FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2001 COMMISSION FILE NUMBER 1-7094 EASTGROUP PROPERTIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 13-2711135 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 300 ONE JACKSON PLACE 188 EAST CAPITOL STREET JACKSON, MISSISSIPPI 39201 (Address of principal executive offices) (Zip code) Registrant's telephone number: (601) 354-3555 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (x) NO ( ) The number of shares of common stock, $.0001 par value, outstanding as of May 8, 2001 was 15,871,133.
EASTGROUP PROPERTIES, INC. FORM 10-Q TABLE OF CONTENTS FOR THE QUARTER ENDED MARCH 31, 2001 <TABLE> <CAPTION> Pages PART I. FINANCIAL INFORMATION <S> <C> <C> Item 1. Consolidated Financial Statements Consolidated balance sheets, March 31, 2001 (unaudited) and December 31, 2000 3 Consolidated statements of income for the three months ended March 31, 2001 and 2000 (unaudited) 4 Consolidated statement of changes in stockholders' equity for the three months ended March 31, 2001 (unaudited) 5 Consolidated statements of cash flows for the three months ended March 31, 2001 and 2000 (unaudited) 6 Notes to consolidated financial statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 SIGNATURES Authorized signatures 18 </TABLE> <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) March 31, 2001 December 31, 2000 --------------------------------------------------------- (Unaudited) <S> <C> <C> ASSETS Real estate properties: Industrial $ 644,726 630,860 Industrial development 38,884 37,193 --------------------------------------------------------- 683,610 668,053 Less accumulated depreciation (72,025) (66,492) --------------------------------------------------------- 611,585 601,561 --------------------------------------------------------- Real estate held for sale 29,469 26,602 Less accumulated depreciation (3,757) (3,628) --------------------------------------------------------- 25,712 22,974 --------------------------------------------------------- Mortgage loans 5,225 9,191 Investment in real estate investment trusts 10,580 8,068 Cash 3,452 2,861 Other assets 20,849 21,550 --------------------------------------------------------- TOTAL ASSETS $ 677,403 666,205 ========================================================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Mortgage notes payable $ 163,915 168,709 Notes payable to banks 121,159 102,000 Accounts payable & accrued expenses 13,368 13,792 Other liabilities 4,588 4,615 --------------------------------------------------------- 303,030 289,116 --------------------------------------------------------- Minority interest in joint ventures 1,704 1,697 --------------------------------------------------------- 1,704 1,697 --------------------------------------------------------- STOCKHOLDERS' EQUITY Series A 9.00% Cumulative Redeemable Preferred Shares and additional paid-in capital; $.0001 par value; 1,725,000 shares authorized and issued; stated liquidation preference of $43,125 41,357 41,357 Series B 8.75% Cumulative Convertible Preferred Shares and additional paid-in capital; $.0001 par value; 2,800,000 shares authorized and issued; stated liquidation preference of $70,000 67,178 67,178 Series C Preferred Shares; $.0001 par value; 600,000 shares authorized; no shares issued - - Common shares; $.0001 par value; 64,875,000 shares authorized; 15,871,133 shares issued at March 31, 2001 and 15,849,318 at December 31, 2000 2 2 Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares issued - - Additional paid-in capital on common shares 239,347 238,910 Undistributed earnings 25,342 28,185 Accumulated other comprehensive income 2,685 3,104 Unearned compensation (3,242) (3,344) --------------------------------------------------------- 372,669 375,392 --------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 677,403 666,205 ========================================================= See accompanying notes to consolidated financial statements. </TABLE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended March 31, ----------------------------------------------- 2001 2000 ----------------------------------------------- <S> <C> <C> REVENUES Income from real estate operations $ 24,445 21,982 Interest: Mortgage loans 109 198 Other interest 20 27 Gain on securities - 555 Other 200 379 ----------------------------------------------- 24,774 23,141 ----------------------------------------------- EXPENSES Operating expenses from real estate operations 6,020 5,196 Interest 4,509 4,134 Depreciation and amortization 6,244 5,529 General and administrative 1,103 1,219 ----------------------------------------------- 17,876 16,078 ----------------------------------------------- INCOME BEFORE MINORITY INTEREST AND GAIN ON REAL ESTATE INVESTMENTS 6,898 7,063 Minority interest in joint ventures 85 99 ----------------------------------------------- INCOME BEFORE GAIN ON REAL ESTATE INVESTMENTS 6,813 6,964 Gain on real estate investments - 1 ----------------------------------------------- NET INCOME 6,813 6,965 Preferred dividends-Series A 970 970 Preferred dividends-Series B 1,532 1,532 ----------------------------------------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 4,311 4,463 =============================================== BASIC PER SHARE DATA Net income available to common shareholders $ 0.28 0.29 =============================================== Weighted average shares outstanding 15,673 15,569 =============================================== DILUTED PER SHARE DATA Net income available to common shareholders $ 0.27 0.28 =============================================== Weighted average shares outstanding 16,029 15,732 =============================================== See accompanying notes to consolidated financial statements. </TABLE> <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) Accumulated Additional Other Preferred Common Paid-In Unearned Undistributed Comprehensive Stock Stock Capital Compensation Earnings Income Total ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE, DECEMBER 31, 2000 $ 108,535 2 238,910 (3,344) 28,185 3,104 375,392 Comprehensive income Net income - - - - 6,813 - 6,813 Net unrealized change in investment securities - - - - - (419) (419) ------------ Total comprehensive income 6,394 ------------ Cash dividends declared-common, $.45/share - - - - (7,154) - (7,154) Preferred stock dividends declared - - - - (2,502) - (2,502) Issuance of 8,204 shares of common stock, incentive compensation - - 179 - - - 179 Issuance of 3,886 shares of common stock, dividend reinvestment plan - - 91 - - - 91 Issuance of 10,225 shares of common stock, exercise options - - 177 - - - 177 Forfeiture of 500 shares of common stock, incentive restricted stock - - (10) 10 - - - Amortization of unearned compensation, incentive restricted stock - - - 92 - - 92 ---------------------------------------------------------------------------------------- BALANCE, MARCH 31, 2001 $ 108,535 2 239,347 (3,242) 25,342 2,685 372,669 ======================================================================================== See accompanying notes to consolidated financial statements. </TABLE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) Three Months Ended March 31, ------------------------------------- 2001 2000 ------------------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 6,813 6,965 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,244 5,529 Gain on real estate investments, net - (1) Gain on real estate investment trust shares - (555) Amortization of unearned compensation 92 - Minority interest depreciation and amortization (40) (39) Changes in operating assets and liabilities: Accrued income and other assets (3,163) (1,288) Accounts payable, accrued expenses and prepaid rent (54) (532) ------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,892 10,079 ------------------------------------- INVESTING ACTIVITIES: Payments on mortgage loans receivable 4,565 2,158 Advances on mortgage loans receivable (599) - Proceeds from sale of real estate investments - 1,593 Real estate improvements (1,186) (3,101) Real estate development (7,643) (4,776) Purchases of real estate (9,595) (2,517) Purchases of real estate investment trust shares (2,931) - Proceeds from real estate investment trust shares - 5,826 Changes in other assets and other liabilities 3,472 (3,232) ------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (13,917) (4,049) ------------------------------------- FINANCING ACTIVITIES: Proceeds from bank borrowings 54,072 37,365 Principal payments on bank borrowings (34,913) (32,365) Principal payments on mortgage notes payable (4,794) (1,046) Debt issuance costs (192) (31) Distributions paid to shareholders (9,561) (8,432) Purchases of shares of common stock - (430) Proceeds from exercise of stock options 177 1,103 Proceeds from dividend reinvestment plan 91 72 Other (264) (2,046) ------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,616 (5,810) ------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS 591 220 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,861 2,657 ------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,452 2,877 ===================================== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of amount capitalized $ 5,095 4,325 See accompanying notes to consolidated financial statements. </TABLE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the 2000 annual report and the notes thereto. (2) RECLASSIFICATIONS Certain reclassifications have been made in the 2000 financial statements to conform to the 2001 presentation. (3) SUBSEQUENT EVENTS In April 2001, EastGroup closed a $45 million nonrecourse mortgage loan with an interest rate of 7.25%, a 25-year amortization and a 10-year maturity. This loan is secured by eight properties in Dallas, Houston and El Paso. The proceeds were used to reduce the Company's variable rate bank debt. In May 2001, EastGroup sold the following properties: <TABLE> <CAPTION> <S> <C> <C> <C> Approximate Property Location Size Sales Price -------------------------------- ---------------------------------- ----------------- --------------------- (In thousands) Nobel Center Hercules, California 54,000 sq. ft. $5,375 West Palm II West Palm Beach, Florida 12,000 sq. ft. 1,475 --------------------- $6,850 ===================== </TABLE> The Nobel Center transaction is expected to generate a gain of approximately $3,200,000 for financial reporting purposes, and the sales proceeds are expected to be reinvested in new industrial properties through Section 1031 tax deferred exchange transactions. The West Palm II transaction is expected to generate a small gain for financial reporting purposes, and the sale proceeds are expected to be used to reduce bank debt. Subsequent to March 31, 2001, the Company purchased two parcels of land for development, a 20.35-acre parcel in El Paso, Texas for approximately $1,906,000 and a 4.7-acre parcel in Chandler, Arizona for approximately $820,000. Also, subsequent to March 31, 2001, the Company entered into a contract to sell the 109th Street Warehouse (54,000 square feet) in Dallas, Texas for approximately $1,400,000. This sale is expected to generate a small gain for financial reporting purposes. The sale proceeds are expected to be used to reduce bank debt. (4) BUSINESS SEGMENTS The Company's reportable segments consist of industrial properties and an "other" category that includes office buildings and other real estate. The Company's chief decision makers use two primary measures of operating results in making decisions, such as allocating resources: property net operating income (PNOI), defined as real estate operating revenues less real estate operating expenses (before interest expense and depreciation), and funds from operations (FFO), defined as net income (loss) (computed in accordance with generally accepted accounting principles (GAAP)), excluding gains or losses from sales of depreciable real estate property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The Company believes that FFO is an appropriate measure to evaluate the Company's performance and also uses FFO as a comparative measure to other equity real estate investment trusts. FFO is not considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) or as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make distributions. The table below presents on a comparative basis for the three months ended March 31, 2001 and 2000 reported PNOI by operating segment, followed by reconciliations of PNOI to FFO and FFO to net income. <TABLE> <CAPTION> Three Months Ended March 31, ----------------------------- 2001 2000 ---------------- ------------ (In thousands) <S> <C> <C> Property Revenues: Industrial $ 24,086 21,054 Other 359 928 ----------------------------- 24,445 21,982 ----------------------------- Property Expenses: Industrial (5,916) (4,885) Other (104) (311) ----------------------------- (6,020) (5,196) ----------------------------- Property Net Operating Income: Industrial 18,170 16,169 Other 255 617 ----------------------------- Total Property Net Operating Income 18,425 16,786 ----------------------------- Gain on securities - 555 Other income 329 604 Interest expense (4,509) (4,134) General and administrative expense (1,103) (1,219) Minority interest in earnings (125) (138) Dividends on Series A preferred shares (970) (970) Limited partnership unit distributions - 12 ----------------------------- Funds From Operations 12,047 11,496 Depreciation and amortization (6,244) (5,529) Share of joint venture depreciation and amortization 40 39 Gain on depreciable real estate investments - 1 Limited partnership unit distributions - (12) Dividends on Series B convertible preferred shares (1,532) (1,532) ----------------------------- Net Income Available to Common Shareholders 4,311 4,463 Dividends on preferred shares 2,502 2,502 ----------------------------- NET INCOME $ 6,813 6,965 ============================= </TABLE> (5) COMPREHENSIVE INCOME Comprehensive income comprises net income plus all other changes in equity from nonowner sources. The components of comprehensive income for the three months ended March 31, 2001 are presented in the Company's Consolidated Statements of Stockholders' Equity. There were no realized gains (losses) during the three months ended March 31, 2001. <TABLE> <CAPTION> (In thousands) ------------------- <S> <C> Other comprehensive income: Unrealized holding losses during the period $ (419) Less reclassification adjustment for gains included in net income - ------------------- Net unrealized change in investment securities $ (419) =================== </TABLE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION (Comments are for the balance sheet dated March 31, 2001 compared to December 31, 2000.) Assets of EastGroup were $677,403,000 at March 31, 2001, an increase of $11,198,000 from December 31, 2000. Liabilities (excluding minority interests) increased $13,914,000 to $303,030,000; minority interests increased $7,000 to $1,704,000 and stockholders' equity decreased $2,723,000 to $372,669,000 during the same period. Book value per common share decreased from $16.55 at December 31, 2000 to $16.35 at March 31, 2001. The paragraphs that follow explain these changes in greater detail. Industrial properties increased $13,866,000 during the three months ended March 31, 2001. This increase was primarily due to the acquisition of two properties for $9,595,000 (as detailed below), the transfer of two properties from development with total costs of $6,175,000 and capital improvements of $1,156,000. These increases were offset by the transfer of two properties to the category "held for sale" with total costs of $2,837,000 and a net decrease of $223,000 in capital improvements for properties transferred from development in the previous twelve-month period. <TABLE> <CAPTION> Industrial Properties <S> <C> <C> <C> <C> Industrial Properties Acquired Cost in 2001 Location Size Date Acquired (In thousands) - --------------------------------------------------------------------------------------------------------------------- World Houston 10 Houston, Texas 107,000 sq. ft. 01-04-01 $5,712 North Stemmons Dallas, Texas 123,000 sq. ft. 03-15-01 3,883 -------------------- Total Industrial Acquisitions $9,595 ==================== </TABLE> Industrial development increased $1,691,000 during the three months ended March 31, 2001. This increase resulted primarily from year-to-date development costs of $7,866,000 on existing and completed development properties, offset by development properties transferred to industrial properties with costs of $6,175,000, as detailed below. <TABLE> <CAPTION> Industrial Development Costs Incurred --------------------------------------- Size at For the 3 Months Cumulative as Estimated Completion Ended 3/31/01 of 3/31/01 Total Costs (1) - ------------------------------------------------------------------------------------------------------------------- (Square feet) (In thousands) <S> <C> <C> <C> <C> Lease-Up: Palm River North I & III Tampa, Florida 116,000 $ 353 5,281 6,290 Westlake II Tampa, Florida 70,000 103 3,446 4,270 Beach Commerce Center Jacksonville, Florida 46,000 238 2,267 2,800 World Houston XI Houston, Texas 129,000 662 4,383 5,460 Interstate Commons II Phoenix, Arizona 59,000 240 2,449 2,900 Kyrene II Tempe, Arizona 60,000 460 2,269 3,710 Walden Distribution Center I Tampa, Florida 90,000 1,909 2,688 4,240 --------------------------------------------------------------------------- Total Lease-up 570,000 3,965 22,783 29,670 --------------------------------------------------------------------------- Under Construction: Techway Southwest I Houston, Texas 126,000 1,166 3,054 5,040 Sunport Center II Orlando, Florida 60,000 847 1,609 3,500 --------------------------------------------------------------------------- Total Under Construction 186,000 2,013 4,663 8,540 --------------------------------------------------------------------------- Prospective Development: Phoenix, Arizona 40,000 22 259 2,000 Tucson, Arizona 70,000 10 309 3,500 Tampa, Florida 230,000 48 1,883 9,200 Orlando, Florida 314,000 1,520 3,243 18,900 Houston, Texas 1,117,000 151 5,744 45,300 --------------------------------------------------------------------------- Total Prospective Development 1,771,000 1,751 11,438 78,900 --------------------------------------------------------------------------- 2,527,000 $ 7,729 38,884 117,110 =========================================================================== Completed Development and Transferred to Industrial Properties During Three Months Ended March 31, 2001: Glenmont II Houston, Texas 104,000 $ 233 3,149 Sunport Center I Orlando, Florida 56,000 (96) 3,026 --------------------------------------------------------- Total Transferred to Industrial 160,000 $ 137 6,175 ========================================================= </TABLE> (1) The information provided above includes forward-looking data based on current construction schedules, the status of lease negotiations with potential tenants and other relevant factors currently available to the Company. There can be no assurance that any of these factors will not change or that any change will not affect the accuracy of such forward-looking data. Among the factors that could affect the accuracy of the forward-looking statements are weather or other natural occurrence, default or other failure of performance by contractors, increases in the price of construction materials or the unavailability of such materials, failure to obtain necessary permits or approvals from government entities, changes in local and/or national economic conditions, increased competition for tenants or other occurrences that could depress rental rates, and other factors not within the control of the Company. Real estate held for sale increased $2,867,000 due to the reclassification of two properties from the portfolio with total costs of $2,837,000 and capital improvements of $30,000. Accumulated depreciation on real estate properties and real estate held for sale increased $5,662,000 due to depreciation expense. Mortgage loans receivable decreased $3,966,000 during the first three months of 2001 as a result of repayments of $4,565,000 that included the payoff of the World Houston 10 loan, offset by advances of $599,000. Investment in real estate investment trusts (REITs) increased from $8,068,000 at December 31, 2000 to $10,580,000 at March 31, 2001 as a result of the purchase of real estate investment trust shares for $2,931,000 offset by a decrease of $419,000 in the market value of the Company's investment in REIT shares. Other assets decreased $701,000 during the three months ended March 31, 2001 compared to December 31, 2000 primarily as a result of a decrease in cash escrows for Section 1031 tax deferred exchange transactions offset by increases in unamortized leasing commissions, receivables and other prepaid costs. Mortgage notes payable decreased $4,794,000 during the three months ended March 31, 2001, as a result of the payoff of the Northwest Point mortgage loan of $3,829,000 in March and regularly scheduled principal payments of $965,000. Notes payable to banks increased $19,159,000 as a result of borrowings of $54,072,000 offset by payments of $34,913,000. The Company's credit facilities are described in greater detail under Liquidity and Capital Resources. Accounts payable and accrued expenses decreased $424,000 during the three months ended March 31, 2001 compared to December 31, 2000 primarily as a result of a net decrease in payables due to timing differences. Accumulated other comprehensive income decreased $419,000 as a result of a decrease in the market value of the Company's investments recorded in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Undistributed earnings decreased from $28,185,000 at December 31, 2000 to $25,342,000 at March 31, 2001, as a result of dividends on common and preferred stock of $9,656,000 exceeding net income for financial reporting purposes of $6,813,000. Results of Operations (Comments are for the three months ended March 31, 2001, compared to the three months ended March 31, 2000.) Net income available to common shareholders for the three months ended March 31, 2001 was $4,311,000 ($.28 per basic share and $.27 per diluted share), compared to net income available to common shareholders for the three months ended March 31, 2000 of $4,463,000 ($.29 per basic share and $.28 per diluted share). Income before gain on real estate investments was $6,813,000 for the three months ended March 31, 2001, compared to $6,964,000 for the three months ended March 31, 2000. There was no gain on real estate investments for the three months ended March 31, 2001, compared to $1,000 for the same period in 2000. The paragraphs that follow describe the results of operations in greater detail. Property net operating income (PNOI) from real estate properties, defined as income from real estate operations less property operating expenses (before interest expense and depreciation) increased by $1,639,000 or 9.8% for the three months ended March 31, 2001, compared to the three months ended March 31, 2000. PNOI by property type and percentage leased for industrial were as follows: <TABLE> <CAPTION> Property Net Operating Income PNOI Three Months Ended Percentage March 31, Leased ------------------------------------------------------------ 2001 2000 3-31-01 3-31-00 ------------------------------------------------------------ (In thousands) <S> <C> <C> <C> <C> Industrial $ 18,170 16,169 95.8% 97.8% Other 255 617 ---------------------------- Total PNOI $ 18,425 16,786 ============================ </TABLE> PNOI from industrial properties increased $2,001,000 for the three months ended March 31, 2001, compared to March 31, 2000, primarily due to acquisitions, rental rate increases and development properties that achieved stabilized operations in 2000 and 2001. Industrial properties held throughout the three months ended March 31, 2001 compared to the same period in 2000 showed an increase in PNOI of .2%. PNOI from other properties decreased $362,000 for the three months ended March 31, 2001, compared to March 31, 2000. This decrease was primarily the result of the sale of the La Vista Crossing Apartments in December 2000. Gain on securities decreased $555,000 due to a zero gain for the three months ended March 31, 2001 compared to a realized gain of $555,000 for the same period in 2000 on the liquidation of Franklin Select Realty Trust securities owned by EastGroup. Bank interest expense (excluding amortization of loan costs of $66,000 for both the three months ended March 31, 2001 and 2000) increased $56,000 from $1,819,000 for the three months ended March 31, 2000 to $1,875,000 for the three months ended March 31, 2001. Average bank borrowings were $106,093,000 for the three months ended March 31, 2001 compared to $98,644,000 for the same period in 2000 with average interest rates of 7.07% for the three months ended March 31, 2001 compared to 7.38% for the same period in 2000. Interest costs incurred during the period of construction of real estate properties are capitalized and offset against the bank interest expense. The interest costs capitalized on real estate properties for the three months ended March 31, 2001 were $675,000 compared to $644,000 for the same period in 2000. Interest expense on real estate properties (excluding amortization of loan costs of $43,000 and $34,000 for the three months ended March 31, 2001 and 2000, respectively) increased $341,000 from $2,859,000 for the three months ended March 31, 2000 to $3,200,000 for the three months ended March 31, 2001, primarily as a result of the issuance of two mortgage loans in 2000 offset by the payoff of several smaller loans in 2000 and 2001. Depreciation and amortization increased $715,000 for the three months ended March 31, 2001 compared to the same period in 2000. This increase was primarily due to the industrial properties acquired in both 2000 and 2001, offset by the sales of several properties in 2000 and the transfer of several properties to real estate held for sale (depreciation not taken on those properties held in the category "real estate held for sale"). There were no property sales in the first quarter of 2001. A summary of the gain on real estate investments for the three months ended March 31, 2000 is detailed below. <TABLE> <CAPTION> Gain on Real Estate Investments Net Recognized Basis Sales Price Gain ---------------------------------------------------- (In thousands) <S> <C> <C> <C> 2000 Real estate properties: LeTourneau Center of Commerce, Tampa, FL $ 1,592 1,593 1 ---------------------------------------------------- $ 1,592 1,593 1 ==================================================== </TABLE> NAREIT has recommended supplemental disclosures concerning straight-line rent, capital expenditures and leasing costs. Straight-line rent for the three months ended March 31, 2001 was $524,000 compared to $423,000 for the same period in 2000. Capital expenditures for the three months ended March 31, 2001 (by category) and the three months ended March 31, 2000 are as follows: <TABLE> <CAPTION> Capital Expenditures 2001 ------------------------------------------ 2000 Industrial Other Total Total ---------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> Upgrade on Acquisitions $ 170 - 170 1,762 Tenant improvements: New Tenants 391 - 391 626 New Tenants (first generation) 33 - 33 221 Renewal Tenants 43 - 43 61 Other 519 30 549 431 ----------------------------------------------------- Total capital expenditures $ 1,156 30 1,186 3,101 ===================================================== </TABLE> The Company's leasing costs are capitalized and included in other assets. The costs are amortized over the lives of the leases and are included in depreciation and amortization expense. A summary of these costs for the three months ended March 31, 2001 (by category) and the three months ended March 31, 2000 is as follows: <TABLE> <CAPTION> Capitalized Leasing Costs 2001 ------------------------------------------------------------ Industrial 2000 Industrial Other Development Total Total --------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> Capitalized leasing costs: New Tenants $ 202 - - 202 233 New Tenants (first generation) 12 - 109 121 1,221 Renewal Tenants 354 38 - 392 187 --------------------------------------------------------------------- Total capitalized leasing costs $ 568 38 109 715 1,641 ===================================================================== Amortization of leasing costs $ 568 478 ======================== </TABLE> LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $9,892,000 for the three months ended March 31, 2001. Other sources of cash were primarily from bank borrowings, collections on mortgage loan receivables, and Section 1031 Exchange escrows. The Company distributed $7,059,000 in common and $2,502,000 in preferred stock dividends. Other primary uses of cash were for bank debt payments, purchases of real estate investments, construction and development of properties, mortgage note payments, purchase of REIT shares, capital improvements at the various properties, and advances on mortgage loans receivable. Total debt at March 31, 2001 and 2000 was as follows: <TABLE> <CAPTION> As of March 31, ---------------------------------- 2001 2000 ---------------------------------- (In thousands) <S> <C> <C> Mortgage notes payable - fixed rate $ 163,915 147,619 Bank notes payable - floating rate 121,159 100,000 ---------------------------------- Total debt $ 285,074 247,619 ================================== </TABLE> The Company has a three-year $150,000,000 unsecured revolving credit facility with a group of ten banks that matures in January 2002. The interest rate is based on the Eurodollar rate plus 1.25% and was 6.41% on $82,000,000 and 6.75% on $25,000,000 at March 31, 2001. An unused facility fee of .25% is also assessed on this note. The Company has a one-year $10,000,000 unsecured revolving credit facility with Chase Bank of Texas that matures in January 2002. The interest rate is based on Chase Bank of Texas, National Association's prime rate less .75% and was 7.25% on $159,000 at March 31, 2001. The Company has a $15,000,000 unsecured discretionary line of credit with Chase Bank of Texas. The interest rate and maturity date for each loan proceeds are determined at the time of any advances by the Company and Chase. At March 31, 2001, the rate for this loan was 6.25% on a balance of $14,000,000. In April 2001, EastGroup closed a $45 million nonrecourse mortgage loan with an interest rate of 7.25%, a 25-year amortization and a 10-year maturity. This loan is secured by eight properties in Dallas, Houston and El Paso. The proceeds were used to reduce the Company's variable rate bank debt. EastGroup's Board of Directors has authorized the repurchase of up to 1,500,000 shares of its outstanding common stock. The shares may be purchased from time to time in the open market or in privately negotiated transactions. The Company did not repurchase any shares during the three months ended March 31, 2001. Since September 30, 1998, a total of 827,700 shares have been repurchased for $14,170,000 (an average of $17.12 per share). On June 20, 2000, Pacific Gulf Properties announced that it had entered into an agreement to sell all of its industrial properties and is marketing its multi-family assets with the disposition of its senior housing assets to be determined at a future date. EastGroup owns 487,100 shares of PAG. In December 2000, upon receipt of the initial liquidating distribution of $22.00 per share from PAG, the Company reduced its basis in PAG shares to zero and recorded a gain of $807,000. Based on publicly available estimates prepared by analysts who follow PAG, management estimates that the Company will receive an additional $6.40 per PAG share in 2001 from PAG's distributions of cash as it sells its remaining assets. <TABLE> <CAPTION> In May 2001, EastGroup sold the following properties: Approximate Property Location Size Sales Price ---------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> Nobel Center Hercules, California 54,000 sq. ft. $5,375 West Palm II West Palm Beach, Florida 12,000 sq. ft. 1,475 --------------------- $6,850 ===================== </TABLE> The Nobel Center transaction is expected to generate a gain of approximately $3,200,000 for financial reporting purposes, and the sales proceeds are expected to be reinvested in new industrial properties through Section 1031 tax deferred exchange transactions. The West Palm II transaction is expected to generate a small gain for financial reporting purposes, and the sale proceeds are expected to be used to reduce bank debt. Subsequent to March 31, 2001, the Company purchased two parcels of land for development, a 20.35-acre parcel in El Paso, Texas for approximately $1,906,000 and a 4.7-acre parcel in Chandler, Arizona for approximately $820,000. Also, subsequent to March 31, 2001, the Company entered into a contract to sell the 109th Street Warehouse (54,000 square feet) in Dallas, Texas for approximately $1,400,000. This sale is expected to generate a small gain for financial reporting purposes. The sale proceeds are expected to be used to reduce bank debt. The Company anticipates that its current cash balance, operating cash flows, and borrowings under its lines of credit will be adequate for the Company's (i) operating and administrative expenses, (ii) normal repair and maintenance expenses at its properties, (iii) debt service obligations, (iv) distributions to stockholders, (v) capital improvements, (vi) purchases of properties, (vii) development, and (viii) common stock repurchases. INFLATION In the last five years, inflation has not had a significant impact on the Company because of the relatively low inflation rate in the Company's geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation. In addition, the Company's leases typically have three to five year terms, which may enable the Company to replace existing leases with new leases at a higher base if rents on the existing leases are below the then-existing market rate. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to interest rate changes primarily as a result of its lines of credit and long-term debt maturities. This debt is used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at fixed rates but also has several variable rate bank lines as discussed under Liquidity and Capital Resources. The table below presents the principal payments due and weighted average interest rates for both the fixed rate and variable rate debt. <TABLE> <CAPTION> Apr-Dec Fair 2001 2002 2003 2004 2005 Thereafter Total Value ----------- ---------- ------- -------- --------- ------------ ---------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed rate debt (in thousands) $ 3,126 12,452 8,248 8,993 22,756 108,340 163,915 167,445 Weighted average interest rate 7.78% 7.59% 8.31% 8.19% 8.10% 7.56% 7.72% Variable rate debt (in thousands) $ 14,000 107,159 - - - - 121,159 121,159 Weighted average interest rate 6.25% 6.49% - - - - 6.46% </TABLE> As the table above incorporates only those exposures that exist as of March 31, 2001, it does not consider those exposures or positions that could arise after that date. The Company's ultimate economic impact with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates. Forward Looking Statements In addition to historical information, certain sections of this Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company's hopes, expectations, intentions, beliefs, strategies regarding the future, the anticipated performance of development and acquisition properties, capital resources, profitability and portfolio performance. Forward-looking statements involve numerous risks and uncertainties. The following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: defaults or non-renewal of leases, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, environmental uncertainties, risks related to natural disasters 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, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements. See also the Company's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATED: May 10, 2001 EASTGROUP PROPERTIES, INC. /s/ BRUCE CORKERN Bruce Corkern, CPA Senior Vice President and Controller /s/ N. KEITH MCKEY N. Keith McKey, CPA Executive Vice President, Chief Financial Officer and Secretary