UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2009 COMMISSION FILE NUMBER 1-07094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
190 EAST CAPITOL STREET
SUITE 400
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (601) 354-3555
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES (x) NO ( )
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 May 6,
2009 was 25,207,655.
1
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 2009
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, March 31, 2009 (unaudited) and December
31, 2008 3
Consolidated Statements of Income for the three months ended March 31,
2009 and 2008 (unaudited) 4
Consolidated Statement of Changes in Equity for the three months ended
March 31, 2009 (unaudited) 5
Consolidated Statements of Cash Flows for the three months ended March
31, 2009 and 2008 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 23
SIGNATURES
Authorized signatures 24
2
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
March 31, 2009 December 31, 2008
-------------------------------------------------
(Unaudited)
ASSETS
Real estate properties.................................................. $ 1,267,039 1,252,282
Development............................................................. 151,438 150,354
-------------------------------------------------
1,418,477 1,402,636
Less accumulated depreciation....................................... (321,249) (310,351)
-------------------------------------------------
1,097,228 1,092,285
Unconsolidated investment............................................... 2,687 2,666
Cash.................................................................... 279 293
Other assets............................................................ 61,892 60,961
-------------------------------------------------
TOTAL ASSETS........................................................ $ 1,162,086 1,156,205
=================================================
LIABILITIES AND EQUITY
LIABILITIES
Mortgage notes payable.................................................. $ 549,972 585,806
Notes payable to banks.................................................. 164,209 109,886
Accounts payable & accrued expenses..................................... 23,552 32,838
Other liabilities....................................................... 15,442 14,299
-------------------------------------------------
Total Liabilities................................................... 753,175 742,829
-------------------------------------------------
EQUITY
Stockholders' Equity:
Common shares; $.0001 par value; 70,000,000 shares authorized;
25,186,459 shares issued and outstanding at March 31, 2009 and
25,070,401 at December 31, 2008....................................... 3 3
Excess shares; $.0001 par value; 30,000,000 shares authorized;
no shares issued...................................................... - -
Additional paid-in capital on common shares............................. 529,336 528,452
Distributions in excess of earnings..................................... (122,492) (117,093)
Accumulated other comprehensive loss.................................... (492) (522)
-------------------------------------------------
Total Stockholders' Equity.......................................... 406,355 410,840
-------------------------------------------------
Noncontrolling interest in joint ventures................................. 2,556 2,536
-------------------------------------------------
Total Equity........................................................ 408,911 413,376
-------------------------------------------------
TOTAL LIABILITIES AND EQUITY........................................ $ 1,162,086 1,156,205
=================================================
See accompanying Notes to Consolidated Financial Statements (unaudited).
3
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
2009 2008
-------------------------------
REVENUES
Income from real estate operations....................................... $ 43,310 40,079
Other income............................................................. 15 195
-------------------------------
43,325 40,274
-------------------------------
EXPENSES
Expenses from real estate operations..................................... 12,591 10,839
Depreciation and amortization............................................ 13,044 12,375
General and administrative............................................... 2,561 2,081
-------------------------------
28,196 25,295
-------------------------------
OPERATING INCOME........................................................... 15,129 14,979
OTHER INCOME (EXPENSE)
Equity in earnings of unconsolidated investment.......................... 81 80
Gain on sale of non-operating real estate................................ 8 7
Gain on sales of securities.............................................. - 435
Interest income.......................................................... 124 37
Interest expense......................................................... (7,501) (7,373)
-------------------------------
INCOME FROM CONTINUING OPERATIONS.......................................... 7,841 8,165
-------------------------------
DISCONTINUED OPERATIONS
Income from real estate operations....................................... - 82
-------------------------------
INCOME FROM DISCONTINUED OPERATIONS........................................ - 82
-------------------------------
NET INCOME................................................................. 7,841 8,247
Net income attributable to noncontrolling interest in joint ventures..... (163) (156)
-------------------------------
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC....................... 7,678 8,091
Dividends on Series D preferred shares................................... - 656
-------------------------------
NET INCOME AVAILABLE TO EASTGROUP PROPERTIES, INC.
COMMON STOCKHOLDERS..................................................... $ 7,678 7,435
===============================
BASIC PER COMMON SHARE DATA FOR INCOME ATTRIBUTABLE TO
EASTGROUP PROPERTIES, INC.
Income from continuing operations........................................ $ .31 .31
Income from discontinued operations...................................... .00 .00
-------------------------------
Net income available to common stockholders.............................. $ .31 .31
===============================
Weighted average shares outstanding...................................... 24,999 23,684
===============================
DILUTED PER COMMON SHARE DATA FOR INCOME ATTRIBUTABLE TO
EASTGROUP PROPERTIES, INC.
Income from continuing operations........................................ $ .31 .31
Income from discontinued operations...................................... .00 .00
-------------------------------
Net income available to common stockholders.............................. $ .31 .31
===============================
Weighted average shares outstanding...................................... 25,070 23,829
===============================
AMOUNTS ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.
COMMON STOCKHOLDERS
Income from continuing operations........................................ $ 7,678 7,353
Income from discontinued operations...................................... - 82
-------------------------------
Net income available to common stockholders.............................. $ 7,678 7,435
===============================
Dividends declared per common share........................................ $ .52 .52
See accompanying Notes to Consolidated Financial Statements (unaudited).
4
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
EastGroup Properties, Inc.
---------------------------------------------------
Accumulated
Additional Distributions Other Noncontrolling
Common Paid-In In Excess Comprehensive Interest in
Stock Capital Of Earnings Loss Joint Ventures Total
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2008....................... $ 3 528,452 (117,093) (522) 2,536 413,376
Comprehensive income
Net income................................... - - 7,678 - 163 7,841
Net unrealized change in fair value of
interest rate swap.......................... - - - 30 - 30
--------
Total comprehensive income................ 7,871
--------
Common dividends declared - $.52 per share..... - - (13,077) - - (13,077)
Stock-based compensation, net of forfeitures... - 437 - - - 437
Issuance of 25,000 shares of common stock,
options exercised............................ - 509 - - - 509
Issuance of 2,431 shares of common stock,
dividend reinvestment plan................... - 67 - - - 67
3,628 shares withheld to satisfy tax
withholding obligations in connection with
the vesting of restricted stock.............. - (129) - - - (129)
Distributions to noncontrolling interest....... - - - - (143) (143)
--------------------------------------------------------------------------------
BALANCE, MARCH 31, 2009.......................... $ 3 529,336 (122,492) (492) 2,556 408,911
================================================================================
See accompanying Notes to Consolidated Financial Statements (unaudited).
5
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
------------------------------
2009 2008
------------------------------
OPERATING ACTIVITIES
Net income attributable to EastGroup Properties, Inc................................. $ 7,678 8,091
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization from continuing operations........................... 13,044 12,375
Depreciation and amortization from discontinued operations......................... - 43
Noncontrolling interest depreciation and amortization.............................. (51) (49)
Amortization of mortgage loan premiums............................................. (30) (30)
Gain on sale of non-operating real estate.......................................... (8) (7)
Gain on sales of securities........................................................ - (435)
Amortization of discount on mortgage loan receivable............................... (4) -
Stock-based compensation expense................................................... 438 458
Equity in earnings of unconsolidated investment, net of distributions.............. (21) (20)
Changes in operating assets and liabilities:
Accrued income and other assets.................................................. 992 282
Accounts payable, accrued expenses and prepaid rent.............................. (4,043) (7,081)
------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................................. 17,995 13,627
------------------------------
INVESTING ACTIVITIES
Real estate development.............................................................. (12,327) (26,874)
Purchases of real estate............................................................. - (41,058)
Real estate improvements............................................................. (3,515) (3,533)
Repayments on mortgage loans receivable.............................................. 8 7
Purchases of securities.............................................................. - (7,534)
Proceeds from sales of securities.................................................... - 7,969
Changes in other assets and other liabilities........................................ (2,140) (1,232)
------------------------------
NET CASH USED IN INVESTING ACTIVITIES.................................................. (17,974) (72,255)
------------------------------
FINANCING ACTIVITIES
Proceeds from bank borrowings........................................................ 80,267 126,084
Repayments on bank borrowings........................................................ (25,944) (128,821)
Proceeds from mortgage notes payable................................................. 9,365 78,000
Principal payments on mortgage notes payable......................................... (45,169) (3,745)
Debt issuance costs.................................................................. (30) (1,595)
Distributions paid to stockholders................................................... (13,098) (13,086)
Proceeds from exercise of stock options.............................................. 8 26
Proceeds from dividend reinvestment plan............................................. 67 71
Other................................................................................ (5,501) 1,157
------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................... (35) 58,091
------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (14) (537)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................................... 293 724
------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 279 187
==============================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $1,651 and $1,705
for 2009 and 2008, respectively.................................................... $ 7,240 7,749
Fair value of common stock awards issued to employees and directors,
net of forfeitures................................................................. 2,217 1,018
See accompanying Notes to Consolidated Financial Statements (unaudited).
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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.
(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 March 31, 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 March 31, 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 extend the useful life of or improve the assets are
capitalized. Depreciation expense for continuing and discontinued operations was
$10,898,000 and $10,222,000 for the three months ended March 31, 2009 and 2008,
respectively. The Company's real estate properties at March 31, 2009 and
December 31, 2008 were as follows:
March 31, 2009 December 31, 2008
--------------------------------------
(In thousands)
Real estate properties:
Land................................................ $ 188,825 187,617
Buildings and building improvements................. 876,926 867,506
Tenant and other improvements....................... 201,288 197,159
Development............................................ 151,438 150,354
--------------------------------------
1,418,477 1,402,636
Less accumulated depreciation....................... (321,249) (310,351)
--------------------------------------
$ 1,097,228 1,092,285
======================================
(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, 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).
7
(6) BUSINESS COMBINATIONS AND ACQUIRED INTANGIBLES
Upon acquisition of real estate properties, the Company applies the
principles of Statement of Financial Accounting Standards (SFAS) No. 141R,
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 Statement 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. 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 remaining purchase price is allocated among three categories of
intangible assets consisting of 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 to 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 $566,000 and
$742,000 for the three months ended March 31, 2009 and 2008, respectively.
Amortization of above and below market leases was immaterial for all periods
presented.
There were no acquisitions during the first quarter of 2009.
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 March 31, 2009, and December 31, 2008.
(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 SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, 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 SFAS
No. 144, 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 quarter of 2009
and had no real estate properties that were considered to be held for sale at
March 31, 2009.
(8) OTHER ASSETS
A summary of the Company's Other Assets follows:
March 31, 2009 December 31, 2008
--------------------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization........ $ 20,901 20,866
Straight-line rent receivable, net of allowance for doubtful accounts........... 14,979 14,914
Accounts receivable, net of allowance for doubtful accounts..................... 3,926 4,094
Acquired in-place lease intangibles, net of accumulated amortization
of $5,699 and $5,626 for 2009 and 2008, respectively.......................... 3,803 4,369
Mortgage loans receivable, net of discount of $77 and $81 for 2009 and
2008, respectively............................................................ 4,170 4,174
Loan costs, net of accumulated amortization..................................... 4,007 4,246
Goodwill........................................................................ 990 990
Prepaid expenses and other assets............................................... 9,116 7,308
--------------------------------------
$ 61,892 60,961
======================================
8
(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
March 31, 2009 December 31, 2008
--------------------------------------
(In thousands)
Property taxes payable......................................... $ 8,554 11,136
Development costs payable...................................... 7,061 7,127
Interest payable............................................... 2,475 2,453
Dividends payable.............................................. 1,236 1,257
Other payables and accrued expenses............................ 4,226 10,865
--------------------------------------
$ 23,552 32,838
======================================
(10) OTHER LIABILITIES
A summary of the Company's Other Liabilities follows:
March 31, 2009 December 31, 2008
--------------------------------------
(In thousands)
Security deposits.............................................. $ 7,412 7,560
Prepaid rent and other deferred income......................... 6,061 5,430
Other liabilities.............................................. 1,969 1,309
--------------------------------------
$ 15,442 14,299
======================================
(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 for the three months ended March 31, 2009 are presented in the Company's
Consolidated Statement of Changes in Equity and for the three months ended March
31, 2009 and 2008 are summarized below.
Three Months Ended
March 31,
----------------------------------
2009 2008
----------------------------------
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Balance at beginning of period................................. $ (522) (56)
Change in fair value of interest rate swap................. 30 (295)
----------------------------------
Balance at end of period....................................... $ (492) (351)
==================================
(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. SFAS No. 157, Fair
Value Measurements, 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. SFAS No. 157 also provides guidance
for using fair value to measure financial assets and liabilities. The Statement
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 SFAS No. 157.
On January 1, 2009, the Company adopted the provisions of SFAS No. 161,
Disclosures About Derivative Instruments and Hedging Activities, 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. EastGroup has an interest rate swap agreement to
hedge its exposure to the variable interest rate on the Company's $9,365,000
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 loss (see Note 11). The Company does not hold or
issue this type of derivative contract for trading or speculative purposes.
9
Current
Type of Notional Maturity Fixed Effective Fair Value Fair Value
Hedge Amount Date Reference Rate Interest Rate Interest Rate at 3/31/09 at 12/31/08
------------------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $9,365 12/31/10 1 month LIBOR 4.03% 6.03% ($492) ($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.
Reconciliation of the numerators and denominators in the basic and diluted
EPS computations is as follows:
Three Months Ended
March 31,
----------------------------------
2009 2008
----------------------------------
(In thousands)
BASIC EPS COMPUTATION FOR INCOME ATTRIBUTABLE TO
EASTGROUP PROPERTIES, INC.
Numerator-net income available to common stockholders........ $ 7,678 7,435
Denominator-weighted average shares outstanding.............. 24,999 23,684
DILUTED EPS COMPUTATION FOR INCOME ATTRIBUTABLE TO
EASTGROUP PROPERTIES, INC.
Numerator-net income available to common stockholders........ $ 7,678 7,435
Denominator:
Weighted average shares outstanding........................ 24,999 23,684
Common stock options....................................... 22 60
Nonvested restricted stock................................. 49 85
----------------------------------
Total Shares............................................. 25,070 23,829
==================================
(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 March 31, 2009. Typically, the Company
issues new shares to fulfill stock grants or upon the exercise of stock options.
Stock-based compensation was $435,000 and $603,000 for the three months
ended March 31, 2009 and 2008, respectively, of which $58,000 and $184,000 were
capitalized as part of the Company's development costs.
Restricted Stock
In the second quarter of 2008, the Company granted shares to executive
officers contingent upon the attainment of certain annual performance goals. In
March 2009, 31,811 shares were awarded at a grant date fair value of $47.65 per
share. These shares vested 20% on March 5, 2009, and will vest 20% per year on
each January 1 for the subsequent four years.
In the second quarter of 2006, the Company granted shares to executive
officers contingent upon the attainment of performance goals over a three-year
period ended December 31, 2008. The weighted average grant date fair value for
shares to be awarded under the multi-year market conditions was approximately
$2.1 million. In March 2009, 60,474 shares were awarded, and these shares will
vest 25% per year on January 1, 2010, 2011, 2012 and 2013.
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. 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.
10
Restricted Stock Activity:
Three Months Ended
March 31, 2009
---------------------------
Weighted
Average
Shares Grant Date
Fair Value
---------------------------
Nonvested at beginning of period....... 87,685 $ 36.95
Granted (1)............................ 92,555 39.40
Forfeited.............................. (300) 20.50
Vested................................. (23,400) 31.93
--------
Nonvested at end of period............. 156,540 37.04
========
(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.
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 $61,000 and
$39,000 for the three months ended March 31, 2009 and 2008, respectively.
(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 Financial Accounting Standards Board (FASB) deferred for one year the
fair value measurement requirements contained in SFAS No. 157, Fair Value
Measurements, 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 FASB Staff Position (FSP) FAS 157-2, 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 SFAS No. 141 (Revised 2007), Business
Combinations, which retains the fundamental requirements in SFAS No. 141 and
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, Statement 141R 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. The Statement also requires that acquisition-related costs
be recognized as expenses in the periods in which the costs are incurred and the
services are received. SFAS No. 141R 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 Statement 141R in 2009 had an immaterial impact on the Company's
overall financial position and results of operations.
Also in December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, which is an amendment of
Accounting Research Bulletin (ARB) No. 51. Statement 160 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. SFAS No. 160 was effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. The adoption
of Statement 160 in 2009 had an immaterial impact on the Company's overall
financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative
Instruments and Hedging Activities, which is an amendment of FASB Statement No.
133. SFAS No. 161 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 SFAS No.
161 on January 1, 2009.
During 2008, the FASB issued FSP FAS 142-3, which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 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 Staff Position is to improve the consistency
between the useful life of a recognized intangible asset under Statement 142 and
the period of expected cash flows used to measure the fair value of the asset
under Statement 141R and other U.S. generally accepted accounting principles.
FSP FAS 142-3 was effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim
11
periods within those fiscal years. The adoption of FSP FAS 142-3 in 2009 had an
immaterial impact on the Company's overall financial position and results of
operations.
Also in 2008, the Emerging Issues Task Force (EITF) issued EITF 08-6,
Equity Method Investment Accounting Considerations, which applies to all
investments accounted for under the equity method and clarifies the accounting
for certain transactions and impairment considerations involving those
investments. EITF 08-6 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 EITF 08-6 in 2009 had an immaterial impact on the
Company's overall financial position and results of operations.
In April 2009, the FASB issued FSP FAS 107-1, which amends SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends Accounting Principles Board (APB) No. 28, Interim Financial
Reporting, to require those disclosures in summarized financial information at
interim reporting periods. FSP FAS 107-1 is effective for interim reporting
periods ending after June 15, 2009, and the Company anticipates that the
adoption of this FSP will have an immaterial impact on the Company's overall
financial position and results of operations.
(17) SUBSEQUENT EVENTS
In March, EastGroup executed an application 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
closed on May 5, 2009, and 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.
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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
EastGroup's goal is to maximize shareholder value by being the 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 is projecting a continued
decrease in occupancy, and there are 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 is
decreasing, and long-term interest rates are increasing. 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 as evidenced by the executed loan application for $67 million
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 three months ended March 31,
2009, leases on 1,286,000 square feet (5.0%) of EastGroup's total square footage
of 25,757,000 expired, and the Company was successful in renewing or re-leasing
73% of the expiring square feet. In addition, EastGroup leased 342,000 square
feet of other vacant space during this period. During the three months ended
March 31, 2009, average rental rates on new and renewal leases decreased by
5.0%.
EastGroup's total leased percentage was 93.4% at March 31, 2009, compared
to 94.9% at March 31, 2008. Leases scheduled to expire for the remainder of 2009
were 9.7% of the portfolio on a square foot basis at March 31, 2009, and this
figure was reduced to 7.0% as of May 6, 2009. Property net operating income
(PNOI) from same properties decreased 2.6% for the quarter ended March 31, 2009,
as compared to the same period in 2008.
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 quarter of
2009 and currently does not have any plans to start construction on new
developments for the remainder of 2009. During the first quarter of 2009, the
Company transferred two properties (145,000 square feet) with aggregate costs of
$10.2 million at the date of transfer from development to real estate
properties. These properties, which were collectively 82.9% leased as of May 6,
2009, are located in Phoenix, Arizona, and San Antonio, Texas.
During the first quarter of 2009, the Company funded its development
program through its $225 million lines of credit (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 the 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.
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
13
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. 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 months ended March 31, 2009 and 2008 reconciliations of PNOI and FFO
Available to Common Stockholders to Net Income Attributable to EastGroup
Properties, Inc.
Three Months Ended March 31,
--------------------------------
2009 2008
--------------------------------
(In thousands)
Income from real estate operations.............................................. $ 43,310 40,079
Expenses from real estate operations............................................ (12,591) (10,839)
--------------------------------
PROPERTY NET OPERATING INCOME................................................... 30,719 29,240
Equity in earnings of unconsolidated investment (before depreciation)........... 114 113
Income from discontinued operations (before depreciation and amortization)...... - 125
Interest income................................................................. 124 37
Gain on sales of securities..................................................... - 435
Other income.................................................................... 15 195
Interest expense................................................................ (7,501) (7,373)
General and administrative expense.............................................. (2,561) (2,081)
Noncontrolling interest in earnings (before depreciation and amortization)...... (214) (205)
Gain on sale of non-operating real estate....................................... 8 7
Dividends on Series D preferred shares.......................................... - (656)
--------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS.......................... 20,704 19,837
Depreciation and amortization from continuing operations........................ (13,044) (12,375)
Depreciation and amortization from discontinued operations...................... - (43)
Depreciation from unconsolidated investment..................................... (33) (33)
Noncontrolling interest depreciation and amortization........................... 51 49
--------------------------------
NET INCOME AVAILABLE TO EASTGROUP PROPERTIES, INC.
COMMON STOCKHOLDERS.......................................................... 7,678 7,435
Dividends on preferred shares................................................... - 656
--------------------------------
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC............................ $ 7,678 8,091
================================
Net income available to common stockholders per diluted share................... $ .31 .31
Funds from operations available to common stockholders per diluted share........ .83 .83
Diluted shares for earnings per share and funds from operations................. 25,070 23,829
The Company analyzes the following performance trends in evaluating the progress
of the Company:
o 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 first quarter of 2009 was $.83 per share, the same as
the first quarter of 2008. Excluding gain on sales of securities of
$435,000 and gain on involuntary conversion of $175,000 in the first
quarter of 2008, FFO increased by 2.5% over the first quarter of 2008. PNOI
increased 5.1% primarily due to additional PNOI of $1,787,000 from newly
developed properties and $414,000 from 2008 acquisitions, offset by a
decrease of $745,000 from same property growth.
o Same property net operating income change represents the PNOI increase or
decrease for operating properties owned during the entire current period
and prior year reporting period. PNOI from same properties decreased 2.6%
for the first quarter of 2009 as compared to the same quarter last year.
Occupancy for same properties decreased from 94.4% to 93.1%.
o 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 March 31, 2009, was 92.8%.
Quarter-end occupancy ranged from 92.8% to 95.0% over the period from March
31, 2008 to March 31, 2009.
o 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 (5.0% of total square footage)
averaged 5.0% for the first quarter of 2009.
14
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.
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 remaining purchase price is
allocated among three categories of intangible assets consisting of 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 to 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.
15
FINANCIAL CONDITION
EastGroup's assets were $1,162,086,000 at March 31, 2009, an increase of
$5,881,000 from December 31, 2008. Liabilities increased $10,346,000 to
$753,175,000 and equity decreased $4,465,000 to $408,911,000 during the same
period. The paragraphs that follow explain these changes in detail.
ASSETS
Real Estate Properties
Real estate properties increased $14,757,000 during the three months ended
March 31, 2009, primarily due to the transfer of two properties from
development, as detailed under Development below.
The Company made capital improvements of $3,515,000 on existing and
acquired properties (included in the Capital Expenditures table under Results of
Operations). Also, the Company incurred costs of $1,061,000 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 March 31, 2009, was $151,438,000 compared
to $150,354,000 at December 31, 2008. Total capital invested for development
during the first three months of 2009 was $12,327,000, which consisted of costs
of $11,266,000 as detailed in the development activity table and costs of
$1,061,000 on developments transferred to Real Estate Properties during the
12-month period following transfer.
The Company transferred two developments to Real Estate Properties during
the first quarter of 2009 with a total investment of $10,182,000 as of the date
of transfer.
Costs Incurred
----------------------------------------------
Costs For the Cumulative
Transferred Three Months as of Estimated
DEVELOPMENT Size in 2009 (1) Ended 3/31/09 3/31/09 Total Costs
------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Beltway Crossing VI, Houston, TX.................... 128,000 $ - 149 5,756 6,700
Oak Creek VI, Tampa, FL............................ 89,000 - 42 5,629 6,100
Southridge VIII, Orlando, FL........................ 91,000 - 270 6,271 6,900
Techway SW IV, Houston, TX.......................... 94,000 - 365 5,208 6,400
SunCoast III, Fort Myers, FL........................ 93,000 - 136 6,854 8,400
Sky Harbor, Phoenix, AZ............................. 264,000 - 401 23,230 25,100
World Houston 26, Houston, TX....................... 59,000 - 151 2,969 3,600
12th Street Distribution Center, Jacksonville, FL... 150,000 - 104 4,954 5,300
Beltway Crossing VII, Houston, TX................... 95,000 - 320 4,533 5,900
Country Club III & IV, Tucson, AZ................... 138,000 - 1,453 9,500 11,200
Oak Creek IX, Tampa, FL............................ 86,000 - 567 4,767 5,500
----------------------------------------------------------------------------
Total Lease-up........................................ 1,287,000 - 3,958 79,671 91,100
----------------------------------------------------------------------------
UNDER CONSTRUCTION
Blue Heron III, West Palm Beach, FL................. 20,000 - 525 2,423 2,600
World Houston 28, Houston, TX....................... 59,000 - 1,814 4,194 4,900
World Houston 29, Houston, TX....................... 70,000 - 1,982 3,868 4,800
World Houston 30, Houston, TX....................... 88,000 - 2,423 4,014 5,800
----------------------------------------------------------------------------
Total Under Construction.............................. 237,000 - 6,744 14,499 18,100
----------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Tucson, AZ.......................................... 70,000 - - 417 3,500
Tampa, FL........................................... 249,000 - (128) 3,762 14,600
Orlando, FL......................................... 1,254,000 - 235 14,688 78,700
Fort Myers, FL...................................... 659,000 - (69) 14,945 48,100
Dallas, TX.......................................... 70,000 - 16 586 5,000
El Paso, TX......................................... 251,000 - - 2,444 9,600
Houston, TX......................................... 1,064,000 - 334 13,120 68,100
San Antonio, TX..................................... 595,000 - 145 5,584 37,500
Charlotte, NC....................................... 95,000 - 21 1,016 7,100
Jackson, MS......................................... 28,000 - - 706 2,000
----------------------------------------------------------------------------
Total Prospective Development......................... 4,335,000 - 554 57,268 274,200
----------------------------------------------------------------------------
5,859,000 $ - 11,256 151,438 383,400
============================================================================
16
Costs Incurred
----------------------------------------------
Costs For the Cumulative
Transferred Three Months as of Estimated
DEVELOPMENT Size in 2009 (1) Ended 3/31/09 3/31/09 Total Costs
------------------------------------------------------------------------------------------------------------------------------------
(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
--------------------------------------------------------------
Total Transferred to Real Estate Properties........... 145,000 $ - 10 10,182 (2)
==============================================================
(1) Represents costs transferred from Prospective Development (primarily land)
to Under Construction during the period.
(2) Represents cumulative costs at the date of transfer.
Accumulated depreciation on real estate properties increased $10,898,000
during the first three 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 the
Consolidated Financial Statements.
LIABILITIES
Mortgage notes payable decreased $35,834,000 during the three months ended
March 31, 2009, as a result of the repayment of one mortgage of $31,357,000,
regularly scheduled principal payments of $4,447,000 and mortgage loan premium
amortization of $30,000. 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 increased $54,323,000 during the three months ended
March 31, 2009, as a result of advances of $80,267,000 exceeding repayments of
$25,944,000. The Company's credit facilities are described in greater detail
under Liquidity and Capital Resources.
See Note 9 in the Notes to the Consolidated Financial Statements for a
summary of Accounts Payable and Accrued Expenses. See Note 10 in the Notes to
the Consolidated Financial Statements for a summary of Other Liabilities.
EQUITY
Distributions in excess of earnings increased $5,399,000 as a result of
dividends on common stock of $13,077,000 exceeding net income for financial
reporting purposes of $7,678,000. See Note 14 in the Notes to the Consolidated
Financial Statements for information related to the changes in additional
paid-in capital resulting from stock-based compensation.
RESULTS OF OPERATIONS
(Comments are for the three months ended March 31, 2009, compared to the three
months ended March 31, 2008.)
Net income available to common stockholders for the three months ended
March 31, 2009, was $7,678,000 ($.31 per basic and diluted share) compared to
$7,435,000 ($.31 per basic and diluted share) for the same period in 2008.
PNOI increased by $1,479,000, or 5.1%, for the first quarter of 2009 as
compared to the same period in 2008. The increase was primarily attributable to
$1,787,000 from newly developed properties and $414,000 from 2008 acquisitions,
offset by a decrease of $745,000 from same property growth. The Company recorded
gains on sales of securities of $435,000 and a gain on an involuntary conversion
of $175,000 during the first quarter of 2008.
Expense to revenue ratios were 29.1% for the three months ended March 31,
2009, compared to 27.0% for the same period in 2008. The increase was primarily
due to increased bad debt expense and lower occupancy in the first quarter of
2009 as compared to the same period last year. The Company's percentages leased
and occupied were 93.4% and 92.8%, respectively, at March 31, 2009, compared to
94.9% and 94.4%, respectively, at March 31, 2008.
General and administrative expense increased $480,000 for the three months
ended March 31, 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.
The following table presents the components of interest expense for the
three months ended March 31, 2009 and 2008:
17
Three Months Ended March 31,
----------------------------- Increase/
2009 2008 Decrease
-------------------------------------------
(In thousands, except rates of interest)
Average bank borrowings......................................................... $ 133,523 151,906 (18,383)
Weighted average variable interest rates (excluding loan cost amortization)..... 1.47% 4.54%
VARIABLE RATE INTEREST EXPENSE
Variable rate interest (excluding loan cost amortization)....................... $ 482 1,716 (1,234)
Amortization of bank loan costs................................................. 74 74 -
-------------------------------------------
Total variable rate interest expense............................................ 556 1,790 (1,234)
-------------------------------------------
FIXED RATE INTEREST EXPENSE
Fixed rate interest (excluding loan cost amortization).......................... 8,401 7,135 1,266
Amortization of mortgage loan costs............................................. 195 153 42
-------------------------------------------
Total fixed rate interest expense............................................... 8,596 7,288 1,308
-------------------------------------------
Total interest.................................................................. 9,152 9,078 74
Less capitalized interest....................................................... (1,651) (1,705) 54
-------------------------------------------
TOTAL INTEREST EXPENSE.......................................................... $ 7,501 7,373 128
===========================================
Interest costs incurred during the period of construction of real estate
properties are capitalized and offset against interest expense. The Company's
weighted average variable interest rates and average bank borrowings in the
first three months of 2009 were lower than in 2008, thereby decreasing variable
rate interest expense.
The increase in mortgage interest expense in 2009 was primarily due to the
Company's new mortgages detailed in the table below.
INTEREST MATURITY
NEW MORTGAGES IN 2008 AND 2009 RATE DATE 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
----------- -------------
Weighted Average/Total Amount................................ 5.635% $ 146,365,000
=========== =============
(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 two mortgages in 2009 as shown in the following table:
INTEREST DATE PAYOFF
MORTGAGE LOANS REPAID IN 2009 RATE REPAID 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
---------- ---------------
Weighted Average/Total Amount......................... 7.081% $ 40,722,000
========== ===============
(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 $669,000
for the three months ended March 31, 2009, as compared to the same period in
2008. This increase was primarily due to properties transferred from development
during 2008 and 2009 and properties acquired during the first quarter of 2008.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent for
continuing operations increased income by $66,000 in the first quarter of 2009
compared to $280,000 in the same period of 2008.
18
Capital Expenditures
Capital expenditures for operating properties for the three months ended
March 31, 2009 and 2008 were as follows:
Three Months Ended March 31,
Estimated ------------------------------
Useful Life 2009 2008
-----------------------------------------------
(In thousands)
Upgrade on Acquisitions................ 40 yrs $ - 31
Tenant Improvements:
New Tenants......................... Lease Life 1,375 2,088
New Tenants (first generation) (1).. Lease Life 60 3
Renewal Tenants..................... Lease Life 284 512
Other:
Building Improvements............... 5-40 yrs 810 182
Roofs............................... 5-15 yrs 696 108
Parking Lots........................ 3-5 yrs 64 538
Other............................... 5 yrs 226 71
------------------------------
Total capital expenditures....... $ 3,515 3,533
==============================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
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 months ended March 31, 2009 and 2008
were as follows:
Three Months Ended March 31,
Estimated ------------------------------
Useful Life 2009 2008
-----------------------------------------------
(In thousands)
Development............................ Lease Life $ 344 833
New Tenants............................ Lease Life 487 471
New Tenants (first generation) (1)..... Lease Life 4 7
Renewal Tenants........................ Lease Life 780 239
------------------------------
Total capitalized leasing costs.. $ 1,615 1,550
==============================
Amortization of leasing costs (2)...... $ 1,580 1,454
==============================
(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 months ended March 31, 2009
and 2008. There were no sales of properties during the first three months of
2009 or 2008; however, the Company has reclassified the operations of North
Stemmons I and Delp Distribution Center III, which were sold during 2008, to
Discontinued Operations as shown in the following table.
Three Months Ended March 31,
------------------------------
Discontinued Operations 2009 2008
--------------------------------------------------------------------------------------------------
(In thousands)
Income from real estate operations............................... $ - 167
Expenses from real estate operations............................. - (42)
------------------------------
Property net operating income from discontinued operations..... - 125
Depreciation and amortization.................................... - (43)
------------------------------
Income from real estate operations............................... $ - 82
==============================
19
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) deferred for one year the
fair value measurement requirements contained in SFAS No. 157, Fair Value
Measurements, 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 FASB Staff Position (FSP) FAS 157-2, 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 SFAS No. 141 (Revised 2007), Business
Combinations, which retains the fundamental requirements in SFAS No. 141 and
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, Statement 141R 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. The Statement also requires that acquisition-related costs
be recognized as expenses in the periods in which the costs are incurred and the
services are received. SFAS No. 141R 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 Statement 141R in 2009 had an immaterial impact on the Company's
overall financial position and results of operations.
Also in December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, which is an amendment of
Accounting Research Bulletin (ARB) No. 51. Statement 160 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. SFAS No. 160 was effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. The adoption
of Statement 160 in 2009 had an immaterial impact on the Company's overall
financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative
Instruments and Hedging Activities, which is an amendment of FASB Statement No.
133. SFAS No. 161 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 SFAS No.
161 on January 1, 2009.
During 2008, the FASB issued FSP FAS 142-3, which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 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 Staff Position is to improve the consistency
between the useful life of a recognized intangible asset under Statement 142 and
the period of expected cash flows used to measure the fair value of the asset
under Statement 141R and other U.S. generally accepted accounting principles.
FSP FAS 142-3 was effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The adoption of FSP FAS 142-3 in 2009 had an immaterial impact on the
Company's overall financial position and results of operations.
Also in 2008, the Emerging Issues Task Force (EITF) issued EITF 08-6,
Equity Method Investment Accounting Considerations, which applies to all
investments accounted for under the equity method and clarifies the accounting
for certain transactions and impairment considerations involving those
investments. EITF 08-6 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 EITF 08-6 in 2009 had an immaterial impact on the
Company's overall financial position and results of operations.
In April 2009, the FASB issued FSP FAS 107-1, which amends SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends Accounting Principles Board (APB) No. 28, Interim Financial
Reporting, to require those disclosures in summarized financial information at
interim reporting periods. FSP FAS 107-1 is effective for interim reporting
periods ending after June 15, 2009, and the Company anticipates that the
adoption of this FSP will have an immaterial impact on the Company's overall
financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $17,995,000 for the three
months ended March 31, 2009. The primary other sources of cash were from bank
borrowings and mortgage note proceeds. The Company distributed $13,098,000 in
common stock dividends during the three months ended March 31, 2009. Other
primary uses of cash were for mortgage note repayments, bank debt repayments,
construction and development of properties, and capital improvements at various
properties.
Total debt at March 31, 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
March 31, 2009 and December 31, 2008.
20
March 31, 2009 December 31, 2008
-------------------------------------
(In thousands)
Mortgage notes payable - fixed rate......... $ 549,972 585,806
Bank notes payable - floating rate.......... 164,209 109,886
-------------------------------------
Total debt............................... $ 714,181 695,692
=====================================
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 March 31, 2009, the weighted average interest rate was
1.230% on a balance of $162,000,000. At May 6, 2009, the Company's weighted
average interest rate was 1.143% on a balance of $92,000,000. The Company had an
additional $108,000,000 remaining on this line of credit on May 6, 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
cash 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 March 31, 2009, the interest rate was 1.251% on a
balance of $2,209,000. At May 6, 2009, the interest rate was 1.145% on a balance
of $4,363,000. The Company had an additional $20,637,000 remaining on this line
of credit on May 6, 2009.
The current economic situation is impacting lenders, and it is more
difficult to obtain financing. Loan proceeds as a percentage of property value
is decreasing, and long-term interest rates are increasing. 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. In March 2009, EastGroup executed an application 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 closed on May 5, 2009, and 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.
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.
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
notes 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) distributions
to stockholders, (v) capital improvements, (vi) purchases of properties, (vii)
development, and (viii) any other normal business activities of the Company,
both in the short- and long-term.
Contractual Obligations
EastGroup's fixed, noncancelable obligations as of December 31, 2008, did
not materially change during the three months ended March 31, 2009, except for
the decrease in mortgage notes payable and the increase 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 our 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 we can charge to re-lease properties upon expiration of current
leases. In all of these cases, our cash flow would be adversely affected.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate changes primarily as a result of
its lines of credit and long-term debt maturities. This debt is used to maintain
liquidity and fund capital expenditures and expansion of the Company's real
estate investment portfolio and operations. The Company's 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.
Apr-Dec
2009 2010 2011 2012 2013 Thereafter Total Fair Value
---------------------------------------------------------------------------------------------
Fixed rate debt (1) (in thousands).... $ 13,150 18,185 84,971 62,117 53,232 318,317 549,972 516,649 (2)
Weighted average interest rate........ 5.95% 5.89% 7.00% 6.61% 5.06% 5.63% 5.91%
Variable rate debt (in thousands)..... $ - - - 164,209 - - 164,209 150,848 (3)
Weighted average interest rate........ - - - 1.23% - - 1.23%
(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
March 31, 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 12 basis points,
interest expense and cash flows would increase or decrease by approximately
$202,000 annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $9,365,000 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 loss. The Company does not hold or issue this type of derivative
contract for trading or speculative purposes.
Current Fixed
Type of Notional Maturity Interest Effective Fair Value Fair Value
Hedge Amount Date Reference Rate Rate Interest Rate at 3/31/09 at 12/31/08
-------------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $9,365 12/31/10 1 month LIBOR 4.03% 6.03% ($492) ($522)
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 "expects," "anticipates," "intends," "plans," "believes,"
"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; changes in
the supply of and demand for industrial/warehouse properties; increases in
interest rate levels; increases in operating costs; the availability of
financing; natural disasters 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 that
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.
22
ITEM 4. CONTROLS AND PROCEDURES.
(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 March 31,
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 first fiscal quarter ended March 31, 2009, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION.
ITEM 1A. RISK FACTORS.
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Total Number Average Total Number of Shares Maximum Number of Shares
of Shares Price Paid Purchased as Part of Publicly That May Yet Be Purchased
Period Purchased Per Share Announced Plans or Programs Under the Plans or Programs
------------------------------------------------------------------------------------------------------------------------------
01/01/09 thru 01/31/09 3,607 (1) $ 35.58 - 672,300
02/01/09 thru 02/28/09 - - - 672,300
03/01/09 thru 03/31/09 21 (1) 26.55 - 672,300 (2)
-------------------------------------------------------------------
Total 3,628 $ 35.53 -
===================================================================
(1) As permitted under the Company's equity compensation plans, these shares
were withheld by the Company to satisfy the tax withholding obligations for
those employees who elected this option in connection with the vesting of
shares of restricted stock. Shares withheld for tax withholding obligations
do not affect the total number of remaining shares available for repurchase
under the Company's common stock repurchase plan.
(2) EastGroup's Board of Directors has authorized the repurchase of up to
1,500,000 shares of its outstanding common stock. The shares may be
purchased from time to time in the open market or in privately negotiated
transactions. Under the common stock repurchase plan, the Company has
purchased a total of 827,700 shares for $14,170,000 (an average of $17.12
per share) with 672,300 shares still authorized for repurchase. The Company
has not repurchased any shares under this plan since 2000.
ITEM 6. EXHIBITS.
(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
23
SIGNATURES
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: May 8, 2009
EASTGROUP PROPERTIES, INC.
By: /s/ BRUCE CORKERN
-------------------------
Bruce Corkern, CPA
Senior Vice President, Controller and
Chief Accounting Officer
By: /s/ N. KEITH MCKEY
-------------------------
N. Keith McKey, CPA
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
24