U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------------------------------------- FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 --------------------------------------------------- For Quarter Ended March 31,1996 -------------- Commission File Number 1 - 7094 -------- EASTGROUP PROPERTIES ---------------------------------------------------------- (Exact name of Registrant specified in its charter) Maryland 13-2711135 - ------------------------------- --------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 300 One Jackson Place 188 East Capitol Street P.O. Box 22728 Jackson, Mississippi 39201-2195 - ---------------------------------------- ------------------ (Address of principal executive offices) Zip Code Issuer's telephone number, including area code (601) 354-3555 --------------- - ----------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report 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 --------- ---------- 4,245,083 shares of beneficial interest ($1.00 par value) were outstanding at May 14, 1996. EASTGROUP PROPERTIES FORM 10-Q TABLE OF CONTENTS FOR THE QUARTER ENDED MARCH 31, 1996 - ----------------------------------------------------------------- Pages Part I. Financial Information Item 1. Consolidated financial statements Consolidated balance sheets, March 31, 1996 3 and December 31, 1995 Consolidated statements of income for the three months ended March 31, 1996 and 1995 4 Consolidated statements of cash flow for the three months ended March 31, 1996 and 1995 5 Consolidated statements of changes in shareholders' equity for the three months 6 ended March 31, 1996 and 1995 Notes to consolidated financial statements 7 Item 2. Management's discussion and analysis of financial condition and results of operations 9 CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) March 31, December 31, 1996 1995 ------------ ------------ (Unaudited) Assets Real estate properties Industrial $ 72,161 $ 71,870 Office Buildings 34,261 34,076 Apartments 46,601 49,658 ------------ ------------ 153,023 155,604 Less accumulated depreciation (19,385) (19,206) ------------ ------------ 133,638 136,398 Mortgage loans 6,047 6,008 Land and land purchase-leasebacks 1,327 1,327 Investment in real estate investment trusts 11,906 10,787 Cash and cash equivalents 144 26 Other assets 4,344 3,409 ------------ ------------ $ 157,406 $ 157,955 ============ ============ Liabilities and Shareholders' Equity Liabilities Mortgage notes payable $ 63,747 $ 67,203 Notes payable to banks 6,040 4,359 Accounts payable and accrued expenses 1,308 2,096 Minority interests in joint ventures 907 909 Other liabilities 559 488 ------------ ------------ 72,561 75,055 ------------ ------------ Shareholders' Equity Shares of beneficial interest, par value $1.00 per share; authorized 10,000,000 shares; issued 4,245,083 shares in 1996 and 4,231,656 in 1995 4,245 4,232 Additional paid-in-capital 68,586 68,344 Undistributed earnings 10,191 9,657 Unrealized gain on securities 1,823 667 ------------ ------------ 84,845 82,900 ------------ ------------ $ 157,406 $ 157,955 ============ ============ See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data) Three Months Ended March 31, -------------------------- 1996 1995 ----------- ---------- Revenues Income from real estate operations $ 6,853 $ 6,895 Land rents 52 80 Equity in earnings of real estate investment trust 40 9 Interest: Mortgage loans 246 276 Other 221 23 ----------- ---------- 7,412 7,283 ----------- ---------- Expenses Operating expenses from real estate operations 2,741 2,750 Interest expense 1,527 1,507 Depreciation and amortization 1,424 1,337 Minority interests in joint ventures 32 73 General and administrative expenses 512 526 ----------- ---------- 6,236 6,193 ----------- ---------- Income before gain on investments 1,176 1,090 ----------- ---------- Gain on investments Real estate 1,353 412 ----------- ---------- Net Income $ 2,529 $ 1,502 =========== ========== Net Income per share of beneficial interest $ .60 $ .36 =========== ========== Weighted average shares outstanding 4,235 4,222 =========== ========== See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) (In thousands) Three Months Ended March 31, -------------------------- 1996 1995 ----------- ---------- Operating Activities Net income $ 2,529 $ 1,502 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,424 1,337 Gain on investments, net (1,353) (412) Other - (26) Changes in operating assets and liabilities: Accrued income and other assets (73) 604 Accrued payable, accrued expenses and prepaid rent (631) 120 ----------- ---------- Net cash provided by operating activities 1,896 3,125 ----------- ---------- Investing Activities Payments on mortgage loans receivable - 26 Sale of real estate investments 4,146 862 Purchases of real estate improvements (1,249) (515) Return of capital dividends - 87 Change in other assets and other liabilities (1,033) (553) ----------- ---------- Net cash provided by (used in) investing activities 1,864 (93) ----------- ---------- Financing Activities Proceeds from bank borrowings 5,119 4,592 Principal payments on bank borrowings (3,438) (5,511) Principal payments on mortgage notes payable and improvement bonds (3,456) (229) Distributions paid to shareholders (1,995) (1,900) Proceeds from issuance of stock 128 - ----------- ---------- Net cash used in financing activities (3,642) (3,048) ----------- ---------- Increase (Decrease) in cash and cash equivalents 118 (16) Cash and cash equivalents at beginning of period 26 301 ----------- ---------- Cash and cash equivalent at end of period $ 144 $ 285 =========== ========== Supplemental Cash Flow Information: Cash paid for interest 1,434 1,467 See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (In thousands, except for per share data) Three Months Ended March 31, --------------------------- 1996 1995 ----------- ---------- Shares of beneficial interest, $1.00 par value Balance at beginning $ 4,232 $ 4,222 Issuance of shares 13 - ----------- ---------- Balance at end of period 4,245 4,222 ----------- ---------- Additional paid-in-capital Balance at beginning 68,344 68,210 Issuance of shares 242 - ----------- ---------- Balance at end of period 68,586 68,210 ----------- ---------- Undistributed earnings Balance at beginning of period 9,657 9,723 Net income 2,529 1,502 Cash dividends declared: $.47 per share in 1996, and $.45 per share in 1995 (1,995) (1,900) ----------- ---------- Balance at end of period 10,191 9,325 ----------- ---------- Unrealized gain on securities Balance at beginning of period 667 21 Change in unrealized gain 1,156 - ----------- ---------- Balance at end of period 1,823 21 ----------- ---------- Total shareholders' equity $ 84,845 $ 81,778 =========== ========== 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 the opinion of management, 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 annual report and the notes thereto. (2) Reclassifications Certain reclassifications have been made in the fiscal 1995 financial statements to conform to the fiscal 1996 classifications. (3) Subsequent Events On February 13, 1996, the Trust and Copley Properties, Inc., both of which are real estate investment trusts, jointly announced that they entered into an Agreement and Plan of Merger under which Copley will be merged into EastGroup. In the merger, each share of Copley's common stock will be converted into EastGroup shares of beneficial interest with a value of $15.60. The value of East Group shares for purposes of calculating the ratio at which Copley shares will be converted into EastGroup shares in the merger will be the average of the closing price of EastGroup shares on the New York Stock Exchange on the 20 trading days immediately preceding the fifth trading day prior to the effective date of the merger (the "EastGroup Stock Price"); however, the EastGroup Stock Price will be deemed to equal $20.25 if the average price of EastGroup shares calculated above is less than or equal to $20.25, and $23.00 if the average price of EastGroup shares is greater than or equal to $23.00. Copley has the right, waivable by it, to terminate the merger agreement without liability if the average closing price of East Group shares on the New York Stock Exchange on the 20 trading days immediately preceding the fifth trading day prior to (I) the date on which the Securities and Exchange Commission declares EastGroup's Registration Statement with respect to the merger effective or (ii) the date on which Copley's stockholders' meeting with respect to the merger is held is equal to or less than $18.25. The merger is subject to several conditions including approval by the shareholders of both Copley and EastGroup and registration of the EastGroup shares to be issued in the merger with the Securities and Exchange Commission. The shareholders of the Trust and Copley will vote on the merger at meetings to be held on June 19, 1996. EastGroup presently owns 14.76% of Copley's outstanding shares. On May 14, 1996, the Trust and LNH REIT, Inc. ("LNH") jointly announced that LNH's shareholders approved the previously announced merger of LNH with and into EastGroup-LNH Corporation, a wholly-owned subsidiary of EastGroup, and that the merger was consummated immediately after the LNH shareholder meeting. Under the terms of the merger, each LNH share was converted into the right to receive 0.3671 EastGroup shares. EastGroup will issue approximately 618,000 of its shares as a result of the merger. EASTGROUP PROPERTIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION (Comments are for the balance sheet dated March 31, 1996, compared to December 31, 1995.) Real estate properties decreased $2,581,000 during the first quarter of 1996, primarily as a result of the sale of the Garden Villa Apartments on January 31, 1996 with a basis of $3,830,000. This decrease was offset by capital improvements of $1,249,000 on existing Trust properties. Accumulated depreciation increased $179,000 during the first quarter of 1996 due to depreciation expense of $1,293,000, offset by the sale of the Garden Villa Apartments with accumulated depreciation of $1,114,000. Mortgage loans receivable increased $39,000 during the first quarter of 1996. This increase in mortgage loans receivable was the result of amortization of loan discounts of $34,000 and the advance on mortgage loans of $39,000 offset by principal payments of $34,000. Investments in real estate investment trusts increased from $10,787,000 at December 31, 1995 to $11,906,000 at March 31, 1996. During the first quarter of 1996, the Trust recognized $40,000 of equity in earnings of LNH, offset by $77,000 of LNH dividends received. The Trust also recognized an unrealized gain of $1,156,000 recorded on the Trust's available-for-sale securities (Copley) in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Mortgage notes payable decreased $3,456,000 during the first quarter of 1996, as a result of regularly scheduled principal repayments of $324,000 and the repayment of the $3,132,000 first mortgage on the Garden Villa Apartments sold January 31, 1996. Notes payable to banks increased from $4,359,000 at December 31, 1995 to $6,040,000 at March 31, 1996. As of March 31, 1996, the acquisition line had a balance of $2,100,000 and the working capital line had a balance of $3,940,000. The working capital line matured April 30, 1996 and was renewed with an interest rate of LIBOR plus 2%, monthly interest and a maturity date of May 30, 1996. The bank has verbally agreed to increase the working capital line to $20,000,000 and to change the interest rates on the working capital line and the acquisition line to LIBOR plus 1.85%. Unrealized gain (loss) on securities increased $1,156,000 as a result of unrealized gain recorded on the Trust's investment in Copley in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Undistributed earnings increased from $9,657,000 at December 31, 1995 to $10,191,000 at March 31, 1996, as a result of net income for financial reporting purposes of $2,529,000 exceeding dividends of $1,995,000. RESULTS OF OPERATIONS (Comments are for the three months ended March 31, 1996, compared to the three months ended March 31, 1995.) Net income for the three months ended March 31,1996 was $2,529,000 ($.60 per share), compared to net income for the three months ended March 31, 1995 of $1,502,000 ($.36 per share). Income before gains on investments was $1,176,000 and $1,090,000 for the three months ended March 31, 1996 and 1995. Gains on investments were $1,353,000 and $412,000 for the three months ended March 31, 1996 and 1995. 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) decreased by $33,000 or .8% for the three months ended March 31,1996 compared to the three months ended March 31, 1995 Property net operating income (loss) and percentage leased by property type were as follows: PNOI Percentage Leased March 31 March 31 ------------------ ------------------ 1996 1995 1996 1995 ------- ------- ------- ------- (In thousands) Industrial $ 2,072 $ 1,815 98% 97% Office Buildings 766 900 95% 92% Apartments 1,281 1,438 94% 97% Other (7) (8) - - ------- ------- Total PNOI $ 4,112 $ 4,145 ======= ======= PNOI from industrial properties increased $257,000 for the three months ended March 31, 1996, compared to March 31, 1995. Industrial properties held throughout the three months ended March 31, 1996 and 1995, showed an increase in PNOI of 11.6% for 1996 compared to 1995. Also contributing to the increase in PNOI from industrial properties was the acquisition of Jetport 515 Commerce Park ("JetPort 515") in September 1995, and the development of a 36,400 square foot distribution building at the Phillips Distribution Center ("Phillips") completed in August 1995. In addition, the increase in PNOI from industrial properties was due to improved operations at Rampart Distribution Center ("Rampart"), Venture Distribution Center ("Venture"), Lake Pointe Business Park ("LakePointe") and Westport Commerce Center ("WestPort"). PNOI from the Trust's office buildings decreased $134,000 as a result of the sale of the Cascade VII office building in September 1995 and lower operating income from the Trust's office building portfolio due to lower occupancy. PNOI from the Trust's apartment properties decreased $157,000 for 1996 compared to 1995. This decrease is attributable primarily to the sale of the SunChase Apartments in October 1995 and the Garden Villa Apartments in January 1996, offset by the acceptance of a deed in lieu of foreclosure on the EastGate Apartments in April 1995. Apartment properties held throughout the three months ended March 31, 1996 and 1995, increased $12,000 for 1996 compared to 1995. Land rents decreased $28,000 primarily as a result of the sale of the Iroquois land purchase-leaseback investments and the deed in lieu of foreclosure on the EastGate Apartments land purchase-leaseback investment. Equity in earnings from LNH of $40,000 was recorded during the three months ended March 31, 1996, compared to $9,000 in 1995. Interest income on mortgage loans decreased $30,000 for the three months ended March 31, 1996 compared to 1995. The following is a breakdown of interest income for the three months ended March 31, 1996 compared to 1995. March 31 ---------------- 1996 1995 ------ ----- (In thousands) Interest income from: 25% joint venture $ 4 69 mortgage loans Motel mortgage loans 108 69 Wrap mortgage loan - 15 Other mortgage loans 134 123 ------ ----- $ 246 276 ====== ===== Interest income from the 25% joint venture mortgage loans decreased as a result of repayments of these notes. Interest income from the motel mortgage loans is recorded as received, and the notes have been written down to their net realizable value. Interest income from the wrap mortgage loan decreased as a result of the foreclosure in April 1995 of the EastGate mortgage. Interest expense increased $20,000 from March 31, 1996 compared to March 31, 1995. Average bank borrowings were $3,970,000 and $27,339,000 for the three months ended March 31, 1996 and 1995. Bank interest rates at March 31, 1996 and March 31, 1995 were 7.0309% (LIBOR plus 2%) and 9.0% (Prime and Prime plus 1/8%). Interest expense on real estate properties increased as a result of the following new mortgages: Date of Interest Maturity Amount of Loan Property Rate Date Mortgage - -------- ---------------------------- ------ ------ ----------- 6-27-95 Exchange Distribution Center 8.375% 8-1-05 $ 2,500,000 7-27-95 WestPort Commerce Center 8.000% 8-1-05 3,350,000 8-01-95 LaVista Crossing Apartments 8.688% 9-1-05 5,950,000 9-12-95 JetPort Commerce Park 8.125% 10-1-05 4,000,000 9-29-95 LakePointe Business Park 8.125% 10-1-05 11,000,000 12-15-95 Plantations Apartments 7.625% 12-1-05 5,300,000 ----------- $32,100,000 =========== These increases were offset by the repayment of the Exchange Drive Warehouse mortgage payable of $565,000 and the JetPort mortgage payable of $636,000 in September 1995. The Trust repaid the underlying first mortgage on the Country Club wrap mortgage note of $2,267,000 on August 3, 1995. General and administrative expenses decreased $14,000 for the three months ended March 31, 1996 compared to 1995. In January 1996, the Trust sold the Garden Villa Apartments in Seattle, Washington for net cash of $4,148,000 and the assumption of debt of $3,132,000, and for financial reporting purposes, the Trust recognized a gain of $1,353,000 on the sale. In February 1995, the Trust sold its Winchester Ranch land purchase-leaseback investment for $862,000. For financial reporting purposes, the Trust recognized a gain of $412,000 on the sale. The real estate investment trust industry has recommended supplemental disclosures concerning capital expenditures, leasing costs, financing costs and straight-line rents. The Trust expenses apartment unit turnover cost such as carpet, painting and small appliances. Capital expenditures for the three months ended March 31, 1996 and 1995 by category are as follows: March 31 ---------------- 1996 1995 ----- ----- ( In thousands) Upgrades on acquisitions $ 76 224 Major Renovation 671 16 Tenant improvements: New tenants 282 171 Renewal tenants 88 23 Other 132 81 ----- ----- 1,249 515 ===== ===== For the three months ended March 31, 1996 and 1995, the Trust capitalized $200,000 and $206,000 of leasing costs, which included $106,000 and $204,000 related to new tenants and $94,000 and $2,000 related to renewal tenants, and $11,000 and $39,000 of financing costs and included these amounts in other assets. For the three months ended March 31, 1996 and 1995, the Trust amortized $131,000 and $74,000 related to capitalized leasing costs and included these amounts in depreciation and amortization expense, and $83,000 and $56,000 related to financing costs and included these amounts in interest expense. Leasing costs are amortized over the life of the lease and financing costs are amortized over the life of the loan. Rental income included straight-line rent of $0 and $22,000 for the three months ended March 31, 1996 and 1995. This resulted from income recorded on the straight line method as compared to when cash was actually received. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $1,896,000 for the three months ended March 31, 1996. The Trust distributed $1,995,000 in dividends. Other sources of cash were collections on mortgage loan receivables, sale of real estate investments and bank borrowings. Primary uses of cash were for capital improvements at the various properties, bank debt payments and mortgage note payments. Total debt at March 31, 1996 is as follows: March 31 ------------------ 1996 1995 ------- ------ ( In thousands) Mortgage notes payable - fixed rate $ 63,747 37,052 Mortgage notes payable - floating rate - 2,277 Bank notes payable - floating rate 6,040 27,752 -------- ------ Total debt $ 69,787 67,081 ======== ====== At March 31, 1996, the LIBOR rate plus 2% was 7.0309%. There is also a .25% fee on the unused amount of the $7 million credit line and the acquisition credit line. The Trust owes $3,940,000 on the credit line and $2,100,000 on the acquisition line as of March 31, 1996. On April 30, 1996, the Trust renewed the working capital line as discussed previously. The Trust also has a $15,000,000 acquisition line, which bears interest at the LIBOR rate plus 2% and matures on April 30, 1997. The bank has agreed verbally to increase the working capital line to $20,000,000 and change interest rates on the working capital line and the acquisition line to LIBOR plus 1.85%. Budgeted capital expenditures for the year ending December 31, 1996 are as follows: (In thousands) ------------- Upgrades on acquisitions $ 112 New development costs 1,526 Tenant Improvements: New Tenants 864 Renewal Tenants 254 Other 978 ------------- $ 3,734 ============= The Trust anticipates that its current cash balance, operating cash flow and borrowings (including borrowings under the revolving line of credit) will be adequate to pay the Trust's (I) operating and administrative expenses, (ii) debt service obligations, (iii) distributions to shareholders, (iv) capital improvements, and (v) normal repair and maintenance expenses at its properties both in the short and long term. On February 13, 1996, the Trust and Copley Properties, Inc., both of which are real estate investment trusts, jointly announced that they entered into an Agreement and Plan of Merger under which Copley will be merged into EastGroup. In the merger, each share of Copley's common stock will be converted into EastGroup shares of beneficial interest with a value of $15.60. The value of East Group shares for purposes of calculating the ratio at which Copley shares will be converted into EastGroup shares in the merger will be the average of the closing price of EastGroup shares on the New York Stock Exchange on the 20 trading days immediately preceding the fifth trading day prior to the effective date of the merger (the "EastGroup Stock Price"); however, the EastGroup Stock Price will be deemed to equal $20.25 if the average price of EastGroup shares calculated above is less than or equal to $20.25, and $23.00 if the average price of EastGroup shares is greater than or equal to $23.00. Copley has the right, waivable by it, to terminate the merger agreement without liability if the average closing price of East Group shares on the New York Stock Exchange on the 20 trading days immediately preceding the fifth trading day prior to (I) the date on which the Securities and Exchange Commission declares EastGroup's Registration Statement with respect to the merger effective or (ii) the date on which Copley's stockholders' meeting with respect to the merger is held is equal to or less than $18.25. The merger is subject to several conditions including approval by the shareholders of both Copley and EastGroup and registration of the EastGroup shares to be issued in the merger with the Securities and Exchange Commission. EastGroup presently owns 14.76% of Copley's outstanding shares. The shareholders of the Trust and Copley will vote on the merger at meetings to be held on June 19, 1996. On May 14, 1996, the Trust and LNH REIT, Inc. ("LNH") jointly announced that LNH's shareholders approved the previously announced merger of LNH with and into EastGroup-LNH Corporation, a wholly-owned subsidiary of EastGroup, and that the merger was consummated immediately after the LNH shareholder meeting. Under the terms of the merger, each LNH share was converted into the right to receive 0.3671 EastGroup shares. EastGroup will issue approximately 618,000 of its shares as a result of the merger. EASTGROUP PROPERTIES PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders None Item 6. Exhibits and reports on Form 8-K Items reported Document Filed Date -------------- ------------------- None 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 15, 1996 EASTGROUP PROPERTIES BY: /s/ Diane W. Hayman ---------------------- Diane W. Hayman, CPA Controller /s/ N. Keith McKey ---------------------- N. Keith McKey, CPA Executive Vice President, Chief Financial Officer and Secretary