<PAGE> 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, 1998 COMMISSION FILE NUMBER 1-7094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 ONE JACKSON PLACE
188 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (601) 354-3555
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES (x) NO ( )
The number of shares of common stock, $.0001 par value, outstanding as of May
12, 1998 was 16,302,876.
<PAGE> 2
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Pages
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated financial statements
Consolidated balance sheets, March 31, 1998 (unaudited) and
December 31, 1997 3
Consolidated statements of income for the three months
ended March 31, 1998 and 1997 (unaudited) 4
Consolidated statements of cash flow for the three months
ended March 31, 1998 and 1997 (unaudited) 5
Consolidated statements of changes in stockholders'
equity for the three months ended March 31, 1998 (unaudited) 6
Notes to consolidated financial statements 7
Item 2. Management's discussion and analysis of financial
condition and results of operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
Authorized signatures 16
</TABLE>
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 31-MAR-98 31-DEC-97
--------- ---------
(unaudited)
<S> <C> <C>
Real estate properties:
Industrial $ 333,004 316,808
Industrial Development 13,468 13,831
Office Buildings 39,944 39,753
Apartments 15,410 15,380
--------- ---------
401,826 385,772
Less accumulated depreciation (32,071) (29,095)
--------- ---------
369,755 356,677
Real estate held for sale:
Land 585 585
Operating properties 22,665 22,648
less accumulated depreciation (3,217) (3,217)
--------- ---------
20,033 20,016
--------- ---------
Mortgage loans 10,868 10,852
Investment in real estate investment trusts 18,688 16,518
Cash 965 1,298
Other assets 9,885 7,766
--------- ---------
TOTAL ASSETS $ 430,194 413,127
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 107,355 105,380
Notes payable to banks 54,042 41,770
Accounts payable & accrued expenses 3,938 3,979
Minority interest payable 2,476 2,436
Other liabilities 2,111 2,247
--------- ---------
169,922 155,812
--------- ---------
STOCKHOLDERS' EQUITY
Shares of common stock - Par value $.0001 per share; 2 2
authorized 70,000,000 shares; issued 16,277,068 at
March 31, 1998 and 16,204,523 at December 31, 1997
Additional paid-in capital 245,720 244,215
Undistributed earnings 13,098 13,633
Accumulated other comprehensive income 1,452 (535)
--------- ---------
260,272 257,315
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 430,194 413,127
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
REVENUES
Income from real estate operations $15,335 11,197
Interest:
Mortgage loans 458 520
Other interest 24 85
Other 224 187
------- -------
16,041 11,989
------- -------
EXPENSES
Operating expenses from real
estate operations 3,996 3,332
Interest expense 2,939 2,436
Depreciation and amortization 3,206 2,394
Minority interests in joint ventures 106 158
General and administrative expense 869 694
------- -------
11,116 9,014
------- -------
INCOME BEFORE GAIN ON
INVESTMENTS 4,925 2,975
------- -------
GAIN ON REAL ESTATE INVESTMENTS 73 112
------- -------
NET INCOME $ 4,998 3,087
======= =======
BASIC PER SHARE DATA
Net Income $ 0.31 0.26
======= =======
Weighted average shares outstanding 16,223 11,722
======= =======
DILUTED PER SHARE DATA
Net Income $ 0.30 0.26
======= =======
Weighted average shares outstanding 16,391 11,861
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
-------- --------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,998 3,087
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of deferred
leasing costs 3,206 2,394
Gains on investments, net (73) (112)
Other (75) (44)
Changes in operating assets and liabilities:
Accrued income and other assets (966) (1,606)
Accounts payable, accrued expenses and prepaid rent 112 (545)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,202 3,174
-------- -------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable, net of
amortization of loan discounts (16) 632
Real estate improvements (1,208) (1,101)
Real estate development (4,846) (2,008)
Purchases of real estate (7,406) (1,083)
Purchases of real estate investment trusts shares (182) (1,708)
Merger expenses (20) --
Change in other assets and other liabilities (163) 918
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (13,841) (4,350)
-------- -------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 21,189 18,605
Proceeds from mortgage notes payable -- 9,250
Principal payments on bank borrowings (8,917) (31,686)
Principal payments on mortgage notes payable (635) (19,823)
Distributions paid to shareholders (5,533) (4,139)
Purchases of shares of beneficial interest and common stock -- (150)
Proceeds from exercise of stock options 130 254
Net proceeds from issuance of shares of
beneficial interest and common stock -- 36,654
Proceeds from dividend reinvestment plan 72 64
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,306 9,029
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (333) 7,853
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,298 438
-------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 965 8,291
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 2,872 2,453
Debt assumed by the Company in purchase of real
estate 2,610 --
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Shares Accumulated
of Additional Other
Common Paid-In Undistributed Comprehensive
Stock Capital Earnings Income Total
-------- ------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 2 244,215 13,633 (535) 257,315
Net income -- -- 4,998 -- 4,998
Cash dividends declared, $.34 per share -- -- (5,533) -- (5,533)
Change in unrealized gain (loss) on
securities -- -- -- 1,987 1,987
Issuance of 5,007 shares of
common stock, incentive compensation -- 103 -- -- 103
Issuance of 9,485 shares of
common stock, exercise options -- 130 -- -- 130
Issuance of 54,545 shares of
common stock, Ensign merger -- 1,200 -- -- 1,200
Issuance of 3,508 shares of
common stock, dividend reinvestment plan -- 72 -- -- 72
-------- ------- ------ ----- -------
BALANCE, MARCH 31, 1998 $ 2 245,720 13,098 1,452 260,272
======== ======= ====== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 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 1997
annual report and the notes thereto.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the 1997 financial
statements to conform to the 1998 classifications.
(3) SUBSEQUENT EVENTS
As of May 12, 1998, the Company had entered into contracts to purchase
six additional industrial properties aggregating approximately 1,125,000 square
feet of leasable space, for a total purchase price of approximately $45,662,000.
The Company has also entered into contracts to purchase one parcel of land for
future development, for a purchase price of approximately $785,000. Since March
31, 1998, EastGroup purchased one industrial property - Air Park, a 92,230
square foot distribution warehouse in Memphis, Tennessee, for a purchase price
of $2,150,000.
The Company reclassified the Hampton House Apartments in Jackson,
Mississippi with a cost of $6,634,000, the Sutton House Apartments with a cost
of $8,741,000; and the Doral Club Apartments with a cost of $7,219,000, both in
San Antonio, Texas to "held for sale" properties effective September 30, 1997.
The Company currently has a contract to sell the Hampton House Apartments for
approximately $6,700,000.
On April 22, 1998, EastGroup completed its cash tender offer and
purchased 1,208,693 Common Shares and 3,132,905 Preferred Shares of Meridian
Point Realty Trust VIII ("Meridian") for $41,603,000 which, when combined with
the 1,469,556 Meridian Preferred Shares already owned by EastGroup, represent
83.2% of the outstanding voting securities of Meridian. On May 12, 1998,
EastGroup-Meridian, Inc., a wholly-owned subsidiary of the Company (the
"Purchaser"), delivered to Meridian written notice stating that Purchaser will
purchase 1,440,740 Preferred Shares for $10.00 per share and 3,302,510 Common
Shares for $8.50 per share pursuant to the exercise of its options under
Article VIII of the Merger Agreement. The closing of such purchase will take
place on June 1, 1998. Immediately following the closing of the purchase of
such Shares, Purchaser and Meridian will complete the Merger. Immediately
after the effectiveness of the Merger, Meridian's Preferred Shares and Common
Shares will be delisted from the American Stock Exchange and will be removed
from registration under the Exchange Act. At the Effective Time of the Merger,
(i) each Preferred Share issued and outstanding (other than Dissenting Shares
representing Preferred Shares and Preferred Shares held by the Company, any
subsidiary of the Company, EastGroup or the Purchaser which are to be canceled
pursuant to the Merger Agreement) will be converted into the right to receive
in cash, without interest, $10.00 per share, and (ii) each Common Share issued
and outstanding (other than Dissenting Shares representing Common Shares and
Common Shares held by the Company, any subsidiary of the Company, EastGroup or
the Purchaser which are to be canceled pursuant to the Merger Agreement) will
be converted into the right to receive in cash, without interest, $8.50 per
share.
The total purchase price to EastGroup is anticipated to be
approximately $100,000,000 which includes the assumption of Meridian's
outstanding indebtedness of approximately $33,000,000. Meridian is an equity
real estate investment trust whose assets consist principally of industrial
properties.
<PAGE> 8
Meridian's property portfolio contains approximately 2.6 million square feet of
leasable space primarily in the states of Tennessee, California, Arizona and
Texas.
(4) ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting comprehensive
income. SFAS No. 130 defines comprehensive income as the change in equity of an
enterprise except those resulting from stockholder transactions. All components
of comprehensive income are required to be reported in a new financial statement
that is displayed with equal prominence as existing financial statements. The
Company adopted this standard as of January 1, 1998. Following is a comparison
of comprehensive income for the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Net income $4,998 3,087
Other comprehensive income, net of tax:
Unrealized holding gains (losses)
arising during period
1,987 270
------ ------
Comprehensive income $6,985 $3,357
====== ======
</TABLE>
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement establishes
standards for the way that public business enterprises report information about
operating standards for annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of this statement on January 1, 1998 did not have a
material impact on the Company's consolidated financial statements, but could
require expanded disclosures in subsequent periods.
(5) 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.
<PAGE> 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, 1998, compared to December
31, 1997.)
Assets of EastGroup were $430,194,000 at March 31, 1998, an increase of
$17,067,000 from December 31, 1997. Liabilities increased $14,110,000 to
$169,922,000 and stockholders' equity increased $2,957,000 to $260,272,000
during the same period. Book value per share increased from $15.88 at December
31, 1997 to $15.99 at March 31, 1998.
Industrial properties (excluding accumulated depreciation) increased
$16,196,000 during the three months ended March 31, 1998, as a result of the
acquisition of three industrial properties for $10,016,000 (as detailed below),
capital improvements on existing properties of $971,000, the reclassification of
Rampart III with a cost of $3,207,000 from industrial development to industrial
property, and the reclassification of Chancellor with a cost of $2,002,000 from
industrial development to industrial property.
<TABLE>
<CAPTION>
Industrial Properties Size Date Cost
Acquired in 1998 Location (Square Feet) Acquired (In thousands)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Estrella East Phoenix, Arizona 174,450 02-18-98 $5,317
Stemmons Circle Dallas, Texas 98,960 03-06-98 2,375
51st Avenue Phoenix, Arizona 79,150 03-09-98 2,324
</TABLE>
Industrial development decreased $363,000 during the three months ended
March 31, 1998. This decrease resulted from the reclassification of Rampart III
Distribution Center with a cost of $3,207,000 and Chancellor Distribution Center
with a cost of $2,002,000 to industrial property. These decreases were offset by
the acquisition of land for development of World Houston Six, Seven and Eight
for $1,104,000 and improvements and development costs on existing properties of
$3,742,000.
Office buildings increased $191,000 during the three months ended March
31, 1998 as a result of capital improvements to existing buildings.
Additionally, apartments increased $30,000 as a result of capital improvements.
Real estate held for sale (excluding accumulated depreciation)
increased $17,000 as a result of capital improvements. The Company currently has
a contract to sell the Hampton House Apartments in Jackson, Mississippi for
approximately $6,700,000.
Accumulated depreciation on real estate properties and real estate held
for sale increased $2,976,000 due to depreciation expense recognized for the
quarter.
Mortgage loans receivable increased $16,000 during the quarter as a
result of amortization of loan discounts of $154,000 netted against regularly
scheduled principal payments of $138,000.
Investments in real estate investment trusts increased from
$16,518,000 at December 31, 1997 to $18,688,000 at March 31, 1998. This
increase was due to the acquisition of 19,600 preferred shares of Meridian Point
Realty Trust VIII Co. for $182,000. Also, the Company recognized an unrealized
gain of $2,100,000 on Meridian Point Realty Trust VIII and an unrealized loss of
$113,000 on another investment in the Company's available-for-sale securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
<PAGE> 10
Mortgage notes payable increased $1,975,000 during the three months
ended March 31, 1998, as a result of regularly scheduled principal payments of
$635,000 and the debt assumption of $2,610,000 on the acquisition of Estrella.
The terms of the Estrella mortgage note payable are 9.25% interest, monthly
principal and interest of $23,979 and a maturity date of January 1, 2003.
Notes payable to banks increased from $41,770,000 at December 31, 1997
to $54,042,000 at March 31, 1998, as a result of borrowings of $21,189,000 and
payments of $8,917,000. As of March 31, 1998, the acquisition line had a balance
of $35,181,000 and the working capital line had a balance of $18,861,000. These
lines of credit are described in detail under Liquidity and Capital Resources.
Unrealized gain on securities increased $1,987,000 as a result of an
net increase in the market value of the Company's investments recorded in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
Undistributed earnings decreased from $13,633,000 at December 31, 1997
to $13,098,000 at March 31, 1998, as a result of dividends of $5,533,000
exceeding net income of $4,998,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Net income for the three months ended March 31, 1998 was $4,998,000
($.31 per basic share) compared to net income for the three months ended March
31, 1997 of $3,087,000 ($.26 per basic share). Income before gains on
investments was $4,925,000 for the three months ended March 31, 1998 compared to
$2,975,000 for the same period in 1997. Gains on investments were $73,000 for
the three months ended March 31, 1998 compared to $112,000 for the same period
in 1997.
Property net operating income (PNOI) from real estate properties,
defined as income from real estate operations less property operating expenses
(before interest expense and depreciation), increased by $3,474,000 or 44.2% for
the three months ended March 31, 1998, compared to the three months ended March
31, 1997. PNOI and percentage leased by property type were as follows:
<TABLE>
<CAPTION>
PNOI
Three Months Ended Percent
------------------ -------
March 31, Leased
1998 1997 3-31-98 3-31-97
---- ---- ------- -------
(In thousands)
<S> <C> <C>
Industrial $ 9,090 5,274 96% 97%
Office Buildings 1,230 1,463 100% 90%
Apartments 1,023 938 95% 99%
Other (4) 190 - -
------- -----
Total PNOI $11,339 7,865
======= =====
</TABLE>
PNOI from industrial properties increased $3,816,000 for the three
months ended March 31, 1998 compared to the three months ended March 31, 1997.
Industrial properties held throughout the first quarter 1998 showed an increase
in PNOI of 6.6% compared to the same period in 1997. The increase in PNOI from
industrial properties primarily resulted from industrial properties acquired in
1997,
<PAGE> 11
accounting for $3,153,000 of the increase and from the three industrial
properties acquired in first quarter of 1998.
PNOI from the Company's office buildings decreased $233,000 for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997. Office properties held throughout first quarter 1998 showed an increase in
PNOI of 15.4% compared to first quarter 1997. The decrease in PNOI from office
buildings resulted from the sale of the Santa Fe Energy Building in July of 1997
which had generated $397,000 of PNOI for the three months ending March 31, 1997.
PNOI from the Company's apartment properties increased $85,000 or 9.1%
for the three months ended March 31, 1998 compared to the same period in 1997.
Interest income on mortgage loans decreased $62,000 for the three
months ended March 31, 1998 compared to the three months ended March 31, 1997.
The following is a breakdown of interest income for the three months ended March
31, 1998 compared to the same period in 1997:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Interest income from:
Land mortgage loans $222 225
Apartment mortgage loans 137 131
Motel mortgage loans 59 93
Other mortgage loans 38 68
25% joint venture
mortgage loans 2 3
---- ---
$458 520
==== ===
</TABLE>
Interest income from motel mortgage loans decreased as a result of
the repayment of the Plus Park and the Bell Road mortgage loans. Due to
uncertainty of collection, interest income from the motel mortgage loans is
recorded as received, and the notes have been written down to their net
realizable value. Interest income on other mortgage loans decreased primarily as
a result of the repayment of the Citrus Center and Bay Green mortgage loans.
Interest expense increased $503,000 for the three months ended March
31, 1998 compared to the three months ended March 31, 1997. Average bank
borrowings were $44,208,000 during the three months ended March 31, 1998
compared to $8,895,000 during the same period in 1997. Bank interest rates at
March 31, 1998 and 1997 were 7.19% (LIBOR plus 1.50%) and 7.225% (LIBOR plus
1.85%), respectively. Interest cost incurred during the period of construction
of real estate properties is capitalized. The interest cost capitalized on real
estate properties for the three months ended 1998 was $148,000 compared to
$39,000 for the three months ended March 31, 1997. Interest expense on real
estate properties increased primarily as a result of mortgages assumed on
Southbay and Estrella and from the payoff of the Sunbelt mortgage.
Depreciation and amortization increased $812,000 for the three months
ended March 31, 1998 compared to the three months ended March 31, 1997. This
increase was primarily due to the industrial properties acquired in 1997 and to
the additional three industrial properties acquired during first quarter 1998.
The increase in general and administrative expenses of $175,000 for the
three months ended March 31, 1998 compared to the same period in 1997 is
primarily due to an increase in personnel costs due to the growth of the
Company.
<PAGE> 12
In the three months ended March 31, 1998 and 1997, the Company
recognized deferred gains of $73,000 and $112,000 from previous sales.
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, 1998 and 1997 by category are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------
Industrial
Industrial Other Total Development Total
--------- ----- ------ ----------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Upgrade on Acquisitions $492 - 492 - 197
Major Renovation - - - - 41
New Development - - - 4,395 2,008
Tenant improvements:
New Tenants 403 89 492 - 390
New Tenants (first generation) - - - 451
Renewal Tenants 76 97 173 - 219
Other - 51 51 - 254
---- --- ----- ----- ------
$971 237 1,208 4,846 $3,109
==== === ===== ===== ======
</TABLE>
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, 1998 and 1997 by category is as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------
Industrial
Industrial Other Total Development Total
---------- ----- ----- ----------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Capitalized leasing costs:
New Tenants $169 61 230 - 105
New Tenants (first generation) - - - 63 24
Renewal Tenants 404 - 404 - 121
---- -- ---- -- ---
$573 61 634 63 $250
==== == ==== == ====
Amortization of leasing costs: $230 $154
==== ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7,202,000 for the three
months ended March 31, 1998. Other sources of cash were collections on mortgage
loan receivables and bank borrowings. The Company distributed $5,533,000 in
dividends. Other uses of cash were for capital improvements at the various
properties, construction and development of properties, purchases of real estate
investments, bank
<PAGE> 13
debt payments, mortgage note payments and purchases of real estate investment
trust shares. Total debt at March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
March 31,
---------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Mortgage notes payable - fixed rate $107,355 104,542
Bank notes payable - floating rate 54,042 881
-------- -------
Total debt $161,397 105,423
======== =======
</TABLE>
The Company currently has an acquisition credit line of $100,000,000
available for the acquisition of properties and a $50,000,000 working capital
line. The facilities bear interest at LIBOR plus 1.40%. As of March 31, 1998,
the acquisition line had a balance of $35,181,000 and the working capital line
had a balance of $18,861,000.
Budgeted capital expenditures for the year ending December 31, 1998
follow:
<TABLE>
<CAPTION>
Industrial
Capital Improvements Development
-----------------------------------------------------------
Industrial Office Total Total
---------- ------ ----- -----
<S> <C> <C> <C> <C>
Upgrades on Acquisitions $ 806 - 806 -
Major Renovation 113 - 113 -
New Development - - - 12,174
Tenant Improvements:
New Tenants 1,583 306 1,889 -
New Tenants-First
Generation 100 - 100 2,206
Renewal Tenants 231 19 250 -
Other 1,275 744 2,019 -
------ ----- ----- ------
$4,108 1,069 5,177 14,380
====== ===== ===== ======
</TABLE>
The Company anticipates that its current cash balance, operating cash
flows and borrowings (including borrowings under the working capital line of
credit) will be adequate for the Company's (i) operating and administrative
expenses, (ii) debt service obligations, (iii) distributions to stockholders,
(iv) capital improvements, and (v) normal repair and maintenance expenses at its
properties. EastGroup is exploring various financing alternatives to fund the
acquisitions. These include additional bank debt, fixed rate mortgage financing
and the sale of equity securities.
As of May 12, 1998, the Company had entered into contracts to purchase
six additional industrial properties aggregating approximately 1,125,000 square
feet of leasable space, for a total purchase price of approximately $45,662,000.
The Company has also entered into contracts to purchase one parcel of land for
future development, for a total purchase price of approximately $785,000. Since
March 31, 1998, EastGroup purchased one industrial property - Air Park, a 92,230
square foot distribution warehouse in Memphis, Tennessee, for a purchase price
of $2,150,000.
On May 12, 1998, EastGroup-Meridian, Inc., a wholly-owned subsidiary of
the Company (the "Purchaser"), delivered to Meridian written notice stating
that Purchaser will purchase 1,440,740 Preferred Shares for $10.00 per share
and 3,302,510 Common Shares for $8.50 per share pursuant to
<PAGE> 14
the exercise of its options under Article VIII of the Merger Agreement. The
closing of such purchase will take place on June 1, 1998. Immediately following
the closing of the purchase of such Shares, Purchaser and Meridian will
complete the Merger. Immediately after the effectiveness of the Merger,
Meridian's Preferred Shares and Common Shares will be delisted from the
American Stock Exchange and will be removed from registration under the
Exchange Act. At the Effective Time of the Merger, (i) each Preferred Share
issued and outstanding (other than Dissenting Shares representing Preferred
Shares and Preferred Shares held by the Company, any subsidiary of the Company,
EastGroup or the Purchaser which are to be canceled pursuant to the Merger
Agreement) will be converted into the right to receive in cash, without
interest, $10.00 per share, and (ii) each Common Share issued and outstanding
(other than Dissenting Shares representing Common Shares and Common Shares held
by the Company, any subsidiary of the Company, EastGroup or the Purchaser which
are to be canceled pursuant to the Merger Agreement) will be converted into the
right to receive in cash, without interest, $8.50 per share. The common and
preferred shares that were not tendered amount to approximately $10,975,000.
These amounts will be paid to the exchange agent at the date of merger.
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.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures, and has conducted a review
of its major financial and operating computer systems with respect to Year 2000
compliance. All such systems are either compliant or can be made compliant
without material cost to the Company. The Company has established processes for
continuing to evaluate and manage the risks and costs associated with the Year
2000 issue and does not expect a material impact therefrom on its business,
its operations or its financial condition.
<PAGE> 15
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 - 1998 Financial Data Schedule attached hereto.
(b) Exhibit 27 - Restated 1997 Financial Data Schedule attached
hereto.
(c) Reports on Form 8-K
(1) Filed March 17, 1998, reporting an Agreement and Plan of
Merger among EastGroup, EastGroup-Meridian and Meridian VIII and the tender
offer commenced pursuant thereto.
<PAGE> 16
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 15, 1998
EASTGROUP PROPERTIES, INC.
/s/ Diane W. Hayman
Diane W. Hayman, CPA
Vice President and Controller
/s/ N. Keith McKey
N. Keith McKey, CPA Executive
Vice President, Chief Financial
Officer and Secretary
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