear interest at LIBOR plus 1.50%.
Budgeted capital expenditures for the year ending December 31, 1997 are
as follows:
(IN THOUSANDS)
--------------
Upgrades on acquisitions $ 762
Major renovations 130
New development 12,981
Tenant Improvements:
New tenants 2,162
New tenants - first generation 617
Renewal tenants 319
Other 1,296
-------
$18,267
=======
The Company anticipates that its current cash balance, operating cash
flows and borrowings (including borrowings under the working capital line of
credit) will be adequate to pay the Company's (i) operating and administrative
expenses, (ii) debt service obligations, (iii) distributions to shareholders,
(iv) capital improvements, (v) purchases of properties and (vi) normal repair
and maintenance expenses at its properties both in the short and long term.
In October 1997, the Company completed the offering of 3,500,000 shares
of its Common Stock for net proceeds of approximately $72,500,000. Approximately
$35,500,000 was used to repay all outstanding indebtedness under the Company's
revolving credit facilities, and the remainder will be used to purchase
industrial properties and/or to repay additional indebtedness.
The Company has entered into contracts to purchase five additional
industrial properties, aggregating approximately 1,189,000 square feet of
leasable space, for a total cost of approximately $38,496,000.
On November 12, 1997, the Company acquired Interchange B, a 27,000
square foot industrial complex in Jackson, Mississippi for a total cost of
approximately $1,210,000.
The Company incurred a mortgage note payable of $45,000,000 on the
purchase of the four industrial properties in Jacksonville and New Orleans in
September 1997. The note is due on December 31, 1997. The Company plans to
repay the note with any remaining proceeds of the stock offering and bank debt.
18
EASTGROUP PROPERTIES, INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule attached hereto.
(b) Reports on Form 8-K
(1) Filed September 29, 1997 Reporting the purchase of four
industrial properties (14 buildings) totaling 1,692,000 square
feet located in Jacksonville, Florida and New Orleans,
Louisiana for a total purchase price of $50,237,000 including
closing costs.
19
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 14, 1997
EASTGROUP PROPERTIES, INC.
/s/ Diane W. Hayman
-------------------------------
Diane W. Hayman, CPA Controller
/s/ N. Keith McKey
-------------------------------
N. Keith McKey, CPA Executive
Vice President, Chief Financial
Officer and Secretary