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 JUNE 30, 1999 COMMISSION FILE NUMBER 1-7094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 ONE JACKSON PLACE
188 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (601) 354-3555
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES (x) NO ( )
The number of shares of common stock, $.0001 par value, outstanding as
of August 10, 1999 was 16,052,315.
2
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 1999
PAGES
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated balance sheets, June 30, 1999 (unaudited)
and December 31, 1998 3
Consolidated statements of income for the three and six
months ended June 30, 1999 and 1998 (unaudited) 4
Consolidated statements of cash flows for the six months
ended June 30, 1999 and 1998 (unaudited) 5
Consolidated statements of changes in stockholders' equity
for the six months ended June 30, 1999 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES
Authorized signatures 22
3
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
June 30, 1999 December 31, 1998
------------ -----------------
(Unaudited)
ASSETS
Real estate properties:
Industrial $ 537,869 507,187
Industrial development 36,075 25,682
Other 15,815 15,762
--------- ---------
589,759 548,631
Less accumulated depreciation (42,631) (34,042)
--------- ---------
547,128 514,589
--------- ---------
Real estate held for sale 26,503 25,620
Less accumulated depreciation (9,150) (8,794)
--------- ---------
17,353 16,826
--------- ---------
Mortgage loans 9,913 8,814
Investment in real estate investment trusts 15,875 5,737
Cash 4,160 2,784
Other assets 16,974 18,798
--------- ---------
TOTAL ASSETS $ 611,403 567,548
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 164,920 122,494
Notes payable to banks 119,820 114,322
Accounts payable & accrued expenses 10,059 9,138
Other liabilities 3,628 2,867
--------- ---------
298,427 248,821
--------- ---------
Minority interest in joint ventures 2,242 2,053
Minority interest in operating partnership 650 650
--------- ---------
2,892 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; 16,052,315 shares issued at
June 30, 1999 and 16,307,681 at
December 31, 1998 2 2
Excess shares; $.0001 par value; 30,000,000 shares
authorized; no shares issued -- --
Additional paid-in capital on common shares 242,052 246,340
Undistributed earnings 16,459 18,076
Accumulated other comprehensive income 574 607
--------- ---------
310,084 316,024
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 611,403 567,548
========= =========
See accompanying notes to financial statements.
4
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Six Months
Ended Ended
June 30, June 30,
---------------------------------------
1999 1998 1999 1998
REVENUES
Income from real estate operations $20,262 18,080 40,461 33,415
Interest:
Mortgage loans 395 408 683 866
Other interest 45 87 79 111
Other 396 106 760 330
----------------- -----------------
21,098 18,681 41,983 34,722
----------------- -----------------
EXPENSES
Operating expenses from real
estate operations 4,901 4,727 9,895 8,723
Interest 4,634 4,349 8,985 7,288
Depreciation and amortization 4,884 4,018 9,684 7,224
General and administrative 936 907 2,072 1,776
----------------- -----------------
15,355 14,001 30,636 25,011
----------------- -----------------
INCOME BEFORE MINORITY INTEREST
AND GAIN ON INVESTMENTS 5,743 4,680 11,347 9,711
Minority interest in joint ventures 114 149 206 255
----------------- -----------------
INCOME BEFORE GAIN ON
REAL ESTATE INVESTMENTS 5,629 4,531 11,141 9,456
Gain on real estate investments 224 1,017 1,675 1,090
----------------- -----------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 5,853 5,548 12,816 10,546
Cumulative effect of change in accounting principle -- -- 418 --
----------------- -----------------
NET INCOME 5,853 5,548 12,398 10,546
Preferred dividends-Series A 970 129 1,940 129
Preferred dividends-Series B 219 -- 438 --
----------------- -----------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 4,664 5,419 10,020 10,417
================= =================
BASIC PER SHARE DATA
Net income available to
common shareholders $ 0.29 0.33 0.62 0.64
================= =================
Weighted average shares outstanding 16,076 16,299 16,189 16,261
================= =================
DILUTED PER SHARE DATA (A)
Net income available to
common shareholders $ 0.29 0.33 0.61 0.63
================= =================
Weighted average shares outstanding 16,245 16,452 16,336 16,422
================= =================
(A) Assumes conversion of all limited partnership units.
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
June 30, June 30,
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income $ 12,398 10,546
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of deferred
leasing costs 9,684 7,224
Gains on investments, net (1,675) (1,090)
Other (163) (185)
Changes in operating assets and liabilities:
Accrued income and other assets 1,213 (2,239)
Accounts payable, accrued expenses and prepaid rent 1,871 872
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,328 15,128
--------- ---------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable, net of
amortization of loan discounts 5,682 778
Advances on mortgage loans receivable (5,266) --
Sale of real estate investments 797 6,611
Real estate improvements (3,430) (3,254)
Real estate development (25,431) (7,502)
Purchases of real estate (13,778) (63,243)
Acquisition of Meridian -- (52,760)
Purchases of real estate investment trusts shares (10,171) (88)
Merger expenses -- (1,589)
Changes in other assets and other liabilities (141) (277)
Cash balances of acquired company -- 6,046
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (51,738) (115,278)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 217,686 136,788
Proceeds from mortgage notes payable 47,000 --
Principal payments on bank borrowings (212,188) (64,613)
Principal payments on mortgage notes payable (4,574) (3,010)
Distributions paid to shareholders (13,796) (11,076)
Purchases of shares of common stock (4,774) --
Proceeds from exercise of stock options 289 164
Net proceeds from issuance of preferred stock (2) 41,418
Proceeds from dividend reinvestment plan 145 145
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,786 99,816
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,376 (334)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,784 1,298
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,160 964
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 7,848 6,506
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 financial statements.
6
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Shares Shares Accumulated
of of Additional Undistri- Other
Preferred Common Paid-In buted Comprehensive
Stock Stock Capital Earnings Income Total
----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 50,999 2 246,340 18,076 607 316,024
Comprehensive income
Net income - - - 12,398 - 12,398
Net unrealized change in
investment securities - - - - (33) (33)
---------
Total comprehensive income 12,365
---------
Cash dividends declared-common, $.72
per share - - - (11,637) - (11,637)
Preferred stock dividends declared - - - (2,378) - (2,378)
Preferred stock issuance costs (2) - - - - (2)
Issuance of 8,009 shares of common stock,
incentive compensation - - 52 - 52
Issuance of 8,085 shares of common stock,
dividend reinvestment plan - - 145 - 145
Issuance of 20,210 shares of common stock,
exercise options - - 289 - 289
Repurchase of 2,070 common shares,
options exercised (34) (34)
Repurchase of 289,600 common shares,
stock repurchase plan - - (4,740) - (4,740)
----------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 $ 50,997 2 242,052 16,459 574 310,084
=========================================================================
See accompanying notes to 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
In July 1999, EastGroup sold its 8150 Leesburg Pike Office Building
(198,000 square feet) in Vienna, Virginia for an all cash price of $29,025,000.
The transaction will generate a gain for financial reporting purposes of
approximately $14,200,000, which will be recorded in the Company's third
quarter. Also in July, the Company sold the 2020 Exchange Building (37,000
square feet) in Dallas, Texas for $1,065,000. This transaction will generate a
gain for financial reporting purposes of approximately $128,000. The proceeds of
these sales will be reinvested in industrial properties through new
acquisitions.
In July 1999, EastGroup purchased two industrial properties, Yosemite
Distribution Center (102,000 square feet) located in Milpitas, California (San
Francisco Bay area) for $7,375,000 and Interstate Commons Distribution Center
(136,000 square feet) located in Phoenix, Arizona for $4,775,000. Yosemite
consists of two buildings completed in 1974 and 1987, and is 100% leased to a
single tenant. Interstate Commons consists of two buildings built in 1988, is
100% leased to five tenants and includes an additional 3.7 acres of land for
future development. These purchases were funded from the proceeds of the sale of
the 8150 Leesburg Pike Office Building as previously discussed.
In addition to the properties described above, in July 1999, EastGroup
also acquired the remaining 25% ownership interests in Jetport Commerce Park
and 56th Street Commerce Park in Tampa from our partner, an officer of the
Company, Anthony J. Bruno, for $3,588,000 giving the Company 100% ownership of
these two complexes. This acquisition was also funded from the proceeds of the
sale of the 8150 Leesburg Pike Office Building.
Subsequent to June 30, 1999, the Company has entered into contracts to
purchase the following properties:
APPROXIMATE
PROPERTY LOCATION SIZE PURCHASE PRICE
- -------------------------------------- -------------------- -------------------- --------------------
(In thousands)
Kyrene Distribution Center Tempe, Arizona 70,000 sq. ft. $3,500
Adjacent 3.5 acres
Fairmont Distribution Center Tempe Arizona 19,000 sq. ft. 935
Wilson Distribution Center Tempe, Arizona 56,000 sq. ft. 2,500
Jetport/Meadows/LeTourneau Tampa, Florida 184,000 sq. ft. 6,200
Altamonte Commerce Center Orlando, Florida 123,000 sq. ft. 4,165
Land for Development Orlando, Florida 8.46 acres 1,161
-------
$18,461
=======
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The Company has also entered into a contract to sell the 610 acres of
Estelle land located in Jefferson Parish, Louisiana for $950,000. This
transaction would generate a gain for financial reporting purposes of
approximately $430,000. We anticipate the sale of this property to close in
fourth quarter 1999; 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 MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
CONSOLIDATED STATEMENTS OF INCOME 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
Income before cumulative effect of change in accounting principle $ 5,853 5,548 12,816 10,546
Cumulative effect of change in accounting principle -- -- (418) --
-----------------------------------------------
Net income 5,853 5,548 12,398 10,546
Preferred dividends (1,189) (129) (2,378) (129)
-----------------------------------------------
Net income available to common shareholders $ 4,664 5,419 10,020 10,417
===============================================
Basic earnings per common share:
Before cumulative effect of change in accounting principle $ .29 .33 .65 .64
Accounting change -- -- (.03) --
-----------------------------------------------
Basic earnings per common share $ .29 .33 .62 .64
===============================================
Diluted earnings per common share:
Before cumulative effect of change in accounting principle $ .29 .33 .64 .63
Accounting change -- -- (.03) --
-----------------------------------------------
Diluted earnings per common share $ .29 .33 .61 .63
===============================================
(5) BUSINESS SEGMENTS
The Company's reportable segments consist of industrial properties,
office buildings, and an other category that includes apartments and other real
estate. The Company's chief decision makers use two primary measures of
operating results in making decisions, such as allocating resources: property
net operating income (PNOI) and funds from operations (FFO), defined as net
income (loss) (computed in accordance with generally accepted accounting
principles (GAAP)), excluding gains or losses from debt restructuring and sales
of property, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. The Company uses
FFO as a measure of the performance of our industry as an equity real estate
investment trust because, along with cash flows from operating activities,
financing and investing activities, it provides a measure of our ability to
incur and service debt and to make capital expenditures. FFO is not considered
as an alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including our ability to make distributions. The table
below presents on a comparative basis for the three and six months ended June
30, 1999 and 1998 reported PNOI by operating segment, followed by
reconciliations of PNOI to FFO and FFO to net income before cumulative effect of
change in accounting principle:
9
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
(In thousands)
---------------------------------------------
PROPERTY REVENUES:
Industrial $ 18,383 14,549 36,754 26,281
Office 1,335 1,637 2,619 3,358
Other 544 1,894 1,088 3,776
-------- -------- -------- --------
20,262 18,080 40,461 33,415
-------- -------- -------- --------
PROPERTY EXPENSES:
Industrial (4,278) (3,408) (8,526) (6,050)
Office (425) (476) (868) (967)
Other (198) (843) (501) (1,706)
-------- -------- -------- --------
(4,901) (4,727) (9,895) (8,723)
-------- -------- -------- --------
PROPERTY NET OPERATING INCOME:
Industrial 14,105 11,141 28,228 20,231
Office 910 1,161 1,751 2,391
Other 346 1,051 587 2,070
-------- -------- -------- --------
TOTAL PROPERTY NET OPERATING INCOME 15,361 13,353 30,566 24,692
-------- -------- -------- --------
Other income 836 601 1,522 1,307
Interest expense (4,634) (4,349) (8,985) (7,288)
General and administrative expenses (936) (907) (2,072) (1,776)
Minority interest in earnings (185) (259) (369) (440)
Dividends on Series A preferred shares (970) (129) (1,940) (129)
-------- -------- -------- --------
FUNDS FROM OPERATIONS 9,472 8,310 18,722 16,366
Depreciation and amortization (4,884) (4,018) (9,684) (7,224)
Share of joint venture depreciation and amortization 71 110 163 185
Gains from property sales/investment in REITs 224 1,017 1,675 1,090
Dividends on Series B convertible preferred shares (219) -- (438) --
Cumulative effect of change in accounting principle -- -- (418) --
-------- -------- -------- --------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 4,664 5,419 10,020 10,417
Dividends on preferred shares 1,189 129 2,378 129
Cumulative effect of change in accounting principle -- -- 418 --
-------- -------- -------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ 5,853 5,548 12,816 10,546
=============================================
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION:
(Comments are for the balance sheet dated June 30, 1999 compared to December 31,
1998.)
Assets of EastGroup were $611,403,000 at June 30, 1999, an increase of
$43,855,000 from December 31, 1998. Liabilities increased $49,606,000 to
$298,427,000; minority interests increased $189,000 to $2,892,000 and
stockholders' equity decreased $5,940,000 to $310,084,000 during the same
period. The paragraphs that follow explain these changes in greater detail.
Industrial properties increased $30,682,000 during the six months ended
June 30, 1999. This increase was due to the acquisition of three industrial
properties for $13,778,000 (as detailed below), capital improvements of
$3,084,000 made on existing and acquired properties, the transfer of four
industrial properties from industrial development with total costs of
$15,038,000, and the transfer of one industrial property to real estate held
for sale with costs of $1,218,000.
INDUSTRIAL PROPERTIES ACQUIRED SIZE DATE ACQUIRED COST
IN 1999 LOCATION (SQUARE FEET) (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
Rojas Commerce Park El Paso, Texas 172,000 06-11-99 4,561
-------------------
TOTAL INDUSTRIAL ACQUISITIONS $13,778
===================
Industrial development increased $10,393,000 during the six months
ended June 30, 1999. This increase resulted from year-to-date development costs
of $25,431,000 on existing and completed development properties, offset by costs
of $15,038,000 on completed development properties transferred to industrial
properties, as detailed below.
COSTS INCURRED
------------------------------------
SIZE AT FOR THE SIX
COMPLETION MONTHS CUMULATIVE AS ESTIMATED
(SQUARE FEET) ENDED 6/30/99 OF 6/30/99 TOTAL COSTS (1)
- ------------------------------------------ ------------------ -------------------------------------------------------
(In thousands)
LEASE-UP:
John Young II
Orlando, Florida 46,000 $1,570 2,235 2,828
World Houston 9
Houston, Texas 155,000 3,976 4,992 7,200
Rampart Distribution Center III
Denver, Colorado 92,000 2,373 4,546 5,550
Sample 95 II
Pompano, Florida 70,000 1,719 2,730 3,438
------------------ ------------------- ---------------- ------------------
TOTAL LEASE-UP 363,000 9,638 14,503 19,016
------------------ ------------------- ---------------- ------------------
UNDER CONSTRUCTION:
Airport Commerce Center
Tampa, Florida 108,000 2,651 4,036 5,427
Premier Beverage
Tampa, Florida 222,000 5,255 5,664 7,777
Chestnut Business Center
11
City of Industry, California 75,000 1,166 2,840 5,207
Westlake I
Tampa, Florida 70,000 1,344 2,955 4,072
Palm River North
Tampa, Florida 96,000 1,887 1,997 4,908
Glenmont I
Houston, Texas 110,000 101 1,037 3,862
Westside Expansion
Jacksonville, Florida 35,000 322 322 1,200
Main Street
Carson, California 106,000 1,929 1,929 5,548
------------------ ------------------- ---------------- ------------------
TOTAL UNDER CONSTRUCTION 822,000 14,655 20,780 38,001
------------------ ------------------- ---------------- ------------------
PROSPECTIVE DEVELOPMENT:
Phoenix, Arizona 123,000 - - 6,200
Tampa, Florida 310,000 105 792 14,880
Orlando, Florida 116,000 - - 5,568
Houston, Texas 110,000 - - 3,900
------------------ ------------------- ---------------- ------------------
TOTAL PROSPECTIVE DEVELOPMENT 659,000 105 792 30,548
------------------ ------------------- ---------------- ------------------
1,844,000 $24,398 36,075 87,565
================== =================== ================ ==================
COMPLETED DEVELOPMENT AND
TRANSFERRED TO INDUSTRIAL
PROPERTIES DURING SIX
MONTHS ENDED JUNE 30, 1999:
World Houston 7 & 8
Houston, Texas 166,000 $576 5,264 7,600
Walden Distribution Center II
Tampa, Florida 122,000 62 4,252 4,300
Sunbelt Distribution Center II
Orlando, Florida 61,000 113 2,325 2,300
John Young
Orlando, Florida 51,000 282 3,197 3,200
------------------ ------------------- ---------------- ------------------
TOTAL TRANSFERRED TO INDUSTRIAL 400,000 $1,033 15,038 17,400
================== =================== ================ ==================
(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 $8,945,000 due to depreciation expense recognized for the six
months ended June 30, 1999.
Mortgage loans receivable increased $1,099,000 during the first six
months of 1999 as a result of amortization of loan discounts of $331,000,
recognition of deferred gains of $1,515,000 on the payoff of the Country Club
and Gainesville mortgage notes receivable, and the issuance of three new notes
receivable for a total of $5,266,000. These increases were offset by principal
payments of $2,000 and the repayment of $6,011,000 on five mortgage loans
receivable.
12
Investments in real estate investment trusts increased from $5,737,000
at December 31, 1998 to $15,875,000 at June 30, 1999 as a result of purchases of
other real estate investment trust shares for $10,171,000 and unrealized losses
of $33,000.
Mortgage notes payable increased $42,426,000 during the six months
ended June 30, 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 $1,886,000.
Notes payable to banks increased from $114,322,000 at December 31, 1998
to $119,820,000 at June 30, 1999, as a result of payments of $212,188,000 and
borrowings of $217,686,000. 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 $16,459,000 at June 30, 1999, as a result of $12,398,000 net income less
dividends on preferred stock of $2,378,000 and dividends on common stock of
$11,637,000.
RESULTS OF OPERATIONS
(Comments are for the three months and six months ended June 30, 1999, compared
to the three months and six months ended June 30, 1998.)
Net income available to common shareholders for the three months and
six months ended June 30, 1999 was $4,664,000 ($.29 per basic and diluted share)
and $10,020,000 ($.62 per basic share and $.61 per diluted share), compared to
net income for the three months and six months ended June 30, 1998 of $5,419,000
($.33 per basic and diluted share) and $10,417,000 ($.64 per basic share and
$.63 per diluted share). Income before gain on investments was $5,629,000 and
$11,141,000 for the three months and six months ended June 30, 1999, compared to
$4,531,000 and $9,456,000 for the three months and six months ended June 30,
1998. Gains on investments were $224,000 and $1,675,000 for the three months and
six months ended June 30, 1999, compared to $1,017,000 and $1,090,000 for the
three months and six months ended June 30, 1998. Income before cumulative effect
of change in accounting principle was $5,853,000 and $12,816,000 for the three
months and six months ended June 30, 1999, compared to $5,548,000 and
$10,546,000 for the three months and six months ended June 30, 1998. The
paragraphs that follow describe the results of operations in greater detail.
Property net operating income (PNOI) from real estate properties,
defined as income from real estate operations less property operating expenses
(before interest expense and depreciation) increased by $2,008,000 or 15% for
the three months ended June 30, 1999, compared to the three months ended June
30, 1998. For the six months ended June 30, 1999, PNOI increased by $5,874,000
or 24% compared to the six months ended June 30, 1998.
PNOI 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
1999 1998 1999 1998 6-30-99
---- ---- ---- ---- -------
(In thousands)
----------------------------------------------------------
Industrial $14,105 11,141 28,228 20,231 97%
Other 1,256 2,212 2,338 4,461
----------------------------------------------------------
TOTAL PNOI $15,361 13,353 30,566 24,692
==========================================================
13
PNOI from industrial properties increased $2,964,000 and $7,997,000 for
the three months and six months ended June 30, 1999, compared to June 30, 1998.
Industrial properties held throughout the three months and six months ended June
30, 1999 compared to the same period in 1998 showed an increase in PNOI of 5.3%
for the three months ended June 30, 1999 and 4.3% for the six months ended June
30, 1999. The increase in PNOI from industrial properties resulted primarily
from the 1998 and 1999 acquisitions, from an increase in same store property
operations and from stabilized operations of nine industrial development
properties.
PNOI from other properties decreased $956,000 and $2,123,000 for the
three months and six months ended June 30, 1999, compared to June 30, 1998.
These decreases were primarily the result of the sale of the Columbia Place
Office Building in December 1998 and the sales 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 $285,000 and $1,697,000 for the three
months and six months ended June 30, 1999 compared to 1998. Average bank
borrowings were $107,197,000 and $110,240,000 for the three months and six
months ended June 30, 1999, compared to $91,136,000 and $67,298,000 for the same
period of 1998. Average bank borrowings increased primarily as a result of the
Meridian acquisition in 1998, the acquisition of other industrial properties in
1999 and 1998 and increased new development costs. Bank interest rates at June
30, 1999 were 6.19% on $107,000,000, 7.75% on $4,000,000 and 7.00% on
$8,820,000. The bank interest rate at June 30, 1998 was 7.06% (LIBOR plus
1.40%). Interest costs incurred during the period of construction of real estate
properties are capitalized. The interest costs capitalized on real estate
properties for the three months and six months ended June 30, 1999 were $481,000
and $759,000 compared to $140,000 and $288,000 for the three months and six
months ended June 30, 1998. Interest expense on real estate properties increased
primarily as a result of mortgages assumed in 1998 on Estrella and World Houston
1 & 2 and other mortgages assumed in the Meridian VIII merger, and from the
issuance of the $47,000,000 mortgage loan with Metropolitan Life (discussed in
Liquidity and Capital Resources). These increases were offset by the sales of
Columbia Place Office Building and the Sutton House and Doral Club Apartments.
Depreciation and amortization increased $866,000 and $2,460,000 for the
three months and six months ended June 30, 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 $29,000 and
$296,000 for the three months and six months ended June 30, 1999 is primarily
due to an increase in general and administrative costs due to growth of the
Company.
14
A summary of gains (losses) on real estate investments for the six
months ended June 30, 1999 and 1998 is detailed below.
RECOGNIZED
BASIS NET SALES PRICE GAIN (LOSS)
----- --------------- -----------
(IN THOUSANDS)
1999
----
Mortgage loans:
Country Club-deferred gain $ (1,127) - 1,127
Gainesville-deferred gain (388) (65) 323
Country Club land purchase-leaseback 500 499 (1)
Plus Park - 2 2
Estelle land 137 368 231
Other - (7) (7)
-------------------------------------------------------
Total (878) 797 1,675
=======================================================
1998
----
Real estate properties:
Hampton House Apartments 5,977 6,611 634
Jacksonville-deferred gain (383) - 383
Other (73) - 73
-------------------------------------------------------
Total $5,521 6,611 1,090
========================================================
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, 1999 (by category) and
June 30, 1998 are as follows:
1999 1998
------------------------------------------------------ ------------------
INDUSTRIAL
INDUSTRIAL OTHER TOTAL DEVELOPMENT TOTAL
---------- ----- ----- ----------- -----
(In thousands)
------------- --------- ---------- ---------------- ------------------
Upgrade on Acquisitions $333 - 333 - 1,049
Major Renovation 53 - 53 - 300
New Development 77 - 77 25,079 5,780
Tenant Improvements:
New Tenants 1,053 264 1,317 - 1,082
New Tenants (first generation) 174 - 174 352 1,752
Renewal Tenants 238 9 247 - 576
Other 1,169 60 1,229 217
-
------------- --------- ---------- ---------------- ------------------
TOTAL CAPITAL EXPENDITURES $3,097 333 3,430 25,431 10,756
============= ========= ========== ================ ==================
15
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, 1999 (by category) and June 30, 1998 is as follows:
1999 1998
------------- --------- ---------- ----------------- -----------------
INDUSTRIAL
INDUSTRIAL OTHER TOTAL DEVELOPMENT TOTAL
---------- ----- ----- ----------- -----
(In thousands)
------------- --------- ---------- ----------------- -----------------
Capitalized Leasing Costs:
New Tenants $135 9 144 35 588
New Tenants (first generation) 91 - 91 18 311
Renewal Tenants 406 5 411 - 595
-----------------------------------------------------------------------
TOTAL CAPITALIZED LEASING COSTS $632 14 646 53 1,494
======================================================================
AMORTIZATION OF LEASING COSTS: $739 481
======================================================================
16
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $23,328,000 for the six
months ended June 30, 1999. The Company distributed $11,637,000 in common stock
dividends and $2,159,000 in preferred stock dividends. 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
June 30, 1999 and 1998 was as follows:
AS OF JUNE 30,
1999 1998
---- ----
(In thousands)
------------------------- ----------------------
Mortgage Notes Payable - Fixed Rate $164,920 142,959
Bank Notes Payable - Floating Rate 119,820 113,945
------------------------- ----------------------
TOTAL DEBT $284,740 256,904
========================= ======================
At December 31, 1998, the Company had a line of credit from a
commercial bank in the amount of $50,000,000 that was secured by the outstanding
stock of two of the Company's wholly-owned subsidiaries and by the Company's
ownership interests in two partnerships. Borrowings under the credit line at
December 31, 1998 were $17,392,000 and the interest rate was LIBOR plus 1.40%
(6.96% at December 31, 1998). This line of credit expired January 31, 1999.
At December 31, 1998, the Company had $96,930,000 outstanding under a
$100,000,000 acquisition line of credit from a commercial bank. The acquisition
line had an interest rate of LIBOR plus 1.40% at December 31, 1998. The line was
secured by 11 properties of the Company with an aggregate carrying amount of
$129,754,000 at December 31, 1998 and was due to expire September 30, 2000.
On January 13, 1999, the Company replaced the $50,000,000 and
$100,000,000 bank lines with a new three-year $150,000,000 unsecured revolving
credit facility with a group of ten banks. The interest rate is based on the
Eurodollar rate and was 6.19% on June 30, 1999.
Also on January 13, 1999, the Company obtained a one-year $10,000,000
unsecured revolving credit facility with Chase Bank of Texas. The interest rate
is based on Chase Bank of Texas, National Association's Prime Rate less .75%.
On March 1, 1999, the Company closed a $47,000,000, 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. The proceeds were used to reduce bank
borrowings.
During the third quarter 1998, EastGroup's Board of Directors
authorized the repurchase of up to 500,000 shares of its outstanding common
stock. The shares may be purchased from time to time in the open market or in
privately negotiated transactions. For the six months ended June 30, 1999, the
Company repurchased 289,600 shares for $4,740,000 and a total of 310,700
shares for $5,100,000 since September 30, 1998.
On December 30, 1998, EastGroup sold $10 million in the first closing
of our agreement to issue $70 million of Series B Preferred Stock to Five Arrows
Realty Securities II, L.L.C. The Company is required to sell the remaining $60
million by September 24, 1999.
17
Budgeted capital expenditures and development for the year ending
December 31, 1999 follow:
INDUSTRIAL
CAPITAL IMPROVEMENTS DEVELOPMENT
-------------------- -----------
Industrial Other Total Total
-------------- ------------ ------------ -------------
Upgrades on Acquisitions $1,500 - 1,500 -
Major Renovation 104 - 104 -
New Development 77 - 77 38,144
Tenant Improvements:
New Tenants 1,905 264 2,169 -
New Tenants-First Generation 655 - 655 1,237
Renewal Tenants 476 9 485 -
Other 1,831 60 1,891 -
-------------- ------------ ------------ -------------
$6,548 333 6,881 39,381
============== ============ ============ =============
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.
In July 1999, EastGroup sold its 8150 Leesburg Pike Office Building
(198,000 square feet) in Vienna, Virginia for an all cash price of $29,025,000.
The transaction will generate a gain for financial reporting purposes of
approximately $14,200,000, which will be recorded in the Company's third
quarter. Also in July, the Company sold the 2020 Exchange Building (37,000
square feet) in Dallas, Texas for $1,065,000. This transaction will generate a
gain for financial reporting purposes of approximately $128,000. The proceeds of
these sales will be reinvested in industrial properties through new
acquisitions.
In July 1999, EastGroup purchased two industrial properties, Yosemite
Distribution Center (102,000 square feet) located in Milpitas, California (San
Francisco Bay area) for $7,375,000 and Interstate Commons Distribution Center
(136,000 square feet) located in Phoenix, Arizona for $4,775,000. Yosemite
consists of two buildings completed in 1974 and 1987, and is 100% leased to a
single tenant. Interstate Commons consists of two buildings built in 1988, is
100% leased to five tenants and includes an additional 3.7 acres of land for
future development. These purchases were funded from the proceeds of the sale of
the 8150 Leesburg Pike Office Building as previously discussed.
In addition to the properties described above, in July 1999,
EastGroup also acquired the remaining 25% ownership interests in Jetport
Commerce Park and 56th Street Commerce Park in Tampa from our partner, an
officer of the Company, Anthony J. Bruno, for $3,588,000 giving the Company 100%
ownership of these two complexes. This acquisition was also funded from the
proceeds of the sale of the 8150 Leesburg Pike Office Building.
18
Subsequent to June 30, 1999, the Company has entered into contracts to
purchase the following properties:
APPROXIMATE
PROPERTY LOCATION SIZE PURCHASE PRICE
======================================================================================================
(In thousands)
Kyrene Distribution Center Tempe, Arizona 70,000 sq. ft. $3,500
Adjacent 3.5 acres
Fairmont Distribution Center Tempe Arizona 19,000 sq. ft. 935
Wilson Distribution Center Tempe, Arizona 56,000 sq. ft. 2,500
Jetport/Meadows/LeTourneau Tampa, Florida 184,000 sq. ft. 6,200
Altamonte Commerce Center Orlando, Florida 123,000 sq. ft. 4,165
Land for Development Orlando, Florida 8.46 acres 1,161
-------
$18,461
=======
The Company has also entered into a contract to sell the 610 acres of
Estelle land located in Jefferson Parish, Louisiana for $950,000. This
transaction would generate a gain for financial reporting purposes of
approximately $430,000. We anticipate the sale of this property to close in
fourth quarter 1999; however, there can be no assurance that the sale will
actually be completed.
In the last five years, inflation has not had a significant impact on
the Company because of the relatively low inflation rate in the Company's
geographic areas of operation. Most of the leases require the tenants to pay
their pro rata share of operating expenses, including common area maintenance,
real estate taxes and insurance, thereby reducing the Company's exposure to
increases in operating expenses resulting from inflation. In addition, the
Company's leases typically have three to five year terms, which may enable the
Company to replace existing leases with new leases at a higher base if rents on
the existing leases are below the then-existing market rate.
19
YEAR 2000 ISSUE
The Company has been addressing the potential computer program and
other related problems resulting from the arrival of Year 2000 (Y2K). The
Company has established a Y2K compliance review process to assess the impact on
its internal financial and management information systems and property
mechanical operations systems, as well as the potential impact on the Company
from Y2K problems of significant tenants, vendors and suppliers of financial and
other services (collectively "independent third parties").
Regarding the Company's internal financial and management information
systems, as part of the Company's ongoing capital improvements process, during
the first quarter of 1999, the Company replaced the financial information and
reporting system (which the vendor has represented to us is Y2K compliant) with
a new, more efficient, information and reporting system designed to be Y2K
compliant and which is also being used by our major external property managers.
The 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 third 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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result
of its line of credit and long-term debt used to maintain liquidity and fund
capital expenditures and expansion of the Company's real estate investment
portfolio and operations. The Company's interest rate risk management objective
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve its objectives, the Company
borrows at fixed rates but also has a three-year $150,000,000 unsecured
revolving credit facility with a group of ten banks which was arranged by Chase
Securities, Inc. The interest rate is based on the Eurodollar rate plus 1.25%.
In addition, the Company has a one-year $10,000,000 unsecured revolving credit
facility and a $4,000,000 short-term note with Chase Bank of Texas. The interest
rate on the $10,000,000 note is based on Chase Bank of Texas, National
Association's Prime Rate less .75%; the interest rate on the $4,000,000 is
7.75%. The table below presents the principal payments due and weighted average
interest rates for both the fixed rate and variable rate debt.
JUL-DEC
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
----------- ---------- --------- ----------- --------- -------------- ----------- ------------
Fixed rate debt $1,978 12,712 8,360 12,844 8,675 120,351 164,920 165,623
(in thousands)
Average interest rate 7.94% 8.65% 7.80% 7.62% 8.33% 7.90% 8.04%
Variable rate debt
(in thousands) $4,000 8,820 -- 107,000 - - 119,820 119,820
Average interest rate 7.75% 7.00% -- 6.19% - - 6.30%
21
EASTGROUP PROPERTIES, INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 2, 1999, the Registrant held its Annual Meeting of
Shareholders. At the Annual Meeting, D. Pike Aloian, 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 2000 Annual Meeting. The following is a summary of the voting
for directors:
VOTE
NOMINEE VOTE FOR WITHHELD
------- -------- --------
D. Pike Aloian 14,546,092 306,333
Alexander G. Anagnos 14,543,576 310,848
H.C. Bailey, Jr. 14,549,935 304,469
Fredric H. Gould 14,551,435 302,889
David H. Hoster II 14,549,935 304,489
David M. Osnos 14,549,617 304,907
John N. Palmer 14,546,435 307,989
Leland R. Speed 14,495,712 358,712
Amendments to the Company's 1994 Management Incentive Plan were
approved by a 53% favorable vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - 1999 Financial Data Schedule attached hereto.
22
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 13, 1999
EASTGROUP PROPERTIES, INC.
/s/ N. Keith Mckey
N. Keith McKey, CPA
Executive Vice President, Chief
Financial Officer and Secretary