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 MARCH 31, 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 May
12, 1999 was 16,030,642.
2
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 1999
PAGES
-----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated balance sheets, March 31, 1999 (unaudited)
and December 31, 1998 3
Consolidated statements of income for the three months
ended March 31, 1999 and 1998 (unaudited) 4
Consolidated statements of cash flows for the three months
ended March 31, 1999 and 1998 (unaudited) 5
Consolidated statements of changes in stockholders' equity
for the three months ended March 31, 1999 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
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 FOR SHARE AND PER SHARE DATA)
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(UNAUDITED)
ASSETS
Real estate properties:
Industrial $ 527,456 507,187
Industrial development 27,665 25,682
Other 15,779 15,762
--------- ---------
570,900 548,631
Less accumulated depreciation (38,456) (34,042)
--------- ---------
532,444 514,589
--------- ---------
Real estate held for sale 25,326 25,620
Less accumulated depreciation (8,816) (8,794)
--------- ---------
16,510 16,826
--------- ---------
Mortgage loans 6,055 8,814
Investment in real estate investment trusts 15,375 5,737
Cash 4,388 2,784
Other assets 16,650 18,798
--------- ---------
TOTAL ASSETS $ 591,422 567,548
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 165,957 122,494
Notes payable to banks 95,213 114,322
Accounts payable & accrued expenses 9,289 9,138
Other liabilities 3,488 2,867
--------- ---------
273,947 248,821
--------- ---------
Minority interest in joint ventures 2,059 2,053
Minority interest in operating partnership 650 650
--------- ---------
2,709 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; 400,000 shares issued;
stated liquidation preference of $10,000 9,640 9,642
Series C Preferred Shares; $.0001 par value -- --
Common shares; $.0001 par value; 65,475,000
shares authorized; 16,299,942 shares issued at
March 31, 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 246,120 246,340
Undistributed earnings 17,573 18,076
Accumulated other comprehensive income 74 607
--------- ---------
314,766 316,024
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 591,422 567,548
========= =========
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED
MARCH 31,
1999 1998
-------- --------
REVENUES
Income from real estate operations $ 20,199 15,335
Interest:
Mortgage loans 288 458
Other interest 34 24
Other 364 224
-------- --------
20,885 16,041
-------- --------
EXPENSES
Operating expenses from real
estate operations 4,994 3,996
Interest 4,351 2,939
Depreciation and amortization 4,800 3,206
General and administrative 1,136 869
-------- --------
15,281 11,010
-------- --------
INCOME BEFORE MINORITY INTEREST
AND GAIN ON INVESTMENTS 5,604 5,031
Minority interest in joint ventures and
operating partnership 92 106
-------- --------
INCOME BEFORE GAIN ON INVESTMENTS 5,512 4,925
Gain on real estate investments 1,451 73
-------- --------
INCOME BEFORE CUMULATIVE EFFECT 6,963 4,998
OF CHANGE IN ACCOUNTING PRINCIPLE
Preferred dividends-Series A 970 --
Preferred dividends-Series B 219 --
-------- --------
INCOME AVAILABLE TO
COMMON SHAREHOLDERS 5,774 4,998
Cumulative effect of change in accounting principle 418 --
-------- --------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 5,356 4,998
======== ========
BASIC PER SHARE DATA
Net income available to
common shareholders $ 0.33 0.31
======== ========
Weighted average shares outstanding 16,303 16,223
======== ========
DILUTED PER SHARE DATA (A)
Net income available to
common shareholders $ 0.33 0.30
======== ========
Weighted average shares outstanding 16,429 16,391
======== ========
(A) Assumes conversion of all limited partnership units.
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
March 31, March 31,
1999 1998
------------------- -------------------
OPERATING ACTIVITIES:
Net income $ 6,545 4,998
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of deferred
leasing costs 4,800 3,206
Gains on investments, net (1,451) (73)
Other (92) (75)
Changes in operating assets and liabilities:
Accrued income and other assets (966)
Accounts payable, accrued expenses and
prepaid rent 507 112
--------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,139 7,202
--------------- -------------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable, net of
amortization of loan discounts 5,862 (16)
Advances on mortgage loans receivable (1,588) -
Sale of real estate investments 436 -
Real estate improvements (1,500) (1,208)
Real estate development (9,217) (4,846)
Purchases of real estate (11,758) (7,406)
Purchases of real estate investment
trusts shares (11,758) (182)
Merger expenses 150 (20)
Changes in other assets and other liabilities - (163)
------------------ ----------------
NET CASH USED IN INVESTING ACTIVITIES (27,786) (13,841)
------------------ ----------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 179,020 21,189
Proceeds from mortgage notes payable 47,000 -
Principal payments on bank borrowings (198,129) (8,917)
Principal payments on mortgage notes payable (3,537) (635)
Distributions paid to shareholders (6,829) (5,533)
Purchases of shares of beneficial interest
and common stock (346) -
Proceeds from exercise of stock options - 130
Preferred stock issuance costs (2) -
Proceeds from dividend reinvestment plan 74 72
------------------ ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,251 6,306
------------------ ----------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,604 (333)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,784 1,298
------------------ ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,388 965
================== ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 4,648 2,872
Debt assumed by the Company in purchase of real estate - 2,610
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 Shares Accumulated
of of of Additional Other
Preferred Common Beneficial Paid-In Undistributed Comprehensive
Stock Stock Interest Capital Earnings Income Total
-------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 50,999 2 -- 246,340 18,076 607 316,024
Comprehensive income
Net income -- -- -- -- 6,545 -- 6,545
Net unrealized change in
investment securities -- -- -- -- -- (533) (533)
--------
Total comprehensive income 6,012
--------
Cash dividends declared-common,
$.36 per share -- -- -- -- (5,859) -- (5,859)
Preferred stock dividends declared -- -- -- -- (1,189) -- (1,189)
Preferred stock issuance costs (2) -- -- -- -- -- (2)
Issuance of 8,009 shares of common
stock, incentive compensation -- -- -- 52 -- -- 52
Issuance of 4,552 shares of common
stock, dividend reinvestment plan -- -- -- 74 -- -- 74
Repurchase of 20,300 common shares,
stock repurchase plan -- -- -- (346) -- -- (346)
-------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 $ 50,997 2 -- 246,120 17,573 74 314,766
=====================================================================================
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
As of May 14, 1999, the Company had entered into contracts to purchase
the following properties:
APPROXIMATE
PROPERTY LOCATION SIZE PURCHASE PRICE
- -------------------------------------------------------------------------------------------
(In thousands)
Wilson Distribution Center Tempe, Arizona 56,000 sq. ft. $2,500
Rojas Commerce Park El Paso, Texas 172,000 sq. ft. 4,650
Land for Development Tampa, Florida 4.4 acres 684
Land for Development Orlando, Florida 4.7 acres 494
------
$8,328
======
Also, as of May 14, 1999, the Company had entered into a contract to
sell the 198,000 square foot 8150 Leesburg Pike Office Building located in
Tyson's Corner, Virginia for an approximate net sales price of $28,000,000. We
anticipate the sale of this property to close in early July; 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.
THREE MOTNTHS ENDED
MARCH 31,
--------------------
CONSOLIDATED STATEMENTS OF INCOME 1999 1998
- ------------------------------------------------------------------------------------------
(in thousands)
Income before cumulative effect of change in accounting principle $6,963 4,998
Preferred dividends (1,189) -
----------------------
Income available to common shareholders 5,774 4,998
Cumulative effect of change in accounting principle (418) -
----------------------
Net income available to common shareholders $5,356 4,998
======================
8
THREE MONTHS ENDED
MARCH 31,
---------
CONSOLIDATED STATEMENTS OF INCOME 1999 1998
- ----------------------------------------------------------------------------------------------------------
(In thousands)
Basic earnings per common share:
Before cumulative effect of change in accounting principle $.36 $.31
Accounting change (.03) --
----------------------------
Basic earnings per common share $.33 $.31
----------------------------
Diluted earnings per common share:
Before cumulative effect of change in accounting principle $.36 $.30
Accounting change (.03) --
----------------------------
Diluted earnings per common share $.33 $.30
----------------------------
(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 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 months ended March 31, 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:
THREE MONTHS ENDED
MARCH 31,
1999 1998
(In thousands)
-----------------------
PROPERTY REVENUES:
Industrial $18,371 11,732
Office 1,284 1,721
Other 544 1,882
------- ------
20,199 15,335
------- ------
PROPERTY EXPENSES:
Industrial (4,245) (2,642)
Office (447) (491)
Other (302) (863)
------- ------
(4,994) (3,996)
------- ------
PROPERTY NET OPERATING INCOME:
Industrial 14,126 9,090
Office 837 1,230
Other 242 1,019
------- ------
TOTAL PROPERTY NET OPERATING INCOME 15,205 11,339
------- ------
Other income 686 706
Interest expenses (4,351) (2,939)
General and administrative expenses (1,136) (869)
Minority interest in earnings (184) (181)
Dividends on Series A preferred shares (970) --
------- ------
FUNDS FROM OPERATIONS 9,250 8,056
Depreciation and amortization (4,800) (3,206)
Share of joint venture depreciation and amortization 92 75
Gains from property sales/investment in REITs 1,451 73
Dividends on Series B convertible preferred shares (219) --
Cumulative effect of change in accounting principle (418) --
------- ------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 5,356 4,998
Dividends on preferred shares 1,189 --
Cumulative effect of change in accounting principle 418 --
------- ------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $6,963 4,998
====== =====
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION:
(Comments are for the balance sheet dated March 31, 1999 compared to December
31, 1998.)
Assets of EastGroup were $591,422,000 at March 31, 1999, an increase of
$23,874,000 from December 31, 1998. Liabilities increased $25,126,000 to
$273,947,000; minority interests increased $6,000 to $2,709,000 and
stockholders' equity decreased $1,258,000 to $314,766,000 during the same
period. The paragraphs that follow explain these changes in greater detail.
Industrial properties increased $20,269,000 during the three months
ended March 31, 1999. This increase was due to the acquisition of two industrial
properties for $9,217,000 (as detailed below), capital improvements of
$1,277,000 made on existing and acquired properties, and the reclassifications
of three industrial properties from industrial development with total costs of
$9,775,000.
INDUSTRIAL PROPERTIES SIZE DATE COST
ACQUIRED IN 1999 LOCATION (SQUARE FEET) ACQUIRED (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
Central Green Houston, Texas 84,000 01-07-99 $4,600
Blue Heron West Palm Beach, Florida 110,000 01-15-99 4,617
------
TOTAL INDUSTRIAL ACQUISITIONS $9,217
======
10
Industrial development increased $1,983,000 during the three months
ended March 31, 1999. This increase resulted from year-to-date development costs
of $11,758,000 on existing and completed development properties, offset by costs
of $9,775,000 on completed development properties reclassified to industrial
properties, as detailed below.
COSTS INCURRED
------------------------------------
SIZE AT FOR THE THREE
COMPLETION MONTHS CUMULATIVE AS ESTIMATED
(SQUARE FEET) ENDED 3/31/99 OF 3/31/99 TOTAL COSTS (1)
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
LEASE-UP:
- ---------
World Houston 7 & 8
Houston, Texas 166,000 $ 533 $ 5,221 $ 7,600
--------------------------------------------------------------------------
TOTAL LEASE-UP 166,000 533 5,221 7,600
--------------------------------------------------------------------------
UNDER CONSTRUCTION:
- -------------------
Rampart Distribution Center III
Denver, Colorado 92,000 966 3,138 5,550
Sample 95 II
Pompano, Florida 70,000 343 1,354 3,438
World Houston 9
Houston, Texas 160,000 1,968 2,983 7,200
Airport Commerce Center
Tampa, Florida 108,000 853 2,238 5,427
John Young II
Orlando, Florida 46,000 857 1,523 2,828
Premier Beverage
Tampa, Florida 222,000 2,175 2,584 7,777
Chestnut Business Center
City of Industry, California 75,000 295 1,969 5,207
--------------------------------------------------------------------------
TOTAL UNDER CONSTRUCTION 773,000 7,457 15,789 37,427
--------------------------------------------------------------------------
APPROVED BY BOARD
FOR CONSTRUCTION:
- -----------------
Westlake I
Tampa, Florida 70,000 3 1,615 4,072
Glenmont I
Houston, Texas 110,000 28 964 3,862
Main Street
Carson, California 106,000 1,632 1,632 5,548
Palm River North
Tampa, Florida 96,000 1,648 1,757 4,908
--------------------------------------------------------------------------
TOTAL APPROVED BY BOARD 382,000 3,311 5,968 18,390
--------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT:
- ------------------------
Houston, Texas 110,000 0 0 3,900
Tampa, Florida 363,000 0 687 15,024
--------------------------------------------------------------------------
TOTAL PROSPECTIVE DEVELOPMENT 473,000 0 687 18,924
--------------------------------------------------------------------------
1,794,000 $11,301 $27,665 $82,341
--------------------------------------------------------------------------
COMPLETED DEVELOPMENT AND
TRANSFERRED TO INDUSTRIAL
PROPERTIES DURING
THREE MONTHS ENDED MARCH 31, 1999:
- ----------------------------------
Walden Distribution Center II
Tampa, Florida 122,000 $ 62 $4,253 $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 234,000 $457 $9,775 $9,800
--------------------------------------------------------------------------
(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 $4,436,000 due to depreciation expense recognized
for the three months ended March 31, 1999.
Mortgage loans receivable decreased $2,759,000 during the first three
months of 1999 as a result of amortization of loan discounts of $120,000,
recognition of deferred gains of $1,515,000 on the payoff of the Country Club
and Gainesville mortgage notes receivable, issuance of a new note of $1,588,000
on World Houston 10, principal payments of $1,000 and the repayment of
$5,981,000 on four mortgage loans receivable.
Investments in real estate investment trusts increased from $5,737,000
at December 31, 1998 to $15,375,000 at March 31, 1999 as a result of purchases
of other real estate investment trust shares for $10,171,000 and unrealized
losses of $533,000.
11
Mortgage notes payable increased $43,463,000 during the three months
ended March 31, 1999, as a result of the Company's new $47,000,000, nonrecourse
first mortgage loan with Metropolitan Life, loan payoffs of $2,688,000 on the
Interstate Distribution Center and West Palm Distribution Centers mortgages and
regularly scheduled principal payments of $849,000.
Notes payable to banks decreased from $114,322,000 at December 31, 1998
to $95,213,000 at March 31, 1999, as a result of payments of $198,129,000
and borrowings of $179,020,000. 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 decreased from $18,076,000 at December 31, 1998
to $17,573,000 at March 31, 1999, as a result of $6,545,000 net income less
dividends on preferred stock of $1,189,000 and dividends on common stock of
$5,859,000.
RESULTS OF OPERATIONS
(Comments are for the three months ended March 31, 1999, compared to the three
months ended March 31, 1998.)
Net income available to common stockholders for the three months ended
March 31, 1999 was $5,356,000 ($.33 per basic and diluted share), compared to
net income for the three months ended March 31, 1998 of $4,998,000 ($.31 per
basic share and $.30 per diluted share). Income before gain on investments was
$5,512,000 for the three months ended March 31, 1999, compared to $4,925,000 for
the three months ended March 31, 1998. Gains on investments were $1,451,000 for
the three months ended March 31, 1999, compared to $73,000 for the three months
ended March 31, 1998. Income before cumulative effect of change in accounting
principle was $6,963,000 for the three months ended March 31, 1999, compared to
$4,998,000 for the three months ended March 31, 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 $3,866,000 or 34% for
the three months ended March 31, 1999, compared to the three months ended March
31, 1998.
PNOI and percentage leased by property type were as follows:
THREE MONTHS ENDED PERCENTAGE
MARCH 31, LEASED
1999 1998 3-31-99
---- ---- -------
(In thousands)
----------------------
Industrial $14,126 9,090 96%
Office Buildings 837 1,230 95%
Other 242 1,019 98%
------- ------
TOTAL PNOI $15,205 11,339
------- ------
PNOI from industrial properties increased $5,036,000 for the three
months ended March 31, 1999, compared to March 31, 1998. Industrial properties
held throughout the three months ended March 31, 1999 compared to the same
period in 1998 showed an increase in PNOI of 5.5%. The increase in PNOI from
industrial properties resulted primarily from the 1998 and 1999 acquisitions and
from an increase in same store property operations.
12
PNOI from office buildings decreased $393,000 for the
three months ended March 31, 1999, compared to March 31, 1998. These decreases
were primarily the result of the sale of the Columbia Place Office Building in
December 1998. Office buildings held throughout the three months ended March 31,
1999 compared to the same period in 1998 showed an increase of 3.6%.
PNOI from other properties decreased $777,000 for the three months
ended March 31, 1999, compared to March 31, 1998. The decrease in the three
months ended March 31, 1999 is attributable to the sale of the Sutton House and
Doral Club Apartments in September 1998, the Hampton House Apartments in June
1998 and the Grande Pointe Apartments in December 1998.
Total interest expense increased $1,412,000 for the three months ended
March 31, 1999 compared to 1998. Average bank borrowings were $112,922,000 for
the three months ended March 31, 1999, compared to $44,208,000 for the same
period of 1998. Average bank borrowings increased primarily as a result of the
Meridian acquisition and the acquisition of other industrial properties in 1999
and 1998. Bank interest rates at March 31, 1999 were 6.19% (Eurodollar rate plus
1.25%) and 7.00% (Chase Bank of Texas, National Association's prime rate less
.75%). Bank interest rate at March 31, 1998 was 7.19% (LIBOR plus 1.50%).
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 ended March 31, 1999 were $278,000 compared to
$148,000 for the three months ended March 31, 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, offset by the sales of Columbia Place Office Building and the
Sutton House and Doral Club Apartments.
Depreciation and amortization increased $1,594,000 for the three months
ended March 31, 1999 compared to 1998. This increase was primarily due to the
industrial properties acquired in both 1998 and 1999, offset by the sale of the
Hampton House Apartments in June 1998, the sales of the Doral Club Apartments,
the Sutton House Apartments, East Maricopa and 401 Exchange during third quarter
1998, the sales of Grande Pointe Apartments and Columbia Place Office Building
during fourth quarter 1998 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 $267,000 for the
three months ended March 31, 1999 is primarily due to an increase in general and
administrative costs due to growth of the Company.
A summary of gains (losses) on real estate investments for the three
months ended March 31, 1999 is detailed below. The Company recognized deferred
gains of $73,000 in the three months ended March 31, 1998.
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 500 499 (1)
Plus Park -- 2 2
---------------------------------------------
Total $(1,015) 436 1,451
=============================================
13
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 three months ended March 31, 1999 (by category) and
March 31, 1998 are as follows:
1999 1998
----------------------------------------------------------------------
Industrial
Industrial Other Total Development Total
---------- ----- ----- ----------- -----
(In thousands)
----------------------------------------------------------------------
Upgrade on Acquisitions $136 -- 136 -- 492
Major Renovation 103 -- 103 -- --
New Development 77 -- 77 11,406 4,395
Tenant Improvements:
New Tenants 246 174 420 -- 492
New Tenants (first generation) 128 - 128 352 451
Renewal Tenants 71 9 80 -- 173
Other 538 18 556 -- 51
----------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $1,299 201 1,500 11,758 6,054
======================================================================
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 three
months ended March 31, 1999 (by category) and March 31, 1998 is as follows:
1999 1998
----------------------------------------------------------------------
Industrial
Industrial Other Total Development Total
---------- ----- ----- ----------- -----
(In thousands)
----------------------------------------------------------------------
Capitalized Leasing Costs:
New Tenants $149 -- 149 -- 230
New Tenants (first generation) 76 -- 76 -- 63
Renewal Tenants 159 -- 159 -- 404
----------------------------------------------------------------------
TOTAL CAPITALIZED LEASING COSTS $384 -- 384 -- 697
----------------------------------------------------------------------
AMORTIZATION OF LEASING COSTS: $363 230
======================================================================
14
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $12,139,000 for the three
months ended March 31, 1999. The Company distributed $5,859,000 in common stock
dividends and $970,000 in preferred stock dividends. Other sources of cash were
collections on mortgage loan receivables, mortgage borrowings and bank
borrowings. 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
March 31, 1999 and 1998 was as follows:
AS OF MARCH 31,
1999 1998
---- ----
(In thousands)
-------------------------------
Mortgage Notes Payable - Fixed Rate $165,957 107,355
Bank Notes Payable - Floating Rate 95,213 54,042
-------------------------------
TOTAL DEBT $261,170 161,397
===============================
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. The interest rate is based on the Eurodollar rate plus 1.25%
and was 6.19% on April 20, 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, nonrecourse 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.
During the third quarter 1998, EastGroup's Board of Directors
authorized the repurchase of up to 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. During 1999, the Company repurchased 20,300
shares for $346,000 in the first quarter and a total of 289,600 shares for
$4,741,000 through May 14, 1999. The Company has repurchased a total of 310,700
shares for $5,100,000 since September 30, 1998.
15
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. The Company is required to sell the remaining
$60 million by September 25, 1999.
Budgeted capital expenditures and development for the year ending
December 31, 1999 follow:
INDUSTRIAL
CAPITAL IMPROVEMENTS DEVELOPMENT
-------------------- -----------
INDUSTRIAL OFFICE TOTAL TOTAL
------------------------------------------------------------
Upgrades on Acquisitions $ 651 -- 651 --
Major Renovation 776 29 805 --
New Development 1,200 -- 1,200 40,739
Tenant Improvements:
New Tenants 2,242 216 2,458 --
New Tenants-First Generation
278 -- 278 4,759
Renewal Tenants 1,526 27 1,553 --
Other 1,238 39 1,277 --
------------------------------------------------------------
$7,911 311 8,222 45,498
============================================================
The Company anticipates that its current cash balance, operating cash
flows, borrowings under the working capital line of credit and the Series B
Preferred Stock offering 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.
As of May 14, 1999, the Company had entered into contracts to purchase
the following properties:
APPROXIMATE
PROPERTY LOCATION SIZE PURCHASE PRICE
- -----------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
Wilson Distribution Center Tempe, Arizona 56,000 sq. ft. $2,500
Rojas Commerce Park El Paso, Texas 172,000 sq. ft. 4,650
Land for Development Tampa, Florida 4.4 acres 684
Land for Development Orlando, Florida 4.7 acres 494
------
$8,328
======
Also, as of May 14, 1999, the Company had entered into a contract to
sell the 198,000 square foot 8150 Leesburg Pike Office Building located in
Tyson's Corner, Virginia for an approximate net sales price of $28,000,000. We
anticipate the sale of this property to close in early July; 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.
16
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 Company is assessing Y2K compliance of its individual property
engineering and mechanical systems through inquiry via questionnaire of its
respective property managers. This is 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. 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 will be sent during the second quarter of 1999.
Additionally, the Company's compliance plan is to continue 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 will
formulate appropriate contingency plans to take necessary and feasible
precautions against problems not within our 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 extend further into
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.
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.
17
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 million 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 million 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%. The table below presents the
principal payments due and weighted average interest rates for both the fixed
rate and variable rate debt.
APR-DEC
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
------------------------------------------------------------------------------------------------
Fixed rate debt 3,015 12,712 8,360 12,844 8,675 120,351 165,957 173,583
(in thousands)
Average interest rate 7.92% 8.65% 7.80% 7.62% 8.33% 7.90% 8.03%
Variable rate
Eurodollar debt -- 3,213 -- 92,000 -- -- 95,213 95,213
(in thousands)
Average interest rate -- 7.00% -- 6.19% -- -- 6.22%
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 - 1999 Financial Data Schedule attached hereto.
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: May 17, 1999
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