FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER 1-7094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 ONE JACKSON PLACE
188 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (601) 354-3555
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES (x) NO ( )
The number of shares of common stock, $.0001 par value, outstanding as
of November 6, 2000, was 15,657,017.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
PART I. FINANCIAL INFORMATION Pages
<S> <C> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated balance sheets, September 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated statements of income for the three and nine
months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated statement of changes in stockholders' equity
for the nine months ended September 30, 2000 (unaudited) 5
Consolidated statements of cash flows for the nine months
ended September 30, 2000 and 1999 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
Authorized signatures 20
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
September 30, 2000 December 31, 1999
------------------------- ---------------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate properties:
Industrial $ 636,377 580,598
Industrial development 27,364 35,480
Other 6,923 6,919
------------------------- ---------------------
670,664 622,997
Less accumulated depreciation (62,520) (46,829)
------------------------- ---------------------
608,144 576,168
------------------------- ---------------------
Real estate held for sale 14,521 18,051
Less accumulated depreciation (4,754) (4,750)
------------------------- ---------------------
9,767 13,301
------------------------- ---------------------
Mortgage loans 10,191 8,706
Investment in real estate investment trusts 13,419 15,708
Cash 3,411 2,657
Other assets 19,069 15,611
------------------------- ---------------------
TOTAL ASSETS $ 664,001 632,151
========================= =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 148,915 148,665
Notes payable to banks 126,499 95,000
Accounts payable & accrued expenses 14,067 12,170
Other liabilities 4,308 4,664
------------------------- ---------------------
293,789 260,499
------------------------- ---------------------
Minority interest in joint ventures 1,670 1,690
Minority interest in operating partnership - 650
------------------------- ---------------------
1,670 2,340
------------------------- ---------------------
STOCKHOLDERS' EQUITY
Series A 9.00% Cumulative Redeemable Preferred
Shares and additional paid-in capital; $.0001 par value;
1,725,000 shares authorized and issued; stated
liquidation preference of $43,125 41,357 41,357
Series B 8.75% Cumulative Convertible Preferred
Shares and additional paid-in capital; $.0001 par value;
2,800,000 shares authorized and issued; stated
liquidation preference of $70,000 67,178 67,178
Series C Preferred Shares; $.0001 par value; 600,000
shares authorized; no shares issued - -
Common shares; $.0001 par value; 64,875,000
shares authorized; 15,657,017 shares issued at
September 30, 2000 and 15,555,505 at December 31, 1999 2 2
Excess shares; $.0001 par value; 30,000,000 shares
authorized; no shares issued - -
Additional paid-in capital on common shares 234,998 233,453
Undistributed earnings 21,873 26,654
Accumulated other comprehensive income 3,134 668
------------------------- ---------------------
368,542 369,312
------------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 664,001 632,151
========================= =====================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
REVENUES
Income from real estate operations $ 24,125 20,784 69,160 61,245
Interest:
Mortgage loans 206 233 589 916
Other interest 13 99 116 178
Gain on sale of securities - 30 555 30
Other 257 358 928 1,118
--------------------------------- --------------------------------
24,601 21,504 71,348 63,487
--------------------------------- --------------------------------
EXPENSES
Operating expenses from real
estate operations 5,730 4,771 16,251 14,666
Interest 4,830 4,677 13,549 13,662
Depreciation and amortization 5,799 5,177 17,239 14,892
General and administrative 1,228 1,134 3,716 3,175
--------------------------------- --------------------------------
17,587 15,759 50,755 46,395
--------------------------------- --------------------------------
INCOME BEFORE MINORITY INTEREST AND
GAIN ON REAL ESTATE INVESTMENTS 7,014 5,745 20,593 17,092
Minority interest in joint ventures 80 106 300 312
--------------------------------- --------------------------------
INCOME BEFORE GAIN ON
REAL ESTATE INVESTMENTS 6,934 5,639 20,293 16,780
Gain on real estate investments 94 13,978 715 15,653
--------------------------------- --------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 7,028 19,617 21,008 32,433
Cumulative effect of change in accounting principle - - - 418
--------------------------------- --------------------------------
NET INCOME 7,028 19,617 21,008 32,015
Preferred dividends-Series A 970 970 2,910 2,910
Preferred dividends-Series B 1,532 276 4,596 714
--------------------------------- --------------------------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 4,526 18,371 13,502 28,391
================================= ================================
BASIC PER SHARE DATA
Net income available to common shareholders $ 0.29 1.15 0.86 1.76
================================= ================================
Weighted average shares outstanding 15,643 16,006 15,612 16,127
================================= ================================
DILUTED PER SHARE DATA
Net income available to common shareholders $ 0.29 1.11 0.86 1.74
================================= ================================
Weighted average shares outstanding 15,828 16,724 15,784 16,768
================================= ================================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Accumulated
Additional Other
Preferred Common Paid-In Undistributed Comprehensive
Stock Stock Capital Earnings Income Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 $ 108,535 2 233,453 26,654 668 369,312
Comprehensive income
Net income - - - 21,008 - 21,008
Net unrealized change in investment securities - - - - 2,466 2,466
---------
Total comprehensive income 23,474
---------
Cash dividends declared-common, $1.17 per share - - - (18,283) - (18,283)
Preferred stock dividends declared - - - (7,506) - (7,506)
Issuance of 9,638 shares of common stock,
incentive compensation - - 174 - - 174
Issuance of 10,474 shares of common stock,
dividend reinvestment plan - - 228 - - 228
Issuance of 104,900 shares of common stock,
exercise options - - 1,628 - - 1,628
Repurchase limited partnership units - - (55) - - (55)
Purchase of 23,500 common shares - - (430) - - (430)
-------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 $ 108,535 2 234,998 21,873 3,134 368,542
===================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30, September 30,
2000 1999
------------ ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 21,008 32,015
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting principle - 418
Depreciation and amortization 17,239 14,892
Gain on real estate investments, net (715) (15,653)
Gain on sale of real estate investment trust shares (555) (30)
Minority interest depreciation and amortization (118) (202)
Changes in operating assets and liabilities:
Accrued income and other assets (1,391) (115)
Accounts payable, accrued expenses and prepaid rent 4,686 2,666
------------ ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 40,154 33,991
------------ ----------------
INVESTING ACTIVITIES:
Payments on mortgage loans receivable, net of
amortization of loan discounts 2,158 9,808
Advances on mortgage loans receivable (3,643) (7,700)
Proceeds from sale of real estate investments 2,642 30,026
Real estate improvements (9,029) (6,225)
Real estate development (25,444) (35,771)
Purchases of real estate (11,716) (36,326)
Purchases of real estate investment trust shares (376) (10,171)
Proceeds from sale of real estate investment trust shares 5,826 292
Changes in other assets and other liabilities (2,798) 285
------------ ----------------
NET CASH USED IN INVESTING ACTIVITIES (42,380) (55,782)
------------ ----------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 141,084 238,215
Debt issuance costs (922) (902)
Proceeds from mortgage notes payable 11,500 47,000
Principal payments on bank borrowings (109,585) (285,194)
Principal payments on mortgage notes payable (11,250) (8,454)
Distributions paid to shareholders (25,789) (21,122)
Purchase of limited partnership units (705) -
Purchases of common shares (430) (6,849)
Proceeds from exercise of stock options 1,628 317
Net proceeds from issuance of preferred stock - 57,634
Proceeds from dividend reinvestment plan 228 221
Other (2,779) 1,820
------------ ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,980 22,686
------------ ----------------
INCREASE IN CASH AND CASH EQUIVALENTS 754 895
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,657 2,784
------------ ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,411 3,679
============ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 13,593 14,195
Debt assumed by the Company in purchase of real estate - 1,103
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In management's opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The financial statements should be read in conjunction with the 1999
annual report and the notes thereto.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the 1999 financial
statements to conform to the 2000 presentation.
(3) SUBSEQUENT EVENTS
Subsequent to September 30, 2000, EastGroup purchased a 2.6-acre
development site in Orlando, Florida for $299,000. Also subsequent to September
30, 2000, the Company entered into contracts to purchase two additional
development sites, a 5-acre site in Chandler, Arizona for approximately $820,000
and a 9.5-acre site in Fort Lauderdale, Florida for approximately $2,287,000.
On October 17, 2000, EastGroup closed on a mortgage loan with New York
Life Insurance Company for a $26.3 million nonrecourse mortgage secured by nine
properties in Houston, Texas. The note has an interest rate of 7.92%, a 30-year
amortization and a 10.5-year maturity. The proceeds of this loan were used to
pay down existing bank debt.
(4) ACCOUNTING CHANGES
Organization Costs
In April 1998, Statement of Position (SOP) No. 98-5, "Reporting on the
Costs of Start-Up Activities," was issued. This SOP provides guidance on the
financial reporting of start-up costs and organization costs, and requires that
these costs be expensed as incurred effective for fiscal years beginning after
December 15, 1998. Unamortized organization costs of $418,000 were written off
in first quarter 1999 and accounted for as a cumulative effect of a change in
accounting principle. The accounting change reduced basic and diluted earnings
per share $.03 and $.02, respectively, for the nine months ending September 30,
1999.
Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998 and, as
amended, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. All derivatives
are required to be recognized as either assets or liabilities in the statement
of financial position and measured at fair value. Changes in fair value will be
reported either in earnings or outside of earnings depending on the intended use
of the derivative and the resulting designation. Entities applying hedge
accounting are required to establish at the inception of the hedge the method
used to assess the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. The Company has
evaluated the effect of adopting this statement and believes the effect of
adoption would have no impact to its financial position or results of
operations.
(5) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which established new rules for the reporting of comprehensive income and its
components. Comprehensive income comprises net income plus all other changes in
equity from nonowner sources. The components of comprehensive income for the
nine months ended September 30, 2000 are presented in the Company's Consolidated
Statement of Changes in Stockholders' Equity.
<TABLE>
<S> <C>
(In thousands)
----------------
Other comprehensive income:
Unrealized holding gains during the period, net of losses of $158,000 $ 3,021
Less reclassification adjustment for gains included in net income (555)
----------------
Net unrealized change in investment securities $ 2,466
================
</TABLE>
(6) BUSINESS SEGMENTS
The Company's reportable segments consist of industrial properties,
office buildings, and an other category that includes apartments and other real
estate. The Company's chief decision makers use two primary measures of
operating results in making decisions, such as allocating resources: property
net operating income (PNOI), defined as real estate operating revenues less real
estate operating expenses (before interest expense and depreciation), and funds
from operations (FFO), defined as net income (loss) (computed in accordance with
generally accepted accounting principles (GAAP)), excluding gains or losses from
sales of depreciable real estate property, plus real estate related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that FFO is an appropriate measure of
performance for equity real estate investment trusts. FFO is not considered as
an alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available for the Company's
cash needs, including the ability to make distributions. The table below
presents on a comparative basis for the three months and nine months ended
September 30, 2000 and 1999 reported PNOI by operating segment, followed by
reconciliations of PNOI to FFO and FFO to net income.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
---------------- ------------- --------------- --------------
2000 1999 2000 1999
---------------- ------------- --------------- --------------
(In thousands)
Property Revenues:
Industrial $ 23,149 19,767 66,318 56,521
Office 390 438 1,101 3,057
Other 586 579 1,741 1,667
---------------- ------------- --------------- --------------
24,125 20,784 69,160 61,245
---------------- ------------- --------------- --------------
Property Expenses:
Industrial (5,409) (4,338) (15,278) (12,864)
Office (103) (160) (300) (1,028)
Other (218) (273) (673) (774)
---------------- ------------- --------------- --------------
(5,730) (4,771) (16,251) (14,666)
---------------- ------------- --------------- --------------
Property Net Operating Income:
Industrial 17,740 15,429 51,040 43,657
Office 287 278 801 2,029
Other 368 306 1,068 893
---------------- ------------- --------------- --------------
Total Property Net Operating Income 18,395 16,013 52,909 46,579
---------------- ------------- --------------- --------------
Gain on sale of securities - 30 555 30
Gain on nondepreciable real estate investments - - 620 -
Other income 476 690 1,633 2,212
Interest expense (4,830) (4,677) (13,549) (13,662)
General and administrative (1,228) (1,134) (3,716) (3,175)
Minority interest in earnings (120) (145) (418) (514)
Dividends on Series A preferred shares (970) (970) (2,910) (2,910)
Limited partnership unit distributions - - 18 -
---------------- ------------- --------------- --------------
Funds From Operations 11,723 9,807 35,142 28,560
Depreciation and amortization (5,799) (5,177) (17,239) (14,892)
Share of joint venture depreciation and amortization 40 39 118 202
Gain on depreciable real estate investments 94 13,978 95 15,653
Limited partnership unit distributions - - (18) -
Dividends on Series B convertible preferred shares (1,532) (276) (4,596) (714)
Cumulative effect of change in accounting principle - - - (418)
---------------- ------------- --------------- --------------
Net Income Available to
Common Shareholders 4,526 18,371 13,502 28,391
Dividends on preferred shares 2,502 1,246 7,506 3,624
---------------- ------------- --------------- --------------
NET INCOME $ 7,028 19,617 21,008 32,015
================ ============= =============== ==============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
(Comments are for the balance sheet dated September 30, 2000 compared to
December 31, 1999.)
Assets of EastGroup were $664,001,000 at September 30, 2000, an
increase of $31,850,000 from December 31, 1999. Liabilities (excluding minority
interests) increased $33,290,000 to $293,789,000; minority interests decreased
$670,000 to $1,670,000 and stockholders' equity decreased $770,000 to
$368,542,000 during the same period. Book value per common share decreased from
$16.47 at December 31, 1999 to $16.31 at September 30, 2000. The paragraphs that
follow explain these changes in greater detail.
Industrial properties increased $55,779,000 during the nine months
ended September 30, 2000. This increase was primarily due to the
reclassifications of eight industrial properties from industrial development
with total costs of $33,560,000; the acquisition of five industrial properties
for $11,716,000, as detailed below; capital improvements of $8,786,000 made on
existing and acquired properties; the reclassification of one industrial
property from real estate held for sale with costs of $2,749,000; and the
reclassification of one property to real estate held for sale with costs of
$1,032,000.
<TABLE>
<S> <C> <C> <C> <C>
Industrial Properties Acquired Size Date Acquired Cost
in 2000 Location (Square feet) (In thousands)
---------------------------------- ------------------------- ----------------- ----------------- -------------------
Wilson Distribution Center Tempe, Arizona 56,000 01-13-00 $ 2,517
Founders Business Center El Paso, Texas 77,000 04-11-00 2,302
Interstate Distribution Center III Dallas, Texas 78,000 05-19-00 2,528
Broadway Industrial #4 Tempe, Arizona 40,000 07-27-00 2,032
West Loop I Houston, Texas 84,000 09-12-00 2,337
-------------------
Total Industrial Acquistions $ 11,716
===================
</TABLE>
Industrial development decreased $8,116,000 during the nine months
ended September 30, 2000 as a result of the reclassifications of eight
development properties with costs of $33,560,000 to industrial real estate
properties, offset by year-to-date development costs of $25,444,000 on existing
and completed development properties, as detailed below.
<TABLE>
Industrial Development
Costs Incurred
---------------------------------------
Size at For the 9 Months Cumulative as Estimated
Completion Ended 9/30/00 of 9/30/00 Total Costs (1)
<S> <C> <C> <C> <C>
----------------------------------------- ----------------- ---------------------------------------------------------
(Square feet) (In thousands)
Lease-Up:
Glenmont II
Houston, Texas 104,000 $ 2,396 2,864 3,676
Palm River North I & III
Tampa, Florida 116,000 3,125 4,691 5,287
Westlake II
Tampa, Florida 70,000 2,862 2,862 4,208
Sunport I
Orlando, Florida 56,000 1,461 2,732 3,024
Beach Commerce Center
Jacksonville, Florida 46,000 1,990 1,990 2,800
----------------- --------------------- ----------------- -----------------
Total Lease-up 392,000 11,834 15,139 18,995
----------------- --------------------- ----------------- -----------------
Under Construction:
World Houston 11
Houston, Texas 126,000 2,929 3,515 5,455
Kyrene II
Tempe, Arizona 60,000 532 1,172 3,705
Walden Distribution Center I
Tampa, Florida 90,000 15 352 4,250
Sunport Center II
Orlando, Florida 60,000 672 672 3,300
Interstate Commons II
Phoenix, Arizona 60,000 1,075 1,395 3,000
Techway Southwest I
Houston, Texas 126,000 888 888 5,040
----------------- --------------------- ----------------- -----------------
Total Under Construction 522,000 6,111 7,994 24,750
----------------- --------------------- ----------------- -----------------
Prospective Development:
Phoenix, Arizona 40,000 207 207 2,000
Tucson, Arizona 70,000 268 268 3,500
Tampa, Florida 90,000 27 511 3,600
Orlando, Florida 299,000 1,381 1,381 16,603
Houston, Texas 317,000 1,864 1,864 12,300
----------------- --------------------- ----------------- -----------------
Total Prospective Development 816,000 3,747 4,231 38,003
----------------- --------------------- ----------------- -----------------
1,730,000 $21,692 27,364 81,748
================= ===================== ================= =================
Completed Development and
Transferred to Industrial
Properties During Nine
Months Ended September 30, 2000:
John Young II
Orlando, Florida 47,000 $ 315 2,877
Rampart Distribution Center III
Denver, Colorado 92,000 804 5,558
Sample 95 II
Pompano, Florida 70,000 271 3,772
Chestnut Business Center
City of Industry, California 75,000 354 4,708
Palm River North II
Tampa, Florida 96,000 23 3,168
Westlake I
Tampa, Florida 70,000 505 4,808
Glenmont I
Houston, Texas 108,000 425 3,631
Main Street
Carson, California 106,000 1,055 5,038
----------------- --------------------- -----------------
Total Transferred to Industrial 664,000 $3,752 33,560
================= ===================== =================
</TABLE>
(1) The information provided above includes forward-looking data based on
current construction schedules, the status of lease negotiations with
potential tenants and other relevant factors currently available to the
Company. There can be no assurance that any of these factors will not
change or that any change will not affect the accuracy of such
forward-looking data. Among the factors that could affect the accuracy of
the forward-looking statements are weather or other natural occurrence,
default or other failure of performance by contractors, increases in the
price of construction materials or the unavailability of such materials,
failure to obtain necessary permits or approvals from government entities,
changes in local and/or national economic conditions, increased competition
for tenants or other occurrences that could depress rental rates, and other
factors not within the control of the Company.
Real estate held for sale decreased $3,530,000 primarily due to the
sale of one industrial property, the LeTourneau Center of Commerce with a cost
of $1,623,000, the sale of the Estelle land with a cost of $429,000 and the
transfer of West Palm I and II to real estate properties with a cost of
$2,749,000. These decreases were offset by the transfer of 109th Street from
real estate properties to real estate held for sale with a cost of $1,032,000
and capital improvements of $239,000.
Accumulated depreciation on real estate properties and real estate held
for sale increased $15,695,000 due to depreciation expense of $15,730,000,
offset by the sale of one property with accumulated depreciation of $35,000.
Mortgage loans receivable increased $1,485,000 during the first nine
months of 2000 as a result of advances of $3,643,000 on one mortgage loan,
offset by repayments of $2,158,000.
Investments in real estate investment trusts decreased from $15,708,000
at December 31, 1999 to $13,419,000 at September 30, 2000, primarily as a result
of the first liquidating dividend from Franklin Select Realty Trust. The
Company`s basis in the investment decreased from $5,844,000 to zero. This
decrease was partially offset by investment in other real estate investment
shares and from an increase of $3,166,000 in the market value of the Company's
investment in Pacific Gulf Properties and other REIT shares. Pacific Gulf
Properties has announced that it is selling most of its assets (see Liquidity
and Capital Resources).
Other assets increased $3,458,000 during the nine months ended
September 30, 2000 compared to December 31, 1999 primarily as a result of
increases in unamortized leasing commissions.
Mortgage notes payable increased $250,000 during the nine months ended
September 30, 2000 as a result of one new note for $11,500,000, offset by
regularly scheduled principal payments of $2,838,000 and the repayment of one
mortgage note for $8,412,000.
Notes payable to banks increased $31,499,000 as a result of borrowings
of $141,084,000 offset by payments of $109,585,000. The Company's credit
facilities are described in greater detail under Liquidity and Capital
Resources.
Accounts payable and accrued expenses increased $1,897,000 during the
nine months ended September 30, 2000 compared to December 31, 1999 primarily as
a result of a net increase in payables due to timing differences.
Accumulated other comprehensive income increased $2,466,000 as a result
of the liquidating dividends from Franklin Select Realty Trust and an increase
in the market value of the Company's investments recorded in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Undistributed earnings decreased from $26,654,000 at December 31, 1999
to $21,873,000 at September 30, 2000 as a result of dividends on common stock of
$18,283,000 exceeding net income available to common stockholders for financial
reporting purposes of $13,502,000.
Results of Operations
(Comments are for the three months and nine months ended September 30, 2000
compared to the three months and nine months ended September 30, 1999.)
Net income available to common stockholders for the three months and
nine months ended September 30, 2000 was $4,526,000 ($.29 per basic share and
diluted share) and $13,502,000 ($.86 per basic share and diluted share),
compared to net income for the three months and nine months ended September 30,
1999 of $18,371,000 ($1.15 per basic share and $1.11 per diluted share) and
$28,391,000 ($1.76 per basic share and $1.74 per diluted share). Income before
gain on real estate investments was $6,934,000 and $20,293,000 for the three
months and nine months ended September 30, 2000, compared to $5,639,000 and
$16,780,000 for the three months and nine months ended September 30, 1999. Gain
on real estate investments was $94,000 and $715,000 for the three months and
nine months ended September 30, 2000, compared to $13,978,000 and $15,653,000
for the three months and nine months ended September 30, 1999. The cumulative
effect of the change in accounting principle (described in Note 4 to the
financial statements) was zero for the three months and nine months ended
September 30, 2000, compared to zero and $418,000 for the three months and nine
months ended September 30, 1999. The paragraphs that follow describe the results
of operations in greater detail.
Property net operating income (PNOI) from real estate properties,
defined as income from real estate operations less property operating expenses
(before interest expense and depreciation), increased by $2,382,000 or 14.9% for
the three months ended September 30, 2000 compared to the three months ended
September 30, 1999. For the nine months ended September 30, 2000, PNOI increased
by $6,330,000 or 13.6% compared to the nine months ended September 30, 1999.
PNOI and percentage leased by property type were as follows:
<TABLE>
Property Net Operating Income
Three Months Ended Nine Months Ended Percent
September 30, September 30, Leased
------------- ------------ ----------- -------------- ---------- ----------
2000 1999 2000 1999 9-30-00 9-30-99
<S> <C> <C> <C> <C> <C> <C>
------------- ------------ ----------- -------------- ---------- ----------
(In thousands)
Industrial $ 17,740 15,429 51,040 43,657 98% 97%
Office 287 278 801 2,029
Other 368 306 1,068 893
------------- ------------ ----------- --------------
Total PNOI $ 18,395 16,013 52,909 46,579
============= ============ =========== ==============
</TABLE>
PNOI from industrial properties increased $2,311,000 and $7,383,000 for
the three months and nine months ended September 30, 2000, compared to September
30, 1999, primarily due to acquisitions, rental rate increases and development
properties that achieved stabilized operations in 1999 and 2000. Industrial
properties held throughout the three months and nine months ended September 30,
2000 compared to the same period in 1999 showed an increase in PNOI of 3.8% for
the three months ended September 30, 2000 and 3.0% for the nine months ended
September 30, 2000.
PNOI from office properties decreased $1,228,000 for the nine months
ended September 30, 2000, compared to September 30, 1999. This decrease was
primarily the result of the sale of the 8150 Leesburg Pike Office Building in
July 1999. PNOI from other properties increased slightly for the three months
and nine months ended September 30, 2000 primarily due to increased occupancy
at the La Vista apartment complex in Atlanta.
Gain on sale of securities increased $525,000 for the nine months ended
September 30, 2000, compared to September 30, 1999 as a result of a gain of
$555,000 realized on the first liquidating dividend of Franklin Select Realty
Trust compared to a gain of $30,000 realized in the third quarter of 1999 due to
partial sale of our investment in Pacific Gulf.
Bank interest expense increased $336,000 and $789,000 for the three
months and nine months ended September 30, 2000 compared to 1999. Average bank
borrowings were $117,958,000 and $107,590,000 for the three months and nine
months ended September 30, 2000 compared to $121,420,000 and $113,342,000 for
the same periods of 1999. Average bank interest rates were 7.80% and 7.74% for
the three months and nine months ended September 30, 2000 compared to 6.48% and
6.42% for the same periods of 1999. Bank interest rates at September 30, 2000
were 7.875% on $115,000,000, 7.75% on $9,700,000 and 8.75% on $1,799,000. Bank
interest rates at September 30, 1999 were 6.625% on $67,000,000 and 7.50% on
$343,000. Interest costs incurred during the period of construction of real
estate properties are capitalized and offset against the bank interest expense.
The interest costs capitalized on real estate properties for the three months
and nine months ended September 30, 2000 were $465,000 and $1,497,000 compared
to $531,000 and $1,265,000 for the three months and nine months ended September
30, 1999.
Interest expense on real estate properties decreased $255,000 and
$659,000 for the three months and nine months ended September 30, 2000 compared
to 1999. These decreases were primarily the result of the sales of the 8150
Leesburg Pike Office Building and the Waldenbooks/Borders Distribution Center in
1999, the payoff of the Interstate Distribution Centers mortgages in 1999 and
the payoff of one of the University Business Center mortgages in 2000. These
decreases were partially offset by increases due to the assumption of the Kyrene
mortgage in 1999 and a new mortgage for University Business Center in 2000.
Depreciation and amortization increased $622,000 and $2,347,000 for the
three months and nine months ended September 30, 2000 compared to 1999. This
increase was primarily due to the industrial properties acquired in both 1999
and 2000 and development properties that achieved stabilized operations in 1999
and 2000, offset by the sales of several properties in 1999 and the transfer of
several properties to real estate held for sale (depreciation not taken on those
properties held in real estate held for sale).
A summary of gains/(losses) on real estate investments for the nine
months ended September 30, 2000 and 1999 is detailed below.
<TABLE>
Gains/(Losses) on Real Estate Investments
Net Recognized
Basis Sales Price Gain (Loss)
--------------------------------------------------
(In thousands)
<S> <C> <C> <C>
2000
Real estate properties:
LeTourneau Center of Commerce $ 1,592 1,593 1
8150 Leesburg Pike Office Building-deferred gain (94) - 94
Estelle land 429 1,049 620
--------------------------------------------------
$ 1,927 2,642 715
==================================================
1999
Mortgage loans:
Country Club-deferred gain $ (1,127) - 1,127
Gainesville-deferred gain (388) - 388
Country Club land purchase-leaseback 500 500 -
Estelle Land 137 367 230
LNH Land 19 137 118
8150 Leesburg Pike Office Building 13,917 28,082 14,165
2020 Exchange 867 997 130
West Palm writedown 448 - (448)
Other - (57) (57)
--------------------------------------------------
$ 14,373 30,026 15,653
==================================================
</TABLE>
NAREIT has recommended supplemental disclosures concerning
straight-line rent, capital expenditures and leasing costs. Straight-line rent
for the three months and nine months ended September 30, 2000 was $439,000 and
$1,205,000 compared to $210,000 for the same periods in 1999. Capital
improvements for the nine months ended September 30, 2000 (by category) and 1999
are as follows:
<TABLE>
Capital Improvements
2000
--------------------------------------------
1999
Industrial Other Total Total
------------- ------------- -------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Upgrade on Acquisitions $ 3,614 - 3,614 1,230
Major Renovation - - - 49
Tenant improvements:
New Tenants 2,183 - 2,183 2,370
New Tenants (first generation) 1,135 - 1,135 312
Renewal Tenants 646 - 646 390
Other 1,222 229 1,451 1,874
------------- ------------- -------------- ----------
Total capital improvements $ 8,800 229 9,029 6,225
============= ============= ============== ==========
</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 nine
months ended September 30, 2000 (by category) and 1999 is as follows:
<TABLE>
Capitalized Leasing Costs
2000
------------------------------------------------------------
Industrial 1999
Industrial Other Development Total Total
------------- ------------- ---------------- --------------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Capitalized leasing costs:
New Tenants $ 614 - - 614 746
New Tenants (first generation) 210 - 1,360 1,570 641
Renewal Tenants 723 19 - 742 576
------------- ------------- ---------------- --------------- ---------
Total capitalized leasing costs $ 1,547 19 1,360 2,926 1,963
============= ============= ================ =============== =========
Amortization of leasing costs $ 1,463 1,110
=============== =========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $40,154,000 for the nine
months ended September 30, 2000. Other sources of cash were primarily from
collections on mortgage loan receivables, sales of real estate investments,
liquidation of real estate investment trust shares, bank borrowings, proceeds
from a new mortgage note and proceeds from exercise of stock options. The
Company distributed $18,283,000 in common and $7,506,000 in preferred stock
dividends. Other primary uses of cash were for capital improvements at the
various properties, construction and development of properties, purchases of
real estate investments, bank debt payments, mortgage note payments and advances
on mortgage loans receivable. Total debt at September 30, 2000 and 1999 was as
follows:
<TABLE>
As of September 30,
----------------------------------
2000 1999
---------------- -----------------
(In thousands)
<S> <C> <C>
Mortgage notes payable - fixed rate $ 148,915 162,143
Bank notes payable - floating rate 126,499 67,343
---------------- -----------------
Total debt $ 275,414 229,486
================ =================
</TABLE>
The Company has a three-year $150,000,000 unsecured revolving credit
facility with a group of ten banks that is due to expire in January 2002. The
interest rate is based on the Eurodollar rate plus 1.25% and was 7.875% on
$115,000,000 at September 30, 2000. An unused line fee of .25% is also assessed
on this note.
The Company has a one-year $10,000,000 unsecured revolving credit
facility with Chase Bank of Texas that is due to expire in January 2001. The
interest rate is based on Chase Bank of Texas, National Association's prime rate
less .75% and was 8.75% at September 30, 2000. The balance at September 30, 2000
was $1,799,000.
The Company has a $15,000,000 unsecured discretionary line of credit
with Chase Bank of Texas. The interest rate and maturity date for each loan
proceeds are by agreement between the Company and Chase and was 7.75% at
September 30, 2000. At September 30, 2000, the outstanding balance for this loan
was $9,700,000, payable on demand.
In June 2000, EastGroup closed a mortgage loan with Metropolitan Life
Insurance Company to refinance the Company's only mortgage debt maturity for
2000. A mortgage of $8.4 million at 9.06% was repaid and replaced with an $11.5
million nonrecourse mortgage at 7.98%. The loan matures in 12 years and has an
amortization based on 25 years.
In October 2000, EastGroup closed on a mortgage loan with New York Life
Insurance Company for a $26.3 million nonrecourse mortgage secured by nine
buildings in Houston, Texas. The note has an interest rate of 7.92%, a 30-year
amortization and a 10.5-year maturity. The proceeds of this loan were used to
pay down existing bank debt. Plans are to further reduce bank debt through
additional first mortgage financings over the next two quarters.
During the third quarter of 1998, EastGroup's Board of Directors
authorized the repurchase of up to 500,000 shares of its outstanding common
stock. In September 1999, EastGroup's Board of Directors authorized the
repurchase of 500,000 additional shares of its outstanding common stock and an
additional 500,000 shares in December 1999. The shares may be purchased from
time to time in the open market or in privately negotiated transactions. The
Company did not repurchase any shares associated with this plan during the nine
months ended September 30, 2000. Since September 30, 1998, a total of 817,700
shares have been repurchased for $13,980,000 (an average of $17.10 per share).
On February 10, 2000, Franklin Select Realty Trust announced the
closing of the sale of all of the company's real estate assets for an aggregate
purchase price of $131.5 million, less existing project debt assumed by the
buyer of approximately $26.5 million. Pursuant to the plan of liquidation
recently approved by Franklin's shareholders, Franklin's board of directors
declared an initial liquidating distribution of $7.11 per share, which was paid
to shareholders and received by EastGroup on March 10, 2000. The Company
reported a gain from this distribution of $555,000. It is expected that
Franklin's shareholders will receive a final liquidating distribution in the
fourth quarter of 2000, subject, however, to final court approval of settlements
of pending litigation. The total basis of EastGroup's Franklin shares was used
in computing the gain on the March 10, 2000 transaction. The amount of any final
distributions paid to EastGroup, minus certain transaction expenses, will be
recorded as an additional gain. The Company estimates an additional distribution
and gain of $700,000 in the fourth quarter of 2000 based on FSN's quarterly
reports.
EastGroup owns 487,100 shares of Pacific Gulf Properties (PAG) with a
cost basis of $9,909,000 or $20.34 per share. On June 20, 2000, PAG announced
that it had entered into an agreement to sell all of its industrial properties
and is marketing its multi-family assets with the disposition of its senior
housing assets to be determined at a future date. Pacific Gulf also announced
that the industrial and multi-family sales were scheduled to close before the
end of the year and that it planned to distribute the sales proceeds of
approximately $26.00 per share to shareholders in the fourth quarter of 2000. As
a result of the announced PAG distribution, EastGroup expects to record a gain
of approximately $2,750,000 in the fourth quarter of this year. PAG expects to
make final liquidating dividends in 2001. We anticipate achieving an internal
rate of return in excess of 25% on our investment in PAG.
Subsequent to September 30, 2000, EastGroup purchased a 2.6-acre
development site in Orlando, Florida for $299,000. Also, the Company has entered
into contracts to purchase three additional properties as detailed below:
<TABLE>
<S> <C> <C> <C>
Approximate
Property Location Size Purchase Price
------------------------------------ ----------------------------- ---------------------------- --------------------
(In thousands)
Stemmons Dallas, Texas 123,000 sq. ft. $ 3,900
Land for Development Chandler, Arizona 5 acres 820
Land for Development Fort Lauderdale, Florida 9.5 acres 2,287
--------------------
$ 7,007
====================
</TABLE>
In addition, the Company is under contract to sell two properties, the
109th Street Warehouse in Dallas, Texas for approximately $1.3 million with an
expected gain of approximately $300,000 for financial reporting purposes and the
La Vista Apartments in Atlanta, Georgia for approximately $14.5 million with an
expected gain of approximately $8 million for financial reporting purposes.
These sales are expected to close in fourth quarter 2000, and the Company plans
to reinvest the sales proceeds through 1031 tax deferred exchange transactions.
Budgeted capital improvements for the year ending December 31, 2000
follow:
<TABLE>
Capital Improvements
Industrial Other Total
------------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Upgrades on Acquisitions $ 3,649 - 3,649
Tenant Improvements:
New Tenants 2,787 - 2,787
New Tenants (first generation) 2,049 - 2,049
Renewal Tenants 761 - 761
Other 1,618 340 1,958
------------- ----------- -----------
Total budgeted capital improvements $10,864 340 11,204
============= =========== ===========
</TABLE>
Budgeted industrial development costs are estimated to be $40,000,000
for the year.
The Company anticipates that its current cash balance, operating cash
flows, and borrowings under the lines of credit will be adequate for the
Company's (i) operating and administrative expenses, (ii) normal repair and
maintenance expenses at its properties, (iii) debt service obligations, (iv)
distributions to stockholders, (v) capital improvements, (vi) purchases of
properties, (vii) development, and (viii) common stock repurchases.
INFLATION
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate changes primarily as a result
of its lines of credit and long-term debt maturities. This debt is used to
maintain liquidity and fund capital expenditures and expansion of the Company's
real estate investment portfolio and operations. The Company's interest rate
risk management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower its overall borrowing costs. To achieve its
objectives, the Company borrows at fixed rates but also has several variable
rate bank lines as discussed under Liquidity and Capital Resources. The table
below presents the principal payments due and weighted average interest rates
for both the fixed rate and variable rate debt.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sep-Dec Fair
2000 2001 2002 2003 2004 Thereafter Total Value
----------- ------- ---------- -------- -------- ------------ ---------- ----------
Fixed rate debt (in thousands) $ 901 7,886 12,329 8,116 8,851 110,832 148,915 149,346
Weighted average interest rate 7.72% 7.77% 7.59% 8.33% 8.21% 7.64% 7.72%
Variable rate debt (in thousands) $ 9,700 1,799 115,000 - - - 126,499 126,499
Weighted average interest rate 7.75% 8.75% 7.88% - - - 7.88%
</TABLE>
As the table above incorporates only those exposures that exist as of
September 30, 2000, it does not consider those exposures or positions that could
arise after that date. Moreover, because future commitments are not presented in
the table above, the information presented has limited predictive value. As a
result, the Company's ultimate economic impact with respect to interest rate
fluctuations will depend on the exposures that arise during the period and
interest rates.
Forward Looking Statements
In addition to historical information, certain sections of this Form
10-Q contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as those pertaining to the Company's hopes, expectations, intentions,
beliefs, strategies regarding the future, the anticipated performance of
development and acquisition properties, 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 Form 10-Q. 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.
EASTGROUP PROPERTIES, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - 2000 Financial Data Schedule attached hereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: November 13, 2000
EASTGROUP PROPERTIES, INC.
/s/ BRUCE CORKERN
Bruce Corkern, CPA
Senior Vice President and Controller
/s/ N. KEITH MCKEY
N. Keith McKey, CPA
Executive Vice President, Chief
Financial Officer and Secretary
