FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 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 November 12, 2001 was 15,910,211.
EASTGROUP PROPERTIES, INC. FORM 10-Q TABLE OF CONTENTS FOR THE QUARTER ENDED SEPTEMBER 30, 2001 <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Pages <S> <C> <C> <C> Item 1. Consolidated Financial Statements Consolidated balance sheets, September 30, 2001 (unaudited) and December 31, 2000 3 Consolidated statements of income for the three and nine months ended September 30, 2001 and 2000 (unaudited) 4 Consolidated statement of changes in stockholders' equity for the nine months ended September 30, 2001 (unaudited) 5 Consolidated statements of cash flows for the nine months ended September 30, 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 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 SIGNATURES Authorized signatures 20 </TABLE>
<TABLE> <CAPTION> EASTGROUP PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) September 30, 2001 December 31, 2000 ------------------------ ---------------------- (Unaudited) <S> <C> <C> ASSETS Real estate properties: Industrial $ 685,826 630,860 Industrial development 32,906 37,193 Other 7,069 - ------------------------ ---------------------- 725,801 668,053 Less accumulated depreciation (85,622) (66,492) ------------------------ ---------------------- 640,179 601,561 ------------------------ ---------------------- Real estate held for sale 2,079 26,602 Less accumulated depreciation (239) (3,628) ------------------------ ---------------------- 1,840 22,974 ------------------------ ---------------------- Mortgage loans 5,126 9,191 Investment in real estate investment trusts 6,437 8,068 Cash 2,066 2,861 Other assets 21,780 21,550 ------------------------ ---------------------- TOTAL ASSETS $ 677,428 666,205 ======================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Mortgage notes payable $ 206,281 168,709 Notes payable to banks 75,323 102,000 Accounts payable & accrued expenses 14,226 13,792 Other liabilities 7,558 4,615 ------------------------ ---------------------- 303,388 289,116 ------------------------ ---------------------- Minority interest in joint ventures 1,726 1,697 ------------------------ ---------------------- 1,726 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; 15,910,211 shares issued at September 30, 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 240,173 238,910 Undistributed earnings 25,742 28,185 Accumulated other comprehensive income 1,179 3,104 Unearned compensation (3,317) (3,344) ------------------------ ---------------------- 372,314 375,392 ------------------------ ---------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 677,428 666,205 ======================== ====================== </TABLE> See accompanying notes to consolidated financial statements.
<TABLE> <CAPTION> EASTGROUP PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------------------------- 2001 2000 2001 2000 ---------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES Income from real estate operations $ 25,583 24,125 74,890 69,160 Interest: Mortgage loans 117 206 361 589 Other interest 60 13 546 116 Gain on securities 1,774 - 2,480 555 Other 161 257 549 928 ---------------------------------------------------------- 27,695 24,601 78,826 71,348 ---------------------------------------------------------- EXPENSES Operating expenses from real estate operations 6,444 5,730 18,543 16,251 Interest 4,458 4,830 13,590 13,549 Depreciation and amortization 6,890 5,799 19,810 17,239 General and administrative 1,207 1,228 3,489 3,716 Minority interest in joint ventures 86 80 260 300 ---------------------------------------------------------- 19,085 17,667 55,692 51,055 ---------------------------------------------------------- INCOME BEFORE GAIN (LOSS) ON REAL ESTATE INVESTMENTS 8,610 6,934 23,134 20,293 Gain (loss) on real estate investments (35) 94 3,420 715 ---------------------------------------------------------- NET INCOME 8,575 7,028 26,554 21,008 Preferred dividends-Series A 970 970 2,910 2,910 Preferred dividends-Series B 1,532 1,532 4,596 4,596 ----------------------------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 6,073 4,526 19,048 13,502 =========================================================== BASIC PER SHARE DATA Net income available to common stockholders $ 0.39 0.29 1.21 0.86 =========================================================== Weighted average shares outstanding 15,702 15,643 15,689 15,612 =========================================================== DILUTED PER SHARE DATA Net income available to common stockholders $ 0.38 0.29 1.19 0.86 =========================================================== Weighted average shares outstanding 16,045 15,828 16,033 15,784 =========================================================== </TABLE> See accompanying notes to consolidated financial statements.
<TABLE> <CAPTION> EASTGROUP PROPERTIES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) (UNAUDITED) 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 - - - - 26,554 - 26,554 Net unrealized change in investment securities - - - - - (1,925) (1,925) -------- Total comprehensive income 24,629 -------- Cash dividends declared-common, $1.35/share - - - - (21,491) - (21,491) Preferred stock dividends declared - - - - (7,506) - (7,506) Issuance of 8,204 shares of common stock, incentive compensation - - 179 - - - 179 Issuance of 11,939 shares of common stock, dividend reinvestment plan - - 268 - - - 268 Issuance of 27,750 shares of common stock, exercise options - - 511 - - - 511 Issuance of 15,000 shares of common stock, incentive restricted stock - - 346 (346) - - - Forfeiture of 2,000 shares of common stock, incentive restricted stock - - (41) 35 - - (6) Amortization of unearned compensation, incentive restricted stock - - - 338 - - 338 ---------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 2001 $ 108,535 2 240,173 (3,317) 25,742 1,179 372,314 ================================================================================== </TABLE> See accompanying notes to consolidated financial statements.
<TABLE> <CAPTION> EASTGROUP PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Nine Months Ended September 30, ------------------------------------------ 2001 2000 ------------------------------------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 26,554 21,008 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,810 17,239 Gain on real estate investments, net (3,420) (715) Gain on real estate investment trust shares (2,480) (555) Amortization of unearned compensation 332 - Minority interest depreciation and amortization (121) (118) Changes in operating assets and liabilities: Accrued income and other assets (1,696) (1,391) Accounts payable, accrued expenses and prepaid rent 3,546 4,686 ------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 42,525 40,154 ------------------------------------------ INVESTING ACTIVITIES: Payments on mortgage loans receivable 4,991 2,158 Advances on mortgage loans receivable (926) (3,643) Proceeds from sale of real estate investments 9,260 2,642 Real estate improvements (5,100) (9,029) Real estate development (22,797) (25,444) Purchases of real estate (13,804) (11,716) Purchases of real estate investment trust shares (5,258) (376) Proceeds from sale of real estate investment trust shares 7,444 5,826 Changes in other assets and other liabilities 206 (2,798) ------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (25,984) (42,380) ------------------------------------------ FINANCING ACTIVITIES: Proceeds from bank borrowings 101,286 141,084 Principal payments on bank borrowings (127,963) (109,585) Proceeds from mortgage notes payable 45,000 11,500 Principal payments on mortgage notes payable (7,050) (11,250) Debt issuance costs (489) (922) Distributions paid to stockholders (28,699) (25,789) Purchase of limited partnership units - (705) Purchases of shares of common stock - (430) Proceeds from exercise of stock options 511 1,628 Proceeds from dividend reinvestment plan 268 228 Other (200) (2,779) ------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (17,336) 2,980 ------------------------------------------ INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (795) 754 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,861 2,657 ------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,066 3,411 ========================================== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of amount capitalized $ 13,063 13,318 Debt assumed by buyer of real estate 378 - </TABLE> See accompanying notes to consolidated financial statements.
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) REAL ESTATE HELD FOR SALE Real estate properties that are currently offered for sale or are under contract to sell have been shown separately on the consolidated balance sheets as "real estate held for sale." Such assets are carried at the lower of current carrying amount or fair market value less estimated selling costs and are not depreciated while they are held for sale. At September 30, 2001, the Company had one industrial property and one parcel of land held for sale. There can be no assurances that such properties will be sold. During 2001, three properties were reclassified from the category "real estate held for sale" to the category "real estate properties." As noted above, depreciation is not recorded for those properties while held for sale. As such, upon the reclassification of these properties, depreciation was adjusted to reflect the carrying amount of these properties as if they had never been classified as "held for sale." (3) COMPREHENSIVE INCOME The Company applies Statement of Financial Accounting Standards (SFAS) No. 130 which requires the disclosure of comprehensive income. The Company's comprehensive income includes, in addition to net income, other income consisting of unrealized gains and losses on the Company's investment in real estate investment trust (REIT) shares, which are recorded directly into a separate section of stockholders' equity on the balance sheet. <TABLE> <CAPTION> (In thousands) --------------- <S> <C> Other comprehensive income: Unrealized holding gains during the period $ 555 Less reclassification adjustment for gains included in net income (2,480) --------------- Net unrealized change in investment securities $ (1,925) =============== </TABLE> (4) EARNINGS PER SHARE The Company applies SFAS No. 128 "Earnings Per Share," which requires companies to present basic earnings per share (EPS) and diluted EPS. Basic EPS represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. The Company's basic EPS is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The Company's diluted EPS is calculated by totaling net income available to common stockholders plus dividends on dilutive convertible preferred shares and limited partnership (LP) distributions and dividing it by the weighted average number of common shares outstanding plus the dilutive effect of stock options related to outstanding employee stock options, LP units, nonvested restricted stock and convertible preferred stock, had the options or conversions been exercised. Reconciliation of the numerators and denominators in the basic and diluted EPS computations is as follows:
<TABLE> <CAPTION> Reconciliation of Numerators and Denominators Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------- 2001 2000 2001 2000 ----------------------------------------------- (In thousands) <S> <C> <C> <C> <C> Basic EPS Computation Numerator-net income available to common stockholders $ 6,073 4,526 19,048 13,502 Denominator-weighted average shares outstanding 15,702 15,643 15,689 15,612 Diluted EPS Computation Numerator-net income available to common stockholders plus limited partnership distributions ($18 for the nine months ended September 30, 2000) $ 6,073 4,526 19,048 13,520 Denominator: Weighted average shares outstanding 15,702 15,643 15,689 15,612 Common stock options 159 176 162 152 Nonvested restricted stock 184 - 182 - Limited partnership units - 9 - 20 ----------------------------------------------- Total Shares 16,045 15,828 16,033 15,784 =============================================== </TABLE> The Series B Preferred Stock, which is convertible into common stock at a conversion price of $22.00 per share, was not included in the computation of diluted earnings per share for the periods presented due to its antidilutive effect. (5) BUSINESS SEGMENTS The Company's reportable segments consist of industrial properties and an "other" category that includes an office building. 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 and nine months ended September 30, 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 Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ---------------- ------------- --------------- -------------- (In thousands) <S> <C> <C> <C> <C> PROPERTY REVENUES: Industrial $ 25,204 23,149 73,787 66,318 Other 379 976 1,103 2,842 ---------------- ------------- --------------- -------------- 25,583 24,125 74,890 69,160 ---------------- ------------- --------------- -------------- PROPERTY EXPENSES: Industrial (6,328) (5,409) (18,218) (15,278) Other (116) (321) (325) (973) ---------------- ------------- --------------- -------------- (6,444) (5,730) (18,543) (16,251) ---------------- ------------- --------------- -------------- PROPERTY NET OPERATING INCOME: Industrial 18,876 17,740 55,569 51,040 Other 263 655 778 1,869 ---------------- ------------- --------------- -------------- TOTAL PROPERTY NET OPERATING INCOME 19,139 18,395 56,347 52,909 ---------------- ------------- --------------- -------------- Gain on securities 1,774 - 2,480 555 Gain on nondepreciable real estate investments - - - 620 Other income 338 476 1,456 1,633 Interest expense (4,458) (4,830) (13,590) (13,549) General and administrative expense (1,207) (1,228) (3,489) (3,716) Minority interest in earnings (127) (120) (381) (418) Dividends on Series A preferred shares (970) (970) (2,910) (2,910) Limited partnership unit distributions - - - 18 ---------------- ------------- --------------- -------------- FUNDS FROM OPERATIONS 14,489 11,723 39,913 35,142 Depreciation and amortization (6,890) (5,799) (19,810) (17,239) Share of joint venture depreciation and amortization 41 40 121 118 Gain (loss) on depreciable real estate investments (35) 94 3,420 95 Limited partnership unit distributions - - - (18) Dividends on Series B convertible preferred shares (1,532) (1,532) (4,596) (4,596) ---------------- ------------- --------------- -------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 6,073 4,526 19,048 13,502 Dividends on preferred shares 2,502 2,502 7,506 7,506 ---------------- ------------- --------------- -------------- NET INCOME $ 8,575 7,028 26,554 21,008 ================ ============= =============== ============== </TABLE> (6) NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for by using the purchase method of accounting and addresses accounting for purchased goodwill and other intangibles. SFAS No. 142 addresses financial accounting and reporting for the impairment of goodwill and other intangibles and is effective for fiscal years beginning after December 15, 2001. The Company had no business combinations since June 30, 2001. At September 30, 2001, the Company had unamortized goodwill of $1,006,000 resulting from the acquisition of Ensign Properties in 1998. The Company periodically reviews the recoverability of goodwill for possible impairment and will continue to do so under the new statement. In management's opinion, no material impairment of goodwill existed at September 30, 2001. The Company's current annual amortization of goodwill is $61,000. Upon adoption of SFAS No. 142 in January 2002, amortization of goodwill will cease. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company's adoption of this statement in January 2002 is expected to have little or no effect on the Company's overall financial statements. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION (Comments are for the balance sheet dated September 30, 2001 compared to December 31, 2000.) Assets of EastGroup were $677,428,000 at September 30, 2001, an increase of $11,223,000 from December 31, 2000. Liabilities (excluding minority interests) increased $14,272,000 to $303,388,000 and stockholders' equity decreased $3,078,000 to $372,314,000 during the same period. Book value per common share decreased from $16.55 at December 31, 2000 to $16.29 at September 30, 2001. The following paragraphs explain these changes in greater detail. Industrial properties increased $54,966,000 during the nine months ended September 30, 2001. This increase was primarily due to the acquisition of three industrial properties and the remaining 20% minority interest in Wiegman Associates for a total of $13,804,000, as detailed below; the transfer of seven properties from development with total costs of $26,007,000; the transfer of two properties from the category "held for sale" with total costs of $13,519,000 and capital improvements of $6,139,000 made on existing and acquired properties. These increases were offset by the transfer of three properties to the category "held for sale" with costs of $4,220,000. <TABLE> <S> <C> <C> <C> <C> Industrial Properties Acquired Date Cost in 2001 Location Size 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 Wiegman Associates (20% Interest) Hayward, California 262,000 sq. ft. 05-30-01 553 Southpark Chandler, Arizona 70,000 sq. ft. 09-27-01 3,656 ------------------- Total Industrial Acquisitions $ 13,804 =================== </TABLE> Industrial development decreased $4,287,000 during the nine months ended September 30, 2001. This decrease resulted from development properties transferred to industrial properties with costs of $26,007,000, offset by year-to-date development costs of $21,720,000 on existing and completed development properties, as detailed below.
<TABLE> <CAPTION> Industrial Development Costs Incurred --------------------------------------- Size at For the 9 Months Cumulative as Estimated Completion Ended 9/30/01 of 9/30/01 Total Costs (1) - --------------------------------------------------------------------------------------------------------------------- (Square feet) (In thousands) <S> <C> <C> <C> <C> Lease-Up: Interstate Commons II Phoenix, Arizona 59,000 $ 530 2,739 2,900 Kyrene II Tempe, Arizona 60,000 1,190 2,999 3,710 Walden Distribution Center I Tampa, Florida 90,000 2,715 3,494 4,240 Techway Southwest I Houston, Texas 126,000 2,242 4,130 5,040 ----------------- --------------------- ----------------- ----------------- Total Lease-up 335,000 6,677 13,362 15,890 ----------------- --------------------- ----------------- ----------------- Under Construction: World Houston XIV Houston, Texas 77,000 809 809 3,575 Americas 10 Business Center I El Paso, Texas 97,000 1,059 1,059 3,320 Sunport Center III Orlando, Florida 66,000 1,461 1,461 4,000 World Houston XIII Houston, Texas 51,000 519 519 2,795 World Houston XII Houston, Texas 59,000 430 430 2,832 Tower Automotive Jackson, Mississippi 170,000 - - 9,300 ----------------- --------------------- ----------------- ----------------- Total Under Construction 520,000 4,278 4,278 25,822 ----------------- --------------------- ----------------- ----------------- Prospective Development (Principally Land): Phoenix, Arizona 104,000 939 1,176 6,000 Tucson, Arizona 70,000 22 321 3,500 Tampa, Florida 230,000 366 2,201 9,200 Orlando, Florida 248,000 852 2,577 14,900 Fort Lauderdale, Florida 139,000 2,041 2,041 8,100 El Paso, Texas 251,000 1,445 1,445 7,580 Houston, Texas 1,088,000 (675) 4,917 46,820 Jackson, Mississippi 60,000 588 588 3,000 ----------------- --------------------- ----------------- ----------------- Total Prospective Development 2,190,000 5,578 15,266 99,100 ----------------- --------------------- ----------------- ----------------- 3,045,000 $ 16,533 32,906 140,812 ================= ===================== ================= ================= Completed Development and Transferred to Industrial Properties During the Nine Months Ended September 30, 2001: Palm River North I & III Tampa, Florida 116,000 $ 765 5,693 Westlake II Tampa, Florida 70,000 153 3,495 Beach Commerce Center Jacksonville, Florida 46,000 345 2,374 Sunport Center II Orlando, Florida 60,000 3,106 3,868 World Houston XI Houston, Texas 129,000 681 4,402 Glenmont II Houston, Texas 104,000 233 3,149 Sunport Center I Orlando, Florida 56,000 (96) 3,026 ----------------- --------------------- ----------------- Total Transferred to Industrial 581,000 $ 5,187 26,007 ================= ===================== ================= </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.
Other real estate properties increased by $7,069,000 as a result of the transfer of an office building from the category "held for sale." Real estate held for sale decreased $24,523,000 primarily due to the transfer of three properties from held for sale to real estate properties with total costs of $20,588,000 and the sale of four properties with total costs of $8,193,000. (Several of the properties classified as held for sale were transferred back to the portfolio as a result of a change in plans by the Company due to market conditions.) These decreases were offset by the transfer of three properties from the portfolio to real estate held for sale with total costs of $4,220,000. Accumulated depreciation on real estate properties and real estate held for sale increased $15,741,000 due to depreciation expense of $17,853,000, offset by the sale of three properties with total accumulated depreciation of $2,112,000. Mortgage loans receivable decreased $4,065,000 during the first nine months of 2001 as a result of repayments of $4,991,000 that included the payoff of the World Houston 10 loan, offset by advances of $926,000. Investments in real estate investment trusts (REITs) decreased from $8,068,000 at December 31, 2000 to $6,437,000 at September 30, 2001 as a result of the sale and liquidation of REIT shares with a carrying value of $7,444,000 offset by the purchase of other REIT shares for $5,258,000 and unrealized gains of $555,000. Other assets increased $230,000 during the nine months ended September 30, 2001 compared to December 31, 2000 primarily as a result of net increases in receivables, unamortized leasing commissions and loan costs, and other prepaid assets. These increases were primarily offset by a net decrease in cash escrows for Section 1031 tax deferred exchange transactions. Mortgage notes payable increased $37,572,000 during the nine months ended September 30, 2001 primarily as a result of the Company's new $45,000,000 nonrecourse mortgage loan obtained in April. This note has an interest rate of 7.25%, a 25-year amortization and a 10-year maturity and is secured by eight properties in Dallas, Houston and El Paso. The proceeds of this note were used to pay down existing bank debt. This increase was offset by the payoff of the Northwest Point mortgage loan of $3,829,000 in March, regularly scheduled principal payments of $3,221,000 and the assumption of bonds payable of $378,000 by the buyer of Nobel Business Center. Notes payable to banks decreased $26,677,000. Bank debt was paid down with funds from the Company's new $45 million nonrecourse mortgage loan as discussed above. The Company's credit facilities are described in greater detail under Liquidity and Capital Resources. Other liabilities increased $2,943,000 during the nine months ended September 30, 2001 compared to December 31, 2000. As part of the final accounting of an external escrow account established for the redemption of shares in the Company's 1998 acquisition of Meridian Point Realty Trust VIII, the Company received the residual cash escrow of $2,701,000 from the external agent and recorded a liability for the remaining unexchanged shares. Accumulated other comprehensive income decreased $1,925,000 as a result of unrealized holding gains of $555,000 recorded in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," offset by realized gains of $2,480,000 on REIT shares. Undistributed earnings decreased from $28,185,000 at December 31, 2000 to $25,742,000 at September 30, 2001 as a result of dividends on common and preferred stock of $28,997,000 exceeding net income for financial reporting purposes of $26,554,000.
RESULTS OF OPERATIONS (Comments are for the three months and nine months ended September 30, 2001 compared to the three months and nine months ended September 30, 2000.) Net income available to common stockholders for the three months and nine months ended September 30, 2001 was $6,073,000 ($.39 per basic share and $.38 per diluted share) and $19,048,000 ($1.21 per basic share and $1.19 per diluted share), compared to net income available to common stockholders for the three months and nine months ended September 30, 2000 of $4,526,000 ($.29 per basic and diluted share) and $13,502,000 ($.86 per basic and diluted share). Income before gain (loss) on real estate investments was $8,610,000 and $23,134,000 for the three months and nine months ended September 30, 2001, compared to $6,934,000 and $20,293,000 for the three months and nine months ended September 30, 2000. Gain (loss) on real estate investments was ($35,000) and $3,420,000 for the three months and nine months ended September 30, 2001, compared to $94,000 and $715,000 for the three months and nine months ended September 30, 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 $744,000 or 4.0% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000. For the nine months ended September 30, 2001, PNOI increased by $3,438,000 or 6.5% compared to the nine months ended September 30, 2000. PNOI by property type and percentage leased for industrial were as follows: <TABLE> <CAPTION> Property Net Operating Income Three Months Ended Nine Months Ended Percent September 30, September 30, Leased ------------- ------------ ----------- -------------- ---------- ---------- 2001 2000 2001 2000 9-30-01 9-30-00 ------------- ------------ ----------- -------------- ---------- ---------- (In thousands) <S> <C> <C> <C> <C> <C> <C> Industrial $ 18,876 17,740 55,569 51,040 93.2% 97.6% Other 263 655 778 1,869 ------------- ------------ ----------- -------------- Total PNOI $ 19,139 18,395 56,347 52,909 ============= ============ =========== ============== </TABLE> PNOI from industrial properties increased $1,136,000 (6.4%) and $4,529,000 (8.9%) for the three months and nine months ended September 30, 2001, compared to September 30, 2000, primarily due to acquisitions, rental rate increases and development properties that achieved stabilized operations in 2001 and 2000. PNOI from industrial properties held throughout the three months and nine months ended September 30, 2001 increased 2.0% and decreased 1.1% compared to the same periods in 2000. While both the three months and nine months ended September 30, 2001 included greater than normal vacancies, the three-month period ended September 30, 2001 included increased lease termination fees of $635,000 compared to the same period in 2000. PNOI from other properties decreased $392,000 and $1,091,000 for the three months and nine months ended September 30, 2001 compared to September 30, 2000. These decreases were primarily the result of the sale of the La Vista Crossing Apartments in December 2000. Other interest income increased $430,000 for the nine months ended September 30, 2001 compared to September 30, 2000. This increase was primarily the result of interest received from the final accounting of an escrow account established for the redemption of shares in the Company's 1998 acquisition of Meridian Point Realty Trust VIII. Gain on the sale and liquidation of REIT securities was $1,774,000 for the three months and $2,480,000 for the nine months ended September 30, 2001 compared to zero for the three months and $555,000 for the nine months ended September 30, 2000. Bank interest expense (excluding amortization of loan costs) decreased $1,361,000 from $2,301,000 for the three months ended September 30, 2000 to $940,000 for the same three months in 2001. Bank interest expense (excluding amortization of loan costs) decreased $2,213,000 from $6,246,000 for the nine months ended September 30, 2000 to $4,033,000 for the nine months ended September 30, 2001. Amortization of loan costs was $66,000 and $198,000 for both the three months and nine months ended September 30, 2001 and 2000. Average bank borrowings were $72,297,000 and $85,296,000 for the three months and nine months ended September 30, 2001 compared to $117,958,000 and $107,590,000 for the same periods of 2000. Average bank interest rates were 5.20% and 6.30% for the three months and nine months ended September 30, 2001 compared to 7.80% and 7.74% for the same periods of 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 and nine months ended September 30, 2001 were $524,000 and $1,808,000 compared to $465,000 and $1,497,000 for the three months and nine months ended September 30, 2000.
Interest expense on real estate properties (excluding amortization of loan costs) increased $1,034,000 from $2,891,000 for the three months ended September 30, 2000 to $3,925,000 for the three months ended September 30, 2001. Interest expense (excluding amortization of loan costs) increased $2,527,000 from $8,504,000 for the nine months ended September 30, 2000 to $11,031,000 for the nine months ended September 30, 2001. Amortization of loan costs was $51,000 and $136,000 for the three months and nine months ended September 30, 2001 and $37,000 and $98,000 for the three months and nine months ended September 30, 2000. These increases were primarily the result of the issuance of two mortgage loans in 2000 and one mortgage loan in 2001, offset by the payoff of several smaller loans in 2000 and 2001. Depreciation and amortization increased $1,091,000 and $2,571,000 for the three months and nine months ended September 30, 2001 compared to 2000. This increase was primarily due to the industrial properties acquired and development properties that achieved stabilized operations in both 2000 and 2001 and to write-off of leasing commissions for lease buyouts. These increases were offset by the sales of several properties in 2000 and 2001 and the transfer of several properties to real estate held for sale (depreciation not taken on those properties in the category "real estate held for sale"). A summary of gains (losses) on real estate investments for the nine months ended September 30, 2001 and 2000 is detailed below. <TABLE> <CAPTION> Gains (Losses) on Real Estate Investments Net Recognized Basis Sales Price Gain (Loss) -------------------------------------------------- (In thousands) <S> <C> <C> <C> 2001 Real estate properties: Nobel Business Center $ 2,113 5,250 3,137 West Palm II 1,274 1,350 76 109th Street Distribution Center 990 1,232 242 West Palm I 1,463 1,428 (35) -------------------------------------------------- $ 5,840 9,260 3,420 ================================================== 2000 Real estate properties: LeTourneau Center of Commerce $ 1,592 1,593 1 8150 Leesburg Pike Office Building - deferred gain (94) - 94 Estelle land 429 1,049 620 -------------------------------------------------- $ 1,927 2,642 715 ================================================== </TABLE> NAREIT has recommended supplemental disclosures concerning straight-line rent, capital expenditures and leasing costs. Straight-line rent for the three months and nine months ended September 30, 2001 was $389,000 and $1,355,000 compared to $439,000 and $1,205,000 for the same periods in 2000. Capital expenditures for the nine months ended September 30, 2001 (by category) and for the nine months ended September 30, 2000 are as follows:
<TABLE> <CAPTION> Capital Expenditures 2001 --------------------------------------------- 2000 Industrial Other Total Total ---------------- ------------ --------------- --------- (In thousands) <S> <C> <C> <C> <C> Upgrade on Acquisitions $ 257 - 257 3,614 Tenant improvements: New Tenants 2,490 - 2,490 2,183 New Tenants (first generation) 372 - 372 1,135 Renewal Tenants 483 - 483 646 Other 1,466 32 1,498 1,451 ---------------- ------------ ---------------- --------- Total capital expenditures $ 5,068 32 5,100 9,029 ================ ============ ================ ========= </TABLE> The Company's leasing costs are capitalized and included in other assets. The costs are amortized over the lives of the leases and are included in depreciation and amortization expense. A summary of these costs for the nine months ended September 30, 2001 (by category) and for the nine months ended September 30, 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 $ 834 - - 834 614 New Tenants (first generation) (39) - 1,306 1,267 1,570 Renewal Tenants 725 38 - 763 742 ------------- ------------- ---------------- --------------- ----------- Total capitalized leasing costs $ 1,520 38 1,306 2,864 2,926 ============= ============= ================ =============== =========== Amortization of leasing costs $ 1,905 1,463 =============== =========== </TABLE> LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $42,525,000 for the nine months ended September 30, 2001. Other sources of cash were primarily from bank borrowings, proceeds from mortgage notes payable, sales of real estate investments, sales and liquidation of real estate investment trust shares and collections on mortgage loans receivable. The Company distributed $21,193,000 in common and $7,506,000 in preferred stock dividends. Other primary uses of cash were for bank debt payments, construction and development of properties, purchases of real estate investments, mortgage note payments, purchase of REIT shares, capital improvements at the various properties and advances on mortgage loans receivable. Total debt at September 30, 2001 and 2000 was as follows: <TABLE> <CAPTION> As of September 30, ---------------------------------- 2001 2000 ---------------- ----------------- (In thousands) <S> <C> <C> Mortgage notes payable - fixed rate $ 206,281 148,915 Bank notes payable - floating rate 75,323 126,499 ---------------- ----------------- Total debt $ 281,604 275,414 ================ ================= </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 4.75% on $67,000,000 at September 30, 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 5.25% on $1,023,000 at September 30, 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 negotiated at the time of any advances. At September 30, 2001, the rate for this loan was 4.25% on a balance of $7,300,000, payable on demand. The foregoing three credit facilities mature in January 2002. The Company is negotiating new credit facilities with similar rates and terms and expects to complete the negotiations in January 2002. 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 nine months ended September 30, 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) with 672,300 shares still available for repurchase. In June 2000, Pacific Gulf Properties announced that it entered into an agreement to sell all of its industrial properties and to market 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 with an estimated fair value of $1,071,000 at September 30, 2001. In December 2000, upon receipt of the initial liquidating distribution of $22.00 per PAG share, the Company reduced its basis in PAG shares to zero and recorded a gain of $807,000. The Company received additional liquidating distributions of $1.15 per PAG share in the second quarter of 2001 and $3.125 per PAG share in the third quarter. Additional gains of $560,000 were recorded in the second quarter and $1,522,000 in the third quarter. PAG announced that its shareholders may receive up to an additional $2.20 per share as part of its final liquidation. 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> Oct-Dec Fair 2001 2002 2003 2004 2005 Thereafter Total Value ----------- ---------- ------- -------- --------- ------------ ---------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed rate debt (in thousands) $ 1,248 13,126 8,975 9,775 23,596 149,561 206,281 217,413 Weighted average interest rate 7.74% 7.57% 8.23% 8.12% 8.06% 7.48% 7.61% Variable rate debt (in thousands) $ 7,300 68,023 - - - - 75,323 75,323 Weighted average interest rate 4.25% 4.76% - - - - 4.71% </TABLE> As the table above incorporates only those exposures that exist as of September 30, 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. If the weighted average interest rate on the variable rate bank debt as shown above changes by 10% or approximately 47 basis points, interest expense and cash flows would increase or decrease by approximately $354,000 annually. 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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATED: November 14, 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