1 FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998 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 August 7, 1998 was 16,307,857. 1
2 EASTGROUP PROPERTIES, INC. FORM 10-Q TABLE OF CONTENTS FOR THE QUARTER ENDED JUNE 30, 1998 <TABLE> <CAPTION> PAGES ----- PART I. FINANCIAL INFORMATION <S> <C> Item 1. Consolidated financial statements Consolidated balance sheets, June 30, 1998 (unaudited) and December 31, 1997 3 Consolidated statements of income for the three and six months ended June 30, 1998 and 1997 (unaudited) 4 Consolidated statements of cash flow for the six months ended June 30, 1998 and 1997 (unaudited) 5 Consolidated statements of changes in stockholders' equity for the six months ended June 30, 1998 (unaudited) 6 Notes to consolidated financial statements 7 Item 2. Management's discussion and analysis of financial condition and results of operations 10 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES Authorized signatures 19 </TABLE> 2
3 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) <TABLE> <CAPTION> ASSETS June 30, 1998 December 31, 1997 ------------- ----------------- (Unaudited) <S> <C> <C> Real estate properties: Industrial $495,076 316,808 Industrial Development 10,828 13,831 Office Buildings 28,086 39,753 Apartments 8,793 15,380 --------- --------- 542,783 385,772 Less accumulated depreciation (34,107) (29,095) --------- --------- 508,676 356,677 Real estate held for sale: Land 585 585 Operating properties 36,290 22,648 less accumulated depreciation (3,999) (3,217) --------- --------- 32,876 20,016 --------- --------- Mortgage loans 10,457 10,852 Investment in real estate investment trusts 4,441 16,518 Cash 964 1,298 Other assets 11,505 7,766 --------- --------- TOTAL ASSETS $568,919 413,127 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Mortgage notes payable $142,959 105,380 Notes payable to banks 113,945 41,770 Accounts payable & accrued expenses 5,637 3,979 Minority interest 2,029 2,436 Other liabilities 2,528 2,247 --------- --------- 267,098 155,812 --------- --------- STOCKHOLDERS' EQUITY Shares of common stock - Par value $.0001 per share; 2 2 authorized 68,275,000 shares; issued 16,307,857 at June 30, 1998 and 16,204,523 at December 31, 1997 Shares of Preferred Stock - Par value $.0001 per share; - - 9.00% Series A Cumulative Redeemable; authorized and issued 1,725,000 shares at June 30, 1998 and 0 at December 31, 1997 Shares of Excess Stock - Par value $.0001 per share; - - authorized 30,000,000 shares; no shares issued Additional paid-in capital 287,790 244,215 Undistributed earnings 12,974 13,633 Accumulated other comprehensive income 1,055 (535) --------- --------- 301,821 257,315 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $568,919 413,127 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 3
4 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Three Months Six Months Ended Ended June 30, June 30, ------------------------------ ------------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> REVENUES Income from real estate operations $ 18,080 11,788 33,415 22,985 Interest: Mortgage loans 408 484 866 1,004 Other interest 87 101 111 186 Other 106 292 330 479 ------------------------------ ------------------------------ 18,681 12,665 34,722 24,654 EXPENSES Operating expenses from real estate operations 4,727 3,661 8,723 6,993 Interest 4,349 2,275 7,288 4,711 Depreciation and amortization 4,018 2,328 7,224 4,722 Minority interests 149 141 255 299 General and administrative 907 707 1,776 1,401 ------------------------------ ------------------------------ 14,150 9,112 25,266 18,126 ------------------------------ ------------------------------ INCOME BEFORE GAIN (LOSS) ON INVESTMENTS 4,531 3,553 9,456 6,528 Gain (loss) on real estate investments 1,017 (5) 1,090 107 ------------------------------ ------------------------------ NET INCOME 5,548 3,548 10,546 6,635 Preferred stock dividends 129 - 129 - ------------------------------ ------------------------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 5,419 3,548 10,417 6,635 ============================== ============================== BASIC PER SHARE DATA Net income available to common shareholders $ 0.33 0.28 0.64 0.54 ============================== ============================== Weighted average shares outstanding 16,299 12,675 16,261 12,201 ============================== ============================== DILUTED PER SHARE DATA Net income available to common shareholders $ 0.33 0.28 0.63 0.54 ============================== ============================== Weighted average shares outstanding 16,452 12,822 16,422 12,344 ============================== ============================== </TABLE> See accompanying notes to consolidated financial statements. 4
5 CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, June 30, 1998 1997 --------------- ---------------- (In thousands) <S> <C> <C> OPERATING ACTIVITIES: Net income $ 10,546 6,635 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of deferred leasing costs 7,224 4,722 Gains on investments, net (1,090) (107) Other (185) (137) Changes in operating assets and liabilities: Accrued income and other assets (2,239) (1,813) Accounts payable, accrued expenses and prepaid rent 872 248 --------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 15,128 9,548 --------------- ---------------- INVESTING ACTIVITIES: Payments on mortgage loans receivable, net of amortization of loan discounts 778 563 Advances on mortgage loans receivable - (1,575) Sale of real estate investments 6,611 - Real estate improvements (3,254) (2,093) Real estate development (7,502) (5,121) Purchases of real estate (63,243) (21,871) Acquisition of Meridian (52,760) - Purchases of real estate investment trusts shares (88) (2,217) Merger expenses (1,589) - Change in other assets and other liabilities (277) 1,107 Cash balances of acquired company 6,046 - --------------- ---------------- NET CASH USED IN INVESTING ACTIVITIES (115,278) (31,207) --------------- ---------------- FINANCING ACTIVITIES: Proceeds from bank borrowings 136,788 43,984 Proceeds from mortgage notes payable - 9,250 Principal payments on bank borrowings (64,613) (39,497) Principal payments on mortgage notes payable (3,010) (20,374) Distributions paid to shareholders (11,076) (8,323) Purchases of shares of beneficial interest and common stock - (241) Proceeds from exercise of stock options 164 417 Net proceeds from issuance of shares of beneficial interest - 36,654 Net proceeds from issuance of shares of preferred stock 41,418 - Proceeds from dividend reinvestment plan 145 138 --------------- ---------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 99,816 22,008 --------------- ---------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (334) 349 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,298 438 =============== ================ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 964 787 =============== ================ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of amount capitalized $ 6,506 4,777 Debt assumed by the Company in purchase of real estate 7,167 - Debt assumed by the Company in the Meridian acquisition 33,422 - Issuance of common stock to acquire Ensign 1,746 - </TABLE> See accompanying notes to consolidated financial statements 5
6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Shares Shares Accumulated of of Additional Other Common Preferred Paid-In Undistributed Comprehensive Stock Stock Capital Earnings Income Total -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> BALANCE, DECEMBER 31, 1997 $2 - 244,215 13,633 (535) 257,315 Net income - - - 10,546 - 10,546 Cash dividends declared - common, $.68 per share - - - (11,076) - (11,076) Preferred stock dividends declared - - - (129) - (129) Change in unrealized gain (loss) on securities - - - - 1,590 1,590 Issuance of 5,007 shares of common stock, incentive compensation - - 102 - - 102 Issuance of 11,785 shares of common stock, exercise options - - 164 - - 164 Issuance of 79,353 shares of common stock, Ensign merger - - 1,746 - - 1,746 Issuance of 1,725,000 shares of preferred stock - - 41,418 - - 41,418 Issuance of 7,189 shares of common stock, dividend reinvestment plan - - 145 - - 145 -------- -------- -------- -------- -------- -------- BALANCE, JUNE 30, 1998 $2 - 287,790 12,974 1,055 301,821 ======== ======== ======== ======== ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 6
7 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 1997 annual report and the notes thereto. (2) RECLASSIFICATIONS Certain reclassifications have been made in the 1997 financial statements to conform to the 1998 classifications. (3) SUBSEQUENT EVENTS Since June 30, 1998, the Company purchased two parcels of land for future development for a purchase price of $2,008,000. Also, as of August 14, 1998, the Company had entered into contracts to purchase three industrial properties for $15,585,000 and seven parcels of land, consisting of approximately 69 acres, for a purchase price of approximately $8,329,000 for future development. The Company had previously reclassified the Sutton House Apartments with a cost of $8,741,000 and the Doral Club Apartments with a cost of $7,219,000, both in San Antonio, Texas to "held for sale" properties. The Company currently has contracts to sell these apartment complexes for a total of approximately $18,625,000. On August 11, 1998, the Company sold East Maricopa Distribution Center in Phoenix, Arizona for a net sales price of approximately $639,000. No significant gain (loss) is anticipated on this transaction. 7
8 (4) ACCOUNTING CHANGES In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income. SFAS No. 130 defines comprehensive income as the changes in equity of an enterprise except those resulting from stockholder transactions. All components of comprehensive income are required to be reported in a new financial statement that is displayed with equal prominence as existing financial statements. The Company adopted this standard as of January 1, 1998. Following is a comparison of comprehensive income for the six months ended June 30, 1998 and 1997. <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1998 1997 ---- ---- (In thousands) -------------------------------------------------- <S> <C> <C> Net income $10,546 6,635 Other comprehensive income: Unrealized holding gains arising during period 1,590 226 -------------------------------------------------- Comprehensive income $12,136 $6,861 ================================================== </TABLE> Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating standards for annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement is effective for fiscal years beginning after December 15, 1997. The adoption of this statement on January 1, 1998 did not have a material impact on the Company's consolidated financial statements, but could require expanded disclosures in subsequent periods. (5) MERIDIAN POINT REALTY TRUST VIII During second quarter 1998, the Company completed the acquisition of Meridian Point Realty Trust VIII ("Meridian VIII") described below, accounting for the acquisition by using the purchase method of accounting. For financial reporting purposes, the acquired assets of Meridian VIII are assigned new cost basis amounts based on the allocation of the purchase price of the assets to the Company. In general, the purchase price to the Company consisted of the cash paid for Meridian VIII and the previous investment the Company had in Meridian VIII. The shares of Meridian VIII owned by the Company were retired at the merger date. The operating results of Meridian VIII have been included in the consolidated statement of income subsequent to the date of acquisition. On June 1, 1998, the merger of Meridian VIII into a wholly-owned subsidiary of EastGroup was completed. Pursuant to the terms of its merger agreement with Meridian VIII, EastGroup's wholly-owned subsidiary exercised options to acquire a sufficient number of common and preferred shares of Meridian VIII such that it owned 90% of all outstanding common and preferred shares. Prior to the exercise of the options, EastGroup's subsidiary beneficially owned approximately 83.2% of the outstanding voting securities of Meridian VIII. Following the exercise of the options, Meridian VIII was merged into EastGroup's wholly-owned subsidiary, with all outstanding common shares of Meridian VIII not held by EastGroup receiving, as a result of the merger, $8.50 per share in cash and all preferred shares of Meridian VIII not held by EastGroup receiving $10.00 per share in cash. The consideration paid to the remaining common and preferred shareholders of Meridian VIII was equivalent to that paid by EastGroup in its tender offer for Meridian VIII's common and preferred shares which was completed in April 1998. The total purchase price to EastGroup was approximately $102,000,000 which included the assumption of Meridian VIII's outstanding indebtedness. As a result of the merger, Meridian VIII's common and preferred shares have been removed from registration under the Securities Exchange Act of 1934 and ceased to be listed on the American Stock Exchange effective as of June 1, 1998. 8
9 The increase in net assets at the acquisition date, based on relative fair values, resulting from the acquisition was as follows (in thousands): <TABLE> <S> <C> Real estate properties $ 96,343 Cash 6,046 Accrued interest and other receivables 119 Other assets 124 Mortgage notes/interest payables (33,422) Accounts payable and other liabilities (776) ------------ TOTAL $ 68,434 ============ </TABLE> The purchase price of the net assets acquired consisted of the following (in thousands): <TABLE> <S> <C> Acquisition of Meridian $ 52,760 Merger expenses 1,569 Prior investment in Meridian 14,105 ------------ TOTAL $ 68,434 ============ </TABLE> The following unaudited pro forma combined results of operations give effect to the Meridian VIII merger as if it had occurred at the beginning of each of the six-month periods presented: <TABLE> <CAPTION> (In thousands, except per share amounts) 1998 1997 ---- ---- <S> <C> <C> Revenues $38,016 29,921 ======= ====== Net income $ 8,473 5,579 ======= ====== Net income per basic share $ .52 .46 ======= ====== Shares used in computation 16,261 12,201 ======= ====== </TABLE> In management's opinion, the unaudited pro forma combined results of operations are not necessarily indicative of the actual results that would have occurred had the transaction been consummated at the beginning of 1998 and the beginning of 1997 or of future operations of the combined companies under the ownership and management of the Company. (6) FORWARD LOOKING STATEMENTS In addition to historical information, certain sections of this Quarterly Report on 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 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, 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 Quarterly Report. 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. 9
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Comments are for the balance sheet dated June 30, 1998, compared to December 31, 1997.) FINANCIAL CONDITION: Assets of EastGroup were $568,919,000 at June 30, 1998, an increase of $155,792,000 from December 31, 1997. Liabilities increased $111,286,000 to $267,098,000 and stockholders' equity increased $44,506,000 to $301,821,000 during the same period. Industrial properties (excluding accumulated depreciation) increased $178,268,000 during the six months ended June 30, 1998, primarily as a result of the acquisition of 10 industrial properties for $69,617,000 and the purchase of the 25% interest in WestPort Commerce for $793,000, for a total of $70,410,000 (as detailed below); the acquisition of 18 properties in the Meridian merger with an allocated purchase price of $96,343,000 (as detailed below); capital improvements on existing properties of $2,769,000; the reclassifications to industrial properties of Rampart II with a cost of $3,207,000, Chancellor with a cost of $2,002,000, Benjamin Center II with a cost of $2,417,000, and Palm River II with a cost of $3,144,000; and the reclassifications to real estate held for sale of 401 Exchange with a cost of $742,000 and East Maricopa with a cost of $640,000. <TABLE> <CAPTION> INDUSTRIAL PROPERTIES SIZE DATE COST ACQUIRED IN 1998 LOCATION (SQUARE FEET) ACQUIRED (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Estrella East Phoenix, Arizona 174,000 02-18-98 $5,322 Stemmons Circle Dallas, Texas 99,000 03-06-98 2,377 51st Avenue Phoenix, Arizona 79,000 03-09-98 2,324 3906 Airpark Drive Memphis, Tennessee 92,000 04-01-98 2,166 WestPort Commerce (25% interest) Tampa, Florida 140,000 06-05-98 793 Industry Distribution Los Angeles, California 572,000 06-11-98 22,581 World Houston 1 & 2 Houston, Texas 158,000 06-18-98 6,553 Wal-Mart Distribution Tucson, Arizona 162,000 06-23-98 5,766 Interstate Commerce Fort Lauderdale, Florida 85,000 06-24-98 3,137 American Plaza Houston, Texas 121,000 06-25-98 5,312 Shaw Commerce Fresno, California 398,000 06-25-98 14,079 -------------------- TOTAL INDUSTRIAL ACQUISITIONS $70,410 ==================== <CAPTION> INDUSTRIAL PROPERTIES ACQUIRED IN MERIDIAN MERGER SIZE MERGER COST LOCATION (SQUARE FEET) DATE (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> East Maricopa Distribution Phoenix, Arizona 14,000 06-01-98 640 East University I & II Phoenix, Arizona 145,000 06-01-98 5,602 7th Street Distribution Phoenix, Arizona 39,000 06-01-98 1,863 55th Street Distribution Phoenix, Arizona 131,000 06-01-98 4,647 Ethan Allen Distribution Los Angeles, California 300,000 06-01-98 12,719 Park Ridge Distribution Fort Lauderdale, Florida 45,000 06-01-98 3,006 West Palm I & II Fort Lauderdale, Florida 26,000 06-01-98 3,177 Auburn Facility Auburn Hills, Michigan 114,000 06-01-98 16,152 Air Park Distribution II Memphis, Tennessee 17,000 06-01-98 329 Delp Distribution I, II and III Memphis, Tennessee 274,000 06-01-98 5,246 Getwell Distribution Memphis, Tennessee 26,000 06-01-98 754 Lamar Distribution Memphis, Tennessee 276,000 06-01-98 6,659 Penney Distribution Memphis, Tennessee 106,000 06-01-98 2,432 Senator Street Distribution II Memphis, Tennessee 105,000 06-01-98 2,177 Waldenbooks Distribution Nashville, Tennessee 564,000 06-01-98 22,145 Ambassador Row Dallas, Texas 317,000 06-01-98 5,781 Carpenter Duplex Dallas, Texas 47,000 06-01-98 1,041 Viscount Row Dallas, Texas 104,000 06-01-98 1,973 ---------------------- TOTAL MERIDIAN INDUSTRIAL $96,343 ====================== </TABLE> 10
11 Industrial development decreased $3,003,000 during the six months ended June 30, 1998. This decrease resulted primarily from the reclassification to industrial properties of Rampart II Distribution Center with a cost of $3,207,000, Chancellor Distribution Center with a cost of $2,002,000, Benjamin Distribution II Center with a cost of $2,417,000 and Palm River II with a cost of $3,144,000. These decreases were offset by the acquisition of land for development of World Houston Six, Seven and Eight for $1,112,000 and improvements and development costs on existing properties of $6,390,000. Office buildings decreased $11,667,000 during the six months ended June 30, 1998 as a result of capital improvements of $345,000 to existing buildings and the reclassification to real estate held for sale of Columbia Place with a cost of $12,012,000. Additionally, apartments decreased $6,587,000 as a result of capital improvements of $105,000 and the reclassification to real estate held for sale of Grande Pointe Apartments with a cost of $6,692,000. Real estate held for sale (excluding accumulated depreciation) increased $13,642,000 as a result of capital improvements of $34,000; the sale of Hampton House Apartments with a cost of $6,667,000; and the reclassifications to real estate held for sale of Grande Pointe with a cost of $6,692,000, 401 Exchange with a cost of $742,000, East Maricopa with a cost of $640,000 and Columbia Place with a cost of $12,012,000. The Company currently has contracts to sell the two apartment complexes previously classified in held for sale properties, Sutton House and Doral Club Apartments, both located in San Antonio, Texas. Accumulated depreciation on real estate properties and real estate held for sale increased $6,484,000 due to depreciation expense recognized for the six months ended June 30, 1998. This increase was offset by the sale of the Hampton House Apartments with accumulated depreciation of $690,000. Mortgage loans receivable decreased $395,000 during the first six months of 1998 as a result of amortization of loan discounts of $283,000 and the recognition of deferred gains of $383,000 on the payoff of the Jacksonville mortgage note receivable. These increases were offset by regularly scheduled principal payments of $287,000 and the repayment of the Jacksonville mortgage note receivable of $774,000. Investments in real estate investment trusts decreased from $16,518,000 at December 31, 1997 to $4,441,000 at June 30, 1998. This decrease was due to the merger of Meridian VIII and the purchase of other real estate investment shares for $88,000. Also, the Company recorded an unrealized gain of $341,000 on another investment in the Company's available for sale securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Mortgage notes payable increased $37,579,000 during the six months ended June 30, 1998, as a result of regularly scheduled principal payments of $1,342,000, the repayment of $1,668,000 on the Metro mortgage note payable and the debt assumptions of $2,614,000 on the acquisition of Estrella, $4,553,000 on the acquisition of World Houston 1&2 and $33,422,000 in the Meridian VIII acquisitions. Terms of these mortgage notes payable are detailed in the following table. <TABLE> <CAPTION> MORTGAGES ASSUMED IN ACQUISITIONS DATE OF INTEREST MATURITY AMOUNT OF ASSUMPTION PROPERTY RATE DATE MORTGAGE OF LOAN (IN THOUSANDS) - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 02/18/98 ESTRELLA 9.250% 01/02/03 $ 2,614 06/18/98 WORLD HOUSTON 1 & 2 7.770% 04/15/07 4,553 --------- $ 7,167 ========= <CAPTION> MORTGAGES ASSUMED IN MERIDIAN MERGER DATE OF ASSUMPTION INTEREST MATURITY AMOUNT OF OF LOAN PROPERTY RATE DATE MORTGAGE (IN THOUSANDS) - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 06/01/98 AUBURN 8.875% 08/01/09 $ 5,529 06/01/98 WEST PALM 8.250% 09/01/00 986 06/01/98 ETHAN ALLEN 8.060% 06/26/07 6,438 06/01/98 55TH STREET, 7TH STREET, & E. UNIV. 8.060% 06/26/07 5,942 06/01/98 LAMAR 8.000% 11/01/98 1,642 06/01/98 WALDENBOOKS 7.830% 09/15/07 12,885 --------- $ 33,422 ========= </TABLE> Notes payable to banks increased from $41,770,000 at December 31, 1997 to $113,945,000 at June 30, 1998, as a result of borrowings of $136,788,000 and payments of $64,613,000. As of June 30, 1998, the acquisition line had a balance of $83,117,000 and the working capital line had a balance of $30,828,000. These lines of credit are described in detail under Liquidity and Capital Resources. 11
12 Undistributed earnings decreased from $13,633,000 at December 31, 1997 to $12,974,000 at June 30, 1998, as a result of dividends on common stock of $11,076,000 exceeding net income for financial reporting purposes of $10,546,000. Dividends of $129,000 were declared on preferred stock in June 1998 but were not paid. In June 1998, EastGroup sold 1,725,000 shares of 9.00% Series A Cumulative Redeemable Preferred Stock at $25.00 per share in a public offering. Net proceeds of approximately $41,418,000 were used to repay advances outstanding on the Company's line of credit. RESULTS OF OPERATIONS (Comments are for the three months and six months ended June 30,1998, compared to the three months and six months ended June 30, 1997.) Net income available to common stockholders for the three months and six months ended June 30, 1998 was $5,419,000 ($.33 per basic and diluted share) and $10,417,000 ($.64 per basic share and $.63 per diluted share), compared to net income for the three months and six months ended June 30, 1997 of $3,548,000 ($.28 per basic and diluted share) and $6,635,000 ($.54 per basic and diluted share). Income before gains on investments was $4,531,000 and $9,456,000 for the three months and six months ended June 30, 1998, compared to $3,553,000 and $6,528,000 for the three months and six months ended June 30, 1997. Gains (losses) on investments were $1,017,000 and $1,090,000 for the three months and six months ended June 30, 1998, compared to ($5,000) and $107,000 for the three months and six months ended June 30, 1997. 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 $5,226,000 or 64% for the three months ended June 30, 1998, compared to the three months ended June 30, 1997. For the six months ended June 30, 1998, PNOI increased by $8,700,000 or 54% compared to the six months ended June 30, 1997. Property net operating income (loss) and percentage leased by property type were as follows: <TABLE> <CAPTION> PROPERTY NET OPERATING INCOME (PNOI) THREE MONTHS ENDED SIX MONTHS ENDED PERCENTAGE JUNE 30, JUNE 30, LEASED 1998 1997 1998 1997 6-30-98 ---- ---- ---- ---- ------- (In thousands) --------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Industrial $11,141 5,542 20,231 10,816 97% Office Buildings 1,161 1,541 2,391 3,004 100% Apartments 1,054 858 2,077 1,796 95% Other (3) 186 (7) 376 --------------------------------------------------------------- TOTAL PNOI $13,353 8,127 24,692 15,992 =============================================================== </TABLE> PNOI from industrial properties increased $5,599,000 and $9,415,000 for the three months and six months ended June 30, 1998, compared to June 30, 1997. Industrial properties held throughout the three months and six months ended June 30, 1998 and 1997, showed an increase in PNOI of 5.7% for the three months ended June 30, 1998 and 6.1% for the six months ended June 30, 1998. The increase in PNOI from industrial properties resulted primarily from the 1997 and 1998 acquisitions and from an increase in same store property operations. PNOI from the Company's office buildings decreased $380,000 and $613,000 for the three months and six months ended June 30, 1998, compared to June 30, 1997. Office buildings held throughout the three months and six months ended June 30, 1998 showed a decrease of .8% and an increase of 6.9%, respectively. 12
13 These decreases are primarily the result of the sale of the Santa Fe Office Building in July 1997. PNOI from the Company's apartment properties increased $196,000 and $281,000 for the three months and six months ended June 30, 1998, compared to June 30, 1997. These increases are primarily attributable to improved operating efficiencies at the complexes and to near capacity occupancy levels. Interest income on mortgage loans decreased $76,000 and $138,000 for the three months and six months ended June 30, 1998 compared to 1997. The following is a breakdown of interest income for the three months and six months ended June 30, 1998 compared to 1997: <TABLE> <CAPTION> INTEREST INCOME FROM MORTGAGE LOANS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ---- ---- ---- ---- (In thousands) ---------------------------------------------- <S> <C> <C> <C> <C> Land $223 228 444 453 Apartments 138 133 275 264 Motels 31 78 91 171 Other 16 45 56 116 ---------------------------------------------- TOTAL INTEREST INCOME $408 484 866 1,004 ============================================== </TABLE> Interest income from motel mortgage loans decreased as a result of the repayment of the Plus Park, Bell Road and Jacksonville mortgage loans. Due to uncertainty of collection, 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 on other mortgage loans decreased primarily as a result of the repayment of the Citrus Center and Bay Green mortgage loans. Total interest expense increased $2,074,000 and $2,577,000 for the three months and six months ended June 30, 1998 compared to 1997. Average bank borrowings were $91,136,000 and $67,298,000 for the three months and six months ended June 30, 1998, compared to $4,165,000 and $6,517,000 for the same period of 1997. Average bank borrowings increased primarily as a result of the Meridian acquisition and the acquisition of other industrial properties. Bank interest rates at June 30, 1998 and 1997 were 7.06% (LIBOR plus 1.40%) and 7.44% (LIBOR plus 1.75%), respectively. Interest costs incurred during the period of construction of real estate properties is capitalized. The interest costs capitalized on real estate properties for the three and six months ended June 30, 1998 were $140,000 and $288,000 compared to $63,000 and $102,000 for the three and six months ended June 30, 1997. Interest expense on real estate properties increased primarily as a result of mortgages assumed on Southbay, Estrella, World Houston 1&2 and mortgages assumed in the Meridian VIII merger. Depreciation and amortization increased $1,690,000 and $2,502,000 for the three months and six months ended June 30, 1998 compared to 1997. This increase was primarily due to the industrial properties acquired in both 1997 and 1998, offset by the sale of the Hampton House Apartments in June 1998. The increase in general and administrative expenses of $200,000 and $375,000 for the three months and six months ended June 30, 1998 is primarily due to an increase in personnel costs due to growth of the Company. In the six months ended June 30, 1998 and 1997, the Company recognized deferred gains of $456,000 and $107,000 from previous sales. Also, in June 1998, the Company recognized a gain for financial reporting purposes of $634,000 on the sale of the Hampton House Apartments. 13
14 NAREIT has recommended supplemental disclosures concerning capital expenditures and leasing costs. The Company expenses apartment unit turnover costs such as carpet, painting and small appliances. Capital expenditures for the six months ended June 30, 1998 by category and for 1997 are as follows: <TABLE> <CAPTION> 1998 1997 ----------------------------------------------------------------------------- Industrial Industrial Other Total Development Total ---------- ----- ----- ----------- ----- (In thousands) ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Upgrade on Acquisitions $1,049 - 1,049 - $ 364 Major Renovation 300 - 300 - 69 New Development - - - 5,780 5,123 Tenant Improvements: New Tenants 842 240 1,082 - 597 New Tenants (first generation) 30 - 30 1,722 210 Renewal Tenants 476 100 576 - 254 Other 72 145 217 - 597 ------------------------------------------------------------------------------ TOTAL CAPITAL EXPENDITURES $2,769 485 3,254 7,502 $7,214 ============================================================================== </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 six months ended June 30, 1998 by category and for 1997 is as follows: <TABLE> <CAPTION> ------------------------------------------------------------------------------ 1998 1997 ------------------------------------------------------------------------------ Industrial Industrial Other Total Development Total ---------- ----- ----- ----------- ----- (In thousands) ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Capitalized Leasing Costs: New Tenants $476 112 588 - $385 New Tenants (first generation) 248 - 248 63 86 Renewal Tenants 595 - 595 - 255 ------------------------------------------------------------------------------ TOTAL CAPITALIZED LEASING COSTS $1,319 112 1,431 63 $726 ============================================================================== AMORTIZATION OF LEASING COSTS: $481 $324 ============================================================================== </TABLE> LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $15,128,000 for the six months ended June 30, 1998. The Company distributed $11,076,000 in common stock dividends. Other sources of cash were collections on mortgage loan receivables, mortgage borrowings, bank borrowings and proceeds from the preferred stock offering. Primary uses of cash were for capital improvements at the various properties, construction and development of properties, purchases of real estate investments, bank debt payments, mortgage note payments and purchases of real estate investment trust shares. Total debt at June 30, 1998 is as follows: <TABLE> <CAPTION> AS OF JUNE 30, 1998 1997 ---- ---- (In thousands) ------------------------- <S> <C> <C> Mortgage Notes Payable - Fixed Rate $142,959 103,992 Bank Notes Payable - Floating Rate 113,945 18,449 ------------------------- TOTAL DEBT $256,904 122,441 ========================= </TABLE> 14
15 The Company currently has an acquisition credit line of $100,000,000 available for the acquisition of properties and a $50,000,000 working capital line. The facilities bear interest at LIBOR plus 1.40%. As of June 30, 1998, the acquisition line had a balance of $83,117,000 and the working capital line had a balance of $30,828,000. In June 1998, EastGroup sold 1,725,000 shares of 9.00% Series A Cumulative Redeemable Preferred Stock at $25.00 per share in a public offering. Net proceeds of approximately $41,418,000 were used to repay advances outstanding on the Company's line of credit. Budgeted capital expenditures for the year ending December 31, 1998 are as follows: <TABLE> <CAPTION> Industrial Capital Improvements Development ------------------------------------------------------ Industrial Office Total Total ---------- ------ ----- ----- (In thousands) ------------------------------------------------------ <S> <C> <C> <C> <C> Upgrades on Acquisitions $1,900 - 1,900 - Major Renovation 467 - 467 - New Development 1,372 - 1,372 17,044 Tenant Improvements: New Tenants 2,477 390 2,867 - New Tenants (first generation) 755 - 755 3,091 Renewal Tenants 727 137 864 - Other 1,213 206 1,419 - ------------------------------------------------------ TOTAL BUDGETED $8,911 733 9,644 20,135 ====================================================== </TABLE> The Company anticipates that its current cash balance, operating cash flows and borrowings (including borrowings under the working capital line of credit) will be adequate for the Company's (i) operating and administrative expenses, (ii) debt service obligations, (iii) distributions to stockholders, (iv) capital improvements, and (v) normal repair and maintenance expenses at its properties. EastGroup is exploring various financing alternatives to fund the acquisitions. These include additional bank debt, fixed rate mortgage financing and the sale of equity securities. Since June 30, 1998, the Company purchased two parcels of land for future development for a purchase price of $2,008,000. Also, as of August 14, 1998, the Company had entered into contracts to purchase one industrial property for $3,875,000 and seven parcels of land, for a purchase price of approximately $8,329,000, as detailed below, for future development. (3) SUBSEQUENT EVENTS Since June 30, 1998, the Company purchased two parcels of land for future development for a purchase price of $2,008,000. Also, as of August 14, 1998, the Company had entered into contracts to purchase three industrial properties for $15,585,000 and seven parcels of land, consisting of approximately 69 acres, for a purchase price of approximately $8,329,000 for future development. The Company had previously reclassified the Sutton House Apartments with a cost of $8,741,000 and the Doral Club Apartments with a cost of $7,219,000, both in San Antonio, Texas to "held for sale" properties. The Company currently has contracts to sell these apartment complexes for a total of approximately $18,625,000. 15
16 On August 11, 1998, the Company sold East Maricopa Distribution Center in Phoenix, Arizona for a net sales price of approximately $639,000. No significant gain (loss) is anticipated on this transaction. 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. Year 2000 Issue The Company has been addressing the potential computer program problems resulting from the arrival of Year 2000 (Y2K). The Company has established a Y2K compliance review process to access the impact on the Company's internal financial information systems and property mechanical operations systems, as well as the potential impact from Y2K problems of significant tenants, vendors and suppliers of financial and other services (collectively "independent third parties"). The Company has identified required modifications to its internal corporate computer operating system and certain software modifications at its apartment properties. The Company plans to complete these identified modifications in 1998 at an immaterial cost. The Company's compliance plan is to continue the process of conducting inquiries of its independent third parties in order to determine if these third parties have Y2K problems and what contingency plans they have developed to deal with identified exposure. Based on the results of these inquiries, the Company will formulate appropriate contingency plans to take necessary and feasible precautions against problems not within its control. The Company is also continuing the process of reviewing its own internal systems to ensure that they are Y2K compliant and to make necessary and timely corrections of identified Y2K problems under its direct control. This overall process will be ongoing for the remainder of 1998 and will likely extend into 1999 depending upon the timeliness of activities of the Company's third parties, whom it does not control. 16
17 EASTGROUP PROPERTIES, INC. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 4, 1998, the Registrant held its Annual Meeting of Shareholders. At the Annual Meeting, Alexander G. Anagnos, H.C. Bailey, Jr., Fredric H. Gould, David H. Hoster II, David M. Osnos, John N. Palmer and Leland R. Speed were elected directors of the Registrant, each to serve until the 1999 Annual Meeting. The following is a summary of the voting for directors: <TABLE> <CAPTION> VOTE NOMINEE VOTE FOR WITHHELD ------- -------- -------- <S> <C> <C> Alexander G. Anagnos 14,446,565 148,402 H.C. Bailey, Jr. 14,460,658 134,309 Fredric H. Gould 14,460,549 134,419 David H. Hoster II 14,464,790 130,177 David M. Osnos 14,459,367 135,600 John N. Palmer 14,459,554 134,413 Leland R. Speed 14,464,318 130,864 </TABLE> 17
18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 4 - Articles Supplementary of the Company relating to the 9.00% Series A Cumulative Redeemable Preferred Stock (incorporated by reference to Registrants' Form 8-K filed June 19, 1998). (b) Exhibit 10 - Material Contracts. Employment Agreement Between Anthony J. Bruno and EastGroup Property Services, Inc. a wholly-owned subsidiary of EastGroup Properties, Inc., dated as of March 1, 1998. (c) Exhibit 27 - 1998 Financial Data Schedule attached hereto. (d) Exhibit 27 - Restated 1997 Financial Data Schedule attached hereto. (e) Reports on Form 8-K. (1) Filed June 2, 1998, reporting purchase of four industrial distribution centers totaling 444,790 square feet located in Phoenix, Arizona; Memphis, Tennessee; and Dallas, Texas for total acquisition costs of $12,187,000, including closing costs. This 8K also reported contracts to purchase five industrial distribution centers totaling 1,098,753 square feet located in Tucson, Arizona; Los Angeles, California; Fort Lauderdale, Florida; and Houston, Texas for anticipated acquisition costs of $43,472,000. In addition, this 8-K reported the June 1, 1998 completed acquisition of Meridian Point Realty Trust VIII Co. (2) Filed June 19, 1998, reporting EastGroup Properties, Inc.'s offering of 1,500,000 shares of 9.00% Series A Cumulative Redeemable Preferred Stock at $25.00 per share in a public offering underwritten by Paine Webber, Inc., A.G. Edwards & Sons, Inc., J.C. Bradford & Co. and Raymond James & Associates, Inc. 18
19 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: August 14, 1998 EASTGROUP PROPERTIES, INC. /s/ DIANE W. HAYMAN Diane W. Hayman, CPA Vice President and Controller /s/ N. KEITH MCKEY N. Keith McKey, CPA Executive Vice President, Chief Financial Officer and Secretary 19