<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SHARES OF COMMON STOCK, $.0001 PAR VALUE,
NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. (x)
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 9, 1998 was
$316,951,000.
The number of shares of common stock, $.0001 par value,
outstanding as of March 9, 1998 was 16,264,075.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF SHAREHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III.
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PART I
ITEM 1. BUSINESS.
ORGANIZATION
EastGroup Properties, Inc. (the "Company", the "Registrant" or
"EastGroup") is an equity oriented real estate investment trust ("REIT")
organized in 1969. The Registrant has elected to be taxed as a real estate
investment trust under Sections 856-860 of the Internal Revenue Code, as
amended, and intends to continue to qualify to be so taxed. On June 5, 1997, the
Company's shareholders approved and the Company subsequently completed the
reorganization of the Company into a Maryland corporation. The purpose of the
reorganization was to modernize EastGroup's governance procedures and to provide
EastGroup with a greater degree of certainty and flexibility in planning and
implementing corporate action by adopting a form of organization used by many
real estate investment trusts.
On March 20, 1997, the Company announced that its Board of Directors
approved a three-for-two share split in the form of a share dividend of one
share for every two shares outstanding. The share dividend was distributed on
April 7, 1997 to shareholders of record as of March 31, 1997. All share and per
share amounts in these financial statements have been retroactively restated for
the share split.
ADMINISTRATION
The Company is self administered and maintains its principal executive
offices in Jackson, Mississippi. As of March 9, 1998, EastGroup had 39 full-time
and 4 part-time employees.
CURRENT OPERATIONS
EastGroup is a self-administered REIT focused on the ownership,
acquisition and selective development of industrial properties in major Sunbelt
markets throughout the United States. As of December 31, 1997, EastGroup's
portfolio included industrial properties comprising over 9 million square feet
of leasable space. As of December 31, 1997, the industrial portfolio was 97%
leased.
During 1997, EastGroup significantly expanded its industrial properties
portfolio through 19 acquisitions in seven states, aggregating 4,021,000 square
feet of leaseable space for a total cost of approximately $124,149,000.
Additionally, capital improvements amounting to $4,405,000 were made on existing
properties, and $14,936,000 was invested in industrial development projects. In
addition to direct property acquisitions, EastGroup also seeks to grow its
portfolio through the acquisition of other public and private real estate
companies and REITs. EastGroup acquired $16,119,000 in stock of REITs during the
period. These increases were partially offset by the sale of the two shopping
centers and one office building for net proceeds of $23,852,000 and gains of
approximately $6,596,000.
The Registrant intends to continue to qualify as a REIT under the Code.
Ordinary taxable income will continue to be paid to the stockholders. The
Registrant has the option of paying out capital gains to the stockholders with
no tax to the Registrant or paying a capital gains tax and retaining the gains
on sales. The book value of the property sold and the retained portion of
capital gains, if any, are generally reinvested by the Registrant, which
considers many factors in making these investments, such as type of property,
location, current yield, potential for appreciation and others.
EastGroup incurs short-term floating rate debt in connection with the
acquisition of real estate, and attempts to replace floating rate debt with
fixed-rate term loans secured by real property or the proceeds of sales of
equity securities as market conditions permit. EastGroup also may, in
appropriate circumstances, acquire one or more properties in exchange for
EastGroup's equity securities. EastGroup holds its properties as long-term
investments, but may determine to sell certain properties that no longer meet
its investment criteria. The Company may provide financing in connection with
such sales of property if market conditions so require, but it does not
presently intend to make loans other than in connection with such transactions.
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EastGroup has no present intentions of underwriting securities of other
issuers or repurchasing or reacquiring its shares. The strategies and policies
set forth above were determined, and are subject to review by, EastGroup's Board
of Directors which may change such strategies or policies based upon their
evaluation of the state of the real estate market, the performance of
EastGroup's assets, capital and credit market conditions, and other relevant
factors. EastGroup provides annual reports to its stockholders which contain
financial statements audited by the Company's independent public accountants.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and
regulations, an owner of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner knows
of, or was responsible for, the presence of such hazardous or toxic substances.
The presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to use such property as collateral in its borrowings. All of
EastGroup's properties have been subjected to environmental audits by
independent environmental consultants, which reports have not revealed any
potential significant environmental liability. Management of EastGroup is not
aware of any environmental liability that would have a material adverse effect
on EastGroup's business, assets or results of operations.
Environmental studies performed at the Cowesett Shopping Center, in
Rhode Island ("Cowesett") in which the Company formerly owned a 50% interest,
indicated that certain hazardous materials have been released at Cowesett in
connection with the dry cleaning operations and paint store operations conducted
on part of the property by parties unrelated to EastGroup. Such preliminary
environmental studies included a Phase II investigation of the Cowesett
property. On September 16, 1997, the Company sold its 50% joint venture interest
in Cowesett. Prior to this sale, in August 1997, the Company, its joint
venturer, the purchaser of Cowesett and the State of Rhode Island entered into a
Settlement Agreement and Covenant Not to Sue (the "Settlement Agreement").
Pursuant to the Settlement Agreement, the State of Rhode Island agreed not to
sue or take any other civil or administrative action against the parties in
connection with the existing environmental condition at Cowesett, provided the
purchaser satisfies certain conditions and obligations. Additionally, in
connection with the Settlement Agreement and the sale of the property, the
purchaser released EastGroup from all liability in connection with the existing
environmental condition and agreed to indemnify EastGroup against any and all
claims and liabilities incurred by, or asserted against, EastGroup as a result
of the existing environmental condition and the failure of the purchaser to
comply with the remediation plan provided for in the Settlement Agreement. As a
prior owner of the property, however, the Company may be liable for any
additional costs incurred as a result of the removal or remediation of hazardous
or toxic substances on, under, or in such property, but the Company has no
reason to believe that any such condition existed on the date of sale.
ITEM 2. PROPERTIES.
The Registrant conducts its operations from approximately 12,000
square feet of rented office space located at 300 One Jackson Place, 188 East
Capitol Street, Jackson, Mississippi. The Registrant does not own or lease
properties other than those carried as part of its real estate investment
portfolio shown on Financial Statement Schedule III. At December 31, 1997, the
Company does not have any single property that is 10% or more of total book
value or 10% or more of total gross revenues and thus is not subject to the
requirements of Items 14 and 15 of Form S-11.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material litigation nor,
to its knowledge, is any material litigation threatened against the Company or
its properties, other than routine litigation arising in the ordinary course of
business or which is expected to be covered by the Company's liability
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
SHARES OF COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's shares of common stock are presently listed for trading
on the New York Stock Exchange under the symbol "EGP". The following table shows
the high and low share prices for each quarter (1996 and first quarter of 1997
restated to give effect to the 3 for 2 share split in April 1997) reported by
the New York Stock Exchange during the past two years and per share
distributions paid (restated to give effect to the share split) for each
quarter.
<TABLE>
<CAPTION>
CALENDAR 1997 CALENDAR 1996
------------- -------------
DISTRI- DISTRI-
QUARTER HIGH LOW BUTIONS HIGH LOW BUTIONS
- ------- ---- --- ------- ---- --- -------
<S> <C> <C> <C> <C> <C> <C>
First $ 19.92 17.75 $ .33 $ 15.50 13.83 $ .31
Second 20.25 17.38 .33 14.92 14.33 .31
Third 22.94 19.25 .34 16.50 13.83 .33
Fourth 22.88 18.75 .34 18.33 16.08 .33
-------- --------
$ 1.34 $ 1.28
======== ========
</TABLE>
As of March 9, 1998, there were 1,770 holders of record of the
Company's shares of common stock. Approximately 91% of the Company's outstanding
shares are held by CEDE & Co., which is accounted for as a single shareholder of
record for multiple common stock owners. In 1997, of the $1.34 per share total
distributions paid, $1.14 per share was taxable as ordinary income for federal
income tax purposes and $.20 per share represented a return of capital. All of
the 1996 distributions paid, $1.28 per share, was taxable as ordinary income for
federal income tax purposes.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth selected consolidated financial data
for the Company and should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Income from real estate operations $49,791 37,143 28,386 23,194 13,771
Interest 2,571 1,718 1,036 1,054 1,174
Other 1,260 904 842 647 1,143
------- ------- ------- ------- -------
53,622 39,765 30,264 24,895 16,088
------- ------- ------- ------- -------
Expenses
Operating expenses from
real estate operations 14,825 13,262 11,575 9,741 6,159
Interest expense 10,551 8,930 6,287 3,905 3,415
Depreciation and
amortization 10,409 7,759 5,613 4,323 2,874
Minority interests in
joint ventures 512 289 220 163 78
General and administrative
expenses 2,923 2,356 2,180 2,046 1,531
Stock appreciation rights
and incentive compensation
expense (recovery) -- -- -- (129) 320
Recovery of possible losses -- -- -- -- (144)
------- ------- ------- ------- -------
39,220 32,596 25,875 20,049 14,233
------- ------- ------- ------- -------
Income before gains
on investments 14,402 7,169 4,389 4,846 1,855
Gains on investments
Real estate 6,377 5,334 3,322 2,322 3,408
Real estate investment
trust securities -- 6 -- -- 1,152
------- ------- ------- ------- -------
Net income $20,779 12,509 7,711 7,168 6,415
======= ======= ======= ======= =======
BASIC PER SHARE DATA:
Net income $ 1.58 1.44 1.22 1.16 1.74
Weighted average number of
shares outstanding 13,176 8,677 6,338 6,170 3,690
DILUTED PER SHARE DATA:
Net Income $ 1.56 1.43 1.21 1.15 1.71
Weighted average number of
shares outstanding 13,338 8,749 6,362 6,220 3,743
OTHER PER SHARE DATA:
Book value (at end of
year) $ 15.88 13.78 13.06 12.98 13.22
Cash distributions declared 1.34 1.28 1.23 0.87 1.07
Cash distributions paid 1.34 1.28 1.23 1.16 1.03
</TABLE>
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from operations:
Net income $ 20,779 12,509 7,711 7,168 6,415
Add:
Depreciation and amortization 10,409 7,759 5,613 4,323 2,874
Stock appreciation rights and
incentive compensation
expense (recovery) -- -- -- (129) 320
Real estate investment
trust dividends received -- 77 182 60 75
Recovery of possible losses -- -- -- -- (144)
Deduct:
Gains on investments, net (6,377) (5,340) (3,322) (2,322) (4,560)
Equity in earnings of real
estate investment trust -- (43) (203) (123) (67)
Other (284) (142) (134) (64) (18)
--------- --------- --------- --------- ---------
Funds from operations (1) $ 24,527 14,820 9,847 8,913 4,895
========= ========= ========= ========= =========
Cash flows provided by (used in):
Operating activities $ 23,685 13,996 9,746 8,448 5,276
Investing activities (79,959) (577) (5,721) (46,831) (19,073)
Financing activities 57,134 (13,007) (4,300) 35,994 16,324
BALANCE SHEET DATA (AT END
OF YEAR):
Real estate investments,
at cost (2) $ 419,857 292,620 162,400 165,395 113,181
Real estate investments,
net of accumulated
depreciation and allowance
for losses (2) 387,545 269,058 143,194 149,507 98,700
Total assets 413,127 281,455 157,955 154,860 107,508
Mortgage, bond and bank
loans payable 147,150 129,078 71,562 68,229 53,203
Total liabilities 155,812 136,129 75,055 72,684 58,707
Total shareholders' equity 257,315 145,326 82,900 82,176 48,801
</TABLE>
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(1) EastGroup defines funds from operations ("FFO"), consistent with the
National Association of Real Estate Investments Trusts ("NAREIT") definition, 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 believes FFO is helpful to investors as a measure of the performance of
an equity REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt and to
make capital expenditures. The Company computes FFO in accordance with
standards established by EastGroup, which may differ from the methodology for
calculating FFO utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. Further, FFO does not represent amounts
available for management's discretionary use because of needed capital
replacement or expansion, debt service obligations, or other commitments and
uncertainties. FFO should not be 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 its
ability to make distributions.
(2) Does not include a 50% controlled joint venture investment of $4,367,000
at December 31, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION:
Assets of EastGroup were $413,127,000 at December 31, 1997, an increase
of $131,672,000 from December 31, 1996. Liabilities increased $19,683,000 to
$155,812,000 and stockholders' equity increased $111,989,000 to $257,315,000
during the same period. Book value per share increased from $13.78 at December
31, 1996 to $15.88 at December 31, 1997.
Industrial properties (excluding accumulated depreciation) increased
$129,900,000 during the year ended December 31, 1997, as a result of the
acquisition of 19 industrial properties for $124,149,000 (as detailed below),
capital improvements on existing properties of $2,721,000, the reclassification
of Benjamin Distribution Center I with a cost of $2,388,000 from industrial
development to industrial properties, the reclassification of Deerwood expansion
costs of $891,000 from industrial development to the Deerwood industrial
property, and the reclassification of the Sunbelt II vacant lot of $249,000 to
industrial development. As of December 31, 1997, the Benjamin Distribution
Center I property was 100% leased and occupied.
<TABLE>
<CAPTION>
INDUSTRIAL PROPERTIES SIZE DATE
ACQUIRED IN 1997 LOCATION (SQUARE FEET) ACQUIRED COST
- ---------------------------------- --------------------- ------------------- ----------------- --------------
<S> <C> <C> <C> <C>
(In thousands)
Interchange Business Park Jackson, MS 127,000 3-20-97
6-13-97
11-12-97 $5,350
Palm River Distribution Center Tampa, FL 72,000 4-30-97 2,671
West Loop II Business Park Houston, TX 77,000 5-02-97 2,951
Lockwood Distribution Center Houston, TX 392,000 5-09-97 6,193
Lockhart Distribution Center Fort Lauderdale, FL 118,000 6-23-97 3,489
Cypress Creek Business Park Fort Lauderdale, FL 56,000 6-23-97 2,465
Senator Street Distribution Memphis, TN 80,000 7-16-97 2,727
Center
Chamberlain Distribution Center Tucson, AZ 120,000 7-22-97 4,070
35th Avenue Distribution Center Phoenix, AZ 124,000 7-31-97 2,799
Washington Distribution Center Santa Fe Springs, CA 141,000 8-19-97 6,536
San Clemente Distribution Center Hayward, CA 81,000 8-22-97 2,897
Elmwood Business Park New Orleans, LA 262,000 9-24-97 9,198
Riverbend Business Park New Orleans, LA 591,000 9-24-97 20,215
Ellis Distribution Center Jacksonville, FL 337,000 9-24-97 8,053
Westside Distribution Center Jacksonville, FL 502,000 9-24-97 12,896
56th Street Commerce Park Tampa, FL 25,000 9-30-97 886
Butterfield Trail Industrial El Paso, TX 671,000 12-01-97 19,842
Eastlake Distribution Center San Diego, CA 191,000 12-05-97 9,934
109th Street Dallas, TX 54,000 12-31-97 977
--------- --------
4,021,000 $124,149
========= ========
</TABLE>
Industrial development increased $11,906,000 during the year ended
December 31, 1997. This increase resulted from the investment of $14,936,000 in
industrial development (as detailed below) and the reclassification of the
Sunbelt II vacant land of $249,000 from industrial properties to industrial
development. During 1997, the Company completed the construction and lease-up of
the Benjamin Distribution Center I with a cost of $2,388,000 and the Deerwood
expansion with costs of $891,000 and reclassified these costs to industrial
properties.
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<TABLE>
<CAPTION>
COSTS INCURRED
---------------------------------
SIZE AT CUMULATIVE ESTIMATED
COMPLETION FOR THE YEAR ENDED AS OF DECEMBER TOTAL
INDUSTRIAL DEVELOPMENT (SQUARE FEET) DECEMBER 31, 1997 31, 1997 COSTS(1)
---------------------- ------------ ------------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
LEASE-UP:
Rampart Distribution Center II
Denver, Colorado 66,000 $ 2,009 2,913 3,196
Chancellor Center
Orlando, Florida 51,000 813 1,834 1,984
------- -------- -------- ---------
117,000 2,822 4,747 5,180
------- -------- -------- ---------
UNDER CONSTRUCTION:
Walden Distribution Center II
Tampa, Florida 122,000 2,366 2,366 3,352
Sunbelt Distribution Center II
Orlando, Florida 61,000 888 1,137 1,932
Benjamin Distribution Center II
Tampa, Florida 47,000 1,643 1,643 1,806
Palm River Center II
Tampa, Florida 72,000 2,015 2,015 2,493
John Young
Orlando, Florida 51,000 519 519 2,108
------- -------- -------- ---------
353,000 7,431 7,680 11,691
------- -------- -------- ---------
PROSPECTIVE DEVELOPMENT:
Rampart Distribution Center III
Denver, Colorado 95,000 1,039 1,039 N/A
Walden Distribution Center I
Tampa, Florida 90,000 365 365 N/A
------- -------- ------ ---------
185,000 1,404 1,404 --
------- -------- ------ ---------
655,000 $ 11,657 13,831 16,871
======= ======== ====== =========
COMPLETED DEVELOPMENT AND TRANSFERRED
TO INDUSTRIAL PROPERTIES:
Benjamin Distribution Center I
Tampa, Florida 46,000 $ 2,388 2,388 N/A
Deerwood Expansion
Jacksonville, Florida 29,000 891 891 N/A
------- -------- ------ ---------
75,000 $ 3,279 3,279 --
======= ======== ======== =========
<FN>
- ----------------------
(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.
</TABLE>
Office buildings increased $841,000 during the year ended December 31,
1997, primarily as a result of improvements of $1,092,000, offset by the
reimbursement of tenant improvements of $251,000 related to a tenant vacancy.
Apartments decreased $22,114,000, primarily as a result of the
reclassification of three apartment complexes to real estate held for sale,
offset by capital improvements of $480,000 on apartment complexes. The Company
reclassified the Hampton House Apartments located 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 located in San
Antonio, Texas, to held for sale properties effective September 30, 1997.
Real estate held for sale (excluding accumulated depreciation)
increased $3,988,000. This increase is due to the reclassification of the three
apartment complexes discussed above with a total cost of $22,594,000 and capital
improvements on real estate held for sale of $112,000. The Company currently has
contracts to sell the three apartment complexes for approximately $25,460,000.
These increases were primarily
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offset by the sale of the Santa Fe Energy Office Building with a cost of
$10,908,000, the Liberty Corners Shopping Center with a cost of $3,443,000 and
the Cowesett Corners Shopping Center with a basis of $4,253,000.
Accumulated depreciation on real estate properties and real estate held
for sale increased $8,750,000, primarily due to depreciation expense of
$9,691,000, offset by the sale of properties with accumulated depreciation of
$859,000 consisting of the Santa Fe Office Building ($803,000) and Liberty
Corners Shopping Center ($56,000), and the write-off of $82,000 of accumulated
depreciation related to a tenant vacancy.
Mortgage loans receivable decreased $1,651,000 during 1997. Decreases
resulted primarily from regularly scheduled principal payments of $285,000 and
the payoff of the Baygreen mortgage (acquired in the Copley merger) of $700,000,
the Citrus Center mortgage (acquired in the LNH merger) of $1,164,000, the Bell
Road mortgage of $935,000, and the paydown on the Plus Park mortgage note
receivable of $444,000. Increases resulted from the $1,575,000 mortgage on the
acquisition of the Palm River Center and the amortization of loan discounts of
$618,000. The terms of the Palm River Center note receivable are an interest
rate of 8.5%, monthly interest only payments and a maturity of April 30, 1998.
Investments in real estate investment trusts increased from $934,000 at
December 31, 1996 to $16,518,000 at December 31, 1997. This increase was due to
the acquisition of 1,449,956 preferred shares of Meridian Point Realty Trust
VIII Co. for $13,755,000 and the purchase of stock in other real estate
investment trusts of $2,364,000. Also, the Company recognized an unrealized loss
of $535,000 on the Company's available-for-sale securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Mortgage notes payable decreased $9,736,000 during 1997, as a result of
regularly scheduled principal payments of $2,240,000, and the repayment of the
following mortgages: $2,524,000 on the Nobel Center mortgage, $5,138,000 on the
Dominguez Distribution Center mortgage, $3,373,000 on the Metro Business Park
mortgage, $8,250,000 on the University Business Center mortgage, $4,103,000 on
the Sunbelt Distribution Center mortgage, $45,000,000 on the Jacksonville and
New Orleans mortgage and $937,000 on the Wiegman Associates mortgage. The
decreases were offset by the placement of a 7.45% mortgage of $9,250,000 on the
University Business Center with monthly principal and interest of $74,235 and a
maturity date of February 28, 2002. Also, the Company assumed debt of
$2,519,000 on the acquisition of the Chamberlain Distribution Center,
$45,000,000 on the acquisition of the four industrial properties in
Jacksonville and New Orleans, and $5,060,000 on the acquisition of the Eastlake
Distribution Center. The terms of the Chamberlain mortgage note payable are
8.75% interest, monthly principal and interest of $21,376 and a maturity date
of January 1, 2005. The terms of the Jacksonville and New Orleans mortgage note
payable were 9.25% interest, with interest only payments due monthly. The
Jacksonville and New Orleans notes were repaid on December 30, 1997. The terms
of the Eastlake mortgage note payable are 8.5% interest, monthly principal and
interest of $57,115 and a maturity date of July 5, 2004.
Notes payable to banks increased from $13,962,000 at December 31, 1996
to $41,770,000 at December 31, 1997, as a result of borrowings of $122,962,000
and payments of $95,154,000. As of December 31, 1997, the acquisition line had a
balance of $35,181,000 and the working capital line had a balance of $6,589,000.
These lines of credit are described in detail under Liquidity and Capital
Resources.
Unrealized loss on securities increased $535,000 as a result of a
decline 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 increased from $10,997,000 at December 31, 1996
to $13,633,000 at December 31, 1997, as a result of net income for financial
reporting purposes of $20,779,000 exceeding dividends of $18,143,000.
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In February 1997, the Company issued a total of 2,100,000 common shares
under an existing shelf registration. Net proceeds of the offering were
approximately $36,654,000, net of underwriting commissions and expenses.
On June 5, 1997, the Company's stockholders approved and the Company
subsequently completed the reorganization from a Maryland trust into a Maryland
corporation. Effective with the reorganization, the Company now has the
authority to issue 100,000,000 shares consisting of 70,000,000 shares of common
stock, $0.0001 par value per share, and 30,000,000 shares of excess stock,
$0.0001 par value per share. Effective June 5, 1997, all stock transactions
reflect the new par value. Stock transactions prior to the reorganization have
not been restated to reflect the new par value. Refer to the Consolidated
Statements of Stockholders' Equity in the consolidated financial statements for
a complete summary of changes in stockholders' equity.
In October 1997, the Company completed an offering of 3,500,000 common
shares of its common stock for net proceeds of $72,555,000.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net income for 1997 was $20,779,000 ($1.58 per basic share) compared to
net income in 1996 of $12,509,000 ($1.44 per basic share). Income before gains
on investments was $14,402,000 in 1997 compared to $7,169,000 in 1996. Gains on
investments were $6,377,000 in 1997 compared to $5,340,000 in 1996.
For 1996, the results of operations include the results of operations
for LNH from May 14, 1996 through December 31, 1996 and the results of
operations for Copley from June 19, 1996 through December 31, 1996 (dates of
acquisition through year-end).
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 $11,085,000 or 46.4%
for 1997, compared to 1996. Property net operating income and percentage leased
by property type were as follows:
<TABLE>
<CAPTION>
PNOI
YEARS ENDED PERCENT
DECEMBER 31, LEASED
------------ ------
1997 1996 12-31-97 12-31-96
---- ---- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Industrial $25,080 14,327 97% 97%
Office Buildings 5,735 4,454 100% 97%
Apartments 3,694 4,824 94% 97%
Other 457 276 - -
------- ------
Total PNOI $34,966 23,881
======= ======
</TABLE>
PNOI from industrial properties increased $10,753,000 for 1997 compared
to 1996. Industrial properties held throughout the year showed an increase in
PNOI of 4.9% for 1997. Of the increase in PNOI from industrial properties,
$5,501,000 resulted from the industrial properties acquired in the mergers with
LNH and Copley. Also contributing to this increase in PNOI from industrial
properties were
11
<PAGE> 12
the 1997 acquisitions discussed previously and the acquisitions of Walnut
Business Center, a 234,070 square foot industrial complex in Fullerton,
California in August 1996 and Braniff Park West, a 259,352 square foot
industrial complex in Tulsa, Oklahoma in September 1996. These acquisitions
contributed $4,696,000 to the increase in PNOI from industrial properties for
1997 compared to 1996.
PNOI from the Company's office buildings increased $1,281,000 for 1997
compared to 1996. Office properties held throughout the year showed an increase
in PNOI of 21.8% compared to 1996. Of the increase in PNOI from office
buildings, $1,384,000 resulted from the office buildings acquired in the
mergers with LNH and Copley. Other increases were attributable to improvement
in operations from office properties held throughout 1997 compared to 1996.
These increases were partially offset by the sale of the Santa Fe Office
Building in July 1997.
PNOI from the Company's apartment properties decreased $1,130,000 for
1997 compared to 1996. This decrease is primarily attributable to the sale of
the Garden Villa Apartments in January 1996, the Pin Oaks and EastGate
Apartments in November 1996 and the Plantations Apartments in December 1996.
Apartment properties held throughout the year showed a decrease in PNOI of 2.0%
compared to 1996.
Interest income on mortgage loans increased $369,000 for 1997 compared
to 1996. The following is a breakdown of interest income for the year ended
December 31, 1997 compared to 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Interest income from:
Land mortgage loans $ 915 566
Apartment mortgage loans 533 514
Motel mortgage loans 364 403
Other mortgage loans 190 147
25% joint venture
mortgage loans 11 14
------ -----
$2,013 1,644
====== =====
</TABLE>
Interest income from land mortgage loans increased as a result of
interest income on loans received in the merger with LNH. The LNH loans were
discounted to fair value at the merger date. This discount is being amortized
over the life of the loans and is included in interest income. The amounts
amortized for 1997 and 1996 were $465,000 and $287,000, respectively. Due to
uncertainty of collection, interest income from the motel mortgage loans is
recorded as received, and the notes have been written down to their net
realizable value. Interest income on other mortgage loans increased primarily
as a result of interest income on loans received in the mergers with LNH and
Copley.
Interest expense increased $1,621,000 from 1996 to 1997. Average bank
borrowings were $11,155,000 in 1997 compared to $11,572,000 in 1996 with average
interest rates of 7.55% in 1997 compared to 7.3% in 1996. Bank interest rates at
December 31, 1997 and 1996 were 7.49% (LIBOR plus 1.50%) and 7.48% (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 1997 was $401,000, compared to $19,000 for 1996. Interest
expense on real estate properties increased primarily as a result of the
University Business Center mortgage, the mortgages assumed in the Copley merger,
the mortgage assumed on the acquisition of Chamberlain and the mortgage on the
purchase of the four industrial properties in Jacksonville and New Orleans. This
increase in interest expense was offset by the payoff of the Nobel Center
mortgage and the sale of the Garden Villa Apartments and the Plantations
Apartments in 1996.
12
<PAGE> 13
Depreciation and amortization increased $2,650,000 in 1997 compared to
1996. This increase was primarily due to the properties acquired in the Copley
and LNH mergers and the industrial properties acquired in 1997. This increase in
depreciation and amortization was offset by sale of the real estate properties
presented below.
The increase in general and administrative expenses of $567,000 for the
year ended December 31, 1997 is primarily due to an increase in costs as a
result of the Copley and LNH mergers and the 1997 property acquisitions.
In 1997, the Company recognized gains of $6,377,000 consisting of the
sale of three properties, a writedown on a mortgage note receivable and the
recognition of other deferred gains. In 1996, the Company recognized gains of
$5,340,000 consisting of the sale of five properties, two land
purchase-leasebacks, three parcels of land, a writedown on a mortgage note
receivable and the sale of REIT securities. See Note (2) of the Consolidated
Financial Statements for details of these 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 years ended December 31, 1997 and 1996 by category are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------- ------------
Industrial
Industrial Other Total Development Total
---------- ----- ----- ----------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Upgrade on Acquisitions $ 742 - 742 - 90
Major Renovation - 105 105 - 2,867
New Development - - - 14,053 1,695
Tenant Improvements:
New Tenants 1,282 905 2,187 - 959
New Tenants (first generation) - - - 883 -
Renewal tenants 214 169 383 - 852
Other 483 505 988 - 1,006
------- ------ ----- ------ -----
$ 2,721 1,684 4,405 14,936 7,469
======= ====== ===== ====== =====
</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 years
ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------ -----------
Industrial
Industrial Other Total Development Total
---------- ----- ----- ----------- -----
(In thousands)
Capitalized leasing costs:
<S> <C> <C> <C> <C> <C>
New Tenants $ 786 399 1,185 62 528
New Tenants (first generation) - - - 324 -
Renewal Tenants 441 15 456 58 290
------- --- ----- --- ---
$ 1,227 414 1,641 444 818
======= === ===== === ===
Amortization of leasing costs: 718 493
===== ===
</TABLE>
13
<PAGE> 14
Rental income from real estate operations is principally recognized
based on the terms of the operating leases, which does not differ materially
from recognizing rental income on a straight-line basis. Straight-line rent
decreased rental income by $0 and $51,000 for the years ended December 31, 1997
and 1996, respectively. This resulted from income recorded on the straight-line
method as compared to when cash was actually received.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
and is effective for fiscal years beginning after December 15, 1997. The
adoption of this statement will not have a material impact on the Company's
consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement establishes
standards for the way that public business enterprises report information about
operating 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 will have an immaterial impact on the
Company's consolidated financial statements, but could require expanded
disclosures in subsequent periods.
1996 COMPARED TO 1995
Net income for 1996 was $12,509,000 ($1.44 per basic share) compared to
net income in 1995 of $7,711,000 ($1.22 per basic share). Income before gains on
investments was $7,169,000 in 1996 compared to $4,389,000 in 1995. Gains on
investments were $5,340,000 in 1996 compared to $3,322,000 in 1995.
The results of operations include LNH from May 14, 1996 through
December 31, 1996 and Copley from June 19, 1996 through December 31, 1996.
PNOI from real estate properties, defined as income from real estate
operations less property operating expenses (before interest expense and
depreciation), increased by $7,070,000 or 42% for 1996, compared to 1995.
Property net operating income (loss) and percentage leased by property
type were as follows:
<TABLE>
<CAPTION>
PNOI
YEARS ENDED PERCENT
DECEMBER 31, LEASED
---------------------- --------
1996 1995 12-31-96
---- ---- --------
(In thousands)
<S> <C> <C> <C>
Industrial $14,327 7,968 97%
Office Buildings 4,454 3,200 97%
Apartments 4,824 5,657 97%
Other 276 (14) -
------- -------
Total PNOI $23,881 16,811
======= =======
</TABLE>
PNOI from industrial properties increased $6,359,000 for 1996 compared
to 1995. Industrial properties held throughout the year showed an increase in
PNOI of 3.6% for the year ended December 31, 1996. PNOI from industrial
properties increased $5,432,000 for the year as a result of the industrial
properties received in the mergers with LNH and Copley discussed previously.
Also contributing to this increase in PNOI from industrial properties were the
acquisitions of Jetport 515 Commerce Park in September 1995, Walnut Business
Center in August 1996, Braniff Park West in September 1996, and the development
of a 36,400 square foot distribution building at the Phillips Distribution
Center completed in August 1995. In addition, the increase in PNOI from
industrial properties was due to improved operations primarily at Rampart
Distribution Center, Lake Pointe Business Park, Deerwood Distribution Center,
JetPort Commerce Park and Northwest Distribution Center.
PNOI from the Company's office buildings increased $1,254,000 for 1996
compared to 1995. The increase for the year ended December 31, 1996 is due
primarily to the PNOI of $1,218,000 from the office buildings received in the
merger with Copley discussed previously and a slight improvement in operations
from office properties held throughout 1996 compared to 1995. These increases
were offset by the sale of the Cascade VII office building in September 1995.
Office properties held throughout the year ending December 31, 1996 and 1995
showed an increase in PNOI of 3.9% for 1996 compared to 1995.
15
<PAGE> 15
PNOI from the Company's apartment properties decreased $833,000 for
1996 compared to 1995. This decrease is primarily attributable to the sale of
the SunChase Apartments in October 1995, the Garden Villa Apartments in January
1996, the Pin Oaks and EastGate Apartments in November 1996 and the Plantations
Apartments in December 1996, offset by the acceptance of a deed in lieu of
foreclosure on the EastGate Apartments in April 1995. Apartment properties held
throughout the years ended December 31, 1996 and 1995 showed an increase in PNOI
of 1.2%.
Interest income on mortgage loans increased $608,000 for 1996 compared
to 1995. The following is a breakdown of interest income for the year ended
December 31, 1996 compared to 1995:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1996 1995
---- ----
(In thousands)
Interest income from:
<S> <C>
Land mortgage loans $ 566 -
Apartment mortgage loans 514 537
Motel mortgage loans 403 340
Other mortgage loans 147 10
25% joint venture
mortgage loans 14 149
------- ------
$ 1,644 1,036
======= ======
</TABLE>
Interest income from land mortgage loans increased as a result of
interest income on loans received in the mergers with LNH and Copley discussed
previously. 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 from the wrap mortgage loans
decreased as a result of the foreclosure of the EastGate mortgage in April 1995.
Interest income from the 25% joint venture mortgage loans decreased as a result
of repayments of these notes. The LNH loans were discounted to allocated fair
value at the merger date. This discount is being amortized over the life of the
loans and amounted to $287,000 for the year ended December 31, 1996.
Interest expense increased $2,643,000 from 1995 to 1996. Average bank
borrowings were $11,572,000 in 1996 compared to $22,874,000 in 1995 with average
interest rates of 7.3% in 1996 compared to 8.8% in 1995. Bank interest rates at
December 31, 1996 and 1995 were 7.48% (LIBOR plus 1.85%) and 7.94%,
respectively. Interest expense on real estate properties increased as a result
of the following new mortgages and mortgages assumed in the Copley merger:
New Mortgages
<TABLE>
<CAPTION>
DATE OF INTEREST MATURITY AMOUNT OF
LOAN PROPERTY RATE DATE MORTGAGE
---- -------- ---- ---- --------
(In thousands)
<S> <C> <C> <C> <C>
6-27-95 Exchange Distribution Center 8.375% 8-1-05 $ 2,500
7-27-95 WestPort Commerce Center 8.000% 8-1-05 3,350
8-01-95 LaVista Crossing Apartments 8.688% 9-1-05 5,950
9-12-95 JetPort Commerce Park 8.125% 10-1-05 4,000
9-29-95 LakePointe Business Park 8.125% 10-1-05 11,000
12-15-95 Plantations Apartments 7.625% 12-1-05 5,300
8-22-96 Huntwood Associates 7.990% 8-22-06 13,000
8-22-96 Wiegman Associates 7.990% 8-22-06 6,000
-------
$51,100
=======
</TABLE>
16
<PAGE> 16
Mortgages Assumed in Copley merger:
<TABLE>
<CAPTION>
DATE OF
ASSUMPTION INTEREST MATURITY AMOUNT OF
OF LOAN PROPERTY RATE DATE MORTGAGE
- ------- -------- ---- ---- --------
(In
thousands)
<S> <C> <C> <C> <C> <C>
6-19-96 University Business Center 9.060% 4-01-00 $ 9,261
6-19-96 University Business Center 9.370% 1-01-97 8,250
6-19-96 Wiegman Associates 8.750% 10-01-97 973
6-19-96 Columbia Place 8.875% 12-31-09 10,139
6-19-96 Dominguez Properties 9.000% 1-01-97 5,175
6-19-96 Metro Business Park 9.250% 3-01-97 3,411
6-19-96 Metro Business Park 8.000% 4-01-98 1,757
-------
$38,966
=======
</TABLE>
These increases were offset by the repayment of the Exchange Drive
Warehouse mortgage payable of $565,000 and the JetPort mortgage payable of
$636,000, both in September 1995, and the repayment of the underlying first
mortgage on the Country Club wrap mortgage note of $2,267,000 on August 3,
1995. The mortgages assumed in the Copley merger are net of principal
repayments of $20,715,000, repaid shortly after the merger date.
In 1996, the Company recognized gains of $5,340,000 consisting of the
sale of five properties, two land purchase-leasebacks, three parcels of land, a
writedown on mortgage notes receivable and the sale of REIT securities. In 1995,
the Company recognized gains of $3,322,000 consisting of the sale of two land
purchase-leasebacks and three real estate properties. See Note (2) of the
Consolidated Financial Statements for details of these sales.
NAREIT has recommended supplemental disclosures concerning capital
expenditures, leasing costs, and straight-line rents. The Company expenses
apartment unit turnover costs such as carpet, painting and small appliances.
Capital expenditures for the years ended December 31, 1996 and 1995 by category
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Upgrades on acquisitions $ 90 981
Major Renovation 2,867 1,499
New Development 1,695 -
Tenant improvements:
New tenants 959 1,367
Renewal tenants 852 221
Other 1,006 318
-------- -------
$ 7,469 4,386
======== ======
</TABLE>
17
<PAGE> 17
Leasing costs are capitalized and included in other assets. The costs
are amortized over the lives of the leases using the straight-line method and
are included in depreciation and amortization expense. A summary of these costs
is as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------
1996 1995
---- ----
(In thousands)
Capitalized leasing costs:
<S> <C> <C>
New Tenants $ 528 493
Renewal Tenants 290 269
----- ---
$ 818 762
===== ===
Amortization of leasing costs $ 493 378
===== ===
</TABLE>
Straight-line rent decreased rental income by $51,000 and increased
rental income by $17,000 for the years ended December 31, 1996 and 1995,
respectively. This resulted from income recorded on the straight-line method as
compared to when cash was actually received. Rental income from real estate
operations is principally recognized based on the terms of the operating leases,
which does not differ materially from recognizing rental income on a
straight-line basis.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $23,685,000 for the year
ended December 31, 1997. Other sources of cash were collections on mortgage loan
receivables, sales of real estate investments, mortgage borrowings, bank
borrowings and proceeds from the stock offerings. The Company distributed
$18,143,000 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 debt payments, mortgage note payments and
purchases of real estate investment trust shares. Total debt at December 31,
1997 and 1996 was as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Mortgage notes payable - fixed rate $105,380 115,116
Bank notes payable - floating rate 41,770 13,962
-------- -------
Total debt $147,150 129,078
======== =======
</TABLE>
The Company currently has an acquisition credit line of $65,000,000
available for the acquisition of properties and a $35,000,000 working capital
line. The maximum principal amount of the acquisition credit line is $65,000,000
through March 31, 1998 and then is reduced to $50,000,000 from April 1, 1998
through September 30, 2000. Through March 31, 1998, the first $48,750,000
advanced under the acquisition credit line will bear interest at LIBOR plus
1.50% and any advances in excess of $48,750,000 will bear interest at LIBOR plus
1.75%. Effective April 1, 1998, all advances under the acquisition credit line
will bear interest at LIBOR plus 1.50%. The maximum principal amount of the
working capital credit line is $35,000,000 through March 31, 1998 and then will
be $25,000,000 from April 1, 1998 through September 30, 1998. Through March 31,
1998, the first $26,250,000 advanced under
18
<PAGE> 18
the working capital credit line will bear interest at LIBOR plus 1.50% and any
advances in excess of $26,250,000 will bear interest at LIBOR plus 1.75%.
Effective April 1, 1998, all advances under the working capital credit line will
bear interest at LIBOR plus 1.50%. The interest rate on both the working capital
line and the acquisition line at December 31, 1997 was LIBOR plus 1.50% (or
7.49%). There is also a .125% fee on the unused amount of the $35,000,000
working capital credit line and the $65,000,000 acquisition credit line. As of
December 31, 1997, the acquisition line had a balance of $35,181,000 and the
working capital line had a balance of $6,589,000.
The Company is negotiating a new credit facility with its bank. The
facility would begin April 1, 1998 with an acquisition line of $100,000,000 and
a working capital line of $50,000,000. The Company expects the interest rate to
be LIBOR plus 1.40% with similar terms as the existing facility.
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, (v) purchases of properties, and (vi) normal repair
and maintenance expenses at its properties.
As of March 16, 1998, the Company has entered into contracts to
purchase three additional industrial properties, aggregating approximately
288,000 square feet of leasable space, for a total purchase price of
approximately $10,850,000. The Company has also entered into contracts to
purchase two parcels of land for future development, for a total purchase price
of approximately $1,893,000.
Purchases of industrial properties subsequent to December 31, 1997
include the following:
<TABLE>
<CAPTION>
PROPERTY LOCATION CLOSING DATE SIZE PURCHASE PRICE
-------- -------- ------------ ---- --------------
(Square Feet) (In thousands)
<S> <C> <C> <C> <C>
Estrella East Phoenix, Arizona 2-18-98 174,450 $5,260
Stemmons Circle Dallas, Texas 3-03-98 98,959 2,373
51st Avenue North Phoenix, Arizona 3-09-98 79,149 2,315
------
$9,948
=======
</TABLE>
19
<PAGE> 19
On February 23, 1998, EastGroup-Meridian, Inc., a wholly-owned
subsidiary of EastGroup Properties, Inc. commenced a tender offer (the Offer)
for all issued and outstanding Preferred Shares of Meridian Point Realty Trust
VIII Co. ("Meridian VIII") not currently held by EastGroup for $10.00 per share
in cash, and for all issued and outstanding Common Shares of Meridian VIII for
$8.50 per share in cash. The offer was made pursuant to an Agreement and Plan of
Merger among EastGroup, EastGroup-Meridian, Inc. and Meridian VIII dated
February 18, 1998. Following completion of the Offer, EastGroup and Meridian
VIII will engage in a second-step merger in which all remaining Preferred
Shares of Meridian VIII (excluding those held by EastGroup) will be converted
into $10.00 per share in cash and all remaining Common Shares of Meridian VIII
(excluding those held by EastGroup) will be converted into $8.50 per share in
cash. The merger will be accounted for using the purchase method of accounting.
EastGroup's obligation to complete the Offer is subject to certain
conditions, which EastGroup may waive at its discretion, including that there
shall have been validly tendered and not withdrawn prior to expiration of the
Offer at least 3,186,354 Preferred Shares and/or Common Shares of Meridian VIII.
This figure reflects the number of Preferred Shares and/or Common Shares which,
when combined with EastGroup's current ownership of 1,469,556 Preferred Shares,
would result in EastGroup owning at least two-thirds of the voting stock of
Meridian VIII.
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 has reviewed the impact of year 2000 issues and does not
expect a material impact therefrom on its business, its operations or its
financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Registrant's Consolidated Balance Sheets as of December 31, 1997
and 1996, and its Consolidated Statements of Income, Changes in Stockholders'
Equity and Cash Flows and Notes to Consolidated Financial Statements for the
years ended December 31, 1997, 1996 and 1995 and the independent auditors'
report thereon are included under Item 14 of this report and are incorporated
herein by reference. Unaudited quarterly results of operations included in the
notes to the consolidated financial statements are also incorporated herein by
reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
20
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant's definitive proxy statement which will be filed with
the Securities and Exchange Commission (the "Commission") pursuant to
Regulation 14A within 120 days of the end of Registrant's calendar year is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The Registrant's definitive proxy statement which will be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of
Registrant's calendar year is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN COMMON STOCK OWNERS AND MANAGEMENT.
The Registrant's definitive proxy statement which will be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of
Registrant's calendar year is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant's definitive proxy statement which will be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of
Registrant's calendar year is incorporated herein by reference.
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Annual
Report 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 Annual 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.
See also the Company's reports to be filed from time to time with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934.
21
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
(a) (1) Consolidated Financial Statements:
Independent Auditors' Report 24
Consolidated Balance Sheets - December 31, 1997 and 1996 25
Consolidated Statements of Income - Years ended December
31, 1997, 1996 and 1995 26
Consolidated Statements of Changes in Stockholders' Equity-
Years ended December 31, 1997, 1996 and 1995 27
Consolidated Statements of Cash Flows - Years ended December
31, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements 29
(2) Consolidated Financial Statement Schedules:
Schedule III - Real Estate Properties and Accumulated Depreciation 47
Schedule IV - Mortgage Loans on Real Estate 53
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted, or the required information is included in the notes to the
consolidated financial statements.
(3) Form 10-K Exhibits:
(a) Articles of Incorporation (incorporated by reference to
Appendix B to the Registrant's Proxy Statement dated
April 24, 1997).
(b) Bylaws of the Registrant (incorporated by reference to
Appendix C to the Registrant's Proxy Statement dated
April 24, 1997).
(10) Material Contracts:
(a) EastGroup Properties 1994 Management Incentive Plan, As
Amended (incorporated by reference to Appendix D of the
Registrant's Registration Statement on Form S-4 (No.
333-01815).*
(b) EastGroup Properties 1991 Directors Stock Option Plan, As
Amended (incorporated by reference to Exhibit B of the
Registrant's proxy statement dated April 26, 1994).*
(c) Form of Change in Control Agreement that Registrant has
entered into with certain executive officers (Leland R.
Speed, David H. Hoster II and N. Keith McKey)(incorporated
by reference to Exhibit 10(e) to the Registrant's 1996
Annual Report on Form 10-K).
(d) Form of Change in Control Agreement that Registrant has
entered into with certain executive officers (Diane W.
Hayman, Marshall A. Loeb, Jann W. Puckett and Stewart R.
Speed) (filed herewith).
(e) Agreement and Plan of Merger dated February 18, 1998 among
the Registrant, EastGroup-Meridian, Inc. and Meridian
Point Realty Trust VIII Co.(incorporated by reference to
Exhibit 10 (a) to the Registrant's Current Report on Form
8-K dated March 13, 1998).
(f) Purchase Agreement for Jacksonville and New Orleans
Properties (incorporated by reference to Exhibit 10(a)
to the Registrant's Current Report on Form 8-K dated
September 24, 1997).
22
<PAGE> 22
(21) Subsidiaries of Registrant (filed herewith).
(23) Consent of KPMG Peat Marwick LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(27) Financial Data Schedule (filed herewith).
(28) Agreement of Registrant to furnish the Commission with copies
of instruments defining the rights of holders of long-term
debt (incorporated by reference to Exhibit 28(e) of the
Registrant's 1986 Annual Report on Form 10-K).
(b) (1) 8K - Filed October 16, 1997 - Reporting the completion of an
offering of 3,500,000 shares of common stock for net
proceeds of $72,555,000.
*Indicates management or compensatory agreement.
23
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
THE DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
We have audited the consolidated financial statements of EastGroup Properties,
Inc. and subsidiaries, as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EastGroup
Properties, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Jackson, Mississippi KPMG Peat Marwick LLP
March 16, 1998
24
<PAGE> 24
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------------
1997 1996
------------- -------------
(In thousands, except per share data)
<S> <C> <C>
ASSETS
Real estate properties:
Industrial $316,808 186,908
Industrial development 13,831 1,925
Office buildings 39,753 38,912
Apartments 15,380 37,494
------------- -------------
385,772 265,239
Less accumulated depreciation (29,095) (22,703)
------------- -------------
356,677 242,536
------------- -------------
Real estate held for sale:
Land 585 585
Operating properties 22,648 14,293
Less accumulated depreciation (3,217) (859)
Investment in joint venture - 4,367
------------- -------------
20,016 18,386
------------- -------------
Mortgage loans 10,852 12,503
Investment in real estate investment trusts 16,518 934
Cash and cash equivalents 1,298 438
Other assets 7,766 6,658
------------- -------------
$413,127 281,455
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Mortgage notes payable $105,380 115,116
Notes payable to banks 41,770 13,962
Accounts payable and accrued expenses 3,979 2,893
Minority interests 2,436 3,141
Other liabilities 2,247 1,017
------------- -------------
155,812 136,129
------------- -------------
Stockholders' Equity
Shares of common stock, par value $.0001 per share;
authorized 70,000,000 shares; issued 16,204,523 shares in 1997 2 -
Shares of excess stock, par value $.0001 per share;
authorized 30,000,000 shares, no shares issued - -
Shares of beneficial interest, par value $1.00 per share;
authorized 20,000,000 shares; issued 10,548,965 shares in 1996 - 10,549
Additional paid-in capital 244,215 123,780
Undistributed earnings 13,633 10,997
Unrealized loss on securities (535) -
------------- -------------
257,315 145,326
------------- -------------
$413,127 281,455
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
25
<PAGE> 25
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C>
REVENUES
Income from real estate operations $ 49,791 37,143 28,386
Interest:
Mortgage loans 2,013 1,644 1,036
Other 558 74 -
Other 1,260 904 842
------------ ------------- -------------
53,622 39,765 30,264
------------ ------------- -------------
EXPENSES
Operating expenses from real estate operations 14,825 13,262 11,575
Interest 10,551 8,930 6,287
Depreciation and amortization 10,409 7,759 5,613
Minority interests in joint ventures 512 289 220
General and administrative 2,923 2,356 2,180
------------ ------------- -------------
39,220 32,596 25,875
------------ ------------- -------------
Income before gains on investments 14,402 7,169 4,389
------------ ------------- -------------
GAINS ON INVESTMENTS
Real estate 6,377 5,334 3,322
Real estate investment trust securities - 6 -
------------ ------------- -------------
6,377 5,340 3,322
------------ ------------- -------------
NET INCOME $ 20,779 12,509 7,711
============ ============= =============
BASIC PER SHARE DATA
Net income $ 1.58 1.44 1.22
============ ============= =============
Weighted average shares outstanding 13,176 8,677 6,338
============ ============= =============
DILUTED PER SHARE DATA
Net income $ 1.56 1.43 1.21
============ ============= =============
Weighted average shares outstanding 13,338 8,749 6,362
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE> 26
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Shares Unrealized
Shares of of Additional Gain
Beneficial Common Paid-In Undistributed (Loss) on
Interest Stock Capital Earnings Securities Total
---------- --------- ---------- ------------- ---------- ---------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 6,333 - 66,099 9,723 21 82,176
Net income - - - 7,711 - 7,711
Cash dividends declared, $1.23 per share - - - (7,777) - (7,777)
Exercise of 22,500 options 23 - 217 - - 240
Purchase and retirement of 7,500 shares (8) - (88) - - (96)
Change in unrealized gain on securities - - - - 646 646
---------- -------- ------------- ------------- --------- ----------
BALANCE, DECEMBER 31, 1995 6,348 - 66,228 9,657 667 82,900
Net income - - - 12,509 - 12,509
Cash dividends declared, $1.28 per share - - - (11,169) - (11,169)
Exercise of 31,500 options 32 - 321 - - 353
Purchase and retirement of 12,750 shares (13) - (137) - - (150)
Issuance of 9,640 shares, incentive compensation 10 - 118 - - 128
Issuance of 927,366 shares in LNH merger 927 - 12,713 - - 13,640
Issuance of 3,238,343 shares in
Copley merger 3,238 - 44,420 - - 47,658
Issuance of 7,382 shares in
dividend reinvestment plan 7 - 117 - - 124
Change in unrealized gain on securities - - - - (667) (667)
---------- -------- ------------- ------------- --------- ----------
BALANCE, DECEMBER 31, 1996 10,549 - 123,780 10,997 - 145,326
Net income - - - 20,779 - 20,779
Cash dividends declared, $1.34 per share - - - (18,143) - (18,143)
Issuance of 2,100,000 shares of
beneficial interest 2,100 - 34,554 - - 36,654
Issuance of 23,800 shares of beneficial
interest and 31,142 shares of common stock,
options exercised 23 - 654 - - 677
Purchase and retirement of 8,268 shares of
beneficial interest and 11,725 shares of common
stock, options exercised (8) - (380) - - (388)
Issuance of 6,490 shares of beneficial
interest, incentive compensation 7 - 97 - - 104
Issuance of 3,441 shares of beneficial interest,
and 10,872 shares of common stock, dividend
reimbursement plan 3 - 288 - - 291
Purchase of 194 fractional shares
of beneficial interest - - (5) - - (5)
Change in unrealized loss on
securities - - - - (535) (535)
Reduction of par value associated
with reorganization (12,674) 1 12,673 - - -
Issuance of 3,500,000 shares of
common stock - 1 72,554 - - 72,555
---------- -------- ------------- ------------- --------- ----------
BALANCE, DECEMBER 31, 1997 $ - 2 244,215 13,633 (535) 257,315
========== ======== ============= ============= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements
27
<PAGE> 27
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $20,779 12,509 7,711
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of deferred
leasing costs 10,409 7,759 5,613
Gains on investments, net (6,377) (5,340) (3,322)
Real estate investment trust:
Equity in earnings - (43) (203)
Dividends received - 77 182
Other (284) (142) (134)
Changes in operating assets and liabilities:
Accrued income and other assets (3,709) (122) 834
Accounts payable, accrued expenses and prepaid rent 2,867 (702) (935)
--------------- ---------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,685 13,996 9,746
--------------- ---------------- ---------------
INVESTING ACTIVITIES:
Advances on mortgage loans receivable (1,575) (121) (150)
Payments on mortgage loans receivable, net of
amortization of loan discounts 2,910 (80) 1,950
Sales of real estate investments 23,838 23,480 8,778
Sales of real estate investment trust securities - 1,056 -
Real estate improvements (4,405) (5,774) (4,386)
Real estate development (14,936) (1,695) -
Purchases of real estate (71,569) (13,865) (806)
Purchases of real estate investment trusts shares (16,119) (934) (9,263)
Return of capital dividends received - - 87
Cash balances of acquired companies - 2,750 -
Merger expenses - (3,169) -
Change in other assets and other liabilities 1,897 (2,225) (1,931)
--------------- ---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (79,959) (577) (5,721)
--------------- ---------------- ---------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 122,962 60,374 30,272
Proceeds from mortgage notes payable 9,250 19,000 32,100
Principal payments on bank borrowings (95,154) (50,771) (54,584)
Principal payments on mortgage notes payable (71,565) (30,768) (4,455)
Distributions paid to shareholders (18,143) (11,169) (7,777)
Purchases of shares of beneficial interest and common stock (393) (150) (96)
Proceeds from exercise of stock options 677 353 240
Net proceeds from issuance of shares of
beneficial interest and common stock 109,209 - -
Proceeds from dividend reinvestment plan 291 124 -
--------------- ---------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES 57,134 (13,007) (4,300)
--------------- ---------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 860 412 (275)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 438 26 301
--------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,298 438 26
=============== ================ ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Debt assumed by buyer of real estate $ - 8,359 -
Cash paid for interest, net of amount capitalized 10,474 8,444 5,926
Debt assumed by the Company in purchase of real
estate 52,579 - -
Fair value of shares issued in Copley merger - 47,658 -
Fair value of shares issued in LNH merger - 13,640 -
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of EastGroup
Properties, Inc. (the Company), its wholly-owned subsidiaries and its investment
in four joint ventures. At December 31, 1997, the four properties in the joint
ventures included the 75% owned 56th Street Commerce Park, JetPort Commerce
Park, and WestPort Commerce Center, and the 80% owned University Business
Center. Included in 1996 was a joint venture in which the Company owned
77.78% of Liberty Corners Shopping Center which was sold in 1997. The Company
records 100% of the joint ventures' assets, liabilities, revenues and expenses
with minority interests provided for the percentage not owned. All significant
intercompany transactions and accounts have been eliminated in consolidation.
The Company's investment in Cowesett Corners Shopping Center (a 50% owned joint
venture) was not consolidated, but accounted for using the equity method of
accounting, prior to its sale in 1997.
(b) Federal Income Taxes
EastGroup Properties, a Maryland real estate investment trust, has
qualified as a real estate investment trust under Sections 856-860 of the
Internal Revenue Code and intends to continue to qualify as such. The Company
distributed all of its 1997, 1996 and 1995 taxable income to its stockholders.
Accordingly, no provision for federal income taxes was necessary. Distributions
paid per share for federal income tax purposes follow:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Ordinary Income $1.14 1.28 1.23
Return of Capital .20 -- --
----- ---- ----
$1.34 1.28 1.23
===== ==== ====
</TABLE>
The Company's income differs for tax and financial reporting purposes
principally because of (1) the timing of the deduction for the provision for
possible losses and losses on investments, (2) the timing of the recognition of
gains or losses from the sale of investments, (3) different depreciation methods
and lives, and (4) mortgage loans having a different basis for tax and financial
reporting purposes, thereby producing different gains upon collection of these
loans.
(c) Income Recognition
Rental income from real estate operations is principally recognized
based on the terms of the operating leases, which does not differ materially
from recognizing rental income on a straight-line basis.
Interest income on mortgage loans is recognized based on the accrual
method unless a significant uncertainty of collection exists. If a significant
uncertainty exists, interest income is recognized as collected. Certain mortgage
loan discounts are amortized over the lives of the loans using a method that
does not differ materially from the interest method.
29
<PAGE> 29
The Company recognizes gains on sales of real estate in accordance with
the principles set forth in Statement of Financial Accounting Standards No. 66
(SFAS 66), "Accounting for Sales of Real Estate." The provisions of SFAS 66
require, upon closing, consideration for the transfer of rights of ownership to
the purchaser, receipt of an adequate cash down payment from the purchaser and
adequate continuing investment by the purchaser. If the requirements for
recognizing gains have not been met, the sale and related costs are recorded,
but the gain is deferred and recognized by the installment method as collections
are received.
(d) Real Estate Properties
Real estate properties are carried at cost less accumulated
depreciation. Cost includes the carrying amount of the Company's investment plus
any additional consideration paid, liabilities assumed, costs of securing title
(not to exceed fair market value in the aggregate) and improvements made
subsequent to acquisition. Depreciation of buildings and other improvements,
including personal property, is computed using the straight-line method over
estimated useful lives of 25 to 40 years for buildings and 3 to 10 years for
other improvements and personal property. Maintenance and repair expenses are
charged to expense as incurred, while building improvements are capitalized.
Apartment turnover costs such as carpet, painting and small appliances are
expensed as incurred. Geographically, the Company's investments are concentrated
in the major sunbelt market areas of the southeastern and southwestern United
States, primarily in the states of California, Florida, Texas and Arizona.
(e) Real Estate Held for Sale
Real estate properties that are currently offered for sale or are under
contract to sell have been shown separately on the consolidated balance sheets
as "real estate held for sale." Such assets are carried at the lower of current
carrying amount or fair market value less estimated selling costs and are not
depreciated while they are held for sale.
(f) Marketable Equity Securities
The Company's marketable equity securities are categorized as
available-for-sale securities, as defined by the Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Unrealized holding gains and losses are reflected as a net
amount in a separate component of stockholders' equity until realized. At
December 31, 1996, the amount of unrealized gains was not material to the
financial statements.
(g) Investments in Real Estate Investment Trusts
At December 31, 1995, the equity method of accounting was used to
account for the investment in LNH REIT, Inc. ("LNH"). As of that date, the
Company did not have voting control over this company but did have the ability
to exercise significant influence on operating and financial policies. Under the
equity method, the Company accrued its share of LNH's unrealized security gains
in accordance with SFAS No. 115. On May 14, 1996, LNH was merged with
EastGroup-LNH Corporation, a wholly-owned subsidiary of the Company. At December
31, 1997, EastGroup had investments in real estate investment trusts, which are
accounted for under the cost method. Although the Company owned 21% of Meridian
VIII at December 31, 1997, it did not exercise significant influence over the
investee and the investment was accounted for under the cost method (the
difference between applying the cost and equity method would not be material to
the 1997 consolidated financial statements). The cost of these investments is
adjusted to fair market value with an equity adjustment to account for
unrealized gains/losses as indicated in Note 1 (f) above.
(h) Allowance for Possible Losses and Impairment Losses
The Company measures impaired and restructured loans at the present
value of expected future cash flows, discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's market price or the fair value
of collateral if the loan is collateral dependent.
30
<PAGE> 30
Effective January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by the Company be reviewed for
impairment of value whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. This statement requires
that the majority of long-lived assets and certain identifiable intangibles to
be disposed of be reported at the lower of carrying amount or fair value less
selling costs. Implementation of this statement did not have a material impact
on the Company's financial statements.
(i) Amortization
Debt origination costs are deferred and amortized using the
straight-line method over the term of the loan. Leasing commissions are deferred
and amortized using the straight-line method over the term of the lease.
(j) Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
(k) Reclassifications
Certain reclassifications have been made in the 1996 and 1995 financial
statements to conform to the 1997 presentation.
(l) Share Split
On March 20, 1997, the Company announced that its Board of Directors
approved a three-for-two share split in the form of a share dividend of one
share for every two shares outstanding. The share dividend was distributed on
April 7, 1997, to shareholders of record as of March 31, 1997. All share and per
share amounts in these financial statements have been retroactively restated to
account for the share split.
(m) Earnings Per Share
In December 1997, the Company adopted SFAS No. 128 "Earnings Per
Share," which requires companies to present basic earnings per share (EPS) and
diluted EPS. Prior to the effective date of SFAS No. 128, EPS was reported under
Accounting Prinicples Board Opinion No. 15 which required presentation of
primary and fully diluted EPS. The new standard, which went into effect December
15, 1997, requires additional informational disclosures contained herein and on
the face of the statement of income, makes certain modifications to APB Opinion
No. 15, and requires restatement of EPS for all prior periods reported.
Accordingly, all EPS figures prior to December 31, 1997 have been restated.
Basic EPS represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting period. The
Company's basic EPS is calculated by dividing net income by the weighted average
number of common shares outstanding.
Diluted EPS represents the amount of earnings for the period available
to each share of common stock outstanding during the period and to each share
that would have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the reporting period. The
Company's diluted EPS is calculated by dividing net income by the weighted
average number of common shares outstanding plus the dilutive effect of stock
options related to outstanding employee stock options had the options been
exercised. The dilutive effect of stock options was determined using the
treasury stock method which assumes exercise of the options as of the beginning
of the period or when
31
<PAGE> 31
issued, if later, and that any proceeds would be used to purchase common stock
at the average market price during the period.
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
revenues and expenses during the reporting period, and to disclose material
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
(o) Stock Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," was adopted by
the Company effective January 1, 1996. This standard defines a fair value based
method of accounting for an employee stock option or similar equity
instrument. Companies are given the choice of either recognizing related
compensation cost by adopting the new fair value method, or to continue to use
the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," while
supplementally disclosing the proforma effect on net income and net income per
share using the new measurement criteria. The Company elected to continue to
follow the requirements of APB No. 25, and accordingly, there was no effect on
the results of operations.
(2) Real Estate Owned
At December 31, 1997, the Company is continuing to reposition its
portfolio to focus on industrial properties. The Company is offering for sale
the Estelle tract of land in New Orleans, Louisiana with a carrying amount of
$558,000; the Silvermill undeveloped land in Houston Texas with a carrying
amount of $27,000; Doral Apartments in San Antonio, Texas with a carrying amount
of $5,861,000; Sutton Apartments in San Antonio, Texas with a carrying amount of
$7,622,000; and Hampton House Apartments in Jackson, Mississippi with a carrying
amount of $5,950,000. No loss is anticipated on the sale of these properties.
The results of operations for real estate held for sale at December 31, 1997,
amounted to $658,000 and $684,000, respectively, for the years ended December
31, 1997 and 1996. The results of operations for real estate held for sale at
December 31, 1996 amounted to $1,604,000 for the year ended December 31, 1996.
32
<PAGE> 32
The Company is currently developing the following properties as
detailed below:
<TABLE>
<CAPTION>
COSTS INCURRED
------------------------------------------
SIZE AT COMPLETION FOR THE YEAR ENDED CUMULATIVE ESTIMATED TOTAL
INDUSTRIAL DEVELOPMENT (SQUARE FEET) DECEMBER 31, 1997 DECEMBER 31, 1997 COSTS(1)
---------------------- ------------- ----------------- ----------------- --------
(In thousands)
<S> <C> <C> <C> <C>
LEASE-UP:
Rampart Distribution Center II
Denver, Colorado 66,000 $ 2,009 2,913 3,196
Chancellor Center
Orlando, Florida 51,000 813 1,834 1,984
------- ------ ----- -----
117,000 2,822 4,747 5,180
------- ------ ----- -----
UNDER CONSTRUCTION:
Walden Distribution Center II
Tampa, Florida 122,000 2,366 2,366 3,352
Sunbelt Distribution Center II
Orlando, Florida 61,000 888 1,137 1,932
Benjamin Distribution Center II
Tampa, Florida 47,000 1,643 1,643 1,806
Palm River Center II
Tampa, Florida 72,000 2,015 2,015 2,493
John Young
Orlando, Florida 51,000 519 519 2,108
------- ------ ----- ------
353,000 7,431 7,680 11,691
------- ------ ----- ------
PROSPECTIVE DEVELOPMENT:
Rampart Distribution Center III
Denver, Colorado 95,000 1,039 1,039 N/A
Walden Distribution Center I
Tampa, Florida 90,000 365 365 N/A
------- ------ ----- ------
185,000 1,404 1,404 --
------- --------- ------ ------
655,000 $ 11,657 13,831 16,871
======= ========= ====== ======
COMPLETED DEVELOPMENT AND
TRANSFERRED TO INDUSTRIAL PROPERTIES:
Benjamin Distribution Center I
Tampa, Florida 46,000 $ 2,388 2,388 N/A
Deerwood Expansion
Jacksonville, Florida 29,000 891 891 N/A
======= ========= ======
75,000 $ 3,279 3,279
======= ========= ======
</TABLE>
Costs incurred include capitalization of interest costs during the
period of construction. The interest costs capitalized on real estate
properties for 1997 was $401,000, compared to $19,000 for 1996.
33
<PAGE> 33
A summary of gains (losses) on real estate investments for the years
ended December 31, 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
RECOGNIZED
NET GAIN
BASIS SALES PRICE (LOSS)
--------------- ------------------ ---------------
(In thousands)
<S> <C> <C> <C>
1997
Real estate properties:
Santa Fe Entergy Building $ 10,354 12,660 2,306
Liberty Corners Shopping Center 2,649 5,263 2,614
Cowesett Corners Shopping Center 4,253 5,929 1,676
Houston Land (98) - 98
Wellington Land (14) (14) -
Plus Park - deferred gain (62) - 62
Bell Road - deferred gain (96) - 96
Mortgage loan writedown 475 - (475)
--------------- ------------------ ---------------
$ 17,461 23,838 6,377
=============== ================== ===============
1996
Real estate properties:
Garden Villa Apartments $ 2,715 4,068 1,353
Southwyck Land 97 149 52
Pompano Beach Land 3,280 3,267 (13)
Baygreen Industrial Center 1,679 1,677 (2)
Wellington Land 397 601 204
Pin Oaks Apartments 1,675 4,235 2,560
Eastgate Apartments 1,326 1,753 427
Plantations Apartments 6,765 7,116 351
Land purchase leasebacks:
Bellevue - 472 472
Taco Bell 12 142 130
Mortgage loan writedown 200 - (200)
--------------- ------------------ ---------------
$ 18,146 23,480 5,334
=============== ================== ===============
1995
Real estate properties:
Cascade Office Building $ 1,486 1,486 -
Sunchase Apartments 2,515 4,396 1,881
2100 Exchange Warehouse 549 539 (10)
Cascade Office Building - writedown 136 - (136)
Land purchase leasebacks:
Winchester 450 862 412
Iroquois 320 1,495 1,175
--------------- ------------------ ---------------
$ 5,456 8,778 3,322
=============== ================== ===============
</TABLE>
The following schedule indicates approximate future minimum rental
receipts under noncancelable leases for the real estate properties by year as
of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998 $ 42,855
1999 36,025
2000 29,772
2001 24,018
2002 17,051
Later Years 18,765
------------------
TOTAL MINIMUM RECEIPTS $ 168,486
==================
</TABLE>
34
<PAGE> 34
(3) MORTGAGE LOANS
A summary of mortgage loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
First mortgage loans:
Industrial (2 loans) $ 1,686 841
Apartment (1 loan) 2,836 2,685
Motels (3 loans) 1,714 2,957
Shopping Center -- 1,636
Undeveloped Land (2 loans) 4,382 4,053
Other (4 loans) 234 331
------- ------
$10,852 12,503
======= ======
</TABLE>
At December 31, 1996, the carrying value of two impaired motel mortgage
loans was $1,700,000. At December 31, 1997, the carrying value of these two
motel mortgage loans was reduced to $1,318,000. The borrower on one motel
mortgage loan is currently in bankruptcy; however, interest payments are
current and the Company believes that the underlying collateral is sufficient
to cover the loan's value if necessary. Interest income recorded on the motel
mortgages was $364,000 for 1997, $403,000 for 1996, and $340,000 for 1995.
(4) INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS
The investment in real estate investment trusts ("REIT") consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(In thousands)
<S> <C> <C> <S> <C>
Meridian VIII $12,506 12,506 - -
Other 4,012 4,012 934 1,001
------- ------ ----- -----
$16,518 16,518 934 1,001
======= ====== ===== =====
</TABLE>
On May 14, 1996, the Company and LNH completed the merger of LNH with
and into EastGroup-LNH Corporation, a wholly-owned subsidiary of the Company.
Under the terms of the merger, each LNH share was converted into the right to
receive .55065 EastGroup shares (.3671 pre-split). The Company issued 927,366 of
its shares as a result of the merger.
On June 19, 1996, the Company and Copley Properties, Inc. (Copley)
completed the merger of Copley with the Company. Under the terms of the merger,
each Copley share was converted into the right to receive 1.06002 EastGroup
shares (.70668 pre-split). The Company issued 3,238,343 of its shares as a
result of the merger.
(5) NOTES PAYABLE TO BANKS
The Company has a line of credit from a commercial bank in the amount
of $35,000,000 which is secured by the outstanding stock of two of the Company's
wholly-owned subsidiaries and by the Company's ownership interests in a
partnership. Borrowings under the credit line at December 31, 1997 were
35
<PAGE> 35
$6,589,000 and the interest rate was LIBOR plus 1.50% (7.49% at December 31,
1997). The maximum principal amount of the working capital line is $35,000,000
through March 31, 1998 and then will be $25,000,000 from April 1, 1998 through
September 30, 1998. Through March 31, 1998, the first $26,250,000 advanced
under the working capital line will bear interest at LIBOR plus 1.50% and any
advances in excess of $26,250,000 will bear interest at LIBOR plus 1.75%.
Effective April 1, 1998, all advances under the working capital line will bear
interest at LIBOR plus 1.50%. The line of credit expires September 30, 1998.
Total loan commitment fees of $75,000, $50,000 and $35,000 were paid in 1997,
1996 and 1995 for this line of credit.
At December 31, 1997, the Company had $35,181,000 outstanding under a
$65,000,000 acquisition line of credit from a commercial bank. The acquisition
line had an interest rate of LIBOR plus 1.50% at December 31, 1997. The line is
secured by nine properties of the Company with an aggregate carrying amount of
$95,386,000 at December 31, 1997. The maximum principal amount of the
acquisition line is $65,000,000 through March 31, 1998 and then will be
$50,000,000 from April 1, 1998 through September 30, 2000. Through March 31,
1998, the first $48,750,000 advanced under the acquisition line will bear
interest at LIBOR plus 1.50% and any advances in excess of $48,750,000 will
bear interest at LIBOR plus 1.75%. Effective April 1, 1998, all advances under
the acquisition line will bear interest at LIBOR plus 1.50%. The line of
credit expires September 30, 2000. Total loan commitment fees of $143,750,
$37,500 and $66,000 were paid in 1997, 1996 and 1995 for this line of credit.
Average bank borrowings were $11,155,000 in 1997 compared to
$11,572,000 in 1996, with average interest rates of 7.55% in 1997 compared to
7.3% in 1996.
(6) MORTGAGE NOTES PAYABLE
A summary of mortgage notes payable follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
INTERSTATE DISTRIBUTION CENTER #1 Warehouse mortgage, interest at
9.25%, principal and interest due $10,827 monthly, maturing June
1, 2009, secured by real estate
with a carrying amount of $2,660,000 at December 31, 1997 $ 814 866
INTERSTATE DISTRIBUTION CENTER #2 Warehouse mortgage, interest at
9.25%, principal and interest due $12,844 monthly, maturing June
1, 2009, secured by real estate
with a carrying amount of $3,079,000 at December 31, 1997 1,032 1,088
8150 LEESBURG PIKE OFFICE BUILDING mortgage, interest at 8.5%,
principal and interest due $52,304 monthly, maturing June 15,
2005, secured by real estate with a carrying amount of $12,890,000
at December 31, 1997 3,456 3,775
SUNBELT DISTRIBUTION CENTER mortgage, interest at 10%,
principal and interest due $39,958 monthly, repaid
August 1997 - 4,148
</TABLE>
36
<PAGE> 36
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
DEERWOOD DISTRIBUTION CENTER mortgage, interest at 8.375%, principal
and interest due $16,339 monthly, maturing July 1, 2003, secured
by real estate with a carrying amount of $2,715,000 at
December 31, 1997 1,699 1,754
DORAL CLUB APARTMENTS mortgage, interest at 8.625%, principal and
interest due $36,494 monthly, maturing October 31, 2003, secured
by real estate with a carrying amount of $5,861,000 at
December 31, 1997 4,230 4,300
NOBEL CENTER mortgage, interest at 7.5%, principal and
interest due $27,915 monthly, repaid January 1997 - 2,536
NORTH SHORE IMPROVEMENT BONDS, interest rates range from 6.3% to
7.75% and mature serially in various amounts through September 2,
2016, secured by land underlying Nobel Center with a carrying
amount of $2,725,000 at December 31, 1997 421 432
SUTTON HOUSE APARTMENTS mortgage, interest at 8%, principal and
interest due $45,257 monthly, maturing October 31, 2003, secured
by real estate with a carrying amount of $7,622,000 at
December 31, 1997 5,746 5,826
NORTHWEST POINT BUSINESS PARK mortgage, interest at 7.75%, principal
and interest due $32,857 monthly, maturing March 1, 2001, secured
by real estate with a carrying amount of $6,647,000
at December 31, 1997 4,096 4,170
56TH STREET COMMERCE PARK mortgage, interest at 8.875%, principal
and interest due $21,816 monthly, maturing August 1, 2004, secured
by real estate with a carrying amount of
$2,762,000 at December 31, 1997 2,212 2,274
EXCHANGE DISTRIBUTION CENTER mortgage, interest at 8.375%, principal
and interest due $21,498 monthly, maturing August 1, 2005, secured
by real estate with a carrying amount
of $3,054,000 at December 31, 1997 2,375 2,432
LAVISTA APARTMENTS mortgage, interest at 8.688%, principal and
interest due $48,667 monthly, maturing September 1, 2005, secured
by real estate with a carrying amount of $6,964,000 at
December 31, 1997 5,784 5,862
</TABLE>
37
<PAGE> 37
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
WESTPORT COMMERCE CENTER mortgage, interest at 8%, principal and
interest due $28,021 monthly, maturing August 1, 2005, secured by
real estate with a carrying amount of $4,618,000 at December 31, 1997 3,176 3,254
LAKEPOINTE BUSINESS PARK mortgage, interest at 8.125%, principal and
interest due $81,675 monthly, maturing October 1, 2005, secured by
real estate with a carrying amount of $9,731,000 at December 31, 1997 10,788 10,887
JETPORT mortgage, interest at 8.125%, principal
and interest due $33,769 monthly, maturing October 1, 2005,
secured by real estate with a carrying
amount of $4,629,000 at December 31, 1997 3,811 3,902
COLUMBIA PLACE mortgage, interest at 8.875%, principal and interest
due $93,292 monthly, maturing December 31, 2009, secured by real
estate with a carrying amount of $11,644,000
at December 31, 1997 9,788 10,046
DOMINGUEZ DISTRIBUTION CENTER mortgage, interest at 9%,
principal and interest due $46,156 monthly, repaid
January 1997 - 5,138
METRO BUSINESS PARK mortgage, interest at 9.25%, principal
and interest due $30,850 monthly, repaid February 1997 - 3,383
METRO BUSINESS PARK mortgage, interest at 8%, principal and interest
due $15,892 monthly, maturing April 1, 1998, secured by real
estate with a carrying amount of $5,135,000 at
December 31, 1997 1,677 1,731
UNIVERSITY BUSINESS CENTER mortgage, interest at 9.06%, principal
and interest due $85,841 monthly, maturing April 1, 2000, secured
by real estate with a carrying amount of
$15,508,000 at December 31, 1997 9,095 9,163
UNIVERSITY BUSINESS CENTER mortgage, interest at 9.37%, interest
only, repaid January 1997 - 8,250
UNIVERSITY BUSINESS CENTER mortgage, interest at 7.45%, principal
and interest due $74,235 monthly, maturing February 28, 2002, secured by
real estate with a carrying amount of $11,300,000 at December
31, 1997 8,955 -
WIEGMAN ASSOCIATES mortgage, interest at 8.75%, principal and
interest due $9,367 monthly, repaid October 1997 - 959
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
HUNTWOOD ASSOCIATES mortgage, interest at 7.99%, principal and
interest due $100,250 monthly, maturing August 22, 2006, secured
by real estate with a carrying amount of $18,223,000 at
December 31, 1997 12,785 12,959
WIEGMAN ASSOCIATES mortgage, interest at 7.99%, principal and
interest due $46,269 monthly, maturing August 22, 2006, secured by
real estate with a carrying amount of $8,971,000 at December
31, 1997 5,900 5,981
CHAMBERLAIN DISTRIBUTION CENTER mortgage, interest at 8.75%,
principal and interest due $21,376 monthly, maturing January 1, 2005,
secured by real estate with a carrying amount of $4,024,000 at
December 31, 1997. 2,501 -
EASTLAKE DISTRIBUTION CENTER mortgage, interest at 8.5%, principal
and interest due $57,115 monthly, maturing July 5, 2004, secured by real
estate with a carrying amount of $9,917,000 at
December 31, 1997 5,039 -
-------- -------
$105,380 115,116
======== =======
</TABLE>
Approximate principal payments due during the next five years are as
follows: 1998, $4,210,000; 1999, $2,794,000; 2000, $11,243,000; 2001,
$6,742,000; and 2002, $10,967,000.
(7) REVERSE REPURCHASE AGREEMENTS
The Company does not in the ordinary course of business take possession
of the securities which collateralize its reverse repurchase agreements (assets
purchased under agreements to resell). However, the Company has the right to
demand additional collateral or to request return of the invested funds at any
time the collateral value is less than the invested funds plus any accrued
earnings thereon. These transactions are conducted on a short-term basis with
financial institutions with which the Company has normal business
relationships. At December 31, 1997 and 1996, the Company did not hold reverse
repurchase agreements with any individual counterparty or group of
counterparties in excess of 10% of stockholders' equity.
(8) STOCKHOLDERS' EQUITY
In 1994, the Company adopted the 1994 Management Incentive Plan. The
Plan includes stock options (50% vested after one year and the other 50% after
two years) and an annual incentive award.
Stock option activity for the 1994 plan is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
(Number of shares) 1997 1996 1995
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 422,250 261,375 262,875
Granted 287,425 202,125 15,000
Exercised (37,692) (31,500) -
</TABLE>
39
<PAGE> 39
<TABLE>
<S> <C> <C> <C>
Expired (3,225) (9,750) (16,500)
------ ------ -------
Outstanding at end of year 668,758 422,250 261,375
======= ======= =======
Exercisable at end of year 282,633 220,125 126,938
Available for grant at end of year 34,205 44,896 38,625
Price range of options:
Outstanding $12.00 - $22.375 $12.00 - $17.92 $12.00 - $13.42
Exercised $12.00 - $14.92 $12.00 - $12.67 -
Exercisable $12.00 - $14.83 $12.00 - $12.67 $12.00 - $12.67
</TABLE>
The annual incentive award program began in 1995 and the Compensation
Committee determined awards based on actual funds from operations per share
("FFO") compared to goals set for the year. The 1997, 1996 and 1995 awards
approximated $307,000, $311,000 and $382,000, respectively, and were payable
two-thirds in cash and one-third in stock of the Company.
The Company has a Directors Stock Option Plan, as amended in 1994,
under which an aggregate of 150,000 shares of common stock were reserved for
issuance upon exercise of any options granted. Under the Directors plan,
each Non-Employee Director is granted an initial 7,500 options and 2,250
additional options on the date of any Annual Meeting at which the Director is
reelected to the Board.
Stock option activity for the Director plan is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
(Number of shares) 1997 1996 1995
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 76,500 65,250 76,500
Granted 11,250 11,250 11,250
Exercised (17,250) - (22,500)
---------- -------- --------
70,500 76,500 65,250
========== ======== ========
Exercisable at end of year 70,500 76,500 65,250
Available for grant at end of year 39,750 51,000 62,250
Price range of options:
Outstanding $10.67 - $19.375 $10.67 - $14.58 $10.67 - $12.67
Exercised $10.67 - $ 11.25 - $10.67
Exercisable $10.67 - $19.375 $10.67 - $14.58 $10.67 - $12.67
</TABLE>
In February 1997, the Company issued a total of 2,100,000 shares
under an existing shelf registration statement for net proceeds of $36,654,000.
On June 5, 1997, the Company's stockholders approved and the Company
subsequently completed the reorganization of the Trust into a Maryland
corporation. The purpose of the reorganization was to modernize EastGroup's
governance procedures and to provide EastGroup with a greater degree of
certainty and flexibility in planning and implementing corporate action by
adopting a form of organization used by many real estate investment trusts.
EastGroup will continue to qualify as a real estate investment trust for tax
purposes. Effective with the reorganization, the Company has the authority to
issue 100,000,000 shares consisting of 70,000,000 shares of common stock, $.0001
par value per share, and 30,000,000 shares of excess stock, $.0001 par value per
share. Effective June 5, 1997, all stock transactions reflect the new par value.
Stock transactions prior to the reorganization have not been restated to reflect
the new par value.
In October 1997, the Company completed an offering of 3,500,000 shares
of its common stock for net proceeds of approximately $72,555,000.
40
<PAGE> 40
During 1995, the Company adopted a dividend reinvestment plan, which
allows stockholders to reinvest cash distributions in new shares of the Company.
In accordance with SFAS No. 123, the following additional disclosures
are required related to options granted after January 1, 1995. The fair value
of each option grant is estimated on the grant date using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
1997, 1996 and 1995, respectively: risk-free interest rates of 6.09%, 6.66% and
6.10%; dividend yields of 7.49%, 8.60% and 9.50%; volatility factors of 13%,
12.4% and 14.5%, and expected option lives of 5 years for all years presented.
The Company applies APB No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option plans. Had compensation cost been determined based on fair
value at the grant dates for awards under the plan consistent with the method
prescribed by SFAS No. 123, the Company's net income and net income per basic
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Net income - as reported $20,779 12,509 7,711
Net income - pro forma 20,642 12,472 7,706
Net income per basic share - as reported 1.58 1.44 1.22
Net income per basic share - pro forma 1.57 1.44 1.22
Weighted average fair value of options
granted during year 1.10 .86 .61
</TABLE>
In December 1997, the Company adopted SFAS No. 128, "Earnings
Per Share," which requires companies to present basic EPS and diluted EPS,
instead of the formerly required primary and fully diluted EPS. Reconciliations
of the numerators and denominators in the basic and diluted EPS computations
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Basic EPS Computation
Numerator - net income $ 20,779 12,509 7,711
======== ====== =====
Denominator - weighted average
shares outstanding 13,176 8,677 6,338
====== ===== =====
Diluted EPS Computation
Numerator - net income $ 20,779 12,509 7,711
======== ====== =====
Denominator - weighted average
shares outstanding 13,176 8,677 6,338
Common stock options 162 72 24
-------- ------- -------
Total Shares 13,338 8,749 6,362
======== ======= =======
</TABLE>
(9) MERGERS
During 1996, the Company acquired the entities described below,
accounting for the entities using the purchase method of accounting. For
financial reporting purposes, the assets of the company acquired are assigned
new cost basis amounts based on the allocation of the purchase price of the
assets to the Company. In general, the purchase price to the Company consisted
of the new shares issued at the
41
<PAGE> 41
market price of the Company's shares and the previous investment the Company had
in LNH and Copley. The shares of LNH and Copley owned by the Company were
retired at the merger date. The operating results of LNH and Copley have been
included in the consolidated statements of income subsequent to the dates of
acquisition.
On May 14, 1996, the merger of LNH with EGP-LNH Corporation, a
wholly-owned subsidiary of the Company, was completed. Under the terms of the
merger, each LNH share was converted into the right to receive .55065 EastGroup
shares (.3671 pre-split). The Company issued 927,366 shares as a result of this
merger.
On June 19, 1996, Copley was merged into the Company. Under the terms
of the merger, each Copley share was converted into the right to receive 1.06002
EastGroup shares (.70668 pre-split). EastGroup issued 3,238,343 of its shares as
a result of this merger.
The increase in net assets at the acquisition dates, based on relative
fair values, resulting from the mergers was as follows (in thousands):
<TABLE>
<CAPTION>
LNH Copley
--- ------
<S> <C> <C>
Real estate properties $ 6,243 113,192
Investment in joint venture 4,298 -
Mortgage loans 5,614 880
Land 521 3,280
Investment in real estate investment trust 1,050 -
Cash 1,200 1,550
Accounts receivable and other assets 425 305
Mortgage notes payable - (59,681)
Minority interests (783) (1,740)
Accounts payable and other liabilities (713) (1,063)
-------- ------
$ 17,855 56,723
======== ======
<CAPTION>
The purchase price of the net assets acquired consisted of the following (in
thousands):
LNH Copley
--- ------
<S> <C> <C>
Shares of beneficial
interest (927,366 and 3,238,343 shares) $ 13,640 47,658
Cash in lieu of fractional
shares (369 and 390 shares) 5 6
Merger expenses 292 2,866
Prior investment in LNH and Copley 3,918 6,193
-------- ------
$ 17,855 56,723
======== ======
<CAPTION>
The following unaudited pro forma combined results of operations give effect to
the LNH and Copley mergers as if they had occurred at the beginning of the
fiscal year for each of the periods presented:
(In thousands, except per share amounts) 1996 1995
---- ----
<S> <C> <C>
Revenues $ 47,191 45,606
====== ======
Net income 12,796 10,363
====== ======
Net income per basic share 1.21 .99
====== ======
Shares used in computation 10,532 10,504
====== ======
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not necessarily indicative of the actual results that would have
occurred had the transaction been consummated at the
42
<PAGE> 42
beginning of 1996 and the beginning of 1995 or of future operations of the
combined companies under the ownership and management of the Company.
(10) QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
1997 1996
Quarter Ended Quarter Ended
--------------------------------------------------- --------------------------------------------------
Mar.31 June 30 Sept.30 Dec. 31 Mar.31 June 30 Sept. 30 Dec. 31
------------ ----------- ----------- ------------ ------------ ----------- ----------- ----------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $11,989 12,665 13,546 15,422 7,412 8,111 12,104 12,138
Expenses (9,014) (9,112) (9,941) (11,153) (6,236) (6,733) (9,569) (10,058)
------------ ----------- ----------- ------------ ------------ ----------- ----------- ----------
Income before gain (loss)
on investments 2,975 3,553 3,605 4,269 1,176 1,378 2,535 2,080
Gain (loss) on investments 112 (5) 6,300 (30) 1,353 656 152 3,179
------------ ----------- ----------- ------------ ------------ ----------- ----------- ----------
Net income $3,087 $3,548 $9,905 $4,239 $2,529 $2,034 $2,687 $5,259
============ =========== =========== ============ ============ =========== =========== ==========
BASIC PER SHARE DATA
Net income 0.26 0.28 0.78 0.27 0.40 0.28 0.26 0.50
============ =========== =========== ============ ============ =========== =========== ==========
Weighted average shares
outstanding 11,722 12,675 12,685 15,583 6,353 7,238 10,535 10,542
============ =========== =========== ============ ============ =========== =========== ==========
DILUTED PER SHARE DATA
Net income 0.26 0.28 0.77 0.27 0.39 0.28 0.25 0.49
============ =========== =========== ============ ============ =========== =========== ==========
Weighted average shares
outstanding 11,861 12,822 12,865 15,765 6,406 7,288 10,613 10,660
============ =========== =========== ============ ============ =========== =========== ==========
</TABLE>
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1997 and 1996.
FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1997 1996
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 1,298 1,298 438 438
Investment in real estate investment
trusts 16,518 16,518 934 1,001
Mortgage loans 10,852 11,937 12,503 13,824
Financial Liabilities
Mortgage notes payable 105,380 110,181 115,116 118,440
Notes payable to banks 41,770 41,770 13,962 13,962
</TABLE>
Carrying amounts shown in the table are included in the balance sheet under
the indicated captions.
The following methods and assumptions were used to estimate fair value of each
class of financial instruments:
43
<PAGE> 43
Cash and Cash Equivalents: The carrying amounts approximate fair value
because of the short maturity of those instruments.
Mortgage Loans: The fair value of performing mortgage loans is either
estimated using discounted cash flows at current interest rates for
loans with similar terms and maturities or based on the estimated value
of the underlying collateral adjusted for the borrower's payment
history and financial strength. The fair value for nonperforming loans
is based on underlying collateral value.
Investment in Real Estate Investment Trusts: The fair value of this
equity investment is based on quoted market prices.
Mortgage Notes Payable: The fair value of the Company's mortgage notes
payable is estimated based on the quoted market prices for similar
issues or by discounting expected cash flows at the rates currently
offered to the Company for debt of the same remaining maturities, as
advised by the Company's bankers.
Notes Payable to Banks: The carrying amounts approximate fair value
because of the variable rates of interest on the debt.
(12) SUBSEQUENT EVENTS
As of March 16, 1998, the Company had entered into contracts to
purchase three additional industrial properties aggregating approximately
288,000 square feet of leasable space, for a total purchase price of
approximately $10,850,000. The Company has also entered into contracts to
purchase two parcels of land for future development, for a total purchase price
of approximately $1,893,000. The following properties were purchased subsequent
to December 31, 1997:
<TABLE>
<CAPTION>
PROPERTY LOCATION CLOSING DATE SIZE PURCHASE PRICE
-------- -------- ------------ ---- --------------
(Square Feet) (In thousands)
<S> <C> <C> <C> <C>
Estrella East Phoenix, Arizona 2-18-98 174,450 $5,260
Stemmons Circle Dallas, Texas 3-03-98 98,959 2,373
51st Avenue North Phoenix, Arizona 3-09-98 79,149 2,315
------
$9,948
======
</TABLE>
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 contracts to sell the three apartment complexes for
approximately $25,460,000.
On February 23, 1998, EastGroup-Meridian, Inc., a wholly-owned
subsidiary of EastGroup Properties, Inc. commenced a tender offer (the Offer)
for all issued and outstanding Preferred Shares of Meridian Point Realty Trust
VIII Co. ("Meridian VIII") not currently held by EastGroup for $10.00 per share
in cash, and for all issued and outstanding Common Shares of Meridian VIII for
$8.50 per share in cash. The offer was made pursuant to an Agreement and Plan of
Merger among EastGroup, EastGroup-Meridian, Inc. and Meridian VIII dated
February 18, 1998. Following completion of the Offer, EastGroup and Meridian
VIII will engage in a second-step merger in which all remaining Preferred Shares
of Meridian VIII (excluding those held by EastGroup) will be converted into
$10.00 per share in cash, and all remaining Common Shares of Meridian VIII
(excluding those held by EastGroup) will be converted into $8.50 per share in
cash. The merger will be accounted for using the purchase method of accounting.
EastGroup's obligation to complete the Offer is subject to certain
conditions, which
44
<PAGE> 44
EastGroup may waive at its discretion, including that there shall have been
validly tendered and not withdrawn prior to expiration of the Offer at least
3,186,354 Preferred Shares and/or Common Shares of Meridian VIII. This figure
reflects the number of Preferred Shares and/or Common Shares which, when
combined with EastGroup's current ownership of 1,469,556 Preferred Shares, would
result in EastGroup owning at least two-thirds of the voting stock of Meridian
VIII.
Meridian VIII is an equity REIT that owns 25 light industrial
properties totaling approximately 2.6 million square feet with locations in
Arizona, Texas, Tennessee, California, Florida and Michigan.
(13) RELATED PARTY TRANSACTIONS
EastGroup and Parkway Properties, Inc. ("Parkway") shared the same
office space at One Jackson Place in Jackson, Mississippi, until April 1997 when
Parkway moved to its own space. EastGroup and Parkway shared the rent with
respect to such space based upon the relative number of employees of each using
the space. EastGroup and Parkway currently share the services and expenses of
the Company's Chairman of the Board and his administrative assistant.
45
<PAGE> 45
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
THE DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
Under date of March 16, 1998, we reported on the consolidated balance sheets of
EastGroup Properties, Inc., and subsidiaries, as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, which are included in the 1997 Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial statement
schedules as listed in Item 14 (a)(2) of Form 10-K. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Jackson, Mississippi KPMG Peat Marwick LLP
March 16, 1998
46
<PAGE> 46
<TABLE>
<CAPTION>
SCHEDULE III
REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (IN THOUSANDS)
Initial Cost
to the Company
-----------------------------------
Buildings
Description Encumbrances Land and Improvements
- ----------- ------------ ---- ----------------
<S> <C> <C> <C>
Real estate properties (c) and (d):
Industrial:
Nobel Center - California 421 542 -
Exchange Warehouses -Texas - 536 1,178
Interstate Warehouses - Texas 1,846 1,757 4,941
Venture Warehouses -Texas - 1,452 3,762
Rampart-Colorado - 1,023 3,861
Sunbelt-Florida - 1,034 5,056
La Quinta-Florida - 191 575
Deerwood-Florida 1,699 1,147 1,799
56th Street - Florida 2,212 683 2,880
JetPort Commerce Park - Florida 3,811 857 3,635
Lake Pointe - Florida 10,788 3,442 6,450
Exchange Dist. - Florida 2,375 603 2,414
Phillips - Florida - 1,375 2,961
Northwest Point - Texas (h) 4,732 1,243 5,640
Westport - Florida 3,176 980 3,800
Lakeside Distribution - Oklahoma - 120 1,154
Linpro Distribution - Florida - 613 2,243
Broadway Industrial Center - Arizona - 837 3,349
Dominguez Distribution - California - 2,006 8,025
Huntwood Associates - California 12,785 3,842 15,368
Kingsview Industrial - California - 643 2,573
Metro Business Park - Arizona 1,677 1,927 7,708
Sample I-95 - Florida - 1,565 6,262
University Business Center - California 18,050 5,517 22,067
Wiegman Associates - California 5,900 2,197 8,788
Braniff Park West - Oklahoma (g) 2,156 1,066 4,641
Walnut Business Park - California (g) 2,930 2,885 5,274
Interchange Business Park - Mississippi (h) 402 343 5,007
Palm River I - Florida - 540 2,131
West Loop II - Texas (h) 282 440 2,511
Lockwood Distribution Center - Texas (h) 588 749 5,444
Lockhart Distribution Center - Texas (h) 342 - 3,489
Cypress Creek - Florida (h) 257 - 2,465
Senator Street - Tennessee (h) 259 540 2,187
Chamberlain - Arizona (h) 2,886 506 3,564
35th Avenue - Arizona (h) 265 418 2,381
Washington - California (h) 620 1,636 4,900
San Clemente - California (h) 276 893 2,004
Ellis Dist. Center - Florida (g) 2,960 540 7,513
Westside Dist. Center - Florida (g) 4,720 1,170 11,726
Elmwood Business Park - Louisiana (g) 3,368 2,861 6,337
Riverbend Business Park - Louisiana (g) 7,376 2,592 17,623
Butterfield Trail Industrial - Texas (g) 7,295 - 19,842
Eastlake Distribution Center - California (h) 5,988 3,046 6,888
109th Street - Texas (h) 94 110 867
Benjamin I - Florida - 422 1,966
------------------- ------------- -------------
112,536 56,889 245,249
------------------- ------------- -------------
</TABLE>
47
<PAGE> 47
<TABLE>
<CAPTION>
SCHEDULE III
(CONTINUED)
REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (IN THOUSANDS)
Initial Cost
to the Company
-------------------------------
Buildings
Description Encumbrances Land and Improvements
- ----------- ------------ ---- ----------------
<S> <C> <C> <C>
Industrial Development:
Chancellor Distribution - Florida - 291 1,411
Rampart II - Colorado - 230 2,201
Rampart III - Colorado - 1,035
John Young Parkway - Florida - 471 48
Walden - Florida - 802 1,547
Benjamin II - Florida - 422 768
Palm River II - Florida - 650 1,286
Sunbelt II - Florida - 249 888
-----------------------------------------------------------------
- 4,150 8,149
-----------------------------------------------------------------
Office Buildings:
8150 Leesburg Pike - Virginia (h) 4,689 2,208 14,068
Columbia Place - Maryland 9,788 2,402 9,610
Los Angeles Corporate Center - California - 1,363 5,453
-----------------------------------------------------------------
14,477 5,973 29,131
-----------------------------------------------------------------
Apartments:
LaVista-Georgia 5,784 1,526 2,886
Grande Pointe - Alabama (g) 2,182 615 5,499
-----------------------------------------------------------------
7,966 2,141 8,385
-----------------------------------------------------------------
Operating Properties Held For Sale:
Doral Club-Texas 4,230 670 5,976
Sutton House - Texas 5,746 471 8,098
Hampton House - Mississippi (g) 2,195 575 5,706
-----------------------------------------------------------------
12,171 1,716 19,780
-----------------------------------------------------------------
Land Held for Sale (e):
Jefferson Parish-Louisiana - 3,050 -
Silvermill - Texas - 27 -
-----------------------------------------------------------------
- 3,077 0
-----------------------------------------------------------------
Total real estate owned 147,150 73,946 310,694
=================================================================
</TABLE>
Notes:
49
<PAGE> 48
SCHEDULE III
(CONTINUED)
<TABLE>
<CAPTION>
COSTS CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO ACQUISITION CARRIED AT CLOSE OF PERIOD
- ----------------------------- -------------------------------------------------
BUILDINGS ACCUMULATED
CAPITALIZED AND DEPRECIATION YEAR YEAR
COSTS OTHER LAND IMPROVEMENTS TOTAL DEC. 31, 1997 ACQUIRED CONSTRUCTED
----- ----- ---- ------------ ----- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
3,710 - 542 3,710 4,252 1,527 1987 1986
232 - 536 1,410 1,946 401 1988 1979
675 - 1,757 5,616 7,373 1,634 1988 1978
718 - 1,452 4,480 5,932 1,255 1988 1979
289 - 1,023 4,150 5,173 1,058 1988 1987
653 - 1,034 5,709 6,743 1,298 1989 1987
60 - 191 635 826 177 1989 1974
1,151 - 1,147 2,950 4,097 490 1989 1978
534 - 683 3,414 4,097 452 1993 1981/86/97
873 - 857 4,508 5,365 736 1993/94/95 1974/79/85
1,231 - 3,442 7,681 11,123 1,392 1993 1986/87
417 - 603 2,831 3,434 380 1994 1975
1,625 - 1,375 4,586 5,961 503 1994 1984/95
309 - 1,243 5,949 7,192 545 1994 1984/85
199 - 980 3,999 4,979 361 1994 1983/87
108 - 120 1,262 1,382 104 1994 1986
46 2 615 2,289 2,904 124 1996 1986
18 - 837 3,367 4,204 237 1996 1971
- - 2,006 8,025 10,031 346 1996 1977
- - 3,842 15,368 19,210 987 1996 1988
- - 643 2,573 3,216 133 1996 1980
436 - 1,927 8,144 10,071 381 1996 1977/79
133 - 1,565 6,395 7,960 486 1996 1990
208 3 5,520 22,275 27,795 987 1996 1987/88
- - 2,197 8,788 10,985 397 1996 1986/87
382 - 1,066 5,023 6,089 243 1996 1974
42 - 2,885 5,316 8,201 257 1996 1966/90
21 - 343 5,028 5,371 73 1997 1981
47 - 540 2,178 2,718 37 1997 1990
42 - 440 2,553 2,993 43 1997 1980
47 - 749 5,491 6,240 92 1997 1968/69
137 - - 3,626 3,626 50 1997 1986
260 - - 2,725 2,725 42 1997 1986
3 - 540 2,190 2,730 25 1997 1982
- - 506 3,564 4,070 46 1997 1994
- - 418 2,381 2,799 25 1997 1967
- - 1,636 4,900 6,536 50 1997 1996/97
- - 893 2,004 2,897 18 1997 1978
29 - 540 7,542 8,082 58 1997 1977
- - 1,170 11,726 12,896 99 1997 1984
30 - 2,861 6,367 9,228 96 1997 1979
- - 2,592 17,623 20,215 217 1997 1984
- - - 19,842 19,842 62 1997 1995
- - 3,046 6,888 9,934 17 1997 1989
- - 110 867 977 - 1997 1970
- - 422 1,966 2,388 8 1997 1996
- --------------------------- -----------------------------------------------------------------
14,665 5 56,894 259,914 316,808 17,949
- --------------------------- -----------------------------------------------------------------
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
SCHEDULE III
(CONTINUED)
COSTS CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO ACQUISITION CARRIED AT CLOSE OF PERIOD
- ------------------------------------ --------------------------------------------------
BUILDINGS ACCUMULATED
CAPITALIZED AND DEPRECIATION YEAR YEAR
COSTS OTHER LAND IMPROVEMENTS TOTAL DEC. 31, 1997 ACQUIRED CONSTRUCTED
----- ----- ---- ------------ ----- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
132 - 291 1,543 1,834 33 1996/97 1996/97
482 - 230 2,683 2,913 43 1996/97 1996/97
- 4 1,039 - 1,039 - 1997/98 1997/98
- 471 48 519 - 1997/98 1997/98
382 802 1,929 2,731 - 1997/98 1997/98
453 422 1,221 1,643 - 1997/98 1997/98
79 650 1,365 2,015 - 1997/98 1997/98
249 888 1,137 - 1997/98 1997/98
- --------------------------------------------------------------------------------------------------------
1,528 4 4,154 9,677 13,831 76
- --------------------------------------------------------------------------------------------------------
-
4,572 - 2,208 18,640 20,848 7,958 1975/89 1974/94
- - 2,402 9,610 12,012 368 1996 1988
77 - 1,363 5,530 6,893 243 1996 1986
- --------------------------------------------------------------------------------------------------------
4,649 - 5,973 33,780 39,753 8,569
- --------------------------------------------------------------------------------------------------------
-
4,304 - 1,526 7,190 8,716 1,752 1991 1968/96
548 2 766 5,898 6,664 749 1994 1983
- --------------------------------------------------------------------------------------------------------
4,852 2 2,292 13,088 15,380 2,501
- --------------------------------------------------------------------------------------------------------
611 - 670 6,587 7,257 1,397 1992 1985
183 - 471 8,281 8,752 1,130 1993 1985
358 - 575 6,064 6,639 690 1994 1990
- --------------------------------------------------------------------------------------------------------
1,152 - 1,716 20,932 22,648 3,217
- --------------------------------------------------------------------------------------------------------
-
49 (2,541) (f) 558 - 558 - 1978 n/a
- - 27 - 27 - 1996 n/a
- --------------------------------------------------------------------------------------------------------
49 (2,541) 585 - 585 -
- --------------------------------------------------------------------------------------------------------
-
26,895 (2,530) 71,614 337,391 409,005 32,312
=========================================================================================================
(a)(b) (a) (continued)
</TABLE>
50
<PAGE> 50
(a) Changes in Real Estate Properties follow:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 280,117 156,392 156,578
Real estate properties acquired - LNH merger -- 6,243
Land acquired in LNH merger -- 521
Real estate properties acquired - Copley merger -- 113,192 --
Land acquired in Copley merger -- 3,280 --
Improvements 19,341 7,469 4,384
Deed in lieu of foreclosure -- -- 1,227
Purchase of real estate properties 124,149 13,865 806
Write-down of real estate properties -- -- (136)
Carrying amount of investments sold (14,351) (20,845) (6,467)
Write-off of depreciated assets (251) -- --
========= ======= =======
Balance at end of year (1) $ 409,005 280,117 156,392
========= ======= =======
<FN>
(1) Includes 25% minority interest in JetPort Commerce Park, 56th Street
Commerce Park, and Westport Commerce Center and 20% minority interest
in University Business Center totaling $8,947,000 at December 31, 1997.
Includes 25% minority interest in JetPort Commerce Park, 56th Street
Commerce Park and WestPort Commerce Park, 20% minority interest in
University Business Center and 22.22% minority interest in Liberty
Corners Shopping Center, totalling $9,576,000 at December 31, 1996.
Includes 25% minority interest in JetPort Commerce Park, 56th Street
Commerce Park, Exchange Distribution Center, JetPort 516 Commerce Park,
JetPort 515 Commerce Park and Westport Commerce Center of $4,054,000
in 1995.
</TABLE>
Changes in the accumulated depreciation on real estate properties follow:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 23,562 19,206 15,888
Depreciation expense 9,691 7,266 5,235
Accumulated depreciation on assets sold (859) (2,910) (1,917)
Write-off of fully depreciated assets (82) -- --
-------- ------ ------
Balance at end of year $ 32,312 23,562 19,206
======== ====== ======
</TABLE>
(b) The aggregate cost for federal income tax purposes is approximately
$335,704,000. The federal income tax return for the year ended
December 31, 1997 has not been filed and, accordingly, the income tax
basis of real estate properties as of December 31, 1997 is based on
preliminary data.
(c) Reference is made to impairment losses on real estate investments in
the notes to consolidated financial statements.
(d) The Company computes depreciation using the straight-line method over
the estimated useful lives of the buildings (25 to 40 years) and other
improvements (3 to 10 years).
51
<PAGE> 51
(e) The investment is not producing income to the Company as of December
31, 1997.
(f) Represents a write-down of $2,496,000 and income received but deferred
of $45,000.
(g) The acquisition line of credit is secured by Hampton House Apartments,
Grande Pointe Apartments, Walnut Business Park, Braniff Park West,
Butterfield Trail Industrial, Elmwood and Riverbend Business Parks,
Ellis Distribution Center, and Westside Distribution Center. The
outstanding acquisition line of $35,181,000 at December 31, 1997 was
allocated to encumbrances for these respective properties based on
carrying value at December 31, 1997.
(h) The line of credit is secured by the outstanding stock of the
Company's wholly-owned subsidiary, EastGroup Virginia, Inc., which
owns 8150 Leesburg Pike Office Building; partnership interests in
EastGroup Houston Partners, Ltd. which owns the Lockwood Distribution
Center and Northwest Point Distribution Center; EastGroup Properties,
LP which owns West Loop II Distribution, Interchange D, Lockhart
Distribution Center, Cypress Creek Business Park, Senator Street
Distribution Center, Chamberlain Distribution Center, 35th Avenue,
Washington Distribution Center, San Clemente Distribution Center,
Interchange B, Eastlake Distribution Industrial Center, and 109th
Street. The outstanding line of credit of $6,589,000 at December 31,
1997 was allocated to encumbrances for these respective properties
based on carrying value at December 31, 1997.
52
<PAGE> 52
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Interest Final Periodic
Number of Loans Rate Maturity Date Payment Terms
--------------- ---- ------------- -------------
<S> <C> <C> <C> <C>
First mortgage loans (c):
MOTELS:
Jacksonville, Florida 1 8.5% 4/00 P&I monthly
Nashville, Tennessee 1 10% 7/98 Interest monthly
Gainesville, Florida 1 10% 1/02 P&I monthly
(effective 2-27-97)
INDUSTRIAL:
Tampa, Florida 1 prime + .125% 10/01 Interest monthly
Tampa, Florida 1 8.5% 4/98 Interest monthly
APARTMENTS:
Country Club - Alabama 1 8.5%-9%(d) 12/99 (d)
OFFICE BUILDINGS:
Dublin, Ohio 1 10.0% 9/99 P&I monthly
Columbia, Maryland 1 9.56% 2/00 P&I annually
UNDEVELOPED LAND:
Hickory Creek, Houston, Texas 1 Prime 9/99 (f)
Baypointe, Houston, Texas 1 9.5% 4/99 P&I semi-annually
OTHER LOANS 2 8.5% 3/07-1/08 P&I monthly
----
Total first mortgage loans 12
====
<CAPTION>
Principal
Amount of Loans
Subject to
Face Amount Carrying to Delinquent
of Mortgages Amount of Principal
Dec. 31, 1997 Mortgages or Interest(e)
------------- --------- ---------------
First mortgage loans (c):
MOTELS:
Jacksonville, Florida $ 779 395 -
Nashville, Tennessee 135 135 -
Gainesville, Florida 1,571 1,183 -
INDUSTRIAL:
Tampa, Florida 111 111 -
Tampa, Florida 1,575 1,575 -
APARTMENTS:
Country Club - Alabama 4,245 2,836(d) -
OFFICE BUILDINGS:
Dublin, Ohio 39 39 -
Columbia, Maryland 141 141 -
UNDEVELOPED LAND:
Hickory Creek, Houston, Texas 3,067 2,669 -
Baypointe, Houston, Texas 1,985 1,713 -
OTHER LOANS 55 55 -
------- ------- ----
Total first mortgage loans $13,703 10,852(a)(b) -
======= ====== ===
</TABLE>
53
<PAGE> 53
MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
Notes:
(a) Changes in mortgage loans follow:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 12,503 6,008 8,817
Loans to facilitate the sale of property, net
of deferred gains -- -- 150
Advances on mortgage notes receivable 1,575 121 --
Deed in lieu of foreclosure -- -- (1,009)
Payments (3,528) (338) (2,088)
Amortization of discount on loans, net 618 418 138
Write-down of mortgage notes receivable (475) (200) --
Deferred gains 159 -- --
Mortgage notes receivable from LNH merger -- 5,614 --
Mortgage notes receivable from Copley merger -- 880 --
-------- ------ -----
Balance at end of year $ 10,852 12,503 6,008
======== ====== =====
</TABLE>
(b) The aggregate cost for federal income tax purposes is approximately
$12,276,000. The federal income tax return for the year ended December
31, 1997 has not been filed and, accordingly, the income tax basis of
mortgage loans as of December 31, 1997 is based on preliminary data.
(c) Reference is made to allowance for possible losses on real estate
investments in the notes to consolidated financial statements.
(d) Effective January 1, 1994, this note was modified. The interest rate
decreased from 9% to 8.50% beginning January 1, 1994, increased to
8.75% as of January 1, 1995 and increased to 9% as of January 1, 1996.
The past due interest and land rent of $70,000 was added to the
outstanding face value of the mortgage balance, increasing it to
$4,245,000. The maturity of the loan was extended from August 28, 1996
to December 31, 1999. Prior to this modification, the stated rate on
the note was 9%. The carrying amount of this note is net of the
deferred gain of $1,127,000 and interest valuation of $282,000. The
deferred gain is recognized by the installment method.
(e) Interest or principal in arrears for three months or less is
disregarded in computing principal amount of loans subject to
delinquent principal or interest.
(f) Payments on this note are received quarterly. They include a fixed
principal amount as scheduled in the note document and interest that
has accrued since the last payment.
54
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
EASTGROUP PROPERTIES, INC.
By: /s/ David H. Hoster II
--------------------------------
David H. Hoster II, Chief Executive
Officer, President & Director
March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
* *
- ------------------------------------ --------------------------------------
H. C. Bailey, Jr., Director Leland R. Speed, Chairman of the Board
March 18, 1998 (Principal Executive Officer)
March 18, 1998
* *
- ------------------------------------ --------------------------------------
David M. Osnos, Director Alexander G. Anagnos, Director
March 18, 1998 March 18, 1998
* /s/ Diane W. Hayman
- ------------------------------------ --------------------------------------
John N. Palmer, Director Diane W. Hayman, Vice President &
March 18, 1998 Controller
(Principal Accounting Officer)
March 20, 1998
* /s/ N. Keith McKey
- ------------------------------------ --------------------------------------
Harold B. Judell, Director N. Keith McKey, Executive Vice-President,
March 18, 1998 Chief Financial Officer and Secretary
(Principal Financial Officer)
March 20, 1998
/s/ N. Keith McKey
- ------------------------------------------------
* By N. Keith McKey, Attorney in fact
</TABLE>
55
<PAGE> 55
EXHIBIT INDEX
-------------
The following exhibits are included in this Form 10-k or are incorporated by
reference as noted in the following table:
(10) Form 10-K Exhibits:
(c) Articles of Incorporation (incorporated by reference to
Appendix B to the Registrant's Proxy Statement dated
April 24, 1997).
(d) Bylaws of the Registrant (incorporated by reference to
Appendix C to the Registrant's Proxy Statement dated
April 24, 1997).
(10) Material Contracts:
(a) EastGroup Properties 1994 Management Incentive Plan, As
Amended (incorporated by reference to Appendix D of the
Registrant's Registration Statement on Form S-4 (No.
333-01815).*
(b) EastGroup Properties 1991 Directors Stock Option Plan, As
Amended (incorporated by reference to Exhibit B of the
Registrant's proxy statement dated April 26, 1994).*
(c) Form of Change in Control Agreement that Registrant has
entered into with certain executive officers (Leland R.
Speed, David H. Hoster II and N. Keith McKey)(incorporated
by reference to Exhibit 10(e) to the Registrant's 1996
Annual Report on Form 10-K).
(d) Form of Change in Control Agreement that Registrant has
entered into with certain executive officers (Diane W.
Hayman, Marshall A. Loeb, Jann W. Puckett and Stewart R.
Speed) (filed herewith).
(e) Agreement and Plan of Merger dated February 18, 1998 among
the Registrant, EastGroup-Meridian, Inc. and Meridian
Point Realty Trust VIII Co.(incorporated by reference to
Exhibit 10 (a) to the Registrant's Current Report on Form
8-K dated March 13, 1998).
(f) Purchase Agreement for Jacksonville and New Orleans
Properties (incorporated by reference to Exhibit 10(a) to
the Registrant's Current Report on Form 8-K dated
September 24, 1997).
(21) Subsidiaries of Registrant (filed herewith).
56
<PAGE> 56
(23) Consent of KPMG Peat Marwick LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(27) Financial Data Schedule (filed herewith).
(28) Agreement of Registrant to furnish the Commission with copies
of instruments defining the rights of holders of long-term
debt (incorporated by reference to Exhibit 28(e) of the
Registrant's 1986 Annual Report on Form 10-K).
(b) (1) 8K - Filed October 16, 1997 - Reporting the completion of an
offering of 3,500,000 shares of common stock for net proceeds
of $72,555,000.
*Indicates management or compensatory agreement.
57
<PAGE> 1
Exhibit (21)
PART IV
ITEM. 25 LIST OF SUBSIDIARIES
100% Owned Subsidiaries
EastGroup California, Inc.
EastGroup Florida, Inc.
EastGroup Houston, Inc.
EastGroup Jackson, Inc.
EastGroup Jacksonville, Inc.
EastGroup Properties General Partners, Inc.
EastGroup Properties Holdings, Inc.
EastGroup Realty Managers, Inc.
EastGroup San Antonio, Inc.
EastGroup Southbay, LLC
EastGroup Sunbelt, Inc.
EastGroup Tampa, Inc.
EastGroup Texas, Inc.
EastGroup Virginia, Inc.
EastGroup Alabama, Inc.
CPI Holdings, Inc.
EastGroup-LNH Corp.
-LNH Florida, Inc.
-LNH KC, Inc.
-LNH RI, Inc.
Partnerships, with Partners indented
EGP Houston Partners Ltd.
99% EastGroup Properties, Inc.
1% EastGroup Houston, Inc.
EastGroup Properties, L.P.
99% EastGroup Properties Holdings, Inc.
1% EastGroup Properties General Partners, Inc.
EGP San Antonio Partners, Ltd.
99% EastGroup Properties, Inc.
1% EastGroup San Antonio, Inc.
EGP Texas Partners Ltd.
99% EastGroup Properties, Inc.
1% EastGroup Texas, Inc.
M.O.R. XXXVI Associates Limited
50% EastGroup Properties, Inc.
50% CPI Holdings, Inc.
IBG Wiegman Road Associates
80% EastGroup Properties, Inc.
20% JCB Limited
Sample I-95 Associates
99% EastGroup Properties, Inc.
1% CPI Holdings, Inc.
IBG Huntwood Associates
99% EastGroup Properties, Inc.
1% CPI Holdings, Inc.
58
<PAGE> 1
Exhibit (23)
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
EastGroup Properties, Inc.
We consent to incorporation by reference in the registration statement (No.
333-29193) on Form S-3 and the registration statement (No. 33-60909) on Form
S-8 of EastGroup Properties, Inc. of our reports dated March 16, 1998, relating
to the consolidated balance sheets of EastGroup Properties, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997, and all related
schedules, which reports appear in the December 31, 1997 Annual Report on Form
10-K of EastGroup Properties, Inc.
KMPG Peat Markwick LLP
Jackson, Mississippi
March 18, 1998
59
<PAGE> 1
Exhibit (24)
EASTGROUP PROPERTIES, INC.
POWER OF ATTORNEY
The undersigned Director of EastGroup Properties, Inc., a State of
Maryland real estate investment trust, hereby constitutes and appoints N. Keith
McKey as the true and lawful Attorney-in-fact and Agent of the undersigned to
sign on behalf of the undersigned: (a) the Annual Report of the Company on Form
10-K (or such other form as may be required) for the year ended December 31,
1997 to be filed with the Securities and Exchange Commission ("SEC"); and (b)
any and all amendments to such Report as may be required to be filed with the
SEC.
/s/ Alexander G. Anagnos
Alexander G. Anagnos
Director
March 18, 1998
60
<PAGE> 2
Exhibit (24)
EASTGROUP PROPERTIES, INC.
POWER OF ATTORNEY
The undersigned Director of EastGroup Properties, Inc., a State of
Maryland real estate investment trust, hereby constitutes and appoints N. Keith
McKey as the true and lawful Attorney-in-fact and Agent of the undersigned to
sign on behalf of the undersigned: (a) the Annual Report of the Company on Form
10-K (or such other form as may be required) for the year ended December 31,
1997 to be filed with the Securities and Exchange Commission ("SEC"); and (b)
any and all amendments to such Report as may be required to be filed with the
SEC.
/s/ H.C. Bailey, Jr.
H.C. Bailey, Jr.
Director
March 18, 1998
61
<PAGE> 3
Exhibit (24)
EASTGROUP PROPERTIES, INC.
POWER OF ATTORNEY
The undersigned Director of EastGroup Properties, Inc., a State of
Maryland real estate investment trust, hereby constitutes and appoints N. Keith
McKey as the true and lawful Attorney-in-fact and Agent of the undersigned to
sign on behalf of the undersigned: (a) the Annual Report of the Company on Form
10-K (or such other form as may be required) for the year ended December 31,
1997 to be filed with the Securities and Exchange Commission ("SEC"); and (b)
any and all amendments to such Report as may be required to be filed with the
SEC.
/s/ Harold B. Judell
Harold B. Judell
Director
March 18, 1998
62
<PAGE> 4
Exhibit (24)
EASTGROUP PROPERTIES, INC.
POWER OF ATTORNEY
The undersigned Director of EastGroup Properties, Inc., a State of
Maryland real estate investment trust, hereby constitutes and appoints N. Keith
McKey as the true and lawful Attorney-in-fact and Agent of the undersigned to
sign on behalf of the undersigned: (a) the Annual Report of the Company on Form
10-K (or such other form as may be required) for the year ended December 31,
1997 to be filed with the Securities and Exchange Commission ("SEC"); and (b)
any and all amendments to such Report as may be required to be filed with the
SEC.
/s/ David M. Osnos
David M. Osnos
Director
March 18, 1998
63
<PAGE> 5
Exhibit (24)
EASTGROUP PROPERTIES, INC.
POWER OF ATTORNEY
The undersigned Director of EastGroup Properties, Inc., a State of
Maryland real estate investment trust, hereby constitutes and appoints N. Keith
McKey as the true and lawful Attorney-in-fact and Agent of the undersigned to
sign on behalf of the undersigned: (a) the Annual Report of the Company on Form
10-K (or such other form as may be required) for the year ended December 31,
1997 to be filed with the Securities and Exchange Commission ("SEC"); and (b)
any and all amendments to such Report as may be required to be filed with the
SEC.
/s/ John N. Palmer
John N. Palmer
Director
March 18, 1998
64
<PAGE> 6
Exhibit (24)
EASTGROUP PROPERTIES, INC.
POWER OF ATTORNEY
The undersigned Director of EastGroup Properties, Inc., a State of
Maryland real estate investment trust, hereby constitutes and appoints N. Keith
McKey as the true and lawful Attorney-in-fact and Agent of the undersigned to
sign on behalf of the undersigned: (a) the Annual Report of the Company on Form
10-K (or such other form as may be required) for the year ended December 31,
1997 to be filed with the Securities and Exchange Commission ("SEC"); and (b)
any and all amendments to such Report as may be required to be filed with the
SEC.
/s/ Leland R. Speed
Leland R. Speed
Chairman of the Board
March 18, 1998
65
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<NAME> EASTGROUP PROPERTIES, INC.
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0
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