U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: SHARES OF COMMON STOCK, $.0001 PAR VALUE, SHARES OF SERIES D 7.95% CUMULATIVE REDEEMABLE PREFERRED STOCK, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (x) NO ( ) Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES ( ) NO (x) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (x) NO ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (x) Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one) Large Accelerated Filer (x) Accelerated Filer ( ) Non-accelerated Filer ( ) Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ( ) NO (x) State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter: $898,182,000. The number of shares of common stock, $.0001 par value, outstanding as of March 7, 2006 was 22,037,832. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 2006 Annual Meeting of Shareholders are incorporated by reference into Part III.
PART I ITEM 1. BUSINESS. Organization EastGroup Properties, Inc. (the Company or EastGroup) is an equity real estate investment trust (REIT) organized in 1969. The Company has elected to be taxed and intends to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code (the Code), as amended. Available Information The Company maintains a website at www.eastgroup.net. The Company posts its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files or furnishes such materials to the Securities and Exchange Commission (SEC). In addition, the Company's website includes items related to corporate governance matters, including, among other things, the Company's corporate governance guidelines, charters of various committees of the Board of Directors, and the Company's code of business conduct and ethics applicable to all employees, officers and directors. The Company intends to disclose on its website any amendment to, or waiver of, any provision of this code of business conduct and ethics applicable to the Company's directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC or the New York Stock Exchange. Copies of these reports and corporate governance documents may be obtained, free of charge, from the Company's website. Any shareholder also may obtain copies of these documents, free of charge, by sending a request in writing to: Investor Relations, EastGroup Properties, Inc., 300 One Jackson Place, 188 East Capitol Street, Jackson, MS 39201-2195. Administration EastGroup maintains its principal executive office and headquarters in Jackson, Mississippi. The Company has regional offices in Phoenix, Orlando and Houston and property management offices in Jacksonville, Tampa and Fort Lauderdale. Offices at these locations allow the Company to directly manage all of its Mississippi, Arizona, Florida and Houston properties, which together account for 55% of the Company's total portfolio on a square foot basis. In addition, the Company currently provides property administration (accounting of operations) for 95% of its total portfolio. The Company uses third-party management groups for the remainder of its portfolio. The regional offices in Arizona, Florida and Texas also provide development capability and oversight in those states. As of March 7, 2006, EastGroup had 60 full-time employees and one part-time employee. Operations EastGroup is focused on the development, acquisition and operation of industrial properties in major Sunbelt markets throughout the United States with an emphasis in the states of Florida, Texas, California and Arizona. The Company's goal is to maximize shareholder value by being the 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. EastGroup's strategy for growth is based on ownership of premier distribution facilities generally clustered near major transportation features in supply constrained submarkets. Substantially all of the Company's revenue is generated from renting warehouse distribution space. During 2005, EastGroup expanded its holdings principally through the acquisition of seven properties comprised of 1,210,000 square feet of warehouse space and 188 acres of land for future development and by the transfer of four properties (301,000 square feet) from development to real estate properties. In addition, the Company acquired a property that was vacant and is being redeveloped. The Company sold two properties (253,000 square feet) and one small parcel of land during 2005. The Company's current portfolio includes 21.9 million square feet of real estate properties with an additional 996,000 square feet under development. EastGroup may invest in other real estate investment trusts that may be potential candidates for a combination with EastGroup. At December 31, 2005 and 2004, the Company had no investment in other REITs. EastGroup incurs short-term floating rate bank debt in connection with the acquisition of real estate and payment of costs of development projects and, as market conditions permit, replaces floating rate debt with equity, including preferred equity, and/or fixed-rate term loans secured by real property. EastGroup also may, in appropriate circumstances, acquire one or more properties in exchange for EastGroup securities. EastGroup holds its properties as long-term investments, but may determine to sell certain properties that no longer meet its investment criteria. The Company may provide financing in connection with such sales of property if market conditions require. In addition, the Company may provide financing to a partner in connection with an acquisition of real estate in certain situations. The Company intends to continue to qualify as a REIT under the Code. To maintain its status as a REIT, the Company is required to distribute 90% of its ordinary taxable income to its shareholders. 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. EastGroup has no present intention of acting as an underwriter of offerings of securities of other issuers. The strategies and policies set forth above were determined and are subject to review by EastGroup's Board of Directors, which may change such strategies or policies based upon its evaluation of the state of the real estate market, the performance of EastGroup's assets, capital and credit market conditions, and other
relevant factors. EastGroup provides annual reports to its stockholders, which contain financial statements audited by the Company's independent registered public accounting firm. Environmental Matters Under various federal, state and local laws, ordinances and regulations, an owner of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Many such laws impose liability without regard to whether the owner knows of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to use such property as collateral in its borrowings. EastGroup's properties have been subjected to environmental audits by independent environmental consultants. These reports have not revealed any potential significant environmental liability. Management of EastGroup is not aware of any environmental liability that would have a material adverse effect on EastGroup's business, assets, financial position or results of operations. ITEM 1A. RISK FACTORS. In addition to the other information contained or incorporated by reference in this document, readers should carefully consider the following risk factors. Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on the Company's financial condition and the performance of its business. The Company refers to itself as "we" or "our" in the following risk factors. Real Estate Industry Risks We face risks associated with local real estate conditions in areas where we own properties. We may be affected adversely by general economic conditions and local real estate conditions. For example, an oversupply of industrial properties in a local area or a decline in the attractiveness of our properties to tenants would have a negative effect on us. Other factors that may affect general economic conditions or local real estate conditions include: o population and demographic trends; o employment and personal income trends; o income tax laws; o changes in interest rates and availability and costs of financing; o increased operating costs, including insurance premiums, utilities and real estate taxes, due to inflation and other factors which may not necessarily be offset by increased rents; and o construction costs. We may be unable to compete with our larger competitors and other alternatives available to tenants or potential tenants of our properties. The real estate business is highly competitive. We compete for interests in properties with other real estate investors and purchasers, many of whom have greater financial resources, revenues, and geographical diversity than we have. Furthermore, we compete for tenants with other property owners. All of our industrial properties are subject to significant local competition. We also compete with a wide variety of institutions and other investors for capital funds necessary to support our investment activities and asset growth. In addition, our portfolio of industrial properties faces competition from other properties within each submarket where they are located. We are subject to significant regulation that inhibits our activities. Local zoning and use laws, environmental statutes and other governmental requirements restrict our expansion, rehabilitation and reconstruction activities. These regulations may prevent us from taking advantage of economic opportunities. Legislation such as the Americans with Disabilities Act may require us to modify our properties and noncompliance could result in the imposition of fines or an award of damages to private litigants. Future legislation may impose additional requirements. We cannot predict what requirements may be enacted or what changes may be implemented to existing legislation. Risks Associated with Our Properties We may be unable to renew leases or relet space as leases expire. When a lease expires, a tenant may elect not to renew it. We may not be able to relet the property on similar terms, if we are able to relet the property at all. The terms of renewal or re-lease (including the cost of required renovations and/or concessions to tenants) may be less favorable to us than the prior lease. If we are unable to relet all or a substantial portion of our properties, or if the rental rates upon such reletting are significantly lower than expected rates, our cash generated before debt repayments and capital expenditures, and our ability to make expected distributions to stockholders, may be adversely affected. We have been and may continue to be affected negatively by tenant bankruptcies and leasing delays. At any time, a tenant may experience a downturn in its business that may weaken its financial condition. Similarly, a general decline in the economy may result in a decline in the demand for space at our industrial properties. As a result, our tenants may delay lease commencement, fail to make rental payments when due, or declare bankruptcy. Any such event could result in the termination of that tenant's lease and losses to us, and distributions to investors may decrease. We receive a substantial portion of our income as rents under long-term leases. If tenants are unable to comply with the terms of their leases because of rising costs or falling sales, we may deem it advisable to modify lease terms to allow tenants to pay a lower rent or a smaller share of taxes, insurance and other operating costs. If a tenant becomes insolvent or bankrupt, we cannot be sure
that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to the tenant. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the tenant. A tenant's default on its obligations to us could adversely affect our financial condition and the cash we have available for distribution. Our investment in property development may be more costly than we anticipate. We intend to continue to develop properties where market conditions warrant such investment. Once made, our investments may not produce results in accordance with our expectations. Risks associated with our current and future development and construction activities include: o the unavailabity of favorable financing alternatives; o construction costs exceeding original estimates due to rising interest rates and increases in the costs of materials and labor; o construction and lease-up delays resulting in increased debt service, fixed expenses and construction costs; o expenditure of funds and devotion of management's time to projects that we do not complete; o occupancy rates and rents at newly completed properties may fluctuate depending on a number of factors, including market and economic conditions, resulting in lower than projected rental rates and a corresponding lower return on our investment; and o complications (including building moratoriums and anti-growth legislation) in obtaining necessary zoning, occupancy and other governmental permits. We face risks associated with property acquisitions. We acquire individual properties and portfolios of properties, and intend to continue to do so. Our acquisition activities and their success are subject to the following risks: o when we are able to locate a desired property, competition from other real estate investors may significantly increase the purchase price; o acquired properties may fail to perform as expected; o the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates; o acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures; o we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and as a result, our results of operations and financial condition could be adversely affected; and o we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a claim were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow. Coverage under our existing insurance policies may be inadequate to cover losses. We generally maintain insurance policies related to our business, including casualty, general liability and other policies, covering our business operations, employees and assets. However, we would be required to bear all losses that are not adequately covered by insurance. In addition, there are certain losses that are not generally insured because it is not economically feasible to insure against them, including losses due to riots or acts of war. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, then we could lose the capital we invested in the properties, as well as the anticipated future revenue from the properties and, in the case of debt, which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties. Moreover, as a number of our properties are located in California, an area known for seismic activity, we may incur material losses in the future in excess of insurance proceeds from our earthquake insurance. Although we believe that our insurance programs are adequate, we cannot assure you that we will not incur losses in excess of our insurance coverage, or that we will be able to obtain insurance in the future at acceptable levels and reasonable costs. We face risks due to lack of geographic diversity. Substantially all of our properties are located in the Sunbelt region of the United States with an emphasis in the states of California, Florida, Texas and Arizona. A downturn in general economic conditions and local real estate conditions in these geographic regions, as a result of oversupply of or reduced demand for industrial properties, local business climate, business layoffs and changing demographics, would have a particularly strong adverse effect on us. We face risks due to the illiquidity of real estate which may limit our ability to vary our portfolio. Real estate investments are relatively illiquid. Our ability to vary our portfolio in response to changes in economic and other conditions will therefore be limited. In addition, the Internal Revenue Code limits our ability to sell our properties. If we must sell an investment, we cannot ensure that we will be able to dispose of the investment at terms favorable to the Company. We face possible environmental liabilities. Current and former real estate owners and operators may be required by law to investigate and clean up hazardous substances released at the properties they own or operate. They may also be liable to the government or to third parties for substantial property or natural resource damage, investigation costs and cleanup costs. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs the government incurs in connection with the contamination. Contamination may affect adversely the owner's ability to use, sell or lease real estate or to borrow using the real estate as
collateral. We have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of environmental conditions or violations with respect to the properties we currently or formerly owned. Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed of, released from, or present at, the property. A conveyance of the property, therefore, does not relieve the owner or operator from liability. Although Phase I environmental site assessments ("ESAs") have been conducted at our properties to identify potential sources of contamination at the properties, such ESAs do not reveal all environmental liabilities or compliance concerns that could arise from the properties. Moreover, material environmental liabilities or compliance concerns may exist, of which we are currently unaware, that in the future may have a material adverse effect on our business, assets or results of operations. Financing Risks We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk. We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. We anticipate that a portion of the principal of our debt will not be repaid prior to maturity. Therefore, we will likely need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt. We face risks related to "balloon payments." Certain of our mortgages will have significant outstanding principal balances on their maturity dates, commonly known as "balloon payments." There can be no assurance whether we will be able to refinance such balloon payments on the maturity of the loans, which may force disposition of properties on disadvantageous terms or require replacement with debt with higher interest rates, either of which would have an adverse impact on our financial performance and ability to pay dividends to investors. We face risks associated with our dependence on external sources of capital. In order to qualify as a REIT, we are required each year to distribute to our stockholders at least 90% of our REIT taxable income, and we are subject to tax on our income to the extent it is not distributed. Because of this distribution requirement, we may not be able to fund all future capital needs from cash retained from operations. As a result, to fund capital needs, we rely on third-party sources of capital, which we may not be able to obtain on favorable terms, if at all. Our access to third-party sources of capital depends upon a number of factors, including (i) general market conditions; (ii) the market's perception of our growth potential; (iii) our current and potential future earnings and cash distributions; and (iv) the market price of our capital stock. Additional debt financing may substantially increase our debt-to-total capitalization ratio. Additional equity financing may dilute the holdings of our current stockholders. Fluctuations in interest rates may adversely affect our operations and value of our stock. As of December 31, 2005, we had approximately $117 million of variable interest rate debt. As of December 31, 2005, the weighted average interest rate on our variable rate debt was 5.16%. We may also incur indebtedness in the future that bears interest at a variable rate or we may be required to refinance our existing debt at higher rates. Accordingly, increases in interest rates could adversely affect our financial condition, our ability to pay expected distributions to stockholders and the value of our stock. A lack of any limitation on our debt could result in our becoming more highly leveraged. Our governing documents do not limit the amount of indebtedness we may incur. Accordingly, our board of directors may incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT. We might become more highly leveraged as a result, and our financial condition and cash available for distribution to stockholders might be negatively affected and the risk of default on our indebtedness could increase. Other Risks The market value of our common stock could decrease based on our performance and market perception and conditions. The market value of our common stock may be based primarily upon the market's perception of our growth potential and current and future cash dividends, and may be secondarily based upon the real estate market value of our underlying assets. The market price of our common stock is influenced by the dividend on our common stock relative to market interest rates. Rising interest rates may lead potential buyers of our common stock to expect a higher dividend rate, which would adversely affect the market price of our common stock. In addition, rising interest rates would result in increased expense, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends. We may fail to qualify as a REIT. If we fail to qualify as a REIT, we will not be allowed to deduct distributions to stockholders in computing our taxable income and will be subject to federal income tax, including any applicable alternative minimum tax, at regular corporate rates. In addition, we may be barred from qualification as a REIT for the four years following disqualification. The additional tax incurred at regular corporate rates would significantly reduce the cash flow available for distribution to stockholders and for debt service. Furthermore, we would no longer be required by the Internal Revenue Code to make any distributions to our stockholders as a condition of REIT qualification. Any distributions to stockholders would be taxable as ordinary income to the extent of our current and accumulated earnings and profits, although such dividend distributions would be subject to a top federal tax rate of 15% through 2008. Corporate distributees, however, may be eligible for the dividends received deduction on the distributions, subject to limitations under the Internal Revenue Code. To qualify as a REIT, we must comply with certain highly technical and complex requirements. We cannot be certain we have complied with these requirements because there are few judicial and administrative interpretations of these provisions. In addition, facts and circumstances that may be beyond our
control may affect our ability to qualify as a REIT. We cannot assure you that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to our qualification as a REIT or with respect to the federal income tax consequences of qualification. We cannot assure you that we will remain qualified as a REIT. There is a risk of changes in the tax law applicable to real estate investment trusts. Since the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any of such legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors. Our Charter contains provisions that may adversely affect the value of shareholders' stock. Our charter generally limits any holder from acquiring more than 9.8% (in value or in number, whichever is more restrictive) of our outstanding equity stock (defined as all of our classes of capital stock, except our excess stock). The ownership limit may limit the opportunity for stockholders to receive a premium for their shares of common stock that might otherwise exist if an investor were attempting to assemble a block of shares in excess of 9.8% of the outstanding shares of equity stock or otherwise effect a change in control. Also, the request of the holders of a majority or more of our common stock is necessary for stockholders to call a special meeting. We also require advance notice by stockholders for the nomination of directors or proposal of business to be considered at a meeting of stockholders. We have adopted a stockholder rights plan that may make a change in control difficult. We have a stockholder rights plan. Under the terms of the plan, we declared a dividend of rights on our common stock and Series B preferred stock. The rights issued under the plan will be triggered, with certain exceptions, if and when any person or group acquires, or commences a tender offer to acquire, 15% or more of our shares, our Board of Directors determines that a substantial stockholder's ownership may be adverse to the interests of our other stockholders or our qualification as a REIT, or other similar events. The plan could have the effect of deterring or preventing our acquisition, even if a majority of our stockholders were in favor of such acquisition, and could have the effect of making it more difficult for a person or group to gain control of us or to change existing management. We have change of control agreements with certain of our officers that may deter changes of control of the Company. We have entered into change of control agreements with certain of our officers providing for the payment of money to these officers upon the occurrence of our change of control as defined in these agreements. If, within a certain time period (as set in the officer's agreement) following a change of control, we terminate the officer's employment other than for cause, or if the officer elects to terminate his or her employment with us for reasons specified in the agreement, we will make a severance payment equal to the officer's average annual compensation times an amount specified in the officer's agreement, together with the officer's base salary and vacation pay that have accrued but are unpaid through the date of termination. These agreements may deter our change of control because of the increased cost for a third party to acquire control of us. Our Board of Directors may authorize and issue securities without stockholder approval. Under our Charter, the board has the power to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as the board of directors may determine. The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders' best interests. Maryland business statutes may limit the ability of a third party to acquire control of us. Maryland law provides protection for Maryland corporations against unsolicited takeovers by limiting, among other things, the duties of the directors in unsolicited takeover situations. The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders rights plan, (c) make a determination under the Maryland Business Combination Act or the Maryland Control Share Acquisition Act, or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition. Moreover, under Maryland law the act of a director of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director. Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law. The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including mergers, dispositions of 10 percent or more of its assets, certain issuances of shares of stock and other specified transactions, with an "interested stockholder" or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met. An interested stockholder is generally a person owning or controlling, directly or indirectly, 10 percent or more of the voting power of the outstanding stock of the Maryland corporation. The Maryland Control Share Acquisition Act provides that "control shares" of a corporation acquired in a "control share acquisition" shall have no voting rights except to the extent approved by a vote of two-thirds of the votes eligible to cast on the matter. "Control Shares" means shares of stock that, if aggregated with all other shares of stock previously acquired by the acquirer, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of the voting power: one-tenth or more but less than one-
third, one-third or more but less than a majority or a majority or more of all voting power. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. If voting rights of control shares acquired in a control share acquisition are not approved at a stockholders' meeting, then subject to certain conditions and limitations, the issuer may redeem any or all of the control shares for fair value. If voting rights of such control shares are approved at a stockholders' meeting and the acquirer becomes entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. EastGroup owned 180 industrial properties and one office building at December 31, 2005. These properties are located primarily in the Sunbelt states of Arizona, California, Florida and Texas, the majority of which are clustered around major transportation features in supply constrained submarkets. The Company has developed over 24% of its total portfolio. The Company's focus is the ownership of business distribution space (currently 75% of the total portfolio) with the remainder in bulk distribution space (20%) and business service space (5%). Business distribution space properties are typically multi-tenant buildings with a building depth of 200 feet or less, clear height of 20-24 feet, office finish of 10-25% and truck courts with a depth of 100-120 feet. See Consolidated Financial Statement Schedule III - Real Estate Properties and Accumulated Depreciation for a detailed listing of the Company's properties. At December 31, 2005, EastGroup did not own any single property that was 10% or more of total book value or 10% or more of total gross revenues and thus is not subject to the requirements of Items 14 and 15 of Form S-11. ITEM 3. LEGAL PROCEEDINGS. The Company is not presently involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company or its properties, other than routine litigation arising in the ordinary course of business or which is expected to be covered by the Company's liability insurance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
PART II. OTHER INFORMATION ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The Company's shares of Common Stock are listed for trading on the New York Stock Exchange under the symbol "EGP." The following table shows the high and low share prices for each quarter reported by the New York Stock Exchange during the past two years and per share distributions paid for each quarter. Shares of Common Stock Market Prices and Dividends <TABLE> <CAPTION> Calendar 2005 Calendar 2004 ---------------------------------------------------------------------------------------------------- Quarter High Low Distributions High Low Distributions ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> First $39.90 35.60 $ .485 $36.00 32.28 $ .480 Second 43.50 36.21 .485 35.75 27.85 .480 Third 45.74 39.83 .485 34.99 31.58 .480 Fourth 46.95 40.00 .485 38.65 33.05 .480 -------------- -------------- $1.940 $1.920 ============== ============== </TABLE> As of March 7, 2006, there were approximately 1,040 holders of record of the Company's 22,037,832 outstanding shares of common stock. The Company distributed all of its 2005 and 2004 taxable income to its stockholders. Accordingly, no provision for income taxes was necessary. The following table summarizes the federal income tax treatment for all distributions by the Company for the years 2005 and 2004. Federal Income Tax Treatment of Share Distributions <TABLE> <CAPTION> Years Ended December 31, ------------------------- 2005 2004 ------------------------- <S> <C> <C> Common Share Distributions: Ordinary Income........................... $1.4816 1.4860 Return of capital......................... .3724 .4060 Long-term 15% capital gain................ .0032 .0140 Long-term 25% capital gain................ .0828 .0140 ------------------------- Total Common Distributions.................... $1.9400 1.9200 ========================= </TABLE> Securities Authorized For Issuance Under Equity Compensation Plans See Item 12 of this Annual Report on Form 10-K, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," for certain information regarding the Company's equity compensation plans. Purchases of Equity Securities by the Issuer and Affiliated Purchasers <TABLE> <CAPTION> Total Number Total Number of Shares Purchased Maximum Number of Shares of Shares Average Price as Part of Publicly Announced That May Yet Be Purchased Period Purchased Paid Per Share Plans or Programs Under the Plans or Programs --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 10/01/05 thru 10/31/05 - - - 672,300 11/01/05 thru 11/30/05 - - - 672,300 12/01/05 thru 12/31/05 649 (1) $45.04 - 672,300 (2) ----------------------------------------------------------------------- Total 649 $45.04 - ======================================================================= </TABLE> (1) As permitted under the Company's equity compensation plans, these shares were withheld by the Company to satisfy the tax withholding obligations for those employees who elected this option in connection with the vesting of shares of restricted stock. Shares withheld for tax withholding obligations do not affect the total number of remaining shares available for repurchase under the Company's common stock repurchase plan. (2) 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. Under the common stock repurchase 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. The Company has not repurchased any shares under this plan since 2000.
ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected consolidated financial data for the Company and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. <TABLE> <CAPTION> Years Ended December 31, ------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------------------------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> <C> <C> OPERATING DATA Revenues Income from real estate operations........................... $ 125,548 113,688 106,571 101,973 99,087 Equity in earnings of unconsolidated investment.............. 450 69 - - - Gain on involuntary conversion............................... 243 154 - - - Other income................................................. 264 289 227 617 727 ------------------------------------------------------------- 126,505 114,200 106,798 102,590 99,814 ------------------------------------------------------------- Expenses Operating expenses from real estate operations............... 35,687 31,983 31,298 29,362 25,138 Depreciation and amortization................................ 39,234 33,135 31,626 29,944 26,567 General and administrative................................... 6,874 6,711 4,966 4,179 4,573 Minority interest in joint ventures.......................... 484 490 416 375 350 ------------------------------------------------------------- 82,279 72,319 68,306 63,860 56,628 ------------------------------------------------------------- Income before gain on sale of real estate investments 44,226 41,881 38,492 38,730 43,186 Gain on sale of real estate investments...................... - - - 93 4,311 ------------------------------------------------------------- Income after gain on sale of real estate investments........... 44,226 41,881 38,492 38,823 47,497 Other Income (Expense) Gain on securities........................................... - - 421 1,836 2,967 Interest income.............................................. 247 121 22 309 1,041 Interest expense............................................. (23,444) (20,349) (18,878) (17,246) (17,677) ------------------------------------------------------------- Income from Continuing Operations 21,029 21,653 20,057 23,722 33,828 Discontinued operations Income (loss) from real estate operations.................... (2) 224 276 (30) 354 Gain (loss) on sale of real estate investments............... 1,164 1,450 112 (66) - ------------------------------------------------------------- Income (loss) from discontinued operations..................... 1,162 1,674 388 (96) 354 ------------------------------------------------------------- Net income .................................................... 22,191 23,327 20,445 23,626 34,182 Preferred dividends-Series A................................. - - 2,016 3,880 3,880 Preferred dividends-Series B................................. - - 2,598 6,128 6,128 Preferred dividends-Series D................................. 2,624 2,624 1,305 - - Costs on redemption of Series A preferred.................... - - 1,778 - - ------------------------------------------------------------- Net income available to common stockholders.................... $ 19,567 20,703 12,748 13,618 24,174 ============================================================= BASIC PER SHARE DATA Income from continuing operations............................ $ .86 .92 .70 .87 1.52 Income (loss) from discontinued operations................... .05 .08 .02 (.01) .02 ------------------------------------------------------------- Net income available to common stockholders.................. $ .91 1.00 .72 .86 1.54 ============================================================= Weighted average shares outstanding.......................... 21,567 20,771 17,819 15,868 15,697 ============================================================= DILUTED PER SHARE DATA Income from continuing operations............................ $ .84 .90 .68 .85 1.49 Income (loss) from discontinued operations................... .05 .08 .02 (.01) .02 ------------------------------------------------------------- Net income available to common stockholders.................. $ .89 .98 .70 .84 1.51 ============================================================= Weighted average shares outstanding.......................... 21,892 21,088 18,194 16,237 16,046 ============================================================= OTHER PER SHARE DATA Book value (at end of year).................................. $ 15.06 15.14 16.01 15.11 16.19 Common distributions declared................................ 1.94 1.92 1.90 1.88 1.80 Common distributions paid.................................... 1.94 1.92 1.90 1.88 1.80 BALANCE SHEET DATA (AT END OF YEAR) Real estate investments, at cost ............................ $1,024,459 904,312 842,577 791,684 741,755 Real estate investments, net of accumulated depreciation..... 818,032 729,250 695,643 672,707 649,554 Total assets................................................. 863,538 768,664 729,267 703,737 684,062 Mortgage, bond and bank loans payable........................ 463,725 390,105 338,272 322,300 291,072 Total liabilities............................................ 496,972 414,974 360,518 345,493 311,613 Minority interest in joint venture........................... 1,702 1,884 1,804 1,759 1,739 Total stockholders' equity................................... 364,864 351,806 366,945 356,485 370,710 </TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW EastGroup's goal is to maximize shareholder value by being the leading provider in its markets of functional, flexible, and high 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 regions. The Company's core markets are in the states of Florida, Texas, California and Arizona. The Company primarily generates revenue 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 risk is leasing space. During 2005, leases on 4,458,000 square feet (20.5%) of EastGroup's total square footage of 21,742,000 expired, and the Company was successful in renewing or re-leasing 68% of that total. In addition, EastGroup leased 1,699,000 square feet of other vacant space during the year. During 2005, average rental rates on new and renewal leases increased by 1.4%. EastGroup's total leased percentage increased to 95.3% at December 31, 2005 from 94.4% at December 31, 2004. Leases scheduled to expire in 2006 were 14.2% of the portfolio on a square foot basis at December 31, 2005. Since the end of 2005, the Company has experienced positive leasing activity and reduced this percentage to 9.8% as of March 7, 2006. Property net operating income from same properties increased 1.2% for 2005 as compared to 2004. The fourth quarter of 2005 was EastGroup's tenth consecutive quarter of positive same property comparisons. The Company generates new sources of leasing revenue through its acquisition and development programs. During 2005, EastGroup purchased 188 acres of land for development and seven properties (1,210,000 square feet) for approximately $95.5 million. The Company purchased an additional property for approximately $4.1 million, which is currently vacant and is being redeveloped into a state-of-the-art incubator research and development center. EastGroup plans to sell (at cost) a 20% ownership interest in this property to an entity controlled by its co-developer partner, who is also a 20% co-owner of the Company's University Business Center complex in the same submarket. EastGroup continues to see targeted development as a major contributor to the Company's growth. The Company mitigates risks associated with development through a Board-approved maximum level of land held for development and adjusting development start dates according to leasing activity. During 2005, the Company transferred four properties (301,000 square feet) with aggregate costs of $15.4 million at the date of transfer from development to real estate properties. Three of these properties are 100% leased and the other is 86% leased. The Company transferred two additional properties to the portfolio in the first quarter of 2006 and expects to transfer two more in the second quarter, all of which are 100% leased. Also, the Company anticipates approximately $70 million in new development starts during 2006. The Company sold two properties and one small parcel of land during 2005 for net proceeds of $6.0 million, generating combined gains of $1.2 million. These dispositions represented an opportunity to recycle capital into acquisitions and development with greater upside potential. For 2006, the Company has projected dispositions of approximately $35 million during the first half of the year and new acquisitions of $35 million in mid-year. The projected dispositions are all in Memphis and reflect the Company's plans of reducing ownership in Memphis, a noncore market, as market conditions permit. The Company primarily funds its acquisition and development programs through a $175 million line of credit (as discussed in Liquidity and Capital Resources). 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. On March 31, 2005, EastGroup closed the sale of 800,000 shares of its common stock. On May 2, 2005, the underwriter closed on the exercise of a portion of its over-allotment option and purchased 60,000 additional shares. Total net proceeds from the offering of the shares were approximately $31.6 million after deducting the underwriting discount and other offering expenses. At December 31, 2005, the Company's investment in Industry Distribution Center II in Los Angeles was $2,618,000, a decrease of $6,638,000 from December 31, 2004. In May 2005, EastGroup and the property co-owner closed a nonrecourse first mortgage loan secured by Industry II. The Company has a 50% undivided tenant-in-common interest in the 309,000 square foot warehouse. The $13.3 million loan has a fixed interest rate of 5.31%, a ten-year term and an amortization schedule of 25 years. As part of this transaction, the loan proceeds payable to the property co-owner ($6.65 million) were paid to EastGroup to reduce the $6.75 million note that the Company advanced to the property co-owner in November 2004 related to the property's acquisition. Also at the closing of the permanent financing, the co-owner repaid the remaining balance of $100,000 on this note. The total proceeds of $13.3 million were used to reduce EastGroup's outstanding variable rate bank debt. In addition to the repayment of the $6.75 million note in 2005, the co-owner repaid the $800,000 additional note that EastGroup had advanced to the co-owner in 2004. In late November 2005, the Company closed a $39 million, nonrecourse first mortgage loan secured by five properties. The note has a fixed interest rate of 4.98%, a ten-year term, and an amortization schedule of 20 years. The proceeds of the note were used to reduce floating rate bank borrowings. In 2006, the Company plans to obtain approximately $100 million of fixed rate debt, using the proceeds of the borrowings to reduce variable rate bank line balances. Tower Automotive, Inc. (Tower) filed for Chapter 11 reorganization on February 2, 2005. Tower, which leases 210,000 square feet from EastGroup under a lease expiring in December 2010, is current with their rental payments to EastGroup through March 2006. EastGroup is obligated under a recourse mortgage loan on the property for $10,345,000 as of December 31, 2005. Property net operating income for 2005 was $1,374,000 for the property occupied by Tower. Rental income due for 2006 is $1,389,000 with estimated property net operating income for 2006 of $1,366,000.
EastGroup has one reportable segment--industrial properties. These properties are primarily located 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: 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 available to common stockholders (FFO), defined as net income (loss) computed in accordance with 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 calculates FFO based on the National Association of Real Estate Investment Trust's (NAREIT's) definition. 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 space and to recover from tenants the operating costs associated with those leases. Real estate income is comprised of rental income, pass-through income and other real estate income including lease termination fees. Property operating expenses are comprised of property taxes, insurance, utilities, repair and maintenance expenses, management fees, other operating costs and bad debt expense. Generally, the Company's most significant operating expenses are property taxes and insurance. 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 recovered. 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), interest rates, the amount of
leverage the Company employs and general and administrative expense. The following table presents the three fiscal years reconciliations of PNOI and FFO Available to Common Stockholders to Net Income. <TABLE> <CAPTION> Years Ended December 31, -------------------------------------------- 2005 2004 2003 -------------------------------------------- (In thousands) <S> <C> <C> <C> Income from real estate operations.............................................. $ 125,548 113,688 106,571 Operating expenses from real estate operations.................................. (35,687) (31,983) (31,298) -------------------------------------------- PROPERTY NET OPERATING INCOME................................................... 89,861 81,705 75,273 Equity in earnings of unconsolidated investment (before depreciation)........... 582 84 - Income from discontinued operations (before depreciation and amortization)...... 70 540 700 Interest income................................................................. 247 121 22 Gain on involuntary conversion.................................................. 243 154 - Gain on securities.............................................................. - - 421 Other income.................................................................... 264 289 227 Interest expense................................................................ (23,444) (20,349) (18,878) General and administrative expense.............................................. (6,874) (6,711) (4,966) Minority interest in earnings (before depreciation and amortization)............ (625) (633) (561) Gain on sale of nondepreciable real estate investments.......................... 33 - 6 Dividends on Series A preferred shares.......................................... - - (2,016) Dividends on Series D preferred shares.......................................... (2,624) (2,624) (1,305) Costs on redemption of Series A preferred....................................... - - (1,778) -------------------------------------------- FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS.......................... 57,733 52,576 47,145 Depreciation and amortization from continuing operations........................ (39,234) (33,135) (31,626) Depreciation and amortization from discontinued operations...................... (72) (316) (424) Depreciation from unconsolidated investment..................................... (132) (15) - Minority interest depreciation and amortization................................. 141 143 145 Gain on sale of depreciable real estate investments............................. 1,131 1,450 106 Dividends on Series B convertible preferred shares.............................. - - (2,598) -------------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS..................................... 19,567 20,703 12,748 Dividends on preferred shares................................................... 2,624 2,624 5,919 Costs on redemption of Series A preferred....................................... - - 1,778 -------------------------------------------- NET INCOME...................................................................... $ 22,191 23,327 20,445 ============================================ Net income available to common stockholders per diluted share................... $ .89 .98 .70 Funds from operations available to common stockholders per diluted share (1).... 2.64 2.49 2.36 Diluted shares for earnings per share....................................... 21,892 21,088 18,194 Convertible preferred stock................................................. - - 1,814 -------------------------------------------- (1) Diluted shares for funds from operations.................................... 21,892 21,088 20,008 ============================================ </TABLE> 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. FFO per share for the fourth quarter of 2005 was $.68 per share compared with $.64 per share for the same period of 2004, an increase of 6.3%. The increase in FFO for the fourth quarter was mainly due to a PNOI increase of $1,836,000, or 8.7%. This increase in PNOI was primarily attributable to $1,312,000 from 2004 and 2005 acquisitions, $510,000 from newly developed properties and $85,000 from same property growth. The fourth quarter of 2005 was the sixth consecutive quarter of increased FFO as compared to the previous year's quarter. For the year 2005, FFO was $2.64 per share compared with $2.49 for 2004, an increase of 6.0%. The increase in FFO for 2005 was mainly due to a PNOI increase of $8,156,000, or 10.0%. The increase in PNOI was primarily attributable to $4,898,000 from 2004 and 2005 acquisitions, $2,377,000 from newly developed properties and $935,000 from same property growth.
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. PNOI from same properties increased .4% for the fourth quarter. The fourth quarter of 2005 was the tenth consecutive quarter of positive results. For the year 2005, PNOI from same properties increased 1.2%. 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. Occupancy at December 31, 2005 was 94.3%, the highest level since the first quarter of 2001, and an increase from September 30, 2005 of 93.6%, June 30, 2005 of 91.8% and March 31, 2005 of 91.2%. Occupancy has ranged from 91.0% to 94.6% for eleven consecutive quarters. o Rental rate change represents the rental rate increase or decrease on new leases compared to expiring leases on the same space. Rental rate decreases on new and renewal leases averaged 1.0% for the fourth quarter; for the year, rental rate increases averaged 1.4%.
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 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 sheets 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 sheets 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. 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 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. On a quarterly basis, the Company evaluates outstanding receivables and estimates the allowance for doubtful 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 doubtful accounts is adequate for its outstanding receivables for the periods presented. In the event that the allowance for doubtful 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 at least 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 2005, 2004 and 2003 taxable income to its stockholders. Accordingly, no provision for income taxes was necessary.
FINANCIAL CONDITION EastGroup's assets were $863,538,000 at December 31, 2005, an increase of $94,874,000 from December 31, 2004. Liabilities increased $81,998,000 to $496,972,000 and stockholders' equity increased $13,058,000 to $364,864,000 during the same period. The paragraphs that follow explain these changes in detail. ASSETS Real Estate Properties Real estate properties increased $98,446,000 during the year ended December 31, 2005. This increase was primarily due to the purchase of seven properties for total costs of $70,882,000 and the transfer of four properties from development with total costs of $15,360,000, as detailed below. <TABLE> <CAPTION> Real Estate Properties Acquired in 2005 Location Size Date Acquired Cost (1) ----------------------------------------------------------------------------------------------------------------- (Square feet) (In thousands) <S> <C> <C> <C> <C> Arion Business Park ................... San Antonio, TX 524,000 01-21-05 $ 35,603 Interstate Distribution Center......... Jacksonville, FL 181,000 03-31-05 7,578 Benan Distribution Center.............. Tucson, AZ 44,000 06-15-05 2,549 Clay Campbell Distribution Center...... Houston, TX 118,000 10-19-05 3,741 World Houston 18....................... Houston, TX 33,000 10-21-05 1,835 Wetmore Business Center................ San Antonio, TX 198,000 12-01-05 12,299 Oak Creek Distribution Center IV....... Tampa, FL 112,000 12-07-05 7,277 -------------- --------------- Total Acquisitions............... 1,210,000 $ 70,882 ============== =============== </TABLE> (1) Total cost of the properties acquired was $76,786,000, of which $70,882,000 was allocated to real estate properties as indicated above. Intangibles associated with the purchases of real estate were allocated as follows: $5,882,000 to in-place lease intangibles and $337,000 to above market leases (both included in Other Assets on the consolidated balance sheet) and $315,000 to below market leases (included in Other Liabilities on the consolidated balance sheet). All of these costs are amortized over the remaining lives of the associated leases in place at the time of acquisition. The Company paid cash of $46,286,000 for the properties and intangibles acquired, assumed mortgages totaling $29,218,000 and recorded premiums totaling $1,282,000 to adjust the mortgage loans assumed to fair value. <TABLE> <CAPTION> Real Estate Properties Transferred from Development in 2005 Location Size Date Transferred Cost at Transfer ----------------------------------------------------------------------------------------------------------------------- (Square feet) (In thousands) <S> <C> <C> <C> <C> Santan 10.............................. Chandler, AZ 65,000 01-31-05 $ 3,493 Sunport Center V....................... Orlando, FL 63,000 01-31-05 3,259 Palm River South I..................... Tampa, FL 79,000 05-31-05 3,842 World Houston 16....................... Houston, TX 94,000 09-01-05 4,766 -------------- ---------------- Total Developments Transferred... 301,000 $ 15,360 ============== ================ </TABLE> In addition to acquisitions and developments in 2005, the Company made capital improvements of $11,262,000 on existing and acquired properties (shown by category in the Capital Expenditures table under Results of Operations). The Company also acquired one parcel of land for additional parking at an existing property for $221,000 and transferred land with costs of $662,000 from development to an operating property for a customer storage yard. Also, the Company incurred costs of $4,017,000 on development properties that had transferred to real estate properties; the Company records these expenditures as development costs during the 12-month period following transfer. Real estate properties decreased $3,770,000 for one property that transferred to real estate held for sale during 2005, which was subsequently sold.
Development The investment in development at December 31, 2005 was $77,483,000 compared to $39,330,000 at December 31, 2004. Total incremental capital investment for development for 2005 was $58,192,000. In addition to the costs of $54,175,000 incurred for the year as detailed in the development activity table, the Company incurred costs of $4,017,000 on developments during the 12-month period following transfer to real estate properties. During 2005, EastGroup acquired 188.1 acres of development land as indicated below. Costs associated with these land acquisitions are all included in the respective markets in the development activity table. <TABLE> <CAPTION> Development Land Acquired in 2005 Location Size Date Acquired Cost ----------------------------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> Arion Business Park Land................... San Antonio, TX 15.5 Acres 01-21-05 $ 2,093 Southridge Additional Land................. Orlando, FL 32.2 Acres 01-24-05 1,920 Oak Creek Land............................. Tampa, FL 65.8 Acres 02-15-05 4,957 Freeport Land.............................. Houston, TX 33.0 Acres 09-27-05 4,121 SunCoast Commerce Park Land................ Fort Myers, FL 9.6 Acres 09-30-05 1,988 World Houston Land......................... Houston, TX 11.6 Acres 11-04-05 1,398 World Houston Land......................... Houston, TX 20.4 Acres 12-02-05 2,219 --------------- --------------- Total Development Land Acquisitions..... 188.1 Acres $ 18,696 =============== =============== </TABLE> In addition to the land purchases, the Company acquired Castilian Research Center in Goleta (Santa Barbara), California for $4,129,000, which is included in the development table below. Castilian is currently vacant and is being redeveloped into a state-of-the-art incubator research and development center. EastGroup plans to sell (at cost) a 20% ownership interest in this property to an entity controlled by its co-developer partner, who is also a 20% co-owner of the Company's University Business Center complex in the same submarket.
The Company transferred four developments (two 100%, one 92% and one 86% leased at the date of transfer) to real estate properties during 2005 with a total investment of $15,360,000 as of the date of transfer. In addition, land with costs of $662,000 was transferred from development to an operating property for a customer storage yard. <TABLE> <CAPTION> Costs Incurred ---------------------------------------------------- Costs For the Year Estimated Transferred Ended Cumulative Total DEVELOPMENT Size in 2005 12/31/05 as of 12/31/05 Costs(1) - ------------------------------------------------------------------------------------------------------------------------------------ (Square feet) (In thousands) <S> <C> <C> <C> <C> <C> LEASE-UP Executive Airport CC II, Fort Lauderdale, FL..... 55,000 $ - 1,513 4,484 4,600 Southridge I, Orlando, FL........................ 41,000 - 2,087 2,931 3,900 Southridge V, Orlando, FL........................ 70,000 - 3,390 4,672 4,900 Palm River South II, Tampa, FL................... 82,000 1,457 2,578 4,035 4,500 Sunport Center VI, Orlando, FL................... 63,000 1,044 2,290 3,334 3,800 Techway SW III, Houston, TX...................... 100,000 1,150 3,246 4,396 5,700 ------------------------------------------------------------------------------- Total Lease-up..................................... 411,000 3,651 15,104 23,852 27,400 ------------------------------------------------------------------------------- UNDER CONSTRUCTION World Houston 15, Houston, TX.................... 63,000 1,007 1,420 2,427 5,800 World Houston 21, Houston, TX.................... 68,000 569 1,523 2,092 3,800 Southridge IV, Orlando, FL....................... 70,000 1,905 1,525 3,430 4,700 Santan 10 II, Chandller, AZ...................... 85,000 1,383 1,490 2,873 4,900 Arion 14, San Antonio, TX........................ 66,000 517 1,134 1,651 3,700 Arion 17, San Antonio, TX........................ 40,000 710 618 1,328 3,500 Oak Creek III, Tampa, FL........................ 61,000 942 - 942 3,700 Southridge II, Orlando, FL....................... 41,000 1,456 - 1,456 4,700 Castilian Research Center, Santa Barbara, CA..... 35,000 - 4,191 4,191 5,800 ------------------------------------------------------------------------------- Total Under Construction........................... 529,000 8,489 11,901 20,390 40,600 ------------------------------------------------------------------------------- PROSPECTIVE DEVELOPMENT (PRIMARILY LAND) Phoenix, AZ...................................... 129,000 (1,383) 348 1,161 6,500 Tucson, AZ....................................... 70,000 - - 326 3,500 Tampa, FL........................................ 464,000 (2,399) 5,813 4,871 25,300 Orlando, FL...................................... 814,000 (4,405) 5,824 8,585 59,100 West Palm Beach, FL.............................. 20,000 - 76 554 2,300 Fort Myers, FL................................... 126,000 - 2,081 2,081 8,800 El Paso, TX...................................... 251,000 - - 2,444 9,600 Houston, TX...................................... 1,317,000 (2,726) 8,336 11,514 69,300 San Antonio, TX.................................. 65,000 (1,227) 2,227 1,000 5,200 Jackson, MS...................................... 28,000 - 124 705 2,000 ------------------------------------------------------------------------------- Total Prospective Development...................... 3,284,000 (12,140) 24,829 33,241 191,600 ------------------------------------------------------------------------------- 4,224,000 $ - 51,834 77,483 259,600 =============================================================================== DEVELOPMENTS COMPLETED AND TRANSFERRED TO REAL ESTATE PROPERTIES DURING THE YEAR ENDED DECEMBER 31, 2005 Santan 10, Chandler, AZ.......................... 65,000 $ - 187 3,493 Sunport Center V, Orlando, FL.................... 63,000 - 5 3,259 Palm River South I, Tampa, FL.................... 79,000 - 650 3,842 World Houston 16, Houston, TX.................... 94,000 - 1,499 4,766 ------------------------------------------------------------------- Total Transferred to Real Estate Properties........ 301,000 $ - 2,341 15,360 (2) =================================================================== </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. (2) Represents cumulative costs at the date of transfer.
Accumulated depreciation on real estate properties increased $31,765,000 primarily due to depreciation expense of $32,693,000 on real estate properties, offset by accumulated depreciation of $834,000 on one property transferred to real estate held for sale in 2005 as discussed below. Real estate held for sale was $773,000 at December 31, 2005 and $2,637,000 at December 31, 2004. Delp Distribution Center II that was transferred to real estate held for sale in 2004 was sold at the end of February 2005. Lamar Distribution Center II was transferred from the portfolio in the second quarter of 2005 and was subsequently sold during the same period. The sale of Delp II and Lamar II reflects the Company's plan of reducing ownership in Memphis, a noncore market, as market conditions permit. Also, in the third quarter, the remaining Sabal land in Tampa was sold. See Note 2 in the Notes to the Consolidated Financial Statements for a summary of the gains on the sale of these properties. The Company has a 50% undivided tenant-in-common interest in Industry Distribution Center II located in the City of Industry (Los Angeles), California. The building is 100% leased through December 2014 to a single tenant who owns the other 50% interest in the property. At December 31, 2005, the Company's investment in Industry II was $2,618,000, a decrease of $6,638,000 from December 31, 2004. In connection with the closing of Industry II in November 2004, EastGroup advanced a total of $7,550,000 in two separate notes to the property co-owner, one for $6,750,000 and one for $800,000. At the end of May 2005, EastGroup and the property co-owner closed a nonrecourse first mortgage loan secured by Industry II. The $13.3 million loan has a fixed interest rate of 5.31%, a ten-year term and an amortization schedule of 25 years. EastGroup's 50% share of the loan proceeds ($6.65 million) reduced the carrying value of the investment. The loan proceeds payable to the property co-owner ($6.65 million) were paid to EastGroup to reduce the $6.75 million note that the Company had advanced to the property co-owner. Also at the closing, the co-owner repaid the remaining balance of $100,000 on this note. The total proceeds of $13.3 million were used to reduce EastGroup's outstanding variable rate bank debt. The $800,000 note was repaid to EastGroup during the last half of 2005. See Notes 1(a), 3 and 4 in the Notes to the Consolidated Financial Statements for more information related to the unconsolidated investment and mortgage loans receivable. A summary of the changes in Other Assets is presented in Note 5 in the Notes to the Consolidated Financial Statements. LIABILITIES Mortgage notes payable increased $43,287,000 during the year ended December 31, 2005. The Company closed a new $39,000,000, nonrecourse first mortgage loan that has a fixed interest rate of 4.98%, a ten-year term, and an amortization schedule of 20 years and used the proceeds of this note to reduce floating rate bank borrowings. During the period, EastGroup assumed three mortgages totaling $29,218,000 on the acquisitions of Arion, Interstate Jacksonville and Oak Creek IV and recorded premiums totaling $1,282,000 to adjust the mortgage loans assumed to fair value. These premiums are being amortized over the remaining lives of the associated mortgages. Also, the Company repaid five mortgages totaling $18,435,000 with a weighted average interest rate of 8.014%. Other decreases were regularly scheduled principal payments of $7,445,000 and mortgage loan premium amortization of $333,000. Notes payable to banks increased $30,333,000 as a result of advances of $187,286,000 exceeding repayments of $156,953,000. The Company's credit facilities are described in greater detail under Liquidity and Capital Resources. See Note 8 in the Notes to the Consolidated Financial Statements for a summary of changes in Accounts Payable and Accrued Expenses. STOCKHOLDERS' EQUITY Distributions in excess of earnings increased $22,723,000 as a result of dividends on common and preferred stock of $44,914,000 exceeding net income for financial reporting purposes of $22,191,000. On March 31, 2005, EastGroup closed the sale of 800,000 shares of its common stock. On May 2, 2005, the underwriter closed on the exercise of a portion of its over-allotment option and purchased 60,000 additional shares. Total net proceeds from the offering of the shares were $31,597,000 after deducting the underwriting discount and other offering expenses.
RESULTS OF OPERATIONS 2005 Compared to 2004 Net income available to common stockholders for 2005 was $19,567,000 ($.91 per basic share and $.89 per diluted share) compared to $20,703,000 ($1.00 per basic share and $.98 per diluted share) for 2004. Diluted earnings per share (EPS) for 2005 included a $.05 per share gain on the sale of real estate properties compared to a $.07 per share gain on the sale of properties in 2004. PNOI increased by $8,156,000 or 10.0% for 2005 compared to 2004, primarily due to increased average occupancy, which includes new acquisitions and developments. Expense to revenue ratios were 28.4% in 2005 compared to 28.1% in 2004. The Company's percentage leased was 95.3% at December 31, 2005 compared to 94.4% at December 31, 2004. Occupancy at the end of 2005 was 94.3% compared to 93.2% at the end of 2004. Occupancy at the end of 2005 was the highest since the first quarter of 2001. The increase in PNOI was primarily attributable to $4,898,000 from 2004 and 2005 acquisitions, $2,377,000 from newly developed properties and $935,000 from same property growth. These increases in PNOI were offset by increased depreciation and amortization expense and other costs as discussed below. In November 2004, the Company acquired a 50% undivided tenant-in-common interest in Industry Distribution Center II and accounts for this investment under the equity method of accounting. The Company recognized $450,000 of equity in earnings from this unconsolidated investment in 2005 and $69,000 in 2004 (PNOI of $798,000 for 2005 and $84,000 for 2004 not included above). EastGroup also earned $224,000 and $65,000 for 2005 and 2004, respectively, in mortgage loan interest income on the advances that the Company made to the co-owner in connection with the closing of this property. These loans were repaid by the co-owner during 2005. See Notes 1(a), 3 and 4 in the Notes to the Consolidated Financial Statements for more information related to this investment and the mortgage loans receivable. The following table presents the components of interest expense for 2005 and 2004: <TABLE> <CAPTION> Years Ended December 31, ------------------------ Increase 2005 2004 (Decrease) ---------------------------------------- (In thousands, except rates of interest) <S> <C> <C> <C> Average bank borrowings....................................... $ 100,504 66,867 33,637 Weighted average variable interest rates...................... 4.53% 2.76% VARIABLE RATE INTEREST EXPENSE Variable rate interest (excluding loan cost amortization)..... 4,555 1,845 2,710 Amortization of bank loan costs............................... 357 404 (47) ---------------------------------------- Total variable rate interest expense.......................... 4,912 2,249 2,663 ---------------------------------------- FIXED RATE INTEREST EXPENSE (1) Fixed rate interest (excluding loan cost amortization)........ 20,573 19,388 1,185 Amortization of mortgage loan costs........................... 444 427 17 ---------------------------------------- Total fixed rate interest expense............................. 21,017 19,815 1,202 ---------------------------------------- Total interest................................................ 25,929 22,064 3,865 Less capitalized interest..................................... (2,485) (1,715) (770) ---------------------------------------- TOTAL INTEREST EXPENSE........................................ $ 23,444 20,349 3,095 ======================================== </TABLE> (1) Does not include interest expense for discontinued operations. See Note 2 in the Notes to the Consolidated Financial Statements for this information.
Interest costs incurred during the period of construction of real estate properties are capitalized and offset against interest expense. Higher bank borrowings were attributable to increased acquisition and development activity during 2005. The Company's weighted average variable interest rates in 2005 were significantly higher than in 2004. Anticipating that variable rates would indeed rise over time, the Company has taken advantage of the lower available longer term interest rates in the market during the past several years and has closed several new mortgages with ten-year terms at fixed rates deemed by management to be attractive, 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. A summary of the Company's weighted average interest rates on mortgage debt for the past several years is presented below: <TABLE> <CAPTION> WEIGHTED AVERAGE MORTGAGE DEBT AS OF: INTEREST RATE ---------------------------------------------------------------------- <S> <C> December 31, 2001............................. 7.61% December 31, 2002............................. 7.34% December 31, 2003............................. 6.92% December 31, 2004............................. 6.74% December 31, 2005............................. 6.31% </TABLE> The increase in mortgage interest expense in 2005 was primarily due to the new and assumed mortgages on acquired properties detailed in the table below. The Company recorded premiums totaling $1,282,000 to adjust the mortgage loans assumed to fair market value. These premiums are being amortized over the lives of the assumed mortgages and reduce the contractual interest expense on these loans. The interest rates shown below for the assumed mortgages represent the fair market rates at the dates of assumption. (The Company assumed one additional mortgage loan in early January 2004, which had an immaterial effect on the increase in interest expense for 2005.) <TABLE> <CAPTION> NEW AND ASSUMED MORTGAGES INTEREST RATE DATE AMOUNT ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> World Houston 17, Kirby, Americas Ten I, Shady Trail, Palm River North I, II & III and Westlake I & II........... 5.680% 09/29/04 $30,300,000 Arion Business Park (assumed)................................ 4.450% 01/21/05 20,500,000 Interstate Distribution Center - Jacksonville (assumed)...... 5.640% 03/31/05 4,642,000 Chamberlain, Lake Pointe, Techway Southwest II and World Houston 19 & 20..................................... 4.980% 11/30/05 39,000,000 Oak Creek Distribution Center IV (assumed)................... 5.680% 12/07/05 4,076,000 ------------- -------------- Weighted Average/Total Amount.............................. 5.145% $98,518,000 ============= ============== </TABLE> Mortgage principal payments were $25,880,000 in 2005 and $14,416,000 in 2004. Included in these principal payments are repayments of five mortgages totaling $18,435,000 in 2005 and three mortgages totaling $6,801,000 in 2004. The details of these mortgages are shown in the following table: <TABLE> <CAPTION> MORTGAGE LOANS REPAID IN 2005 INTEREST RATE DATE REPAID PAYOFF AMOUNT ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Westport Commerce Center............................ 8.000% 03/31/05 $ 2,371,000 Lamar Distribution Center II........................ 6.900% 06/30/05 1,781,000 Exchange Distribution Center I...................... 8.375% 07/01/05 1,762,000 Lake Pointe Business Park........................... 8.125% 07/01/05 9,738,000 JetPort Commerce Park............................... 8.125% 09/30/05 2,783,000 ------------- --------------- Weighted Average/Total Amount..................... 8.014% $ 18,435,000 ============= =============== MORTGAGE LOANS REPAID IN 2004 ---------------------------------------------------- Eastlake Distribution Center........................ 8.500% 02/17/04 $ 3,000,000 Chamberlain Distribution Center..................... 8.750% 07/01/04 2,172,000 56th Street Commerce Park........................... 8.875% 07/30/04 1,629,000 ------------- --------------- Weighted Average/Total Amount..................... 8.670% $ 6,801,000 ============= =============== </TABLE> Depreciation and amortization increased $6,099,000 for 2005 compared to 2004. This increase was primarily due to properties acquired and transferred from development during 2004 and 2005. Property acquisitions and transferred developments were $92 million in 2005 and $49 million in 2004. NAREIT has recommended supplemental disclosures concerning straight-line rent, capital expenditures and leasing costs. Straight-lining of rent increased income by $1,950,000 in 2005 compared to $2,925,000 in 2004.
Capital Expenditures Capital expenditures for the years ended December 31, 2005 and 2004 were as follows: <TABLE> <CAPTION> Years Ended December 31, Estimated -------------------------- Useful Life 2005 2004 ------------------------------------------ (In thousands) <S> <C> <C> <C> Upgrade on Acquisitions................ 40 yrs $ 506 305 Tenant Improvements: New Tenants......................... Lease Life 5,892 4,498 New Tenants (first generation) (1).. Lease Life 615 1,105 Renewal Tenants..................... Lease Life 1,374 1,569 Other: Building Improvements............... 5-40 yrs 1,312 1,445 Roofs............................... 5-15 yrs 318 1,645 Parking Lots........................ 3-5 yrs 999 223 Other............................... 5 yrs 246 76 ------------------------- Total capital expenditures....... $ 11,262 10,866 ========================= </TABLE> (1) First generation refers to space that has never been occupied under EastGroup's ownership. Capitalized Leasing Costs The Company's leasing costs (principally commissions) 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 years ended December 31, 2005 and 2004 were as follows: <TABLE> <CAPTION> Years Ended December 31, Estimated -------------------------- Useful Life 2005 2004 ------------------------------------------ (In thousands) <S> <C> <C> <C> Development............................ Lease Life $ 1,405 656 New Tenants............................ Lease Life 2,497 1,840 New Tenants (first generation) (1)..... Lease Life 187 257 Renewal Tenants........................ Lease Life 1,448 1,429 ------------------------- Total capitalized leasing costs.. $ 5,537 4,182 ========================= Amortization of leasing costs (2)...... $ 3,863 3,392 ========================= </TABLE> (1) First generation refers to space that has never been occupied under EastGroup's ownership. (2) Includes discontinued operations. Discontinued Operations The results of operations, including interest expense (if applicable), for the properties sold or held for sale during the periods reported are shown under Discontinued Operations on the consolidated income statements. During 2005, the Company sold two properties and one parcel of land and recognized total gains of $1,164,000. In 2004, the Company sold three properties and one parcel of land and recognized total gains of $1,450,000. See Notes 1(g) and 2 in the Notes to the Consolidated Financial Statements for more information related to discontinued operations and gains on the sale of these properties. 2004 Compared to 2003 Net income available to common stockholders for 2004 was $20,703,000 ($1.00 per basic share and $.98 per diluted share) compared to $12,748,000 ($.72 per basic share and $.70 per diluted share). Diluted EPS for 2004 included a $.07 per share gain on sale of real estate properties (compared to $.01 in 2003) and a $.01 per share gain on involuntary conversion resulting from insurance proceeds exceeding the net book value of two roofs replaced due to tornado damage. Diluted EPS for 2003 included a $.02 per share gain on securities and a $.10 per share reduction of EPS due to the write-off of the original issuance costs on the Series A Preferred Stock redemption in July 2003. PNOI increased by $6,432,000 or 8.5% for 2004 compared to 2003, primarily due to increased average occupancy, which includes new acquisitions and developments. Expense to revenue ratios were 28.1% in 2004 compared to 29.4% in 2003. The Company's percentage leased was 94.4% at December 31, 2004 compared to 94.0% at December 31, 2003. Occupancy at the end of 2004 was 93.2% compared to 92.0% at the end of 2003. As previously mentioned, in November 2004, the Company acquired a 50% undivided tenant-in-common interest in Industry Distribution Center II and accounts for this investment under the equity method of accounting. The Company recognized $69,000 of equity in
earnings from this unconsolidated investment in 2004 (PNOI of $84,000 included above). EastGroup also earned $65,000 in mortgage loan interest income on the advances that the Company made to the co-owner in connection with the closing of this property. See Notes 1(a), 3 and 4 in the Notes to the Consolidated Financial Statements for more information related to this investment and mortgage loans receivable. The following table presents the components of interest expense for 2004 and 2003: <TABLE> <CAPTION> Years Ended December 31, -------------------------- Increase 2004 2003 (Decrease) ------------------------------------------ (In thousands, except rates of interest) <S> <C> <C> <C> Average bank borrowings....................................... $ 66,867 65,399 1,468 Weighted average variable interest rates...................... 2.76% 2.53% VARIABLE RATE INTEREST EXPENSE Variable rate interest (excluding loan cost amortization)..... 1,845 1,651 194 Amortization of bank loan costs............................... 404 409 (5) ------------------------------------------ Total variable rate interest expense.......................... 2,249 2,060 189 ------------------------------------------ FIXED RATE INTEREST EXPENSE (1) Fixed rate interest (excluding loan cost amortization)........ 19,388 18,507 881 Amortization of mortgage loan costs........................... 427 388 39 ------------------------------------------ Total fixed rate interest expense............................. 19,815 18,895 920 ------------------------------------------ Total interest................................................ 22,064 20,955 1,109 Less capitalized interest..................................... (1,715) (2,077) 362 ------------------------------------------ TOTAL INTEREST EXPENSE........................................ $ 20,349 18,878 1,471 ========================================== </TABLE> (1) Does not include interest expense for discontinued operations. See Note 2 in the Notes to the Consolidated Financial Statements for this information. Interest costs incurred during the period of construction of real estate properties are capitalized and offset against interest expense. The Company has taken advantage of the lower available longer term interest rates in the market during the past several years and has closed several new mortgages with ten-year terms at fixed rates deemed by management to be attractive, 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. A summary of the Company's weighted average interest rates on mortgage debt for the past several years is presented below: <TABLE> <CAPTION> WEIGHTED AVERAGE MORTGAGE DEBT AS OF: INTEREST RATE ---------------------------------------------------------------------- <S> <C> December 31, 2000............................. 7.72% December 31, 2001............................. 7.61% December 31, 2002............................. 7.34% December 31, 2003............................. 6.92% December 31, 2004............................. 6.74% </TABLE>
The increase in mortgage interest expense in 2004 was primarily due to the new and assumed mortgages on acquired properties detailed in the table below. The assumed mortgage below was not adjusted to fair value upon the property acquisition due to the Company's repayment of the mortgage within 12 months. <TABLE> <CAPTION> NEW AND ASSUMED MORTGAGES INTEREST RATE DATE AMOUNT --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Airport Commons Distribution Center (assumed)......... 8.125% 05/28/03 $ 1,478,000 Broadway V, 35th Avenue, Sunbelt, Freeport, Lockwood, Northwest Point, Techway Southwest I and World Houston 10, 11 & 14...................... 4.750% 08/13/03 45,500,000 Blue Heron Distribution Center II..................... 5.390% 01/15/04 1,778,000 World Houston 17, Kirby, Americas Ten I, Shady Trail, Palm River North I, II & III and Westlake I & II... 5.680% 09/29/04 30,300,000 ------------- --------------- Weighted Average/Total Amount....................... 5.179% $ 79,056,000 ============= =============== </TABLE> Mortgage principal payments were $14,416,000 in 2004 and $9,599,000 in 2003. Included in these principals payments are repayments of three mortgages totaling $6,801,000 in 2004 and two mortgages totaling $2,814,000 in 2003. The details of these mortgages are shown in the following table: <TABLE> <CAPTION> MORTGAGE LOANS REPAID IN 2004 INTEREST RATE DATE REPAID PAYOFF AMOUNT ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Eastlake Distribution Center....................... 8.500% 02/17/04 $ 3,000,000 Chamberlain Distribution Center.................... 8.750% 07/01/04 2,172,000 56th Street Commerce Park.......................... 8.875% 07/30/04 1,629,000 ------------- ---------------- Weighted Average/Total Amount.................... 8.670% $ 6,801,000 ============= ================ MORTGAGE LOANS REPAID IN 2003 --------------------------------------------------- Deerwood Distribution Center....................... 8.375% 05/01/03 $ 1,346,000 Airport Commons Distribution Center (assumed)...... 8.125% 09/30/03 1,467,000 ------------- ---------------- Weighted Average/Total Amount.................... 8.245% $ 2,813,000 ============= ================ </TABLE> Depreciation and amortization increased $1,509,000 for 2004 compared to 2003. This increase was primarily due to properties acquired and transferred from development during 2004 and 2003. The increase in general and administrative expenses was $1,745,000 for 2004 compared to 2003. Compensation expense increased by $1,320,000, approximately half of which is due to the Company achieving goals in its incentive plans. The remaining amount is primarily due to increased employee costs for new personnel and salary increases. Accounting and legal costs increased by $463,000, mainly due to costs associated with compliance of the Sarbanes-Oxley Act of 2002. NAREIT has recommended supplemental disclosures concerning straight-line rent, capital expenditures and leasing costs. Straight-lining of rent increased income by $2,925,000 in 2004 compared to $2,326,000 in 2003. Capital Expenditures Capital expenditures for the years ended December 31, 2004 and 2003 were as follows: <TABLE> <CAPTION> Years Ended December 31, Estimated -------------------------- Useful Life 2004 2003 ------------------------------------------ (In thousands) <S> <C> <C> <C> Upgrade on Acquisitions.................. 40 yrs $ 305 173 Tenant Improvements: New Tenants........................... Lease Life 4,498 4,222 New Tenants (first generation) (1).... Lease Life 1,105 874 Renewal Tenants....................... Lease Life 1,569 2,095 Other: Building Improvements................. 5-40 yrs 1,445 960 Roofs................................. 5-15 yrs 1,645 2,383 Parking Lots.......................... 3-5 yrs 223 133 Other................................. 5 yrs 76 89 -------------------------- Total capital expenditures......... $ 10,866 10,929 ========================== </TABLE> (1) First generation refers to space that has never been occupied under EastGroup's ownership.
Capitalized Leasing Costs The Company's leasing costs (principally commissions) 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 years ended December 31, 2004 and 2003 were as follows: <TABLE> <CAPTION> Years Ended December 31, Estimated -------------------------- Useful Life 2004 2003 ------------------------------------------ (In thousands) <S> <C> <C> <C> Development............................ Lease Life $ 656 919 New Tenants............................ Lease Life 1,840 2,102 New Tenants (first generation) (1)..... Lease Life 257 123 Renewal Tenants........................ Lease Life 1,429 1,166 -------------------------- Total capitalized leasing costs.. $ 4,182 4,310 ========================== Amortization of leasing costs (2)...... $ 3,392 3,562 ========================== </TABLE> (1) First generation refers to space that has never been occupied under EastGroup's ownership. (2) Includes discontinued operations. Discontinued Operations The results of operations, including interest expense (if applicable), for the properties sold or held for sale during the periods reported are shown under Discontinued Operations on the consolidated income statements. During 2004, the Company sold three properties and one parcel of land and recognized total gains of $1,450,000. In 2003, the Company sold one property and one parcel of land and recognized total gains of $112,000. In addition, the operations of Delp Distribution Center II and Lamar Distribution Center II are included in both years. Delp II was transferred to "held for sale" in December 2004 and was subsequently sold in February 2005. Lamar II was both transferred to "held for sale" and sold in 2005. See Notes 1(g) and 2 in the Notes to the Consolidated Financial Statements for more information related to discontinued operations and gains on the sale of these properties. NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29. This new standard is the result of a broader effort by the FASB to improve financial reporting by eliminating differences between GAAP in the United States and GAAP developed by the International Accounting Standards Board (IASB). As part of this effort, the FASB and the IASB identified opportunities to improve financial reporting by eliminating certain narrow differences between their existing accounting standards. SFAS 153 amends APB Opinion No. 29 (Opinion 29), Accounting for Nonmonetary Transactions, which was issued in 1973. The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replaced it with a broader exception for exchanges of nonmonetary assets that do not have "commercial substance." Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company's adoption of this Statement in June 2005 had no impact on its overall financial position or results of operation as the Company had no nonmonetary asset exchanges during the periods presented nor does it expect to have nonmonetary asset exchanges in the immediate future. In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143. This Interpretation clarifies that the term conditional asset retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred--generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company adopted this Interpretation on December 31, 2005 with no impact to its overall financial position or results of operations. The FASB has issued SFAS No. 123 (Revised 2004), Share-Based Payment. The new FASB rule requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity
or liability instruments issued. Public entities (other than those filing as small business issuers) will be required to apply SFAS 123R as of the first annual reporting period that begins after June 15, 2005, or January 1, 2006 for EastGroup. Early adoption of the Statement is encouraged. The Company currently accounts for stock-based compensation in accordance with SFAS 148. The Company has evaluated the potential impact of the adoption of SFAS 123R in 2006 and expects such adoption to have an immaterial impact on its overall financial position or results of operation. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $66,973,000 for the year ended December 31, 2005. The primary other sources of cash were from bank borrowings, proceeds from a new mortgage note and a common stock offering, repayments on mortgage loans receivable, distributions from an unconsolidated investment (primarily EastGroup's 50% share of loan proceeds) and the sale of real estate properties. The Company distributed $42,283,000 in common and $2,624,000 in preferred stock dividends during 2005. Other primary uses of cash were for bank debt repayments, construction and development of properties, purchases of real estate properties, mortgage note payments and capital improvements at various properties. Total debt at December 31, 2005 and 2004 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 December 31, 2005 and 2004. <TABLE> <CAPTION> December 31, ------------------------------- 2005 2004 ------------------------------- (In thousands) <S> <C> <C> Mortgage notes payable - fixed rate......... $ 346,961 303,674 Bank notes payable - floating rate.......... 116,764 86,431 ------------------------------- Total debt............................... $ 463,725 390,105 =============================== </TABLE> The Company has a three-year, $175 million unsecured revolving credit facility with a group of nine banks that matures in January 2008. The Company customarily uses this line of credit for acquisitions and developments. The interest rate on the facility is based on the LIBOR index and varies according to debt-to-total asset value ratios, with an annual facility fee of 20 basis points. EastGroup's interest rate under this facility is LIBOR plus .95%, except that it may be lower based upon the competitive bid option in the note (the Company was first eligible under this facility to exercise its option to solicit competitive bid offers in June 2005). The line of credit can be expanded by $100 million and has a one-year extension at EastGroup's option. At December 31, 2005, the weighted average interest rate was 5.15% on a balance of $113,000,000. The interest rate on each tranche is currently reset on a monthly basis. At March 8, 2006, the balance on this line was comprised of a $78 million tranche at 5.56% and $43.7 million in competitive bid loans at a weighted average rate of 5.08%. The Company has a one-year $20 million unsecured revolving credit facility with PNC Bank, N.A. that matures in November 2006. This credit facility is customarily used for working cash needs. The interest rate on the facility is based on LIBOR and varies according to debt-to-total asset value ratios; it is currently LIBOR plus 1.10%. At December 31, 2005, the interest rate was 5.49% on $3,764,000. 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. On March 31, 2005, EastGroup closed the sale of 800,000 shares of its common stock. On May 2, 2005, the underwriter closed on the exercise of a portion of its over-allotment option and purchased 60,000 additional shares. Total net proceeds from the offering of the shares were $31,597,000 after deducting the underwriting discount and other offering expenses. The Company used the net proceeds from this offering for general corporate purposes, including acquisition and development of industrial properties and repayment of fixed rate debt maturing in 2005. The Company has taken advantage of the lower available longer term interest rates in the market during the past several years and has closed several new mortgages with ten-year terms at fixed rates deemed by management to be attractive, 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. In late November 2005, the Company closed a $39 million nonrecourse first mortgage loan secured by five properties. The note has a fixed interest rate of 4.98%, a ten-year term, and an amortization schedule of 20 years. The proceeds of the note were used to reduce floating rate bank borrowings. In January 2006, EastGroup sold its land investment in Madisonville, Kentucky for $825,000, generating a gain of $773,000, of which $592,000 will be recognized in the first quarter of 2006 and $181,000 will be deferred to future periods. As part of the transaction, the Company took back a $185,000 note at 7.00% from the buyer, which is scheduled for repayment over the next six years, beginning in February 2006. The remaining deferred gain will be recognized as payments on this note are received from the buyer. Also subsequent to December 31, 2005, the Company entered into a contract to sell three of its Memphis properties (533,000 square feet) for a sales price of approximately $15.2 million. The sale of these properties is expected to close in March of 2006; however, there can be no assurance that the sale will actually occur.
Contractual Obligations EastGroup's fixed, noncancelable obligations as of December 31, 2005 were as follows: <TABLE> <CAPTION> Payments Due by Period -------------------------------------------------------------------------- Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years -------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> Fixed Rate Debt Obligations (1)....... $ 346,961 45,044 33,006 47,500 221,411 Interest on Fixed Rate Debt........... 111,622 21,136 35,448 28,805 26,233 Variable Rate Debt Obligations (2).... 116,764 3,764 113,000 - - Operating Lease Obligations: Office Leases...................... 1,156 298 600 258 - Ground Leases...................... 20,633 688 1,374 1,374 17,197 Development Obligations (3)........... 5,862 5,862 - - - Tenant Improvements (4)............... 7,066 7,066 - - - Purchase Obligations (5).............. 3,126 3,126 - - - -------------------------------------------------------------------------- Total.............................. $ 613,190 86,984 183,428 77,937 264,841 ========================================================================== </TABLE> (1) These amounts are included on the Consolidated Balance Sheet. A portion of this debt is backed by a letter of credit totaling $10,464,000 at December 31, 2005. This letter of credit is renewable annually and expires on January 15, 2011. (2) The Company's variable rate debt changes depending on the Company's cash needs and, as such, both the principal amounts and the interest rates are subject to variability. At December 31, 2005, the interest rate was 5.49% on $3,764,000 for the variable rate debt due in November 2006, and the rate for the $113,000,000 debt due in January 2008 was 5.15%. See Note 6 in the Notes to the Consolidated Financial Statements. (3) Represents commitments on properties under development, except for tenant improvement obligations. (4) Represents tenant improvement allowance obligations. (5) At December 31, 2005, EastGroup was under contract to purchase one parcel of land. This acquisition is expected to close in June 2006. 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 7A. 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. <TABLE> <CAPTION> 2006 2007 2008 2009 2010 Thereafter Total Fair Value ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed rate debt(1) (in thousands).... $ 45,044 23,398 9,608 39,596 7,904 221,411 346,961 357,034(2) Weighted average interest rate....... 6.07% 7.36% 6.40% 6.69% 6.11% 6.18% 6.31% Variable rate debt (in thousands).... $ 3,764 - 113,000 - - - 116,764 116,764 Weighted average interest rate....... 5.49% - 5.15% - - - 5.16% </TABLE> (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 December 31, 2005, 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 52 basis points, interest expense and cash flows would increase or decrease by approximately $603,000 annually.
The Company has an interest rate swap agreement to hedge its exposure to the variable interest rate on the Company's $10,345,000 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 income (loss). The Company does not hold or issue this type of derivative contract for trading or speculative purposes. <TABLE> <CAPTION> Current Maturity Fair Value Fair Value Type of Hedge Notional Amount Date Reference Rate Fixed Rate at 12/31/05 at 12/31/04 ------------------------------------------------------------------------------------------------------------------ (In thousands) (In thousands) <S> <C> <C> <C> <C> <C> <C> Swap $10,345 12/31/10 1 month LIBOR 4.03% $311 $14 </TABLE> FORWARD-LOOKING STATEMENTS In addition to historical information, certain sections of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company's hopes, expectations, anticipations, 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Registrant's Consolidated Balance Sheets as of December 31, 2005 and 2004, and its Consolidated Statements of Income, Changes in Stockholders' Equity and Cash Flows and Notes to Consolidated Financial Statements for the years ended December 31, 2005, 2004 and 2003 and the Report of the Independent Registered Public Accounting Firm thereon are included under Item 15 of this report and are incorporated herein by reference. Unaudited quarterly results of operations included in the notes to the consolidated financial statements are also incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. (i) Disclosure 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, as of December 31, 2005, 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. (ii) Internal Control Over Financial Reporting. (a) Management's annual report on internal control over financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). EastGroup's Management Report on Internal Control Over Financial Reporting is set forth in Part IV, Item 15 of the Form 10-K on page 32 and is incorporated herein by reference.
(b) Report of the independent registered public accounting firm. The report of KPMG LLP, the Company's independent registered public accounting firm, on management's assessment of the effectiveness of the Company's internal control over financial reporting and the effectiveness of the Company's internal control over financial reporting is set forth in Part IV, Item 15 of this Form 10-K on page 32 and is incorporated herein by reference. (c) Changes in internal control over financial reporting. There was no change in the Company's internal control over financial reporting during the Company's fourth fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Registrant's definitive proxy statement which will be filed with the Securities and Exchange Commission (the Commission) pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. The following table summarizes our equity compensation plan information as of December 31, 2005. <TABLE> <CAPTION> Equity Compensation Plan Information <S> <C> <C> <C> (a) (b) (c) Plan category Number of securities to Weighted-average Number of securities remaining be issued upon exercise exercise price of available for future issuance of outstanding options, outstanding options, under equity compensation plans warrants and rights warrants and rights (excluding securities reflected in column (a)) Equity compensation plans approved by security holders 304,825 $20.289 1,913,891 Equity compensation plans not approved by security holders - - - -------------------------------------------------------------------------------------- Total 304,825 $20.289 1,913,891 ====================================================================================== </TABLE> ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of the Registrant's calendar year is incorporated herein by reference.
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Index to Financial Statements: <TABLE> <CAPTION> Page <S> <C> (a) (1) Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm 31 Management Report on Internal Control Over Financial Reporting 32 Report of Independent Registered Public Accounting Firm 32 Consolidated Balance Sheets - December 31, 2005 and 2004 33 Consolidated Statements of Income - Years ended December 31, 2005, 2004 and 2003 34 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2005, 2004 and 2003 35 Consolidated Statements of Cash Flows - Years ended December 31, 2005, 2004 and 2003 36 Notes to Consolidated Financial Statements 37 (2) Consolidated Financial Statement Schedule: Schedule III - Real Estate Properties and Accumulated Depreciation 54 </TABLE> All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted, or the required information is included in the notes to the consolidated financial statements. (3) Exhibits required by Item 601 of Regulation S-K: (3) Articles of Incorporation and Bylaws (a) Articles of Incorporation (incorporated by reference to Appendix B to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 5, 1997). (b) Bylaws of the Company (incorporated by reference to Appendix C to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 5, 1997). (c) Articles Supplementary of the Company relating to the Series C Preferred Stock (incorporated by reference to Exhibit A to Exhibit 4 to the Company's Form 8-A filed December 9, 1998). (d) Articles Supplementary of the Company relating to the 7.95% Series D Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3 to the Company's Form 8-A filed June 6, 2003). (4) Instruments Defining the Rights of Security Holders (a) Rights Agreement dated as of December 3, 1998 between the Company and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4 to the Company's Form 8-A filed December 9, 1998). (b) First Amendment to Rights Agreement dated December 20, 2004 between the Company and Equiserve Trust Company, N.A., which replaced Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed December 22, 2004). (10) Material Contracts (*Indicates management or compensatory agreement): (a) EastGroup Properties, Inc. 1994 Management Incentive Plan, as Amended (incorporated by reference to Appendix A to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 2, 1999).* (b) EastGroup Properties, Inc. 1991 Directors Stock Option Plan, as Amended (incorporated by reference to Exhibit B to the Company's Proxy Statement for its Annual Meeting of Stockholders held on December 8, 1994).* (c) EastGroup Properties, Inc. 2000 Directors Stock Option Plan (incorporated by reference to Appendix A to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 1, 2000).* (d) EastGroup Properties, Inc. 2004 Equity Incentive Plan (incorporated by reference to Appendix D to the Company's Proxy Statement for its Annual Meeting of Stockholders held on May 27, 2004).* (e) EastGroup Properties, Inc. 2005 Directors Equity Incentive Plan (incorporated by reference to Appendix B to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 2, 2005.)* (f) Form of Change in Control Agreement that the Company has entered into with Leland R. Speed, David H. Hoster II and N. Keith McKey (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1996).* (g) Form of Change in Control Agreement that the Company has entered into with John F. Coleman, William D. Petsas, C. Bruce Corkern and Brent W. Wood (incorporated by reference to Exhibit 10(f) to the Company's Form 10-K for the year ended December 31, 2004).*
(h) Form of Amendment to Change in Control Agreement (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 2002).* (i) Compensation Program for Non-Employee Directors (a written description thereof is set forth in Item 1.01 of the Company's Form 8-K filed with the SEC on June 6, 2005).* (j) Annual Cash Bonus and Annual Long-Term Incentive Performance Goals (a written description thereof is set forth in Item 1.01 of the Company's Form 8-K filed with the SEC on June 6, 2005).* (k) Credit Agreement dated December 6, 2004 among EastGroup Properties, L.P.; EastGroup Properties, Inc.; PNC Bank, National Association, as Administrative Agent; Commerzbank Aktiengesellschaft, New York Branch and SunTrust Bank as Co-Syndication Agents; AmSouth Bank and Wells Fargo Bank, National Association, as Co-Documentation Agents; PNC Capital Markets, Inc., as Sole Lead Arranger and Sole Bookrunner; and the Lenders (incorporated by reference to Exhibit 10(h) to the Company's Form 10-K for the year ended December 31, 2004). (21) Subsidiaries of EastGroup Properties, Inc. (filed herewith). (23) Consent of KPMG LLP (filed herewith). (24) Powers of attorney (filed herewith). (31) Rule 13a-14(a)/15d-14(a) Certifications (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) (a) David H. Hoster II, Chief Executive Officer (b) N. Keith McKey, Chief Financial Officer (32) Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) (a) David H. Hoster II, Chief Executive Officer (b) N. Keith McKey, Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE DIRECTORS AND STOCKHOLDERS EASTGROUP PROPERTIES, INC.: We have audited the accompanying consolidated balance sheets of EastGroup Properties, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EastGroup Properties, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 8, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. Jackson, Mississippi KPMG LLP March 8, 2006
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING EastGroup's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the chief executive officer and chief financial officer, EastGroup conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on EastGroup's evaluation under the framework in Internal Control-Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2005. Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein. Jackson, Mississippi EASTGROUP PROPERTIES, INC. March 3, 2006 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE DIRECTORS AND STOCKHOLDERS EASTGROUP PROPERTIES, INC.: We have audited management's assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that EastGroup Properties, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that EastGroup Properties, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, EastGroup Properties, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of EastGroup Properties, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 8, 2006, expressed an unqualified opinion on those consolidated financial statements. Jackson, Mississippi KPMG LLP March 8, 2006
CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> December 31, --------------------------------------------------- 2005 2004 --------------------------------------------------- (In thousands, except for share and per share data) <S> <C> <C> ASSETS Real estate properties........................................................ $ 943,585 845,139 Development................................................................... 77,483 39,330 --------------------------------------------------- 1,021,068 884,469 Less accumulated depreciation............................................. (206,427) (174,662) --------------------------------------------------- 814,641 709,807 --------------------------------------------------- Real estate held for sale..................................................... 773 2,637 Unconsolidated investment..................................................... 2,618 9,256 Mortgage loans receivable..................................................... - 7,550 Cash.......................................................................... 1,915 1,208 Other assets.................................................................. 43,591 38,206 --------------------------------------------------- TOTAL ASSETS.............................................................. $ 863,538 768,664 =================================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Mortgage notes payable........................................................ $ 346,961 303,674 Notes payable to banks........................................................ 116,764 86,431 Accounts payable & accrued expenses........................................... 22,941 16,181 Other liabilities............................................................. 10,306 8,688 --------------------------------------------------- 496,972 414,974 --------------------------------------------------- --------------------------------------------------- Minority interest in joint venture.............................................. 1,702 1,884 --------------------------------------------------- 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; 22,030,682 shares issued and outstanding at December 31, 2005 and 21,059,164 at December 31, 2004............................................. 2 2 Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares issued............................................................ - - Additional paid-in capital on common shares................................... 392,126 357,011 Distributions in excess of earnings........................................... (57,930) (35,207) Accumulated other comprehensive income........................................ 311 14 Unearned compensation......................................................... (1,971) (2,340) --------------------------------------------------- 364,864 351,806 --------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 863,538 768,664 =================================================== </TABLE> See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Years Ended December 31, ---------------------------------------------------- 2005 2004 2003 ---------------------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> REVENUES Income from real estate operations....................................... $ 125,548 113,688 106,571 Equity in earnings of unconsolidated investment.......................... 450 69 - Gain on involuntary conversion........................................... 243 154 - Other income............................................................. 264 289 227 ---------------------------------------------------- 126,505 114,200 106,798 ---------------------------------------------------- EXPENSES Expenses from real estate operations..................................... 35,687 31,983 31,298 Depreciation and amortization............................................ 39,234 33,135 31,626 General and administrative............................................... 6,874 6,711 4,966 Minority interest in joint venture....................................... 484 490 416 ---------------------------------------------------- 82,279 72,319 68,306 ---------------------------------------------------- OPERATING INCOME........................................................... 44,226 41,881 38,492 OTHER INCOME (EXPENSE) Gain on securities....................................................... - - 421 Interest income.......................................................... 247 121 22 Interest expense......................................................... (23,444) (20,349) (18,878) ---------------------------------------------------- INCOME FROM CONTINUING OPERATIONS.......................................... 21,029 21,653 20,057 ---------------------------------------------------- DISCONTINUED OPERATIONS Income (loss) from real estate operations................................ (2) 224 276 Gain on sale of real estate investments.................................. 1,164 1,450 112 ---------------------------------------------------- INCOME FROM DISCONTINUED OPERATIONS ....................................... 1,162 1,674 388 ---------------------------------------------------- NET INCOME................................................................. 22,191 23,327 20,445 Preferred dividends-Series A............................................. - - 2,016 Preferred dividends-Series B............................................. - - 2,598 Preferred dividends-Series D............................................. 2,624 2,624 1,305 Costs on redemption of Series A preferred................................ - - 1,778 ---------------------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................ $ 19,567 20,703 12,748 ==================================================== BASIC PER COMMON SHARE DATA Income from continuing operations........................................ $ .86 .92 .70 Income from discontinued operations...................................... .05 .08 .02 ---------------------------------------------------- Net income available to common stockholders.............................. $ .91 1.00 .72 ==================================================== Weighted average shares outstanding...................................... 21,567 20,771 17,819 ==================================================== DILUTED PER COMMON SHARE DATA Income from continuing operations........................................ $ .84 .90 .68 Income from discontinued operations...................................... .05 .08 .02 ---------------------------------------------------- Net income available to common stockholders.............................. $ .89 .98 .70 ==================================================== Weighted average shares outstanding...................................... 21,892 21,088 18,194 ==================================================== Dividends declared per common share........................................ $ 1.94 1.92 1.90 ==================================================== </TABLE> See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Undistributed Earnings Accumulated Additional (Distributions Other Preferred Common Paid-In Unearned in Excess of Comprehensive Stock Stock Capital Compensation Earnings) Income (Loss) Total ---------------------------------------------------------------------------------- (In thousands, except for share and per share data) <S> <C> <C> <C> <C> <C> <C> <C> BALANCE, DECEMBER 31, 2002........................ $108,535 2 243,562 (2,781) 7,109 58 356,485 Comprehensive income Net income...................................... - - - - 20,445 - 20,445 Net unrealized change in investment securities.. - - - - - (355) (355) Net unrealized change in cash flow hedge........ - - - - - 267 267 --------- Total comprehensive income.................... 20,357 --------- Common dividends declared - $1.90 per share....... - - - - (35,452) - (35,452) Preferred stock dividends declared................ - - - - (5,919) - (5,919) Redemption of 1,725,000 shares of Series A preferred stock................................. (41,357) - - - (1,778) - (43,135) Conversion of 2,800,000 shares of cumulative convertible preferred stock into 3,181,920 shares of common stock.......................... (67,178) - 67,178 - - - - Issuance of 1,320,000 shares of Series D preferred stock, net of expenses................ 32,326 - - - - - 32,326 Issuance of 1,418,887 shares of common stock, common stock offerings, net of expenses......... - - 38,974 - - - 38,974 Stock-based compensation, net of forfeitures...... - - 2,473 474 - - 2,947 Issuance of 12,925 shares of common stock, dividend reinvestment plan...................... - - 362 - - - 362 ---------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2003........................ 32,326 2 352,549 (2,307) (15,595) (30) 366,945 Comprehensive income Net income...................................... - - - - 23,327 - 23,327 Net unrealized change in cash flow hedge........ - - - - - 44 44 --------- Total comprehensive income.................... 23,371 --------- Common dividends declared - $1.92 per share....... - - - - (40,315) - (40,315) Preferred stock dividends declared................ - - - - (2,624) - (2,624) Stock-based compensation, net of forfeitures ..... - - 4,114 (33) - - 4,081 Issuance of 10,247 shares of common stock, dividend reinvestment plan...................... - - 357 - - - 357 Other............................................. - - (9) - - - (9) ---------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2004........................ 32,326 2 357,011 (2,340) (35,207) 14 351,806 Comprehensive income Net income...................................... - - - - 22,191 - 22,191 Net unrealized change in cash flow hedge........ - - - - - 297 297 -------- Total comprehensive income.................... 22,488 -------- Common dividends declared - $1.94 per share....... - - - - (42,290) - (42,290) Preferred stock dividends declared................ - - - - (2,624) - (2,624) Issuance of 860,000 shares of common stock, common stock offering, net of expenses.......... - - 31,597 - - - 31,597 Stock-based compensation, net of forfeitures ..... - - 3,211 369 - - 3,580 Issuance of 8,279 shares of common stock, dividend reinvestment plan...................... - - 346 - - - 346 Other............................................. - - (39) - - - (39) ---------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2005........................ $ 32,326 2 392,126 (1,971) (57,930) 311 364,864 ================================================================================== </TABLE> See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Years Ended December 31, ---------------------------------------------- 2005 2004 2003 ---------------------------------------------- (In thousands) <S> <C> <C> <C> OPERATING ACTIVITIES Net income......................................................................... $ 22,191 23,327 20,445 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization from continuing operations......................... 39,234 33,135 31,626 Depreciation and amortization from discontinued operations....................... 72 316 424 Minority interest depreciation and amortization.................................. (141) (143) (145) Amortization of mortgage loan premiums........................................... (333) (24) - Gain on sale of real estate investments from discontinued operations............. (1,164) (1,450) (112) Gain on involuntary conversion................................................... (243) (154) - Gain on real estate investment trust (REIT) shares............................... - - (421) Stock-based compensation expense................................................. 2,048 1,256 620 Equity in earnings of unconsolidated investment net of distributions............. (20) (69) - Changes in operating assets and liabilities: Accrued income and other assets................................................ 579 (2,560) (1,139) Accounts payable, accrued expenses and prepaid rent............................ 4,750 3,890 (1,000) ---------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 66,973 57,524 50,298 ---------------------------------------------- INVESTING ACTIVITIES Real estate development............................................................ (58,192) (19,196) (22,238) Purchases of real estate........................................................... (46,507) (19,666) (19,034) Real estate improvements........................................................... (11,262) (10,866) (10,929) Purchase of unconsolidated investment.............................................. - (9,187) - Distributions from unconsolidated investment....................................... 6,658 - - Advances on mortgage loans receivable.............................................. - (7,550) - Repayments on mortgage loans receivable............................................ 7,550 - 13 Proceeds from sale of real estate investments...................................... 6,034 5,340 841 Proceeds from sale and liquidation of REIT shares.................................. - - 1,729 Changes in other assets and other liabilities...................................... (3,249) (4,235) (4,907) ---------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES................................................ (98,968) (65,360) (54,525) ---------------------------------------------- FINANCING ACTIVITIES Proceeds from bank borrowings...................................................... 187,286 153,572 175,944 Repayments on bank borrowings...................................................... (156,953) (119,691) (197,351) Proceeds from mortgage notes payable............................................... 39,000 30,300 45,500 Principal payments on mortgage notes payable....................................... (25,880) (14,416) (9,599) Debt issuance costs................................................................ (664) (1,436) (716) Distributions paid to stockholders................................................. (44,907) (42,550) (42,749) Redemption of Series A preferred stock............................................. - - (43,135) Proceeds from Series D preferred stock offering.................................... - - 32,326 Proceeds from common stock offerings............................................... 31,597 - 38,974 Proceeds from exercise of stock options............................................ 1,507 2,592 2,539 Proceeds from dividend reinvestment plan........................................... 346 357 362 Other.............................................................................. 1,370 (1,470) 2,535 ---------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES............................................ 32,702 7,258 4,630 ---------------------------------------------- INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 707 (578) 403 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................................... 1,208 1,786 1,383 ---------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR........................................... $ 1,915 1,208 1,786 ============================================== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest, net of amount capitalized of $2,485, $1,715 and $2,077 for 2005, 2004 and 2003, respectively............................................ $ 22,842 19,638 18,068 Conversion of cumulative preferred stock into common stock......................... - - 67,178 Fair value of debt assumed by the Company in the purchase of real estate........... 30,500 2,091 1,478 Common stock awards issued to employees and directors, net of forfeitures.......... 1,000 879 (73) </TABLE> See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004 AND 2003 (1) SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include the accounts of EastGroup Properties, Inc. (the Company or EastGroup), its wholly-owned subsidiaries and its investment in any joint ventures in which the Company has a controlling interest. At December 31, 2005, 2004 and 2003, the Company had a controlling interest in one joint venture: the 80% owned University Business Center. The Company records 100% of the joint venture's assets, liabilities, revenues and expenses with minority interest provided for in accordance with the joint venture agreement. The equity method of accounting is used for the Company's 50% undivided tenant-in-common interest in Industry Distribution Center II (see Note 3). All significant intercompany transactions and accounts have been eliminated in consolidation. (b) Income Taxes EastGroup, a Maryland corporation, has qualified as a real estate investment trust (REIT) 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 2005, 2004 and 2003 taxable income to its stockholders. Accordingly, no provision for income taxes was necessary. The following table summarizes the federal income tax treatment for all distributions by the Company for the years ended 2005, 2004 and 2003. Federal Income Tax Treatment of Share Distributions <TABLE> <CAPTION> Years Ended December 31, --------------------------------------- 2005 2004 2003 --------------------------------------- <S> <C> <C> <C> Common Share Distributions: Ordinary income........................... $ 1.4816 1.4860 1.68388 Return of capital......................... .3724 .4060 .21612 Long-term 15% capital gain................ .0032 .0140 - Long-term 25% capital gain................ .0828 .0140 - --------------------------------------- Total Common Distributions.................... $ 1.9400 1.9200 1.90000 ======================================= Series A Preferred Share Distributions: Ordinary income........................... $ - - 1.08125 --------------------------------------- Total Preferred A Distributions............... $ - - 1.08125 ======================================= Series B Preferred Share Distributions: Ordinary income........................... $ - - 1.64100 --------------------------------------- Total Preferred B Distributions............... $ - - 1.64100 ======================================= Series D Preferred Share Distributions: Ordinary income........................... $ 1.8788 1.9512 .98830 Long-term 15% capital gain................ .0044 .0180 - Long-term 25% capital gain................ .1044 .0184 - --------------------------------------- Total Preferred D Distributions............... $ 1.9876 1.9876 .98830 ======================================= </TABLE> The Company's income differs for tax and financial reporting purposes principally because of (1) the timing of the deduction for the provision for possible losses and losses on investments, (2) the timing of the recognition of gains or losses from the sale of investments, (3) different depreciation methods and lives, and (4) real estate properties having a different basis for tax and financial reporting purposes. (c) Income Recognition Minimum rental income from real estate operations is recognized on a straight-line basis. The straight-line rent calculation on leases includes the effects of rent concessions and scheduled rent increases, and the calculated straight-line rent income is recognized over the lives of the individual leases. The Company maintains allowances for doubtful accounts receivables, including deferred rent receivable, based upon estimates determined by management. 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. Interest income on mortgage loans receivable is recognized based on the accrual method unless a significant uncertainty of collection exists. If a significant uncertainty exists, interest income is recognized as collected. The Company recognizes gains on sales of real estate in accordance with the principles set forth in Statement of Financial Accounting Standards (SFAS) No. 66, "Accounting for Sales of Real Estate." Upon closing of real estate transactions, the provisions of SFAS No. 66 require
consideration for the transfer of rights of ownership to the purchaser, receipt of an adequate cash down payment from the purchaser, adequate continuing investment by the purchaser and no substantial continuing involvement by the Company. If the requirements for recognizing gains have not been met, the sale and related costs are recorded, but the gain is deferred and recognized by a method other than the full accrual method. (d) Real Estate Properties Geographically, the Company's investments are concentrated in major Sunbelt markets of the United States, primarily in the states of Florida, Texas, California and Arizona. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Real estate properties held for investment are reported at the lower of the carrying amount or fair value. Depreciation of buildings and other improvements, including personal property, is computed using the straight-line method over estimated useful lives of generally 40 years for buildings and 3 to 15 years for improvements and personal property. Building improvements are capitalized, while maintenance and repair expenses are charged to expense as incurred. Significant renovations and improvements that extend the useful life of or improve the assets are capitalized. Depreciation expense for continuing and discontinued operations was $32,693,000, $29,249,000 and $28,128,000 for 2005, 2004 and 2003, respectively. (e) Capitalized Development Costs 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. As the property becomes occupied, interest, depreciation, property taxes and other costs for the percentage occupied only are expensed as incurred. When the property becomes 80% occupied or one year after completion of the shell construction, whichever comes first, the property is no longer considered a development property and becomes an industrial property. When the property becomes classified as an industrial property, the entire property is depreciated accordingly, and all interest and property taxes are expensed. (f) Real Estate Held for Sale Real estate properties that are held for sale 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. In accordance with the guidelines established under SFAS No. 144, the results of operations for the properties sold or held for sale during the reported periods are shown under Discontinued Operations on the consolidated income statements. Interest expense is not generally allocated to the properties that are held for sale or whose operations are included under Discontinued Operations unless the mortgage is required to be paid in full upon the sale of the property. (g) Investment in Real Estate Investment Trusts Marketable equity securities owned by the Company are categorized as available-for-sale securities. Unrealized holding gains and losses are reflected as a net amount in a separate component of stockholders' equity until realized. The costs of these investments are adjusted to fair market value with an equity adjustment to account for unrealized gains/losses as indicated above. At December 31, 2005 and 2004, the Company had no investments in marketable equity securities. (h) Derivative Instruments and Hedging Activities The Company applies SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that all derivatives be recognized as either assets or liabilities in the balance sheet and measured at fair value. Changes in fair value are to be reported either in earnings or as a component of stockholders' equity 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 an interest rate swap agreement, which is summarized in Note 6. (i) Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. (j) Amortization Debt origination costs are deferred and amortized using the straight-line method over the term of the loan. Amortization of loan costs for continuing operations was $801,000, $831,000 and $797,000 for 2005, 2004 and 2003, respectively. Leasing costs are deferred and amortized using the straight-line method over the term of the lease. Leasing costs amortization expense for continuing and discontinued operations was $3,863,000, $3,392,000 and $3,562,000 for 2005, 2004 and 2003, respectively. Amortization expense for in-place lease intangibles is disclosed in Business Combinations and Acquired Intangibles.
(k) Business Combinations and Acquired Intangibles 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 Company determines whether any financing assumed is above or below market based upon comparison to similar financing terms for similar properties. The cost of the properties acquired may be adjusted based on indebtedness assumed from the seller that is determined to be above or below market rates. 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 sheets 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 sheets and are amortized over the remaining term of the existing lease, or the anticipated life of the customer relationship, as applicable. Amortization expense for in-place lease intangibles was $2,750,000, $810,000 and $360,000 for 2005, 2004 and 2003, respectively. Amortization of above and below market leases was immaterial for all periods presented. Projected amortization of in-place lease intangibles for the next five years as of December 31, 2005 is as follows: <TABLE> <CAPTION> Year (In thousands) ------------------------------------------- <S> <C> 2006........................ $2,480 2007........................ 1,540 2008........................ 900 2009........................ 604 2010........................ 256 </TABLE> Total cost of the properties acquired for 2005 was $76,786,000, of which $70,882,000 was allocated to real estate properties. In accordance with SFAS No. 141, intangibles associated with the purchases of real estate were allocated as follows: $5,882,000 to in-place lease intangibles and $337,000 to above market leases (both included in Other Assets on the balance sheet) and $315,000 to below market leases (included in Other Liabilities on the balance sheet). All of these costs are amortized over the remaining lives of the associated leases in place at the time of acquisition. The Company paid cash of $46,286,000 for the properties and intangibles acquired, assumed mortgages of $29,218,000 and recorded premiums totaling $1,282,000 to adjust the mortgage loans assumed to fair value. The Company periodically reviews (at least annually) the recoverability of goodwill and (on a quarterly basis) the recoverability of other intangibles for possible impairment. In management's opinion, no material impairment of goodwill and other intangibles existed at December 31, 2005 and 2004. (l) Stock-Based Compensation The Company has a management incentive plan, which was adopted in 2004 (the "2004 Plan"), under which employees of the Company are issued common stock in the form of restricted stock and may, in the future, be issued other forms of stock-based compensation. Vesting in the stock is dependent on the achievement of goals and/or the passage of time. The purpose of the restricted stock plan is to act as a retention device since it allows participants to benefit from dividends as well as potential stock appreciation, while also aligning participants' interests with shareholder interests. The 2004 Plan replaced a previous plan adopted in 1994 (the "1994 Plan"), under which employees of the Company were also granted stock option awards, restricted stock and other forms of stock-based compensation. The Company accounts for restricted stock in accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123, Accounting for Stock-Based Compensation, and accordingly, compensation expense is recognized over the expected vesting period using the straight-line method. The Company records the fair market value of the restricted stock to additional paid-in capital when the shares are granted and offsets unearned compensation by the same amount. The unearned compensation is amortized over the restricted period into compensation expense. Previously expensed stock-based compensation related to forfeited shares reduces compensation expense during the period in which the shares are forfeited. During the restricted period, the Company accrues dividends and holds the certificates for the shares; however, the employee can vote the shares. Share certificates and dividends are delivered to the employee as they vest. Expected option lives for options granted to directors were eight years for 2003. The fair value of each stock option grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for 2003: risk-free interest rate of 3.41%, dividend yield of 11.13%, and volatility factor of 18.8%. The weighted average fair value of each option granted for 2003 was $.36. No stock options were granted during 2005 and 2004. Stock-based compensation expense for options was immaterial for 2004 and 2003, with an immaterial effect to pro forma net income available to common stockholders and no effect to basic or diluted
earnings per share (EPS). The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period. <TABLE> <CAPTION> --------------------------------------- 2005 2004 2003 --------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> Net income available to common stockholders as reported........... $ 19,567 20,703 12,748 Add: Stock options compensation expense included in reported net income.......................... - 1 8 Deduct: Total stock options compensation expense determined under fair value based method for all awards.................................... - (1) (13) --------------------------------------- Net income available to common stockholders pro forma............. $ 19,567 20,703 12,743 ======================================= Earnings per share: Basic - as reported...................................... $ .91 1.00 .72 Basic - pro forma........................................ .91 1.00 .72 Diluted - as reported.................................... .89 .98 .70 Diluted - pro forma...................................... .89 .98 .70 </TABLE> (m) Earnings Per Share 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 their equivalents (such as 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. (n) Involuntary Conversion In 2005, the Company recognized a gain on an involuntary conversion of $243,000 resulting from insurance proceeds exceeding the net book value of a roof replaced due to hurricane damage. In 2004, the Company recognized a gain on an involuntary conversion of $154,000 resulting from insurance proceeds exceeding the net book value of two roofs replaced due to tornado damage. (o) Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses during the reporting period, and to disclose material contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. (p) New Accounting Pronouncements In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29. This new standard is the result of a broader effort by the FASB to improve financial reporting by eliminating differences between GAAP in the United States and GAAP developed by the International Accounting Standards Board (IASB). As part of this effort, the FASB and the IASB identified opportunities to improve financial reporting by eliminating certain narrow differences between their existing accounting standards. SFAS 153 amends APB Opinion No. 29 (Opinion 29), Accounting for Nonmonetary Transactions, which was issued in 1973. The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replaced it with a broader exception for exchanges of nonmonetary assets that do not have "commercial substance." Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company's adoption of this Statement in June 2005 had no impact on its overall financial position or results of operation as the Company had no nonmonetary asset exchanges during the periods presented nor does it expect to have nonmonetary asset exchanges in the immediate future. In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143. This Interpretation clarifies that the term conditional asset retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred-generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company adopted this Interpretation on December 31, 2005 with no impact to its financial positions or results of operations. (q) Reclassifications Certain reclassifications have been made in the 2004 and 2003 consolidated financial statements to conform to the 2005 presentation. (2) REAL ESTATE OWNED EastGroup has one reportable segment--industrial properties. These properties are primarily located 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 real estate properties at December 31, 2005 and 2004 were as follows: <TABLE> <CAPTION> December 31, ---------------------------- 2005 2004 ---------------------------- (In thousands) <S> <C> <C> Real estate properties: Land................................................ $ 152,954 139,857 Buildings and building improvements................. 656,897 595,852 Tenant and other improvements....................... 133,734 109,430 Development............................................ 77,483 39,330 ---------------------------- 1,021,068 884,469 Less accumulated depreciation....................... (206,427) (174,662) ---------------------------- $ 814,641 709,807 ============================ </TABLE> The Company is currently developing the properties detailed below. Costs incurred include capitalization of interest costs during the period of construction. The interest costs capitalized on real estate properties for 2005 were $2,485,000 compared to $1,715,000 for 2004 and $2,077,000 for 2003. Total capital investment for development during 2005 was $58,192,000. In addition to the costs incurred for the year as detailed in the table below, development costs included $4,017,000 for improvements on developments during the 12-month period following transfer to Real Estate Properties.
<TABLE> <CAPTION> Costs Incurred ---------------------------------------------- Costs For the Year Transferred Ended Cumulative Estimated Size in 2005 12/31/05 as of 12/31/05 Total Costs --------------------------------------------------------------------------- DEVELOPMENT (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------- (Square feet) (In thousands) <S> <C> <C> <C> <C> <C> LEASE-UP Executive Airport CC II, Fort Lauderdale, FL..... 55,000 $ - 1,513 4,484 4,600 Southridge I, Orlando, FL........................ 41,000 - 2,087 2,931 3,900 Southridge V, Orlando, FL........................ 70,000 - 3,390 4,672 4,900 Palm River South II, Tampa, FL................... 82,000 1,457 2,578 4,035 4,500 Sunport Center VI, Orlando, FL................... 63,000 1,044 2,290 3,334 3,800 Techway SW III, Houston, TX...................... 100,000 1,150 3,246 4,396 5,700 --------------------------------------------------------------------------- Total Lease-up..................................... 411,000 3,651 15,104 23,852 27,400 --------------------------------------------------------------------------- UNDER CONSTRUCTION World Houston 15, Houston, TX.................... 63,000 1,007 1,420 2,427 5,800 World Houston 21, Houston, TX.................... 68,000 569 1,523 2,092 3,800 Southridge IV, Orlando, FL....................... 70,000 1,905 1,525 3,430 4,700 Santan 10 II, Chandler, AZ....................... 85,000 1,383 1,490 2,873 4,900 Arion 14, San Antonio, TX........................ 66,000 517 1,134 1,651 3,700 Arion 17, San Antonio, TX........................ 40,000 710 618 1,328 3,500 Oak Creek III, Tampa, FL........................ 61,000 942 - 942 3,700 Southridge II, Orlando, FL....................... 41,000 1,456 - 1,456 4,700 Castilian Research Center, Santa Barbara, CA..... 35,000 - 4,191 4,191 5,800 --------------------------------------------------------------------------- Total Under Construction........................... 529,000 8,489 11,901 20,390 40,600 --------------------------------------------------------------------------- PROSPECTIVE DEVELOPMENT (PRIMARILY LAND) Phoenix, AZ...................................... 129,000 (1,383) 348 1,161 6,500 Tucson, AZ....................................... 70,000 - - 326 3,500 Tampa, FL........................................ 464,000 (2,399) 5,813 4,871 25,300 Orlando, FL...................................... 814,000 (4,405) 5,824 8,585 59,100 West Palm Beach, FL.............................. 20,000 - 76 554 2,300 Fort Myers, FL................................... 126,000 - 2,081 2,081 8,800 El Paso, TX...................................... 251,000 - - 2,444 9,600 Houston, TX...................................... 1,317,000 (2,726) 8,336 11,514 69,300 San Antonio, TX.................................. 65,000 (1,227) 2,227 1,000 5,200 Jackson, MS...................................... 28,000 - 124 705 2,000 --------------------------------------------------------------------------- Total Prospective Development...................... 3,284,000 (12,140) 24,829 33,241 191,600 --------------------------------------------------------------------------- 4,224,000 $ - 51,834 77,483 259,600 =========================================================================== DEVELOPMENTS COMPLETED AND TRANSFERRED TO REAL ESTATE PROPERTIES DURING THE YEAR ENDED DECEMBER 31, 2005 Santan 10, Chandler, AZ.......................... 65,000 $ - 187 3,493 Sunport Center V, Orlando, FL.................... 63,000 - 5 3,259 Palm River South I, Tampa, FL.................... 79,000 - 650 3,842 World Houston 16, Houston, TX.................... 94,000 - 1,499 4,766 -------------------------------------------------------------- Total Transferred to Real Estate Properties........ 301,000 $ - 2,341 15,360 (1) ============================================================== </TABLE> (1) Represents cumulative costs at the date of transfer. At December 31, 2004, the Company was offering for sale the Delp Distribution Center II in Memphis, Tennessee with a carrying value of $1,662,000 and 8.26 acres of land in Houston, Texas and Tampa, Florida with a carrying amount of $975,000. During the first quarter of 2005, the Company sold Delp II. During the second quarter of 2005, Lamar Distribution Center II was transferred to real estate held for sale and was subsequently sold during the quarter. During the third quarter, the Company sold the Tampa land with a carrying amount of $202,000. At December 31, 2005, the Houston land with a total carrying value of $773,000 was held for sale. No loss is anticipated on the sale of the properties that are held for sale. In accordance with the guidelines established under SFAS No. 144, the results of operations for the properties sold or held for sale during the reported periods are shown under Discontinued Operations on the consolidated income statements. No interest expense was allocated to
the properties that are held for sale or whose operations are included under Discontinued Operations except for Lamar Distribution Center II, the mortgage of which was required to be paid in full upon the sale of the property. Accordingly, Discontinued Operations includes interest expense of $64,000, $132,000 and $137,000 for 2005, 2004 and 2003, respectively. A summary of gains on sale of real estate investments for the years ended December 31, 2005, 2004 and 2003 follows: Gains on Sale of Real Estate Investments <TABLE> <CAPTION> Date Net Recognized Real Estate Properties Location Size Sold Sales Price Basis Gain ---------------------------------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> <C> 2005 Delp Distribution Center II......... Memphis, TN 102,000 SF 02/23/05 $ 2,085 1,708 377 Lamar Distribution Center II........ Memphis, TN 151,000 SF 06/30/05 3,710 2,956 754 Sabal Land.......................... Tampa, FL 1.9 Acres 09/30/05 239 206 33 -------------------------------------- $ 6,034 4,870 1,164 ====================================== 2004 Getwell Distribution Center......... Memphis, TN 26,000 SF 06/30/04 $ 746 685 61 Sample 95 Business Park III......... Pompano Beach, FL 18,000 SF 07/01/04 1,994 711 1,283 Viscount Distribution Center........ Dallas, TX 104,000 SF 08/20/04 2,197 2,091 106 Sabal Land.......................... Tampa, FL 4.4 Acres 10/04/04 403 403 - -------------------------------------- $ 5,340 3,890 1,450 ====================================== 2003 Air Park Distribution Center II..... Memphis, TN 17,000 SF 02/14/03 $ 445 339 106 Orlando Central Park Land........... Orlando, FL 2.6 Acres 07/30/03 396 390 6 -------------------------------------- $ 841 729 112 ====================================== </TABLE> The following schedule indicates approximate future minimum rental receipts under noncancelable leases for real estate properties by year as of December 31, 2005: Future Minimum Rental Receipts Under Noncancelable Leases <TABLE> <CAPTION> Years Ended December 31, (In thousands) -------------------------------------------------------------- <S> <C> 2006...................................... $ 97,601 2007...................................... 80,650 2008...................................... 61,609 2009...................................... 44,313 2010...................................... 28,754 Thereafter................................ 53,772 --------------- Total minimum receipts................. $ 366,699 =============== </TABLE> Ground Leases As of December 31, 2005, the Company owned two properties in Florida, two properties in Texas, one property in Arizona and one property in Mississippi that are subject to ground leases. These leases have terms of 40 to 75 years, expiration dates of August 2031 to November 2076, and renewal options of 15 to 35 years, except for the one lease in Arizona which is automatically renewed annually. Total lease expenditures for the years ended December 31, 2005, 2004 and 2003 were $686,000, $679,000 and $676,000, respectively. Payments on five of the properties are subject to increases at 3 to 10 year intervals based upon the agreed or appraised fair market value of the leased premises on the adjustment date or the Consumer Price Index percentage increase since the base rent date. The following schedule indicates approximate future minimum lease payments for these properties by year as of December 31, 2005: Future Minimum Ground Lease Payments <TABLE> <CAPTION> Years Ended December 31, (In thousands) ---------------------------------------------------------------- <S> <C> 2006...................................... $ 688 2007...................................... 687 2008...................................... 687 2009...................................... 687 2010...................................... 687 Thereafter................................ 17,197 ----------------- Total minimum payments................. $ 20,633 ================= </TABLE>
(3) UNCONSOLIDATED INVESTMENT In November 2004, the Company acquired a 50% undivided tenant-in-common interest in Industry Distribution Center II, a 309,000 square foot warehouse distribution building in the City of Industry (Los Angeles), California. The building was constructed in 1998 and is 100% leased through December 2014 to a single tenant who owns the other 50% interest in the property. This investment is accounted for under the equity method of accounting and had a carrying value of $2,618,000 at December 31, 2005, a decrease of $6,638,000 from $9,256,000 at December 31, 2004. At the end of May 2005, EastGroup and the property co-owner closed a nonrecourse first mortgage loan secured by Industry Distribution Center II. The $13.3 million loan has a fixed interest rate of 5.31%, a ten-year term and an amortization schedule of 25 years. The co-owner's 50% share of the loan proceeds ($6.65 million) were paid to EastGroup and reduced the Company's mortgage loan receivable (see Note 4). EastGroup's 50% share of the loan proceeds ($6.65 million) reduced the carrying value of the investment. EastGroup's share of this mortgage was $6,585,000 at December 31, 2005. (4) MORTGAGE LOANS RECEIVABLE In connection with the closing of the investment in Industry Distribution Center II, EastGroup advanced a total of $7,550,000 in two separate notes to the property co-owner, one for $6,750,000 and one for $800,000. As discussed in Note 3, the Company and the property co-owner secured permanent fixed-rate financing on the investment in Industry Distribution Center II in May 2005. As part of this transaction, the loan proceeds payable to the property co-owner ($6.65 million) were paid to EastGroup to reduce the $6.75 million note. Also at the closing of the permanent financing, the co-owner repaid the remaining balance of $100,000 on this note. The $800,000 note was repaid in full to EastGroup during the last half of 2005. Mortgage interest income for these notes was $224,000 for 2005 and $65,000 for 2004. (5) OTHER ASSETS A summary of the Company's Other Assets follows: <TABLE> <CAPTION> December 31, -------------------------- 2005 2004 -------------------------- (In thousands) <S> <C> <C> Leasing costs (principally commissions), net of accumulated amortization....... $ 13,630 12,003 Deferred rent receivable, net of allowance for doubtful accounts............... 12,773 10,832 Accounts receivable, net of allowance for doubtful accounts.................... 2,930 2,316 Acquired in-place lease intangibles, net of accumulated amortization of $3,580 and $999 for 2005 and 2004, respectively........................... 6,062 2,931 Goodwill....................................................................... 990 990 Prepaid expenses and other assets.............................................. 7,206 9,134 -------------------------- $ 43,591 38,206 ========================== </TABLE> (6) NOTES PAYABLE TO BANKS The Company has a three-year, $175 million unsecured revolving credit facility with a group of nine banks that matures in January 2008. The Company customarily uses this line of credit for acquisitions and developments. The interest rate on the facility is based on the LIBOR index and varies according to debt-to-total asset value ratios, with an annual facility fee of 20 basis points. EastGroup's interest rate under this facility is LIBOR plus .95%, except that it may be lower based upon the competitive bid option in the note (the Company was first eligible under this facility to exercise its option to solicit competitive bid offers in June 2005). The line of credit can be expanded by $100 million and has a one-year extension at EastGroup's option. At December 31, 2005, the weighted average interest rate was 5.15% on a balance of $113,000,000. The interest rate on each tranche is currently reset on a monthly basis. The Company has a one-year $20 million unsecured revolving credit facility with PNC Bank, N.A. that matured in December 2005 and was renewed with a maturity date of November 2006. This credit facility is customarily used for working cash needs. The interest rate on the facility is based on LIBOR and varies according to debt-to-total asset value ratios; it is currently LIBOR plus 1.10%. At December 31, 2005, the interest rate was 5.49% on $3,764,000. Average bank borrowings were $100,504,000 in 2005 compared to $66,867,000 in 2004 with weighted average interest rates of 4.53% in 2005 compared to 2.76% in 2004. Weighted average interest rates including amortization of loan costs were 4.89% for 2005 and 3.36% for 2004. Amortization of bank loan costs was $357,000, $404,000 and $409,000 for 2005, 2004 and 2003, respectively. The Company's bank credit facilities have certain restrictive covenants, and the Company was in compliance with all of its debt covenants at December 31, 2005. The Company has an interest rate swap agreement to hedge its exposure to the variable interest rate on the Company's $10,345,000 Tower Automotive Center recourse mortgage (see Note 7). 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 income (loss). The Company does not hold or issue this type of derivative contract for trading or speculative purposes. The interest rate swap agreement is summarized as follows: <TABLE> <CAPTION> Current Notional Fair Value Fair Value Type of Hedge Amount Maturity Date Reference Rate Fixed Rate at 12/31/05 at 12/31/04 --------------------------------------------------------------------------------------------------------------------------- (In thousands) (In thousands) <S> <C> <C> <C> <C> <C> <C> Swap $10,345(1) 12/31/10 1 month LIBOR 4.03% $311 $14 </TABLE> (1) This mortgage is backed by a letter of credit totaling $10,464,000 at December 31, 2005. The letter of credit is renewable annually and expires on January 15, 2011. (7) MORTGAGE NOTES PAYABLE A summary of mortgage notes payable follows: <TABLE> <CAPTION> Carrying Amount Monthly of Securing Balance at December 31, P&I Maturity Real Estate at ------------------------ Property Rate Payment Date December 31, 2005 2005 2004 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> Westport Commerce Center............................. 8.000% $ 28,021 Repaid 03/05 $ - - 2,407 Lamar Distribution Center II......................... 6.900% 16,925 Repaid 06/05 - - 1,820 Exchange Distribution Center I....................... 8.375% 21,498 Repaid 07/05 - - 1,816 Lake Pointe Business Park............................ 8.125% 81,675 Repaid 07/05 - - 9,830 Jetport Commerce Park................................ 8.125% 33,769 Repaid 09/05 - - 2,913 Huntwood Distribution Center......................... 7.990% 100,250 08/22/06 15,292 10,761 11,089 Wiegman Distribution Center.......................... 7.990% 46,269 08/22/06 7,893 4,967 5,118 Arion Business Park(1)............................... 4.450% 102,329 12/01/06 33,063 20,784 - World Houston 1 & 2.................................. 7.770% 33,019 04/15/07 5,053 4,122 4,195 E. University I & II, Broadway VI, 55th Avenue and Ethan Allen.................................... 8.060% 96,974 06/26/07 20,711 10,653 10,945 Dominguez, Kingsview, Walnut, Washington, Industry and Shaw.................................. 6.800% 358,770 03/01/09 54,530 37,532 39,222 Auburn Facility...................................... 8.875% 52,109 09/01/09 12,992 1,988 2,416 Tower Automotive Center (recourse)(2)................ 5.300% Semiannual 01/15/11 9,879 10,345 10,620 Interstate I, II & III, Venture, Stemmons Circle, Glenmont I & II, West Loop I & II, Butterfield Trail and Rojas.................................... 7.250% 325,263 05/01/11 44,521 41,529 42,388 America Plaza, Central Green and World Houston 3-9... 7.920% 191,519 05/10/11 26,834 24,958 25,266 University Business Center (120 & 130 Cremona)....... 6.430% 81,856 05/15/12 9,561 6,372 6,925 University Business Center (125 & 175 Cremona)....... 7.980% 88,607 06/01/12 13,123 10,499 10,715 Oak Creek Distribution Center IV..................... 5.680% 31,253 06/01/12 7,253 4,439 - Airport Distribution, Southpointe, Broadway I, III & IV, Southpark, 51st Avenue, Chestnut, Main Street, Interchange Business Park, North Stemmons I and World Houston 12 & 13......... 6.860% 279,149 09/01/12 43,146 37,801 38,531 Interstate Distribution Center - Jacksonville........ 5.640% 31,645 01/01/13 7,372 4,934 - Broadway V, 35th Avenue, Sunbelt, Freeport, Lockwood, Northwest Point, Techway Southwest I and World Houston 10, 11 & 14...................... 4.750% 259,403 09/05/13 45,085 43,245 44,278 Kyrene Distribution Center I......................... 9.000% 11,246 07/01/14 2,406 805 865 World Houston 17, Kirby, Americas Ten I, Shady Trail, Palm River North I, II & III and Westlake I & II(3)................................. 5.680% 143,420 10/10/14 30,799 30,300 30,300 Chamberlain, Lake Pointe, Techway Southwest II and World Houston 19 & 20.......................... 4.980% 256,952 12/05/15 23,853 39,000 - Blue Heron Distribution Center II.................... 5.390% 16,176 02/29/20 5,832 1,927 2,015 ----------------------------------------- $ 419,198 346,961 303,674 ========================================= </TABLE> (1) Interest only is paid on this note until December 2006. (2) The Tower Automotive mortgage 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%. Semiannual principal payments are made on this note; interest is paid monthly. (See Note 6.) The principal amounts of these payments increase incrementally as the loan approaches maturity. (3) Interest only is paid on this note until November 2006.
The Company currently intends to repay its debt service obligations, both in the short- and long-term, through its operating cash flows, borrowings under its lines of credit, proceeds from new mortgage debt and/or proceeds from the issuance of equity instruments. Principal payments due during the next five years as of December 31, 2005 are as follows: <TABLE> <CAPTION> Year (In thousands) --------------------------------------- <S> <C> 2006................... $ 45,044 2007................... 23,398 2008................... 9,608 2009................... 39,596 2010................... 7,904 </TABLE> (8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES A summary of the Company's Accounts Payable and Accrued Expenses follows: <TABLE> <CAPTION> December 31, -------------------------- 2005 2004 -------------------------- (In thousands) <S> <C> <C> Property taxes payable............................ $ 8,224 6,689 Development costs payable......................... 2,777 921 Dividends payable................................. 2,363 2,355 Other payables and accrued expenses............... 9,577 6,216 --------------------------- $ 22,941 16,181 =========================== </TABLE> (9) COMMON STOCK ACTIVITY The following table presents the common stock activity for the three years ended December 31, 2005: <TABLE> <CAPTION> Years Ended December 31, ------------------------------------------------- 2005 2004 2003 ------------------------------------------------- Common Shares <S> <C> <C> <C> Shares outstanding at beginning of year........... 21,059,164 20,853,780 16,104,356 Conversion of preferred into common stock......... - - 3,181,920 Common stock offerings............................ 860,000 - 1,418,887 Stock options exercised........................... 72,415 167,380 139,584 Dividend reinvestment plan........................ 8,279 10,247 12,925 Management incentive stock awarded................ - - 2,108 Incentive restricted stock granted................ 33,446 36,767 - Incentive restricted stock forfeited.............. (3,396) (9,010) (6,000) Director incentive restricted stock granted....... 481 - - Director common stock awarded..................... 1,200 - - Restricted stock withheld for tax obligations..... (907) - - ------------------------------------------------- Shares outstanding at end of year................. 22,030,682 21,059,164 20,853,780 ================================================= </TABLE> Common Stock Issuances On March 31, 2005, EastGroup closed the sale of 800,000 shares of its common stock. On May 2, 2005, the underwriter closed on the exercise of a portion of its over-allotment option and purchased 60,000 additional shares. Total net proceeds from the offering of the shares were $31,597,000 after deducting the underwriting discount and other offering expenses. In May 2003, the Company completed a direct placement offering of 571,429 shares of its common stock at $26.25 per share. The proceeds of the offering were approximately $14,461,000, net of all related expenses. In November 2003, the Company completed a direct placement offering of 847,458 shares of its common stock at $29.50 per share. The proceeds of the offering were approximately $24,513,000, net of all related expenses. Dividend Reinvestment Plan The Company has a dividend reinvestment plan that allows stockholders to reinvest cash distributions in new shares of the Company. 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. Under the common stock repurchase 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. The Company has not repurchased any shares under this plan since 2000.
Shareholder Rights Plan In December 1998, EastGroup adopted a Shareholder Rights Plan (the Plan) designed to enhance the ability of all of the Company's stockholders to realize the long-term value of their investment. Under the Plan, Shareholder Rights (Rights) were distributed as a dividend on each share of Common Stock (one Right for each share of Common Stock) held as of the close of business on December 28, 1998. A Right was also delivered with all shares of Common Stock issued after December 28, 1998. The Rights will expire at the close of business on December 3, 2008. Each whole Right will entitle the holder to buy one one-thousandth (1/1000) of a newly issued share of EastGroup's Series C Preferred Stock at an exercise price of $70.00. The Rights attach to and trade with the shares of the Company's Common Stock. No separate Rights Certificates will be issued unless an event triggering the Rights occurs. The Rights will detach from the Common Stock and will initially become exercisable for shares of Series C Preferred Stock if a person or group acquires beneficial ownership of, or commences a tender or exchange offer which would result in such person or group beneficially owning, 15% or more of EastGroup's Common Stock, except through a tender or exchange offer for all shares which the Board determines to be fair and otherwise in the best interests of EastGroup and its shareholders. The Rights will also detach from the Common Stock if the Board determines that a person holding at least 9.8% of EastGroup's Common Stock intends to cause EastGroup to take certain actions adverse to it and its shareholders or that such holder's ownership would have a material adverse effect on EastGroup. On December 20, 2004, EastGroup amended the Plan to require a committee comprised entirely of independent directors to review and evaluate the Plan to consider whether the maintenance of the Plan continues to be in the interest of the Company, its stockholders and other relevant constituencies of the Company at least every three years. If any person becomes the beneficial owner of 15% or more of EastGroup's Common Stock and the Board of Directors does not within 10 days thereafter redeem the Rights, or a 9.8% holder is determined by the Board to be an adverse person, each Right not owned by such person or related parties will then enable its holder to purchase, at the Right's then-current exercise price, EastGroup Common Stock (or, in certain circumstances as determined by the Board, a combination of cash, property, common stock or other securities) having a value of twice the Right's exercise price. Under certain circumstances, if EastGroup is acquired in a merger or similar transaction with another person, or sells more than 50% of its assets, earning power or cash flow to another entity, each Right that has not previously been exercised will entitle its holder to purchase, at the Right's then-current exercise price, common stock of such other entity having a value of twice the Right's exercise price. EastGroup will generally be entitled to redeem the Rights at $0.0001 per Right at any time until the 10th day following public announcement that a 15% position has been acquired, or until the Board has determined a 9.8% holder to be an adverse person. Prior to such time, the Board of Directors may extend the redemption period. (10) STOCK-BASED COMPENSATION PLANS The Company has a management incentive plan which was adopted in 2004 (the 2004 Plan), which authorizes the issuance of up to 1,900,000 shares of common stock (not including shares granted in the 1994 Plan) to employees in the form of options, stock appreciation rights, restricted stock, deferred stock units, performance shares, stock bonuses, and stock in place of cash compensation. The 2004 Plan has replaced the 1994 Plan. Under the 1994 Plan, employees of the Company were granted stock options (50% vested after one year and the other 50% after two years), an annual incentive award and restricted stock awards. Shares remaining for grant under the 1994 Plan were cancelled upon adoption of the 2004 Plan. Outstanding grants under the 1994 Plan will be fulfilled under that Plan. Total shares available for grant were 1,865,572, 1,898,945 and 543,577 at December 31, 2005, 2004 and 2003, respectively. The following discussions and tables illustrate the Company's various forms of stock-based compensation. Stock-based compensation expense for these plans collectively was $2,048,000, $1,256,000 and $620,000 for 2005, 2004 and 2003, respectively. Restricted Stock The purpose of the restricted stock plan is to act as a retention device since it allows participants to benefit from dividends as well as potential stock appreciation. The Company records the fair market value of the restricted stock to additional paid-in capital when the shares are granted and offsets unearned compensation by the same amount. The unearned compensation is amortized over the restricted period into compensation expense. Previously expensed stock-based compensation related to forfeited shares reduces compensation expense during the period in which the shares are forfeited. During the restricted period, the Company accrues dividends and holds the certificates for the shares; however, the employee can vote the shares. Share certificates and dividends are delivered to the employee as they vest. Vesting occurs from three to ten years from the date of the grant. Following is a summary of the total shares that will vest by year for the remainder of the vesting periods as of December 31, 2005. <TABLE> <CAPTION> Remaining Shares Vesting Schedule Number of Shares ---------------------------------------------------------------- <S> <C> 2006...................................... 56,757 2007...................................... 50,247 2008...................................... 35,220 2009...................................... 35,220 ----------------- Total Nonvested Shares.................... 177,444 ================= </TABLE>
Following is a summary of the total restricted shares granted, forfeited and delivered to officers and employees with related weighted average share prices for 2005, 2004 and 2003. Of the shares that vested in 2005, 907 shares were withheld by the Company to satisfy the tax obligations for those employees who elected this option as permitted under the applicable equity plan. <TABLE> <CAPTION> Restricted Stock Activity: Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------ 2005 2004 2003 -------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Share Price Shares Share Price Shares Share Price -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Nonvested at beginning of year...... 204,348 $ 22.249 183,100 $ 21.006 189,100 $ 21.010 Granted............................. 33,446 30.150 36,767 30.593 - - Forfeited........................... (3,396) 22.936 (9,010) 27.308 (6,000) 21.096 Vested.............................. (56,954) 24.495 (6,509) 27.300 - - ----------- ----------- ----------- Nonvested at end of year............ 177,444 23.005 204,348 22.249 183,100 21.006 =========== =========== =========== </TABLE> Following is a summary of the total officers and employees stock options granted, exercised and expired with related weighted average share prices for 2005, 2004 and 2003. <TABLE> <CAPTION> Officers and Employees Stock Options Stock Option Activity: Years Ended December 31, - ---------------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year.... 286,740 $ 19.853 432,370 $ 18.394 567,704 $ 18.503 Granted............................. - - - - - - Exercised........................... (34,665) 20.112 (145,630) 15.578 (134,334) 18.802 Expired............................. (1,000) 24.400 - - (1,000) 25.095 ----------- ----------- ----------- Outstanding at end of year.......... 251,075 19.800 286,740 19.853 432,370 18.394 =========== =========== =========== Exercisable at end of year.......... 251,075 $ 19.800 286,740 $ 19.853 427,695 $ 18.325 </TABLE> <TABLE> <CAPTION> Officer and employee outstanding stock options at December 31, 2005, all exercisable: ------------------------------------------------------------------------------------------ Weighted Average Remaining Weighted Average Exercise Price Range Number Contractual Life Exercise Price ------------------------------------------------------------------------------------------ <S> <C> <C> <C> $ 14.580-19.000 75,319 0.823 years $ 16.226 20.000-22.000 167,406 2.698 years 21.227 22.400-25.750 8,350 5.728 years 23.413 </TABLE> (11) DIRECTORS EQUITY INCENTIVE PLAN The Company has a director incentive plan which was adopted in 2000 (the 2000 Plan), which authorizes the issuance of up to 150,000 shares of common stock (not including shares granted in the 1994 Plan, as amended) upon exercise of any options. Options granted to directors vest 100% at the grant date. The 2000 Plan replaced the 1994 Plan. Under the 2000 Plan, each Non-Employee Director was granted an initial 7,500 options. Through the year 2003, 2,250 additional options were granted on the date of any Annual Meeting at which the Director was reelected to the Board. In lieu of option grants in 2004, cash awards totaling $34,000 were paid to the Non-Employee Directors. At the Company's annual meeting in June 2005, the Company's shareholders approved the 2005 Directors Equity Incentive Plan (the 2005 Plan), which replaced the 2000 Plan. Shares remaining for grant under the 2000 Plan were cancelled upon adoption of the 2005 Plan. Outstanding grants under the 1994 and 2000 Plans will be fulfilled under those Plans. The 2005 Plan authorizes the issuance of up to 50,000 shares of common stock through awards of shares and restricted shares granted to Non-Employee Directors of the Company. In 2005, the Company granted 1,200 shares of common stock to directors under the 2005 Plan. In addition, 481 shares of restricted stock at $41.57 were
granted during 2005, none of which was vested as of December 31, 2005. The restricted stock vesting period is 25% per year for four years. There were 48,319 shares available for grant under the 2005 Plan at December 31, 2005. <TABLE> <CAPTION> Stock Option Activity: Years Ended December 31, ---------------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year.... 91,500 $ 22.118 113,250 $ 20.726 107,250 $ 19.354 Granted............................. - - - - 13,500 26.600 Exercised........................... (37,750) 21.465 (21,750) 14.872 (7,500) 11.670 Expired............................. - - - - - - ----------- ---------- ----------- Outstanding at end of year.......... 53,750 22.576 91,500 22.118 113,250 20.726 =========== ========== =========== Exercisable at end of year.......... 53,750 $ 22.576 91,500 $ 22.118 113,250 $ 20.726 Available for grant at end of year.. - - 88,500 - 88,500 - </TABLE> <TABLE> <CAPTION> Director outstanding stock options at December 31, 2005, all exercisable: --------------------------------------------------------------------------------------------- Weighted Average Remaining Weighted Average Exercise Price Range Number Contractual Life Exercise Price --------------------------------------------------------------------------------------------- <S> <C> <C> <C> $ 14.580-14.580 2,250 0.463 years $ 14.580 19.375-21.750 27,000 3.672 years 20.829 24.020-26.600 24,500 6.709 years 25.234 </TABLE> (12) PREFERRED STOCK Series A 9.00% Cumulative Redeemable Preferred Stock In June 1998, EastGroup sold 1,725,000 shares of Series A 9.00% Cumulative Redeemable Preferred Stock at $25.00 per share in a public offering. The preferred stock was redeemable by the Company at $25.00 per share, plus accrued and unpaid dividends, on or after June 19, 2003. The preferred stock had no stated maturity, sinking fund or mandatory redemption and was not convertible into any other securities of the Company. On July 7, 2003, the Company redeemed all of the outstanding Series A Preferred Stock. The redemption price of these shares (excluding accrued dividends) was $43,125,000. The original issuance costs of $1,768,000 related to Series A in 1998 were recorded as a preferred issuance cost and treated in a manner similar to a preferred dividend in the third quarter of 2003. The redemption cost was funded with the proceeds from the Company's common offering in May 2003 and the 7.95% Series D Cumulative Redeemable Preferred Stock offering in earlier July 2003. The Company declared dividends of $1.08125 per share of Series A Preferred for 2003. Series B 8.75% Cumulative Convertible Preferred Stock In December 1998 and September 1999, EastGroup sold $10,000,000 and $60,000,000, respectively, of Series B 8.75% Cumulative Convertible Preferred Stock at a net price of $24.50 per share to Five Arrows Realty Securities II, L.L.C. (Five Arrows), an investment fund managed by Rothschild Realty, Inc., a member of the Rothschild Group. The Series B Preferred Stock, which was convertible into common stock at a conversion price of $22.00 per share (3,181,920 common shares), was entitled to quarterly dividends in arrears equal to the greater of $.547 per share or the dividend on the number of shares of common stock into which a share of Series B Preferred Stock was convertible. In connection with this offering, EastGroup entered into certain related agreements with Five Arrows, providing, among other things, for certain registration rights with respect to the Series B Preferred Stock. Also, the preferred stock was not redeemable by the Company at its option prior to the fifth anniversary of the original date of issuance of the Series B Preferred Stock, after which it was redeemable at various redemption prices at certain dates and under certain circumstances. During 2003, all of the 2,800,000 shares of the Series B Preferred Stock were converted into 3,181,920 common shares. Five Arrows began converting the shares in April 2003 and completed the conversion in November 2003. Since it was the policy of Five Arrows to not hold common stock, the common shares were sold in the market throughout the year with the final shares being sold on December 15, 2003. The Company declared dividends of $1.641 per share of Series B Preferred for 2003. Series D 7.95% Cumulative Redeemable Preferred Stock In July 2003, EastGroup sold 1,320,000 shares of 7.95% Series D Cumulative Redeemable Preferred Stock at $25.00 per share in a direct placement. The preferred stock is redeemable by the Company at $25.00 per share, plus accrued and unpaid dividends, on or after July 2, 2008. The preferred stock has no stated maturity, sinking fund or mandatory redemption and is not convertible into any other securities of the Company. The Company declared dividends of $1.9876 per share for Series D Preferred for both 2005 and 2004 and $.9883 per share for 2003.
(13) 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 2005, 2004 and 2003 are presented in the Company's Consolidated Statements of Changes in Stockholders' Equity and are summarized below. <TABLE> <CAPTION> --------------------------------------- 2005 2004 2003 --------------------------------------- (In thousands) <S> <C> <C> <C> ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Balance at beginning of year......................................... $ 14 (30) 58 Unrealized holding gains on REIT securities during the year...... - - 66 Less reclassification adjustment for gains on REIT securities included in net income............................ - - (421) Change in fair value of interest rate swap....................... 297 44 267 --------------------------------------- Balance at end of year............................................... $ 311 14 (30) ======================================= </TABLE> (14) EARNINGS PER SHARE The Company applies SFAS No. 128, "Earnings Per Share," which requires companies to present basic EPS and diluted EPS. Reconciliation of the numerators and denominators in the basic and diluted EPS computations is as follows: Reconciliation of Numerators and Denominators <TABLE> <CAPTION> -------------------------------------------- 2005 2004 2003 -------------------------------------------- (In thousands) <S> <C> <C> <C> BASIC EPS COMPUTATION Numerator-net income available to common stockholders........ $ 19,567 20,703 12,748 Denominator-weighted average shares outstanding.............. 21,567 20,771 17,819 DILUTED EPS COMPUTATION Numerator-net income available to common stockholders........ $ 19,567 20,703 12,748 Denominator: Weighted average shares outstanding........................ 21,567 20,771 17,819 Common stock options....................................... 171 193 189 Nonvested restricted stock................................. 154 124 186 -------------------------------------------- Total Shares............................................ 21,892 21,088 18,194 ============================================ </TABLE> 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 2003 due to its antidilutive effect. All of the Series B Preferred Stock was converted into common stock during 2003.
(15) QUARTERLY RESULTS OF OPERATIONS - UNAUDITED <TABLE> <CAPTION> 2005 Quarter Ended 2004 Quarter Ended --------------------------------------------------------------------------------- Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 --------------------------------------------------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues............................... $ 30,555 31,433 32,049 32,715 27,382 27,937 29,265 29,737 Expenses............................... (25,423) (26,270) (26,235) (27,795) (22,428) (22,822) (23,287) (24,131) --------------------------------------------------------------------------------- Income from continuing operations...... 5,132 5,163 5,814 4,920 4,954 5,115 5,978 5,606 Income from discontinued operations.... 404 725 33 - 58 166 1,431 19 --------------------------------------------------------------------------------- Net income............................. 5,536 5,888 5,847 4,920 5,012 5,281 7,409 5,625 Preferred dividends.................... (656) (656) (656) (656) (656) (656) (656) (656) --------------------------------------------------------------------------------- Net income available to common stockholders........................ $ 4,880 5,232 5,191 4,264 4,356 4,625 6,753 4,969 ================================================================================= BASIC PER SHARE DATA Net income available to common stockholders........................ $ .23 .24 .24 .20 .21 .22 .32 .24 ================================================================================= Weighted average shares outstanding.... 20,891 21,755 21,799 21,811 20,687 20,745 20,804 20,845 ================================================================================= DILUTED PER SHARE DATA Net income available to common stockholders........................ $ .23 .24 .23 .19 .21 .22 .32 .23 ================================================================================= Weighted average shares outstanding.... 21,196 22,073 22,130 22,147 21,114 21,142 21,179 21,157 ================================================================================= </TABLE> The above quarterly earnings per share calculations are based on the weighted average number of common shares outstanding during each quarter for basic earnings per share and the weighted average number of outstanding common shares and common share equivalents during each quarter for diluted earnings per share. The annual earnings per share calculations in the Consolidated Statements of Income are based on the weighted average number of common shares outstanding during each year for basic earnings per share and the weighted average number of outstanding common shares and common share equivalents during each year for diluted earnings per share. (16) DEFINED CONTRIBUTION PLAN EastGroup maintains a 401(k) plan for its employees. The Company makes matching contributions of 50% of the employee's contribution (limited to 10% of compensation as defined by the plan) and may also make annual discretionary contributions. The Company's total expense for this plan was $387,000, $332,000 and $273,000 for 2005, 2004 and 2003, respectively. (17) LEGAL MATTERS The Company is not presently involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company or its properties, other than routine litigation arising in the ordinary course of business or which is expected to be covered by the Company's liability insurance.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2005 and 2004. SFAS No. 107, Disclosures About Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. <TABLE> <CAPTION> -------------------------------------------------------- 2005 2004 -------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> Financial Assets Mortgage loans receivable...... $ - - 7,550 7,550 Cash and cash equivalents...... 1,915 1,915 1,208 1,208 Interest rate swap............. 311 311 14 14 Financial Liabilities Mortgage notes payable......... 346,961 357,034 303,674 325,241 Notes payable to banks......... 116,764 116,764 86,431 86,431 </TABLE> Carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions, except as indicated in the notes below. The following methods and assumptions were used to estimate fair value of each class of financial instruments: Mortgage Loans Receivable: The carrying amount at December 31, 2004 approximates fair value due to the issuance of the loans in November 2004. Cash and Cash Equivalents: The carrying amounts approximate fair value because of the short maturity of those instruments. Interest Rate Swap: The fair value of the interest rate swap is the amount at which it could be settled, based on estimates obtained from the counterparty. The interest rate swap is shown under Other Assets on the consolidated balance sheets. Mortgage Notes Payable: The fair value of the Company's mortgage notes payable is estimated based on the quoted market prices for similar issues or by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company's bankers. Notes Payable to Banks: The carrying amounts approximate fair value because of the variable rates of interest on the debt. (19) SUBSEQUENT EVENTS In January 2006, EastGroup sold its land investment in Madisonville, Kentucky for $825,000, generating a gain of $773,000, of which $592,000 will be recognized in the first quarter of 2006 and $181,000 will be deferred to future periods. As part of the transaction, the Company took back a $185,000 note at 7.00% from the buyer, which is scheduled for repayment over the next six years, beginning in February 2006. The remaining deferred gain will be recognized as payments on this note are received from the buyer. Also subsequent to December 31, 2005, the Company entered into a contract to sell three of its Memphis properties (533,000 square feet) for a sales price of approximately $15.2 million. The sale of these properties is expected to close in March of 2006; however, there can be no assurance that the sale will actually occur. (20) RELATED PARTY TRANSACTIONS EastGroup and Parkway Properties, Inc. equally share the services and expenses of the Company's Chairman of the Board of Directors. These services and expenses include rent for office and storage space, administrative costs, insurance benefits, and entertainment and travel expenses. EastGroup and Parkway each pay a separate salary to the Chairman. EastGroup also leases 12,000 square feet of space for its executive offices in Jackson, Mississippi in a building owned by Parkway.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE THE DIRECTORS AND STOCKHOLDERS EASTGROUP PROPERTIES, INC.: Under date of March 8, 2006, we reported on the consolidated balance sheets of EastGroup Properties, Inc. and subsidiaries, as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2005, which are included in the 2005 Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in Item 15(a)(2) of Form 10-K. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Jackson, Mississippi KPMG LLP March 8, 2006
SCHEDULE III REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION DECEMBER 31, 2005 (In thousands) <TABLE> <CAPTION> Gross Amount at Initial Cost which Carried at to the Company Close of Period -------------------- --------------------------- Costs Capitalized Accumulated Buildings and Subsequent to Buildings and Depreciation Year Year Description Encumbrances Land Improvements Acquisition Land Improvements Total Dec. 31, 2005 Acquired Constructed - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Real Estate Properties (c): Industrial: FLORIDA Jacksonville Deerwood $ - 1,147 1,799 1,367 1,147 3,166 4,313 1,234 1989 1978 Phillips - 1,375 2,961 2,841 1,375 5,802 7,177 2,285 1994 1984/95 Lake Pointe (l) 17,094 3,442 6,450 3,433 3,442 9,883 13,325 4,681 1993 1986/87 Ellis - 540 7,513 509 540 8,022 8,562 2,025 1997 1977 Westside - 1,170 12,400 3,590 1,170 15,990 17,160 4,111 1997 1984 Beach - 476 1,899 511 476 2,410 2,886 517 2000 2000 Interstate D.C. 4,934 1,879 5,700 104 1,879 5,804 7,683 311 2005 1990 Orlando Chancellor - 291 1,711 60 291 1,771 2,062 600 1996/97 1996/97 Exchange I - 603 2,414 1,524 603 3,938 4,541 1,444 1994 1975 Exchange II - 300 945 28 300 973 1,273 233 2002 1976 Exchange III - 320 997 4 320 1,001 1,321 239 2002 1980 Sunbelt Center (j) 7,817 1,474 5,745 3,288 1,475 9,032 10,507 3,861 1989/97/98 1974/87/97/98 John Young I - 497 2,444 441 497 2,885 3,382 774 1997/98 1997/98 John Young II - 512 3,613 (215) 512 3,398 3,910 1,099 1998 1999 Altamonte I - 1,518 2,661 741 1,518 3,402 4,920 1,505 1999 1980/82 Altamonte II - 745 2,618 277 745 2,895 3,640 399 2003 1975 Sunport I - 555 1,977 488 555 2,465 3,020 648 1999 1999 Sunport II - 597 3,271 811 597 4,082 4,679 1,589 1999 2001 Sunport III - 642 3,121 379 642 3,500 4,142 677 1999 2002 Sunport IV - 642 2,917 309 642 3,226 3,868 258 1999 2004 Sunport V - 750 2,509 1,845 750 4,354 5,104 230 2001 2005 Tampa 56th Street - 843 3,567 2,133 843 5,700 6,543 2,766 1993 1981/86/97 Jetport - 1,034 4,416 1,999 1,034 6,415 7,449 2,954 1993/94/95 1974/79/85 Jetport 517 & 518 - 541 2,175 444 541 2,619 3,160 980 1999 1981/82 Westport - 980 3,800 1,865 980 5,665 6,645 2,176 1994 1983/87 Benjamin I & II - 843 3,963 368 883 4,291 5,174 1,466 1997 1996 Benjamin III - 407 1,503 231 407 1,734 2,141 917 1999 1988 Palm River Center - 1,190 4,625 983 1,190 5,608 6,798 2,082 1997/98 1990/97/98 Palm River North I & III (k) 5,651 1,005 4,688 1,439 1,005 6,127 7,132 1,299 1998 2000 Palm River North II (k) 5,186 724 4,418 (16) 634 4,492 5,126 1,063 1997/98 1999 Palm River South - 655 3,187 328 655 3,515 4,170 124 2000 2005 Walden I - 337 3,318 233 337 3,551 3,888 835 1997/98 2001 Walden II - 465 3,738 424 465 4,162 4,627 1,261 1998 1998 Oak Creek I - 1,110 6,126 186 1,110 6,312 7,422 1,492 1998 1998 Airport - 1,257 4,012 621 1,257 4,633 5,890 1,140 1998 1998 Westlake (k) 7,200 1,333 6,998 919 1,333 7,917 9,250 2,557 1998 1998/99 Expressway II - 1,013 3,247 - 1,013 3,247 4,260 401 2003 2001 Oak Creek II - 647 3,603 403 647 4,006 4,653 449 2003 2001 Oak Creek IV 4,439 805 6,472 - 805 6,472 7,277 24 2005 2001 Expressway I - 915 5,346 293 915 5,639 6,554 505 2002 2004 Fort Lauderdale/ Pompano Beach area Linpro - 613 2,243 1,053 616 3,293 3,909 1,286 1996 1986 Cypress Creek - - 2,465 1,039 - 3,504 3,504 1,132 1997 1986
Lockhart - - 3,489 1,350 - 4,839 4,839 1,477 1997 1986 Interstate - 485 2,652 367 485 3,019 3,504 1,068 1998 1988 Sample 95 - 2,202 8,785 1,025 2,202 9,810 12,012 3,026 1996/98 1990/99 Blue Heron - 975 3,626 987 975 4,613 5,588 1,200 1999 1986 Blue Heron II 1,927 1,385 4,222 660 1,385 4,882 6,267 435 2004 1988 Executive Airport I & III - 1,210 4,857 380 1,210 5,237 6,447 510 2001 2004 CALIFORNIA San Francisco area Wiegman 4,967 2,197 8,788 871 2,308 9,548 11,856 2,539 1996 1986/87 Huntwood 10,761 3,842 15,368 698 3,842 16,066 19,908 4,616 1996 1988 San Clemente - 893 2,004 92 893 2,096 2,989 423 1997 1978 Yosemite - 259 7,058 380 259 7,438 7,697 1,800 1999 1974/87 Los Angeles area Kingsview (e) 1,771 643 2,573 - 643 2,573 3,216 668 1996 1980 Dominguez (e) 6,142 2,006 8,025 1,124 2,006 9,149 11,155 2,766 1996 1977 Main Street (i) 4,116 1,606 4,103 366 1,606 4,469 6,075 1,104 1999 1999 Walnut (e) 4,629 2,885 5,274 249 2,885 5,523 8,408 1,620 1996 1966/90 Washington (e) 3,783 1,636 4,900 334 1,636 5,234 6,870 1,356 1997 1996/97 Ethan Allen (f) 5,221 2,544 10,175 95 2,544 10,270 12,814 2,592 1998 1980 Industry (e) 12,887 10,230 12,373 801 10,230 13,174 23,404 3,492 1998 1959 Chestnut (i) 3,523 1,674 3,465 61 1,674 3,526 5,200 773 1998 1999 Los Angeles Corporate Center - 1,363 5,453 1,140 1,363 6,593 7,956 1,753 1996 1986 Santa Barbara University Bus. Center 16,871 5,517 22,067 2,011 5,520 24,075 29,595 6,911 1996 1987/88 Fresno Shaw (e) 8,320 2,465 11,627 1,018 2,465 12,645 15,110 3,731 1998 1978/81/87 San Diego Eastlake - 3,046 6,888 748 3,046 7,636 10,682 2,048 1997 1989 TEXAS Dallas Interstate I & II (h) 5,056 1,757 4,941 1,422 1,757 6,363 8,120 3,516 1988 1978 Interstate III (h) 1,977 520 2,008 647 520 2,655 3,175 627 2000 1979 Interstate IV - 416 2,481 10 416 2,491 2,907 191 2004 2002 Venture (h) 3,918 1,452 3,762 1,078 1,452 4,840 6,292 2,590 1988 1979 Stemmons Circle (h) 1,608 363 2,014 206 363 2,220 2,583 886 1998 1977 Ambassador Row - 1,156 4,625 1,459 1,156 6,084 7,240 2,338 1998 1958/65 North Stemmons I (i) 2,804 619 3,264 255 619 3,519 4,138 821 2001 1979 North Stemmons II - 150 583 169 150 752 902 152 2002 1971 Shady Trail (k) 3,210 635 3,621 117 635 3,738 4,373 351 2003 1998 Houston Northwest Point (j) 6,579 1,243 5,640 1,961 1,243 7,601 8,844 2,687 1994 1984/85 Lockwood (j) 5,579 749 5,444 1,306 749 6,750 7,499 1,613 1997 1968/69 West Loop (h) 4,062 905 4,383 1,235 905 5,618 6,523 1,725 1997/2000 1980 World Houston 1 & 2 4,122 660 5,893 611 660 6,504 7,164 2,111 1998 1996 World Houston 3, 4 & 5 (g) 5,029 1,025 6,413 291 1,025 6,704 7,729 2,287 1998 1998 World Houston 6 (g) 2,278 425 2,423 38 425 2,461 2,886 777 1998 1998 World Houston 7 & 8 (g) 5,788 680 4,584 3,231 680 7,815 8,495 2,540 1998 1998 World Houston 9 (g) 5,030 800 4,355 1,422 800 5,777 6,577 1,052 1998 1998 World Houston 10 (j) 4,255 933 4,779 7 933 4,786 5,719 926 2001 1999
World Houston 11 (j) 3,681 638 3,764 546 638 4,310 4,948 831 1999 1999 World Houston 12 (i) 1,992 340 2,419 181 340 2,600 2,940 451 2000 2002 World Houston 13 (i) 1,947 282 2,569 23 282 2,592 2,874 898 2000 2002 World Houston 14 (j) 2,785 722 2,629 392 722 3,021 3,743 607 2000 2003 World Houston 16 - 519 4,248 52 519 4,300 4,819 119 2000 2005 World Houston 17 (k) 2,805 373 1,945 758 373 2,703 3,076 151 2000 2004 World Houston 18 - 323 1,512 16 323 1,528 1,851 17 2005 1995 World Houston 19 (l) 4,159 373 2,256 613 373 2,869 3,242 352 2000 2004 World Houston 20 (l) 4,708 346 1,948 1,376 1,009 2,661 3,670 162 2000 2004 America Plaza (g) 3,606 662 4,660 396 662 5,056 5,718 1,387 1998 1996 Central Green (g) 3,227 566 4,031 97 566 4,128 4,694 1,222 1999 1998 Glenmont (h) 5,093 936 6,161 1,083 936 7,244 8,180 2,075 1998 1999/2000 Techway S.W. I (j) 4,242 729 3,765 1,208 729 4,973 5,702 648 2000 2001 Techway S.W. II (l) 5,833 550 3,689 308 550 3,997 4,547 417 2000 2004 Freeport (j) 5,016 458 5,712 573 458 6,285 6,743 1,016 2002 2001 Kirby (k) 3,150 530 3,153 218 530 3,371 3,901 187 2004 1980 Clay Campbell - 742 2,998 - 742 2,998 3,740 61 2005 1982 El Paso Butterfield Trail (h) 15,945 - 22,144 3,464 - 25,608 25,608 8,362 1997/2000 1987/95 Rojas (h) 3,870 900 3,659 1,656 900 5,315 6,215 2,394 1999 1986 Americas Ten I (k) 3,098 526 2,778 846 526 3,624 4,150 601 2001 2003 San Antonio Alamo Downs - 1,342 6,338 290 1,342 6,628 7,970 770 2004 1986/2002 Arion 20,784 4,170 31,432 273 4,170 31,705 35,875 2,812 2005 1988-2000 Wetmore - 1,494 10,804 - 1,494 10,804 12,298 66 2005 1998/99 ARIZONA Phoenix area Broadway I (i) 3,119 837 3,349 417 837 3,766 4,603 1,371 1996 1971 Broadway II - 455 482 125 455 607 1,062 237 1999 1971 Broadway III (i) 1,739 775 1,742 49 775 1,791 2,566 604 2000 1983 Broadway IV (i) 1,520 380 1,652 212 380 1,864 2,244 527 2000 1986 Broadway V (j) 1,080 353 1,090 9 353 1,099 1,452 250 2002 1980 Broadway VI (f) 1,030 599 1,855 73 599 1,928 2,527 467 2002 1979 Kyrene 805 850 2,044 349 850 2,393 3,243 837 1999 1981 Kyrene II - 640 2,409 265 640 2,674 3,314 748 1999 2001 Metro - 1,927 7,708 1,759 1,927 9,467 11,394 2,754 1996 1977/79 35th Avenue (j) 2,211 418 2,381 173 418 2,554 2,972 605 1997 1967 Estrella - 628 4,694 154 628 4,848 5,476 1,187 1998 1988 51st Avenue (i) 1,778 300 2,029 296 300 2,325 2,625 668 1998 1987 East University I and II (f) 2,379 1,120 4,482 237 1,120 4,719 5,839 1,273 1998 1987/89 55th Avenue (f) 2,023 912 3,717 337 917 4,049 4,966 1,103 1998 1987 Interstate Commons I - 798 3,632 264 798 3,896 4,694 1,130 1999 1988 Interstate Commons II - 320 2,448 239 320 2,687 3,007 547 1999 2000 Southpark (i) 2,863 918 2,738 570 918 3,308 4,226 614 2001 2000 Airport Commons - 1,000 1,510 117 1,000 1,627 2,627 227 2003 1971 SanTan 10 - 846 2,647 239 846 2,886 3,732 210 2001 2005 Tucson Chamberlain (l) 7,206 506 3,564 1,547 506 5,111 5,617 936 1997/2003 1994/2003 Airport (i) 4,112 1,103 4,672 294 1,103 4,966 6,069 1,019 1998 1995
Southpointe (i) 3,886 - 3,982 1,754 - 5,736 5,736 1,707 1999 1989 Benan - 707 1,842 14 707 1,856 2,563 76 2005 2001 TENNESSEE Memphis Senator Street I - 540 2,187 400 540 2,587 3,127 789 1997 1982 Senator Street II - 435 1,742 234 435 1,976 2,411 477 1998 1968 Air Park I - 250 1,916 238 250 2,154 2,404 562 1998 1975 Lamar I - 655 2,651 353 655 3,004 3,659 795 1998 1978/80 Delp I & III - 649 2,583 895 649 3,478 4,127 1,004 1998 1977 Crowfarn - 486 1,946 49 486 1,995 2,481 495 1998 1972 Southeast Crossing - 1,802 10,267 1,663 1,802 11,930 13,732 4,121 1999 1987/97 LOUISIANA New Orleans Elmwood - 2,861 6,337 2,211 2,861 8,548 11,409 3,691 1997 1979 Riverbend - 2,592 17,623 1,729 2,592 19,352 21,944 6,106 1997 1984 COLORADO Denver Rampart I - 1,023 3,861 543 1,023 4,404 5,427 2,151 1988 1987 Rampart II - 230 2,977 866 230 3,843 4,073 1,537 1996/97 1996/97 Rampart III - 1,098 3,884 1,252 1,098 5,136 6,234 1,422 1997/98 1999 OKLAHOMA Oklahoma City Northpointe - 777 3,113 626 999 3,517 4,516 645 1998 1996/97 Tulsa Braniff - 1,066 4,641 1,280 1,066 5,921 6,987 2,257 1996 1974 MISSISSIPPI Interchange (i) 4,402 343 5,007 1,147 343 6,154 6,497 2,090 1997 1981 Tower 10,345 - 9,958 1,173 - 11,131 11,131 1,252 2001 2002 Metro Airport I - 303 1,479 498 303 1,977 2,280 253 2001 2003 MICHIGAN Auburn 1,988 3,230 12,922 131 3,230 13,053 16,283 3,291 1998 1986 -------------------------------------------------------------------------------------- 346,961 151,996 684,937 106,652 152,954 790,631 943,585 206,368 -------------------------------------------------------------------------------------- Industrial Development: FLORIDA Palm River South II - 655 - 3,380 655 3,380 4,035 - 2000 n/a Oak Creek III - 665 - 277 665 277 942 - 2005 n/a Oak Creek Land - 4,292 - 578 4,292 578 4,870 - 2005 n/a Executive Airport II - 781 - 3,704 781 3,704 4,485 - 2001 n/a Sunport VI - 672 - 2,662 672 2,662 3,334 - 2001 n/a Southridge I - 650 - 2,281 650 2,281 2,931 7 2003 n/a Southridge II - 680 - 776 680 776 1,456 - 2003 n/a Southridge IV - 893 - 2,537 893 2,537 3,430 - 2003 n/a Southridge V - 875 - 3,797 875 3,797 4,672 52 2003 n/a SouthRidge Land - 4,094 - 4,490 6,534 2,050 8,584 - 2003/05 n/a Blue Heron Land - 450 - 104 450 104 554 - 2004 n/a SunCoast Land - 1,988 - 93 2,034 47 2,081 - 2005 n/a CALIFORNIA Castilian (Redevelopment) - 2,718 - 1,473 2,718 1,473 4,191 - 2005 n/a
TEXAS Techway S.W. III - 597 - 3,799 751 3,645 4,396 - 1999 n/a Techway S.W. IV - 535 - 779 674 640 1,314 - 1999 n/a World Houston 15 - 731 - 1,696 731 1,696 2,427 - 2000 n/a World Houston 21 - 436 - 1,656 436 1,656 2,092 - 2000/03 n/a World Houston Land - 5,292 - 669 5,292 669 5,961 - 2000/03/05 n/a Freeport Land - 4,130 - 110 4,130 110 4,240 - 2005 n/a Americas Ten II - 708 - 561 708 561 1,269 - 2001 n/a Americas Ten III - 656 - 518 656 518 1,174 - 2001 n/a Arion 14 - 500 - 1,151 500 1,151 1,651 - 2005 n/a Arion 17 - 728 - 600 728 600 1,328 - 2005 n/a Arion Land - 865 - 135 865 135 1,000 - 2005 n/a ARIZONA SanTan 10 Phase Two - 1,088 - 1,785 1,088 1,785 2,873 - 2004 n/a 40th Street - 703 - 68 703 68 771 - 2004 n/a Interstate Commons III - 242 - 148 242 148 390 - 2000 n/a Airport II - 300 - 26 300 26 326 - 2000 n/a MISSISSIPPI Metro Airport II - 307 - 399 307 399 706 - 2001 n/a -------------------------------------------------------------------------------------- - 37,231 - 40,252 40,010 37,473 77,483 59 -------------------------------------------------------------------------------------- Real Estate Properties Held For Sale: TEXAS World Houston Land (d) - 765 - 8 773 - 773 - 2000 n/a -------------------------------------------------------------------------------------- - 765 - 8 773 - 773 - -------------------------------------------------------------------------------------- Total real estate owned (a)(b) $346,961 189,992 684,937 146,912 193,737 828,104 1,021,841 206,427 ====================================================================================== </TABLE>
(a) Changes in Real Estate Properties follow: <TABLE> <CAPTION> Years Ended December 31, ------------------------------------- 2005 2004 2003 ------------------------------------- (In thousands) <S> <C> <C> <C> Balance at beginning of year.......................... $ 887,506 842,577 791,671 Purchase of real estate properties.................... 71,103 19,867 18,639 Development of real estate properties................. 58,192 19,196 22,238 Improvements to real estate properties................ 11,262 10,866 10,929 Carrying amount of investments sold................... (6,034) (4,659) (784) Write-off of improvements............................. (188) (341) (116) ------------------------------------- Balance at end of year (1) ........................... $ 1,021,841 887,506 842,577 ===================================== </TABLE> (1) Includes 20% minority interest in University Business Center totaling $5,919,000 at December 31, 2005 and $5,874,000 at December 31, 2004. Changes in the accumulated depreciation on real estate properties follow: <TABLE> <CAPTION> Years Ended December 31, ------------------------------------- 2005 2004 2003 ------------------------------------- (In thousands) <S> <C> <C> <C> Balance at beginning of year.......................... $ 175,062 146,934 118,977 Depreciation expense.................................. 32,693 29,249 28,128 Accumulated depreciation on assets sold............... (1,234) (968) (55) Other................................................. (94) (153) (116) ------------------------------------- Balance at end of year ............................... $ 206,427 175,062 146,934 ===================================== </TABLE> (b) The estimated aggregate cost of real estate properties at December 31, 2005 for federal income tax purposes was approximately $957,924,000 before estimated accumulated tax depreciation of $148,662,000. The federal income tax return for the year ended December 31, 2005 has not been filed and, accordingly, this estimate is based on preliminary data. (c) The Company computes depreciation using the straight-line method over the estimated useful lives of the buildings (generally 40 years) and improvements (generally 3 to 15 years). (d) The investment was not producing income to the Company as of December 31, 2005, 2004 and 2003. (e) EastGroup has a $37,532,000 nonrecourse first mortgage loan with Metropolitan Life secured by Dominguez, Kingsview, Walnut, Washington, Industry and Shaw. (f) EastGroup has a $10,653,000 nonrecourse first mortgage loan with Prudential Life secured by East University I & II, Broadway VI, 55th Avenue and Ethan Allen. (g) EastGroup has a $24,958,000 nonrecourse first mortgage loan with New York Life secured by America Plaza, Central Green and World Houston 3-9. (h) EastGroup has a $41,529,000 nonrecourse first mortgage loan with Metropolitan Life secured by Interstate I, II & III, Venture, Stemmons Circle, Glenmont I & II, West Loop I & II, Butterfield Trail and Rojas. (i) EastGroup has a $37,801,000 nonrecourse first mortgage loan with Metropolitan Life secured by Airport Distribution, Southpointe, Broadway I, III & IV, Southpark, 51st Avenue, Chestnut, Main Street, Interchange Business Park, North Stemmons I and World Houston 12 & 13. (j) EastGroup has a $43,245,000 nonrecourse first mortgage loan with Prudential Life secured by Broadway V, 35th Avenue, Sunbelt, Freeport, Lockwood, Northwest Point, Techway Southwest I and World Houston 10, 11 & 14. (k) EastGroup has a $30,300,000 nonrecourse first mortgage loan with New York Life secured by World Houston 17, Kirby, Americas Ten I, Shady Trail, Palm River North I, II & III and Westlake I & II. (l) EastGroup has a $39,000,000 nonrecourse first mortgage loan with Prudential Life secured by Chamberlain, Lake Pointe, Techway Southwest II and World Houston 19 & 20.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EASTGROUP PROPERTIES, INC. By: /s/ DAVID H. HOSTER II -------------------------- David H. Hoster II, Chief Executive Officer, President & Director March 9, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. * * - -------------------------------------- ------------------------------------- D. Pike Aloian, Director H. C. Bailey, Jr., Director March 6, 2006 March 6, 2006 * * - -------------------------------------- ------------------------------------- Hayden C. Eaves III, Director Fredric H. Gould, Director March 6, 2006 March 6, 2006 * * - -------------------------------------- ------------------------------------- Mary Elizabeth McCormick, Director David M. Osnos, Director March 6, 2006 March 6, 2006 * /s/ N. KEITH MCKEY - -------------------------------------- ------------------------------------- Leland R. Speed, Chairman of the Board * By N. Keith McKey, Attorney-in-fact (Principal Executive Officer) March 9, 2006 March 6, 2006 /s/ BRUCE CORKERN - -------------------------------------------------- Bruce Corkern, Sr. Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) March 9, 2006 /s/ N. KEITH MCKEY - -------------------------------------------------- N. Keith McKey, Executive Vice-President, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer) March 9, 2006
EXHIBIT INDEX The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table: (3) Exhibits required by Item 601 of Regulation S-K: (3) Articles of Incorporation and Bylaws (a) Articles of Incorporation (incorporated by reference to Appendix B to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 5, 1997). (b) Bylaws of the Company (incorporated by reference to Appendix C to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 5, 1997). (c) Articles Supplementary of the Company relating to the Series C Preferred Stock (incorporated by reference to Exhibit A to Exhibit 4 to the Company's Form 8-A filed December 9, 1998). (d) Articles Supplementary of the Company relating to the 7.95% Series D Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3 to the Company's Form 8-A filed June 6, 2003). (4) Instruments Defining the Rights of Security Holders (a) Rights Agreement dated as of December 3, 1998 between the Company and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4 to the Company's Form 8-A filed December 9, 1998). (b) First Amendment to Rights Agreement dated December 20, 2004 between the Company and Equiserve Trust Company, N.A., which replaced Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed December 22, 2004). (10) Material Contracts (*Indicates management or compensatory agreement): (a) EastGroup Properties, Inc. 1994 Management Incentive Plan, as Amended (incorporated by reference to Appendix A to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 2, 1999).* (b) EastGroup Properties, Inc. 1991 Directors Stock Option Plan, as Amended (incorporated by reference to Exhibit B to the Company's Proxy Statement for its Annual Meeting of Stockholders held on December 8, 1994).* (c) EastGroup Properties, Inc. 2000 Directors Stock Option Plan (incorporated by reference to Appendix A to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 1, 2000).* (d) EastGroup Properties, Inc. 2004 Equity Incentive Plan (incorporated by reference to Appendix D to the Company's Proxy Statement for its Annual Meeting of Stockholders held on May 27, 2004).* (e) EastGroup Properties, Inc. 2005 Directors Equity Incentive Plan (incorporated by reference to Appendix B to the Company's Proxy Statement for its Annual Meeting of Stockholders held on June 2, 2005.)* (f) Form of Change in Control Agreement that the Company has entered into with Leland R. Speed, David H. Hoster II and N. Keith McKey (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1996).* (g) Form of Change in Control Agreement that the Company has entered into with John F. Coleman, William D. Petsas, C. Bruce Corkern and Brent W. Wood (incorporated by reference to Exhibit 10(f) to the Company's Form 10-K for the year ended December 31, 2004).* (h) Form of Amendment to Change in Control Agreement (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 2002).* (i) Compensation Program for Non-Employee Directors (a written description thereof is set forth in Item 1.01 of the Company's Form 8-K filed with the SEC on June 6, 2005).* (j) Annual Cash Bonus and Annual Long-Term Incentive Performance Goals (a written description thereof is set forth in Item 1.01 of the Company's Form 8-K filed with the SEC on June 6, 2005).* (k) Credit Agreement dated December 6, 2004 among EastGroup Properties, L.P.; EastGroup Properties, Inc.; PNC Bank, National Association, as Administrative Agent; Commerzbank Aktiengesellschaft, New York Branch and SunTrust Bank as Co-Syndication Agents; AmSouth Bank and Wells Fargo Bank, National Association, as Co-Documentation Agents; PNC Capital Markets, Inc., as Sole Lead Arranger and Sole Bookrunner; and the Lenders (incorporated by reference to Exhibit 10(h) to the Company's Form 10-K for the year ended December 31, 2004). (21) Subsidiaries of EastGroup Properties, Inc. (filed herewith). (23) Consent of KPMG LLP (filed herewith). (24) Powers of attorney (filed herewith).
(31) Rule 13a-14(a)/15d-14(a) Certifications (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) (a) David H. Hoster II, Chief Executive Officer (b) N. Keith McKey, Chief Financial Officer (32) Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) (a) David H. Hoster II, Chief Executive Officer (b) N. Keith McKey, Chief Financial Officer