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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 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.)
300 ONE JACKSON PLACE
188 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (601) 354-3555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SHARES OF COMMON STOCK, $.0001 PAR VALUE,
SHARES OF SERIES D 7.95% CUMULATIVE REDEEMABLE PREFERRED STOCK, $.0001 PAR VALUE
NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES (x) NO ( )
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the Registrant's most recently completed second
fiscal quarter: $685,561,000.
The number of shares of common stock, $.0001 par value, outstanding as of
March 10, 2005 was 21,084,479.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2005 Annual Meeting of
Shareholders are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS.
Organization
EastGroup Properties, Inc. (the Company or EastGroup) is an equity real estate
investment trust (REIT) organized in 1969. The Company has elected to be taxed
as a REIT under Sections 856-860 of the Internal Revenue Code (the Code), as
amended, and intends to continue to qualify to be so taxed.
Available Information
The Company maintains a website at www.eastgroup.net. The Company posts its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after it electronically files or furnishes such materials to the
Securities and Exchange Commission (SEC). In addition, the Company's website
includes items related to corporate governance matters, including, among other
things, the Company's corporate governance guidelines, charters of various
committees of the Board of Directors, and the Company's code of business conduct
and ethics applicable to all employees, officers and directors. The Company
intends to disclose on its website any amendment to, or waiver of, any provision
of this code of business conduct and ethics applicable to the Company's
directors and executive officers that would otherwise be required to be
disclosed under the rules of the SEC or the New York Stock Exchange. Copies of
these reports and corporate governance documents may be obtained, free of
charge, from the Company's website. Any shareholder also may obtain copies of
these documents, free of charge, by sending a request in writing to: Investor
Relations, EastGroup Properties, Inc., 300 One Jackson Place, 188 East Capitol
Street, Jackson, MS 39201-2195.
Administration
EastGroup maintains its principal executive office and headquarters in Jackson,
Mississippi. The Company has regional offices in Phoenix, Orlando and Houston
and property management offices in Jacksonville, Tampa and Fort Lauderdale.
Offices at these locations allow the Company to manage all of its Mississippi,
Arizona, Florida and Houston properties, which together account for 54% of the
Company's total portfolio on a square foot basis. In addition, the Company
currently provides property administration (accounting of operations) for 93% of
its total portfolio. The Company uses third-party management groups for the
remainder of its portfolio. The regional offices in Arizona, Florida and Texas
also provide development capability and oversight in those states. As of March
10, 2005, EastGroup had 58 full-time and two part-time employees.
Operations
EastGroup is focused on the development, acquisition and operation of industrial
properties in major Sunbelt markets throughout the United States with a special
emphasis in the states of Florida, Texas, California and Arizona. The Company's
goal is to maximize shareholder value by being a leading provider of functional,
flexible, and quality business distribution space for location sensitive tenants
primarily in the 5,000 to 50,000 square foot range. EastGroup's strategy for
growth is based on ownership of premier distribution facilities generally
clustered near major transportation features in supply constrained submarkets.
During 2004, EastGroup expanded its holdings principally through the
acquisition of four properties comprised of 524,000 square feet of warehouse
space and 15 acres of land for future development and by the transfer of seven
properties (539,000 square feet) from development to real estate properties.
EastGroup also acquired a 50% undivided tenant-in-common interest in another
property (309,000 square feet). The Company sold three properties (148,000
square feet) and one small parcel of land during 2004. The Company's current
portfolio includes 21 million square feet of real estate properties with an
additional 521,000 square feet under development.
EastGroup may invest in other real estate investment trusts that may be a
potential candidate for a combination with EastGroup. At December 31, 2004, the
Company had no investments in other REITs.
EastGroup incurs short-term floating rate debt in connection with the
acquisition of real estate and payment of costs of development projects and, as
market conditions permit, replaces floating rate debt with equity, including
preferred equity, and/or fixed-rate term loans secured by real property.
EastGroup also may, in appropriate circumstances, acquire one or more properties
in exchange for EastGroup securities.
EastGroup holds its properties as long-term investments, but may determine
to sell certain properties that no longer meet its investment criteria. The
Company may provide financing in connection with such sales of property if
market conditions require. In addition, the Company may provide financing in
connection with an acquisition of real estate in certain situations.
The Company intends to continue to qualify as a REIT under the Code. To
maintain its status as a REIT, the Company is required to distribute 90% of its
ordinary taxable income to its shareholders. 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.
EastGroup has no present intentions of underwriting securities of other
issuers. The strategies and policies set forth above were determined and are
subject to review by EastGroup's Board of Directors, which may change such
strategies or policies based upon its evaluation of the state of the real estate
market, the performance of EastGroup's assets, capital and credit market
conditions, and other relevant factors.
EastGroup provides annual reports to its stockholders, which contain financial
statements audited by the Company's independent public accountants.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an
owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. Many such laws
impose liability without regard to whether the owner knows of, or was
responsible for, the presence of such hazardous or toxic substances. The
presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to use such property as collateral in its borrowings. All of
EastGroup's properties have been subjected to environmental audits by
independent environmental consultants. These reports have not revealed any
potential significant environmental liability. Management of EastGroup is not
aware of any environmental liability that would have a material adverse effect
on EastGroup's business, assets, financial position or results of operations.
ITEM 2. PROPERTIES.
EastGroup owned 171 industrial properties and one office building at December
31, 2004. These properties are located throughout the United States, primarily
in the Sunbelt states of Arizona, California, Florida and Texas, the majority of
which are clustered around major transportation features in supply constrained
submarkets. The Company has developed over 20% of its total portfolio. The
Company's focus is the ownership of business distribution space (currently 75%
of the total portfolio) with the remainder in bulk distribution space (20%) and
business service space (5%). Business distribution space properties are
typically multi-tenant buildings with a building depth of 200 feet or less,
clear height of 20-24 feet, office finish of 10-25% and truck courts with a
depth of 100-120 feet. See Consolidated Financial Statement Schedule III - Real
Estate Properties and Accumulated Depreciation for a detailed listing of the
Company's properties.
At December 31, 2004, EastGroup did not own any single property that was
10% or more of total book value or 10% or more of total gross revenues and thus
is not subject to the requirements of Items 14 and 15 of Form S-11.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material litigation nor, to its
knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business or which is expected to be covered by the Company's liability
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II. OTHER INFORMATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's shares of Common Stock are listed for trading on the New York
Stock Exchange under the symbol "EGP." The following table shows the high and
low share prices for each quarter reported by the New York Stock Exchange during
the past two years and per share distributions paid for each quarter.
Shares of Common Stock Market Prices and Dividends
Calendar 2004 Calendar 2003
--------------------------------------------------------------------------------------------------
Quarter High Low Distributions High Low Distributions
--------------------------------------------------------------------------------------------------
First $36.00 32.28 $ .480 $26.12 23.64 $ .475
Second 35.75 27.85 .480 27.65 25.45 .475
Third 34.99 31.58 .480 28.70 26.33 .475
Fourth 38.65 33.05 .480 33.10 27.81 .475
--------------- ---------------
$ 1.920 $ 1.900
=============== ===============
As of March 10, 2005, there were approximately 1,100 holders of record of the
Company's 21,084,479 outstanding shares of common stock. The Company distributed
all of its 2004 and 2003 taxable income to its stockholders. Accordingly, no
provision for income taxes was necessary. The following table summarizes the
federal income tax treatment for all distributions by the Company for the years
2004 and 2003.
Federal Income Tax Treatment of Share Distributions
Years Ended December 31,
--------------------------
2004 2003
--------------------------
Common Share Distributions:
Ordinary Income........................... $ 1.4860 1.68388
Return of capital......................... .4060 .21612
Long-term 15% capital gain................ .0140 -
Long-term 25% capital gain................ .0140 -
--------------------------
Total Common Distributions.................... $ 1.9200 1.90000
==========================
Common Stock Repurchase Plan
EastGroup's Board of Directors has authorized the repurchase of up to 1,500,000
shares of its outstanding common stock. The shares may be purchased from time to
time in the open market or in privately negotiated transactions. The Company has
not repurchased any shares since 2000. Under the 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.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data for the
Company and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report.
Years Ended December 31,
------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------
(In thousands, except per share data)
OPERATING DATA
Revenues
Income from real estate operations............................. $114,051 106,925 102,272 99,454 92,796
Interest....................................................... 121 22 309 1,041 975
Gain on involuntary conversion................................. 154 - - - -
Gain on securities............................................. - 421 1,836 2,967 2,154
Equity in earnings of unconsolidated investment................ 69 - - - -
Other.......................................................... 289 227 617 727 1,068
------------------------------------------------------------
114,684 107,595 105,034 104,189 96,993
------------------------------------------------------------
Expenses
Operating expenses from real estate operations................. 32,142 31,429 29,493 25,259 22,015
Interest....................................................... 20,481 19,015 17,387 17,823 18,570
Depreciation and amortization.................................. 33,288 31,774 30,076 26,689 23,172
General and administrative..................................... 6,711 4,966 4,179 4,573 5,607
Minority interest in joint ventures............................ 490 416 375 350 377
------------------------------------------------------------
93,112 87,600 81,510 74,694 69,741
------------------------------------------------------------
Income before gain on sale of real estate investments............ 21,572 19,995 23,524 29,495 27,252
Gain on sale of real estate investments........................ - - 93 4,311 8,771
------------------------------------------------------------
Income from continuing operations................................ 21,572 19,995 23,617 33,806 36,023
------------------------------------------------------------
Discontinued operations
Income from real estate operations............................. 304 338 75 376 489
Gain (loss) on sale of real estate investments................. 1,451 112 (66) - -
------------------------------------------------------------
Income from discontinued operations.............................. 1,755 450 9 376 489
------------------------------------------------------------
Net income ...................................................... 23,327 20,445 23,626 34,182 36,512
Preferred dividends-Series A................................... - 2,016 3,880 3,880 3,880
Preferred dividends-Series B................................... - 2,598 6,128 6,128 6,128
Preferred dividends-Series D................................... 2,624 1,305 - - -
Costs on redemption of Series A preferred...................... - 1,778 - - -
------------------------------------------------------------
Net income available to common stockholders...................... $ 20,703 12,748 13,618 24,174 26,504
============================================================
BASIC PER SHARE DATA
Income from continuing operations.............................. $ 0.91 0.69 0.86 1.52 1.67
Income from discontinued operations............................ 0.09 0.03 0.00 0.02 0.03
------------------------------------------------------------
Net income available to common stockholders.................... $ 1.00 0.72 0.86 1.54 1.70
============================================================
Weighted average shares outstanding............................ 20,771 17,819 15,868 15,697 15,623
============================================================
DILUTED PER SHARE DATA
Income from continuing operations.............................. $ 0.90 0.68 0.84 1.48 1.65
Income from discontinued operations............................ 0.08 0.02 0.00 0.03 0.03
------------------------------------------------------------
Net income available to common stockholders.................... $ 0.98 0.70 0.84 1.51 1.68
============================================================
Weighted average shares outstanding............................ 21,088 18,194 16,237 16,046 15,798
============================================================
OTHER PER SHARE DATA
Book value (at end of year).................................... $ 15.14 16.01 15.11 16.19 16.55
Common distributions declared.................................. 1.92 1.90 1.88 1.80 1.58
Common distributions paid...................................... 1.92 1.90 1.88 1.80 1.58
BALANCE SHEET DATA (AT END OF YEAR)
Real estate investments, at cost .............................. $904,312 842,577 791,684 741,755 703,846
Real estate investments, net of accumulated depreciation....... 729,250 695,643 672,707 649,554 633,726
Total assets................................................... 768,664 729,267 703,737 684,062 666,414
Mortgage, bond and bank loans payable.......................... 390,105 338,272 322,300 291,072 270,709
Total liabilities.............................................. 414,974 360,518 345,493 311,613 289,325
Minority interest in joint ventures and operating partnership.. 1,884 1,804 1,759 1,739 1,697
Total stockholders' equity..................................... 351,806 366,945 356,485 370,710 375,392
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
EastGroup's goal is to maximize shareholder value by being a leading provider of
functional, flexible, and high 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, California and Arizona.
The Company primarily generates revenue by leasing space at its real estate
properties. As such, EastGroup's greatest challenge is leasing space at
competitive market rates. The Company's primary risks are lease expirations,
rental decreases and tenant defaults. During 2004, leases on 21.5% of
EastGroup's portfolio square footage expired, and the Company was successful in
renewing or re-leasing 74% of that total. In addition, EastGroup leased
1,526,000 square feet of other vacant space during the year. Average rental
rates on new and renewal leases for 2004 compared to 2003 were essentially
unchanged. Bad debt expense for 2004 was $245,000, a decrease of $615,000 from
2003.
EastGroup's total leased percentage increased to 94.4% at December 31, 2004
from 94.0% at December 31, 2003. The expiring leases anticipated for 2005 were
15.5% of the portfolio at December 31, 2004. Since the end of 2004, the Company
has experienced positive leasing activity and reduced this percentage to 11.0%
as of March 10, 2005. Property net operating income from same properties
increased 3.5% for 2004 as compared to 2003. The fourth quarter of 2004 was
EastGroup's sixth consecutive quarter of positive same property comparisons.
The Company generates new sources of leasing revenue through its
acquisition and development programs. During 2004, the Company purchased three
parcels of land for development (14.6 acres) and four properties (524,000 square
feet) for approximately $24 million. EastGroup also acquired a 50% undivided
tenant-in-common interest in another property for $9.2 million. The Company sold
three properties and one parcel of land during 2004 for a combined total of
approximately $5.3 million. These dispositions represented opportunities to
recycle capital into acquisitions and targeted development with greater upside
potential. For 2005, the Company has projected $25-30 million in new
acquisitions (net of dispositions) and has identified approximately $45 million
of development opportunities. In January 2005, EastGroup purchased a $40 million
industrial business park, sold a $2.2 million property in February and expects
to close on another $7.9 million acquisition later in the first quarter.
EastGroup continues to see targeted development as a major contributor to
the Company's growth. The Company mitigates risks associated with development
through a Board-approved maximum level of land held for development and
adjusting development start dates according to leasing activity. During 2004,
the Company transferred seven properties with an aggregate investment of
approximately $27.4 million from development to the operating portfolio; these
properties were collectively 96.3% leased as of December 31, 2004. In January
2005, two development properties were transferred into the portfolio; both were
100% leased. Also, in January 2005, EastGroup purchased 32 acres adjacent to its
Southridge development in Orlando for $1.9 million, which will increase the
eventual build-out of Southridge by 275,000 square feet to a total of over one
million square feet. In February 2005, the Company acquired 65.8 acres in Tampa
for $4.7 million. This represents all the remaining undeveloped industrial land
in the Oak Creek Park in which EastGroup currently owns two buildings.
The Company primarily funds its initial acquisition and development
programs through a $175 million line of credit (as discussed in Liquidity and
Capital Resources below). As market conditions permit, EastGroup issues equity,
including preferred equity, and/or employs fixed-rate, nonrecourse first
mortgage debt to replace the short-term bank borrowings. In late September 2004,
the Company closed a $30.3 million, nonrecourse first mortgage loan secured by
six properties. The note has a fixed interest rate of 5.68%, a ten-year term,
and an amortization schedule of 30 years. The proceeds of the note were used to
reduce floating rate bank borrowings. The Company has no off-balance sheet
arrangements. In mid-2005, the Company plans to obtain $50 million of additional
fixed rate debt, using the proceeds to reduce variable rate bank line balances.
The Company and the co-owner of the undivided tenant-in-common investment in
Industry Distribution Center II plan to secure permanent fixed-rate financing on
the investment. Proceeds from the financing will be used to reduce the Company's
bank debt and the $6.75 million mortgage loan that the Company made to the
co-owner of this property. There can be no assurances that the fixed rate
financing will be obtained.
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 (FFO), defined as
net income (loss) (computed in accordance with accounting principles generally
accepted in the United States of America (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 Trust's (NAREIT's) 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 property's 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 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 warehouse 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, repair and maintenance
expenses, management fees and other operating costs. 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
recoverable.
The Company believes FFO is an appropriate measure of performance for
equity real estate investment trusts. The Company believes that excluding
depreciation and amortization in the calculation of FFO is appropriate since
real estate values have historically increased or decreased based on market
conditions. FFO is not considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance,
or to cash flows from operating activities (determined in accordance with GAAP)
as a measure of the Company's liquidity, nor is it 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 fiscal years reconciliations of PNOI and FFO
Available to Common Stockholders to Net Income.
-------------------------------------------
2004 2003 2002
-------------------------------------------
(In thousands)
Income from real estate operations............................................ $ 114,051 106,925 102,272
Operating expenses from real estate operations................................ (32,142) (31,429) (29,493)
-------------------------------------------
PROPERTY NET OPERATING INCOME................................................. 81,909 75,496 72,779
Equity in earnings of unconsolidated investment (before depreciation)......... 84 - -
Income from discontinued operations (before depreciation and amortization).... 467 614 368
Gain on involuntary conversion................................................ 154 - -
Gain on securities............................................................ - 421 1,836
Other income.................................................................. 410 249 926
Interest expense.............................................................. (20,481) (19,015) (17,387)
General and administrative expense............................................ (6,711) (4,966) (4,179)
Minority interest in earnings (before depreciation and amortization).......... (633) (561) (545)
Gain on sale of nondepreciable real estate.................................... 1 6 -
Dividends on Series A preferred shares........................................ - (2,016) (3,880)
Dividends on Series D preferred shares........................................ (2,624) (1,305) -
Costs on redemption of Series A preferred..................................... - (1,778) -
-------------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS........................ 52,576 47,145 49,918
Depreciation and amortization from continuing operations...................... (33,288) (31,774) (30,076)
Depreciation from unconsolidated investment................................... (15) - -
Depreciation and amortization from discontinued operations.................... (163) (276) (293)
Share of joint venture depreciation and amortization.......................... 143 145 170
Gain on sale of depreciable real estate investments........................... 1,450 106 27
Dividends on Series B convertible preferred shares............................ - (2,598) (6,128)
-------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................... 20,703 12,748 13,618
Dividends on preferred shares................................................. 2,624 5,919 10,008
Costs on redemption of Series A preferred..................................... - 1,778 -
-------------------------------------------
NET INCOME.................................................................... $ 23,327 20,445 23,626
===========================================
Net income available to common stockholders per diluted share................. $ .98 .70 .84
Funds from operations available to common stockholders per diluted share (1).. 2.49 2.36 2.57
Diluted shares for earnings per share..................................... 21,088 18,194 16,237
Convertible preferred stock............................................... - 1,814 3,182
-------------------------------------------
(1) Diluted shares for funds from operations.................................. 21,088 20,008 19,419
===========================================
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 increased 3.2% for the 4th quarter of 2004 and 5.5% for the
year. The Company also experienced an increase in FFO per share for the
third quarter of 2004. The second quarter of 2004 was the same as the prior
year's second quarter. These results are a key improvement over the
previous eight quarters ending March 31, 2004 in which the change was
negative (FFO per share decreased). The Company anticipates an increase in
FFO for 2005 compared to 2004, primarily due to same property operations
and operations resulting from acquisitions and developments.
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 increased 6.9%
for the fourth quarter and 3.5% for the year. The fourth quarter of 2004
was the sixth consecutive quarter of positive results. The Company is
continuing to see improvement which results from increases in occupancy
more than offsetting the decrease in rental rates on lease renewals and new
leasing. The Company budgeted an increase in PNOI for 2005.
o Occupancy is the percentage of total leasable square footage for which the
lease term has commenced as of the close of the reporting period. Occupancy
at December 31, 2004 was 93.2% and included several seasonal tenant leases.
For the prior ten quarters ended September 30, 2004, occupancy ranged from
90% to 92%. Average occupancy is expected to continue to be in this 90-92%
range during 2005.
o Rental rate change represents the rental rate increase or decrease on new
leases compared to expiring leases on the same space. Rental rate increases
on new and renewal leases averaged 1.0% for the fourth quarter of 2004;
year-to-year results were essentially unchanged.
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
In accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," the Company allocates the purchase price of acquired
properties to net tangible and identified intangible assets based on their
respective fair values. 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. Factors
considered by management include an estimate of carrying costs during the
expected lease-up periods considering current market conditions and costs to
execute similar leases. 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 sheet 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 sheet and are amortized
over the remaining term of the existing lease, or the anticipated life of the
customer relationship, as applicable.
During the industrial development stage, costs associated with development
(i.e., land, construction costs, interest expense during construction and
lease-up, property taxes and other direct and indirect costs associated with
development) are aggregated into the total capitalization 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.
In the event of impairment, the property's basis would be reduced and the
impairment would be recognized as a current period charge in the income
statement.
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 in the income statement.
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 2004, 2003 and 2002 taxable income to its stockholders.
Accordingly, no provision for income taxes was necessary.
FINANCIAL CONDITION
EastGroup's assets were $768,664,000 at December 31, 2004, an increase of
$39,397,000 from December 31, 2003. Liabilities increased $54,456,000 to
$414,974,000 and stockholders' equity decreased $15,139,000 to $351,806,000
during the same period. The paragraphs that follow explain these changes in
detail.
ASSETS
Real Estate Properties
Real estate properties increased $53,974,000 during the year ended December 31,
2004. This increase was primarily due to the transfer of seven properties from
development with total costs of $27,367,000 and the purchase of four properties
for total costs of $19,867,000, as detailed below. Three of the acquired
properties are located in the Company's existing core markets and one is in San
Antonio, a new market in a core state for EastGroup. The Company views the San
Antonio market as having potential for growing EastGroup's ownership to over one
million square feet and that the investment there will complement existing
operations in Houston, Dallas and El Paso. In January 2005, EastGroup increased
its ownership in San Antonio to 777,000 square feet with the purchase of Arion
Business Park for $40 million. Arion contains 524,000 square feet in 14
industrial buildings and 15.5 acres of land for the future development of
approximately another 170,000 square feet.
Real Estate Properties Acquired in 2004 Location Size Date Acquired Cost (1)
---------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
Blue Heron Distribution Center II...... West Palm Beach, FL 100,000 01-15-04 $ 5,607
Kirby Business Center.................. Houston, TX 125,000 03-17-04 3,683
Interstate Distribution Center IV...... Dallas, TX 46,000 07-01-04 2,897
Alamo Downs Distribution Center........ San Antonio, TX 253,000 08-10-04 7,680
-------------- -------------
Total Acquisitions................. 524,000 $ 19,867
============== =============
(1) Total cost of the properties acquired was $21,757,000, of which $19,867,000
was allocated to real estate properties as indicated above. In accordance
with SFAS No. 141, "Business Combinations," intangibles associated with the
purchases of real estate were allocated as follows: $1,883,000 to in-place
lease intangibles and $86,000 to above market leases (both included in
Other Assets on the consolidated balance sheet) and $79,000 to below market
leases (included in Other Liabilities on the consolidated balance sheet).
All of these costs are amortized over the remaining lives of the associated
leases in place at the time of acquisition. The Company paid cash of
$19,666,000 for the properties and intangibles acquired, assumed a mortgage
of $1,778,000 and recorded a premium of $313,000 to adjust the mortgage
loan assumed to fair market value.
Real Estate Properties Transferred from
Development in 2004 Location Size Date Transferred Cost at Transfer
------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
World Houston 19 ...................... Houston, TX 66,000 04-30-04 $ 2,629
World Houston 20 ...................... Houston, TX 62,000 04-30-04 2,294
World Houston 17 ...................... Houston, TX 66,000 05-19-04 2,318
Expressway Commerce Center I .......... Tampa, FL 103,000 05-31-04 6,261
Executive Airport CC I & III........... Fort Lauderdale, FL 85,000 05-31-04 6,067
Sunport Center IV...................... Orlando, FL 63,000 07-31-04 3,559
Techway Southwest II................... Houston, TX 94,000 09-30-04 4,239
------------- -----------------
Total Developments Transferred... 539,000 $ 27,367
============= =================
In addition to acquisitions and development in 2004, the Company made
capital improvements of $10,866,000 on existing and acquired properties (shown
by category in the Capital Expenditures table under Results of Operations).
Also, the Company made capital improvements of $2,536,000 on development
properties that had transferred to real estate properties; the Company records
these expenditures as development costs during the 12-month period following
transfer.
Real estate properties decreased $6,320,000 for properties that transferred
to real estate held for sale during 2004. Three of these properties were
subsequently sold during the year and the remaining property was sold in
February 2005.
Development
The investment in development at December 31, 2004 was $39,330,000 compared to
$50,037,000 at December 31, 2003. During 2004, the Company incurred costs of
$16,660,000 on existing and completed developments and transferred seven
properties with a total investment of $27,367,000 to real estate properties.
Total capital investment for development during 2004 was $19,196,000. In
addition to the costs incurred for the year as detailed in the table below,
development costs included $2,536,000 for improvements on developments during
the 12-month period following transfer to real estate properties.
The Company has identified approximately $45 million of development
opportunities for 2005. The timing of these potential development starts will
depend on specific submarket conditions. All of the projected building starts
represent additional phases of existing developments or additions to current
clusters of buildings.
Costs Incurred
---------------------------------------------
Costs For the Year Cumulative Estimated
Transferred Ended as of Total
Size in 2004 12/31/04 12/31/04 Costs (1)
---------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Santan 10, Chandler, AZ............................ 65,000 $ - 694 3,306 3,800
Palm River South I, Tampa, FL...................... 79,000 979 2,213 3,192 4,300
Sunport Center V, Orlando, FL...................... 63,000 925 2,329 3,254 3,800
---------------------------------------------------------------------------
Total Lease-up....................................... 207,000 1,904 5,236 9,752 11,900
---------------------------------------------------------------------------
UNDER CONSTRUCTION
World Houston 16, Houston, TX...................... 94,000 753 2,514 3,267 5,100
Executive Airport CC II, Fort Lauderdale, FL....... 55,000 1,846 1,125 2,971 4,200
Southridge I, Orlando, FL.......................... 41,000 380 464 844 3,900
Southridge V, Orlando, FL.......................... 70,000 390 892 1,282 4,600
---------------------------------------------------------------------------
Total Under Construction............................. 260,000 3,369 4,995 8,364 17,800
---------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Phoenix, AZ........................................ 213,000 - 1,822 2,196 11,400
Tucson, AZ......................................... 70,000 - - 326 3,500
Fort Lauderdale, FL................................ - (1,846) - - -
Tampa, FL.......................................... 80,000 (979) 483 1,457 4,500
Orlando, FL........................................ 713,000 (1,695) 1,150 7,166 55,800
West Palm Beach, FL................................ 20,000 - 478 478 2,300
El Paso, TX........................................ 251,000 - - 2,444 9,600
Houston, TX........................................ 683,000 (753) 597 6,566 36,700
Jackson, MS........................................ 28,000 - 17 581 1,900
---------------------------------------------------------------------------
Total Prospective Development........................ 2,058,000 (5,273) 4,547 21,214 125,700
---------------------------------------------------------------------------
2,525,000 $ - 14,778 39,330 155,400
===========================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING THE
YEAR ENDED DECEMBER 31, 2004
Sunport Center IV, Orlando, FL..................... 63,000 $ - 477 3,559
Techway Southwest II, Houston, TX.................. 94,000 - 154 4,239
Executive Airport CC I & III, Fort Lauderdale, FL.. 85,000 - 116 6,067
Expressway Commerce Center I, Tampa, FL............ 103,000 - 104 6,261
World Houston 17, Houston, TX...................... 66,000 - 853 2,318
World Houston 19, Houston, TX...................... 66,000 - 106 2,629
World Houston 20, Houston, TX...................... 62,000 - 72 2,294
-----------------------------------------------------------
Total Transferred to Real Estate Properties.......... 539,000 $ - 1,882 27,367
===========================================================
(1) The information provided above includes forward-looking data based on
current construction schedules, the status of lease negotiations with potential
tenants and other relevant factors currently available to the Company. There can
be no assurance that any of these factors will not change or that any change
will not affect the accuracy of such forward-looking data. Among the factors
that could affect the accuracy of the forward-looking statements are weather or
other natural occurrence, default or other failure of performance by
contractors, increases in the price of construction materials or the
unavailability of such materials, failure to obtain necessary permits or
approvals from government entities, changes in local and/or national economic
conditions, increased competition for tenants or other occurrences that could
depress rental rates, and other factors not within the control of the Company.
Accumulated depreciation on real estate properties increased $27,728,000
primarily due to depreciation expense of $29,249,000 on real estate properties,
offset by accumulated depreciation of $1,368,000 on properties transferred to
real estate held for sale as mentioned above.
Real estate held for sale was $2,637,000 at December 31, 2004 and
$1,375,000 at December 31, 2003. During 2004, four properties with costs of
$6,320,000 were transferred to real estate held for sale; three of these
properties were sold during the year. Getwell Distribution Center was sold at
the end of June 2004 and reflects the Company's strategy of reducing ownership
in Memphis, a noncore market, as market conditions permit. In July, the Company
sold Sample 95 Business Park III in Pompano Beach, Florida. The Sample 95
disposition represented an opportunity to recycle capital on a highly favorable
basis into investments with greater anticipated upside. In August, Viscount
Distribution Center, a 43-year old manufacturing type building in the
Brookhollow submarket of Dallas, was sold. In addition, a parcel of land in
Tampa was sold during 2004. See Note 2 in the Notes to the Consolidated
Financial Statements for a summary of the gains on the sale of these properties.
The remaining property, Delp Distribution Center II, was also located in Memphis
and sold in February 2005 at a gain.
In November 2004, the Company acquired a 50% undivided tenant-in-common
interest in Industry Distribution Center II, a 309,000 square foot warehouse
distribution building in the City of Industry (Los Angeles), California. The
co-owner leases 100% of the space in Industry II. This investment is accounted
for under the equity method of accounting and had a carrying value of $9,256,000
at December 31, 2004. In connection with the closing of Industry II, EastGroup
advanced a total of $7,550,000 in two separate notes to its co-owner, one for
$6,750,000 and one for $800,000. The interest rate on the $6,750,000 note is 6%
and the interest rate on the $800,000 note is 9%. The Company and its co-owner
plan to secure permanent fixed-rate financing on the investment in Industry
Distribution Center II. Proceeds from the financing will be used to reduce the
Company's bank debt and the $6,750,000 mortgage loan from the co-owner of this
property. There can be no assurances that the fixed rate financing will be
obtained. The principal amount of the $800,000 note is due in three equal annual
installments beginning in November of 2005. Interest is due monthly on both
notes. See Notes 1(a), 3 and 4 in the Notes to the Consolidated Financial
Statements for more information related to this investment and mortgage loans
receivable.
A summary of the changes in Other Assets is presented in Note 5 in the
Notes to the Consolidated Financial Statements.
LIABILITIES
Mortgage notes payable increased $17,952,000 during the year ended December 31,
2004 primarily due to a new $30,300,000, nonrecourse first mortgage loan that
has a fixed interest rate of 5.68%, a ten-year term, and an amortization
schedule of 30 years. The Company used the proceeds of this note to reduce
floating rate bank borrowings. Additionally, the Company assumed a mortgage of
$1,778,000 on the acquisition of Blue Heron II and recorded a premium of
$313,000 to adjust the mortgage loan assumed to fair market value. This premium
is being amortized over the remaining life of the mortgage. These increases were
offset by the repayment of three mortgage loans totaling $6,801,000 and
regularly scheduled principal payments of $7,615,000. The repaid mortgages had
interest rates of 8.5% to 8.875%.
Notes payable to banks increased $33,881,000 as a result of advances of
$153,572,000 exceeding repayments of $119,691,000. The Company's credit
facilities are described in greater detail under Liquidity and Capital
Resources.
See Note 8 in the Notes to the Consolidated Financial Statements for a
summary of changes in Accounts Payable and Accrued Expenses.
STOCKHOLDERS' EQUITY
Distributions in excess of earnings increased $19,612,000 as a result of
dividends on common and preferred stock of $42,939,000 exceeding net income for
financial reporting purposes of $23,327,000.
RESULTS OF OPERATIONS
2004 Compared to 2003
Net income available to common stockholders for 2004 was $20,703,000 ($1.00 per
basic share and $.98 per diluted share) compared to $12,748,000 ($.72 per basic
share and $.70 per diluted share). Diluted earnings per share (EPS) for 2004
included a $.07 per share gain on sale of real estate properties (compared to
$.01 in 2003) and a $.01 per share gain on involuntary conversion resulting from
insurance proceeds exceeding the net book value of two roofs replaced due to
tornado damage. Diluted EPS for 2003 included a $.02 per share gain on
securities and a $.10 per share reduction of EPS due to the write-off of the
original issuance costs on the Series A Preferred Stock redemption in July 2003.
PNOI from continuing operations (including unconsolidated investment)
increased by $6,497,000 or 8.6% for 2004 compared to 2003, primarily due to
increased average occupancy, which includes new acquisitions and developments.
Expense to revenue ratios were 28.2% in 2004 compared to 29.4% in 2003. The
Company's percentage leased was 94.4% at December 31, 2004 compared to 94.0% at
December 31, 2003. Occupancy at the end of 2004 was 93.2% compared to 92.0% at
the end of 2003. PNOI from real estate properties held throughout the full year
of 2004 increased $2,588,000, or 3.5% compared to 2003.
As mentioned, in November 2004, the Company acquired a 50% undivided
tenant-in-common interest in Industry Distribution Center II and accounts for
this investment under the equity method of accounting. The Company recognized
$69,000 of equity in earnings from this unconsolidated investment in 2004 (PNOI
of $84,000 included above). EastGroup also earned $65,000 in mortgage loan
interest income (included in Other Revenues on the consolidated income
statement) on the advances that the Company made to the co-owner in connection
with the closing of this property. See Notes 1(a), 3 and 4 in the Notes to the
Consolidated Financial Statements for more information related to this
investment and mortgage loans receivable.
Bank interest expense before amortization of loan costs and capitalized
interest was $1,845,000 for 2004, an increase of $194,000 from 2003. The
increase for 2004 was due to higher average bank borrowings at higher average
interest rates. Average bank borrowings for 2004 were $66,867,000 at 2.76%
compared with $65,399,000 at 2.53% for 2003. Interest costs incurred during the
development phase of real estate properties are capitalized and offset against
interest expense. The interest costs capitalized on real estate properties for
2004 were $1,715,000 compared to $2,077,000 for 2003. Amortization of bank loan
costs was $404,000 in 2004 compared to $409,000 in 2003. See Note 6 in the Notes
to the Consolidated Financial Statements for disclosure relating to the
Company's notes payable to banks.
Mortgage interest expense on real estate properties was $19,517,000 for
2004, an increase of $876,000 from 2003. Amortization of mortgage loan costs was
$430,000 in 2004 compared to $391,000 in 2003. The increases in 2004 were
primarily due to a new $45,500,000 mortgage that the Company obtained in August
2003 and a $30,300,000 new mortgage in September 2004. Mortgage principal
payments were $14,416,000 in 2004 and $9,599,000 in 2003. The Company has taken
advantage of the lower available interest rates in the market during the past
several years and has fixed several new large mortgages at rates deemed by
management to be attractive, thereby lowering the weighted average interest
rates on mortgage debt. This strategy has also reduced the Company's exposure to
changes in variable floating bank rates as the proceeds from the mortgages were
used to reduce short-term bank borrowings. See Note 7 in the Notes to the
Consolidated Financial Statements for a summary of the Company's mortgage notes
payable.
Depreciation and amortization increased $1,514,000 for 2004 compared to
2003. This increase was primarily due to properties acquired and transferred
from development during 2003 and 2004.
The increase in general and administrative expenses was $1,745,000 for 2004
compared to 2003. Compensation expense increased by $1,320,000, approximately
half of which is due to the Company achieving goals in its incentive plans. The
remaining amount is primarily due to increased employee costs for new personnel
and salary increases. Accounting and legal costs increased by $463,000, mainly
due to costs associated with compliance of the Sarbanes-Oxley Act of 2002.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent increased
income by $2,925,000 in 2004 compared to $2,326,000 in 2003.
Capital Expenditures
Capital expenditures for the years ended December 31, 2004 and 2003 were as
follows:
Years Ended December 31,
Estimated ---------------------------
Useful Life 2004 2003
-------------------------------------------
(In thousands)
Upgrade on Acquisitions................ 40 yrs $ 305 173
Tenant Improvements:
New Tenants......................... Lease Life 4,498 4,222
New Tenants (first generation) (1).. Lease Life 1,105 874
Renewal Tenants..................... Lease Life 1,569 2,095
Other:
Building Improvements............... 5-40 yrs 1,445 960
Roofs............................... 5-15 yrs 1,645 2,383
Parking Lots........................ 3-5 yrs 223 133
Other............................... 5 yrs 76 89
--------------------------
Total capital expenditures....... $ 10,866 10,929
==========================
(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 years ended December 31, 2004 and 2003 were as
follows:
Years Ended December 31,
Estimated --------------------------
Useful Life 2004 2003
-------------------------------------------
(In thousands)
Development............................ Lease Life $ 656 919
New Tenants............................ Lease Life 1,840 2,102
New Tenants (first generation) (1)..... Lease Life 257 123
Renewal Tenants........................ Lease Life 1,429 1,166
--------------------------
Total capitalized leasing costs.. $ 4,182 4,310
==========================
Amortization of leasing costs (2)...... $ 3,392 3,562
==========================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
(2) Includes discontinued operations.
Discontinued Operations
During 2004, the Company sold three properties and one parcel of land and
recognized total gains of $1,451,000. In 2003, the Company sold one property and
one parcel of land and recognized total gains of $112,000. The operations and
gains on sale of these properties are recorded under Discontinued Operations in
accordance with SFAS No. 144. See Note 2 in the Notes to the Consolidated
Financial Statements for a summary of the gains on these properties. In
addition, the operations of Delp Distribution Center II are included in both
years. Delp II was transferred to "held for sale" in December 2004 and was
subsequently sold in February 2005.
2003 Compared to 2002
Net income available to common stockholders for 2003 was $12,748,000 ($.72 per
basic share and $.70 per diluted share) compared to $13,618,000 ($.86 per basic
share and $.84 per diluted share) in 2002. Diluted EPS for 2003 was $.10 lower
in 2003 due to the write-off of the original issuance costs of the Series A
Preferred Stock which was redeemed in July 2003. Gains on securities were $.02
per share in 2003 compared with $.11 per share in 2002. There was a positive
effect on the EPS calculation in 2003 of $.15 per share due to the conversion of
the convertible preferred stock during 2003.
PNOI from continuing operations increased by $2,717,000 or 3.7% for 2003
compared to 2002 primarily due to increased average occupancy. Expense to
revenue ratios were 29.4% for 2003 compared to 28.8% in 2002. The Company's
percentage leased was 94.0% at December 31, 2003 compared to 93.1% at December
31, 2002. Occupancy at the end of 2003 was 92.0% compared to 92.2% at the end of
2002. PNOI from real estate properties held throughout the full year of 2003
decreased $435,000 or 0.6% compared to 2002.
Bank interest expense before amortization of loan costs and capitalized
interest was $1,651,000 for 2003, a decrease of $934,000 from 2002. This
decrease was due to lower average bank borrowings and lower average bank
interest rates in 2003. Average bank borrowings were $65,399,000 in 2003
compared to $83,039,000 in 2002 with average bank interest rates of 2.53% in
2003 compared to 3.11% in 2002. During 2003, the Company obtained a new
$45,500,000 nonrecourse first mortgage loan and used the proceeds to reduce bank
borrowings. Interest costs incurred during the period of construction of real
estate properties are capitalized and offset against interest expense. The
interest costs capitalized on real estate properties for 2003 were $2,077,000
compared to $2,061,000 in 2002. Amortization of bank loan costs was $409,000 in
2003 compared to $407,000 in 2002. See Note 6 in the Notes to the Consolidated
Financial Statements for disclosure relating to the Company's notes payable to
banks.
Mortgage interest expense on real estate properties was $18,641,000 for
2003, an increase of $2,388,000 from 2002. Amortization of mortgage loan costs
was $391,000 in 2003 compared to $203,000 in 2002. The increases in 2003 were
primarily due to several new mortgages in 2002 and 2003. The Company has taken
advantage of the lower available interest rates in the market during the past
two years and fixed several new large mortgages at rates deemed by management to
be attractive, thereby lowering the weighted average interest rates on mortgage
debt from 7.3% in 2002 to 6.9% in 2003. This strategy has also reduced the
Company's exposure to changes in variable floating bank rates as the proceeds
from the mortgages were used to reduce short-term bank borrowings. See Note 7 in
the Notes to the Consolidated Financial Statements for a summary of the
Company's mortgage notes payable.
Depreciation and amortization increased $1,698,000 in 2003 compared to
2002. This increase was primarily due to properties acquired and transferred
from development during 2002 and 2003.
The increase in general and administrative expenses of $787,000 for 2003
compared to 2002 is primarily due to growth of the Company and increased
management bonuses for 2003.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent increased
income by $2,326,000 for 2003 compared to $1,953,000 in 2002.
Capital Expenditures
Capital expenditures for the years ended December 31, 2003 and 2002 were as
follows:
Years Ended December 31,
Estimated -------------------------
Usefule Life 2003 2002
------------------------------------------
(In thousands)
Upgrade on Acquisitions................. 40 yrs $ 173 61
Major Renovation/Redevelopment.......... 40 yrs - 53
Tenant Improvements:
New Tenants.......................... Lease Life 4,222 5,118
New Tenants (first generation) (1)... Lease Life 874 630
Renewal Tenants...................... Lease Life 2,095 1,150
Other:
Building Improvements................ 5-40 yrs 960 853
Roofs................................ 5-15 yrs 2,383 1,588
Parking Lots......................... 3-5 yrs 133 179
Other................................ 5 yrs 89 54
-------------------------
Total capital expenditures........ $ 10,929 9,686
=========================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
Capitalized Leasing Costs
The Company's leasing costs 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 December
31, 2003 and 2002 were as follows:
Years Ended December 31,
Estimated -------------------------
Usefule Life 2003 2002
------------------------------------------
(In thousands)
Development............................. Lease Life $ 919 1,290
New Tenants............................. Lease Life 2,102 1,671
New Tenants (first generation) (1)...... Lease Life 123 179
Renewal Tenants......................... Lease Life 1,166 1,431
-------------------------
Total capitalized leasing costs... $ 4,310 4,571
=========================
Amortization of leasing costs (2)....... $ 3,562 3,319
=========================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
(2) Includes discontinued operations.
Discontinued Operations
During 2003, the Company sold one property and one parcel of land and
recognized total gains of $112,000. In 2002, the Company recognized a gain of
$93,000 from the sale of Carpenter Duplex, which is reported in Income from
Continuing Operations on the consolidated income statement. The Company
recognized a loss of $66,000 on the sale of 7th Street Service Center, which is
recorded under Discontinued Operations in accordance with SFAS No. 144. (SFAS
144 requires that the operations and gain (loss) on disposal for properties
classified to the category "held for sale" subsequent to December 31, 2001 be
recorded in Discontinued Operations.) See Note 2 in the Notes to the
Consolidated Financial Statements for a summary of the gains (losses) on these
properties. In addition, income from discontinued operations for both 2003 and
2002 includes the operations of the properties that were sold during 2004 and
one property that was transferred to "held for sale" in December 2004 and
subsequently sold in February 2005.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51." In December 2003, the FASB published a revision
to Interpretation 46 (46R) to clarify some of the provisions of the original
Interpretation and to exempt certain entities from its requirements. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. Under the new guidance,
special effective date provisions apply to enterprises that have fully or
partially applied Interpretation 46 prior to issuance of this revised
Interpretation. Otherwise, application of Interpretation 46R was required in
financial statements of public entities that have interests in structures that
are commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public entities, other than small business
issuers, for all other types of variable interest entities is required in
financial statements for periods ending after March 15, 2004. The adoption of
this Interpretation had no effect on the Company's consolidated financial
statements.
In December 2004, the FASB issued FASB Statement No. 153, Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29. This new standard is
the result of a broader effort by the FASB to improve financial reporting by
eliminating differences between GAAP in the United States and GAAP developed by
the International Accounting Standards Board (IASB). As part of this effort, the
FASB and the IASB identified opportunities to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. Statement 153 amends APB Opinion No. 29, Accounting for Nonmonetary
Transactions, which was issued in 1973. The amendments made by Statement 153 are
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmonetary
assets that do not have "commercial substance." Previously, Opinion 29 required
that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished. The
provisions in Statement 153 are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Early application is
permitted and companies must apply the standard prospectively. The Company
believes the adoption of this Statement in 2005 will have little or no impact on
its overall financial position or results of operation.
The FASB has issued FASB Statement No. 123 (Revised 2004), Share-Based
Payment. The new FASB rule requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. Statement 123R represents the culmination of a two-year
effort to respond to requests from investors and many others that the FASB
improve the accounting for share-based payment arrangements with employees.
Public entities (other than those filing as small business issuers) will be
required to apply Statement 123R as of the first interim or annual reporting
period that begins after June 15, 2005. Effective January 1, 2002, the Company
adopted the fair value recognition provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure, an amendment of SFAS No.
123, 'Accounting for Stock-Based Compensation'," prospectively to all awards
granted, modified, or settled after January 1, 2002. The Company has not yet
determined the impact of the adoption of SFAS 123R in 2005 on its overall
financial position or results of operation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $57,524,000 for the year ended
December 31, 2004. The primary other sources of cash were from bank borrowings,
proceeds from a new mortgage note, the sale of real estate properties and
proceeds from the exercise of stock options. The Company distributed $39,926,000
in common and $2,624,000 in preferred stock dividends during 2004. Other primary
uses of cash were for bank debt repayments, purchases of real estate properties,
construction and development of properties, mortgage note payments, capital
improvements at various properties and advances on mortgage loans receivable.
Total debt at December 31, 2004 and 2003 is detailed below. The Company's
bank credit facilities have certain restrictive covenants, and the Company was
in compliance with all of its debt covenants at December 31, 2004 and 2003.
December 31,
----------------------------
2004 2003
----------------------------
(In thousands)
Mortgage notes payable - fixed rate......... $ 303,674 285,722
Bank notes payable - floating rate.......... 86,431 52,550
----------------------------
Total debt............................... $ 390,105 338,272
============================
The Company had a three-year $175 million unsecured revolving credit facility
with a group of ten banks that was due to mature in January 2005 and was
refinanced as specified below. The interest rate on the facility was based on
the Eurodollar rate. An unused facility fee was also assessed on this loan.
In December 2004, the Company renewed this credit facility and improved the
interest spread by 10 basis points as well as many other terms from the previous
credit line. The new loan is a three-year, $175 million unsecured revolving
credit facility with a group of nine banks that matures in January 2008. The
Company customarily uses this line of credit for acquisitions and developments.
The interest rate on the facility is based on the LIBOR index and varies
according to debt-to-total asset value ratios, with an annual facility fee of 20
basis points. EastGroup's current interest rate is LIBOR plus .95%. The line of
credit can be expanded by $100 million and has a one-year extension at
EastGroup's option. At December 31, 2004, the interest rate was 3.37% on
$81,000,000. The interest rate on each tranche is currently reset on a monthly
basis. A $104 million tranche was last reset on February 28, 2005 at 3.62%.
The Company had a one-year $12.5 million unsecured revolving credit
facility with PNC Bank, N.A. that matured in December 2004. The Company renewed
this credit facility, customarily used for working cash needs, with a new line
of credit of $20 million with a maturity date in December 2005. The interest
rate on this facility is based on LIBOR and varies according to debt-to-total
asset value ratios; it is currently LIBOR plus 1.10%. At December 31, 2004, the
interest rate was 3.50% on $5,431,000.
As market conditions permit, EastGroup employs fixed-rate, nonrecourse
first mortgage debt to replace the short-term bank borrowings. In late September
2004, the Company closed a $30.3 million nonrecourse first mortgage loan secured
by six properties. The note has a fixed interest rate of 5.68%, a ten-year term,
and an amortization schedule of 30 years. The proceeds of the note were used to
reduce floating rate bank borrowings. Based on current interest rates, this
will, as in past years, reduce earnings in the short-run but, in management's
judgment, is likely to enhance balance sheet stability and flexibility over the
longer term.
Contractual Obligations
EastGroup's fixed, noncancelable obligations as of December 31, 2004 were as
follows:
Payments Due by Period
--------------------------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
--------------------------------------------------------------------------
(In thousands)
Fixed Rate Debt Obligations (1)...... $ 303,674 24,122 44,974 47,604 186,974
Interest on Fixed Rate Debt.......... 111,733 19,937 34,024 27,726 30,046
Variable Rate Debt Obligations (2)... 86,431 5,431 - 81,000 -
Operating Lease Obligations:
Office Leases..................... 1,675 292 586 548 249
Ground Leases..................... 20,817 679 1,355 1,354 17,429
Development Obligations (3).......... 5,742 5,742 - - -
Tenant Improvements (4).............. 5,522 5,522 - - -
Purchase Obligations (5)............. 46,639 46,639 - - -
--------------------------------------------------------------------------
Total............................. $ 582,233 108,364 80,939 158,232 234,698
==========================================================================
(1) These amounts are included on the Consolidated Balance Sheet. A portion of
this debt is backed by a letter of credit totaling $10,742,000 at December 31,
2004. This letter of credit is renewable annually and expires on January 15,
2011.
(2) The Company's variable rate debt changes depending on the Company's cash
needs, as such, both the principal amounts and the interest rates are subject to
variability. At December 31, 2004, the interest rate was 3.50% on $5,431,000 for
the variable rate debt due in December 2005, and the rate for the $81,000,000
debt due in January 2008 was 3.37%. See Note 6 in the Notes to the Consolidated
Financial Statements.
(3) Represents commitments on properties under development, except for tenant
improvement obligations.
(4) Represents tenant improvement allowance obligations.
(5) At December 31, 2004, EastGroup was under contract to purchase one property
and two parcels of land. These acquisitions were completed in January and
February 2005 as indicated below.
In January 2005, EastGroup acquired Arion Business Park in San Antonio, Texas
for a purchase price of $40,000,000. As part of the acquisition price, EastGroup
assumed the outstanding first mortgage balance of $20,500,000. This interest
only, nonrecourse mortgage has a fixed rate of 5.99% and matures in December
2006. Arion is a master-planned business park containing 524,000 square feet in
14 industrial buildings and 15.5 acres of land for the future development of
approximately 170,000 square feet. This acquisition increases EastGroup's
ownership to 777,000 square feet in San Antonio, a market in which the Company
entered in August 2004.
In January 2005, the Company purchased 32 acres adjacent to its Southridge
development in Orlando for $1,900,000. This additional land is expected to
increase the eventual build-out of Southridge warehouses by 275,000 square feet
to a total of over one million square feet. In February, the Company acquired
65.8 acres in Tampa for $4,739,000. This purchase represents all the remaining
undeveloped industrial land in the Oak Creek Park in which EastGroup currently
owns two buildings.
In February 2005, the Company sold Delp Distribution Center II (102,000
square feet) in Memphis, Tennessee for a net sales price of $2,085,000 with a
gain of approximately $375,000. The sale of Delp II reflects the Company's
strategy of reducing ownership in Memphis, a noncore market, as market
conditions permit.
Also, subsequent to December 31, 2004, the Company entered into a contract
to purchase a two-building property (181,000 square feet) in Jacksonville,
Florida for approximately $7,900,000. This acquisition is expected to close in
late March 2005.
The Company anticipates that its current cash balance, operating cash
flows, and borrowings under its lines of credit 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.
INFLATION
In the last five years, inflation has not had a significant impact on the
Company because of the relatively low inflation rate in the Company's geographic
areas of operation. Most of the leases require the tenants to pay their pro rata
share of operating expenses, including common area maintenance, real estate
taxes and insurance, thereby reducing the Company's exposure to increases in
operating expenses resulting from inflation. In addition, the Company's leases
typically have three to five year terms, which may enable the Company to replace
existing leases with new leases at a higher base if rents on the existing leases
are below the then-existing market rate.
ITEM 7A. 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.
2005 2006 2007 2008 2009 Thereafter Total Fair Value
--------------------------------------------------------------------------------------
Fixed rate debt(1) (in thousands)... $ 24,122 22,954 22,020 9,634 37,970 186,974 303,674 325,241(2)
Weighted average interest rate...... 7.75% 7.60% 7.51% 6.69% 6.76% 6.42% 6.74%
Variable rate debt (in thousands)... 5,431 - - 81,000 - - 86,431 86,431
Weighted average interest rate...... 3.50% - - 3.37% - - 3.38%
(1) The fixed rate debt shown above includes the Tower Automotive mortgage,
which has a variable interest rate based on the one-month LIBOR. EastGroup has
an interest rate swap agreement that fixes the rate at 4.03% for the 8-year
term. Interest and related fees result in an annual effective interest rate of
5.3%.
(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.
As the table above incorporates only those exposures that existed as of
December 31, 2004, it does not consider those exposures or positions that could
arise after that date. The ultimate impact of interest rate fluctuations on the
Company will depend on the exposures that arise during the period and interest
rates. If the weighted average interest rate on the variable rate bank debt as
shown above changes by 10% or approximately 34 basis points, interest expense
and cash flows would increase or decrease by approximately $292,000 annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $10,620,000 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 income (loss). The Company does not hold or issue this type of
derivative contract for trading or speculative purposes.
Fair Market
Current Maturity Fair Market Value Value
Type of Hedge Notional Amount Date Reference Rate Fixed Rate at 12/31/04 at 12/31/03
------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,620 12/31/10 1 month LIBOR 4.03% $14 ($30)
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-K
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as those pertaining to the Company's hopes, expectations, anticipations,
intentions, beliefs, budgets, strategies regarding the future, the anticipated
performance of development and acquisition properties, capital resources,
profitability and portfolio performance. Forward-looking statements involve
numerous risks and uncertainties. The following factors, among others discussed
herein, could cause actual results and future events to differ materially from
those set forth or contemplated in the forward-looking statements: defaults or
nonrenewal of leases, increased interest rates and operating costs, failure to
obtain necessary outside financing, difficulties in identifying properties to
acquire and in effecting acquisitions, failure to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended,
environmental uncertainties, risks related to disasters and the costs of
insurance to protect from such disasters, financial market fluctuations, changes
in real estate and zoning laws and increases in real property tax rates. The
success of the Company also depends upon the trends of the economy, including
interest rates and the effects to the economy from possible terrorism and
related world events, income tax laws, governmental regulation, legislation,
population changes and those risk factors discussed elsewhere in this Form.
Readers are cautioned not to place undue reliance on forward-looking statements,
which reflect management's analysis only as the date hereof. The Company assumes
no obligation to update forward-looking statements. See also the Company's
reports to be filed from time to time with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Registrant's Consolidated Balance Sheets as of December 31, 2004 and 2003,
and its Consolidated Statements of Income, Changes in Stockholders' Equity and
Cash Flows and Notes to Consolidated Financial Statements for the years ended
December 31, 2004, 2003 and 2002 and the Report of the Independent Registered
Public Accounting Firm thereon are included under Item 15 of this report and are
incorporated herein by reference. Unaudited quarterly results of operations
included in the notes to the consolidated financial statements are also
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 December 31,
2004, 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) Internal Control Over Financial Reporting.
(a) Management's annual report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). EastGroup's Management Report on Internal Control Over Financial
Reporting is set forth in the Company's 2004 Annual Report on page 23 and is
incorporated herein by reference.
(b) Report of the independent registered public accounting firm.
The report of KPMG LLP, the Company's independent registered public accounting
firm, on management's assessment of the effectiveness of the Company's internal
control over financial reporting and the effectiveness of the Company's internal
control over financial reporting is set forth in the Company's 2004 Annual
Report on page 23 and is incorporated herein by reference.
(c) Changes in internal control over financial reporting.
There was no change in the Company's internal control over financial reporting
during the Company's fourth fiscal quarter ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant's definitive proxy statement which will be filed with the
Securities and Exchange Commission (the Commission) pursuant to Regulation 14A
within 120 days of the end of Registrant's calendar year is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The Registrant's definitive proxy statement which will be filed with the
Commission pursuant to Regulation 14A within 120 days of the end of Registrant's
calendar year is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The Registrant's definitive proxy statement which will be filed with the
Commission pursuant to Regulation 14A within 120 days of the end of Registrant's
calendar year is incorporated herein by reference. The following table provides
information required by Item 201(d) of Regulation S-K.
Equity Compensation Plan Information
(a) (b) (c)
Plan category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options, outstanding options, under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected
in column (a))
Equity compensation
plans approved by
security holders 378,240 $20.401 1,987,445
Equity compensation
plans not approved
by security holders - - -
------------------------------------------------------------------------------------
Total 378,240 $20.401 1,987,445
====================================================================================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant's definitive proxy statement which will be filed with the
Commission pursuant to Regulation 14A within 120 days of the end of Registrant's
calendar year is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Registrant's definitive proxy statement which will be filed with the
Commission pursuant to Regulation 14A within 120 days of the end of the
Registrant's calendar year is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Index to Financial Statements:
Page
------
(a) (1) Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm 22
Management Report on Internal Control Over Financial Reporting 23
Report of Independent Registered Public Accounting Firm 23
Consolidated Balance Sheets - December 31, 2004 and 2003 24
Consolidated Statements of Income - Years ended December 31, 2004, 2003 and 2002 25
Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2004, 2003 and 2002 26
Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 and 2002 27
Notes to Consolidated Financial Statements 28
(2) Consolidated Financial Statement Schedule:
Schedule III - Real Estate Properties and Accumulated Depreciation 44
Schedule IV - Mortgage Loans on Real Estate 49
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted, or
the required information is included in the notes to the consolidated financial
statements.
(3) Exhibits required by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation (incorporated by reference to
Appendix B to the Company's Proxy Statement for its Annual
Meeting of Stockholders held on June 5, 1997).
(b) Bylaws of the Company (incorporated by reference to Appendix
C to the Company's Proxy Statement for its Annual Meeting of
Stockholders held on June 5, 1997).
(c) Articles Supplementary of the Company relating to the Series
C Preferred Stock (incorporated by reference to Exhibit A to
Exhibit 4 to the Company's Form 8-A filed December 9, 1998).
(d) Articles Supplementary of the Company relating to the 7.95%
Series D Cumulative Redeemable Preferred Stock (incorporated
by reference to Exhibit 3 to the Company's Form 8-A filed
June 6, 2003).
(4) Instruments Defining the Rights of Security Holders
(a) Rights Agreement dated as of December 3, 1998 between the
Company and Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's
Form 8-A filed December 9, 1998).
(b) First Amendment to Rights Agreement dated December 20, 2004
between the Company and Equiserve Trust Company, N.A., which
replaced Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to Exhibit 99.1 to the Company's
Form 8-K filed December 22, 2004).
(10) Material Contracts (*Indicates management or compensatory
agreement):
(a) EastGroup Properties, Inc. 1994 Management Incentive Plan,
as Amended (incorporated by reference to Appendix A to the
Company's Proxy Statement for its Annual Meeting of
Stockholders held on June 2, 1999).*
(b) EastGroup Properties, Inc. 1991 Directors Stock Option Plan,
as Amended (incorporated by reference to Exhibit B to the
Company's Proxy Statement for its Annual Meeting of
Stockholders held on December 8, 1994).*
(c) EastGroup Properties, Inc. 2000 Directors Stock Option Plan
(incorporated by reference to Appendix A to the Company's
Proxy Statement for its Annual Meeting of Stockholders held
on June 1, 2000).*
(d) EastGroup Properties, Inc. 2004 Equity Incentive Plan
(incorporated by reference to Appendix D to the Company's
Proxy Statement for its Annual Meeting of Stockholders held
May 27, 2004).*
(e) Form of Change in Control Agreement that the Company has
entered into with Leland R. Speed, David H. Hoster II and N.
Keith McKey (incorporated by reference to Exhibit 10(e) to
the Company's Form 10-K for the year ended December 31,
1996).*
(f) Form of Change in Control Agreement that the Company has
entered into with John F. Coleman, William D. Petsas and C.
Bruce Corkern (filed herewith).*
(g) Form of Amendment to Change in Control Agreement
(incorporated by reference to Exhibit 10(e) to the Company's
Form 10-K for the year ended December 31, 2002).*
(h) Credit Agreement dated December 6, 2004 among EastGroup
Properties, L.P.; EastGroup Properties, Inc.; PNC Bank,
National Association, as Administrative Agent; Commerzbank
Aktiengesellschaft, New York Branch and SunTrust Bank as
Co-Syndication Agents; AmSouth Bank and Wells Fargo Bank,
National Association, as Co-Documentation Agents; PNC
Capital Markets, Inc., as Sole Lead Arranger and Sole
Bookrunner; and the Lenders (filed herewith).
(21) Subsidiaries of EastGroup Properties, Inc. (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
We have audited the accompanying consolidated balance sheets of EastGroup
Properties, Inc. and subsidiaries (the Company) as of December 31, 2004 and
2003, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EastGroup
Properties, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated March 11, 2005 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
Jackson, Mississippi KPMG LLP
March 11, 2005
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
EastGroup's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of
management, including the chief executive officer and chief financial officer,
EastGroup conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on EastGroup's evaluation under the framework in Internal
Control-Integrated Framework, management concluded that our internal control
over financial reporting was effective as of December 31, 2004.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004, has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.
Jackson, Mississippi EASTGROUP PROPERTIES, INC.
March 10, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that EastGroup Properties,
Inc. and subsidiaries (the Company) maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that EastGroup Properties, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also, in our
opinion, EastGroup Properties, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of EastGroup Properties, Inc. and subsidiaries as of December 31, 2004
and 2003, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2004, and our report dated March 11, 2005, expressed
an unqualified opinion on those consolidated financial statements.
Jackson, Mississippi KPMG LLP
March 11, 2005
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------------------------
2004 2003
---------------------------------------------------
(In thousands, except for share and per share data)
ASSETS
Real estate properties.................................................... $ 845,139 791,165
Development............................................................... 39,330 50,037
---------------------------------------------------
884,469 841,202
Less accumulated depreciation......................................... (174,662) (146,934)
---------------------------------------------------
709,807 694,268
---------------------------------------------------
Real estate held for sale................................................. 2,637 1,375
Unconsolidated investment................................................. 9,256 -
Mortgage loans receivable................................................. 7,550 -
Cash...................................................................... 1,208 1,786
Other assets.............................................................. 38,206 31,838
---------------------------------------------------
TOTAL ASSETS................................................................ $ 768,664 729,267
===================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable.................................................... $ 303,674 285,722
Notes payable to banks.................................................... 86,431 52,550
Accounts payable & accrued expenses....................................... 16,181 14,266
Other liabilities......................................................... 8,688 7,980
---------------------------------------------------
414,974 360,518
---------------------------------------------------
---------------------------------------------------
Minority interest in joint venture.......................................... 1,884 1,804
---------------------------------------------------
STOCKHOLDERS' EQUITY
Series C Preferred Shares; $.0001 par value;
600,000 shares authorized; no shares issued............................. - -
Series D 7.95% Cumulative Redeemable Preferred Shares
and additional paid-in capital; $.0001 par value;
1,320,000 shares authorized and issued; stated liquidation
preference of $33,000................................................... 32,326 32,326
Common shares; $.0001 par value; 68,080,000 shares authorized;
21,059,164 shares issued and outstanding at December 31, 2004 and
20,853,780 at December 31, 2003......................................... 2 2
Excess shares; $.0001 par value; 30,000,000 shares authorized;
no shares issued........................................................ - -
Additional paid-in capital on common shares............................... 357,011 352,549
Distributions in excess of earnings....................................... (35,207) (15,595)
Accumulated other comprehensive income (loss)............................. 14 (30)
Unearned compensation..................................................... (2,340) (2,307)
---------------------------------------------------
351,806 366,945
---------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $ 768,664 729,267
===================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------------------
2004 2003 2002
----------------------------------------------------
(In thousands, except per share data)
REVENUES
Income from real estate operations......................... $ 114,051 106,925 102,272
Gain on involuntary conversion............................. 154 - -
Gain on securities......................................... - 421 1,836
Equity in earnings of unconsolidated investment............ 69 - -
Other...................................................... 410 249 926
----------------------------------------------------
114,684 107,595 105,034
----------------------------------------------------
EXPENSES
Operating expenses from real estate operations............. 32,142 31,429 29,493
Interest................................................... 20,481 19,015 17,387
Depreciation and amortization.............................. 33,288 31,774 30,076
General and administrative................................. 6,711 4,966 4,179
Minority interest in joint venture......................... 490 416 375
----------------------------------------------------
93,112 87,600 81,510
----------------------------------------------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE INVESTMENT......... 21,572 19,995 23,524
Gain on sale of real estate investment..................... - - 93
-----------------------------------------------------
INCOME FROM CONTINUING OPERATIONS............................ 21,572 19,995 23,617
----------------------------------------------------
DISCONTINUED OPERATIONS
Income from real estate operations......................... 304 338 75
Gain (loss) on sale of real estate investments............. 1,451 112 (66)
----------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS ......................... 1,755 450 9
----------------------------------------------------
NET INCOME................................................... 23,327 20,445 23,626
Preferred dividends-Series A............................... - 2,016 3,880
Preferred dividends-Series B............................... - 2,598 6,128
Preferred dividends-Series D............................... 2,624 1,305 -
Costs on redemption of Series A preferred.................. - 1,778 -
----------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS.................. $ 20,703 12,748 13,618
====================================================
BASIC PER COMMON SHARE DATA
Income from continuing operations.......................... $ 0.91 0.69 0.86
Income from discontinued operations........................ 0.09 0.03 0.00
----------------------------------------------------
Net income available to common stockholders................ $ 1.00 0.72 0.86
====================================================
Weighted average shares outstanding........................ 20,771 17,819 15,868
====================================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations.......................... $ 0.90 0.68 0.84
Income from discontinued operations........................ 0.08 0.02 0.00
----------------------------------------------------
Net income available to common stockholders................ $ 0.98 0.70 0.84
====================================================
Weighted average shares outstanding........................ 21,088 18,194 16,237
====================================================
Dividends declared per common share.......................... $ 1.92 1.90 1.88
====================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Undistributed
Earnings Accumulated
Additional (Distributions Other
Preferred Common Paid-In Unearned in Excess of Comprehensive
Stock Stock Capital Compensation Earnings) Income (Loss) Total
----------------------------------------------------------------------------------
(In thousands, except for share and per share data)
BALANCE, DECEMBER 31, 2001........................ $108,535 2 240,197 (2,970) 23,753 1,193 370,710
Comprehensive income
Net income...................................... - - - - 23,626 - 23,626
Net unrealized change in investment securities.. - - - - - (838) (838)
Net unrealized change in cash flow hedge........ - - - - - (297) (297)
--------
Total comprehensive income.................... 22,491
--------
Common dividends declared - $1.88 per share....... - - - - (30,262) - (30,262)
Preferred stock dividends declared................ - - - - (10,008) - (10,008)
Stock-based compensation, net of forfeitures...... - - 3,001 189 - - 3,190
Issuance of 14,305 shares of common stock,
dividend reinvestment plan.................... - - 364 - - - 364
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002........................ 108,535 2 243,562 (2,781) 7,109 58 356,485
Comprehensive income
Net income...................................... - - - - 20,445 - 20,445
Net unrealized change in investment securities.. - - - - - (355) (355)
Net unrealized change in cash flow hedge........ - - - - - 267 267
--------
Total comprehensive income.................... 20,357
--------
Common dividends declared - $1.90 per share....... - - - - (35,452) - (35,452)
Preferred stock dividends declared................ - - - - (5,919) - (5,919)
Redemption of 1,725,000 shares of Series A
preferred stock................................. (41,357) - - - (1,778) - (43,135)
Conversion of 2,800,000 shares of cumulative
convertible preferred stock into 3,181,920 shares
of common stock................................. (67,178) - 67,178 - - - -
Issuance of 1,320,000 shares of Series D
preferred stock................................. 32,326 - - - - - 32,326
Issuance of 1,418,887 shares of common stock,
common stock offerings.......................... - - 38,974 - - - 38,974
Stock-based compensation, net of forfeitures...... - - 2,473 474 - - 2,947
Issuance of 12,925 shares of common stock,
dividend reinvestment plan...................... - - 362 - - - 362
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003........................ 32,326 2 352,549 (2,307) (15,595) (30) 366,945
Comprehensive income
Net income...................................... - - - - 23,327 - 23,327
Net unrealized change in cash flow hedge........ - - - - - 44 44
--------
Total comprehensive income.................... 23,371
--------
Common dividends declared - $1.92 per share....... - - - - (40,315) - (40,315)
Preferred stock dividends declared................ - - - - (2,624) - (2,624)
Stock-based compensation, net of forfeitures ..... - - 4,114 (33) - - 4,081
Issuance of 10,247 shares of common stock,
dividend reinvestment plan...................... - - 357 - - - 357
Other............................................. - - (9) - - - (9)
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004........................ $ 32,326 2 357,011 (2,340) (35,207) 14 351,806
==================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------------
2004 2003 2002
--------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income......................................................................... $ 23,327 20,445 23,626
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings of unconsolidated investment.................................. (69) - -
Depreciation and amortization from continuing operations......................... 33,288 31,774 30,076
Depreciation and amortization from discontinued operations....................... 163 276 293
Gain on sale of real estate investments.......................................... - - (93)
(Gain) loss on sale of real estate investments from discontinued operations...... (1,451) (112) 66
Gain on involuntary conversion................................................... (154) - -
Gain on real estate investment trust (REIT) shares............................... - (421) (1,836)
Stock-based compensation expense................................................. 1,256 620 449
Minority interest depreciation and amortization.................................. (143) (145) (170)
Changes in operating assets and liabilities:
Accrued income and other assets.................................................. (2,559) (1,139) (139)
Accounts payable, accrued expenses and prepaid rent.............................. 3,866 (1,000) 1,514
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 57,524 50,298 53,786
--------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of real estate investments...................................... 5,340 841 2,917
Real estate improvements........................................................... (10,866) (10,929) (9,686)
Real estate development............................................................ (19,196) (22,238) (35,600)
Purchases of real estate........................................................... (19,666) (19,034) (13,667)
Purchase of unconsolidated investment.............................................. (9,187) - -
Advances on mortgage loans receivable.............................................. (7,550) - -
Payments on mortgage loans receivable.............................................. - 13 5,502
Purchases of REIT shares........................................................... - - (1,308)
Proceeds from sale and liquidation of REIT shares.................................. - 1,729 7,095
Changes in other assets and other liabilities...................................... (4,235) (4,907) (2,667)
--------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................................ (65,360) (54,525) (47,414)
--------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank borrowings...................................................... 153,572 175,944 195,586
Repayments on bank borrowings...................................................... (119,691) (197,351) (207,687)
Proceeds from mortgage notes payable............................................... 30,300 45,500 59,200
Principal payments on mortgage notes payable....................................... (14,416) (9,599) (15,871)
Debt issuance costs................................................................ (1,436) (716) (1,842)
Distributions paid to stockholders................................................. (42,550) (42,749) (39,881)
Redemption of Series A preferred stock............................................. - (43,135) -
Proceeds from Series D preferred stock offering.................................... - 32,326 -
Proceeds from common stock offerings............................................... - 38,974 -
Proceeds from exercise of stock options............................................ 2,592 2,539 2,582
Proceeds from dividend reinvestment plan........................................... 357 362 364
Other.............................................................................. (1,470) 2,535 793
--------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................. 7,258 4,630 (6,756)
--------------------------------------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (578) 403 (384)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 1,786 1,383 1,767
--------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 1,208 1,786 1,383
============================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $1,715, $2,077 and $2,061
for 2004, 2003 and 2002, respectively............................................. $ 19,638 18,068 16,571
Conversion of cumulative preferred stock into common stock......................... - 67,178 -
Fair value of debt assumed by the Company in the purchase of real estate........... 2,091 1,478 -
Issuance of common stock, incentive compensation, net of forfeitures............... 879 (73) 412
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of EastGroup
Properties, Inc. (the Company or EastGroup), its wholly-owned subsidiaries and
its investment in any joint ventures in which the Company has a controlling
interest. At December 31, 2004, 2003 and 2002, the Company had a controlling
interest in one joint venture: the 80% owned University Business Center. The
Company records 100% of the joint ventures' assets, liabilities, revenues and
expenses with minority 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 (see
Note 3). All significant intercompany transactions and accounts have been
eliminated in consolidation.
(b) Income Taxes
EastGroup, a Maryland corporation, has qualified as a real estate investment
trust (REIT) 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 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
2004, 2003 and 2002 taxable income to its stockholders. Accordingly, no
provision for income taxes was necessary. The following table summarizes the
federal income tax treatment for all distributions by the Company for the years
ended 2004, 2003 and 2002.
Federal Income Tax Treatment of Share Distributions
Years Ended December 31,
-----------------------------------------
2004 2003 2002
-----------------------------------------
Common Share Distributions:
Ordinary Income........................... $ 1.4860 1.68388 1.8348
Return of capital......................... .4060 .21612 -
Long-term 15% capital gain................ .0140 - -
Long-term 20% capital gain................ - - .0452
Long-term 25% capital gain................ .0140 - -
-----------------------------------------
Total Common Distributions.................... $ 1.9200 1.90000 1.8800
=========================================
Series A Preferred Share Distributions:
Ordinary Income........................... $ - 1.08125 2.1960
Long-term 20% capital gain................ - - .0540
-----------------------------------------
Total Preferred A Distributions............... $ - 1.08125 2.2500
=========================================
Series B Preferred Share Distributions:
Ordinary Income........................... $ - 1.64100 2.1355
Long-term 20% capital gain................ - - .0525
-----------------------------------------
Total Preferred B Distributions............... $ - 1.64100 2.1880
=========================================
Series D Preferred Share Distributions:
Ordinary Income........................... $ 1.9512 .98830 -
Long-term 15% capital gain................ .0180 - -
Long-term 25% capital gain................ .0184 - -
-----------------------------------------
Total Preferred D Distributions............... $ 1.9876 .98830 -
=========================================
The Company's income differs for tax and financial reporting purposes
principally because of (1) the timing of the deduction for the provision for
possible losses and losses on investments, (2) the timing of the recognition of
gains or losses from the sale of investments, (3) different depreciation methods
and lives, and (4) real estate properties having a different basis for tax and
financial reporting purposes.
(c) Income Recognition
Minimum rental income from real estate operations is recognized on a
straight-line basis.
Interest income on mortgage loans receivable is recognized based on the
accrual method unless a significant uncertainty of collection exists. If a
significant uncertainty exists, interest income is recognized as collected.
The Company recognizes gains on sales of real estate in accordance with the
principles set forth in Statement of Financial Accounting Standards (SFAS) No.
66, "Accounting for Sales of Real Estate." Upon closing of real estate
transactions, the provisions of SFAS No. 66 require consideration for the
transfer of rights of ownership to the purchaser, receipt of an adequate cash
down payment from the purchaser and adequate continuing investment by the
purchaser. If the requirements for recognizing gains have not been met, the sale
and related costs are recorded, but the gain is deferred and recognized by the
installment method as collections are received.
(d) Real Estate Properties
Geographically, the Company's investments are concentrated in major Sunbelt
market areas of the United States, primarily in the states of Florida, Texas,
California and Arizona. Real estate properties are carried at cost less
accumulated depreciation. Cost includes the carrying amount of the Company's
investment plus any additional consideration paid, liabilities assumed, costs of
securing title (not to exceed fair market value in the aggregate) and
improvements made subsequent to acquisition. 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 $29,249,000, $28,128,000, and $27,050,000 for
2004, 2003 and 2002, respectively.
(e) Capitalized Development Costs
During the industrial development stage, costs associated with development
(i.e., land, construction costs, interest expense during construction and
lease-up, property taxes and other direct and indirect costs associated with
development) are aggregated into the total capitalization of the property. As
the property becomes occupied, interest, depreciation, property taxes and other
costs for the percentage occupied only are expensed as incurred. When the
property becomes 80% occupied or one year after completion of the shell
construction, whichever comes first, the property is no longer considered a
development property and becomes an industrial property. When the property
becomes classified as an industrial property, the entire property is depreciated
accordingly, and all interest and property taxes are expensed.
(f) Asset Impairment
The Company applies SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which requires that long-lived assets be reviewed 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 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. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less estimated costs
to sell.
(g) Real Estate Held for Sale
Real estate properties that are currently offered for sale or are under contract
to sell have been shown separately on the consolidated balance sheets as "real
estate held for sale." The Company applies SFAS No. 144, which requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Assets to be disposed of 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.
At December 31, 2003, the Company was offering for sale 11.3 acres in
Houston, Texas and Tampa, Florida with a total carrying value of $1,375,000.
During 2004, four properties were transferred to "held for sale." Three of these
properties and one of the land parcels in Tampa were sold during the year. At
December 31, 2004, the Company was offering for sale the Delp Distribution
Center II in Memphis, Tennessee with a carrying value of $1,662,000 and 6.87
acres of land in Houston, Texas and Tampa, Florida with a carrying amount of
$975,000. No loss is anticipated on the sale of the properties that are held for
sale.
In accordance with the guidelines established under SFAS No. 144,
operations and gains and losses on sales from the properties placed in the
category "held for sale" subsequent to December 31, 2001 have been classified as
income from discontinued operations for 2004, 2003 and 2002. No interest expense
was allocated to the properties that are held for sale.
(h) Investment in Real Estate Investment Trusts
Marketable equity securities owned by the Company are categorized as
available-for-sale securities, as defined by SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Unrealized holding gains and
losses are reflected as a net amount in a separate component of stockholders'
equity until realized. Since the Company did not exercise significant influence
over any of its investments in REITs, these investments were accounted for under
the cost method. The costs of these investments were adjusted to fair market
value with an equity adjustment to account for unrealized gains/losses as
indicated above. At December 31, 2004 and 2003, the Company had no investments
in marketable equity securities.
(i) Derivative Instruments and Hedging Activities
The Company applies SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which requires that all derivatives be recognized as either
assets or liabilities in the balance sheet and measured at fair value. Changes
in fair value are to be reported either in earnings or outside of earnings
depending on the intended use of the derivative and the resulting designation.
Entities applying hedge accounting are required to establish at the inception of
the hedge the method used to assess the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. The Company has an interest rate swap agreement, which is summarized in
Note 6.
(j) Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
(k) Amortization
Debt origination costs are deferred and amortized using the straight-line method
over the term of the loan. Amortization of bank loan costs was $404,000 in 2004,
$409,000 in 2003 and $407,000 in 2002.
Leasing costs are deferred and amortized using the straight-line method
over the term of the lease. Leasing costs amortization expense for continuing
and discontinued operations was $3,392,000, $3,562,000 and $3,319,000 for 2004,
2003 and 2002, respectively. Amortization expense for in-place lease intangibles
is disclosed in Business Combinations and Acquired Intangibles.
(l) Business Combinations and Acquired Intangibles
Upon acquisition of real estate properties, the Company applies the principles
of SFAS No. 141, "Business Combinations," to 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 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. Factors considered by management include an estimate of
carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases. 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 sheet 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 sheet 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 $810,000 for 2004, $360,000 for 2003 and none for 2002.
Amortization of above and below market leases was immaterial for all periods
presented.
Total cost of the properties acquired for 2004 was $21,757,000, of which
$19,867,000 was allocated to real estate properties. In accordance with SFAS No.
141, intangibles associated with the purchases of real estate were allocated as
follows: $1,883,000 to in-place lease intangibles and $86,000 to above market
leases (both included in Other Assets on the balance sheet) and $79,000 to below
market leases (included in Other Liabilities on the balance sheet). All of these
costs are amortized over the remaining lives of the associated leases in place
at the time of acquisition. The Company paid cash of $19,666,000 for the
properties and intangibles acquired, assumed a mortgage of $1,778,000 and
recorded a premium of $313,000 to adjust the mortgage loan assumed to fair
market value.
The Company periodically reviews (at least annually) the recoverability of
goodwill and (on a quarterly basis) the recoverability of other intangibles for
possible impairment. In management's opinion, no material impairment of goodwill
and other intangibles existed at December 31, 2004 and 2003.
(m) Stock-Based Compensation
At the Company's annual meeting in May 2004, the Company's shareholders approved
the EastGroup Properties, Inc. 2004 Equity Incentive Plan (the "2004 Plan"),
which authorizes the issuance of common stock to employees in the form of
options, stock appreciation rights, restricted stock, deferred stock units,
performance shares, stock bonuses, and stock in place of cash compensation. The
2004 Plan replaced the 1994 Plan, also under which employees of the Company were
granted stock option awards and other forms of stock-based compensation. No
further grants will be made under the 1994 Plan.
Effective January 1, 2002, the Company adopted the fair value recognition
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure, an amendment of SFAS No. 123, 'Accounting for Stock-Based
Compensation'," prospectively to all awards granted, modified, or settled after
January 1, 2002.
The Company accounts for restricted stock in accordance with SFAS No. 123,
and accordingly, compensation expense is recognized over the expected vesting
period using the straight-line method. The Company records the fair market value
of the restricted stock to additional paid-in capital when the shares are
granted and offsets unearned compensation by the same amount. The unearned
compensation is amortized over the restricted period into compensation expense.
Previously expensed stock-based compensation related to forfeited shares reduces
compensation expense during the period in which the shares are forfeited. During
the restricted period, the Company accrues dividends and holds the certificates
for the shares; however, the employee can vote the shares. Share certificates
and dividends are delivered to the employee as they vest.
In accordance with SFAS No. 123, the following disclosures are required
related to stock options. The fair value of each option grant is estimated on
the grant date using the Black-Scholes option pricing model with the following
weighted-average assumptions used for 2003 and 2002, respectively: risk-free
interest rates of 3.41% and 3.60%; dividend yields of 11.13% and 11.97%;
volatility factors of 18.8% and 19.0%. Expected option lives for employees were
five years for 2003 and 2002; for directors, expected option lives were eight
years for 2003 and 2002. The weighted average fair value of each option granted
for 2003 and 2002 was $.36 and $.35, respectively. No stock options were granted
during 2004. Stock-based compensation expense for options was immaterial for
2004, 2003 and 2002 with an immaterial effect to pro forma net income available
to common stockholders and no effect to basic or diluted EPS. The following
table illustrates the effect on net income and earnings per share if the fair
value based method had been applied to all outstanding and unvested awards in
each period.
----------------------------------------
2004 2003 2002
----------------------------------------
(In thousands, except per share data)
Net income available to common stockholders as reported........... $ 20,703 12,748 13,618
Add: Stock options compensation expense
included in reported net income.............................. 1 8 6
Deduct: Total stock options compensation
expense determined under fair value based
method for all awards........................................ (1) (13) (20)
----------------------------------------
Net income available to common stockholders pro forma............. $ 20,703 12,743 13,604
========================================
Earnings per share:
Basic - as reported...................................... $ 1.00 .72 .86
Basic - pro forma........................................ 1.00 .72 .86
Diluted - as reported.................................... .98 .70 .84
Diluted - pro forma...................................... .98 .70 .84
(n) Earnings Per Share
The Company applies SFAS No. 128, "Earnings Per Share," which requires companies
to present basic earnings per share (EPS) and diluted EPS. Basic EPS represents
the amount of earnings for the period available to each share of common stock
outstanding during the reporting period. The Company's basic EPS is calculated
by dividing net income available to common stockholders by the weighted average
number of common shares outstanding.
Diluted EPS represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of common shares
for all dilutive potential common shares outstanding during the reporting
period. The Company calculates diluted EPS by totaling net income available to
common stockholders plus dividends on dilutive convertible preferred shares and
dividing this numerator by the weighted average number of common shares
outstanding plus the dilutive effect of stock options, nonvested restricted
stock and convertible preferred stock, had the options or conversions 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. The
dilutive effect of convertible securities was determined using the if-converted
method.
(o) Involuntary Conversion
In 2004, the Company recognized a gain on an involuntary conversion of $154,000
resulting from insurance proceeds exceeding the net book value of two roofs
replaced due to tornado damage. This transaction was recorded in accordance with
the Financial Accounting Standards Board (FASB) Interpretation No. 30,
"Accounting for Involuntary Conversion of Nonmonetary Assets to Monetary Assets,
an interpretation of APB Opinion No. 29."
(p) Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
(q) New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." In December 2003,
the FASB published a revision to Interpretation 46 (46R) to clarify some of the
provisions of the original Interpretation and to exempt certain entities from
its requirements. This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation.
Under the new guidance, special effective date provisions apply to enterprises
that have fully or partially applied Interpretation 46 prior to issuance of this
revised Interpretation. Otherwise, application of Interpretation 46R was
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The adoption of
this Interpretation had no effect on the Company's consolidated financial
statements.
In December 2004, the FASB issued FASB Statement No. 153, Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29. This new standard is
the result of a broader effort by the FASB to improve financial reporting by
eliminating differences between GAAP in the United States and GAAP developed by
the International Accounting Standards Board (IASB). As part of this effort, the
FASB and the IASB identified opportunities to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. Statement 153 amends APB Opinion No. 29, Accounting for Nonmonetary
Transactions, which was issued in 1973. The amendments made by Statement 153 are
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmonetary
assets that do not have "commercial substance." Previously, Opinion 29 required
that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished. The
provisions in Statement 153 are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Early application is
permitted and companies must apply the standard prospectively. The Company
believes the adoption of this Statement in 2005 will have little or no impact on
its overall financial position or results of operation.
The FASB has issued FASB Statement No. 123 (Revised 2004), Share-Based
Payment. The new FASB rule requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. Statement 123R represents the culmination of a two-year
effort to respond to requests from investors and many others that the FASB
improve the accounting for share-based payment arrangements with employees.
Public entities (other than those filing as small business issuers) will be
required to apply Statement 123R as of the first interim or annual reporting
period that begins after June 15, 2005. Effective January 1, 2002, the Company
adopted the fair value recognition provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure, an amendment of SFAS No.
123, 'Accounting for Stock-Based Compensation'," prospectively to all awards
granted, modified, or settled after January 1, 2002. The Company has not yet
determined the impact of the adoption of SFAS 123R in 2005 on its overall
financial position or results of operation.
(r) Reclassifications
Certain reclassifications have been made in the 2003 and 2002 financial
statements to conform to the 2004 presentation.
(2) REAL ESTATE OWNED
The Company's real estate properties at December 31, 2004 and 2003 were as
follows:
December 31,
----------------------------------
2004 2003
----------------------------------
(In thousands)
Real estate properties:
Land................................................ $ 139,857 132,900
Buildings and building improvements................. 595,852 563,538
Tenant and other improvements....................... 109,430 94,727
Development............................................ 39,330 50,037
----------------------------------
884,469 841,202
Less accumulated depreciation....................... (174,662) (146,934)
----------------------------------
$ 709,807 694,268
==================================
The Company is currently developing the properties detailed below. Costs
incurred include capitalization of interest costs during the period of
construction. The interest costs capitalized on real estate properties for 2004
were $1,715,000 compared to $2,077,000 for 2003 and $2,061,000 for 2002.
Total capital investment for development during 2004 was $19,196,000. In
addition to the costs incurred for the year as detailed in the table below,
development costs included $2,536,000 for improvements on developments during
the 12-month period following transfer to Real Estate Properties.
Development
Costs Incurred
-----------------------------------------
For the
Costs Year Cumulative
Transferred Ended as of Estimated
Size in 2004 12/31/04 12/31/04 Total Costs
--------------------------------------------------------------------
(Unaudited) (Unaudited)
--------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Santan 10, Chandler, AZ.............................. 65,000 $ - 694 3,306 3,800
Palm River South I, Tampa, FL........................ 79,000 979 2,213 3,192 4,300
Sunport Center V, Orlando, FL........................ 63,000 925 2,329 3,254 3,800
--------------------------------------------------------------------
Total Lease-up......................................... 207,000 1,904 5,236 9,752 11,900
--------------------------------------------------------------------
UNDER CONSTRUCTION
World Houston 16, Houston, TX........................ 94,000 753 2,514 3,267 5,100
Executive Airport CC II, Fort Lauderdale, FL......... 55,000 1,846 1,125 2,971 4,200
Southridge I, Orlando, FL............................ 41,000 380 464 844 3,900
Southridge V, Orlando, FL............................ 70,000 390 892 1,282 4,600
--------------------------------------------------------------------
Total Under Construction............................... 260,000 3,369 4,995 8,364 17,800
--------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Phoenix, AZ.......................................... 213,000 - 1,822 2,196 11,400
Tucson, AZ........................................... 70,000 - - 326 3,500
Fort Lauderdale, FL.................................. - (1,846) - - -
Tampa, FL............................................ 80,000 (979) 483 1,457 4,500
Orlando, FL.......................................... 713,000 (1,695) 1,150 7,166 55,800
West Palm Beach, FL.................................. 20,000 - 478 478 2,300
El Paso, TX.......................................... 251,000 - - 2,444 9,600
Houston, TX.......................................... 683,000 (753) 597 6,566 36,700
Jackson, MS.......................................... 28,000 - 17 581 1,900
--------------------------------------------------------------------
Total Prospective Development.......................... 2,058,000 (5,273) 4,547 21,214 125,700
--------------------------------------------------------------------
2,525,000 $ - 14,778 39,330 155,400
====================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING THE
YEAR ENDED DECEMBER 31, 2004
Sunport Center IV, Orlando, FL....................... 63,000 $ - 477 3,559
Techway Southwest II, Houston, TX.................... 94,000 - 154 4,239
Executive Airport CC I & III, Fort Lauderdale, FL.... 85,000 - 116 6,067
Expressway Commerce Center I, Tampa, FL.............. 103,000 - 104 6,261
World Houston 17, Houston, TX........................ 66,000 - 853 2,318
World Houston 19, Houston, TX........................ 66,000 - 106 2,629
World Houston 20, Houston, TX........................ 62,000 - 72 2,294
------------------------------------------------------
Total Transferred to Real Estate Properties............ 539,000 $ - 1,882 27,367
======================================================
At December 31, 2003, the Company was offering for sale 11.3 acres in
Houston, Texas and Tampa, Florida with a total carrying value of $1,375,000.
During 2004, four properties were transferred to held for sale. Three of these
properties and one of the land parcels in Tampa were sold during the year as
shown in the following table. At December 31, 2004, the Company was offering for
sale the Delp Distribution Center II in Memphis, Tennessee with a carrying value
of $1,662,000 and 6.87 acres of land in Houston, Texas and Tampa, Florida with a
carrying amount of $975,000. No loss is anticipated on the sale of the
properties that are held for sale. The results of operations for the properties
sold or held for sale during the periods reported are shown under Discontinued
Operations on the consolidated income statement. A summary of gains (losses) on
real estate investments for the years ended December 31, 2004, 2003 and 2002
follows:
Gains (Losses) on Real Estate Investments
Date Net Recognized
Real Estate Properties Location Size Sold Sales Price Basis Gain (Loss)
----------------------------------------------------------------------------------------------------------------------------
(In thousands)
2004
Getwell Distribution Center...... Memphis, TN 26,000 sf 06/30/04 $ 746 685 61
Sample 95 Business Park III...... Pompano Beach, FL 18,000 sf 07/01/04 1,994 711 1,283
Viscount Distribution Center..... Dallas, TX 104,000 sf 08/20/04 2,197 2,091 106
Sabal Land (Broadway Parcel)..... Tampa, FL 4.43 acres 10/04/04 403 402 1
-----------------------------------------
$ 5,340 3,889 1,451
=========================================
2003
Air Park Distribution Center II.. Memphis, TN 17,000 sf 02/14/03 $ 445 339 106
Orlando Central Park Land........ Orlando, FL 2.6 acres 07/30/03 396 390 6
-----------------------------------------
$ 841 729 112
=========================================
2002
Carpenter Duplex................. Dallas, TX 47,000 sf 02/12/02 $ 1,111 1,018 93
7th Street Service Center........ Phoenix, AZ 39,000 sf 09/20/02 1,806 1,872 (66)
-----------------------------------------
$ 2,917 2,890 27
=========================================
The following schedule indicates approximate future minimum rental receipts
under noncancelable leases for real estate properties by year as of December 31,
2004:
Future Minimum Rental Receipts Under Noncancelable Leases
Years Ended December 31, (In thousands)
-------------------------------------------------------------
2005...................................... $ 85,610
2006...................................... 72,771
2007...................................... 56,945
2008...................................... 39,910
2009...................................... 26,943
Thereafter................................ 51,613
--------------
Total minimum receipts................. $ 333,792
==============
Ground Leases
As of December 31, 2004, the Company owned two properties in Florida, two
properties in Texas, one property in Arizona and one property in Mississippi
that are subject to ground leases. These leases have terms of 40 to 75 years,
expiration dates of August 2031 to November 2076, and renewal options of 15 to
35 years, except for the one lease in Arizona which is automatically renewed
annually. Total lease expenditures for the years ended December 31, 2004, 2003
and 2002 were $679,000, $676,000 and $610,000, respectively. Payments on five of
the properties are subject to increases at 3 to 10 year intervals based upon the
agreed or appraised fair market value of the leased premises on the adjustment
date or the Consumer Price Index percentage increase since the base rent date.
The following schedule indicates approximate future minimum lease payments for
these properties by year as of December 31, 2004:
Future Minimum Ground Lease Payments
Years Ended December 31, (In thousands)
-------------------------------------------------------------
2005...................................... $ 679
2006...................................... 678
2007...................................... 677
2008...................................... 677
2009...................................... 677
Thereafter................................ 17,429
--------------
Total minimum payments................. $ 20,817
==============
(3) UNCONSOLIDATED INVESTMENT
In November 2004, the Company acquired a 50% undivided tenant-in-common interest
in Industry Distribution Center II, a 309,000 square foot warehouse distribution
building in the City of Industry (Los Angeles), California. The building was
constructed in 1998 and is 100% leased for ten years to a single tenant who owns
the other 50% interest in the property. This investment is accounted for under
the equity method of accounting and had a carrying value of $9,256,000 at
December 31, 2004.
(4) MORTGAGE LOANS RECEIVABLE
In connection with the closing of the investment in Industry Distribution Center
II, EastGroup advanced a total of $7,550,000 in two separate notes to its
co-owner, one for $6,750,000 and one for $800,000. The interest rate on the
$6,750,000 note is 6% and the interest rate on the $800,000 note is 9%. Interest
is due monthly on both of these notes by the borrower.
The Company and its co-owner plan to secure permanent fixed-rate financing
on the investment in Industry Distribution Center II. Proceeds from the
financing will be used to reduce the Company's bank debt and the $6,750,000
mortgage loan from the co-owner of this property. There can be no assurances
that the fixed rate financing will be obtained. If the $6,750,000 note is not
repaid within 180 days of the initial disbursement, the interest rate will be
adjusted to 400 basis points above the 10-year U.S. Treasury Note rate on the
181st day and every 90 days thereafter, except that the rate will not exceed
10%. All principal and unpaid interest is payable in full from the co-owner on
November 14, 2007.
The principal amount of the $800,000 note is due in three equal annual
installments beginning in November of 2005 until maturity on November 14, 2007.
(5) OTHER ASSETS
A summary of the Company's Other Assets follows:
December 31,
--------------------------
2004 2003
--------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization............ $ 12,003 11,286
Deferred rent receivable, net of allowance for doubtful accounts.................... 10,832 8,029
Accounts receivable, net of allowance for doubtful accounts......................... 2,316 2,696
Acquired in-place lease intangibles, net of accumulated amortization................ 2,931 1,857
Goodwill............................................................................ 990 990
Prepaid expenses and other assets................................................... 9,134 6,980
--------------------------
$ 38,206 31,838
==========================
(6) NOTES PAYABLE TO BANKS
The Company had a three-year $175 million unsecured revolving credit facility
with a group of ten banks that was due to mature in January 2005 and was
refinanced as specified below. The interest rate on the facility was based on
the Eurodollar rate. At December 31, 2003, the interest rate was 2.40% on $32
million and 2.42% on $19 million. An unused facility fee was also assessed on
this loan.
In December 2004, the Company renewed this credit facility. The new loan is
a three-year, $175 million unsecured revolving credit facility with a group of
nine banks that matures in January 2008. The Company customarily uses this line
of credit for acquisitions and developments. The interest rate on the facility
is based on the LIBOR index and varies according to debt-to-total asset value
ratios, with an annual facility fee of 20 basis points. EastGroup's current
interest rate is LIBOR plus .95%. The line of credit can be expanded by $100
million and has a one-year extension at EastGroup's option. At December 31,
2004, the interest rate was 3.37% on $81,000,000. The interest rate on each
tranche is currently reset on a monthly basis.
The Company had a one-year $12.5 million unsecured revolving credit
facility with PNC Bank, N.A. that matured in December 2004. At December 31,
2003, the interest rate was 2.295% on $1,550,000. The Company renewed this
credit facility, customarily used for working cash needs, with a new line of
credit of $20 million with a maturity date in December 2005. The interest rate
on this facility is based on LIBOR and varies according to debt-to-total asset
value ratios; it is currently LIBOR plus 1.10%. At December 31, 2004, the
interest rate was 3.50% on $5,431,000.
Bank loan commitment fees were $44,000 in 2004, $44,000 in 2003 and $43,000
in 2002.
Average bank borrowings were $66,867,000 in 2004 compared to $65,399,000 in
2003 with weighted average interest rates of 2.76% in 2004 compared to 2.53% in
2003. Weighted average interest rates including amortization of loan costs were
3.36% for 2004 and 3.15% for 2003. Amortization of bank loan costs was $404,000
in 2004, $409,000 in 2003 and $407,000 in 2002.
The Company's bank credit facilities have certain restrictive covenants,
and the Company was in compliance with all of its debt covenants at December 31,
2004.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $10,620,000 Tower Automotive Center
recourse mortgage (see Note 7). 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 income (loss). The
Company does not hold or issue this type of derivative contract for trading or
speculative purposes.
The interest rate swap agreement is summarized as follows:
Current Notional Fair Market Value Fair Market Value
Type of Hedge Amount Maturity Date Reference Rate Fixed Rate at 12/31/04 at 12/31/03
----------------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $10,620 12/31/10 1 month LIBOR 4.03% $14 ($30)
(1) This mortgage is backed by a letter of credit totaling $10,742,000 at
December 31, 2004. The letter of credit is renewable annually and expires on
January 15, 2011.
(7) MORTGAGE NOTES PAYABLE
A summary of mortgage notes payable follows:
Carrying Amount
Monthly Of Securing Balance at December 31,
P&I Maturity Real Estate at -----------------------
Property Rate Payment Date December 31, 2004 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Eastlake Distribution Center (recourse).............. 8.500% $ 57,115 Repaid 02/04 $ - - 3,035
Chamberlain Distribution Center...................... 8.750% 21,376 Repaid 07/04 - - 2,210
56th Street Commerce Park............................ 8.875% 21,816 Repaid 07/04 - - 1,695
Exchange Distribution Center I....................... 8.375% 21,498 07/01/05 2,701 1,816 1,917
Westport Commerce Center............................. 8.000% 28,021 08/01/05 4,594 2,407 2,545
Lake Pointe Business Park............................ 8.125% 81,675 10/01/05 8,760 9,830 10,004
Jetport Commerce Park................................ 8.125% 33,769 10/01/05 4,536 2,913 3,074
Huntwood Associates.................................. 7.990% 100,250 08/22/06 15,660 11,089 11,393
Wiegman Associates................................... 7.990% 46,269 08/22/06 8,128 5,118 5,258
World Houston 1 & 2.................................. 7.770% 33,019 04/15/07 5,194 4,195 4,262
E. University I & II, Broadway VI, 55th Avenue
and Ethan Allen.................................... 8.060% 96,974 06/26/07 21,467 10,945 11,215
Lamar II Distribution Center......................... 6.900% 16,925 12/01/08 3,004 1,820 1,895
Dominguez, Kingsview, Walnut, Washington,
Industry and Shaw.................................. 6.800% 358,770 03/01/09 55,811 39,222 40,801
Auburn Facility...................................... 8.875% 64,885 09/01/09 13,426 2,416 3,049
Tower Automotive Center (recourse)(1)................ 5.300% Semiannual 01/15/11 10,230 10,620 10,880
Interstate I, II & III, Venture, Stemmons Circle,
Glenmont I & II, West Loop I & II, Butterfield
Trail and Rojas.................................... 7.250% 325,263 05/01/11 46,298 42,388 43,187
America Plaza, Central Green and World Houston 3-9... 7.920% 191,519 05/10/11 27,216 25,266 25,551
University Business Center (120 & 130 Cremona)....... 6.430% 81,856 05/15/12 9,757 6,925 7,444
University Business Center (125 & 175 Cremona)....... 7.980% 88,607 06/01/12 13,392 10,715 10,914
Airport Distribution, Southpointe, Broadway I, III
& IV, Southpark, 51st Avenue, Chestnut, Main
Street, Interchange Business Park,
North Stemmons I and World Houston 12 & 13......... 6.860% 279,149 09/01/12 44,207 38,531 39,212
Broadway V, 35th Avenue, Sunbelt, Freeport,
Lockwood, Northwest Point, Techway Southwest I
and World Houston 10, 11 & 14...................... 4.750% 259,403 09/05/13 46,458 44,278 45,262
Kyrene Distribution Center........................... 9.000% 11,246 07/01/14 2,504 865 919
World Houston 17, Kirby, Americas Ten I, Shady
Trail, Palm River North I, II & III and
Westlake I & II(2)................................. 5.680% 143,420 10/10/14 32,015 30,300 -
Blue Heron Distribution Center II.................... 5.390% 16,167 03/01/20 5,849 2,015 -
------------------------------------------
$ 381,207 303,674 285,722
==========================================
(1) The Tower Automotive mortgage has a variable interest rate based on the
one-month LIBOR. EastGroup has an interest rate swap agreement that fixes the
rate at 4.03% for the 8-year term. Interest and related fees result in an annual
effective interest rate of 5.3%. Semiannual principal payments are made on this
note; interest is paid monthly. (See Note 6.) The principal amounts of these
payments increase incrementally as the loan approaches maturity.
(2) Interest only is paid on this note until November 2006.
The Company currently intends to repay its debt service obligations, both
in the short- and long-term, through its operating cash flows, borrowings under
its lines of credit, proceeds from new mortgage debt and/or proceeds from the
issuance of equity instruments. Principal payments due during the next five
years as of December 31, 2004 are as follows:
Year (In thousands)
----------------------------------------
2005................. $ 24,122
2006................. 22,954
2007................. 22,020
2008................. 9,634
2009................. 37,970
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
December 31,
-------------------------------
2004 2003
-------------------------------
(In thousands)
Property taxes payable............................ $ 6,689 6,457
Dividends payable................................. 2,355 1,967
Other payables and accrued expenses............... 7,137 5,842
-------------------------------
$ 16,181 14,266
===============================
(9) COMMON STOCK ACTIVITY
The following table presents the common stock activity for the three years ended
December 31, 2004:
Years Ended December 31,
-------------------------------------------------
2004 2003 2002
-------------------------------------------------
Common Shares
Shares outstanding at beginning of year........... 20,853,780 16,104,356 15,912,060
Conversion of preferred into common stock......... - 3,181,920 -
Common stock offerings............................ - 1,418,887 -
Management incentive stock awarded................ - 2,108 6,822
Incentive restricted stock granted................ 36,767 - 19,100
Incentive restricted stock forfeited.............. (9,010) (6,000) (9,250)
Stock options exercised........................... 167,380 139,584 161,319
Dividend reinvestment plan........................ 10,247 12,925 14,305
-------------------------------------------------
Shares outstanding at end of year................. 21,059,164 20,853,780 16,104,356
=================================================
Common Stock Issuances
In May 2003, the Company completed a direct placement offering of 571,429 shares
of its common stock at $26.25 per share. The proceeds of the offering were
approximately $14,461,000, net of all related expenses. In November 2003, the
Company completed a direct placement offering of 847,458 shares of its common
stock at $29.50 per share. The proceeds of the offering were approximately
$24,513,000, net of all related expenses.
Dividend Reinvestment Plan
The Company has a dividend reinvestment plan that allows stockholders to
reinvest cash distributions in new shares of the Company.
Common Stock Repurchase Plan
EastGroup's Board of Directors has authorized the repurchase of up to 1,500,000
shares of its outstanding common stock. The shares may be purchased from time to
time in the open market or in privately negotiated transactions. The Company has
not repurchased any shares since 2000. Under the 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.
Shareholder Rights Plan
In December 1998, EastGroup adopted a Shareholder Rights Plan (the Plan)
designed to enhance the ability of all of the Company's stockholders to realize
the long-term value of their investment. Under the Plan, Rights were distributed
as a dividend on each share of Common Stock (one Right for each share of Common
Stock) held as of the close of business on December 28, 1998. A Right was also
delivered with all shares of Common Stock issued after December 28, 1998. The
Rights will expire at the close of business on December 3, 2008.
Each whole Right will entitle the holder to buy one one-thousandth (1/1000)
of a newly issued share of EastGroup's Series C Preferred Stock at an exercise
price of $70.00. The Rights attach to and trade with the shares of the Company's
Common Stock. No separate Rights Certificates will be issued unless an event
triggering the Rights occurs. The Rights will detach from the Common Stock and
will initially become exercisable for shares of Series C Preferred Stock if a
person or group acquires beneficial ownership of, or commences a tender or
exchange offer which would result in such person or group beneficially owning
15% or more of EastGroup's Common Stock, except through a tender or exchange
offer for all shares which the Board determines to be fair and otherwise in the
best interests of EastGroup and its shareholders. The Rights will also detach
from the Common Stock if the Board determines that a person holding at least
9.8% of EastGroup's Common Stock intends to cause EastGroup to take certain
actions adverse to it and its shareholders or that such holder's ownership would
have a material adverse effect on EastGroup.
On December 20, 2004, EastGroup amended the Plan to require a committee
comprised entirely of independent directors to review and evaluate the Plan to
consider whether the maintenance of the Plan continues to be in the interest of
the Company, its stockholders and other relevant constituencies of the Company
at least every three years.
If any person becomes the beneficial owner of 15% or more of EastGroup's
Common Stock and the Board of Directors does not within 10 days thereafter
redeem the Rights, or a 9.8% holder is determined by the Board to be an adverse
person, each Right not owned by such person or related parties will then enable
its holder to purchase, at the Right's then-current exercise price, EastGroup
Common Stock (or, in certain circumstances as determined by the Board, a
combination of cash, property, common stock or other securities) having a value
of twice the Right's exercise price.
Under certain circumstances, if EastGroup is acquired in a merger or
similar transaction with another person, or sells more than 50% of its assets,
earning power or cash flow to another entity, each Right that has not previously
been exercised will entitle its holder to purchase, at the Right's then-current
exercise price, common stock of such other entity having a value of twice the
Right's exercise price.
EastGroup will generally be entitled to redeem the Rights at $0.0001 per
Right at any time until the 10th day following public announcement that a 15%
position has been acquired, or until the Board has determined a 9.8% holder to
be an adverse person. Prior to such time, the Board of Directors may extend the
redemption period.
(10) STOCK-BASED COMPENSATION PLANS
At the Company's annual meeting in May 2004, the Company's shareholders approved
the EastGroup Properties, Inc. 2004 Equity Incentive Plan (the "2004 Plan"),
which authorizes the issuance of up to 1,900,000 shares of common stock (not
including shares granted in the 1994 plan) to employees in the form of options,
stock appreciation rights, restricted stock, deferred stock units, performance
shares, stock bonuses, and stock in place of cash compensation. The 2004 Plan
has replaced the 1994 Plan. Under the 1994 Plan, employees of the Company were
granted stock options (50% vested after one year and the other 50% after two
years), an annual incentive award and restricted stock awards. No further grants
will be made under the 1994 Plan. Outstanding grants under the 1994 Plan will be
fulfilled under that Plan. Total shares available for grant were 1,898,945,
543,577, and 164,360 at December 31, 2004, 2003 and 2002, respectively.
The following discussions and tables illustrate the Company's various forms
of stock-based compensation. Stock-based compensation expense for these plans
collectively was $1,256,000, $620,000 and $449,000 for 2004, 2003 and 2002,
respectively. Included in those amounts were costs for 2,108 shares in 2003 and
6,822 shares in 2002 awarded as annual incentives to management.
Restricted Stock
The purpose of the restricted stock plan is to act as a retention device since
it allows participants to benefit from dividends as well as potential stock
appreciation. The Company records the fair market value of the restricted stock
to additional paid-in capital when the shares are granted and offsets unearned
compensation by the same amount. The unearned compensation is amortized over the
restricted period into compensation expense. Previously expensed stock-based
compensation related to forfeited shares reduces compensation expense during the
period in which the shares are forfeited. During the restricted period, the
Company accrues dividends and holds the certificates for the shares; however,
the employee can vote the shares. Share certificates and dividends are delivered
to the employee as they vest.
In 2000, the Compensation Committee granted restricted stock to all
employees. The restricted period for the 2000 grant is 10 years and vesting is
20% at the end of the sixth year through the tenth year.
In 2004, the Compensation Committee granted restricted stock to all
non-executive employees. The restricted period for the 2004 non-executive grant
is three years and vests 33.33% on January 1, 2005, 2006 and 2007.
Also in 2004, the Compensation Committee granted restricted stock to
executive management. The restricted stock period is three years and vests
33.33% on January 1, 2004, 2005 and 2006.
Following is a summary of the total restricted shares granted, forfeited
and delivered to officers and employees with related weighted average share
prices for 2004, 2003 and 2002:
Restricted Stock Activity: Years Ended December 31,
-------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Share Price Shares Share Price Shares Share Price
-------------------------------------------------------------------------------
Nonvested at beginning of year...... 183,100 $ 21.006 189,100 $ 21.010 179,250 $ 20.714
Granted............................. 36,767 30.593 - - 19,100 23.522
Forfeited........................... (9,010) 27.308 (6,000) 21.096 (9,250) 20.499
Vested.............................. (6,509) 27.300 - - - -
------------ ------------ ------------
Nonvested at end of year............ 204,348 22.249 183,100 21.006 189,100 21.010
============ ============ ============
Officers and Employees Stock Options
Stock Option Activity: Years Ended December 31,
-------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------
Outstanding at beginning of year.... 432,370 $ 18.394 567,704 $ 18.503 698,423 $ 17.921
Granted............................. - - - - 11,350 24.651
Exercised........................... (145,630) 15.578 (134,334) 18.802 (138,069) 15.966
Expired............................. - - (1,000) 25.095 (4,000) 22.078
------------ ------------- -------------
Outstanding at end of year.......... 286,740 19.853 432,370 18.394 567,704 18.503
============ ============= =============
Exercisable at end of year.......... 286,740 $ 19.853 427,695 $ 18.325 544,104 $ 18.287
Officer and employee outstanding stock options at December 31, 2004, all exercisable:
- --------------------------------------------------------------------------------------
Weighted Average Remaining Weighted Average
Exercise Price Range Number Contractual Life Exercise Price
- --------------------------------------------------------------------------------------
$ 14.580-19.000 87,319 1.846 years $ 16.383
20.000-22.780 188,671 3.799 years 21.234
23.050-26.350 10,750 7.016 years 23.814
(11) DIRECTORS STOCK OPTION PLAN
At the Company's annual meeting in June 2000, the Company's shareholders
approved the 2000 Directors Stock Option Plan (the "2000 Plan"), which
authorizes the issuance of up to 150,000 shares of common stock (not including
shares granted in the 1994 plan, as amended) upon exercise of any options. The
2000 Plan replaced the 1994 Plan. Options granted to directors vest 100% at the
grant date. Under the Directors plan, each Non-Employee Director is granted an
initial 7,500 options. Through the year 2003, 2,250 additional options were
granted on the date of any Annual Meeting at which the Director was reelected to
the Board. In lieu of option grants in 2004, cash awards totaling $34,000 were
paid to the Non-Employee Directors.
Stock Option Activity: Years Ended December 31,
-------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------
Outstanding at beginning of year.... 113,250 $ 20.726 107,250 $ 19.354 109,500 $ 17.744
Granted............................. - - 13,500 26.600 21,000 24.331
Exercised........................... (21,750) 14.872 (7,500) 11.670 (23,250) 16.273
Expired............................. - - - - - -
------------ ------------- -------------
Outstanding at end of year.......... 91,500 22.118 113,250 20.726 107,250 19.354
============ ============= =============
Exercisable at end of year.......... 91,500 $ 22.118 113,250 $ 20.726 107,250 $ 19.354
Available for grant at end of year.. 88,500 - 88,500 - 102,000 -
Director outstanding stock options at December 31, 2004, all exercisable:
- --------------------------------------------------------------------------------------
Weighted Average Remaining Weighted Average
Exercise Price Range Number Contractual Life Exercise Price
- --------------------------------------------------------------------------------------
$ 12.670-14.580 4,500 .938 years $ 13.625
19.375-21.750 52,500 4.536 years 20.807
24.020-26.600 34,500 7.753 years 25.219
(12) PREFERRED STOCK
Series A 9.00% Cumulative Redeemable Preferred Stock
In June 1998, EastGroup sold 1,725,000 shares of Series A 9.00% Cumulative
Redeemable Preferred Stock at $25.00 per share in a public offering. The
preferred stock was redeemable by the Company at $25.00 per share, plus accrued
and unpaid dividends, on or after June 19, 2003. The preferred stock had no
stated maturity, sinking fund or mandatory redemption and was not convertible
into any other securities of the Company.
On July 7, 2003, the Company redeemed all of the outstanding Series A
Preferred Stock. The redemption price of these shares (excluding accrued
dividends) was $43,125,000. The original issuance costs of $1,768,000 related to
Series A in 1998 were recorded as a preferred issuance cost and treated in a
manner similar to a preferred dividend in the third quarter of 2003. The
redemption cost was funded with the proceeds from the Company's common offering
in May 2003 and the 7.95% Series D Cumulative Redeemable Preferred Stock
offering in earlier July 2003.
The Company declared dividends of $1.08125 per share of Series A Preferred
for 2003 and $2.25 per share for 2002.
Series B 8.75% Cumulative Convertible Preferred Stock
In December 1998 and September 1999, EastGroup sold $10,000,000 and $60,000,000,
respectively, of Series B 8.75% Cumulative Convertible Preferred Stock at a net
price of $24.50 per share to Five Arrows Realty Securities II, L.L.C. (Five
Arrows), an investment fund managed by Rothschild Realty, Inc., a member of the
Rothschild Group. The Series B Preferred Stock, which was convertible into
common stock at a conversion price of $22.00 per share (3,181,920 common
shares), was entitled to quarterly dividends in arrears equal to the greater of
$0.547 per share or the dividend on the number of shares of common stock into
which a share of Series B Preferred Stock was convertible. In connection with
this offering, EastGroup entered into certain related agreements with Five
Arrows, providing, among other things, for certain registration rights with
respect to the Series B Preferred Stock. Also, the preferred stock was not
redeemable by the Company at its option prior to the fifth anniversary of the
original date of issuance of the Series B Preferred Stock, after which it was
redeemable at various redemption prices at certain dates and under certain
circumstances.
During 2003, all of the 2,800,000 shares of the Series B Preferred Stock
were converted into 3,181,920 common shares. Five Arrows began converting the
shares in April 2003 and completed the conversion in November 2003. Since it was
the policy of Five Arrows to not hold common stock, the common shares were sold
in the market throughout the year with the final shares being sold on December
15, 2003.
The Company declared dividends of $1.641 per share of Series B Preferred
for 2003 and $2.188 per share for 2002.
Series D 7.95% Cumulative Redeemable Preferred Stock
In July 2003, EastGroup sold 1,320,000 shares of 7.95% Series D Cumulative
Redeemable Preferred Stock at $25.00 per share in a direct placement. The
preferred stock is redeemable by the Company at $25.00 per share, plus accrued
and unpaid dividends, on or after July 2, 2008. The preferred stock has no
stated maturity, sinking fund or mandatory redemption and is not convertible
into any other securities of the Company.
The Company declared dividends of $1.9876 per share for Series D Preferred
for 2004 and $.9883 per share for 2003.
(13) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in equity
from nonowner sources. The components of accumulated other comprehensive income
(loss) for 2004, 2003 and 2002 are presented in the Company's Consolidated
Statements of Changes in Stockholders' Equity and are summarized below.
---------------------------------------
2004 2003 2002
---------------------------------------
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year......................................... $ (30) 58 1,193
Unrealized holding gains on REIT securities during the year...... - 66 998
Less reclassification adjustment for gains on REIT
securities included in net income............................ - (421) (1,836)
Change in fair value of interest rate swap....................... 44 267 (297)
---------------------------------------
Balance at end of year............................................... $ 14 (30) 58
=======================================
(14) EARNINGS PER SHARE
The Company applies SFAS No. 128, "Earnings Per Share," which requires companies
to present basic EPS and diluted EPS. Reconciliation of the numerators and
denominators in the basic and diluted EPS computations is as follows:
Reconciliation of Numerators and Denominators
-------------------------------------------
2004 2003 2002
-------------------------------------------
(In thousands)
BASIC EPS COMPUTATION
Numerator-net income available to common stockholders........ $ 20,703 12,748 13,618
Denominator-weighted average shares outstanding.............. 20,771 17,819 15,868
DILUTED EPS COMPUTATION
Numerator-net income available to common stockholders........ $ 20,703 12,748 13,618
Denominator:
Weighted average shares outstanding........................ 20,771 17,819 15,868
Common stock options....................................... 193 189 182
Nonvested restricted stock................................. 124 186 187
-------------------------------------------
Total Shares............................................ 21,088 18,194 16,237
===========================================
The Company's Series B Preferred Stock, which was convertible into common stock
at a conversion price of $22.00 per share, was not included in the computation
of diluted earnings per share for 2003 and 2002 due to its antidilutive effect.
All of the Series B Preferred Stock was converted into common stock during 2003.
(15) QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
2004 Quarter Ended 2003 Quarter Ended
------------------------------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues.................................... $ 27,448 28,037 29,361 29,838 26,643 26,459 27,150 27,343
Expenses.................................... (22,530) (22,922) (23,406) (24,254) (21,560) (21,292) (22,085) (22,663)
------------------------------------------------------------------------------
Income from continuing operations........... 4,918 5,115 5,955 5,584 5,083 5,167 5,065 4,680
Income from discontinued operations......... 94 166 1,454 41 181 92 98 79
------------------------------------------------------------------------------
Net income.................................. 5,012 5,281 7,409 5,625 5,264 5,259 5,163 4,759
Preferred dividends......................... (656) (656) (656) (656) (2,502) (1,736) (1,025) (656)
Costs on redemption of Series A preferred... - - - - - - (1,778) -
------------------------------------------------------------------------------
Net income available to common
stockholders.............................. $ 4,356 4,625 6,753 4,969 2,762 3,523 2,360 4,103
------------------------------------------------------------------------------
BASIC PER SHARE DATA
Net income available to common
stockholders.............................. $ 0.21 0.22 0.32 0.24 0.17 0.21 0.13 0.21
==============================================================================
Weighted average shares outstanding......... 20,687 20,745 20,804 20,845 15,924 16,864 18,451 19,986
==============================================================================
DILUTED PER SHARE DATA
Net income available to common
stockholders.............................. $ 0.21 0.22 0.32 0.23 0.17 0.20 0.13 0.20
==============================================================================
Weighted average shares outstanding......... 21,114 21,142 21,179 21,157 16,282 17,225 18,818 20,608
==============================================================================
The above quarterly earnings per share calculations are based on the weighted
average number of common shares outstanding during each quarter for basic
earnings per share and the weighted average number of outstanding common shares
and common share equivalents during each quarter for diluted earnings per share.
The annual earnings per share calculations in the Consolidated Statements of
Income are based on the weighted average number of common shares outstanding
during each year for basic earnings per share and the weighted average number of
outstanding common shares and common share equivalents during each year for
diluted earnings per share.
The Series B Preferred Stock, which was convertible into common stock, was
included in the computation of diluted earnings per share for the quarter ended
December 31, 2003 due to its dilutive effect in such quarter.
(16) DEFINED CONTRIBUTION PLAN
EastGroup maintains a 401(k) plan for its employees. The Company makes matching
contributions of 50% of the employee's contribution (limited to 10% of
compensation as defined by the plan) and may also make annual discretionary
contributions. The Company's total expense for this plan was $332,000, $273,000
and $251,000 for 2004, 2003 and 2002, respectively.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 2004 and 2003. SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
-------------------------------------------------------
2004 2003
-------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------
(In thousands)
Financial Assets
Mortgage loans receivable...... $ 7,550 7,550 - -
Cash and cash equivalents...... 1,208 1,208 1,786 1,786
Interest rate swap............. 14 14 - -
Financial Liabilities
Mortgage notes payable......... 303,674 325,241 285,722 304,317
Notes payable to banks......... 86,431 86,431 52,550 52,550
Interest rate swap............. - - 30 30
Carrying amounts shown in the table are included in the consolidated balance
sheet under the indicated captions, except as indicated in the notes below.
The following methods and assumptions were used to estimate fair value of each
class of financial instruments:
Mortgage Loans Receivable: The carrying amounts approximate fair value due to
the recent issuance of the loans in November 2004.
Cash and Cash Equivalents: The carrying amounts approximate fair value because
of the short maturity of those instruments.
Interest Rate Swap: The fair value of the interest rate swap is the amount at
which it could be settled, based on estimates obtained from the counterparty.
The interest rate swap is shown under either Other Assets or Other Liabilities
on the consolidated balance sheet, depending on the settlement amount due to or
from the counterparty at the respective balance sheet date.
Mortgage Notes Payable: The fair value of the Company's mortgage notes payable
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.
Notes Payable to Banks: The carrying amounts approximate fair value because of
the variable rates of interest on the debt.
(18) SUBSEQUENT EVENTS
In January 2005, EastGroup acquired Arion Business Park in San Antonio, Texas
for a purchase price of $40,000,000. As part of the acquisition price, EastGroup
assumed the outstanding first mortgage balance of $20,500,000. This interest
only, nonrecourse mortgage has a fixed rate of 5.99% and matures in December
2006. Arion is a master-planned business park containing 524,000 square feet in
14 industrial buildings and 15.5 acres of land for the future development of
approximately 170,000 square feet.
Also in January 2005, the Company purchased 32 acres adjacent to its
Southridge development in Orlando for $1,900,000. This additional land is
expected to increase the eventual build-out of Southridge warehouses by 275,000
square feet to a total of over one million square feet. In February, the Company
acquired 65.8 acres in Tampa for $4,739,000. This purchase represents all the
remaining undeveloped industrial land in the Oak Creek Park in which EastGroup
currently owns two buildings.
In February 2005, the Company sold Delp Distribution Center II (102,000
square feet) in Memphis, Tennessee for a net sales price of $2,085,000 with a
gain of approximately $375,000.
Also, subsequent to December 31, 2004, the Company entered into a contract
to purchase a two-building property (181,000 square feet) in Jacksonville,
Florida for approximately $7,900,000. This acquisition is expected to close in
late March 2005.
Tower Automotive, Inc. (Tower) filed for Chapter 11 reorganization on
February 2, 2005. Tower, who leases 210,000 square feet from EastGroup under a
lease expiring in December 2010, is current with their rental payments to
EastGroup through March 2005. EastGroup has a recourse mortgage loan on the
property for $10,620,000 as of December 31, 2004. Property net operating income
for 2004 was $1,369,000, 2003 was $1,374,000 and 2002 was $420,000 (lease
commenced in September 2002). Rental income due for 2005 is $1,389,000 with
estimated property net operating income budgeted for 2005 of $1,372,000.
(19) RELATED PARTY TRANSACTIONS
EastGroup and Parkway Properties, Inc. equally share the services and expenses
of the Company's Chairman of the Board of Directors. These services and expenses
include rent for office and storage space, administrative costs, insurance
benefits, and entertainment and travel expenses. EastGroup and Parkway each pay
a separate salary to the Chairman.
EastGroup also leases 12,000 square feet of space for its executive offices
in Jackson, Mississippi in a building owned by Parkway.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULES
THE DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
Under date of March 11, 2005, we reported on the consolidated balance sheets of
EastGroup Properties, Inc. and subsidiaries, as of December 31, 2004 and 2003,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2004, which are included in the 2004 Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial statement
schedules as listed in Item 15(a)(2) of Form 10-K. The financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Jackson, Mississippi KPMG LLP
March 11, 2005
SCHEDULE III
REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2004 (In thousands)
Gross Amount at
Initial Cost which Carried at
to the Company Close of Period
------------------- --------------------------
Costs
Capitalized Accumulated
Buildings and Subsequent to Buildings and Depreciation Year Year
Description Encumbrances Land Improvements Acquisition Land Improvements Total Dec. 31, 2004 Acquired Constructed
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate
Properties (c):
Industrial:
FLORIDA
Jacksonville
Deerwood $ - 1,147 1,799 1,292 1,147 3,091 4,238 1,126 1989 1978
Phillips - 1,375 2,961 2,613 1,375 5,574 6,949 2,026 1994 1984/95
Lake Pointe 9,830 3,442 6,450 3,118 3,442 9,568 13,010 4,250 1993 1986/87
Ellis - 540 7,513 481 540 7,994 8,534 1,798 1997 1977
Westside - 1,170 12,400 3,445 1,170 15,845 17,015 3,527 1997 1984
Beach - 476 1,899 442 476 2,341 2,817 375 2000 2000
Orlando
Chancellor - 291 1,711 58 291 1,769 2,060 555 1996/97 1996/97
Exchange I 1,816 603 2,414 949 603 3,363 3,966 1,265 1994 1975
Exchange II - 300 945 22 300 967 1,267 164 2002 1976
Exchange III - 320 997 4 320 1,001 1,321 169 2002 1980
Sunbelt
Center (j) 8,033 1,474 5,745 3,187 1,475 8,931 10,406 3,591 1989/97/98 1974/87/97/98
John Young I - 497 2,444 435 497 2,879 3,376 678 1997/98 1997/98
John Young II - 512 3,613 (267) 512 3,346 3,858 983 1998 1999
Altamonte I - 1,518 2,661 644 1,518 3,305 4,823 1,354 1999 1980/82
Altamonte II - 745 2,618 236 745 2,854 3,599 222 2003 1975
Sunport I - 555 1,977 474 555 2,451 3,006 492 1999 1999
Sunport II - 597 3,271 800 597 4,071 4,668 1,229 1999 2001
Sunport III - 642 3,121 345 642 3,466 4,108 436 1999 2002
Sunport IV - 642 2,917 165 642 3,082 3,724 83 1999 2004
Tampa
56th Street - 843 3,567 1,996 843 5,563 6,406 2,483 1993 1981/86/97
Jetport 2,913 1,034 4,416 1,831 1,034 6,247 7,281 2,745 1993/94/95 1974/79/85
Jetport
517 & 518 - 541 2,175 331 541 2,506 3,047 879 1999 1981/82
Westport 2,407 980 3,800 1,757 980 5,557 6,537 1,943 1994 1983/87
Benjamin I & II - 843 3,963 130 883 4,053 4,936 1,257 1997 1996
Benjamin III - 407 1,503 214 407 1,717 2,124 865 1999 1988
Palm River
Center - 1,190 4,625 765 1,190 5,390 6,580 1,858 1997/98 1990/97/98
Palm River
North I & III (k) 5,651 1,005 4,688 1,389 1,005 6,077 7,082 972 1998 2000
Palm River
North II (k) 5,186 724 4,418 (23) 634 4,485 5,119 858 1997/98 1999
Walden I - 337 3,318 225 337 3,543 3,880 624 1997/98 2001
Walden II - 465 3,738 397 465 4,135 4,600 1,128 1998 1998
Premier - 1,110 6,126 137 1,110 6,263 7,373 1,345 1998 1998
Airport - 1,257 4,012 506 1,257 4,518 5,775 1,079 1998 1998
Westlake (k) 7,200 1,333 6,998 913 1,333 7,911 9,244 2,234 1998 1998/99
Expressway II - 1,013 3,247 - 1,013 3,247 4,260 216 2003 2001
Oak Creek - 647 3,603 387 647 3,990 4,637 230 2003 2001
Expressway I - 915 5,346 15 915 5,361 6,276 235 2002 2004
Fort Lauderdale/
Pompano Beach area
Linpro - 613 2,243 973 616 3,213 3,829 1,083 1996 1986
Cypress Creek - - 2,465 939 - 3,404 3,404 962 1997 1986
Lockhart - - 3,489 1,283 - 4,772 4,772 1,306 1997 1986
Interstate - 485 2,652 314 485 2,966 3,451 982 1998 1988
Sample 95 - 2,202 8,785 854 2,202 9,639 11,841 2,682 1996/98 1990/99
Blue Heron - 975 3,626 967 975 4,593 5,568 1,006 1999 1986
Blue Heron II 2,015 1,385 4,222 444 1,385 4,666 6,051 202 2004 1988
Executive Airport
I & III - 1,210 4,857 275 1,210 5,132 6,342 235 2001 2004
CALIFORNIA
San Francisco area
Wiegman 5,118 2,197 8,788 871 2,308 9,548 11,856 2,263 1996 1986/87
Huntwood 11,089 3,842 15,368 612 3,842 15,980 19,822 4,162 1996 1988
San Clemente - 893 2,004 - 893 2,004 2,897 369 1997 1978
Yosemite - 259 7,058 266 259 7,324 7,583 1,618 1999 1974/87
Los Angeles area
Kingsview (e) 1,860 643 2,573 1 643 2,574 3,217 606 1996 1980
Dominguez (e) 6,447 2,006 8,025 1,122 2,006 9,147 11,153 2,444 1996 1977
Main Street (i) 4,096 1,606 4,103 146 1,606 4,249 5,855 980 1999 1999
Walnut (e) 4,834 2,885 5,274 203 2,885 5,477 8,362 1,472 1996 1966/90
Washington (e) 3,971 1,636 4,900 334 1,636 5,234 6,870 1,199 1997 1996/97
Ethan Allen (f) 5,384 2,544 10,175 94 2,544 10,269 12,813 2,250 1998 1980
Industry (e) 13,530 10,230 12,373 802 10,230 13,175 23,405 3,117 1998 1959
Chestnut (i) 3,636 1,674 3,465 59 1,674 3,524 5,198 675 1998 1999
Los Angeles
Corporate Center - 1,363 5,453 1,132 1,363 6,585 7,948 1,512 1996 1986
Santa Barbara
University Bus.
Center 17,640 5,517 22,067 1,788 5,520 23,852 29,372 6,223 1996 1987/88
Fresno
Shaw (e) 8,580 2,465 11,627 750 2,465 12,377 14,842 3,200 1998 1978/81/87
San Diego
Eastlake - 3,046 6,888 748 3,046 7,636 10,682 1,774 1997 1989
TEXAS
Dallas
Interstate
I & II (h) 5,240 1,757 4,941 1,422 1,757 6,363 8,120 3,283 1988 1978
Interstate III (h) 1,958 520 2,008 506 520 2,514 3,034 488 2000 1979
Interstate IV - 416 2,481 6 416 2,487 2,903 64 2004 2002
Venture (h) 4,026 1,452 3,762 1,024 1,452 4,786 6,238 2,469 1988 1979
Stemmons
Circle (h) 1,654 363 2,014 186 363 2,200 2,563 833 1998 1977
Ambassador Row - 1,156 4,625 1,297 1,156 5,922 7,078 2,051 1998 1958/65
North
Stemmons I (i) 2,888 619 3,264 245 619 3,509 4,128 630 2001 1979
North
Stemmons II - 150 583 168 150 751 901 102 2002 1971
Shady Trail (k) 3,210 635 3,621 117 635 3,738 4,373 188 2003 1998
Houston
Northwest
Point (j) 6,797 1,243 5,640 1,920 1,243 7,560 8,803 2,297 1994 1984/85
Lockwood (j) 5,428 749 5,444 838 749 6,282 7,031 1,363 1997 1968/69
West Loop (h) 4,133 905 4,383 1,117 905 5,500 6,405 1,434 1997/2000 1980
World Houston
1 & 2 4,195 660 5,893 554 660 6,447 7,107 1,913 1998 1996
World Houston
3, 4 & 5 (g) 5,091 1,025 6,413 265 1,025 6,678 7,703 2,119 1998 1998
World
Houston 6 (g) 2,306 425 2,423 38 425 2,461 2,886 725 1998 1998
World Houston
7 & 8 (g) 5,860 680 4,584 3,128 680 7,712 8,392 2,358 1998 1998
World
Houston 9 (g) 5,092 800 4,355 1,422 800 5,777 6,577 911 1998 1998
World
Houston 10 (j) 4,416 933 4,779 7 933 4,786 5,719 741 2001 1999
World
Houston 11 (j) 3,820 638 3,764 546 638 4,310 4,948 664 1999 1999
World
Houston 12 (i) 2,057 340 2,419 181 340 2,600 2,940 324 2000 2002
World
Houston 13 (i) 2,011 282 2,569 24 282 2,593 2,875 663 2000 2002
World
Houston 14 (j) 2,836 722 2,629 322 722 2,951 3,673 422 2000 2003
World
Houston 17 (k) 2,805 373 1,945 758 373 2,703 3,076 52 2000 2004
World
Houston 19 - 373 2,256 402 373 2,658 3,031 143 2000 2004
World
Houston 20 - 346 1,948 4 346 1,952 2,298 40 2000 2004
America Plaza (g) 3,651 662 4,660 118 662 4,778 5,440 1,235 1998 1996
Central Green (g) 3,266 566 4,031 97 566 4,128 4,694 1,128 1999 1998
Glenmont (h) 5,255 936 6,161 1,046 936 7,207 8,143 1,664 1998 1999/2000
Techway S.W. I (j) 4,327 729 3,765 1,110 729 4,875 5,604 418 2000 2001
Techway S.W. II - 550 3,689 12 550 3,701 4,251 196 2000 2004
Freeport (j) 5,205 458 5,712 572 458 6,284 6,742 689 2002 2001
Kirby (k) 3,150 530 3,153 3 530 3,156 3,686 80 2004 1980
El Paso
Butterfield
Trail (h) 16,225 - 22,144 2,997 - 25,141 25,141 7,113 1997/2000 1987/95
Rojas (h) 3,897 900 3,659 1,480 900 5,139 6,039 2,101 1999 1986
Americas Ten I (k) 3,098 526 2,778 846 526 3,624 4,150 331 2001 2003
San Antonio
Alamo Downs - 1,342 6,338 12 1,342 6,350 7,692 233 2004 1986/2002
ARIZONA
Phoenix area
Broadway I (i) 3,220 837 3,349 417 837 3,766 4,603 1,280 1996 1971
Broadway II - 455 482 125 455 607 1,062 209 1999 1971
Broadway III (i) 1,795 775 1,742 49 775 1,791 2,566 563 2000 1983
Broadway IV (i) 1,570 380 1,652 212 380 1,864 2,244 422 2000 1986
Broadway V (j) 1,121 353 1,090 9 353 1,099 1,452 180 2002 1980
Broadway VI (f) 1,057 599 1,855 62 599 1,917 2,516 318 2002 1979
Kyrene I 865 850 2,044 349 850 2,393 3,243 739 1999 1981
Kyrene II - 640 2,409 265 640 2,674 3,314 567 1999 2001
Metro - 1,927 7,708 1,264 1,927 8,972 10,899 2,421 1996 1977/79
35th Avenue (j) 2,295 418 2,381 173 418 2,554 2,972 525 1997 1967
Estrella - 628 4,694 143 628 4,837 5,465 1,051 1998 1988
51st Avenue (i) 1,836 300 2,029 296 300 2,325 2,625 599 1998 1987
E. University
I and II (f) 2,418 1,120 4,482 154 1,120 4,636 5,756 1,088 1998 1987/89
55th Avenue (f) 2,086 912 3,717 337 917 4,049 4,966 928 1998 1987
Interstate
Commons I - 798 3,632 195 798 3,827 4,625 1,012 1999 1988
Interstate
Commons II - 320 2,448 221 320 2,669 2,989 385 1999 2000
Southpark (i) 2,956 918 2,738 570 918 3,308 4,226 448 2001 2000
Airport Commons - 1,000 1,510 51 1,000 1,561 2,561 126 2003 1971
Tucson
Chamberlain - 506 3,564 1,547 506 5,111 5,617 810 1997/2003 1994/2003
Airport (i) 4,045 1,103 4,672 8 1,103 4,680 5,783 895 1998 1995
Southpointe (i) 4,012 - 3,982 1,754 - 5,736 5,736 1,570 1999 1989
TENNESSEE
Memphis
Senator
Street I - 540 2,187 382 540 2,569 3,109 689 1997 1982
Senator
Street II - 435 1,742 150 435 1,892 2,327 412 1998 1968
Air Park I - 250 1,916 235 250 2,151 2,401 474 1998 1975
Lamar I - 655 2,651 353 655 3,004 3,659 675 1998 1978/80
Lamar II 1,820 677 2,747 347 677 3,094 3,771 767 1998 1978/80
Delp I & III - 649 2,583 883 649 3,466 4,115 837 1998 1977
Penney - 486 1,946 1 486 1,947 2,433 428 1998 1972
Southeast
Crossing - 1,802 10,267 1,485 1,802 11,752 13,554 3,667 1999 1987/97
LOUISIANA
New Orleans
Elmwood - 2,861 6,337 2,128 2,861 8,465 11,326 3,228 1997 1979
Riverbend - 2,592 17,623 1,386 2,592 19,009 21,601 5,511 1997 1984
COLORADO
Denver
Rampart I - 1,023 3,861 542 1,023 4,403 5,426 2,027 1988 1987
Rampart II - 230 2,977 743 230 3,720 3,950 1,324 1996/97 1996/97
Rampart III - 1,098 3,884 1,169 1,098 5,053 6,151 1,181 1997/98 1999
OKLAHOMA
Oklahoma City
Northpointe - 777 3,113 2 777 3,115 3,892 542 1998 1996/97
Tulsa
Braniff - 1,066 4,641 1,256 1,066 5,897 6,963 1,974 1996 1974
MISSISSIPPI
Interchange (i) 4,409 343 5,007 955 343 5,962 6,305 1,828 1997 1981
Tower 10,620 - 9,958 1,174 - 11,132 11,132 902 2001 2002
Metro Airport I - 303 1,479 319 303 1,798 2,101 124 2001 2003
MICHIGAN
Auburn 2,416 3,230 12,922 132 3,231 13,053 16,284 2,858 1998 1986
---------------------------------------------------------------------------------------
303,674 139,783 614,333 91,023 139,857 705,282 845,139 174,645
---------------------------------------------------------------------------------------
Industrial Development:
FLORIDA
Palm River South - 655 - 2,537 655 2,537 3,192 - 2000 n/a
Palm River
South II 655 - 802 655 802 1,457 - 2000 n/a
Executive
Airport II - 781 - 2,190 781 2,190 2,971 - 2001 n/a
Sunport V - 750 - 2,504 750 2,504 3,254 - 2001 n/a
Sunport VI - 672 - 372 672 372 1,044 - 2001 n/a
Southridge I - 380 - 464 380 464 844 - 2004 n/a
Southridge V - 391 - 891 391 891 1,282 - 2004 n/a
Southridge Land - 5,272 - 850 5,098 1,024 6,122 - 2003 n/a
Blue Heron Land - 450 - 28 450 28 478 - 2004 n/a
TEXAS
World
Houston 16 - 519 - 2,748 519 2,748 3,267 - 2000 n/a
Techway S.W. III - 597 - 552 751 398 1,149 - 1999 n/a
Techway S.W. IV - 535 - 620 674 481 1,155 - 1999 n/a
World Houston Land - 2,135 - 575 2,154 556 2,710 - 2000 n/a
World Houston Land - 1,147 - 405 1,181 371 1,552 - 2000 n/a
Americas Ten II - 708 - 562 708 562 1,270 - 2001 n/a
Americas Ten III - 656 - 518 656 518 1,174 - 2001 n/a
ARIZONA
SanTan 10 - 820 - 2,486 846 2,460 3,306 17 2001 n/a
SanTan 10 Phase Two - 1,088 - 25 1,088 25 1,113 - 2004 n/a
43rd Avenue - 701 - 3 701 3 704 - 2004 n/a
Interstate
Commons III - 237 - 142 242 137 379 - 2000 n/a
Airport II - 299 - 27 300 26 326 - 2000 n/a
MISSISSIPPI
Metro Airport II - 280 - 301 280 301 581 - 2001 n/a
---------------------------------------------------------------------------------------
- 19,728 - 19,602 19,932 19,398 39,330 17
---------------------------------------------------------------------------------------
Real Estate Properties
Held For Sale:
TEXAS
World Houston
Land (d) - 765 - 8 773 - 773 - 2000 n/a
TENNESSEE
Delp II - 400 1,614 48 400 1,662 2,062 400 1998 1977
FLORIDA
Sabal Park Land (d) - 118 - 84 202 - 202 - 1998 n/a
---------------------------------------------------------------------------------------
- 1,283 1,614 140 1,375 1,662 3,037 400
---------------------------------------------------------------------------------------
Total real estate
owned (a)(b) $303,674 160,794 615,947 110,765 161,164 726,342 887,506 175,062
=======================================================================================
(a) Changes in Real Estate Properties follow:
Years Ended December 31,
-------------------------------------------
2004 2003 2002
--------------------------------------------
(In thousands)
Balance at beginning of year.......................... $ 842,577 791,671 736,240
Purchase of real estate properties.................... 19,867 18,639 13,363
Development of real estate properties................. 19,196 22,238 35,600
Improvements to real estate properties................ 10,866 10,929 9,686
Carrying amount of investments sold................... (4,659) (784) (3,218)
Write-off of improvements............................. (341) (116) -
----------- ----------- ----------
Balance at end of year (1) ........................... $ 887,506 842,577 791,671
=========== =========== ==========
(1) Includes 20% minority interest in University Business Center totaling
$5,874,000 at December 31, 2004 and $5,867,000 at December 31, 2003.
Changes in the accumulated depreciation on real estate properties follow:
Years Ended December 31,
--------------------------------------------
2004 2003 2002
--------------------------------------------
(In thousands)
Balance at beginning of year.......................... $ 146,934 118,977 92,201
Depreciation expense.................................. 29,249 28,128 27,050
Accumulated depreciation on assets sold............... (968) (55) (371)
Other................................................. (153) (116) 97
----------- ---------- ----------
Balance at end of year ............................... $ 175,062 146,934 118,977
=========== ========== ==========
(b) The estimated aggregate cost of real estate properties at December 31, 2004
for federal income tax purposes was approximately $815,343,000 before estimated
accumulated tax depreciation of $124,550,000. The federal income tax return for
the year ended December 31, 2004 has not been filed and, accordingly, this
estimate is based on preliminary data.
(c) The Company computes depreciation using the straight-line method over the
estimated useful lives of the buildings (generally 40 years) and improvements
(generally 3 to 15 years).
(d) The investment was not producing income to the Company as of December 31,
2004, 2003 and 2002.
(e) EastGroup has a $39,222,000 nonrecourse first mortgage loan with
Metropolitan Life secured by Dominguez, Kingsview, Walnut, Washington, Industry
and Shaw.
(f) EastGroup has a $10,945,000 nonrecourse first mortgage loan with Prudential
Life secured by East University I & II, Broadway VI, 55th Avenue and Ethan
Allen.
(g) EastGroup has a $25,266,000 nonrecourse first mortgage loan with New York
Life secured by America Plaza, Central Green and World Houston 3-9.
(h) EastGroup has a $42,388,000 nonrecourse first mortgage loan with
Metropolitan Life secured by Interstate I, II & III, Venture, Stemmons Circle,
Glenmont I & II, West Loop I & II, Butterfield Trail and Rojas.
(i) EastGroup has a $38,531,000 nonrecourse first mortgage loan with
Metropolitan Life secured by Airport Distribution, Southpointe, Broadway I, III
& IV, Southpark, 51st Avenue, Chestnut, Main Street, Interchange Business Park,
North Stemmons I and World Houston 12 & 13.
(j) EastGroup has a $44,278,000 nonrecourse first mortgage loan with Prudential
Life secured by Broadway V, 35th Avenue, Sunbelt, Freeport, Lockwood, Northwest
Point, Techway Southwest I and World Houston 10, 11 & 14.
(k) EastGroup has a $30,300,000 nonrecourse first mortgage loan with New York
Life secured by World Houston 17, Kirby, Americas Ten I, Shady Trail, Palm River
North I, II & III and Westlake I & II.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2004
Number of Interest Maturity Periodic
Loans Rate Date Payment Terms
----------------------------------------------------------------------------------
First mortgage loan:
Kearn Creek, City of Industry, California 1 6.00% 11/07 Interest monthly
Second mortgage loan:
Kearn Creek, City of Industry, California 1 9.00% 11/07 Interest monthly/Principal annually
-----------
Total mortgage loans (c) 2
===========
Principal
Face Amount Carrying Amount of Loans
of Mortgages Amount of Subject to Delinquent
Dec. 31, 2004 Mortgages Principal or Interest (d)
---------------------------------------------------------------
(In thousands)
First mortgage loan:
Kearn Creek, City of Industry, California $ 6,750 $ 6,750 -
Second mortgage loan:
Kearn Creek, City of Industry, California 800 800 -
---------------------------------------------------------------
Total mortgage loans $ 7,550 $ 7,550 (a)(b) -
===============================================================
(a) Changes in mortgage loans follow:
Years Ended December 31,
------------------------------------------------
2004 2003 2002
------------------------------------------------
(In thousands)
Balance at beginning of year................... $ - 13 5,515
Advances on mortgage notes receivable.......... 7,550 - -
Payments on mortgage notes receivable.......... - (13) (5,502)
------------------------------------------------
Balance at end of year......................... $ 7,550 - 13
================================================
(b) The aggregate cost for federal income tax purposes is approximately
$7,550,000.
(c) Reference is made to allowance for possible losses on real estate
investments in the notes to consolidated financial statements.
(d) Interest in arrears for three months or less is disregarded in computing
principal amount of loans subject to delinquent interest.
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.
EASTGROUP PROPERTIES, INC.
By: /s/ DAVID H. HOSTER II
----------------------------------------
David H. Hoster II, Chief Executive Officer, President &
Director
March 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
* *
- ------------------------------ ---------------------------------
D. Pike Aloian, Director Alexander G. Anagnos, Director
March 11, 2005 March 11, 2005
* *
- ------------------------------ ---------------------------------
H. C. Bailey, Jr., Director Hayden C. Eaves III, Director
March 11, 2005 March 11, 2005
* *
- ------------------------------ ---------------------------------
Fredric H. Gould, Director David M. Osnos, Director
March 11, 2005 March 11, 2005
* /s/ N. KEITH MCKEY
- ------------------------------ ---------------------------------
Leland R. Speed, Chairman of the Board * By N. Keith McKey, Attorney-in-fact
(Principal Executive Officer) March 15, 2005
March 11, 2005
/s/ BRUCE CORKERN
- ------------------------------
Bruce Corkern, Sr. Vice President & Controller
(Principal Accounting Officer)
March 15, 2005
/s/ N. KEITH MCKEY
- ------------------------------
N. Keith McKey, Executive Vice-President,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer)
March 15, 2005
EXHIBIT INDEX
The following exhibits are included in this Form 10-K or are incorporated by
reference as noted in the following table:
(3) Exhibits required by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation (incorporated by reference to
Appendix B to the Company's Proxy Statement for its Annual
Meeting of Stockholders held on June 5, 1997).
(b) Bylaws of the Company (incorporated by reference to Appendix
C to the Company's Proxy Statement for its Annual Meeting of
Stockholders held on June 5, 1997).
(c) Articles Supplementary of the Company relating to the Series
C Preferred Stock (incorporated by reference to Exhibit A to
Exhibit 4 to the Company's Form 8-A filed December 9, 1998).
(d) Articles Supplementary of the Company relating to the 7.95%
Series D Cumulative Redeemable Preferred Stock (incorporated
by reference to Exhibit 3 to the Company's Form 8-A filed
June 6, 2003).
(4) Instruments Defining the Rights of Security Holders
(a) Rights Agreement dated as of December 3, 1998 between the
Company and Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's
Form 8-A filed December 9, 1998).
(b) First Amendment to Rights Agreement dated December 20, 2004
between the Company and Equiserve Trust Company, N.A., which
replaced Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to Exhibit 99.1 to the Company's
Form 8-K filed December 22, 2004).
(10) Material Contracts (*Indicates management or compensatory
agreement):
(a) EastGroup Properties, Inc. 1994 Management Incentive Plan,
as Amended (incorporated by reference to Appendix A to the
Company's Proxy Statement for its Annual Meeting of
Stockholders held on June 2, 1999).*
(b) EastGroup Properties, Inc. 1991 Directors Stock Option Plan,
as Amended (incorporated by reference to Exhibit B to the
Company's Proxy Statement for its Annual Meeting of
Stockholders held on December 8, 1994).*
(c) EastGroup Properties, Inc. 2000 Directors Stock Option Plan
(incorporated by reference to Appendix A to the Company's
Proxy Statement for its Annual Meeting of Stockholders held
on June 1, 2000).*
(d) EastGroup Properties, Inc. 2004 Equity Incentive Plan
(incorporated by reference to Appendix D to the Company's
Proxy Statement for its Annual Meeting of Stockholders held
May 27, 2004).*
(e) Form of Change in Control Agreement that the Company has
entered into with Leland R. Speed, David H. Hoster II and N.
Keith McKey (incorporated by reference to Exhibit 10(e) to
the Company's Form 10-K for the year ended December 31,
1996).*
(f) Form of Change in Control Agreement that the Company has
entered into with John F. Coleman, William D. Petsas and C.
Bruce Corkern (filed herewith).*
(g) Form of Amendment to Change in Control Agreement
(incorporated by reference to Exhibit 10(e) to the Company's
Form 10-K for the year ended December 31, 2002).*
(h) Credit Agreement dated December 6, 2004 among EastGroup
Properties, L.P.; EastGroup Properties, Inc.; PNC Bank,
National Association, as Administrative Agent; Commerzbank
Aktiengesellschaft, New York Branch and SunTrust Bank as
Co-Syndication Agents; AmSouth Bank and Wells Fargo Bank,
National Association, as Co-Documentation Agents; PNC
Capital Markets, Inc., as Sole Lead Arranger and Sole
Bookrunner; and the Lenders (filed herewith).
(21) Subsidiaries of EastGroup Properties, Inc. (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(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