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FORM 10-Q/A
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 JUNE 30, 1998 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 August 7, 1998 was 16,307,857.
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EASTGROUP PROPERTIES, INC.
FORM 10-Q/A
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 1998
PAGES
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated financial statements
Consolidated balance sheets, June 30, 1998 (unaudited) and
December 31, 1997 3
Consolidated statements of income for the three and six
months ended June 30, 1998 and 1997 (unaudited) 4
Consolidated statements of cash flow for the six months
ended June 30, 1998 and 1997 (unaudited) 5
Consolidated statements of changes in stockholders' equity
for the six months ended June 30, 1998 (unaudited) 6
Notes to consolidated financial statements 7
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 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
Authorized signatures 19
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CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
ASSETS June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
Real estate properties:
Industrial $495,076 316,808
Industrial Development 10,828 13,831
Office Buildings 28,086 39,753
Apartments 8,793 15,380
--------- ---------
542,783 385,772
Less accumulated depreciation (34,107) (29,095)
--------- ---------
508,676 356,677
Real estate held for sale:
Land 585 585
Operating properties 36,290 22,648
less accumulated depreciation (3,999) (3,217)
--------- ---------
32,876 20,016
--------- ---------
Mortgage loans 10,457 10,852
Investment in real estate investment trusts 4,441 16,518
Cash 964 1,298
Other assets 11,505 7,766
--------- ---------
TOTAL ASSETS $568,919 413,127
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $142,959 105,380
Notes payable to banks 113,945 41,770
Accounts payable & accrued expenses 5,637 3,979
Minority interest 2,029 2,436
Other liabilities 2,528 2,247
--------- ---------
267,098 155,812
--------- ---------
STOCKHOLDERS' EQUITY
Shares of common stock - Par value $.0001 per share; 2 2
authorized 68,275,000 shares; issued 16,307,857 at
June 30, 1998 and 16,204,523 at December 31, 1997
Shares of Preferred Stock - Par value $.0001 per share; - -
9.00% Series A Cumulative Redeemable; authorized
and issued 1,725,000 shares at June 30, 1998
and 0 at December 31, 1997
Shares of Excess Stock - Par value $.0001 per share; - -
authorized 30,000,000 shares; no shares issued
Additional paid-in capital 287,790 244,215
Undistributed earnings 12,974 13,633
Accumulated other comprehensive income 1,055 (535)
--------- ---------
301,821 257,315
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $568,919 413,127
========= =========
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Six Months
Ended Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Income from real estate operations $ 18,080 11,788 33,415 22,985
Interest:
Mortgage loans 408 484 866 1,004
Other interest 87 101 111 186
Other 106 292 330 479
------------------------------ ------------------------------
18,681 12,665 34,722 24,654
EXPENSES
Operating expenses from real
estate operations 4,727 3,661 8,723 6,993
Interest 4,349 2,275 7,288 4,711
Depreciation and amortization 4,018 2,328 7,224 4,722
Minority interests 149 141 255 299
General and administrative 907 707 1,776 1,401
------------------------------ ------------------------------
14,150 9,112 25,266 18,126
------------------------------ ------------------------------
INCOME BEFORE GAIN (LOSS) ON
INVESTMENTS 4,531 3,553 9,456 6,528
Gain (loss) on real estate investments 1,017 (5) 1,090 107
------------------------------ ------------------------------
NET INCOME 5,548 3,548 10,546 6,635
Preferred stock dividends 129 - 129 -
------------------------------ ------------------------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 5,419 3,548 10,417 6,635
============================== ==============================
BASIC PER SHARE DATA
Net income available to
common shareholders $ 0.33 0.28 0.64 0.54
============================== ==============================
Weighted average shares outstanding 16,299 12,675 16,261 12,201
============================== ==============================
DILUTED PER SHARE DATA
Net income available to
common shareholders $ 0.33 0.28 0.63 0.54
============================== ==============================
Weighted average shares outstanding 16,452 12,822 16,422 12,344
============================== ==============================
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, June 30,
1998 1997
--------------- ----------------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 10,546 6,635
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of deferred
leasing costs 7,224 4,722
Gains on investments, net (1,090) (107)
Other (185) (137)
Changes in operating assets and liabilities:
Accrued income and other assets (2,239) (1,813)
Accounts payable, accrued expenses and prepaid rent 872 248
--------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,128 9,548
--------------- ----------------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable, net of
amortization of loan discounts 778 563
Advances on mortgage loans receivable - (1,575)
Sale of real estate investments 6,611 -
Real estate improvements (3,254) (2,093)
Real estate development (7,502) (5,121)
Purchases of real estate (63,243) (21,871)
Acquisition of Meridian (52,760) -
Purchases of real estate investment trusts shares (88) (2,217)
Merger expenses (1,589) -
Change in other assets and other liabilities (277) 1,107
Cash balances of acquired company 6,046 -
--------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (115,278) (31,207)
--------------- ----------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 136,788 43,984
Proceeds from mortgage notes payable - 9,250
Principal payments on bank borrowings (64,613) (39,497)
Principal payments on mortgage notes payable (3,010) (20,374)
Distributions paid to shareholders (11,076) (8,323)
Purchases of shares of beneficial interest and common stock - (241)
Proceeds from exercise of stock options 164 417
Net proceeds from issuance of shares of
beneficial interest - 36,654
Net proceeds from issuance of shares of preferred stock 41,418 -
Proceeds from dividend reinvestment plan 145 138
--------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 99,816 22,008
--------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (334) 349
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,298 438
=============== ================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 964 787
=============== ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 6,506 4,777
Debt assumed by the Company in purchase of real estate 7,167 -
Debt assumed by the Company in the Meridian acquisition 33,422 -
Issuance of common stock to acquire Ensign 1,746 -
See accompanying notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
Shares Shares Accumulated
of of Additional Other
Common Preferred Paid-In Undistributed Comprehensive
Stock Stock Capital Earnings Income Total
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 $2 - 244,215 13,633 (535) 257,315
Net income - - - 10,546 - 10,546
Cash dividends declared - common, $.68 per share - - - (11,076) - (11,076)
Preferred stock dividends declared - - - (129) - (129)
Change in unrealized gain (loss) on
securities - - - - 1,590 1,590
Issuance of 5,007 shares of
common stock, incentive compensation - - 102 - - 102
Issuance of 11,785 shares of
common stock, exercise options - - 164 - - 164
Issuance of 79,353 shares of
common stock, Ensign merger - - 1,746 - - 1,746
Issuance of 1,725,000 shares of preferred stock - - 41,418 - - 41,418
Issuance of 7,189 shares of
common stock, dividend reinvestment plan - - 145 - - 145
-------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 1998 $2 - 287,790 12,974 1,055 301,821
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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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 1997
annual report and the notes thereto.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the 1997 financial
statements to conform to the 1998 classifications.
(3) SUBSEQUENT EVENTS
Since June 30, 1998, the Company purchased two parcels of land for
future development for a purchase price of $2,008,000. Also, as of August 14,
1998, the Company had entered into contracts to purchase, for future
development, three industrial properties for approximately $15,585,000 and
seven parcels of land, consisting of approximately 69 acres, for a purchase
price of approximately $8,329,000.
The Company had previously reclassified the Sutton House Apartments
with a cost of $8,741,000 and the Doral Club Apartments with a cost of
$7,219,000, both in San Antonio, Texas to "held for sale" properties. The
Company currently has contracts to sell these apartment complexes for a total of
approximately $18,625,000.
On August 11, 1998, the Company sold East Maricopa Distribution Center
in Phoenix, Arizona for a net sales price of approximately $639,000. No
significant gain (loss) is anticipated on this transaction.
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(4) ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting comprehensive
income. SFAS No. 130 defines comprehensive income as the changes in equity of an
enterprise except those resulting from stockholder transactions. All components
of comprehensive income are required to be reported in a new financial statement
that is displayed with equal prominence as existing financial statements. The
Company adopted this standard as of January 1, 1998. Following is a comparison
of comprehensive income for the six months ended June 30, 1998 and 1997.
SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
(In thousands)
--------------------------------------------------
Net income $10,546 6,635
Other comprehensive income:
Unrealized holding gains arising during period
1,590 226
--------------------------------------------------
Comprehensive income $12,136 $6,861
==================================================
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 standards for 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 on January 1, 1998 did not have a
material impact on the Company's consolidated financial statements, but could
require expanded disclosures in subsequent periods.
(5) MERIDIAN POINT REALTY TRUST VIII
During second quarter 1998, the Company completed the acquisition of
Meridian Point Realty Trust VIII ("Meridian VIII") described below, accounting
for the acquisition by using the purchase method of accounting. For financial
reporting purposes, the acquired assets of Meridian VIII are assigned new
cost basis amounts based on the allocation of the purchase price of the assets
to the Company. In general, the purchase price to the Company consisted of the
cash paid for Meridian VIII and the previous investment the Company had in
Meridian VIII. The shares of Meridian VIII owned by the Company were retired at
the merger date. The operating results of Meridian VIII have been included in
the consolidated statement of income subsequent to the date of acquisition.
On June 1, 1998, the merger of Meridian VIII into a wholly-owned
subsidiary of EastGroup was completed. Pursuant to the terms of its merger
agreement with Meridian VIII, EastGroup's wholly-owned subsidiary exercised
options to acquire a sufficient number of common and preferred shares of
Meridian VIII such that it owned 90% of all outstanding common and preferred
shares. Prior to the exercise of the options, EastGroup's subsidiary
beneficially owned approximately 83.2% of the outstanding voting securities of
Meridian VIII. Following the exercise of the options, Meridian VIII was merged
into EastGroup's wholly-owned subsidiary, with all outstanding common shares of
Meridian VIII not held by EastGroup receiving, as a result of the merger, $8.50
per share in cash and all preferred shares of Meridian VIII not held by
EastGroup receiving $10.00 per share in cash. The consideration paid to the
remaining common and preferred shareholders of Meridian VIII was equivalent to
that paid by EastGroup in its tender offer for Meridian VIII's common and
preferred shares which was completed in April 1998. The total purchase price to
EastGroup was approximately $102,000,000 which included the assumption of
Meridian VIII's outstanding indebtedness. As a result of the merger, Meridian
VIII's common and preferred shares have been removed from registration under the
Securities Exchange Act of 1934 and ceased to be listed on the American Stock
Exchange effective as of June 1, 1998.
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The increase in net assets at the acquisition date, based on relative
fair values, resulting from the acquisition was as follows (in thousands):
Real estate properties $ 96,343
Cash 6,046
Accrued interest and other receivables 119
Other assets 124
Mortgage notes/interest payables (33,422)
Accounts payable and other liabilities (776)
------------
TOTAL $ 68,434
============
The purchase price of the net assets acquired consisted of the following (in
thousands):
Acquisition of Meridian $ 52,760
Merger expenses 1,569
Prior investment in Meridian 14,105
------------
TOTAL $ 68,434
============
The following unaudited pro forma combined results of operations give effect to
the Meridian VIII merger as if it had occurred at the beginning of each of the
six-month periods presented:
(In thousands, except per share amounts) 1998 1997
---- ----
Revenues $38,016 29,921
======= ======
Net income $ 8,473 5,579
======= ======
Net income per basic share $ .52 .46
======= ======
Shares used in computation 16,261 12,201
======= ======
In management's opinion, the unaudited pro forma combined results of
operations are not necessarily indicative of the actual results that would have
occurred had the transaction been consummated at the beginning of 1998 and the
beginning of 1997 or of future operations of the combined companies under the
ownership and management of the Company.
(6) FORWARD LOOKING STATEMENTS
In addition to historical information, certain sections of this
Quarterly Report on Form 10-Q contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, such as those pertaining to the Company's
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Comments are for the balance sheet dated June 30, 1998, compared to December
31, 1997.)
FINANCIAL CONDITION:
Assets of EastGroup were $568,919,000 at June 30, 1998, an increase of
$155,792,000 from December 31, 1997. Liabilities increased $111,286,000 to
$267,098,000 and stockholders' equity increased $44,506,000 to $301,821,000
during the same period.
Industrial properties (excluding accumulated depreciation) increased
$178,268,000 during the six months ended June 30, 1998, primarily as a result of
the acquisition of 10 industrial properties for $69,617,000 and the purchase of
the 25% interest in WestPort Commerce for $793,000, for a total of $70,410,000
(as detailed below); the acquisition of 18 properties in the Meridian merger
with an allocated purchase price of $96,343,000 (as detailed below); capital
improvements on existing properties of $2,769,000; the reclassifications to
industrial properties of Rampart II with a cost of $3,207,000, Chancellor with a
cost of $2,002,000, Benjamin Center II with a cost of $2,417,000, and Palm River
II with a cost of $3,144,000; and the reclassifications to real estate held for
sale of 401 Exchange with a cost of $742,000 and East Maricopa with a cost of
$640,000.
INDUSTRIAL PROPERTIES SIZE DATE COST
ACQUIRED IN 1998 LOCATION (SQUARE FEET) ACQUIRED (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------------
Estrella East Phoenix, Arizona 174,000 02-18-98 $5,322
Stemmons Circle Dallas, Texas 99,000 03-06-98 2,377
51st Avenue Phoenix, Arizona 79,000 03-09-98 2,324
3906 Airpark Drive Memphis, Tennessee 92,000 04-01-98 2,166
WestPort Commerce (25% interest) Tampa, Florida 140,000 06-05-98 793
Industry Distribution Los Angeles, California 572,000 06-11-98 22,581
World Houston 1 & 2 Houston, Texas 158,000 06-18-98 6,553
Wal-Mart Distribution Tucson, Arizona 162,000 06-23-98 5,766
Interstate Commerce Fort Lauderdale, Florida 85,000 06-24-98 3,137
American Plaza Houston, Texas 121,000 06-25-98 5,312
Shaw Commerce Fresno, California 398,000 06-25-98 14,079
--------------------
TOTAL INDUSTRIAL ACQUISITIONS $70,410
====================
INDUSTRIAL PROPERTIES
ACQUIRED IN
MERIDIAN MERGER SIZE MERGER COST
LOCATION (SQUARE FEET) DATE (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------------
East Maricopa Distribution Phoenix, Arizona 14,000 06-01-98 640
East University I & II Phoenix, Arizona 145,000 06-01-98 5,602
7th Street Distribution Phoenix, Arizona 39,000 06-01-98 1,863
55th Street Distribution Phoenix, Arizona 131,000 06-01-98 4,647
Ethan Allen Distribution Los Angeles, California 300,000 06-01-98 12,719
Park Ridge Distribution Fort Lauderdale, Florida 45,000 06-01-98 3,006
West Palm I & II Fort Lauderdale, Florida 26,000 06-01-98 3,177
Auburn Facility Auburn Hills, Michigan 114,000 06-01-98 16,152
Air Park Distribution II Memphis, Tennessee 17,000 06-01-98 329
Delp Distribution I, II and III Memphis, Tennessee 274,000 06-01-98 5,246
Getwell Distribution Memphis, Tennessee 26,000 06-01-98 754
Lamar Distribution Memphis, Tennessee 276,000 06-01-98 6,659
Penney Distribution Memphis, Tennessee 106,000 06-01-98 2,432
Senator Street Distribution II Memphis, Tennessee 105,000 06-01-98 2,177
Waldenbooks Distribution Nashville, Tennessee 564,000 06-01-98 22,145
Ambassador Row Dallas, Texas 317,000 06-01-98 5,781
Carpenter Duplex Dallas, Texas 47,000 06-01-98 1,041
Viscount Row Dallas, Texas 104,000 06-01-98 1,973
----------------------
TOTAL MERIDIAN INDUSTRIAL $96,343
======================
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Industrial development decreased $3,003,000 during the six months ended
June 30, 1998. This decrease resulted primarily from the reclassification to
industrial properties of Rampart II Distribution Center with a cost of
$3,207,000, Chancellor Distribution Center with a cost of $2,002,000, Benjamin
Distribution Center II with a cost of $2,417,000 and Palm River II with a cost
of $3,144,000. These decreases were offset by the acquisition of land for
development of World Houston Six, Seven and Eight for $1,112,000 and
improvements and development costs on existing properties of $6,390,000.
Office buildings decreased $11,667,000 during the six months ended June
30, 1998 as a result of capital improvements of $345,000 to existing buildings
and the reclassification to real estate held for sale of Columbia Place with a
cost of $12,012,000. Additionally, apartments decreased $6,587,000 as a result
of capital improvements of $105,000 and the reclassification to real estate held
for sale of Grande Pointe Apartments with a cost of $6,692,000.
Real estate held for sale (excluding accumulated depreciation)
increased $13,642,000 as a result of capital improvements of $34,000; the sale
of Hampton House Apartments with a cost of $6,667,000; and the
reclassifications to real estate held for sale of Grande Pointe with a cost of
$6,692,000, 401 Exchange with a cost of $742,000, East Maricopa with a cost of
$640,000 and Columbia Place with a cost of $12,012,000. The Company currently
has contracts to sell the two apartment complexes previously classified in held
for sale properties, Sutton House and Doral Club Apartments, both located in San
Antonio, Texas.
Accumulated depreciation on real estate properties and real estate held
for sale increased $6,484,000 due to depreciation expense recognized for the six
months ended June 30, 1998. This increase was offset by the sale of the Hampton
House Apartments with accumulated depreciation of $690,000.
Mortgage loans receivable decreased $395,000 during the first six
months of 1998 as a result of amortization of loan discounts of $283,000 and the
recognition of deferred gains of $383,000 on the payoff of the Jacksonville
mortgage note receivable. These increases were offset by regularly scheduled
principal payments of $287,000 and the repayment of the Jacksonville mortgage
note receivable of $774,000.
Investments in real estate investment trusts decreased from $16,518,000
at December 31, 1997 to $4,441,000 at June 30, 1998. This decrease was due to
the merger of Meridian VIII and the purchase of other real estate investment
shares for $88,000. Also, the Company recorded an unrealized gain of $341,000 on
another investment in 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 $37,579,000 during the six months
ended June 30, 1998, as a result of regularly scheduled principal payments of
$1,342,000, the repayment of $1,668,000 on the Metro mortgage note payable and
the debt assumptions of $2,614,000 on the acquisition of Estrella, $4,553,000 on
the acquisition of World Houston 1&2 and $33,422,000 in the Meridian VIII
acquisitions. Terms of these mortgage notes payable are detailed in the
following table.
MORTGAGES ASSUMED IN ACQUISITIONS
DATE OF INTEREST MATURITY AMOUNT OF
ASSUMPTION PROPERTY RATE DATE MORTGAGE
OF LOAN (IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------
02/18/98 ESTRELLA 9.250% 01/02/03 $ 2,614
06/18/98 WORLD HOUSTON 1 & 2 7.770% 04/15/07 4,553
---------
$ 7,167
=========
MORTGAGES ASSUMED IN MERIDIAN MERGER
DATE OF
ASSUMPTION INTEREST MATURITY AMOUNT OF
OF LOAN PROPERTY RATE DATE MORTGAGE
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------
06/01/98 AUBURN 8.875% 08/01/09 $ 5,529
06/01/98 WEST PALM 8.250% 09/01/00 986
06/01/98 ETHAN ALLEN 8.060% 06/26/07 6,438
06/01/98 55TH STREET, 7TH STREET, & E. UNIV. 8.060% 06/26/07 5,942
06/01/98 LAMAR 8.000% 11/01/98 1,642
06/01/98 WALDENBOOKS 7.830% 09/15/07 12,885
---------
$ 33,422
=========
Notes payable to banks increased from $41,770,000 at December 31, 1997
to $113,945,000 at June 30, 1998, as a result of borrowings of $136,788,000 and
payments of $64,613,000. As of June 30, 1998, the acquisition line had a balance
of $83,117,000 and the working capital line had a balance of $30,828,000. These
lines of credit are described in detail under Liquidity and Capital Resources.
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Undistributed earnings decreased from $13,633,000 at December 31, 1997
to $12,974,000 at June 30, 1998, as a result of dividends on common stock of
$11,076,000 exceeding net income for financial reporting purposes of
$10,546,000. Dividends of $129,000 were declared on preferred stock in June 1998
but were not paid.
In June 1998, EastGroup sold 1,725,000 shares of 9.00% Series A
Cumulative Redeemable Preferred Stock at $25.00 per share in a public offering.
Net proceeds of approximately $41,418,000 were used to repay advances
outstanding on the Company's line of credit.
RESULTS OF OPERATIONS
(Comments are for the three months and six months ended June 30,1998, compared
to the three months and six months ended June 30, 1997.)
Net income available to common stockholders for the three months and
six months ended June 30, 1998 was $5,419,000 ($.33 per basic and diluted share)
and $10,417,000 ($.64 per basic share and $.63 per diluted share), compared to
net income for the three months and six months ended June 30, 1997 of $3,548,000
($.28 per basic and diluted share) and $6,635,000 ($.54 per basic and diluted
share). Income before gains on investments was $4,531,000 and $9,456,000 for the
three months and six months ended June 30, 1998, compared to $3,553,000 and
$6,528,000 for the three months and six months ended June 30, 1997. Gains
(losses) on investments were $1,017,000 and $1,090,000 for the three months and
six months ended June 30, 1998, compared to ($5,000) and $107,000 for the three
months and six months ended June 30, 1997.
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 $5,226,000 or 64% for
the three months ended June 30, 1998, compared to the three months ended June
30, 1997. For the six months ended June 30, 1998, PNOI increased by $8,700,000
or 54% compared to the six months ended June 30, 1997.
Property net operating income (loss) and percentage leased by property
type were as follows:
PROPERTY NET OPERATING INCOME (PNOI)
THREE MONTHS ENDED SIX MONTHS ENDED PERCENTAGE
JUNE 30, JUNE 30, LEASED
1998 1997 1998 1997 6-30-98
---- ---- ---- ---- -------
(In thousands)
---------------------------------------------------------------
Industrial $11,141 5,542 20,231 10,816 97%
Office Buildings 1,161 1,541 2,391 3,004 100%
Apartments 1,054 858 2,077 1,796 95%
Other (3) 186 (7) 376
---------------------------------------------------------------
TOTAL PNOI $13,353 8,127 24,692 15,992
===============================================================
PNOI from industrial properties increased $5,599,000 and $9,415,000 for
the three months and six months ended June 30, 1998, compared to June 30, 1997.
Industrial properties held throughout the three months and six months ended June
30, 1998 and 1997, showed an increase in PNOI of 5.7% for the three months ended
June 30, 1998 and 6.1% for the six months ended June 30, 1998. The increase in
PNOI from industrial properties resulted primarily from the 1997 and 1998
acquisitions and from an increase in same store property operations.
PNOI from the Company's office buildings decreased $380,000 and
$613,000 for the three months and six months ended June 30, 1998, compared to
June 30, 1997. Office buildings held throughout the three months and six months
ended June 30, 1998 showed a decrease of .8% and an increase of 6.9%,
respectively.
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13
These decreases are primarily the result of the sale of the Santa Fe Office
Building in July 1997.
PNOI from the Company's apartment properties increased $196,000 and
$281,000 for the three months and six months ended June 30, 1998, compared to
June 30, 1997. These increases are primarily attributable to improved operating
efficiencies at the complexes and to near capacity occupancy levels.
Interest income on mortgage loans decreased $76,000 and $138,000 for
the three months and six months ended June 30, 1998 compared to 1997. The
following is a breakdown of interest income for the three months and six months
ended June 30, 1998 compared to 1997:
INTEREST INCOME FROM MORTGAGE LOANS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
----------------------------------------------
Land $223 228 444 453
Apartments 138 133 275 264
Motels 31 78 91 171
Other 16 45 56 116
----------------------------------------------
TOTAL INTEREST INCOME $408 484 866 1,004
==============================================
Interest income from motel mortgage loans decreased as a result of the
repayment of the Plus Park, Bell Road and Jacksonville mortgage loans. 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 decreased primarily as
a result of the repayment of the Citrus Center and Bay Green mortgage loans.
Total interest expense increased $2,074,000 and $2,577,000 for the
three months and six months ended June 30, 1998 compared to 1997. Average bank
borrowings were $91,136,000 and $67,298,000 for the three months and six months
ended June 30, 1998, compared to $4,165,000 and $6,517,000 for the same period
of 1997. Average bank borrowings increased primarily as a result of the Meridian
acquisition and the acquisition of other industrial properties. Bank interest
rates at June 30, 1998 and 1997 were 7.06% (LIBOR plus 1.40%) and 7.44% (LIBOR
plus 1.75%), respectively. Interest costs incurred during the period of
construction of real estate properties is capitalized. The interest costs
capitalized on real estate properties for the three and six months ended June
30, 1998 were $140,000 and $288,000 compared to $63,000 and $102,000 for the
three and six months ended June 30, 1997. Interest expense on real estate
properties increased primarily as a result of mortgages assumed on Southbay,
Estrella, World Houston 1&2 and mortgages assumed in the Meridian VIII merger.
Depreciation and amortization increased $1,690,000 and $2,502,000 for
the three months and six months ended June 30, 1998 compared to 1997. This
increase was primarily due to the industrial properties acquired in both 1997
and 1998, offset by the sale of the Hampton House Apartments in June 1998.
The increase in general and administrative expenses of $200,000 and
$375,000 for the three months and six months ended June 30, 1998 is primarily
due to an increase in personnel costs due to growth of the Company.
In the six months ended June 30, 1998 and 1997, the Company recognized
deferred gains of $456,000 and $107,000 from previous sales. Also, in June 1998,
the Company recognized a gain for financial reporting purposes of $634,000 on
the sale of the Hampton House Apartments.
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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 six months ended June 30, 1998 by category and for
1997 are as follows:
1998 1997
-----------------------------------------------------------------------------
Industrial
Industrial Other Total Development Total
---------- ----- ----- ----------- -----
(In thousands)
-----------------------------------------------------------------------------
Upgrade on Acquisitions $1,049 - 1,049 - $ 364
Major Renovation 300 - 300 - 69
New Development - - - 5,780 5,123
Tenant Improvements:
New Tenants 842 240 1,082 - 597
New Tenants (first generation) 30 - 30 1,722 210
Renewal Tenants 476 100 576 - 254
Other 72 145 217 - 597
------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $2,769 485 3,254 7,502 $7,214
==============================================================================
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 six
months ended June 30, 1998 by category and for 1997 is as follows:
1998 1997
------------------------------------------------------------------------------
Industrial
Industrial Other Total Development Total
---------- ----- ----- ----------- -----
(In thousands)
------------------------------------------------------------------------------
Capitalized Leasing Costs:
New Tenants $476 112 588 - $385
New Tenants (first generation) 248 - 248 63 86
Renewal Tenants 595 - 595 - 255
------------------------------------------------------------------------------
TOTAL CAPITALIZED LEASING COSTS $1,319 112 1,431 63 $726
==============================================================================
AMORTIZATION OF LEASING COSTS: $481 $324
==============================================================================
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $15,128,000 for the six
months ended June 30, 1998. The Company distributed $11,076,000 in common stock
dividends. Other sources of cash were collections on mortgage loan receivables,
mortgage borrowings, bank borrowings and proceeds from the 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 and purchases of real
estate investment trust shares. Total debt at June 30, 1998 is as follows:
AS OF JUNE 30,
1998 1997
---- ----
(In thousands)
-------------------------
Mortgage Notes Payable - Fixed Rate $142,959 103,992
Bank Notes Payable - Floating Rate 113,945 18,449
-------------------------
TOTAL DEBT $256,904 122,441
=========================
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The Company currently has an acquisition credit line of $100,000,000
available for the acquisition of properties and a $50,000,000 working capital
line. The facilities bear interest at LIBOR plus 1.40%. As of June 30, 1998, the
acquisition line had a balance of $83,117,000 and the working capital line had a
balance of $30,828,000.
In June 1998, EastGroup sold 1,725,000 shares of 9.00% Series A
Cumulative Redeemable Preferred Stock at $25.00 per share in a public offering.
Net proceeds of approximately $41,418,000 were used to repay advances
outstanding on the Company's line of credit.
Budgeted capital expenditures for the year ending December 31, 1998
are as follows:
Industrial
Capital Improvements Development
------------------------------------------------------
Industrial Office Total Total
---------- ------ ----- -----
(In thousands)
------------------------------------------------------
Upgrades on Acquisitions $1,900 - 1,900 -
Major Renovation 467 - 467 -
New Development 1,372 - 1,372 17,044
Tenant Improvements:
New Tenants 2,477 390 2,867 -
New Tenants (first generation) 755 - 755 3,091
Renewal Tenants 727 137 864 -
Other 1,213 206 1,419 -
------------------------------------------------------
TOTAL BUDGETED $8,911 733 9,644 20,135
======================================================
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 for the Company's (i) operating and administrative
expenses, (ii) debt service obligations, (iii) distributions to stockholders,
(iv) capital improvements, and (v) normal repair and maintenance expenses at its
properties. EastGroup is exploring various financing alternatives to fund the
acquisitions. These include additional bank debt, fixed rate mortgage financing
and the sale of equity securities.
Since June 30, 1998, the Company purchased two parcels of land for
future development for a purchase price of $2,008,000. Also, as of August 14,
1998, the Company had entered into contracts to purchase, for future
development, three industrial properties for approximately $15,585,000 and seven
parcels of land, consisting of approximately 69 acres, for a purchase price of
approximately $8,329,000.
The Company had previously reclassified the Sutton House Apartments
with a cost of $8,741,000 and the Doral Club Apartments with a cost of
$7,219,000, both in San Antonio, Texas to "held for sale" properties. The
Company currently has contracts to sell these apartment complexes for a total of
approximately $18,625,000.
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16
On August 11, 1998, the Company sold East Maricopa Distribution Center
in Phoenix, Arizona for a net sales price of approximately $639,000. No
significant gain (loss) is anticipated on this transaction.
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.
Year 2000 Issue
The Company has been addressing the potential computer program
problems resulting from the arrival of Year 2000 (Y2K). The Company has
established a Y2K compliance review process to access the impact on the
Company's internal financial information systems and property mechanical
operations systems, as well as the potential impact from Y2K problems of
significant tenants, vendors and suppliers of financial and other services
(collectively "independent third parties"). The Company has identified required
modifications to its internal corporate computer operating system and certain
software modifications at its apartment properties. The Company plans to
complete these identified modifications in 1998 at an immaterial cost. The
Company's compliance plan is to continue the process of conducting inquiries of
its independent third parties 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, the Company will
formulate appropriate contingency plans to take necessary and feasible
precautions against problems not within its control. 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 will be
ongoing for the remainder of 1998 and will likely extend into 1999 depending
upon the timeliness of activities of the Company's third parties, whom it does
not control.
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17
EASTGROUP PROPERTIES, INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 4, 1998, the Registrant held its Annual Meeting of
Shareholders. At the Annual Meeting, Alexander G. Anagnos, H.C. Bailey, Jr.,
Fredric H. Gould, David H. Hoster II, David M. Osnos, John N. Palmer and Leland
R. Speed were elected directors of the Registrant, each to serve until the 1999
Annual Meeting. The following is a summary of the voting for directors:
VOTE
NOMINEE VOTE FOR WITHHELD
------- -------- --------
Alexander G. Anagnos 14,446,565 148,402
H.C. Bailey, Jr. 14,460,658 134,309
Fredric H. Gould 14,460,549 134,419
David H. Hoster II 14,464,790 130,177
David M. Osnos 14,459,367 135,600
John N. Palmer 14,459,554 134,413
Leland R. Speed 14,464,318 130,864
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 4 - Articles Supplementary of the Company relating to the
9.00% Series A Cumulative Redeemable Preferred Stock (incorporated by reference
to Registrants' Form 8-K filed June 19, 1998).
(b) Exhibit 10 - Material Contracts. Employment Agreement Between
Anthony J. Bruno and EastGroup Property Services, Inc. a wholly-owned subsidiary
of EastGroup Properties, Inc., dated as of March 1, 1998.
(c) Exhibit 27 - 1998 Financial Data Schedule attached hereto.
(d) Exhibit 27 - Restated 1997 Financial Data Schedule attached hereto.
(e) Reports on Form 8-K.
(1) Filed June 2, 1998, reporting purchase of four industrial
distribution centers totaling 444,790 square feet located in Phoenix, Arizona;
Memphis, Tennessee; and Dallas, Texas for total acquisition costs of
$12,187,000, including closing costs. This 8K also reported contracts to
purchase five industrial distribution centers totaling 1,098,753 square feet
located in Tucson, Arizona; Los Angeles, California; Fort Lauderdale, Florida;
and Houston, Texas for anticipated acquisition costs of $43,472,000.
In addition, this 8-K reported the June 1, 1998 completed acquisition of
Meridian Point Realty Trust VIII Co.
(2) Filed June 19, 1998, reporting EastGroup Properties, Inc.'s
offering of 1,500,000 shares of 9.00% Series A Cumulative Redeemable Preferred
Stock at $25.00 per share in a public offering underwritten by Paine Webber,
Inc., A.G. Edwards & Sons, Inc., J.C. Bradford & Co. and Raymond James &
Associates, Inc.
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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: August 14, 1998
EASTGROUP PROPERTIES, INC.
/s/ DIANE W. HAYMAN
Diane W. Hayman, CPA
Vice President and Controller
/s/ N. KEITH MCKEY
N. Keith McKey, CPA Executive
Vice President, Chief Financial
Officer and Secretary
19