10-Q 1 firstqtr10q04.txt EASTGROUP PROPERTIES FORM 10-Q 1ST QUARTER U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2004 COMMISSION FILE NUMBER 1-07094 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 ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES (x) NO ( ) The number of shares of common stock, $.0001 par value, outstanding as of May 5, 2004 was 20,953,330. EASTGROUP PROPERTIES, INC. FORM 10-Q TABLE OF CONTENTS FOR THE QUARTER ENDED MARCH 31, 2004
Pages PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated balance sheets, March 31, 2004 (unaudited) and December 31, 2003 3 Consolidated statements of income for the three months ended March 31, 2004 and 2003 (unaudited) 4 Consolidated statement of changes in stockholders' equity for the three months ended March 31, 2004 (unaudited) 5 Consolidated statements of cash flows for the three months ended March 31, 2004 and 2003 (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 16 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES Authorized signatures 18
EASTGROUP PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
March 31, 2004 December 31, 2003 --------------------------------------------- (Unaudited) ASSETS Real estate properties.................................................... $ 803,126 791,165 Development............................................................... 52,612 50,037 --------------------------------------------- 855,738 841,202 Less accumulated depreciation......................................... (154,229) (146,934) --------------------------------------------- 701,509 694,268 --------------------------------------------- Real estate held for sale................................................. 1,375 1,375 Cash...................................................................... 2,118 1,786 Other assets.............................................................. 32,007 31,838 --------------------------------------------- TOTAL ASSETS.......................................................... $ 737,009 729,267 ============================================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Mortgage notes payable.................................................... $ 282,826 285,722 Notes payable to banks.................................................... 71,392 52,550 Accounts payable & accrued expenses....................................... 10,447 14,266 Other liabilities......................................................... 8,134 7,980 --------------------------------------------- 372,799 360,518 --------------------------------------------- --------------------------------------------- Minority interest in joint venture.......................................... 1,793 1,804 --------------------------------------------- STOCKHOLDERS' EQUITY Series C Preferred Shares; $.0001 par value; 600,000 shares authorized; no shares issued........................................................ - - Series D 7.95% Cumulative Redeemable Preferred Shares and additional paid-in capital; $.0001 par value; 1,320,000 shares authorized and issued; stated liquidation preference of $33,000........................ 32,326 32,326 Common shares; $.0001 par value; 68,080,000 shares authorized; 20,950,830 shares issued and outstanding at March 31, 2004 and 20,853,780 at December 31, 2003......................................... 2 2 Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares issued.................................................................. - - Additional paid-in capital on common shares............................... 354,643 352,549 Distributions in excess of earnings....................................... (21,296) (15,595) Accumulated other comprehensive loss...................................... (294) (30) Unearned compensation..................................................... (2,964) (2,307) --------------------------------------------- 362,417 366,945 --------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $ 737,009 729,267 =============================================
See accompanying notes to consolidated financial statements. EASTGROUP PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended March 31, --------------------------------------- 2004 2003 --------------------------------------- REVENUES Income from real estate operations........................................ $ 27,631 26,487 Other..................................................................... 32 356 --------------------------------------- 27,663 26,843 --------------------------------------- EXPENSES Operating expenses from real estate operations............................ 7,672 7,960 Interest.................................................................. 4,919 4,698 Depreciation and amortization............................................. 8,263 7,687 General and administrative................................................ 1,676 1,239 Minority interest in joint venture........................................ 121 99 --------------------------------------- 22,651 21,683 --------------------------------------- INCOME FROM CONTINUING OPERATIONS........................................... 5,012 5,160 DISCONTINUED OPERATIONS Loss from real estate operations.......................................... - (2) Gain on sale of real estate investments................................... - 106 --------------------------------------- INCOME FROM DISCONTINUED OPERATIONS ........................................ - 104 --------------------------------------- NET INCOME.................................................................. 5,012 5,264 Preferred dividends-Series A.............................................. - 970 Preferred dividends-Series B.............................................. - 1,532 Preferred dividends-Series D.............................................. 656 - --------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................. $ 4,356 2,762 ======================================= BASIC PER COMMON SHARE DATA Income from continuing operations......................................... $ 0.21 0.16 Income from discontinued operations....................................... - 0.01 --------------------------------------- Net income available to common stockholders............................... $ 0.21 0.17 ======================================= Weighted average shares outstanding....................................... 20,687 15,924 ======================================= DILUTED PER COMMON SHARE DATA Income from continuing operations......................................... $ 0.21 0.16 Income from discontinued operations....................................... - 0.01 --------------------------------------- Net income available to common stockholders............................... $ 0.21 0.17 ======================================= Weighted average shares outstanding....................................... 21,114 16,282 =======================================
See accompanying notes to consolidated financial statements. EASTGROUP PROPERTIES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) (UNAUDITED)
Accumulated Additional Distributions Other Preferred Common Paid-In Unearned In Excess Comprehensive Stock Stock Capital Compensation Of Earnings Loss Total ----------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2003...................... $ 32,326 2 352,549 (2,307) (15,595) (30) 366,945 Comprehensive income Net income................................... - - - - 5,012 - 5,012 Net unrealized change in cash flow hedge..... - - - - - (264) (264) -------- Total comprehensive income................. 4,748 -------- Cash dividends declared-common, $.48 per share. - - - - (10,057) - (10,057) Preferred stock dividends declared............. - - - - (656) - (656) Issuance of 6,509 shares of common stock, incentive compensation....................... - - 178 - - - 178 Issuance of 2,454 shares of common stock, dividend reinvestment plan................... - - 86 - - - 86 Issuance of 61,364 shares of common stock, options exercised............................ - - 990 - - - 990 Issuance of 28,723 shares of common stock, incentive restricted stock .................. - - 896 (896) - - - Forfeiture of 2,000 shares of common stock, incentive restricted stock................... - - (47) 28 - - (19) Amortization of unearned compensation, incentive restricted stock................... - - - 211 - - 211 Other.......................................... - - (9) - - - (9) ----------------------------------------------------------------------------------- BALANCE, MARCH 31, 2004......................... $ 32,326 2 354,643 (2,964) (21,296) (294) 362,417 ===================================================================================
See accompanying notes to consolidated financial statements. EASTGROUP PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, --------------------------------------- 2004 2003 --------------------------------------- OPERATING ACTIVITIES Net income................................................................. $ 5,012 5,264 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization from continuing operations................. 8,263 7,687 Gain on sale of real estate investments from discontinued operations..... - (106) Gain on real estate investment trust (REIT) shares....................... - (282) Amortization of unearned compensation.................................... 192 97 Minority interest depreciation and amortization.......................... (35) (40) Changes in operating assets and liabilities: Accrued income and other assets........................................ 687 1,242 Accounts payable, accrued expenses and prepaid rent.................... (433) (970) --------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................................... 13,686 12,892 --------------------------------------- INVESTING ACTIVITIES Proceeds from sale of real estate investments.............................. - 445 Real estate improvements................................................... (2,230) (2,594) Real estate development.................................................... (3,016) (5,052) Purchases of real estate................................................... (8,140) - Proceeds from sale of REIT shares.......................................... - 1,590 Changes in other assets and other liabilities.............................. (1,404) (3,207) --------------------------------------- NET CASH USED IN INVESTING ACTIVITIES........................................ (14,790) (8,818) --------------------------------------- FINANCING ACTIVITIES Proceeds from bank borrowings.............................................. 36,730 30,045 Repayments on bank borrowings.............................................. (17,888) (22,788) Principal payments on mortgage notes payable............................... (4,987) (1,573) Debt issuance costs........................................................ (50) (52) Distributions paid to stockholders......................................... (10,610) (10,082) Proceeds from exercise of stock options.................................... 990 1,203 Proceeds from dividend reinvestment plan................................... 86 89 Other...................................................................... (2,835) (429) --------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.......................... 1,436 (3,587) --------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS........................................ 332 487 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 1,786 1,383 --------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 2,118 1,870 ======================================= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest, net of amount capitalized of $500 and $486 for 2004 and 2003, respectively................................................... $ 4,731 4,505 Fair value of debt assumed by the Company in the purchase of real estate... 2,091 - Issuance of common stock, incentive compensation........................... 178 53 Issuance of incentive restricted stock..................................... 896 - Forfeiture of incentive restricted stock................................... (47) (7)
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying unaudited financial statements of EastGroup Properties, Inc. ("EastGroup" or "the Company") have been prepared in accordance with accounting principles generally accepted in the United States of America 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 2003 annual report and the notes thereto. (2) RECLASSIFICATIONS Certain reclassifications have been made in the 2003 financial statements to conform to the 2004 presentation. (3) REAL ESTATE PROPERTIES The Company's real estate properties at March 31, 2004 and December 31, 2003 were as follows:
------------------------------------------ March 31, 2004 December 31, 2003 ------------------------------------------ (In thousands) Real estate properties: Land................................................ $ 134,815 132,900 Buildings and building improvements................. 570,854 563,538 Tenant and other improvements....................... 97,457 94,727 Development............................................ 52,612 50,037 ------------------------------------------ 855,738 841,202 Less accumulated depreciation....................... (154,229) (146,934) ------------------------------------------ $ 701,509 694,268 ==========================================
(4) 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." The Company applies Statement of Financial Accounting Standards (SFAS) No. 144, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale. At March 31, 2004 and December 31, 2003, the Company was offering approximately 13 acres of land in Houston, Texas and Tampa, Florida for sale with a carrying amount of $1,375,000. No loss is anticipated on the sale of these parcels of land. The Company has a nonbinding contract to sell one parcel and is expected to close this transaction in 2004. There can be no assurances that this property or the remaining properties that are held for sale will be sold. In accordance with the guidelines established under SFAS No. 144, operations and gains and losses on sale from the properties placed in the category "held for sale" have been classified as income from discontinued operations. No interest expense was allocated to the properties that are held for sale. (5) BUSINESS COMBINATIONS AND GOODWILL Upon acquisition of real estate properties, the Company applies the principles of SFAS No. 141, "Business Combinations," to determine the allocation of the purchase price among the individual components of both the tangible and intangible assets based on their respective fair values. The allocation to tangible assets (land, building and improvements) is based upon management's determination of the value of the property as if it were vacant using discounted cash flow models. Factors considered by management include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. The remaining purchase price is allocated among three categories of intangible assets consisting of the above or below market component of in-place leases, the value of in-place leases and the value of customer relationships. The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) management's estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above and below market leases are included in Other Assets and Other Liabilities, respectively, on the consolidated balance sheet and are amortized to rental income over the remaining terms of the respective leases. The total amount of intangible assets is further allocated to in-place lease values and to customer relationship values based upon management's assessment of their respective values. These intangible assets are included in Other Assets on the consolidated balance sheet and are amortized over the remaining term of the existing lease, or the anticipated life of the customer relationship, as applicable. Total cost of the properties acquired during the first quarter of 2004 was $10,231,000, of which $9,290,000 was allocated to real estate properties. In accordance with SFAS No. 141, intangibles associated with the purchases of real estate were allocated as follows: $891,000 to in-place lease intangibles, $37,000 to customer relationship intangibles and $36,000 to above market leases (all included in Other Assets on the balance sheet); $23,000 to below market leases (included in Other Liabilities on the balance sheet). All of these costs will be amortized over the remaining lives of the associated leases in place at the time of acquisition except for the customer relationship intangibles, which will be amortized over the expected useful lives of the related intangibles. The Company paid cash of $8,140,000 for the properties and intangibles acquired, assumed a mortgage of $1,778,000 and recorded a premium of $313,000 to adjust the mortgage loan assumed to fair market value. The Company periodically reviews, at least annually in the fourth quarter, the recoverability of goodwill and other intangibles for possible impairment. In management's opinion, no material impairment of goodwill and other intangibles existed at March 31, 2004 and December 31, 2003. (6) OTHER ASSETS A summary of the Company's Other Assets follows:
March 31, 2004 December 31, 2003 ------------------------------------------ (In thousands) Leasing costs, net of accumulated amortization............ $ 11,431 11,286 Receivables, net of allowance for doubtful accounts....... 9,870 10,725 Prepaid expenses and other assets......................... 10,706 9,827 ------------------------------------------ $ 32,007 31,838 ==========================================
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES A summary of the Company's Accounts Payable and Accrued Expenses follows:
March 31, 2004 December 31, 2003 ------------------------------------------ (In thousands) Property taxes payable.................................... $ 4,566 6,457 Dividends payable......................................... 2,069 1,967 Other payables and accrued expenses....................... 3,812 5,842 ------------------------------------------ $ 10,447 14,266 ==========================================
(8) COMPREHENSIVE INCOME Comprehensive income is comprised of net income plus all other changes in equity from nonowner sources. The components of accumulated other comprehensive income (loss) for the three months ended March 31, 2004 are presented in the Company's Consolidated Statement of Changes in Stockholders' Equity and for the three months ended March 31, 2004 and 2003 are summarized below. Accumulated Other Comprehensive Income (Loss)
Three Months Ended March 31, ------------------------------ 2004 2003 ------------------------------ (In thousands) Balance at beginning of year..................................... $ (30) 58 Unrealized holding gains on REIT securities during the period.. - 49 Less reclassification adjustment for gains on REIT securities included in net income....................... - (282) Change in fair value of interest rate swap..................... (264) 100 ------------------------------ Balance at end of year........................................... $ (294) (75) ==============================
(9) EARNINGS PER SHARE The Company applies SFAS No. 128, "Earnings Per Share," which requires companies to present basic earnings per share (EPS) and diluted EPS. 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 available to common stockholders 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 reporting 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 calculates diluted EPS by totaling net income available to common stockholders plus dividends on dilutive convertible preferred shares and dividing this numerator by the weighted average number of common shares outstanding plus the dilutive effect of stock options, nonvested restricted stock and convertible preferred stock, had the options or conversions been exercised. The dilutive effect of stock options and nonvested restricted stock was determined using the treasury stock method which assumes exercise of the options as of the beginning of the period or when issued, if later, and assumes proceeds from the exercise of options are used to purchase common stock at the average market price during the period. The dilutive effect of convertible securities was determined using the if-converted method. Reconciliation of the numerators and denominators in the basic and diluted EPS computations is as follows: Reconciliation of Numerators and Denominators
Three Months Ended March 31, ---------------------------------- 2004 2003 ---------------------------------- (In thousands) BASIC EPS COMPUTATION Numerator-net income available to common stockholders........ $ 4,356 2,762 Denominator-weighted average shares outstanding.............. 20,687 15,924 DILUTED EPS COMPUTATION Numerator-net income available to common stockholders........ $ 4,356 2,762 Denominator: Weighted average shares outstanding........................ 20,687 15,924 Common stock options....................................... 240 171 Nonvested restricted stock................................. 187 187 ---------------------------------- Total Shares............................................ 21,114 16,282 ==================================
The Company's Series B Preferred Stock, which was convertible into common stock at a conversion price of $22.00 per share, was not included in the computation of diluted earnings per share for the three months ended March 31, 2003 due to its antidilutive effect. All of the Series B Preferred Stock was converted into common stock during 2003. (10) STOCK-BASED COMPENSATION The Company has a management incentive plan, which was adopted in 1994, under which employees and directors of the Company are granted stock option awards. Effective January 1, 2002, the Company adopted the fair value recognition provisions of SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment of SFAS No. 123, 'Accounting for Stock-Based Compensation'," prospectively to all employee awards granted, modified, or settled after January 1, 2002. Stock-based compensation expense was immaterial for both the three months ended March 31, 2004 and 2003. There was an immaterial effect to pro forma net income available to common stockholders for both periods and no effect to basic or diluted earnings per share for either period. The Company elected to continue to follow the requirements of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," during all years prior to 2002 and, accordingly, there was no effect on the results of operations. The Company accounts for restricted stock in accordance with SFAS No. 123, and accordingly, compensation expense is recognized over the expected vesting period using the straight-line method. (11) NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." In December 2003, the FASB published a revision to Interpretation 46 (46R) to clarify some of the provisions of the original Interpretation and to exempt certain entities from its requirements. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied Interpretation 46 prior to issuance of this revised Interpretation. Otherwise, application of Interpretation 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. Currently, the Company does not have any interests in variable interest entities as defined by this Interpretation. Therefore, the adoption of this statement had no impact on the Company's financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW EastGroup's goal is to maximize shareholder value by being a leading provider of functional, flexible, and quality business distribution space for location sensitive tenants primarily in the 5,000 to 50,000 square foot range. The Company develops, acquires and operates distribution facilities, the majority of which are clustered around major transportation features in supply constrained submarkets in major Sunbelt markets. The Company's core markets are primarily in the states of California, Florida, Texas and Arizona. The Company primarily generates its revenues by leasing space at its real estate properties. As such, EastGroup's greatest challenge is leasing space at competitive market rates. The Company's primary risks are lease expirations and rental decreases resulting from deteriorating market conditions. During the first quarter of 2004, leases on 5.65% of EastGroup's portfolio square footage expired, and the Company was successful in renewing or re-leasing 67% of that total. In addition, during the first quarter of 2004, EastGroup leased 476,000 square feet of space that was vacant at December 31, 2003. EastGroup's total leased percentage increased to 93.5% at March 31, 2004 from 90.5% at March 31, 2003. Due to sluggishness in the economy, the Company experienced average rental decreases of 2.5% for the first quarter of 2004. The anticipated expiring leases during 2004 were 14.5% of the portfolio at December 31, 2003. Since the end of 2003, the Company has experienced positive leasing activity and reduced this percentage to 9.4% as of April 19, 2004. The Company generates new revenues through its acquisition and development programs. During the first quarter of 2004, the Company purchased two properties and one parcel of land for development. For 2004, the Company has projected $10 million in new acquisitions and has also identified approximately $34 million of development opportunities. EastGroup continues to see targeted development as a major contributor to the Company's growth. The Company mitigates risks associated with development by maintaining a Board-approved maximum level of land held for development and adjusting development start dates according to leasing activity. The Company primarily funds its acquisition and development programs through a $175 million line of credit (as discussed in Liquidity and Capital Resources below). As market conditions permit, EastGroup issues equity, including preferred equity, and/or employs fixed-rate, nonrecourse first mortgage debt to replace the short-term bank borrowings. During 2004, the Company currently intends (subject to market conditions) to obtain $25-30 million of additional fixed rate debt, using the proceeds to reduce variable rate bank line balances. The Company has no off-balance sheet arrangements. EastGroup has one reportable segment--industrial properties. These properties are concentrated in major Sunbelt regions of the United States, have similar economic characteristics and also meet the other criteria that permit the properties to be aggregated into one reportable segment. 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 income from real estate operations less property operating expenses (before interest expense and depreciation and amortization), and funds from operations (FFO), defined as net income (loss) (computed in accordance with accounting principles generally accepted in the United States of America (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 continues to calculate FFO based on the National Association of Real Estate Investment Trust's (NAREIT's) definition, which excludes gains on depreciable real estate. PNOI is a supplemental industry reporting measurement used to evaluate the performance of the Company's real estate investments. The Company believes that the exclusion of depreciation and amortization in the industry's calculation of PNOI provides a supplemental indicator of the property's performance since real estate values have historically risen or fallen with market conditions. PNOI as calculated by the Company may not be comparable to similarly titled but differently calculated measures for other REITs. The major factors that influence PNOI are occupancy levels, acquisitions and sales, development properties that achieve stabilized operations, rental rate increases or decreases, and the recoverability of operating expenses. The Company's success depends largely upon its ability to lease warehouse space and to recover from tenants the operating costs associated with those leases. Real estate income is comprised of rental income including straight-line rent adjustments, pass-through income and other real estate income including lease termination fees. Property operating expenses are comprised of property taxes, insurance, repair and maintenance expenses, management fees and other operating costs. Generally, the Company's most significant operating expenses are insurance and property taxes. Tenant leases may be net leases in which the total operating expenses are recoverable, modified gross leases in which some of the operating expenses are recoverable, or gross leases in which no expenses are recoverable (gross leases represent only a small portion of the Company's total leases). Increases in property operating expenses are fully recoverable under net leases and recoverable to a high degree under modified gross leases. Modified gross leases often include base year amounts and expense increases over these amounts are recoverable. The Company's exposure to property operating expenses is primarily due to vacancies and leases for occupied space that limit the amount of expenses that can be recoverable. The Company believes FFO is an appropriate measure of performance for equity real estate investment trusts. The Company believes that excluding depreciation and amortization in the calculation of FFO is appropriate since real estate values have historically increased or decreased based on market conditions. FFO is not considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to provide for the Company's cash needs, including its ability to make distributions. The Company's key drivers affecting FFO are changes in PNOI (as discussed above) and interest rates, and the amount of leverage the Company employs. The following table presents on a comparative basis for the three months ended March 31, 2004 and 2003, reconciliations of PNOI and FFO Available to Common Stockholders to Net Income.
Three Months Ended March 31, ---------------------------- 2004 2003 ---------------------------- (In thousands) Income from real estate operations............................................. $ 27,631 26,487 Operating expenses from real estate operations................................. (7,672) (7,960) ---------------------------- PROPERTY NET OPERATING INCOME.................................................. 19,959 18,527 Loss from discontinued operations (before depreciation and amortization)....... - (2) Other income................................................................... 32 356 Interest expense............................................................... (4,919) (4,698) General and administrative expense............................................. (1,676) (1,239) Minority interest in earnings (before depreciation and amortization)........... (156) (139) Dividends on Series A preferred shares......................................... - (970) Dividends on Series D preferred shares......................................... (656) - ---------------------------- FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS......................... 12,584 11,835 Depreciation and amortization from continuing operations....................... (8,263) (7,687) Share of joint venture depreciation and amortization........................... 35 40 Gain on sale of depreciable real estate investments............................ - 106 Dividends on Series B convertible preferred shares............................. - (1,532) ---------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS.................................... 4,356 2,762 Dividends on preferred shares.................................................. 656 2,502 ---------------------------- NET INCOME..................................................................... $ 5,012 5,264 ============================ Net income available to common stockholders per diluted share.................. $ .21 .17 Funds from operations available to common stockholders per diluted share (1)... .60 .61 (1) Diluted shares for earnings per share...................................... 21,114 16,282 Convertible preferred stock................................................ - 3,182 ---------------------------- Diluted shares for funds from operations................................... 21,114 19,464 ============================
The Company analyzes the following performance trends in evaluating the progress of the Company: o The FFO change per share represents the increase or decrease in FFO per share from the same quarter in the current year compared to the prior year. The change was negative (FFO per share decreased) for the last eight quarters ended March 31, 2004. The Company is budgeting an increase for 2004, primarily due to acquisitions and developments. o Same property net operating income change represents the PNOI increase or decrease for operating properties owned during the entire current period and prior year reporting period. The change was negative for the last seven quarters ended June 30, 2003, caused by decreasing rental rates and occupancy. The third and fourth quarters of 2003 and the first quarter of 2004 showed small increases and the Company is budgeting a small increase for 2004. o Occupancy is the percentage of total leasable square footage for which the lease term has commenced as of the close of the reporting period. For the last eight quarters ended March 31, 2004, occupancy has been in the range of 90% to 92%. For 2004, occupancy is budgeted to be in a range of 89% to 91%. o Rental rate change represents the rental rate increase or decrease on new leases compared to expiring leases on the same space. Rental rates decreased on new and renewal leases in the last six quarters ended March 31, 2004. The Company is budgeting a decrease in rental rates for 2004. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's management considers the following accounting policies and estimates to be critical to the reported operations of the Company. Real Estate Properties In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," the Company allocates the purchase price of acquired properties to net tangible and identified intangible assets based on their respective fair values. The allocation to tangible assets (land, building and improvements) is based upon management's determination of the value of the property as if it were vacant using discounted cash flow models. Factors considered by management include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. The remaining purchase price is allocated among three categories of intangible assets consisting of the above or below market component of in-place leases, the value of in-place leases and the value of customer relationships. The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) management's estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above and below market leases are included in Other Assets and Other Liabilities, respectively, on the consolidated balance sheet and are amortized to rental income over the remaining terms of the respective leases. The total amount of intangible assets is further allocated to in-place lease values and to customer relationship values based upon management's assessment of their respective values. These intangible assets are included in Other Assets on the consolidated balance sheet and are amortized over the remaining term of the existing lease, or the anticipated life of the customer relationship, as applicable. During the industrial development stage, costs associated with development (i.e., land, construction costs, interest expense during construction and lease-up, property taxes and other direct and indirect costs associated with development) are aggregated into the total capitalization of the property. Included in these costs are management's estimates for the portions of internal costs (primarily personnel costs) that are deemed directly or indirectly related to such development activities. Because the estimation of capitalizable internal costs requires management's judgment, the Company believes internal cost capitalization is a critical accounting estimate. The Company reviews its real estate investments for impairment of value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any real estate investment is considered permanently impaired, a loss is recorded to reduce the carrying value of the property to its estimated fair value. Real estate assets to be sold are reported at the lower of the carrying amount or fair value less selling costs. The evaluation of real estate investments involves many subjective assumptions dependent upon future economic events that affect the ultimate value of the property. Currently, the Company's management is not aware of any impairment issues nor has it experienced any significant impairment issues in recent years. In the event of an impairment, the property's basis would be reduced and the impairment would be recognized as a current period charge in the income statement. Valuation of Receivables The Company is subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables. In order to mitigate these risks, the Company performs credit reviews and analyses on prospective tenants before significant leases are executed. The Company quarterly evaluates outstanding receivables and estimates the allowance for uncollectible accounts. Management specifically analyzes aged receivables, customer credit-worthiness, historical bad debts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. The Company believes that its allowance for uncollectible accounts is adequate for its outstanding receivables at March 31, 2004 and 2003. In the event that the allowance for uncollectible accounts is insufficient for an account that is subsequently written off, additional bad debt expense would be recognized as a current period charge in the income statement. Tax Status EastGroup, a Maryland corporation, 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. To maintain its status as a REIT, the Company is required to distribute 90% of its ordinary taxable income to its stockholders. The Company has the option of (i) reinvesting the sales price of properties sold through tax-deferred exchanges, allowing for a deferral of capital gains on the sale, (ii) paying out capital gains to the stockholders with no tax to the Company, or (iii) treating the capital gains as having been distributed to the stockholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to the stockholders. The Company distributed all of its 2003 taxable income to its stockholders and expects to distribute all of its taxable income in 2004. Accordingly, no provision for income taxes was necessary in 2003, nor is it expected to be necessary for 2004. FINANCIAL CONDITION (Comments are for the balance sheet dated March 31, 2004 and December 31, 2003.) EastGroup's assets were $737,009,000 at March 31, 2004, an increase of $7,742,000 from December 31, 2003. Liabilities increased $12,281,000 to $372,799,000 and stockholders' equity decreased $4,528,000 to $362,417,000 during the same period. Book value per common share decreased to $15.72 at March 31, 2004 from $16.01 at December 31, 2003. The paragraphs that follow explain these changes in detail. ASSETS Real Estate Properties Real estate properties increased $11,961,000 during the three months ended March 31, 2004. This increase was due to the purchase of two properties, both located in the Company's core markets, for a total of $9,290,000, as detailed below; capital improvements of $2,230,000; and improvements of $441,000 on development properties transferred to real estate properties in the 12-month period following transfer.
Real Estate Properties Acquired in 2004 Location Size Date Acquired Cost (1) -------------------------------------------------------------------------------------------------------------- (Square feet) (In thousands) Blue Heron Distribution Center II ... West Palm Beach, FL 100,000 01-15-04 $ 5,607 Kirby Business Center................ Houston, TX 125,000 03-17-04 3,683 --------------- Total Acquisitions............. $ 9,290 ===============
(1) Total cost of the properties acquired was $10,231,000, of which $9,290,000 was allocated to real estate properties as indicated above. In accordance with SFAS No. 141, "Business Combinations," intangibles associated with the purchases of real estate were allocated as follows: $891,000 to in-place lease intangibles, $37,000 to customer relationship intangibles and $36,000 to above market leases (all included in Other Assets on the balance sheet); $23,000 to below market leases (included in Other Liabilities on the balance sheet). All of these costs will be amortized over the remaining lives of the associated leases in place at the time of acquisition except for the customer relationship intangibles, which will be amortized over the expected useful lives of the related intangibles. The Company paid cash of $8,140,000 for the properties and intangibles acquired, assumed a mortgage of $1,778,000 and recorded a premium of $313,000 to adjust the mortgage loan assumed to fair market value. Development Development increased $2,575,000 during the three months ended March 31, 2004 due to development costs on existing and completed development properties. Total capital investment for development for the three months ended March 31, 2004 was $3,016,000. In addition to the costs incurred for the three months ended March 31, 2004 as detailed in the table below, development costs included $441,000 for improvements on properties transferred to real estate properties during the 12-month period following transfer. These costs are included in Real Estate Properties on the balance sheet. No properties were transferred from development to real estate properties in the three months ended March 31, 2004.
Costs Incurred -------------------------------------- For the 3 Months Cumulative as of Estimated Size Ended 3/31/04 3/31/04 Total Costs (1) ---------------------------------------------------------------------- (Square feet) (In thousands) LEASE-UP World Houston 19, Houston, TX........................ 66,000 $ 92 2,615 3,100 World Houston 20, Houston, TX........................ 62,000 54 2,276 2,800 Executive Airport CC I & III, Fort Lauderdale, FL.... 85,000 73 6,024 6,500 Expressway Commerce Center, Tampa, FL................ 103,000 59 6,216 6,500 Sunport Center IV, Orlando, FL....................... 63,000 198 3,280 3,600 Techway Southwest II, Houston, TX.................... 94,000 48 4,133 4,800 Santan 10, Chandler, AZ.............................. 65,000 315 2,927 3,800 ---------------------------------------------------------------------- Total Lease-up......................................... 538,000 839 27,471 31,100 ---------------------------------------------------------------------- UNDER CONSTRUCTION World Houston 17, Houston, TX........................ 66,000 808 2,273 3,400 Palm River South I, Tampa, FL(2)..................... 79,000 1,013 1,013 4,300 Sunport Center V, Orlando, FL(2)..................... 63,000 1,012 1,012 3,800 ---------------------------------------------------------------------- Total Under Construction............................... 208,000 2,833 4,298 11,500 ---------------------------------------------------------------------- PROSPECTIVE DEVELOPMENT (PRINCIPALLY LAND): Phoenix, AZ.......................................... 40,000 4 378 2,000 Tucson, AZ........................................... 70,000 - 326 3,500 Tampa, FL(2)......................................... 80,000 (961) 992 4,500 Orlando, FL(2)....................................... 839,000 (789) 6,922 45,800 Fort Lauderdale, FL.................................. 80,000 484 2,330 6,100 El Paso, TX.......................................... 251,000 - 2,444 7,600 Houston, TX.......................................... 792,000 156 6,878 38,500 Jackson, MS.......................................... 32,000 9 573 1,900 ---------------------------------------------------------------------- Total Prospective Development.......................... 2,184,000 (1,097) 20,843 109,900 ---------------------------------------------------------------------- 2,930,000 $ 2,575 52,612 152,500 ======================================================================
(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. (2) Development costs of $979,000 for Palm River South I and $925,000 for Sunport Center V that existed prior to 2004 were moved from Prospective Development upon commencement of construction in 2004. Accumulated depreciation on real estate properties increased $7,295,000 due to depreciation expense on real estate properties. LIABILITIES Mortgage notes payable decreased $2,896,000 during the three months ended March 31, 2004 primarily due to the repayment of an 8.5% mortgage of $2,999,000 and regularly scheduled principal payments of $1,988,000. The Company assumed a mortgage of $1,778,000 on the acquisition of Blue Heron II and recorded a premium of $313,000 to adjust the mortgage loan assumed to fair market value. Notes payable to banks increased $18,842,000 as a result of advances of $36,730,000 exceeding repayments of $17,888,000. The Company's credit facilities are described in greater detail under Liquidity and Capital Resources. STOCKHOLDERS' EQUITY Distributions in excess of earnings increased $5,701,000 as a result of dividends on common and preferred stock of $10,713,000 exceeding net income for financial reporting purposes of $5,012,000. RESULTS OF OPERATIONS (Comments are for the three months ended March 31, 2004 compared to the three months ended March 31, 2003.) Net income available to common stockholders for the three months ended March 31, 2004 was $4,356,000 ($.21 per basic and diluted share) compared to $2,762,000 ($.17 per basic and diluted share) for the three months ended March 31, 2003. The primary contributor to the increase in earnings per share was higher PNOI. PNOI from continuing operations increased by $1,432,000 or 7.7% for the three months ended March 31, 2004 compared to the same period in 2003. The Company's percentage leased was 93.5% at March 31, 2004 compared to 90.5% at March 31, 2003. PNOI from real estate properties held throughout the three months ended March 31, 2004 compared to the same period in 2003 increased $654,000 or 3.5%, primarily due to increased average occupancy. Bank interest expense before amortization of loan costs and capitalized interest was $343,000 for the three months ended March 31, 2004, a decrease of $148,000 from the three months ended March 31, 2003. This decrease was due to lower average bank borrowings and lower average bank interest rates in 2004. Average bank borrowings were $57,726,000 for the three months ended March 31, 2004 compared to $75,274,000 for the same period in 2003 with average bank interest rates of 2.39% for the three months ended March 31, 2004 compared to 2.62% for the same period in 2003. Interest costs incurred during the period of construction of real estate properties are capitalized and offset against interest expense. The interest costs capitalized on real estate properties for the three months ended March 31, 2004 were $500,000 compared to $486,000 for the same period in 2003. Amortization of bank loan costs was $102,000 for the three months ended March 31, 2004 compared to $103,000 for the same period in 2003. Mortgage interest expense on real estate properties was $4,869,000 for the three months ended March 31, 2004, an increase of $373,000 from the three months ended March 31, 2003. Amortization of mortgage loan costs was $105,000 for the three months ended March 31, 2004 compared to $94,000 for the same period in 2003. The increase in 2004 was primarily due to a new $45,500,000 mortgage that the Company obtained in August 2003. The Company has taken advantage of the lower available interest rates in the market during the past several years and has fixed several new large mortgages at attractive rates, thereby lowering the weighted average interest rates on mortgage debt. This strategy has also reduced the Company's exposure to changes in variable floating bank rates as the proceeds from the mortgages were used to reduce short-term bank borrowings. Depreciation and amortization increased $576,000 for the three months ended March 31, 2004 compared to the same period in 2003. This increase was primarily due to properties acquired and transferred from development during 2003 and properties acquired during 2004. The increase in general and administrative expenses of $437,000 for the three months ended March 31, 2004 compared to the same period in 2003 is primarily due to increased employee costs. NAREIT has recommended supplemental disclosures concerning straight-line rent, capital expenditures and leasing costs. Straight-lining of rent increased income by $903,000 for the three months ended March 31, 2004 compared to $439,000 for the same period in 2003. Capital expenditures for the three months ended March 31, 2004 and 2003 were as follows: Capital Expenditures
Three Months Ended March 31, Estimated -------------------------- Useful Life 2004 2003 ------------------------------------------- (In thousands) Upgrade on Acquisitions................ 40 yrs $ 23 20 Tenant Improvements: New Tenants......................... Lease Life 1,060 1,054 New Tenants (first generation) (1).. Lease Life 496 442 Renewal Tenants..................... Lease Life 132 810 Other: Building Improvements............... 5-40 yrs 94 157 Roofs............................... 5-15 yrs 410 47 Parking Lots........................ 3-5 yrs - 39 Other............................... 5 yrs 15 25 -------------------------- Total capital expenditures....... $ 2,230 2,594 ==========================
(1) First generation refers to space that has never been occupied. The Company's leasing costs are capitalized and included in other assets. The costs are amortized over the terms of the associated leases and are included in depreciation and amortization expense. Capitalized leasing costs for the three months ended March 31, 2004 and 2003 were as follows: Capitalized Leasing Costs
Three Months Ended March 31, Estimated -------------------------- Useful Life 2004 2003 ------------------------------------------- (In thousands) Development............................ Lease Life $ 41 234 New Tenants............................ Lease Life 526 211 New Tenants (first generation) (1)..... Lease Life 81 82 Renewal Tenants........................ Lease Life 275 275 -------------------------- Total capitalized leasing costs.. $ 923 802 -------------------------- Amortization of leasing costs.......... $ 778 838 ==========================
(1) First generation refers to space that has never been occupied. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." In December 2003, the FASB published a revision to Interpretation 46 (46R) to clarify some of the provisions of the original Interpretation and to exempt certain entities from its requirements. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied Interpretation 46 prior to issuance of this revised Interpretation. Otherwise, application of Interpretation 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. Currently, the Company does not have any interests in variable interest entities as defined by this Interpretation. Therefore, the adoption of this statement had no impact on the Company's financial statements. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $13,686,000 for the three months ended March 31, 2004. The primary other source of cash for the first quarter was from bank borrowings. The Company distributed $9,954,000 in common and $656,000 in preferred stock dividends during the three months ended March 31, 2004. Other primary uses of cash were for bank debt repayments, purchases of real estate properties, mortgage note payments, construction and development of properties, and capital improvements at various properties. Total debt at March 31, 2004 and December 31, 2003 is detailed below. The Company's bank credit facilities have certain restrictive covenants, and the Company was in compliance with all of its debt covenants at March 31, 2004 and December 31, 2003.
March 31, 2004 December 31, 2003 ----------------------------------------- (In thousands) Mortgage notes payable - fixed rate......... $ 282,826 285,722 Bank notes payable - floating rate.......... 71,392 52,550 ----------------------------------------- Total debt............................... $ 354,218 338,272 =========================================
The Company has a three-year $175,000,000 unsecured revolving credit facility with a group of ten banks that matures in January 2005. The interest rate on the facility is based on the Eurodollar rate and varies according to debt-to-total asset value ratios. EastGroup's current interest rate for this facility is the Eurodollar rate plus 1.25%. At March 31, 2004, the interest rate was 2.34% on $45,000,000 and 2.34% on $21,000,000. The interest rate on each tranche is currently reset on a monthly basis. A $43,000,000 tranche was last reset on April 28, 2004 at 2.35% and a $21,000,000 tranche was last reset on April 13, 2004 at 2.35%. An unused facility fee is also assessed on this loan. This fee varies according to debt-to-total asset value ratios and is currently .20%. The Company had a one-year $12,500,000 unsecured revolving credit facility with PNC Bank, N.A. that matured in January 2004. The loan was amended in January 2004 to reflect a new maturity date of December 31, 2004. The interest rate on this facility is based on LIBOR and varies according to debt-to-total asset value ratios; it is currently LIBOR plus 1.175%. At March 31, 2004, the interest rate was 2.265% on $5,392,000. As market conditions permit, EastGroup employs fixed-rate, nonrecourse first mortgage debt to replace the short-term bank borrowings. During 2004, the Company currently intends (subject to market conditions) to obtain $25-30 million of additional fixed rate debt, using the proceeds to reduce variable rate bank line balances. Based on current interest rates, this will, as in past years, be detrimental to earnings in the short-run but is likely to enhance balance sheet stability and flexibility over the longer term. Contractual Obligations EastGroup's fixed, noncancelable obligations as of December 31, 2003 did not materially change during the three months ended March 31, 2004 except for the purchase obligations which were fulfilled upon the closing of Blue Heron II and Blue Heron III land. The Company anticipates that its current cash balance, operating cash flows, and borrowings under its lines of credit will be adequate for (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) any other normal business activities of the Company, both in the short- and long-term. 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 objective for interest rate risk management 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.
Apr-Dec 2004 2005 2006 2007 2008 Thereafter Total Fair Value -------------------------------------------------------------------------------------------- Fixed rate debt(1) (in thousands).. $ 7,302 26,273 22,889 21,622 9,212 195,528 282,826 305,621(2) Weighted average interest rate..... 7.44% 7.83% 7.60% 7.55% 6.74% 6.60% 6.89% Variable rate debt (in thousands).. 5,392 66,000 - - - - 71,392 71,392 Weighted average interest rate..... 2.27% 2.34% - - - - 2.33%
(1) The fixed rate debt shown above includes the Tower Automotive mortgage, which has a variable interest rate based on the one-month LIBOR. EastGroup has an interest rate swap agreement that fixes the rate at 4.03% for the 8-year term. Interest and related fees result in an annual effective interest rate of 5.3%. (2) The fair value of the Company's fixed rate debt 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. As the table above incorporates only those exposures that existed as of March 31, 2004, it does not consider those exposures or positions that could arise after that date. The ultimate impact of interest rate fluctuations on the Company will depend on the exposures that arise during the period and interest rates. If the weighted average interest rate on the variable rate bank debt as shown above changes by 10% or approximately 23 basis points, interest expense and cash flows would increase or decrease by approximately $167,000 annually. The Company has an interest rate swap agreement to hedge its exposure to the variable interest rate on the Company's $10,750,000 Tower Automotive Center recourse mortgage, which is summarized in the table below. Under the swap agreement, the Company effectively pays a fixed rate of interest over the term of the agreement without the exchange of the underlying notional amount. This swap is designated as a cash flow hedge and is considered to be fully effective in hedging the variable rate risk associated with the Tower mortgage loan. Changes in the fair value of the swap are recognized in accumulated other comprehensive loss. The Company does not hold or issue this type of derivative contract for trading or speculative purposes.
Fair Market Current Maturity Fair Market Value Value Type of Hedge Notional Amount Date Reference Rate Fixed Rate at 3/31/04 at 12/31/03 ------------------------------------------------------------------------------------------------------------------ (In thousands) (In thousands) Swap $10,750 12/31/10 1 month LIBOR 4.03% ($294) ($30)
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, budgets, 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 nonrenewal 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 disasters and the costs of insurance to protect from such 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 and the effects to the economy from possible terrorism and related world events, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form. 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. ITEM 4. CONTROLS AND PROCEDURES. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that at the end of the Company's most recent fiscal quarter the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. In addition, the Company reviewed its internal controls, and there have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES. Common Stock Repurchase Plan EastGroup's Board of Directors has authorized the repurchase of up to 1,500,000 shares of its outstanding common stock. The shares may be purchased from time to time in the open market or in privately negotiated transactions. The Company has not repurchased any shares since 2000. Under the Plan, the Company has purchased a total of 827,700 shares for $14,170,000 (an average of $17.12 per share) with 672,300 shares still authorized for repurchase. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Form 10-Q Exhibits: 3(a) Articles of Incorporation (incorporated by reference to Appendix B to the Company's Proxy Statement dated April 24, 1997). 3(b) Bylaws of the Company (incorporated by reference to Appendix C to the Company's Proxy Statement dated April 24, 1997). 3(c) Articles Supplementary of the Company relating to the Series C Preferred Stock (incorporated by reference to the Company's Form 8-A filed December 9, 1998). 3(f) Articles Supplementary of the Company relating to the 7.95% Series D Cumulative Redeemable Preferred Stock (incorporated by reference to the Company's Form 8-A filed June 6, 2003). 31(a)Certification of David H. Hoster II, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31(b)Certification of N. Keith McKey, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32(a)Certification of David H. Hoster II, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32(b)Certification of N. Keith McKey, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K during the quarter ended March 31, 2004: A Form 8-K was filed on February 11, 2004 under Item 12, incorporating by reference EastGroup's February 11, 2004 press release, setting forth the Company's fourth quarter 2003 earnings. 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. Date: May 6, 2004 EASTGROUP PROPERTIES, INC. By: /s/ BRUCE CORKERN ------------------------------------ Bruce Corkern, CPA Senior Vice President and Controller By: /s/ N. KEITH MCKEY ------------------------------------ N. Keith McKey, CPA Executive Vice President, Chief Financial Officer, Secretary and Treasurer