EASTGROUP PROPERTIES INC - Quarter Report: 2009 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE QUARTER ENDED SEPTEMBER 30,
2009 COMMISSION
FILE NUMBER 1-07094
![EGP Logo](https://www.sec.gov/Archives/edgar/data/0000049600/000004960009000012/logonew.jpg)
EASTGROUP
PROPERTIES, INC.
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
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13-2711135
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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190
EAST CAPITOL STREET
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SUITE
400
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JACKSON,
MISSISSIPPI
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39201
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(Address
of principal executive offices)
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(Zip
code)
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Registrant’s
telephone number: (601) 354-3555
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Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES (x) NO ( )
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). YES ( ) NO (
)*
(*Registrant
is not subject to the requirements of Rule 405 of Regulation S-T at this
time.)
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
Accelerated Filer (x) Accelerated Filer (
) Non-accelerated Filer (
) Smaller Reporting Company ( )
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ( ) NO (x)
The
number of shares of common stock, $.0001 par value, outstanding as of October
30, 2009 was 26,130,840.
1
FORM
10-Q
TABLE
OF CONTENTS
FOR
THE QUARTER ENDED SEPTEMBER 30, 2009
Page
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements
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3
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4
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5
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6
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7
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Item
2.
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15
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Item
3.
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26
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Item
4.
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27
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PART
II.
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OTHER
INFORMATION
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Item
1A.
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28
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Item
6.
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28
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SIGNATURES
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29
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2
CONSOLIDATED
BALANCE SHEETS
(IN
THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
September
30, 2009
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December
31, 2008
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(Unaudited)
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ASSETS
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Real estate
properties
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$ | 1,361,357 | 1,252,282 | |||||
Development
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95,244 | 150,354 | ||||||
1,456,601 | 1,402,636 | |||||||
Less
accumulated depreciation
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(343,718 | ) | (310,351 | ) | ||||
1,112,883 | 1,092,285 | |||||||
Unconsolidated
investment
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2,720 | 2,666 | ||||||
Cash
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124 | 293 | ||||||
Other
assets
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63,556 | 60,961 | ||||||
TOTAL
ASSETS
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$ | 1,179,283 | 1,156,205 | |||||
LIABILITIES
AND EQUITY
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||||||||
LIABILITIES
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Mortgage notes
payable
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$ | 607,608 | 585,806 | |||||
Notes payable to
banks
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100,464 | 109,886 | ||||||
Accounts
payable and accrued expenses
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29,506 | 32,838 | ||||||
Other
liabilities
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14,315 | 14,299 | ||||||
Total
Liabilities
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751,893 | 742,829 | ||||||
EQUITY
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Stockholders’
Equity:
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Common
shares; $.0001 par value; 70,000,000 shares authorized;
26,110,174
shares issued and outstanding at September 30, 2009 and
25,070,401
at December 31, 2008
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3 | 3 | ||||||
Excess
shares; $.0001 par value; 30,000,000 shares authorized;
no
shares issued
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– | – | ||||||
Additional paid-in
capital on common shares
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561,391 | 528,452 | ||||||
Distributions in
excess of earnings
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(136,188 | ) | (117,093 | ) | ||||
Accumulated other
comprehensive loss
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(386 | ) | (522 | ) | ||||
Total
Stockholders’ Equity
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424,820 | 410,840 | ||||||
Noncontrolling
interest in joint ventures
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2,570 | 2,536 | ||||||
Total
Equity
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427,390 | 413,376 | ||||||
TOTAL
LIABILITIES AND EQUITY
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$ | 1,179,283 | 1,156,205 |
See
accompanying Notes to Consolidated Financial Statements
(unaudited).
3
CONSOLIDATED
STATEMENTS OF INCOME
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three
Months Ended
September
30,
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Nine
Months Ended
September
30,
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2009
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2008
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2009
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2008
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REVENUES
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Income from real
estate operations
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$ | 43,164 | 42,904 | 129,518 | 124,415 | |||||||||||
Other
income
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22 | 16 | 61 | 232 | ||||||||||||
43,186 | 42,920 | 129,579 | 124,647 | |||||||||||||
EXPENSES
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Expenses from real
estate operations
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12,735 | 12,193 | 37,996 | 34,559 | ||||||||||||
Depreciation and
amortization
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13,587 | 13,436 | 39,941 | 38,428 | ||||||||||||
General and
administrative
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2,246 | 2,250 | 6,973 | 6,349 | ||||||||||||
28,568 | 27,879 | 84,910 | 79,336 | |||||||||||||
OPERATING INCOME
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14,618 | 15,041 | 44,669 | 45,311 | ||||||||||||
OTHER
INCOME (EXPENSE)
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Equity in earnings of
unconsolidated investment
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82 | 80 | 245 | 239 | ||||||||||||
Gain on sales of
non-operating real estate
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8 | 301 | 23 | 313 | ||||||||||||
Gain on sales of
securities
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– | – | – | 435 | ||||||||||||
Interest
income
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73 | 125 | 229 | 189 | ||||||||||||
Interest
expense
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(8,537 | ) | (7,596 | ) | (23,855 | ) | (22,478 | ) | ||||||||
INCOME FROM CONTINUING
OPERATIONS
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6,244 | 7,951 | 21,311 | 24,009 | ||||||||||||
DISCONTINUED
OPERATIONS
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Income
from real estate operations
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– | 7 | – | 130 | ||||||||||||
Gain
on sales of real estate investments
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– | 83 | – | 2,032 | ||||||||||||
INCOME FROM DISCONTINUED
OPERATIONS
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– | 90 | – | 2,162 | ||||||||||||
NET INCOME
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6,244 | 8,041 | 21,311 | 26,171 | ||||||||||||
Net income
attributable to noncontrolling interest in joint
ventures
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(97 | ) | (169 | ) | (330 | ) | (462 | ) | ||||||||
NET
INCOME ATTRIBUTABLE TO EASTGROUP
PROPERTIES,
INC.
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6,147 | 7,872 | 20,981 | 25,709 | ||||||||||||
Dividends
on Series D preferred shares
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– | 14 | – | 1,326 | ||||||||||||
Costs on redemption
of Series D preferred shares
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– | 682 | – | 682 | ||||||||||||
NET
INCOME AVAILABLE TO EASTGROUP PROPERTIES, INC.
COMMON
STOCKHOLDERS
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$ | 6,147 | 7,176 | 20,981 | 23,701 | |||||||||||
BASIC
PER COMMON SHARE DATA FOR INCOME
ATTRIBUTABLE
TO EASTGROUP PROPERTIES, INC.
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Income from
continuing operations
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$ | .24 | .29 | .83 | .88 | |||||||||||
Income from
discontinued operations
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.00 | .00 | .00 | .09 | ||||||||||||
Net income available
to common stockholders
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$ | .24 | .29 | .83 | .97 | |||||||||||
Weighted average
shares outstanding
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25,811 | 24,908 | 25,381 | 24,362 | ||||||||||||
DILUTED
PER COMMON SHARE DATA FOR INCOME
ATTRIBUTABLE
TO EASTGROUP PROPERTIES, INC.
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Income from
continuing operations
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$ | .24 | .29 | .82 | .88 | |||||||||||
Income from
discontinued operations
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.00 | .00 | .00 | .09 | ||||||||||||
Net income available
to common stockholders
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$ | .24 | .29 | .82 | .97 | |||||||||||
Weighted average
shares outstanding
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25,916 | 25,069 | 25,473 | 24,517 | ||||||||||||
AMOUNTS
ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.
COMMON
STOCKHOLDERS
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||||||||||||||||
Income from
continuing operations
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$ | 6,147 | 7,086 | 20,981 | 21,539 | |||||||||||
Income from
discontinued operations
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– | 90 | – | 2,162 | ||||||||||||
Net income available
to common stockholders
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$ | 6,147 | 7,176 | 20,981 | 23,701 | |||||||||||
Dividends
declared per common share
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$ | .52 | .52 | 1.56 | 1.56 | |||||||||||
See
accompanying Notes to Consolidated Financial Statements
(unaudited).
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4
CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
(IN
THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
EastGroup
Properties, Inc.
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||||||||||||||||||||||||
Accumulated
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||||||||||||||||||||||||
Additional
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Distributions
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Other
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Noncontrolling
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|||||||||||||||||||||
Common
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Paid-In
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In
Excess
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Comprehensive
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Interest
in
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Stock
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Capital
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Of
Earnings
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Loss
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Joint
Ventures
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Total
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BALANCE,
DECEMBER 31, 2008
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$ | 3 | 528,452 | (117,093 | ) | (522 | ) | 2,536 | 413,376 | |||||||||||||||
Comprehensive
income
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Net
income
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– | – | 20,981 | – | 330 | 21,311 | ||||||||||||||||||
Net
unrealized change in fair value of interest rate swap
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– | – | – | 136 | – | 136 | ||||||||||||||||||
Total
comprehensive income
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21,447 | |||||||||||||||||||||||
Common
dividends declared – $1.56 per share
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– | – | (40,076 | ) | – | – | (40,076 | ) | ||||||||||||||||
Stock-based
compensation, net of forfeitures
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– | 1,569 | – | – | – | 1,569 | ||||||||||||||||||
Issuance
of 882,980 shares of common stock,
common stock
offering, net of expenses
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– | 30,165 | – | – | – | 30,165 | ||||||||||||||||||
Issuance
of 55,436 shares of common stock,
options
exercised
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– | 1,135 | – | – | – | 1,135 | ||||||||||||||||||
Issuance
of 6,146 shares of common stock,
dividend
reinvestment plan
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– | 199 | – | – | – | 199 | ||||||||||||||||||
Withheld
3,628 shares of common stock to satisfy
tax withholding
obligations in connection with
the vesting of
restricted stock
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– | (129 | ) | – | – | – | (129 | ) | ||||||||||||||||
Distributions
to noncontrolling interest
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– | – | – | – | (296 | ) | (296 | ) | ||||||||||||||||
BALANCE,
SEPTEMBER 30, 2009
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$ | 3 | 561,391 | (136,188 | ) | (386 | ) | 2,570 | 427,390 |
See
accompanying Notes to Consolidated Financial Statements
(unaudited).
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5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
(UNAUDITED)
Nine
Months Ended
September
30,
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||||||||
2009
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2008
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|||||||
OPERATING
ACTIVITIES
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Net
income attributable to EastGroup Properties,
Inc.
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$ | 20,981 | 25,709 | |||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization from continuing
operations
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39,941 | 38,428 | ||||||
Depreciation
and amortization from discontinued
operations
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– | 71 | ||||||
Noncontrolling
interest depreciation and
amortization
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(153 | ) | (151 | ) | ||||
Amortization
of mortgage loan
premiums
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(91 | ) | (90 | ) | ||||
Gain
on sales of land and real estate
investments
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(23 | ) | (2,345 | ) | ||||
Gain
on sales of
securities
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– | (435 | ) | |||||
Amortization
of discount on mortgage loan
receivable
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(10 | ) | (52 | ) | ||||
Stock-based
compensation
expense
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1,344 | 1,668 | ||||||
Equity
in earnings of unconsolidated investment, net of
distributions
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(55 | ) | (39 | ) | ||||
Changes
in operating assets and liabilities:
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||||||||
Accrued
income and other
assets
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4,164 | 2,423 | ||||||
Accounts
payable, accrued expenses and prepaid
rent
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2,200 | 4,080 | ||||||
NET
CASH PROVIDED BY OPERATING
ACTIVITIES
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68,298 | 69,267 | ||||||
INVESTING
ACTIVITIES
|
||||||||
Real
estate
development
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(26,320 | ) | (58,357 | ) | ||||
Purchases
of real
estate
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(17,725 | ) | (46,282 | ) | ||||
Real
estate
improvements
|
(11,688 | ) | (10,705 | ) | ||||
Proceeds
from sales of real estate
investments
|
– | 11,720 | ||||||
Advances
on mortgage loans
receivable
|
– | (4,994 | ) | |||||
Repayments
on mortgage loans
receivable
|
23 | 863 | ||||||
Purchases
of
securities
|
– | (7,534 | ) | |||||
Proceeds
from sales of
securities
|
– | 7,969 | ||||||
Changes
in accrued development
costs
|
(5,022 | ) | (5,592 | ) | ||||
Changes
in other assets and other
liabilities
|
(6,352 | ) | (6,399 | ) | ||||
NET
CASH USED IN INVESTING
ACTIVITIES
|
(67,084 | ) | (119,311 | ) | ||||
FINANCING
ACTIVITIES
|
||||||||
Proceeds
from bank
borrowings
|
175,313 | 251,197 | ||||||
Repayments
on bank
borrowings
|
(184,735 | ) | (249,114 | ) | ||||
Proceeds
from mortgage notes
payable
|
76,365 | 78,000 | ||||||
Principal
payments on mortgage notes
payable
|
(54,472 | ) | (12,138 | ) | ||||
Debt
issuance
costs
|
(427 | ) | (1,686 | ) | ||||
Distributions
paid to
stockholders
|
(39,936 | ) | (40,319 | ) | ||||
Redemption
of Series D preferred
shares
|
– | (33,008 | ) | |||||
Proceeds
from common stock
offerings
|
25,623 | 57,198 | ||||||
Proceeds
from exercise of stock
options
|
1,135 | 526 | ||||||
Proceeds
from dividend reinvestment
plan
|
199 | 212 | ||||||
Other
|
(448 | ) | (283 | ) | ||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(1,383 | ) | 50,585 | |||||
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(169 | ) | 541 | |||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
293 | 724 | ||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 124 | 1,265 | |||||
SUPPLEMENTAL
CASH FLOW INFORMATION
|
||||||||
Cash
paid for interest, net of amount capitalized of $4,714 and
$5,044
for
2009 and 2008,
respectively
|
$ | 22,842 | 22,122 | |||||
Fair
value of common stock awards issued to employees and directors, net of
forfeitures
|
2,444 | 1,248 | ||||||
See
accompanying Notes to Consolidated Financial Statements
(unaudited).
|
6
(1) BASIS
OF PRESENTATION
The accompanying unaudited financial
statements of EastGroup Properties, Inc. (“EastGroup” or “the Company”) have
been prepared in accordance with U.S. generally accepted accounting principles
(GAAP) 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 GAAP 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 financial statements contained in the 2008 annual
report on Form 10-K and the notes thereto.
Certain reclassifications have been
made in the 2008 consolidated financial statements to conform to the 2009
presentation.
(2) PRINCIPLES
OF CONSOLIDATION
The consolidated financial statements
include the accounts of EastGroup Properties, Inc., its wholly-owned
subsidiaries and its investment in any joint ventures in which the Company has a
controlling interest. At December 31, 2008 and September 30, 2009,
the Company had a controlling interest in two joint ventures: the 80% owned
University Business Center and the 80% owned Castilian Research
Center. The Company records 100% of the joint ventures’ assets,
liabilities, revenues and expenses with noncontrolling interests provided for in
accordance with the joint venture agreements. The equity method of
accounting is used for the Company’s 50% undivided tenant-in-common interest in
Industry Distribution Center II. All significant intercompany
transactions and accounts have been eliminated in consolidation.
(3) USE
OF ESTIMATES
The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
revenues and expenses during the reporting period, and to disclose material
contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those
estimates.
(4) REAL
ESTATE PROPERTIES
EastGroup has one reportable segment –
industrial properties. These properties are concentrated in major
Sunbelt markets of the United States, primarily in the states of Florida, Texas,
Arizona and California, have similar economic characteristics and also meet the
other criteria that permit the properties to be aggregated into one reportable
segment.
The Company reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows (including estimated future
expenditures necessary to substantially complete the asset) expected to be
generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. As of September 30, 2009 and December 31, 2008, the Company
determined that no impairment charges on the Company’s real estate properties
were necessary.
Depreciation of buildings and other
improvements, including personal property, is computed using the straight-line
method over estimated useful lives of generally 40 years for buildings and 3 to
15 years for improvements and personal property. Building
improvements are capitalized, while maintenance and repair expenses are charged
to expense as incurred. Significant renovations and improvements that
improve or extend the useful life of the assets are
capitalized. Depreciation expense for continuing and discontinued
operations was $11,447,000 and $33,367,000 for the three and nine months ended
September 30, 2009, respectively, and $10,953,000 and $31,473,000 for the same
periods in 2008.
The Company’s real estate properties at
September 30, 2009 and December 31, 2008 were as follows:
September
30, 2009
|
December
31, 2008
|
|||||||
(In
thousands)
|
||||||||
Real
estate properties:
|
||||||||
Land
|
$ | 207,787 | 187,617 | |||||
Buildings and
building
improvements
|
939,503 | 867,506 | ||||||
Tenant and
other
improvements
|
214,067 | 197,159 | ||||||
Development
|
95,244 | 150,354 | ||||||
1,456,601 | 1,402,636 | |||||||
Less
accumulated
depreciation
|
(343,718 | ) | (310,351 | ) | ||||
$ | 1,112,883 | 1,092,285 |
7
(5) DEVELOPMENT
During the period in which a
property is under development, costs associated with development (i.e., land,
construction costs, interest expense, property taxes and other direct and
indirect costs associated with development) are aggregated into the total
capitalized costs of the property. Included in these costs are
management’s estimates for the portions of internal costs (primarily personnel
costs) that are deemed directly or indirectly related to such development
activities. As the property becomes occupied, depreciation commences on
the occupied portion of the building, and costs are capitalized only for the
portion of the building that remains vacant. When the property becomes 80%
occupied or one year after completion of the shell construction (whichever comes
first), capitalization of development costs ceases. The properties are
then transferred to real estate properties, and depreciation commences on the
entire property (excluding the land).
(6) BUSINESS
COMBINATIONS AND ACQUIRED INTANGIBLES
Upon acquisition of real estate
properties, the Company applies the principles of Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations, which
requires that acquisition-related costs be recognized as expenses in the periods
in which the costs are incurred and the services are received. The
Codification also provides guidance on how to properly determine the allocation
of the purchase price among the individual components of both the tangible and
intangible assets based on their respective fair values. Goodwill is
recorded when the purchase price exceeds the fair value of the assets and
liabilities acquired. The Company determines whether any financing
assumed is above or below market based upon comparison to similar financing
terms for similar properties. The cost of the properties acquired may
be adjusted based on indebtedness assumed from the seller that is determined to
be above or below market rates. Factors considered by management in
allocating the cost of the properties acquired include an estimate of carrying
costs during the expected lease-up periods considering current market conditions
and costs to execute similar leases. The allocation to tangible
assets (land, building and improvements) is based upon management’s
determination of the value of the property as if it were vacant using discounted
cash flow models.
The purchase price is also allocated
among the following categories of intangible assets: the above or
below market component of in-place leases, the value of in-place leases,
and the value of customer relationships. The value allocable to the
above or below market component of an acquired in-place lease is determined
based upon the present value (using a discount rate which reflects the risks
associated with the acquired leases) of the difference between (i) the
contractual amounts to be paid pursuant to the lease over its remaining term,
and (ii) management’s estimate of the amounts that would be paid using fair
market rates over the remaining term of the lease. The amounts
allocated to above and below market leases are included in Other Assets and Other Liabilities,
respectively, on the Consolidated Balance Sheets and are amortized to rental
income over the remaining terms of the respective leases. The total
amount of intangible assets is further allocated to in-place lease values and
customer relationship values based upon management’s assessment of their
respective values. These intangible assets are included in Other Assets on the
Consolidated Balance Sheets and are amortized over the remaining term of the
existing lease, or the anticipated life of the customer relationship, as
applicable. Amortization expense for in-place lease intangibles was
$574,000 and $1,830,000 for the three and nine months ended September 30, 2009,
respectively, and $927,000 and $2,630,000 for the same periods in
2008. Amortization of above and below market leases was immaterial
for all periods presented.
During the second quarter of 2009, the
Company acquired one operating property, Arville Distribution Center in Las
Vegas. During the third quarter, EastGroup acquired three operating
properties, Interstate Distribution Center V, VI, and VII in Dallas, in a single
transaction. The Company purchased these properties for a total cost
of $17,725,000, of which $15,957,000 was allocated to real estate
properties. The Company allocated $6,757,000 of the total purchase
price to land using third party land valuations for the Las Vegas and Dallas
markets. The market values used are considered to be Level 3 inputs
as defined by ASC 820, Fair
Value Measurements and Disclosures (see Note 12 for additional
information on ASC 820). Intangibles associated with the purchase of
real estate were allocated as follows: $1,207,000 to in-place lease
intangibles, $568,000 to above market leases (both included in Other Assets on the
Consolidated Balance Sheets) and $7,000 to below market leases (included in
Other Liabilities on
the Consolidated Balance Sheets). These costs are amortized over the
remaining lives of the associated leases in place at the time of
acquisition. During the first nine months of 2009, the Company
expensed acquisition-related costs of $41,000 in connection with the Arville
Distribution Center acquisition and $74,000 in connection with the Interstate
Distribution Center V, VI, and VII acquisition. These costs are
included in General and
Administrative Expenses on the Consolidated
Statements of Income.
The Company periodically reviews the
recoverability of goodwill (at least annually) and the recoverability of other
intangibles (on a quarterly basis) for possible impairment. In
management’s opinion, no material impairment of goodwill and other intangibles
existed at September 30, 2009 and December 31, 2008.
8
(7) REAL
ESTATE HELD FOR SALE/DISCONTINUED OPERATIONS
The Company considers a real estate
property to be held for sale when it meets the criteria established under ASC
360, Property, Plant, and
Equipment, including when it is probable that the property will be sold
within a year. A key indicator of probability of sale is whether the
buyer has a significant amount of earnest money at risk. Real estate
properties that are held for sale are reported at the lower of the carrying
amount or fair value less estimated costs to sell and are not depreciated while
they are held for sale. In accordance with the guidelines established
under the Codification, the results of
operations for the properties sold or held for sale during the reported periods
are shown under Discontinued
Operations on the Consolidated Statements of Income. Interest
expense is not generally allocated to the properties that are held for sale or
whose operations are included under Discontinued Operations
unless the mortgage is required to be paid in full upon the sale of the
property.
The Company sold no real estate
properties during the first nine months of 2009 and had no real estate
properties that were considered to be held for sale at September 30,
2009.
During the nine months ended September
30, 2008, EastGroup received a condemnation award from the State of Texas for
its North Stemmons I property in Dallas. The Company recognized a
gain of $1,949,000 as a result of this transaction. In addition, the
Company sold one operating property, Delp Distribution Center III in Memphis,
and recognized a gain of $83,000.
(8) OTHER
ASSETS
A summary of the Company’s Other Assets
follows:
September
30, 2009
|
December
31, 2008
|
|||||||
(In
thousands)
|
||||||||
Leasing costs (principally
commissions), net of accumulated amortization
|
$ | 21,641 | 20,866 | |||||
Straight-line
rent receivable, net of allowance for doubtful accounts
|
15,705 | 14,914 | ||||||
Accounts
receivable, net of allowance for doubtful accounts
|
2,555 | 4,094 | ||||||
Acquired
in-place lease intangibles, net of accumulated amortization
of
$5,382
and $5,626 for 2009 and 2008, respectively
|
3,747 | 4,369 | ||||||
Mortgage
loans receivable, net of discount of $71 and $81 for 2009 and
2008,
respectively
|
4,159 | 4,174 | ||||||
Loan
costs, net of accumulated
amortization
|
3,898 | 4,246 | ||||||
Goodwill
|
990 | 990 | ||||||
Prepaid expenses and other
assets
|
10,861 | 7,308 | ||||||
$ | 63,556 | 60,961 |
(9) ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
A summary of the Company’s Accounts Payable and Accrued
Expenses follows:
September
30, 2009
|
December
31, 2008
|
|||||||
(In
thousands)
|
||||||||
Property taxes
payable
|
$ | 18,052 | 11,136 | |||||
Development costs
payable
|
2,105 | 7,127 | ||||||
Interest
payable
|
2,783 | 2,453 | ||||||
Dividends
payable
|
1,398 | 1,257 | ||||||
Other payables and accrued
expenses
|
5,168 | 10,865 | ||||||
$ | 29,506 | 32,838 |
(10) OTHER
LIABILITIES
A summary of the Company’s Other Liabilities
follows:
September
30, 2009
|
December
31, 2008
|
|||||||
(In
thousands)
|
||||||||
Security
deposits
|
$ | 7,501 | 7,560 | |||||
Prepaid rent and other deferred
income
|
5,863 | 5,430 | ||||||
Other
liabilities
|
951 | 1,309 | ||||||
$ | 14,315 | 14,299 |
9
(11) COMPREHENSIVE
INCOME
Comprehensive income is comprised of
net income plus all other changes in equity from non-owner
sources. The components of Accumulated Other Comprehensive
Loss are presented in the Company’s Consolidated Statement of Changes in
Equity and are summarized below. See Note 12 for information
regarding the Company’s interest rate swap.
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
ACCUMULATED
OTHER COMPREHENSIVE LOSS:
|
||||||||||||||||
Balance at beginning of
period
|
$ | (419 | ) | (99 | ) | (522 | ) | (56 | ) | |||||||
Change in
fair value of interest rate
swap
|
33 | (27 | ) | 136 | (70 | ) | ||||||||||
Balance at end of
period
|
$ | (386 | ) | (126 | ) | (386 | ) | (126 | ) |
(12) DERIVATIVES
AND HEDGING ACTIVITIES
The Company’s interest rate
swap is reported at fair value and is shown on the Consolidated Balance Sheets
under Other
Liabilities. ASC 820, Fair Value Measurements and
Disclosures, defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. ASC 820 also provides
guidance for using fair value to measure financial assets and
liabilities. The guidance requires disclosure of the level within the
fair value hierarchy in which the fair value measurements fall, including
measurements using quoted prices in active markets for identical assets or
liabilities (Level 1), quoted prices for similar instruments in active markets
or quoted prices for identical or similar instruments in markets that are not
active (Level 2), and significant valuation assumptions that are not readily
observable in the market (Level 3). The fair value of the Company’s
interest rate swap is determined by estimating the expected cash flows over the
life of the swap using the mid-market rate and price environment as of the last
trading day of the reporting period. This market information is
considered a Level 2 input as defined by ASC 820.
On January 1, 2009, the Company adopted
provisions included in ASC 815, Derivatives and Hedging,
which require all entities with derivative instruments to disclose
information regarding how and why the entity uses derivative instruments and how
derivative instruments and related hedged items affect the entity’s financial
position, financial performance, and cash flows. EastGroup has an
interest rate swap agreement to hedge its exposure to the variable interest rate
on the Company’s $9,175,000 Tower Automotive Center recourse mortgage, which is
summarized in the table below. Under the swap agreement, the Company
effectively pays a fixed rate of interest over the term of the agreement without
the exchange of the underlying notional amount. This swap is
designated as a cash flow hedge and is considered to be fully effective in
hedging the variable rate risk associated with the Tower mortgage
loan. Changes in the fair value of the swap are recognized in
accumulated other comprehensive gain (loss) (see Note 11). The
Company does not hold or issue this type of derivative contract for trading or
speculative purposes.
Type
of Hedge
|
Current
Notional Amount
|
Maturity
Date
|
Reference
Rate
|
Fixed
Interest Rate
|
Effective Interest
Rate
|
Fair
Value
at
9/30/09
|
Fair
Value
at
12/31/08
|
||||||||||||||||
(In
thousands)
|
(In
thousands)
|
||||||||||||||||||||||
Swap
|
$ | 9,175 |
12/31/10
|
1
month LIBOR
|
4.03% | 6.03% | $ | (386 | ) | $ | (522 | ) |
(13) EARNINGS
PER SHARE
Basic earnings per share (EPS)
represents the amount of earnings for the period available to each share of
common stock outstanding during the reporting period. The Company’s
basic EPS is calculated by dividing net income available to common stockholders
by the weighted average number of common shares outstanding.
Diluted EPS represents the amount of
earnings for the period available to each share of common stock outstanding
during the reporting period and to each share that would have been outstanding
assuming the issuance of common shares for all dilutive potential common shares
outstanding during the reporting period. The Company calculates
diluted EPS by dividing net income available to common stockholders by the
weighted average number of common shares outstanding plus the dilutive effect of
nonvested restricted stock and stock options had the options been
exercised. The dilutive effect of stock options and their equivalents
(such as nonvested restricted stock) was determined using the treasury stock
method which assumes exercise of the options as of the beginning of the period
or when issued, if later, and assumes proceeds from the exercise of options are
used to purchase common stock at the average market price during the
period.
10
Reconciliation of the numerators and
denominators in the basic and diluted EPS computations is as
follows:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
BASIC
EPS COMPUTATION FOR INCOME
ATTRIBUTABLE
TO EASTGROUP PROPERTIES, INC.
|
||||||||||||||||
Numerator
– net income available to common
stockholders
|
$ | 6,147 | 7,176 | 20,981 | 23,701 | |||||||||||
Denominator
– weighted average shares
outstanding
|
25,811 | 24,908 | 25,381 | 24,362 | ||||||||||||
DILUTED
EPS COMPUTATION FOR INCOME
ATTRIBUTABLE
TO EASTGROUP PROPERTIES, INC.
|
||||||||||||||||
Numerator
– net income available to common
stockholders
|
$ | 6,147 | 7,176 | 20,981 | 23,701 | |||||||||||
Denominator:
|
||||||||||||||||
Weighted
average shares outstanding
|
25,811 | 24,908 | 25,381 | 24,362 | ||||||||||||
Common
stock options
|
14 | 56 | 20 | 60 | ||||||||||||
Nonvested
restricted stock
|
91 | 105 | 72 | 95 | ||||||||||||
Total
Shares
|
25,916 | 25,069 | 25,473 | 24,517 |
(14) STOCK-BASED
COMPENSATION
Management
Incentive Plan
The Company has a management incentive
plan which was approved by the shareholders and adopted in 2004. This
plan authorizes the issuance of up to 1,900,000 shares of common stock to
employees in the form of options, stock appreciation rights, restricted stock
(limited to 570,000 shares), deferred stock units, performance shares, stock
bonuses, and stock. Total shares available for grant were 1,597,796
at September 30, 2009. Typically, the Company issues new shares to
fulfill stock grants or upon the exercise of stock options.
Stock-based compensation was $465,000
and $1,326,000 for the three and nine months ended September 30, 2009,
respectively, of which $55,000 and $164,000 were capitalized as part of the
Company’s development costs. For the three and nine months ended
September 30, 2008, stock-based compensation was $929,000 and $2,195,000,
respectively, of which $310,000 and $666,000 were capitalized as part of the
Company’s development costs.
Restricted
Stock
In the second quarter of 2009, the
Company’s Board of Directors approved an equity compensation plan for its
executive officers. The number of shares to be awarded will depend on
the Compensation Committee's evaluation of the Company's achievement of a
variety of performance goals for the year. The evaluation is for the
year ending December 31, 2009, therefore any shares issued upon attainment of
these goals will be issued after that date. The number of shares to
be issued will range from zero to 61,426. These shares will vest 20%
on the date shares are determined and awarded and 20% per year on January 1 for
the subsequent four years.
Also in the second quarter of 2009,
EastGroup’s Board of Directors approved an equity compensation plan for the
Company’s executive officers based on EastGroup’s total shareholder return for
the period ending December 31, 2009. Any shares issued pursuant to
this equity compensation plan will be issued after that date. The
number of shares to be issued will range from zero to 61,426. These
shares will vest 25% per year on January 1 in years 2013, 2014, 2015 and
2016.
Following is a summary of the total
restricted shares granted, forfeited and delivered (vested) to employees with
the related weighted average grant date fair value share prices. The
table does not include shares in the 2009 equity compensation plans that are
contingent on certain performance goals and market conditions. Of the
shares that vested in the first quarter of 2009, 3,628 shares were withheld by
the Company to satisfy the tax obligations for those employees who elected this
option as permitted under the applicable equity plan. As of the
vesting date, the fair value of shares that vested during the first quarter of
2009 was $747,000. There were no shares that vested during the second
or third quarters of 2009.
Restricted
Stock Activity:
|
Three
Months Ended
September
30, 2009
|
Nine
Months Ended
September
30, 2009
|
||||||||||||||
Shares
|
Weighted
Average Grant Date Fair Value
|
Shares
|
Weighted
Average Grant Date Fair Value
|
|||||||||||||
Nonvested at beginning of
period
|
156,050 | $ | 37.07 | 87,685 | $ | 36.95 | ||||||||||
Granted
(1)
|
– | – | 92,555 | 39.40 | ||||||||||||
Forfeited
|
– | – | (790 | ) | 23.67 | |||||||||||
Vested
|
– | – | (23,400 | ) | 31.93 | |||||||||||
Nonvested at end of
period
|
156,050 | 37.07 | 156,050 | 37.07 |
(1)
|
Primarily
represents shares issued in March 2009 that were granted in 2008 subject
to the satisfaction of annual performance goals and in 2006 subject to the
satisfaction of performance goals over a three-year
period.
|
11
Directors
Equity Plan
The Company has a directors equity plan
that was approved by shareholders and adopted in 2005 and was further amended by
the Board of Directors in May 2008, which authorizes the issuance of up to
50,000 shares of common stock through awards of shares and restricted shares
granted to non-employee directors of the Company. Stock-based
compensation expense for directors was $60,000 and $182,000 for the three and
nine months ended September 30, 2009, respectively, and $61,000 and $139,000 for
the same periods in 2008.
(15)
RISKS AND UNCERTAINTIES
The state of the overall economy can
significantly impact the Company’s operational performance and thus, impact its
financial position. Should EastGroup experience a significant decline
in operational performance, it may affect the Company’s ability to make
distributions to its shareholders and service debt or meet other financial
obligations.
(16)
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB deferred for one year the fair
value measurement requirements for nonfinancial assets and liabilities that are
not required or permitted to be measured at fair value on a recurring
basis. These provisions, which are included in ASC 820, Fair Value Measurements and
Disclosures, were effective for fiscal years beginning after November 15,
2008. The adoption of these provisions in 2009 had an immaterial
impact on the Company’s overall financial position and results of
operations.
In December 2007, the FASB issued
guidance in ASC 805, Business
Combinations, which requires the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree be measured
at fair value as of the acquisition date. In addition, the
Codification requires that any goodwill acquired in the business combination be
measured as a residual, and it provides guidance in determining what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. ASC 805 also
requires that acquisition-related costs be recognized as expenses in the periods
in which the costs are incurred and the services are received. This
guidance applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The adoption of these
provisions in 2009 had an immaterial impact on the Company’s overall financial
position and results of operations.
Also in December 2007, the FASB issued
guidance in ASC 810, Consolidation, which provides
guidance for entities that prepare consolidated financial statements that have
an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. These provisions were effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The adoption of the provisions in 2009 had
an immaterial impact on the Company’s overall financial position and results of
operations.
In March 2008, the FASB issued updated
guidance in ASC 815, Derivatives and Hedging,
which requires all entities with derivative instruments to disclose information
regarding how and why the entity uses derivative instruments and how derivative
instruments and related hedged items affect the entity’s financial position,
financial performance, and cash flows. The Company adopted the
guidance on January 1, 2009.
During 2008, the FASB issued guidance
in ASC 350, Intangibles –
Goodwill and Other, which requires an entity to disclose information that
enables financial statement users to assess the extent to which the expected
future cash flows associated with the asset are affected by the entity’s intent
and/or ability to renew or extend the arrangement. The intent of this
guidance is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset under ASC 805. This guidance was effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The adoption of the
provisions in 2009 had an immaterial impact on the Company’s overall financial
position and results of operations.
Also in 2008, additional guidance was
issued in ASC 323, Investments
– Equity Method and Joint Ventures, which applies to all investments
accounted for under the equity method and clarifies the accounting for certain
transactions and impairment considerations involving those
investments. The guidance was effective for financial statements
issued for fiscal years beginning on or after December 15, 2008, and interim
periods within those fiscal years. The adoption of the provisions had
an immaterial impact on the Company’s overall financial position and results of
operations.
In April 2009, the FASB issued guidance
in ASC 825, Financial
Instruments, to require disclosures about the fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as for annual financial statements. This guidance also requires those
disclosures in summarized financial information at interim reporting
periods. The provisions were effective for interim reporting periods
ending after June 15, 2009, and the Company adopted the provisions and provided
the disclosures beginning with the period ended June 30, 2009.
In May 2009, the FASB issued ASC 855,
Subsequent Events,
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or available to be issued. The guidance requires the
disclosure of all subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet, including the
estimates inherent in the process of preparing financial
statements. In addition, entities are required to disclose the date
through which subsequent events have been evaluated, as well as whether that
date is the date the financial statements were issued or the date the financial
statements were available to be issued. ASC 855 was effective for
interim or annual financial periods ending after June 15, 2009, and the Company
adopted this guidance beginning with the period ended June 30,
2009.
12
In June 2009, the FASB issued ASC 105,
Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification
as the source of authoritative principles and standards recognized by the FASB
to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. ASC 105 was effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. Technical references to GAAP included in these
Notes to Consolidated Financial Statements are provided under the new FASB
Accounting Standards Codification structure.
In August 2009, the FASB issued an
update to ASC 820, Fair Value
Measurements and Disclosures, which provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
through a valuation technique that uses the quoted price of the identical
liability when traded as an asset or quoted prices for similar liabilities or
similar liabilities when traded as assets. Entities are also
permitted to use other valuation techniques that are consistent with the
principles of ASC 820. The guidance provided in this update was
effective for the first reporting period beginning after issuance, and the
Company’s adoption of this guidance had an immaterial impact on its overall
financial position and results of operations.
(17) FAIR
VALUE OF FINANCIAL INSTRUMENTS
ASC 820, Fair Value Measurements and
Disclosures, defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. ASC 820 also provides
guidance for using fair value to measure financial assets and
liabilities. The Codification requires disclosure of the level within
the fair value hierarchy in which the fair value measurements fall, including
measurements using quoted prices in active markets for identical assets or
liabilities (Level 1), quoted prices for similar instruments in active markets
or quoted prices for identical or similar instruments in markets that are not
active (Level 2), and significant valuation assumptions that are not readily
observable in the market (Level 3). The Company’s interest rate swap,
as discussed in Note 12, is reported at fair value and is shown on the
Consolidated Balance Sheets under Other
Liabilities. The fair value of the interest rate swap is
determined by estimating the expected cash flows over the life of the swap using
the mid-market rate and price environment as of the last trading day of the
reporting period. This market information is considered a Level 2
input as defined by ASC 820.
The following table presents the
carrying amounts and estimated fair values of the Company’s financial
instruments in accordance with ASC 820, at September 30, 2009 and
December 31, 2008.
September
30, 2009
|
December
31, 2008
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Financial
Assets
|
||||||||||||||||
Cash and cash
equivalents
|
$ | 124 | 124 | 293 | 293 | |||||||||||
Mortgage
loans receivable, net of
discount
|
4,159 | 4,173 | 4,174 | 4,189 | ||||||||||||
Financial
Liabilities
|
||||||||||||||||
Mortgage notes
payable
|
607,608 | 594,107 | 585,806 | 555,096 | ||||||||||||
Notes payable
to
banks
|
100,464 | 94,425 | 109,886 | 101,484 |
Carrying
amounts shown in the table are included in the Consolidated Balance Sheets under
the indicated captions, except as indicated in the notes below.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
Cash and cash
equivalents: The carrying amounts approximate fair value due
to the short maturity of those instruments.
Mortgage loans
receivable, net of discount (included in Other Assets on the Consolidated
Balance Sheets): The fair value is estimated by discounting
the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
Mortgage notes
payable: The fair value of the Company’s mortgage notes payable is
estimated by discounting expected cash flows at the rates currently offered to
the Company for debt of the same remaining maturities, as advised by the
Company’s bankers.
Notes payable to
banks: The fair value of the Company’s notes payable to banks is
estimated by discounting expected cash flows at current market
rates.
(18) SUBSEQUENT
EVENTS
The
Company has evaluated and disclosed in the paragraphs below all material
subsequent events that provide additional evidence about conditions that existed
as of September 30, 2009. The Company evaluated these subsequent
events through November 2, 2009, the date on
which the financial statements contained herein were issued.
During the fourth quarter of 2008,
EastGroup acquired 94.3 acres of developable land in Orlando for $9.1
million. The Company is currently under contract to purchase an
additional 35.9 acres in a second phase of this acquisition for $5
million. This transaction is expected to close during the fourth
quarter of 2009.
13
EastGroup
is under contract to sell a vacant 62,000 square foot building in El Paso,
Texas. The closing of the sale is projected to occur during the
fourth quarter and is contingent upon the City of El Paso’s approval of the
transfer of the ground lease associated with the property. The
transaction is not expected to generate a material gain.
Since September 30, 2009, EastGroup has
issued an additional 20,666 shares of common stock through its continuous equity
program at an average price of $38.56 per share. For the year, the
Company has issued a total of 903,646 shares at an average price of $34.84 with
net proceeds to the Company of $31.0 million. The proceeds were used
to reduce variable rate bank borrowings.
14
OVERVIEW
EastGroup’s goal is to maximize
shareholder value by being a leading provider in its markets of functional,
flexible, and quality business distribution space for location sensitive tenants
primarily in the 5,000 to 50,000 square foot range. The Company
develops, acquires and operates distribution facilities, the majority of which
are clustered around major transportation features in supply constrained
submarkets in major Sunbelt regions. The Company’s core markets are
in the states of Florida, Texas, Arizona and California.
The Company believes that the slowdown
in the economy has affected and will continue to affect its
operations. The Company has experienced decreases in occupancy and
rental rates and has no plans for development starts. The current
economic situation is also impacting lenders, and it is more difficult to obtain
financing. Loan proceeds as a percentage of property value has
decreased, and long-term interest rates have increased. The Company believes
that its current lines of credit provide the capacity to fund the operations of
the Company for the remainder of 2009 and 2010. The Company also
believes that it can obtain mortgage financing from insurance companies and
financial institutions and issue common equity as evidenced by the closing of a
$67 million mortgage loan in May and the continuous equity offering program,
which provided net proceeds to the Company of $30.2 million in the first nine
months of 2009, as described in Liquidity and Capital
Resources.
The Company’s primary revenue is rental
income; as such, EastGroup’s greatest challenge is leasing
space. During the nine months ended September 30, 2009, leases on
3,628,000 square feet (13.4%) of EastGroup’s total square footage of 27,073,000
expired, and the Company was successful in renewing or re-leasing 74% of the
expiring square feet. In addition, EastGroup leased 1,333,000 square
feet of other vacant space during this period. During the nine months
ended September 30, 2009, average rental rates on new and renewal leases
decreased by 5.5%.
EastGroup’s total leased percentage was
90.8% at September 30, 2009, compared to 95.1% at September 30,
2008. Leases scheduled to expire for the remainder of 2009 were 3.1%
of the portfolio on a square foot basis at September 30, 2009, and this figure
was reduced to 1.6% as of October
30,
2009.
Property net operating income (PNOI)
from same properties decreased 3.9% for the quarter ended September 30, 2009, as
compared to the same quarter in 2008. For the nine months ended
September 30, 2009, PNOI from same properties decreased 3.4% as compared to the
same period in 2008.
The Company generates new sources of
leasing revenue through its acquisition and development
programs. During the first nine months of 2009, EastGroup purchased
four operating properties for a total of $17,725,000. These
properties, which contain 368,000 square feet, are located in Las Vegas and
Dallas.
EastGroup continues to see targeted
development as a major contributor to the Company’s long-term
growth. The Company mitigates risks associated with development
through a Board-approved maximum level of land held for development and by
adjusting development start dates according to leasing
activity. EastGroup’s development activity has slowed considerably as
a result of current market conditions. The Company had no development
starts in the first nine months of 2009 and currently has no plans to start
construction on new developments for the remainder of the
year. During the nine months ended September 30, 2009, the Company
transferred eleven properties (1,092,000 square feet) with aggregate costs of
$77.1 million at the date of transfer from development to real estate
properties. These properties, which were collectively 66.8%
leased as of October 30,
2009, are located in Phoenix, Arizona; Houston and San Antonio, Texas;
and Ft. Myers, Orlando and Tampa, Florida.
During the first nine months of 2009,
the Company funded its acquisition and development programs through its $225
million lines of credit, the closing of a $67 million mortgage, and the proceeds
from its $30.2 million common stock offering (as discussed in Liquidity and Capital
Resources). As market conditions permit, EastGroup issues
equity, including preferred equity, and/or employs fixed-rate, non-recourse
first mortgage debt to replace short-term bank borrowings.
EastGroup has one reportable segment –
industrial properties. These properties are primarily located in
major Sunbelt regions of the United States, have similar economic
characteristics and also meet the other criteria that permit the properties to
be aggregated into one reportable segment. The Company’s chief
decision makers use two primary measures of operating results in making
decisions: property net operating income (PNOI), defined as income
from real estate operations less property operating expenses (before interest
expense and depreciation and amortization), and funds from operations available
to common stockholders (FFO), defined as net income (loss) computed in
accordance with U.S. 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 calculates FFO based on
the National Association of Real Estate Investment Trusts’ (NAREIT)
definition.
PNOI is a supplemental industry
reporting measurement used to evaluate the performance of the Company’s real
estate investments. The Company believes that the exclusion of depreciation and
amortization in the industry’s calculation of PNOI provides a supplemental
indicator of the properties’ performance since real estate values have
historically risen or fallen with market conditions. PNOI as
calculated by the Company may not be comparable to similarly titled but
differently calculated measures for other real estate investment trusts
(REITs). The major factors that influence PNOI are occupancy levels,
acquisitions and sales, development properties that achieve stabilized
operations, rental rate increases or decreases, and the recoverability of
operating expenses. The Company’s success depends largely upon its
ability to lease space and to recover from tenants the operating costs
associated with those leases.
15
Real estate income is comprised of
rental income, pass-through income and other real estate income including lease
termination fees. Property operating expenses are comprised of
property taxes, insurance, utilities, repair and maintenance expenses,
management fees, other operating costs and bad debt
expense. Generally, the Company’s most significant operating expenses
are property taxes and insurance. Tenant leases may be net leases in
which the total operating expenses are recoverable, modified gross leases in
which some of the operating expenses are recoverable, or gross leases in which
no expenses are recoverable (gross leases represent only a small portion of the
Company’s total leases). Increases in property operating expenses are
fully recoverable under net leases and recoverable to a high degree under
modified gross leases. Modified gross leases often include base year
amounts and expense increases over these amounts are recoverable. The
Company’s exposure to property operating expenses is primarily due to vacancies
and leases for occupied space that limit the amount of expenses that can be
recovered.
The Company believes FFO is a
meaningful supplemental measure of operating performance for equity
REITs. The Company believes that excluding depreciation and
amortization in the calculation of FFO is appropriate since real estate values
have historically increased or decreased based on market
conditions. FFO is not considered as an alternative to net income
(determined in accordance with GAAP) as an indication of the Company’s financial
performance, nor is it a measure of the Company’s liquidity or indicative of
funds available to provide for the Company’s cash needs, including its ability
to make distributions. In addition, FFO, as reported by the Company,
may not be comparable to FFO by other REITs that do not define the term in
accordance with the current NAREIT definition. The Company’s key
drivers affecting FFO are changes in PNOI (as discussed above), interest rates,
the amount of leverage the Company employs and general and administrative
expense. The following table presents, on a comparative basis for the
three and nine months ended September 30, 2009 and 2008, reconciliations of PNOI
and FFO Available to Common Stockholders to Net Income Attributable to EastGroup
Properties, Inc.
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||
Income
from real estate operations
|
$ | 43,164 | 42,904 | 129,518 | 124,415 | |||||||||||
Expenses
from real estate operations
|
(12,735 | ) | (12,193 | ) | (37,996 | ) | (34,559 | ) | ||||||||
PROPERTY
NET OPERATING INCOME
|
30,429 | 30,711 | 91,522 | 89,856 | ||||||||||||
Equity in earnings of
unconsolidated investment (before depreciation)
|
115 | 113 | 344 | 338 | ||||||||||||
Income from discontinued
operations (before depreciation and amortization)
|
– | 10 | – | 201 | ||||||||||||
Interest income
|
73 | 125 | 229 | 189 | ||||||||||||
Gain on sales of
securities
|
– | – | – | 435 | ||||||||||||
Other income
|
22 | 16 | 61 | 232 | ||||||||||||
Interest expense
|
(8,537 | ) | (7,596 | ) | (23,855 | ) | (22,478 | ) | ||||||||
General and administrative
expense
|
(2,246 | ) | (2,250 | ) | (6,973 | ) | (6,349 | ) | ||||||||
Noncontrolling interest in
earnings (before depreciation and amortization)
|
(148 | ) | (220 | ) | (483 | ) | (613 | ) | ||||||||
Gain on sale of non-operating
real estate
|
8 | 301 | 23 | 313 | ||||||||||||
Dividends on Series D preferred
shares
|
– | (14 | ) | – | (1,326 | ) | ||||||||||
Costs on redemption of Series D
preferred shares
|
– | (682 | ) | – | (682 | ) | ||||||||||
FUNDS FROM OPERATIONS AVAILABLE
TO COMMON STOCKHOLDERS
|
19,716 | 20,514 | 60,868 | 60,116 | ||||||||||||
Depreciation and amortization
from continuing operations
|
(13,587 | ) | (13,436 | ) | (39,941 | ) | (38,428 | ) | ||||||||
Depreciation and amortization
from discontinued operations
|
– | (3 | ) | – | (71 | ) | ||||||||||
Depreciation from unconsolidated
investment
|
(33 | ) | (33 | ) | (99 | ) | (99 | ) | ||||||||
Noncontrolling
interest depreciation and amortization
|
51 | 51 | 153 | 151 | ||||||||||||
Gain
on sale of depreciable real estate investments
|
– | 83 | – | 2,032 | ||||||||||||
NET
INCOME AVAILABLE TO EASTGROUP PROPERTIES, INC.
COMMON
STOCKHOLDERS
|
6,147 | 7,176 | 20,981 | 23,701 | ||||||||||||
Dividends
on Series D preferred shares
|
– | 14 | – | 1,326 | ||||||||||||
Costs
on redemption of Series D preferred shares
|
– | 682 | – | 682 | ||||||||||||
NET
INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.
|
$ | 6,147 | 7,872 | 20,981 | 25,709 | |||||||||||
Net
income available to common stockholders per diluted share
|
$ | .24 | .29 | .82 | .97 | |||||||||||
Funds
from operations available to common stockholders per diluted
share
|
.76 | .82 | 2.39 | 2.45 | ||||||||||||
Diluted
shares for earnings per share and funds from operations
|
25,916 | 25,069 | 25,473 | 24,517 |
16
The
Company analyzes the following performance trends in evaluating the progress of
the Company:
·
|
The
FFO change per share represents the increase or decrease in FFO per share
from the same quarter in the current year compared to the prior
year. FFO per share for the third quarter of 2009 was $.76 per
share compared with $.82 per share for the same period of 2008, a decrease
of 7.3% per share. PNOI decreased 0.9% primarily due to a
decrease in PNOI of $1,164,000 from same property operations, offset by
additional PNOI of $617,000 from newly developed properties and $219,000
from 2008 and 2009 acquisitions.
|
For the
nine months ended September 30, 2009, FFO was $2.39 per share compared with
$2.45 for the same period last year. PNOI increased 1.9% mainly due
to additional PNOI of $3,624,000 from newly developed properties and $816,000
from 2008 and 2009 acquisitions, offset by a decrease of $2,875,000 from same
property operations.
·
|
Same
property net operating income change represents the PNOI increase or
decrease for the same operating properties owned during the entire current
period and prior year reporting period. PNOI from same
properties decreased 3.9% for the three months ended September 30, 2009,
and decreased 3.4% for the nine
months.
|
·
|
Occupancy
is the percentage of leased square footage for which the lease term has
commenced as compared to the total leasable square footage as of the close
of the reporting period. Occupancy at September 30, 2009, was
88.9%. Quarter-end occupancy ranged from 88.9% to 94.4% over
the period from September 30, 2008 to September 30,
2009.
|
·
|
Rental
rate change represents the rental rate increase or decrease on new and
renewal leases compared to the prior leases on the same
space. Rental rate decreases on new and renewal leases (3.7% of
total square footage) averaged 7.3% for the third quarter of
2009. For the nine months ended September 30, 2009, rental rate
decreases on new and renewal leases (14.8% of total square footage)
averaged 5.5%.
|
17
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The Company’s management considers the
following accounting policies and estimates to be critical to the reported
operations of the Company.
Real
Estate Properties
The Company allocates the purchase
price of acquired properties to net tangible and identified intangible assets
based on their respective fair values. Goodwill is recorded when the
purchase price exceeds the fair value of the assets and liabilities
acquired. Factors considered by management in allocating the cost of
the properties acquired include an estimate of carrying costs during the
expected lease-up periods considering current market conditions and costs to
execute similar leases. The allocation to tangible assets (land,
building and improvements) is based upon management’s determination of the value
of the property as if it were vacant using discounted cash flow
models. The purchase price is also allocated among the following
categories of intangible assets: the above or below market component
of in-place leases, the value of in-place leases, and the value of customer
relationships. The value allocable to the above or below market
component of an acquired in-place lease is determined based upon the present
value (using a discount rate which reflects the risks associated with the
acquired leases) of the difference between (i) the contractual amounts to be
paid pursuant to the lease over its remaining term and (ii) management’s
estimate of the amounts that would be paid using fair market rates over the
remaining term of the lease. The amounts allocated to above and below
market leases are included in Other Assets and Other Liabilities,
respectively, on the Consolidated Balance Sheets and are amortized to rental
income over the remaining terms of the respective leases. The total
amount of intangible assets is further allocated to in-place lease values and
customer relationship values based upon management’s assessment of their
respective values. These intangible assets are included in Other Assets on the
Consolidated Balance Sheets and are amortized over the remaining term of the
existing lease, or the anticipated life of the customer relationship, as
applicable.
During the period in which a property
is under development, costs associated with development (i.e., land,
construction costs, interest expense, property taxes and other direct and
indirect costs associated with development) are aggregated into the total
capitalized costs of the property. Included in these costs are
management’s estimates for the portions of internal costs (primarily personnel
costs) that are deemed directly or indirectly related to such development
activities.
The Company reviews its real estate
investments for impairment of value whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. If any real estate investment is considered permanently
impaired, a loss is recorded to reduce the carrying value of the property to its
estimated fair value. Real estate assets to be sold are reported at
the lower of the carrying amount or fair value less selling
costs. The evaluation of real estate investments involves many
subjective assumptions dependent upon future economic events that affect the
ultimate value of the property. Currently, the Company’s management
is not aware of any impairment issues nor has it experienced any significant
impairment issues in recent years. EastGroup currently has the intent
and ability to hold its real estate investments and to hold its land inventory
for future development. In the event of impairment, the property’s
basis would be reduced, and the impairment would be recognized as a current
period charge on the Consolidated Statements of Income.
Valuation
of Receivables
The Company is subject to tenant
defaults and bankruptcies that could affect the collection of outstanding
receivables. In order to mitigate these risks, the Company performs
credit reviews and analyses on prospective tenants before significant leases are
executed. On a quarterly basis, the Company evaluates outstanding
receivables and estimates the allowance for doubtful
accounts. Management specifically analyzes aged receivables, customer
credit-worthiness, historical bad debts and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. The
Company believes that its allowance for doubtful accounts is adequate for its
outstanding receivables for the periods presented. In the event that
the allowance for doubtful accounts is insufficient for an account that is
subsequently written off, additional bad debt expense would be recognized as a
current period charge on the Consolidated Statements of Income.
Tax
Status
EastGroup, a Maryland corporation, has
qualified as a real estate investment trust under Sections 856-860 of the
Internal Revenue Code and intends to continue to qualify as such. To
maintain its status as a REIT, the Company is required to distribute at least
90% of its ordinary taxable income to its stockholders. The Company
has the option of (i) reinvesting the sales price of properties sold through
tax-deferred exchanges, allowing for a deferral of capital gains on the sale,
(ii) paying out capital gains to the stockholders with no tax to the Company, or
(iii) treating the capital gains as having been distributed to the stockholders,
paying the tax on the gain deemed distributed and allocating the tax paid as a
credit to the stockholders. The Company distributed all of its
2008 taxable income to its stockholders and expects to distribute all of its
taxable income in 2009. Accordingly, no provision for income taxes
was necessary in 2008, nor is it expected to be necessary for
2009.
18
FINANCIAL
CONDITION
EastGroup’s assets were $1,179,283,000
at September 30, 2009, an increase of $23,078,000 from December 31,
2008. Liabilities increased $9,064,000 to $751,893,000 and equity
increased $14,014,000 to $427,390,000 during the same period. The
paragraphs that follow explain these changes in detail.
Assets
Real
Estate Properties
Real estate properties increased
$109,075,000 during the nine months ended September 30, 2009, primarily due to
the purchase of four operating properties and the transfer of eleven properties
from development, as detailed under Development
below.
REAL
ESTATE PROPERTIES ACQUIRED IN 2009
|
Location
|
Size
|
Date
Acquired
|
Cost
(1)
|
|||||||
(Square
feet)
|
(In
thousands)
|
||||||||||
Arville
Distribution Center
|
Las
Vegas, NV
|
142,000 |
05/27/09
|
$ | 11,050 | ||||||
Interstate
Distribution Center V, VI and VII
|
Dallas,
TX
|
226,000 |
08/13/09
|
6,675 | |||||||
Total
Acquisitions
|
368,000 | $ | 17,725 |
(1)
|
Total
cost of the properties acquired was $17,725,000, of which $15,957,000 was
allocated to real estate properties as indicated
above. Intangibles associated with the purchases of real estate
were allocated as follows: $1,207,000 to in-place lease
intangibles, $568,000 to above market leases (both included in Other
Assets on the Consolidated Balance Sheets) and $7,000 to below market
leases (included in Other Liabilities on the Consolidated Balance
Sheets). All of these costs are amortized over the remaining
lives of the associated leases in place at the time of
acquisition. During the first nine months of 2009, the Company
expensed acquisition-related costs of $115,000 in connection with the
Arville and Interstate acquisitions. These costs are included
in General and Administrative Expenses on the Consolidated Statements of
Income.
|
The Company made capital improvements
of $11,688,000 on existing and acquired properties (included in the Capital
Expenditures table under Results of
Operations). Also, the Company incurred costs of $4,368,000 on
development properties subsequent to transfer to Real Estate Properties; the
Company records these expenditures as development costs on the Consolidated
Statements of Cash Flows during the 12-month period following
transfer.
Development
The investment in development at
September 30, 2009, was $95,244,000 compared to $150,354,000 at December 31,
2008. Total capital invested for development during the first nine
months of 2009 was $26,320,000, which consisted of costs of $21,952,000 as
detailed in the development activity table and costs of $4,368,000 on
developments transferred to Real Estate Properties during
the 12-month period following transfer.
The Company transferred eleven
developments to Real Estate
Properties during the first nine months of 2009 with a total investment
of $77,062,000 as of the date of transfer.
Costs
Incurred
|
||||||||||||||||
DEVELOPMENT
|
Size
|
For
the Nine Months Ended 9/30/09
|
Cumulative
as of 9/30/09
|
Estimated
Total Costs
|
||||||||||||
(Square
feet)
|
(In
thousands)
|
|||||||||||||||
LEASE-UP
|
||||||||||||||||
12th
Street Distribution Center, Jacksonville, FL
|
150,000 | $ | 291 | 5,141 | 5,300 | |||||||||||
Beltway
Crossing VII, Houston, TX
|
95,000 | 1,148 | 5,361 | 6,400 | ||||||||||||
Country
Club III & IV, Tucson, AZ
|
138,000 | 2,433 | 10,480 | 11,200 | ||||||||||||
Oak
Creek IX, Tampa, FL
|
86,000 | 858 | 5,058 | 5,500 | ||||||||||||
Blue
Heron III, West Palm Beach, FL
|
20,000 | 603 | 2,501 | 2,600 | ||||||||||||
World
Houston 30, Houston, TX
|
88,000 | 4,078 | 5,669 | 6,500 | ||||||||||||
Total
Lease-up
|
577,000 | 9,411 | 34,210 | 37,500 | ||||||||||||
PROSPECTIVE
DEVELOPMENT (PRIMARILY LAND)
|
||||||||||||||||
Tucson,
AZ
|
70,000 | – | 417 | 3,500 | ||||||||||||
Tampa,
FL
|
249,000 | (40 | ) | 3,850 | 14,600 | |||||||||||
Orlando,
FL
|
1,254,000 | 949 | 15,402 | 78,700 | ||||||||||||
Fort
Myers, FL
|
659,000 | 759 | 15,773 | 48,100 | ||||||||||||
Dallas,
TX
|
70,000 | 54 | 624 | 5,000 | ||||||||||||
El
Paso, TX
|
251,000 | – | 2,444 | 9,600 | ||||||||||||
Houston,
TX
|
1,064,000 | 2,049 | 14,835 | 68,100 | ||||||||||||
San
Antonio, TX
|
595,000 | 467 | 5,906 | 37,500 | ||||||||||||
Charlotte,
NC
|
95,000 | 82 | 1,077 | 7,100 | ||||||||||||
Jackson,
MS
|
28,000 | – | 706 | 2,000 | ||||||||||||
Total
Prospective Development
|
4,335,000 | 4,320 | 61,034 | 274,200 | ||||||||||||
4,912,000 | $ | 13,731 | 95,244 | 311,700 |
19
Costs
Incurred
|
||||||||||||||
DEVELOPMENT
|
Size
|
For
the Nine Months Ended 9/30/09
|
Cumulative
as of 9/30/09
|
|||||||||||
(Square
feet)
|
(In
thousands)
|
|||||||||||||
DEVELOPMENTS
COMPLETED AND TRANSFERRED
TO
REAL ESTATE PROPERTIES DURING 2009
|
||||||||||||||
40th
Avenue Distribution Center, Phoenix, AZ
|
90,000 | $ | – | 6,539 |
|
|||||||||
Wetmore
II, Building B, San Antonio, TX
|
55,000 | 10 | 3,643 | |||||||||||
Beltway
Crossing VI, Houston, TX
|
128,000 | 149 | 5,756 | |||||||||||
World
Houston 28, Houston, TX
|
59,000 | 1,850 | 4,230 | |||||||||||
Oak
Creek VI, Tampa, FL
|
89,000 | 55 | 5,642 | |||||||||||
Southridge
VIII, Orlando, FL
|
91,000 | 338 | 6,339 | |||||||||||
Techway
SW IV, Houston, TX
|
94,000 | 918 | 5,761 | |||||||||||
SunCoast
III, Fort Myers, FL
|
93,000 | 294 | 7,012 | |||||||||||
Sky
Harbor, Phoenix, AZ
|
264,000 | 1,046 | 23,875 | |||||||||||
World
Houston 26, Houston, TX
|
59,000 | 661 | 3,479 | |||||||||||
World
Houston 29, Houston, TX
|
70,000 | 2,900 | 4,786 | |||||||||||
Total
Transferred to Real Estate Properties
|
1,092,000 | $ | 8,221 | 77,062 | (1) |
|
(1) Represents
cumulative costs at the date of transfer.
Accumulated depreciation on real estate
properties increased $33,367,000 during the first nine months of 2009 due to
depreciation expense on real estate properties.
A summary of Other Assets is presented in
Note 8 in the Notes to Consolidated Financial Statements.
Liabilities
Mortgage notes payable increased
$21,802,000 during the nine months ended September 30, 2009, as a result of a
$67,000,000 mortgage loan executed by the Company during the second quarter,
which was offset by the repayment of two mortgages of $31,562,000, regularly
scheduled principal payments of $13,545,000, and mortgage loan premium
amortization of $91,000. In addition, on January 2, 2009, the
Company’s mortgage note payable of $9,365,000 on the Tower Automotive Center was
repaid and replaced with another mortgage note payable for the same
amount. See Liquidity and Capital
Resources for further discussion of this mortgage note.
Notes payable to banks decreased
$9,422,000 during the nine months ended September 30, 2009, as a result of
repayments of $184,735,000 exceeding advances of $175,313,000. The
Company’s credit facilities are described in greater detail under Liquidity and Capital
Resources.
See Note 9 in the Notes to Consolidated
Financial Statements for a summary of Accounts Payable and Accrued
Expenses. See Note 10 in the Notes to Consolidated Financial
Statements for a summary of Other
Liabilities.
Equity
During the first nine months of 2009,
EastGroup issued 882,980 shares of common stock at an average price of $34.76
per share through its continuous equity program with net proceeds to the Company
of $30.2 million. The proceeds were used to reduce variable rate bank
borrowings. The purpose of the equity program is to better position
the Company for growth through future acquisitions while maintaining a strong
balance sheet.
For the nine months ended September 30,
2009, distributions in excess of earnings increased $19,095,000 as a result of
dividends on common stock of $40,076,000 exceeding net income for financial
reporting purposes of $20,981,000. See Note 14 in the Notes to
Consolidated Financial Statements for information related to the changes in
additional paid-in capital resulting from stock-based
compensation.
20
RESULTS
OF OPERATIONS
(Comments
are for the three and nine months ended September 30, 2009, compared to the
three and nine months ended September 30, 2008.)
Net income available to common
stockholders for the three and nine months ended September 30, 2009, was
$6,147,000 ($.24 per basic and diluted share) and $20,981,000 ($.83 per basic
and $.82 per diluted share) compared to $7,176,000 ($.29 per basic and diluted
share) and $23,701,000 ($.97 per basic and diluted share) for the three and nine
months ended September 30, 2008. The Company recognized gain on sales
of real estate investments, gain on sales of securities, and a gain on
involuntary conversion totaling $2,642,000 ($.11 per basic and diluted share)
during the nine months ended September 30, 2008.
PNOI for the three months ended
September 30, 2009, decreased by $282,000, or 0.9%, as compared to the same
period in 2008. The decrease was primarily attributable to a decrease
in PNOI of $1,164,000 from same property operations, offset by additional PNOI
of $617,000 from newly developed properties and $219,000 from 2008 and 2009
acquisitions.
PNOI for the nine months ended
September 30, 2009, increased by $1,666,000, or 1.9%, as compared to the same
period in 2008. The increase was mainly due to $3,624,000 from newly
developed properties and $816,000 from 2008 and 2009 acquisitions, offset by a
decrease of $2,875,000 from same property operations.
EastGroup’s results of operations for
the third quarter and the nine months were affected by the changes in PNOI,
increased depreciation and amortization expense, and other costs as discussed
below.
Expense to revenue ratios were 29.5%
and 29.3% for the three and nine months ended September 30, 2009, compared to
28.4% and 27.8% for the same periods in 2008. The increase was
primarily due to increased bad debt expense and lower occupancy in the first
nine months of 2009 as compared to the same period last year. The
Company’s percentages leased and occupied were 90.8% and 88.9%, respectively, at
September 30, 2009, compared to 95.1% and 94.4%, respectively, at September 30,
2008.
General and administrative expenses
remained consistent for the three months ended September 30, 2009, as compared
to the same quarter last year. General and administrative expense
increased $624,000 for the nine months ended September 30, 2009, as compared to
the same period in 2008. The increase was primarily attributable to a
decrease in capitalized development costs due to a slowdown in the Company’s
development program. In accordance with the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations, EastGroup
expensed acquisition-related costs of $74,000 and $115,000 during the three and
nine months ended September 30, 2009, in connection with the Las Vegas and
Dallas acquisitions. In 2008, acquisition-related costs were
capitalized with the purchase price of the properties acquired; therefore,
general and administrative expenses for 2008 include no acquisition-related
costs.
The following table presents the
components of interest expense for the three and nine months ended September 30,
2009 and 2008:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||||||||||
2009
|
2008
|
Increase
(Decrease)
|
2009
|
2008
|
Increase
(Decrease)
|
|||||||||||||||||||
(In
thousands, except rates of interest)
|
||||||||||||||||||||||||
Average bank
borrowings
|
$ | 90,738 | 126,113 | (35,375 | ) | 113,845 | 125,051 | (11,206 | ) | |||||||||||||||
Weighted
average variable interest rates
(excluding
loan cost amortization)
|
1.43 | % | 3.50 | % | 1.46 | % | 3.99 | % | ||||||||||||||||
VARIABLE
RATE INTEREST EXPENSE
|
||||||||||||||||||||||||
Variable rate interest
(excluding
loan cost amortization)
|
$ | 327 | 1,111 | (784 | ) | 1,244 | 3,737 | (2,493 | ) | |||||||||||||||
Amortization of bank loan
costs
|
73 | 73 | – | 221 | 221 | – | ||||||||||||||||||
Total variable rate interest
expense
|
400 | 1,184 | (784 | ) | 1,465 | 3,958 | (2,493 | ) | ||||||||||||||||
FIXED
RATE INTEREST EXPENSE
|
||||||||||||||||||||||||
Fixed rate interest (excluding
loan cost amortization)
|
9,277 | 7,931 | 1,346 | 26,550 | 23,067 | 3,483 | ||||||||||||||||||
Amortization of mortgage loan
costs
|
176 | 172 | 4 | 554 | 497 | 57 | ||||||||||||||||||
Total fixed rate interest
expense
|
9,453 | 8,103 | 1,350 | 27,104 | 23,564 | 3,540 | ||||||||||||||||||
Total
interest
|
9,853 | 9,287 | 566 | 28,569 | 27,522 | 1,047 | ||||||||||||||||||
Less
capitalized interest
|
(1,316 | ) | (1,691 | ) | 375 | (4,714 | ) | (5,044 | ) | 330 | ||||||||||||||
TOTAL INTEREST
EXPENSE
|
$ | 8,537 | 7,596 | 941 | 23,855 | 22,478 | 1,377 |
EastGroup’s variable rate interest
expense decreased in the three and nine months ended September 30, 2009, as
compared to the same periods last year due to decreases in the Company’s average
bank borrowings and weighted average variable interest rates.
Interest costs incurred during the
period of construction of real estate properties are capitalized and offset
against interest expense. Due to the slowdown in the Company’s
development program, capitalized interest decreased $375,000 for the three
months and $330,000 for the nine months ended September 30, 2009, as compared to
the same periods last year.
21
The increase in mortgage interest
expense in 2009 was primarily due to the Company’s new mortgages detailed in the
table below.
NEW
MORTGAGES IN 2008 AND 2009
|
Interest
Rate
|
Date
|
Maturity
Date
|
Amount
|
||||||
Beltway
II, III & IV, Eastlake, Fairgrounds I-IV, Nations
Ford
I-IV, Techway Southwest III, Westinghouse,
Wetmore
I-IV and World Houston 15 & 22
|
5.500% |
03/19/08
|
04/05/15
|
$ | 78,000,000 | |||||
Southridge
XII, Airport Commerce Center I & II,
Interchange
Park, Ridge Creek III, World Houston
24,
25 & 27 and Waterford Distribution Center
|
5.750% |
12/09/08
|
01/05/14
|
59,000,000 | ||||||
Tower
Automotive Center (1)
|
6.030% |
01/02/09
|
01/15/11
|
9,365,000 | ||||||
Dominguez,
Kingsview, Walnut, Washington,
Industry
I & III and
Shaw
|
7.500% |
05/05/09
|
05/05/19
|
67,000,000 | ||||||
Weighted
Average/Total
Amount
|
6.220% | $ | 213,365,000 |
(1)
|
The
Company repaid the previous mortgage note on the Tower Automotive Center
and replaced it with this new mortgage note for the same
amount. See the table below for details on the previous
mortgage.
|
These increases were offset by
regularly scheduled principal payments and the repayments of three mortgages in
2009 as shown in the following table:
MORTGAGE
LOANS REPAID IN 2009
|
Interest
Rate
|
Date
Repaid
|
Payoff
Amount
|
||||||
Tower
Automotive Center (1)
|
8.020% |
01/02/09
|
$ | 9,365,000 | |||||
Dominguez,
Kingsview, Walnut, Washington, Industry
Distribution
Center I and
Shaw
|
6.800% |
02/13/09
|
31,357,000 | ||||||
Oak
Creek
I
|
8.875% |
06/01/09
|
205,000 | ||||||
Weighted
Average/Total
Amount
|
7.090% | $ | 40,927,000 |
(1)
|
The
Tower Automotive Center mortgage was repaid and replaced with another
mortgage note payable for the same amount. See the new mortgage
detailed in the new mortgages table
above.
|
Depreciation and amortization for
continuing operations increased $151,000 and $1,513,000 for the three and nine
months ended September 30, 2009, as compared to the same periods in
2008. These increases were primarily due to properties acquired and
transferred from development during 2008 and 2009.
NAREIT has recommended supplemental
disclosures concerning straight-line rent, capital expenditures and leasing
costs. Straight-lining of rent for continuing operations increased
income by $386,000 and $791,000 for the three and nine months ended September
30, 2009, compared to $206,000 and $618,000 for the same periods in
2008.
Capital
Expenditures
Capital expenditures for operating
properties for the three and nine months ended September 30, 2009 and 2008 were
as follows:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
||||||||||||||||
Estimated
Useful
Life
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
thousands)
|
|||||||||||||||||
Upgrade
on
Acquisitions
|
40
yrs
|
$ | 19 | 13 | 23 | 63 | |||||||||||
Tenant
Improvements:
|
|||||||||||||||||
New
Tenants
|
Lease
Life
|
2,241 | 1,725 | 5,074 | 5,081 | ||||||||||||
New
Tenants (first
generation) (1)
|
Lease
Life
|
52 | 3 | 583 | 244 | ||||||||||||
Renewal
Tenants
|
Lease
Life
|
415 | 173 | 951 | 1,335 | ||||||||||||
Other:
|
|||||||||||||||||
Building
Improvements
|
5-40
yrs
|
511 | 484 | 1,912 | 1,788 | ||||||||||||
Roofs
|
5-15
yrs
|
657 | 276 | 2,228 | 1,107 | ||||||||||||
Parking
Lots
|
3-5
yrs
|
75 | 73 | 550 | 848 | ||||||||||||
Other
|
5
yrs
|
24 | 136 | 367 | 239 | ||||||||||||
Total
capital expenditures
|
$ | 3,994 | 2,883 | 11,688 | 10,705 |
(1)
|
First
generation refers to space that has never been occupied under EastGroup’s
ownership.
|
22
Capitalized
Leasing Costs
The Company’s leasing costs
(principally commissions) are capitalized and included in Other Assets. The costs are
amortized over the terms of the associated leases and are included in
depreciation and amortization expense. Capitalized leasing costs for
the three and nine months ended September 30, 2009 and 2008 were as
follows:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
||||||||||||||||
Estimated
Useful
Life
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
thousands)
|
|||||||||||||||||
Development
|
Lease
Life
|
$ | 375 | 667 | 1,349 | 2,796 | |||||||||||
New
Tenants
|
Lease
Life
|
618 | 676 | 2,012 | 1,765 | ||||||||||||
New
Tenants (first
generation) (1)
|
Lease
Life
|
9 | – | 59 | 58 | ||||||||||||
Renewal
Tenants
|
Lease
Life
|
454 | 1,290 | 2,103 | 2,175 | ||||||||||||
Total
capitalized leasing costs
|
$ | 1,456 | 2,633 | 5,523 | 6,794 | ||||||||||||
Amortization
of leasing costs (2)
|
$ | 1,566 | 1,559 | 4,744 | 4,396 |
(1)
|
First
generation refers to space that has never been occupied under EastGroup’s
ownership.
|
(2)
|
Includes
discontinued operations.
|
Discontinued
Operations
The results of operations, including
interest expense (if applicable), for the operating properties sold or held for
sale during the periods reported are shown under Discontinued Operations on
the Consolidated Statements of Income.
The following table presents the
components of revenue and expense for the properties sold or held for sale
during the three and nine months ended September 30, 2009 and
2008. There were no sales of properties during the first nine months
of 2009 nor were any properties considered to be held for sale at September 30,
2009. EastGroup sold North Stemmons I during the second quarter of
2008 and Delp Distribution Center III during the third quarter of
2008. The Company has reclassified the operations of these entities
to Discontinued
Operations as shown in the following table.
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
DISCONTINUED
OPERATIONS
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Income from real estate
operations
|
$ | – | 12 | – | 276 | |||||||||||
Expenses from real estate
operations
|
– | (2 | ) | – | (75 | ) | ||||||||||
Property net
operating income from discontinued operations
|
– | 10 | – | 201 | ||||||||||||
Depreciation and
amortization
|
– | (3 | ) | – | (71 | ) | ||||||||||
Income from real estate
operations
|
– | 7 | – | 130 | ||||||||||||
Gain on sales of real
estate
investments
|
– | 83 | – | 2,032 | ||||||||||||
Income from discontinued
operations
|
$ | – | 90 | – | 2,162 |
23
RECENT
ACCOUNTING PRONOUNCEMENTS
The FASB deferred for one year the
fair value measurement requirements for nonfinancial assets and liabilities that
are not required or permitted to be measured at fair value on a recurring
basis. These provisions, which are included in ASC 820, Fair Value Measurements and
Disclosures, were effective for fiscal years beginning after November 15,
2008. The adoption of these provisions in 2009 had an immaterial
impact on the Company’s overall financial position and results of
operations.
In December 2007, the FASB issued
guidance in ASC 805, Business
Combinations, which requires the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree be measured
at fair value as of the acquisition date. In addition, the
Codification requires that any goodwill acquired in the business combination be
measured as a residual, and it provides guidance in determining what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. ASC 805 also
requires that acquisition-related costs be recognized as expenses in the periods
in which the costs are incurred and the services are received. This
guidance applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The adoption of these
provisions in 2009 had an immaterial impact on the Company’s overall financial
position and results of operations.
Also in December 2007, the FASB issued
guidance in ASC 810, Consolidation, which provides
guidance for entities that prepare consolidated financial statements that have
an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. These provisions were effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The adoption of the provisions in 2009 had
an immaterial impact on the Company’s overall financial position and results of
operations.
In March 2008, the FASB issued updated
guidance in ASC 815, Derivatives and Hedging,
which requires all entities with derivative instruments to disclose information
regarding how and why the entity uses derivative instruments and how derivative
instruments and related hedged items affect the entity’s financial position,
financial performance, and cash flows. The Company adopted the
guidance on January 1, 2009.
During 2008, the FASB issued guidance
in ASC 350, Intangibles –
Goodwill and Other, which requires an entity to disclose information that
enables financial statement users to assess the extent to which the expected
future cash flows associated with the asset are affected by the entity’s intent
and/or ability to renew or extend the arrangement. The intent of this
guidance is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset under ASC 805. This guidance was effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The adoption of the
provisions in 2009 had an immaterial impact on the Company’s overall financial
position and results of operations.
Also in 2008, additional guidance was
issued in ASC 323, Investments
– Equity Method and Joint Ventures, which applies to all investments
accounted for under the equity method and clarifies the accounting for certain
transactions and impairment considerations involving those
investments. The guidance was effective for financial statements
issued for fiscal years beginning on or after December 15, 2008, and interim
periods within those fiscal years. The adoption of the provisions had
an immaterial impact on the Company’s overall financial position and results of
operations.
In April 2009, the FASB issued guidance
in ASC 825, Financial
Instruments, to require disclosures about the fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as for annual financial statements. This guidance also requires those
disclosures in summarized financial information at interim reporting
periods. The provisions were effective for interim reporting periods
ending after June 15, 2009, and the Company adopted the provisions and provided
the disclosures beginning with the period ended June 30, 2009.
In May 2009, the FASB issued ASC 855,
Subsequent Events,
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or available to be issued. The guidance requires the
disclosure of all subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet, including the
estimates inherent in the process of preparing financial
statements. In addition, entities are required to disclose the date
through which subsequent events have been evaluated, as well as whether that
date is the date the financial statements were issued or the date the financial
statements were available to be issued. ASC 855 was effective for
interim or annual financial periods ending after June 15, 2009, and the Company
adopted this guidance beginning with the period ended June 30,
2009.
In June 2009, the FASB issued ASC 105,
Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification
as the source of authoritative principles and standards recognized by the FASB
to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. ASC 105 was effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. Technical references to GAAP included in this
filing are provided under the new FASB Accounting Standards Codification
structure.
In August 2009, the FASB issued an
update to ASC 820, Fair Value
Measurements and Disclosures, which provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
through a valuation technique that uses the quoted price of the identical
liability when traded as an asset or quoted prices for similar liabilities or
similar liabilities when traded as assets. Entities are also
permitted to use other valuation techniques that are consistent with the
principles of ASC 820. The guidance provided in this update was
effective for the first reporting period beginning after issuance, and the
Company’s adoption of this guidance had an immaterial impact on its overall
financial position and results of operations.
24
LIQUIDITY
AND CAPITAL RESOURCES
Net cash provided by operating
activities was $68,298,000 for the nine months ended September 30,
2009. The primary other sources of cash were from bank borrowings,
mortgage note proceeds, and proceeds from common stock offerings. The
Company distributed $39,936,000 in common stock dividends during the nine months
ended September 30, 2009. Other primary uses of cash were for bank
debt repayments, mortgage note repayments, construction and development of
properties, purchases of real estate, and capital improvements at various
properties.
Total debt at September 30, 2009 and
December 31, 2008 is detailed below. The Company’s bank credit
facilities have certain restrictive covenants, such as maintaining debt service
coverage and leverage ratios and maintaining insurance coverage, and the Company
was in compliance with all of its debt covenants at September 30, 2009 and
December 31, 2008.
September
30, 2009
|
December
31, 2008
|
|||||||
(In
thousands)
|
||||||||
Mortgage
notes payable – fixed rate
|
$ | 607,608 | 585,806 | |||||
Bank
notes payable – floating rate
|
100,464 | 109,886 | ||||||
Total
debt
|
$ | 708,072 | 695,692 |
The Company has a four-year, $200
million unsecured revolving credit facility with a group of seven banks that
matures in January 2012. The interest rate on the facility is based
on the LIBOR index and varies according to total liability to total asset value
ratios (as defined in the credit agreement), with an annual facility fee of 15
to 20 basis points. The interest rate on each tranche is usually
reset on a monthly basis and is currently LIBOR plus 70 basis points with an
annual facility fee of 20 basis points. The line of credit has an
option for a one-year extension at the Company’s
request. Additionally, there is a provision under which the line may
be expanded by $100 million contingent upon obtaining increased commitments from
existing lenders or commitments from additional lenders. At September
30, 2009, the weighted average interest rate was 0.950% on a balance of
$85,000,000. At October 30, 2009, the Company’s weighted average
interest rate was 0.950% on a balance of $80,000,000. The Company had
an additional $120,000,000 remaining on this line of credit on October 30,
2009.
The
Company also has a four-year, $25 million unsecured revolving credit facility
with PNC Bank, N.A. that matures in January 2012. This credit
facility is customarily used for working capital needs. The interest
rate on this working capital line is based on the LIBOR index and varies
according to total liability to total asset value ratios (as defined in the
credit agreement). Under this facility, the Company’s current
interest rate is LIBOR plus 75 basis points with no annual facility
fee. At September 30, 2009, the interest rate was 0.996% on a balance
of $15,464,000. At October 30,
2009, the interest rate was 0.994%
on a balance of $12,534,000. The Company had an additional
$12,466,000 remaining on this line of credit on October
30,
2009.
As
market conditions permit, EastGroup issues equity, including preferred equity,
and/or employs fixed-rate first mortgage debt to replace the short-term bank
borrowings.
The current economic situation is
impacting lenders, and it is more difficult to obtain financing. Loan
proceeds as a percentage of property value has decreased, and long-term interest
rates have increased. The Company believes that its current lines of
credit provide the capacity to fund the operations of the Company for the
remainder of 2009 and 2010. The Company also believes that it can
obtain mortgage financing from insurance companies and financial institutions
and issue common equity.
During the first nine months of 2009,
EastGroup issued 882,980 shares of common stock at an average price of $34.76
per share through its continuous equity program with net proceeds to the Company
of $30.2 million. The proceeds were used to reduce variable rate bank
borrowings. The purpose of the equity program is to better position
the Company for growth through future acquisitions while maintaining a strong
balance sheet.
On May 5, 2009, EastGroup closed on a
$67 million, limited recourse first mortgage loan secured by properties
containing 1.7 million square feet. The loan has a recourse liability
of $5 million which may be released based on the secured properties obtaining
certain base rent amounts. The loan has a fixed interest rate of
7.5%, a 10-year term and a 20-year amortization schedule. The Company
used the proceeds of this mortgage loan to reduce variable rate bank
borrowings.
On January 2, 2009, the mortgage note
payable of $9,365,000 on the Tower Automotive Center was repaid and replaced
with another mortgage note payable for the same amount. The previous
recourse mortgage was a variable rate demand note, and EastGroup had entered
into a swap agreement to fix the LIBOR rate. In the fourth quarter of
2008, the bond spread over LIBOR required to re-market the note increased from a
historical range of 3 to 25 basis points to a range of 100 to 500 basis
points. Due to the volatility of the bond spread costs, EastGroup
redeemed the note and replaced it with a recourse mortgage with a bank on the
same payment terms except for the interest rate. The effective
interest rate on the previous note was 5.30% until the fourth quarter of 2008
when the weighted average rate was 8.02%. The effective rate on the
new note, including the swap, is 6.03%.
The Company anticipates that its
current cash balance, operating cash flows, borrowings under its lines of
credit, proceeds from new mortgage debt and/or proceeds from the issuance of
equity instruments will be adequate for (i) operating and administrative
expenses, (ii) normal repair and maintenance expenses at its properties, (iii)
debt service obligations, (iv) maintaining compliance with its debt covenants,
(v) distributions to stockholders, (vi) capital improvements, (vii) purchases of
properties, (viii) development, and (ix) any other normal business activities of
the Company, both in the short- and long-term.
25
Contractual
Obligations
EastGroup’s fixed, noncancelable
obligations as of December 31, 2008, did not materially change during the nine
months ended September 30, 2009, except for the increase in mortgage notes
payable and the decrease in bank borrowings discussed above.
INFLATION
AND OTHER ECONOMIC CONSIDERATIONS
Most of the Company's leases include
scheduled rent increases. Additionally, most of the Company's leases
require the tenants to pay their pro rata share of operating expenses, including
real estate taxes, insurance and common area maintenance, thereby reducing the
Company's exposure to increases in operating expenses resulting from
inflation.
EastGroup's financial results are
affected by general economic conditions in the markets in which the Company's
properties are located. An economic recession, or other adverse
changes in general or local economic conditions, could result in the inability
of some of the Company's existing tenants to make lease payments and may impact
the Company’s ability to (i) renew leases or re-lease space as leases expire, or
(ii) lease development space. In addition, an economic downturn or
recession could also lead to an increase in overall vacancy rates or decline in
rents the Company can charge to re-lease properties upon expiration of current
leases. In all of these cases, EastGroup’s cash flow would be
adversely affected.
The Company is exposed to interest rate
changes primarily as a result of its lines of credit and long-term debt
maturities. This debt is used to maintain liquidity and fund capital
expenditures and expansion of the Company’s real estate investment portfolio and
operations. The Company’s objective for interest rate risk management
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve its objectives, the
Company borrows at fixed rates but also has several variable rate bank lines as
discussed under Liquidity and
Capital Resources. The table below presents the principal
payments due and weighted average interest rates for both the fixed rate and
variable rate debt.
Oct.-Dec.
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
Fair
Value
|
|||||||||||||||||||||||||
Fixed
rate debt (1)
(in
thousands)
|
$ | 4,649 | 19,754 | 86,663 | 63,940 | 55,197 | 377,405 | 607,608 | 594,107 | (2) | ||||||||||||||||||||||
Weighted
average interest rate
|
6.01 | % | 6.02 | % | 7.01 | % | 6.64 | % | 5.15 | % | 5.92 | % | 6.09 | % | ||||||||||||||||||
Variable
rate debt (in
thousands)
|
$ | – | – | – | 100,464 | – | – | 100,464 | 94,425 | (3) | ||||||||||||||||||||||
Weighted
average interest rate
|
– | – | – | 0.96 | % | – | – | 0.96 | % |
(1)
|
The
fixed rate debt shown above includes the Tower Automotive
mortgage. See below for additional information on the Tower
mortgage.
|
(2)
|
The
fair value of the Company’s fixed rate debt is estimated based on the
quoted market prices for similar issues or by discounting expected cash
flows at the rates currently offered to the Company for debt of the same
remaining maturities, as advised by the Company’s
bankers.
|
(3)
|
The
fair value of the Company’s variable rate debt is estimated by discounting
expected cash flows at current market
rates.
|
As the table above incorporates only
those exposures that existed as of September 30, 2009, it does not consider
those exposures or positions that could arise after that date. If the
weighted average interest rate on the variable rate bank debt as shown above
changes by 10% or approximately 10 basis points, interest expense and cash flows
would increase or decrease by approximately $96,000 annually.
The Company has an interest rate swap
agreement to hedge its exposure to the variable interest rate on the Company’s
$9,175,000 Tower Automotive Center recourse mortgage, which is summarized in the
table below. Under the swap agreement, the Company effectively pays a
fixed rate of interest over the term of the agreement without the exchange of
the underlying notional amount. This swap is designated as a cash
flow hedge and is considered to be fully effective in hedging the variable rate
risk associated with the Tower mortgage loan. Changes in the fair
value of the swap are recognized in accumulated other comprehensive gain
(loss). The Company does not hold or issue this type of derivative
contract for trading or speculative purposes.
Type
of Hedge
|
Current
Notional Amount
|
Maturity
Date
|
Reference
Rate
|
Fixed
Interest Rate
|
Effective Interest
Rate
|
Fair
Value
at
9/30/09
|
Fair
Value
at
12/31/08
|
||||||||||||||||
(In
thousands)
|
(In
thousands)
|
||||||||||||||||||||||
Swap
|
$ | 9,175 |
12/31/10
|
1
month LIBOR
|
4.03% | 6.03% | $ | (386 | ) | $ | (522 | ) |
26
FORWARD-LOOKING
STATEMENTS
Certain statements contained in this
report may be deemed “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. Words such as
“will,” “anticipates,” “expects,” “believes,” “intends,” “plans,” “seeks,”
“estimates,” variations of such words and similar expressions are intended to
identify such forward-looking statements, which generally are not historical in
nature. All statements that address operating performance, events or
developments that the Company expects or anticipates will occur in the future,
including statements relating to rent and occupancy growth, development
activity, the acquisition or sale of properties, general conditions in the
geographic areas where the Company operates and the availability of capital, are
forward-looking statements. Forward-looking statements are inherently
subject to known and unknown risks and uncertainties, many of which the Company
cannot predict, including, without limitation: changes in general economic
conditions; the extent of tenant defaults or of any early lease terminations;
the Company's ability to lease or re-lease space at current or anticipated
rents; the availability of financing; changes in the supply of and demand for
industrial/warehouse properties; increases in interest rate levels; increases in
operating costs; natural disasters, terrorism, riots and acts of war, and the
Company's ability to obtain adequate insurance; changes in governmental
regulation, tax rates and similar matters; and other risks associated with the
development and acquisition of properties, including risks that development
projects may not be completed on schedule, development or operating costs may be
greater than anticipated or acquisitions may not close as scheduled, and those
additional factors discussed under “Item 1A. Risk Factors” in this report and in
the Company’s Annual Report on Form 10-K. Although the Company
believes that the expectations reflected in the forward-looking statements are
based upon reasonable assumptions at the time made, the Company can give no
assurance that such expectations will be achieved. The Company
assumes no obligation whatsoever to publicly update or revise any
forward-looking statements. See also the information contained in the
Company’s reports filed or to be filed from time to time with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).
(i) Disclosure
Controls and Procedures.
The Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of September 30, 2009, the Company’s disclosure controls and
procedures were effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company’s periodic SEC filings.
(ii) Changes
in Internal Control Over Financial Reporting.
There was no change in the Company's
internal control over financial reporting during the Company's third fiscal
quarter ended September 30, 2009, that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
27
PART
II. OTHER INFORMATION.
There have been no material changes to
the risk factors disclosed in EastGroup’s Form 10-K for the year ended December
31, 2008. For a full description of these risk factors, please refer
to “Item 1A. Risk Factors” in the 2008 Annual Report on Form 10-K.
(a) Form
10-Q Exhibits:
|
(31) Rule
13a-14(a)/15d-14(a) Certifications (pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002)
|
(a) David
H. Hoster II, Chief Executive Officer
|
(b) N.
Keith McKey, Chief Financial Officer
|
(32) Section
1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of
2002)
|
(a) David
H. Hoster II, Chief Executive Officer
|
(b) N.
Keith McKey, Chief Financial
Officer
|
28
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November
2,
2009
EASTGROUP
PROPERTIES, INC.
|
||
/s/ BRUCE CORKERN
|
||
Bruce
Corkern, CPA
|
||
Senior
Vice President, Controller and
|
||
Chief
Accounting Officer
|
||
/s/ N. KEITH MCKEY
|
||
N.
Keith McKey, CPA
|
||
Executive
Vice President, Chief Financial Officer,
|
||
Treasurer
and Secretary
|
29