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EX-31.B - EXHIBIT 31.B - EASTGROUP PROPERTIES INCexhibit31bq22015.htm
EX-32.A - EXHIBIT 32.A - EASTGROUP PROPERTIES INCexhibit32aq22015.htm
EX-31.A - EXHIBIT 31.A - EASTGROUP PROPERTIES INCexhibit31aq22015.htm
EX-32.B - EXHIBIT 32.B - EASTGROUP PROPERTIES INCexhibit32bq22015.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED JUNE 30, 2015                                       COMMISSION FILE NUMBER 1-07094



EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND
13-2711135
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
 
 
190 EAST CAPITOL STREET
 
SUITE 400
 
JACKSON, MISSISSIPPI
39201
(Address of principal executive offices)
(Zip code)
 
 
Registrant’s telephone number:  (601) 354-3555
 


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES (x) NO ( )

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES (x)   NO ( )

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   (Check one):

Large Accelerated Filer (x)     Accelerated Filer ( )      Non-accelerated Filer ( )     Smaller Reporting Company ( )

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ( ) NO (x)

The number of shares of common stock, $.0001 par value, outstanding as of July 17, 2015 was 32,314,021.

-1-



EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 2015 


 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



-2-





EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate properties
$
1,932,961

 
1,894,973

Development
198,143

 
179,973

 
2,131,104

 
2,074,946

Less accumulated depreciation
(627,336
)
 
(600,526
)
 
1,503,768

 
1,474,420

Unconsolidated investment
8,090

 
7,884

Cash
13

 
11

Other assets
91,612

 
93,509

TOTAL ASSETS
$
1,603,483

 
1,575,824

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

 
 
 
 
LIABILITIES
 

 
 

Secured debt
$
385,714

 
453,776

Unsecured debt
455,000

 
380,000

Unsecured bank credit facilities
133,328

 
99,401

Accounts payable and accrued expenses
35,166

 
39,439

Other liabilities
27,853

 
27,593

Total Liabilities
1,037,061

 
1,000,209

 
 
 
 
EQUITY
 

 
 

Stockholders’ Equity:
 

 
 

Common shares; $.0001 par value; 70,000,000 shares authorized; 32,314,021 shares issued and outstanding at June 30, 2015 and 32,232,587 at December 31, 2014
3

 
3

Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares issued

 

Additional paid-in capital on common shares
877,181

 
874,335

Distributions in excess of earnings
(313,392
)
 
(300,852
)
Accumulated other comprehensive loss
(1,770
)
 
(2,357
)
Total Stockholders’ Equity
562,022

 
571,129

Noncontrolling interest in joint ventures
4,400

 
4,486

Total Equity
566,422

 
575,615

TOTAL LIABILITIES AND EQUITY
$
1,603,483

 
1,575,824

 
See accompanying Notes to Consolidated Financial Statements (unaudited).



-3-



EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
REVENUES
 
 
 
 
 
 
 
Income from real estate operations
$
57,827

 
53,801

 
115,402

 
106,578

Other income
17

 
18

 
34

 
53

 
57,844

 
53,819

 
115,436

 
106,631

EXPENSES
 
 
 
 
 

 
 

Expenses from real estate operations
16,047

 
15,625

 
32,460

 
30,637

Depreciation and amortization
17,984

 
17,154

 
36,126

 
34,322

General and administrative
3,812

 
2,958

 
8,350

 
6,406

Acquisition costs

 
160

 

 
160

 
37,843

 
35,897

 
76,936

 
71,525

OPERATING INCOME
20,001

 
17,922

 
38,500

 
35,106

OTHER INCOME (EXPENSE)
 
 
 
 
 

 
 

Interest expense
(8,483
)
 
(8,898
)
 
(17,288
)
 
(17,884
)
Gain on sales of real estate investments
2,903

 

 
2,903

 
95

Other
242

 
218

 
609

 
439

NET INCOME
14,663

 
9,242

 
24,724

 
17,756

Net income attributable to noncontrolling interest in joint ventures
(130
)
 
(124
)
 
(261
)
 
(266
)
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
14,533

 
9,118

 
24,463

 
17,490

Other comprehensive income (loss) - cash flow hedges
3,122

 
(1,740
)
 
587

 
(2,777
)
TOTAL COMPREHENSIVE INCOME
$
17,655

 
7,378

 
25,050

 
14,713

BASIC PER COMMON SHARE DATA FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
 
 

 
 

Net income attributable to common stockholders
$
0.45

 
0.29

 
0.76

 
0.56

Weighted average shares outstanding
32,045

 
31,137

 
32,039

 
30,972

DILUTED PER COMMON SHARE DATA FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
 
 

 
 

Net income attributable to common stockholders
$
0.45

 
0.29

 
0.76

 
0.56

Weighted average shares outstanding
32,139

 
31,244

 
32,121

 
31,063

See accompanying Notes to Consolidated Financial Statements (unaudited).

-4-




EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)


 
Common Stock
 
Additional
Paid-In Capital
 
Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interest in Joint Ventures
 
Total
BALANCE, DECEMBER 31, 2014
$
3

 
874,335

 
(300,852
)
 
(2,357
)
 
4,486

 
575,615

Net income

 

 
24,463

 

 
261

 
24,724

Net unrealized change in fair value of interest rate swaps

 

 

 
587

 

 
587

Common dividends declared – $1.14 per share

 

 
(37,003
)
 

 

 
(37,003
)
Stock-based compensation, net of forfeitures

 
4,709

 

 

 

 
4,709

Issuance of 1,688 shares of common stock, common stock offering, net of expenses

 
52

 

 

 

 
52

Issuance of 2,160 shares of common stock, dividend reinvestment plan

 
126

 

 

 

 
126

Withheld 32,409 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock

 
(2,041
)
 

 

 

 
(2,041
)
Distributions to noncontrolling interest

 

 

 

 
(347
)
 
(347
)
BALANCE, JUNE 30, 2015
$
3

 
877,181

 
(313,392
)
 
(1,770
)
 
4,400

 
566,422


See accompanying Notes to Consolidated Financial Statements (unaudited).

-5-



EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
Six Months Ended June 30,
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
Net income                                                                                                       
$
24,724

 
17,756

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization from continuing operations                                                                                                       
36,126

 
34,322

Stock-based compensation expense                                                                                                       
3,607

 
2,824

Gain on sales of land and real estate investments
(3,026
)
 
(95
)
Changes in operating assets and liabilities:
 

 
 

Accrued income and other assets                                                                                                       
3,346

 
2,202

Accounts payable, accrued expenses and prepaid rent                                                                                                       
(4,889
)
 
(3,123
)
Other                                                                                                       
(226
)
 
(80
)
NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                                                       
59,662

 
53,806

INVESTING ACTIVITIES
 

 
 

Real estate development                                                                                                       
(48,226
)
 
(56,125
)
Purchases of real estate                                                                                                       

 
(41,751
)
Real estate improvements                                                                                                       
(11,593
)
 
(9,912
)
Proceeds from sales of land and real estate investments                                                                                                       
5,156

 
3,471

Repayments on mortgage loans receivable                                                                                                       
57

 
78

Changes in receivable for development infrastructure cost reimbursements                                                                                                       
(2,020
)
 

Changes in accrued development costs                                                                                                       
(147
)
 
12,076

Changes in other assets and other liabilities                                                                                                       
(3,720
)
 
(4,610
)
NET CASH USED IN INVESTING ACTIVITIES                                                                                                       
(60,493
)
 
(96,773
)
FINANCING ACTIVITIES
 

 
 

Proceeds from unsecured bank credit facilities                                                                                          
195,545

 
165,969

Repayments on unsecured bank credit facilities                                                                                                      
(161,618
)
 
(112,529
)
Repayments on secured debt
(68,042
)
 
(11,152
)
Proceeds from unsecured debt
75,000

 

Debt issuance costs                                                                                                       
(585
)
 
(42
)
Distributions paid to stockholders (not including dividends accrued on unvested restricted stock)                                                                                                     
(37,254
)
 
(34,183
)
Proceeds from common stock offerings                                                                                                       
52

 
37,033

Proceeds from dividend reinvestment plan                                                                                                       
126

 
103

Other                                                                                                       
(2,391
)
 
(2,221
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
833

 
42,978

INCREASE IN CASH AND CASH EQUIVALENTS
2

 
11

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
11

 
8

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
13

 
19

SUPPLEMENTAL CASH FLOW INFORMATION
 

 
 

    Cash paid for interest, net of amount capitalized of $2,494 and $2,336
       for 2015 and 2014, respectively                                                                                                       
$
16,985

 
17,350


See accompanying Notes to Consolidated Financial Statements (unaudited).

-6-



EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1)
BASIS OF PRESENTATION
 
The accompanying unaudited financial statements of EastGroup Properties, Inc. (“EastGroup” or “the Company”) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In management’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  The financial statements should be read in conjunction with the financial statements contained in the 2014 annual report on Form 10-K and the notes thereto. Certain reclassifications have been made in the 2014 consolidated financial statements to conform to the 2015 presentation.

(2)
PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the accounts of EastGroup Properties, Inc., its wholly owned subsidiaries and its investment in any joint ventures in which the Company has a controlling interest.  At June 30, 2015 and December 31, 2014, the Company had a controlling interest in two joint ventures: the 80% owned University Business Center and the 80% owned Castilian Research Center.  The Company records 100% of the joint ventures’ assets, liabilities, revenues and expenses with noncontrolling interests provided for in accordance with the joint venture agreements.  The equity method of accounting is used for the Company’s 50% undivided tenant-in-common interest in Industry Distribution Center II.  All significant intercompany transactions and accounts have been eliminated in consolidation.

(3)
USE OF ESTIMATES
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses during the reporting period and to disclose material contingent assets and liabilities at the date of the financial statements.  Actual results could differ from those estimates.

(4)
REAL ESTATE PROPERTIES
 
EastGroup has one reportable segment – industrial properties.  These properties are concentrated in major Sunbelt markets of the United States, primarily in the states of Florida, Texas, Arizona, California and North Carolina, have similar economic characteristics and also meet the other criteria permitting the properties to be aggregated into one reportable segment.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows (including estimated future expenditures necessary to substantially complete the asset) expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.  As of June 30, 2015 and December 31, 2014, the Company determined that no impairment charges on the Company’s real estate properties were necessary.

Depreciation of buildings and other improvements is computed using the straight-line method over estimated useful lives of generally 40 years for buildings and 3 to 15 years for improvements.  Building improvements are capitalized, while maintenance and repair expenses are charged to expense as incurred.  Significant renovations and improvements that improve or extend the useful life of the assets are capitalized.  Depreciation expense was $14,720,000 and $29,558,000 for the three and six months ended June 30, 2015, respectively, and $14,094,000 and $28,067,000 for the same periods in 2014.














-7-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company’s real estate properties and development at June 30, 2015 and December 31, 2014 were as follows:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Real estate properties:
 
 
 
   Land                                                                  
$
286,708

 
283,116

   Buildings and building improvements                                          
1,311,445

 
1,284,961

   Tenant and other improvements                                                                  
334,808

 
326,896

Development                                                                  
198,143

 
179,973

 
2,131,104

 
2,074,946

   Less accumulated depreciation                                                                  
(627,336
)
 
(600,526
)
 
$
1,503,768

 
1,474,420


(5)
DEVELOPMENT
 
During the period in which a property is under development, costs associated with development (i.e., land, construction costs, interest expense, property taxes and other direct and indirect costs associated with development) are aggregated into the total capitalized costs of the property.  Included in these costs are management’s estimates for the portions of internal costs (primarily personnel costs) deemed directly or indirectly related to such development activities. The internal costs are allocated to specific development properties based on construction activity. As the property becomes occupied, depreciation commences on the occupied portion of the building, and costs are capitalized only for the portion of the building that remains vacant.  When the property becomes 80% occupied or one year after completion of the shell construction (whichever comes first), capitalization of development costs, including interest expense, property taxes and internal personnel costs, ceases.  The properties are then transferred to Real estate properties, and depreciation commences on the entire property (excluding the land).

(6)
BUSINESS COMBINATIONS AND ACQUIRED INTANGIBLES
 
Upon acquisition of real estate properties, the Company applies the principles of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations, which requires that acquisition-related costs be recognized as expenses in the periods in which the costs are incurred and the services are received.  The Codification also provides guidance on how to properly determine the allocation of the purchase price among the individual components of both the tangible and intangible assets based on their respective fair values.  Goodwill is recorded when the purchase price exceeds the fair value of the assets and liabilities acquired.  Factors considered by management in allocating the cost of the properties acquired include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases.  The allocation to tangible assets (land, building and improvements) is based upon management's determination of the value of the property as if it were vacant using discounted cash flow models.  The Company determines whether any financing assumed is above or below market based upon comparison to similar financing terms for similar properties.  The cost of the properties acquired may be adjusted based on indebtedness assumed from the seller that is determined to be above or below market rates.  
 
The purchase price is also allocated among the following categories of intangible assets:  the above or below market component of in-place leases, the value of in-place leases, and the value of customer relationships.  The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate reflecting the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of the amounts that would be paid using fair market rates over the remaining term of the lease.  The amounts allocated to above and below market leases are included in Other Assets and Other Liabilities, respectively, on the Consolidated Balance Sheets and are amortized to rental income over the remaining terms of the respective leases.  The total amount of intangible assets is further allocated to in-place lease values and customer relationship values based upon management’s assessment of their respective values.  These intangible assets are included in Other Assets on the Consolidated Balance Sheets and are amortized over the remaining term of the existing lease or the anticipated life of the customer relationship, as applicable.

Amortization expense for in-place lease intangibles was $1,041,000 and $2,185,000 for the three and six months ended June 30, 2015, respectively, and $1,121,000 and $2,333,000 for the same periods in 2014. Amortization of above and below market leases increased rental income by $110,000 and $232,000 for the three and six months ended June 30, 2015, respectively, and $89,000 and $176,000 for the same periods in 2014.


-8-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

EastGroup did not acquire any operating properties during the six months ended June 30, 2015. During 2014, the Company acquired Ridge Creek Distribution Center III in Charlotte, North Carolina; Colorado Crossing Distribution Center in Austin, Texas; and Ramona Distribution Center in Chino, California. The Company purchased these properties for a total cost of $51,652,000, of which $47,477,000 was allocated to Real estate properties. The Company allocated $10,822,000 of the total purchase price to land using third party land valuations for the Charlotte, Austin and Chino markets. The market values are considered to be Level 3 inputs as defined by ASC 820, Fair Value Measurements and Disclosures (see Note 18 for additional information on ASC 820). Intangibles associated with the purchase of real estate were allocated as follows: $5,074,000 to in-place lease intangibles, $4,000 to above market leases (both included in Other Assets on the Consolidated Balance Sheets), and $903,000 to below market leases (included in Other Liabilities on the Consolidated Balance Sheets). These costs are amortized over the remaining lives of the associated leases in place at the time of acquisition. The Company paid cash of $48,805,000 for the properties and intangibles acquired, assumed a mortgage of $2,617,000 and recorded a premium of $230,000 to adjust the mortgage loan assumed to fair value.
 
EastGroup did not have any acquisition-related costs for the three and six months ended June 30, 2015; during the three and six months ended June 30, 2014, the Company expensed acquisition-related costs of $160,000.

The Company periodically reviews the recoverability of goodwill (at least annually) and the recoverability of other intangibles (on a quarterly basis) for possible impairment.  In management’s opinion, no impairment of goodwill or other intangibles existed at June 30, 2015 and December 31, 2014.

(7)
REAL ESTATE HELD FOR SALE/DISCONTINUED OPERATIONS
 
The Company considers a real estate property to be held for sale when it meets the criteria established under ASC 360, Property, Plant and Equipment, including when it is probable that the property will be sold within a year.  Real estate properties held for sale are reported at the lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale.  

In April 2014, the FASB issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amended the requirements for reporting discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, this ASU requires additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The Company adopted the provisions of ASU 2014-08 as of January 1, 2014, and has applied the provisions prospectively.

EastGroup sold a small parcel of land in New Orleans during the first quarter of 2015 for gross proceeds of $170,000 and recognized a gain of $123,000. During the second quarter of 2015, EastGroup sold one operating property, the last of its three Ambassador Row Warehouses containing 185,000 square feet, for $5,250,000 and recognized a gain of $2,903,000.

During 2014, EastGroup sold five operating properties (442,000 square feet) for $21,381,000 and recognized gains of $9,188,000. In addition, the Company sold a small parcel of land in Orlando for $141,000 and recognized a gain of $98,000.

The results of operations and gains on sales for the properties sold or held for sale during the periods presented are reported in continuing operations on the Consolidated Statements of Income and Comprehensive Income. The gains on the sales of land are included in Other, and the gains on the sales of operating properties are included in Gains on sales of real estate investments.












-9-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(8)
OTHER ASSETS
 
A summary of the Company’s Other Assets follows:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Leasing costs (principally commissions)                                                                                  
$
56,784

 
56,171

Accumulated amortization of leasing costs                                                       
(22,486
)
 
(22,951
)
Leasing costs (principally commissions), net of accumulated amortization
34,298

 
33,220

 
 
 
 
Straight-line rents receivable                                                                                  
25,647

 
25,013

Allowance for doubtful accounts on straight-line rents receivable
(272
)
 
(102
)
Straight-line rents receivable, net of allowance for doubtful accounts
25,375

 
24,911

 
 
 
 
Accounts receivable                                                                                  
2,820

 
4,459

Allowance for doubtful accounts on accounts receivable
(310
)
 
(379
)
Accounts receivable, net of allowance for doubtful accounts
2,510

 
4,080

 
 
 
 
Acquired in-place lease intangibles                                                                                  
18,322

 
20,118

Accumulated amortization of acquired in-place lease intangibles
(8,734
)
 
(8,345
)
Acquired in-place lease intangibles, net of accumulated amortization
9,588

 
11,773

 
 
 
 
Acquired above market lease intangibles                                                                                  
1,444

 
1,575

Accumulated amortization of acquired above market lease intangibles
(686
)
 
(699
)
Acquired above market lease intangibles, net of accumulated amortization
758

 
876

 
 
 
 
Loan costs                                                                                  
8,140

 
8,166

Accumulated amortization of loan costs                                                         
(4,474
)
 
(4,454
)
Loan costs, net of accumulated amortization                                                     
3,666

 
3,712

 
 
 
 
Mortgage loans receivable                                                                                  
4,934

 
4,991

Interest rate swap assets
1,585

 
812

Escrow deposits for 1031 exchange

 
698

Receivable for development infrastructure cost reimbursements
2,020

 

Goodwill                                                                                  
990

 
990

Prepaid expenses and other assets                                                                                  
5,888

 
7,446

Total Other Assets
$
91,612

 
93,509


(9)
DEBT

Secured Debt decreased $68,062,000 during the six months ended June 30, 2015.  The decrease primarily resulted from the repayment of a mortgage loan with a balance of $57,450,000, regularly scheduled principal payments of $10,592,000 and mortgage loan premium amortization of $20,000.

Unsecured Debt increased $75,000,000 during the six months ended June 30, 2015 as a result of the closing of a $75 million unsecured term loan in March 2015. The loan has a seven-year term and requires interest only payments. It bears interest at the annual rate of LIBOR plus an applicable margin (currently 1.4%) based on the Company's senior unsecured long-term debt rating. The Company also entered into an interest rate swap agreement to convert the loan's LIBOR rate component to a fixed interest rate for the entire term of the loan providing a total effective fixed interest rate of 3.031%. See note 13 for additional information on the Company's interest rate swaps.

Unsecured Bank Credit Facilities increased $33,927,000 during the six months ended June 30, 2015.



-10-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Principal payments on long-term debt, including Secured Debt and Unsecured Debt (not including Unsecured Bank Credit Facilities), as of June 30, 2015 are as follows: 
Years Ending December 31,
 
(In thousands)
Remainder of 2015
 
$
34,312

2016
 
92,808

2017
 
58,239

2018
 
141,316

2019
 
130,568

2020 and beyond
 
383,471


(10)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
A summary of the Company’s Accounts Payable and Accrued Expenses follows:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Property taxes payable                                                                                  
$
15,688

 
15,216

Development costs payable                                                                                  
7,773

 
7,920

Interest payable                                                                                  
3,192

 
3,500

Dividends payable on unvested restricted stock                                                            
1,845

 
2,096

Other payables and accrued expenses                                                                                  
6,668

 
10,707

 Total Accounts Payable and Accrued Expenses
$
35,166

 
39,439


(11)
OTHER LIABILITIES
 
A summary of the Company’s Other Liabilities follows:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Security deposits                                                                                  
$
13,072

 
12,803

Prepaid rent and other deferred income                                                     
9,028

 
8,971

 
 
 
 
Acquired below-market lease intangibles
3,371

 
3,657

     Accumulated amortization of below-market lease intangibles
(1,444
)
 
(1,380
)
Acquired below-market lease intangibles, net of accumulated amortization
1,927

 
2,277

 
 
 
 
Interest rate swap liabilities
3,479

 
3,314

Prepaid tenant improvement reimbursements
31

 
212

Other liabilities                                                                                  
316

 
16

 Total Other Liabilities
$
27,853

 
27,593


(12)
COMPREHENSIVE INCOME
 
Total Comprehensive Income is comprised of net income plus all other changes in equity from non-owner sources and is presented on the Consolidated Statements of Income and Comprehensive Income. The components of Accumulated Other Comprehensive Income (Loss) are presented in the Company's Consolidated Statement of Changes in Equity and are summarized below. See Note 13 for information regarding the Company's interest rate swaps.

-11-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
Balance at beginning of period
$
(4,892
)
 
592

 
(2,357
)
 
1,629

    Change in fair value of interest rate swaps
3,122

 
(1,740
)
 
587

 
(2,777
)
Balance at end of period
$
(1,770
)
 
(1,148
)
 
(1,770
)
 
(1,148
)


(13)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risk, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and, to a limited extent, the use of derivative instruments.

Specifically, the Company has entered into derivative instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative instruments, described below, are used to manage differences in the amount, timing and duration of the Company's known or expected cash payments principally related to certain of the Company's borrowings.

The Company's objective in using interest rate derivatives is to manage exposure to interest rate movements and add stability to interest expense. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 

As of June 30, 2015, the Company had five interest rate swaps outstanding, all of which are used to hedge the variable cash flows associated with unsecured loans. The Company executed an $80,000,000 interest rate swap associated with an $80,000,000 unsecured loan during the third quarter of 2012. During the third quarter of 2013, the Company entered into two forward starting interest rate swaps totaling $75,000,000 which are hedging an unsecured loan which closed in December 2013. During the third quarter of 2014, the Company executed a $75,000,000 interest rate swap associated with a $75,000,000 unsecured loan. During the first quarter of 2015, EastGroup executed a $75,000,000 interest rate swap associated with a $75,000,000 unsecured loan. All of the aforementioned interest rate swaps convert the related loans' LIBOR rate components to fixed interest rates for the entire terms of the loans, and the Company has concluded that each of the hedging relationships is highly effective.

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in Other Comprehensive Income (Loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives, which is immaterial for the periods reported, is recognized directly in earnings (included in Other on the Consolidated Statements of Income and Comprehensive Income).

Amounts reported in Other Comprehensive Income (Loss) related to derivatives will be reclassified to Interest Expense as interest payments are made on the Company's variable-rate debt. The Company estimates that an additional $3,810,000 will be reclassified from Other Comprehensive Income (Loss) as an increase to Interest Expense over the next twelve months.

The Company's valuation methodology for over-the-counter (“OTC”) derivatives is to discount cash flows based on Overnight Index Swap (“OIS”) rates.  Uncollateralized or partially-collateralized trades are discounted at OIS, but include appropriate economic adjustments for funding costs (i.e., a LIBOR-OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk.  As of January 15, 2015, the Company began calculating its derivative valuations using mid-market prices; prior to that date, the Company used bid-market prices. The change in valuation methodology is considered a change in accounting estimate and is the result of recent developments in the marketplace. Management has assessed the impact of the change for all periods presented and has deemed the impact to be immaterial.






-12-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of June 30, 2015 and December 31, 2014, the Company had the following outstanding interest rate derivatives that are designated as cash flow hedges of interest rate risk:
Interest Rate Derivative
 
Notional Amount as of June 30, 2015
 
Notional Amount as of December 31, 2014
 
 
(In thousands)
Interest Rate Swap
 
$80,000
 
$80,000
Interest Rate Swap
 
$75,000
 
$75,000
Interest Rate Swap
 
$75,000
 
Interest Rate Swap
 
$60,000
 
$60,000
Interest Rate Swap
 
$15,000
 
$15,000

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014. See Note 18 for additional information on the fair value of the Company's interest rate swaps.
 
Derivatives
As of June 30, 2015
 
Derivatives
As of December 31, 2014
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
(In thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
    Interest rate swap assets
Other Assets
 
$
1,585

 
Other Assets
 
$
812

    Interest rate swap liabilities
Other Liabilities
 
3,479

 
Other Liabilities
 
3,314


The table below presents the effect of the Company's derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
 
 
 
 
 
 
 
Interest Rate Swaps:
 
 
 
 
 
 
 
  Amount of income (loss) recognized in Other Comprehensive Income (Loss) on derivatives                                                                                                     
$
2,006

 
(2,321
)
 
(1,462
)
 
(3,922
)
  Amount of loss reclassified from Accumulated Other Comprehensive Loss into Interest Expense                                                                                               
(1,116
)
 
(581
)
 
(2,049
)
 
(1,145
)

See Note 12 for additional information on the Company's Accumulated Other Comprehensive Loss resulting from its interest rate swaps.

Derivative financial agreements expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company believes it minimizes the credit risk by transacting with financial institutions the Company regards as credit-worthy.

The Company has an agreement with its derivative counterparties containing a provision stating that the Company could be declared in default on its derivative obligations if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender.

As of June 30, 2015, the fair value of derivatives in an asset position related to these agreements was $1,585,000, and the fair value of derivatives in a liability position related to these agreements was $3,479,000. If the Company breached any of the contractual provisions of the derivative contracts, it could be required to settle its obligation under the agreements at the swap termination value. As of June 30, 2015, the swap termination value of derivatives in an asset position was an asset in the amount of $1,631,000, and the swap termination value of derivatives in a liability position was a liability in the amount of $3,517,000.

(14)
EARNINGS PER SHARE
 
The Company applies ASC 260, Earnings Per Share, which requires companies to present basic and diluted earnings per share (EPS).  Basic EPS represents the amount of earnings for the period attributable to each share of common stock outstanding during the reporting period.  The Company’s basic EPS is calculated by dividing Net Income Attributable to EastGroup Properties, Inc.

-13-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Common Stockholders by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of common stock. These unvested restricted shares, although classified as issued and outstanding, are considered forfeitable until the restrictions lapse and will not be included in the basic EPS calculation until the shares are vested.

Diluted EPS represents the amount of earnings for the period attributable to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period.  The Company calculates diluted EPS by dividing Net Income Attributable to EastGroup Properties, Inc. Common Stockholders by the weighted average number of common shares outstanding plus the dilutive effect of unvested restricted stock.  The dilutive effect of unvested restricted stock is determined using the treasury stock method.

Reconciliation of the numerators and denominators in the basic and diluted EPS computations is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
BASIC EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
 
 
 
 
  Numerator – net income attributable to common stockholders                                                                                                     
$
14,533

 
9,118

 
24,463

 
17,490

  Denominator – weighted average shares outstanding                                                                                                     
32,045

 
31,137

 
32,039

 
30,972

DILUTED EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
 
 
 
 
  Numerator – net income attributable to common stockholders                                                                                                     
$
14,533

 
9,118

 
24,463

 
17,490

Denominator:
 
 
 
 
 
 
 
    Weighted average shares outstanding                                                                                                     
32,045

 
31,137

 
32,039

 
30,972

    Unvested restricted stock                                                                                                     
94

 
107

 
82

 
91

      Total Shares                                                                                                     
32,139

 
31,244

 
32,121

 
31,063


(15)
STOCK-BASED COMPENSATION
 
EastGroup applies the provisions of ASC 718, Compensation - Stock Compensation, to account for its stock-based compensation plans. ASC 718 requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements and that the cost be measured on the fair value of the equity or liability instruments issued.

Stock-based compensation cost for employees was $1,839,000 and $4,180,000 for the three and six months ended June 30, 2015, respectively, of which $399,000 and $821,000 were capitalized as part of the Company's development costs. For the three and six months ended June 30, 2014, stock-based compensation cost for employees was $1,348,000 and $3,417,000, respectively, of which $321,000 and $832,000 were capitalized as part of the Company’s development costs.

Stock-based compensation expense for directors was $124,000 and $248,000 for the three and six months ended June 30, 2015, respectively, and $120,000 and $239,000 for the same periods of 2014.

In the second quarter of 2015, the Company’s Board of Directors approved an equity compensation plan for its executive officers based upon certain annual performance measures (primarily funds from operations (FFO) per share and total shareholder return).  Any shares issued pursuant to this compensation plan will be determined by the Compensation Committee in its discretion and issued in the first quarter of 2016.  The number of shares to be issued on the grant date could range from zero to 49,366.  These shares will vest 20% on the date shares are determined and awarded and generally will vest 20% per year on each January 1 for the subsequent four years.

Also in the second quarter of 2015, EastGroup’s Board of Directors approved a long-term equity compensation plan for the Company’s executive officers. The awards will be based on the results of the Company's total shareholder return, both on an absolute basis for 2015 as well as on a relative basis compared to the NAREIT Equity Index, NAREIT Industrial Index and Russell 2000 Index over the five-year period ending December 31, 2015. Any shares issued pursuant to this equity compensation plan will be determined by the Compensation Committee in its discretion and issued in the first quarter of 2016.  The number of shares

-14-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

to be issued on the grant date could range from zero to 51,432.  These shares will vest 25% on the date shares are determined and awarded and generally will vest 25% per year on each January 1 for the subsequent three years.

During the second quarter of 2015, 23,525 shares were granted to certain non-executive officers subject only to continued service as of the vesting date. These shares, which have a grant date fair value of $60.89 per share, will vest 20% per year on January 1 in years 2016, 2017, 2018, 2019 and 2020.

Notwithstanding the foregoing, shares issued to the Company’s Chief Executive Officer, David H. Hoster II, and Chief Financial Officer, N. Keith McKey, will become fully vested no later than January 1, 2016 and April 6, 2016, respectively.

Following is a summary of the total restricted shares granted, forfeited and delivered (vested) to participants with the related weighted average grant date fair value share prices.  Of the shares that vested in the first six months of 2015, the Company withheld 32,409 shares to satisfy the tax obligations for those participants who elected this option as permitted under the applicable equity plan.  As of the vesting date, the fair value of shares that vested during the first six months of 2015 was $6,664,000.
 
Three Months Ended
 
Six Months Ended
Award Activity:
June 30, 2015
 
June 30, 2015
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
Unvested at beginning of period
237,485

 
$
51.88

 
266,223

 
$
49.81

Granted
23,525

 
60.89

 
100,622

 
61.07

Forfeited 

 

 

 

Vested 

 

 
(105,835
)
 
53.40

Unvested at end of period 
261,010

 
$
52.69

 
261,010

 
$
52.69


(16)
RISKS AND UNCERTAINTIES
 
The state of the overall economy can significantly impact the Company’s operational performance and thus impact its financial position.  Should EastGroup experience a significant decline in operational performance, it may affect the Company’s ability to make distributions to its shareholders, service debt, or meet other financial obligations.

(17)
RECENT ACCOUNTING PRONOUNCEMENTS
 
EastGroup has evaluated all ASUs recently released by the FASB through the date the financial statements were issued and determined that ASU 2014-09 and ASU 2015-03 apply to the Company.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. For public business entities, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Entities should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, entities are required to comply with the applicable disclosures for a change in an accounting principle. EastGroup plans to adopt ASU 2015-03 effective January 1, 2016; as such, the Company plans to present debt issuance costs as a direct deduction from the carrying amounts of its debt liabilities and to provide all necessary disclosures beginning with the Form 10-Q for the period ended March 31, 2016.







-15-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(18)
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC 820 also provides guidance for using fair value to measure financial assets and liabilities.  The Codification requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments in accordance with ASC 820 at June 30, 2015 and December 31, 2014.
 
June 30, 2015
 
December 31, 2014
 
Carrying Amount (1)
 
Fair Value
 
Carrying Amount (1)
 
Fair Value
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
13

 
13

 
11

 
11

 Cash held in escrow for 1031 exchange

 

 
698

 
698

   Mortgage loans receivable                                 
4,934

 
4,978

 
4,991

 
5,055

   Interest rate swap assets                             
1,585

 
1,585

 
812

 
812

Financial Liabilities:
 

 
 

 
 

 
 

Secured debt
385,714

 
405,240

 
453,776

 
478,659

Unsecured debt
455,000

 
428,493

 
380,000

 
364,295

 Unsecured bank credit facilities
133,328

 
133,688

 
99,401

 
99,638

   Interest rate swap liabilities                                     
3,479

 
3,479

 
3,314

 
3,314

(1) Carrying amounts shown in the table are included in the Consolidated Balance Sheets under the indicated captions, except as explained in the notes below.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents:  The carrying amounts approximate fair value due to the short maturity of those instruments.
Cash held in escrow for 1031 exchange (included in Other Assets on the Consolidated Balance Sheets):  The carrying amounts approximate fair value due to the short maturity of those instruments.
Mortgage loans receivable (included in Other Assets on the Consolidated Balance Sheets):  The fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities (Level 2 input).
Interest rate swap assets (included in Other Assets on the Consolidated Balance Sheets): The instruments are recorded at fair value based on models using inputs, such as interest rate yield curves, LIBOR swap curves and OIS curves, observable for substantially the full term of the contract (Level 2 input). See Note 13 for additional information on the Company's interest rate swaps.
Secured debt: The fair value of the Company’s secured debt is estimated by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company’s bankers (Level 2 input).
Unsecured debt:  The fair value of the Company’s unsecured debt is estimated by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company’s bankers (Level 2 input).
Unsecured bank credit facilities: The fair value of the Company’s unsecured bank credit facilities is estimated by discounting expected cash flows at current market rates (Level 2 input).
Interest rate swap liabilities (included in Other Liabilities on the Consolidated Balance Sheets): The instruments are recorded at fair value based on models using inputs, such as interest rate yield curves, LIBOR swap curves and OIS curves, observable for substantially the full term of the contract (Level 2 input). See Note 13 for additional information on the Company's interest rate swaps.








-16-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(19)
SUBSEQUENT EVENTS

EastGroup's current $225 million and $25 million unsecured bank credit facilities have margins over LIBOR of 117.5 basis points, facility fees of 22.5 basis points and maturity dates of January 5, 2017. The Company has negotiated terms to amend the credit facilities and expects to close on the amended agreements by the end of July. The amended agreements expand the current facilities to $300 million and $35 million, reduce the margins to 100 basis points and the facility fees to 20 basis points, and extend the maturity dates to four years from closing. The amended $300 million agreement contains an option for a one-year extension (at the Company's election) and a $150 million expansion (with agreement by both parties). The $35 million agreement contains a provision that the credit facility would automatically be extended for one year if the extension option in the $300 million facility is exercised. The transaction is expected to close by the end of July 2015, subject to due diligence and completion of final documentation.

EastGroup has also entered into an agreement in principle with two insurance companies under which the Company plans to issue $75 million of senior unsecured private placement notes which are expected to close in October. The 10-year notes will have a weighted average interest rate of 3.98% with semi-annual interest payments. The notes will not be and have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. The transaction is expected to close in October 2015, and the issuance of the notes in this private placement is subject to due diligence and completion of final documentation.


-17-



ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW
EastGroup’s goal is to maximize shareholder value by being the leading provider in its markets of functional, flexible and quality business distribution space for location sensitive customers (primarily in the 5,000 to 50,000 square foot range).  The Company develops, acquires and operates distribution facilities, the majority of which are clustered around major transportation features in supply constrained submarkets in major Sunbelt regions.  The Company’s core markets are in the states of Florida, Texas, Arizona, California and North Carolina.

The Company believes its current operating cash flows and unsecured bank credit facilities provide the capacity to fund the operations of the Company.  The Company also believes it can issue common and/or preferred equity and obtain financing from financial institutions and insurance companies. The continuous common equity program provided net proceeds to the Company of $52,000 in the first six months of 2015, as described in Liquidity and Capital Resources.

The Company’s primary revenue is rental income; as such, EastGroup’s greatest challenge is leasing space.  During the six months ended June 30, 2015, leases expired on 3,608,000 square feet (10.7% of EastGroup’s total square footage of 33,641,000), and the Company was successful in renewing or re-leasing 90% of the expiring square feet.  In addition, EastGroup leased 850,000 square feet of other vacant space during this period.  During the first six months of 2015, average rental rates on new and renewal leases increased by 10.8%.  Property net operating income (PNOI) from same properties, defined as operating properties owned during the entire current period and prior year reporting period, increased 4.0% for the quarter ended June 30, 2015, as compared to the same quarter in 2014. For the six months ended June 30, 2015, PNOI from same properties increased 3.5% as compared to the same period of 2014.

EastGroup’s total leased percentage was 97.1% at June 30, 2015, compared to 95.7% at June 30, 2014.  Leases scheduled to expire for the remainder of 2015 were 4.6% of the portfolio on a square foot basis at June 30, 2015, and this figure was reduced to 3.7% as of July 17, 2015.

The Company generates new sources of leasing revenue through its development and acquisition programs. EastGroup continues to see targeted development as a contributor to the Company’s long-term growth.  The Company mitigates risks associated with development through a Board-approved maximum level of land held for development and by adjusting development start dates according to leasing activity.   During the first six months of 2015, the Company began construction of seven development projects containing 823,000 square feet in Orlando, Tampa, San Antonio, Houston and Phoenix.  EastGroup also transferred five properties (427,000 square feet) in Orlando, Phoenix, Charlotte and Houston from its development program to real estate properties with costs of $28.1 million at the date of transfer.  As of June 30, 2015, EastGroup’s development program consisted of 22 projects (2,197,000 square feet) located in Houston, Dallas, San Antonio, Phoenix, Tampa, Orlando, Denver and Charlotte.  The projected total investment for the development projects, which were collectively 38% leased as of July 17, 2015, is $162.2 million, of which $48.9 million remained to be invested as of June 30, 2015.
 
Typically, the Company initially funds its development and acquisition programs through its $250 million unsecured bank credit facilities (as discussed in Liquidity and Capital Resources).  As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, to replace short-term bank borrowings. In March 2015, Moody's Investor Services affirmed the Company's issuer rating of Baa2 with a stable outlook. Also in March 2015, Fitch Ratings affirmed EastGroup's issuer rating of BBB with a stable outlook. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. The Company intends to obtain primarily unsecured fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, in the future. The Company may also access the public debt market in the future as a means to raise capital.

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 permitting 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:  (1) property net operating income (PNOI), defined as Income from real estate operations less Expenses from real estate operations (including market-based internal management fee expense) plus the Company's share of income and property operating expenses from its less-than-wholly-owned real estate investments, and (2) funds from operations attributable to common stockholders (FFO), defined as net income (loss) attributable to common stockholders computed in accordance with U.S. generally accepted accounting principles (GAAP), excluding gains or losses from sales of depreciable real estate property and impairment

-18-



losses, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.  The Company calculates FFO based on the National Association of Real Estate Investment Trusts’ (NAREIT) definition.

PNOI is a supplemental industry reporting measurement used to evaluate the performance of the Company’s real estate investments. The Company believes the exclusion of depreciation and amortization in the industry’s calculation of PNOI provides a supplemental indicator of the properties’ performance since real estate values have historically risen or fallen with market conditions.  PNOI as calculated by the Company may not be comparable to similarly titled but differently calculated measures for other real estate investment trusts (REITs).  The major factors influencing PNOI are occupancy levels, acquisitions and sales, development properties that achieve stabilized operations, rental rate increases or decreases, and the recoverability of operating expenses.  The Company’s success depends largely upon its ability to lease space and to recover from tenants the operating costs associated with those leases.

PNOI is comprised of Income from real estate operations, less Expenses from real estate operations plus the Company's share of income and property operating expenses from its less-than-wholly-owned real estate investments.  PNOI was calculated as follows for the three and six months ended June 30, 2015 and 2014.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Income from real estate operations
$
57,827

 
53,801

 
115,402

 
106,578

Expenses from real estate operations
(16,047
)
 
(15,625
)
 
(32,460
)
 
(30,637
)
Noncontrolling interest in PNOI of consolidated 80% joint ventures
(209
)
 
(204
)
 
(420
)
 
(427
)
PNOI from 50% owned unconsolidated investment
208

 
198

 
416

 
396

PROPERTY NET OPERATING INCOME
$
41,779

 
38,170

 
82,938

 
75,910

 
Income from real estate operations is comprised of rental income, expense reimbursement pass-through income and other real estate income including lease termination fees.  Expenses from real estate operations is comprised of property taxes, insurance, utilities, repair and maintenance expenses, management fees, other operating costs and bad debt expense.  Generally, the Company’s most significant operating expenses are property taxes and insurance.  Tenant leases may be net leases in which the total operating expenses are recoverable, modified gross leases in which some of the operating expenses are recoverable, or gross leases in which no expenses are recoverable (gross leases represent only a small portion of the Company’s total leases).  Increases in property operating expenses are fully recoverable under net leases and recoverable to a high degree under modified gross leases.  Modified gross leases often include base year amounts and expense increases over these amounts are recoverable.  The Company’s exposure to property operating expenses is primarily due to vacancies and leases for occupied space that limit the amount of expenses that can be recovered.

The following table presents reconciliations of Net Income to PNOI for the three and six months ended June 30, 2015 and 2014.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
NET INCOME
$
14,663

 
9,242

 
24,724

 
17,756

Interest income
(65
)
 
(125
)
 
(130
)
 
(252
)
Gain on sales of real estate investments
(2,903
)
 

 
(2,903
)
 
(95
)
Company's share of interest expense from unconsolidated investment

 
71

 

 
142

Company's share of depreciation from unconsolidated investment
31

 
33

 
60

 
66

Other income 
(17
)
 
(18
)
 
(34
)
 
(53
)
Gain on sales of non-operating real estate

 

 
(123
)
 

Depreciation and amortization from continuing operations
17,984

 
17,154

 
36,126

 
34,322

Interest expense 
8,483

 
8,898

 
17,288

 
17,884

General and administrative expense 
3,812

 
2,958

 
8,350

 
6,406

Acquisition costs 

 
160

 

 
160

Interest rate swap ineffectiveness

 
1

 

 
1

Noncontrolling interest in PNOI of consolidated 80% joint ventures
(209
)
 
(204
)
 
(420
)
 
(427
)
PROPERTY NET OPERATING INCOME
$
41,779

 
38,170

 
82,938

 
75,910


-19-



The Company believes FFO is a meaningful supplemental measure of operating performance for equity REITs.  The Company believes excluding depreciation and amortization in the calculation of FFO is appropriate since real estate values have historically increased or decreased based on market conditions.  FFO is not considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company’s financial performance, nor is it a measure of the Company’s liquidity or indicative of funds available to provide for the Company’s cash needs, including its ability to make distributions.  In addition, FFO, as reported by the Company, may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition.  The Company’s key drivers affecting FFO are changes in PNOI (as discussed above), interest rates, the amount of leverage the Company employs and general and administrative expenses.  The following table presents reconciliations of Net Income Attributable to EastGroup Properties, Inc. Common Stockholders to FFO Attributable to Common Stockholders for the three and six months ended June 30, 2015 and 2014.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES,  INC. COMMON STOCKHOLDERS
$
14,533

 
9,118

 
24,463

 
17,490

Depreciation and amortization from continuing operations 
17,984

 
17,154

 
36,126

 
34,322

Company's share of depreciation from unconsolidated investment 
31

 
33

 
60

 
66

Depreciation and amortization from noncontrolling interest
(52
)
 
(51
)
 
(102
)
 
(103
)
Gain on sales of real estate investments
(2,903
)
 

 
(2,903
)
 
(95
)
FUNDS FROM OPERATIONS (FFO) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
29,593

 
26,254

 
57,644

 
51,680

Net income attributable to common stockholders per diluted share
$
0.45

 
0.29

 
0.76

 
0.56

Funds from operations (FFO) attributable to common
   stockholders per diluted share
$
0.92

 
0.84

 
1.79

 
1.66

Diluted shares for earnings per share and funds from operations
32,139

 
31,244

 
32,121

 
31,063



The Company analyzes the following performance trends in evaluating the progress of the Company:

The FFO change per share represents the increase or decrease in FFO per share from the current period compared to the same period in the prior year.  FFO per share for the second quarter of 2015 was $.92 per share compared with $.84 per share for the same period of 2014, an increase of 9.5%. For the six months ended June 30, 2015, FFO was $1.79 per share compared with $1.66 per share for the same period of 2014, an increase of 7.8%.

For the three months ended June 30, 2015, PNOI increased by $3,609,000, or 9.5%, compared to the same period in 2014. PNOI increased $1,729,000 from newly developed properties, $1,505,000 from same property operations and $751,000 from 2014 acquisitions; PNOI decreased $387,000 from properties sold in 2014 and 2015.

For the six months ended June 30, 2015, PNOI increased by $7,028,000, or 9.3%, compared to the same period in 2014. PNOI increased $3,454,000 from newly developed properties, $2,575,000 from same property operations and $1,719,000 from 2014 acquisitions; PNOI decreased $729,000 from properties sold in 2014 and 2015.
  
The same property net operating income change represents the PNOI increase or decrease for the same operating properties owned during the entire current period and prior year reporting period.  PNOI from same properties increased 4.0% for the three months ended June 30, 2015, and increased 3.5% for the six months compared to the same periods in 2014.

Same property average occupancy represents the average month-end percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage for the same operating properties owned during the entire current period and prior year reporting period. Same property average occupancy for the three months ended June 30, 2015, was 96.1% compared to 95.4% for the same period of 2014. Same property average occupancy for the six months ended June 30, 2015, was 96.1% compared to 95.1% for the same period of 2014

The same property average rental rate calculated in accordance with GAAP represents the average annual rental rates of leases in place for the same operating properties owned during the entire current period and prior year reporting period. The same property average rental rate was $5.38 per square foot for the three months ended June 30, 2015, compared to $5.16 per square foot for the same period of 2014. The same property average rental rate was $5.36 per square foot for the six months ended June 30, 2015, compared to $5.15 per square foot for the same period of 2014.


-20-



Occupancy is the percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage as of the close of the reporting period.  Occupancy at June 30, 2015, was 96.2%.  Quarter-end occupancy ranged from 95.0% to 96.3% over the period from June 30, 2014 to March 31, 2015.

Rental rate change represents the rental rate increase or decrease on new and renewal leases compared to the prior leases on the same space.  Rental rate increases on new and renewal leases (4.9% of total square footage) averaged 10.5% for the second quarter of 2015. For the six months ended June 30, 2015, rental rate increases on new and renewal leases (12.2% of total square footage) averaged 10.8%.

Lease termination fee income for the three and six months ended June 30, 2015 was $20,000 and $81,000, respectively, compared to $19,000 and $138,000 for the same periods of 2014. The Company recorded net bad debt recoveries of $17,000 for the three months ended June 30, 2015 and recorded bad debt expense of $338,000 for the six months ended June 30, 2015. The Company recorded net bad debt recoveries of $20,000 and $7,000 for the three and six months ended June 30, 2014, respectively.

-21-



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s management considers the following accounting policies and estimates to be critical to the reported operations of the Company.

Real Estate Properties
The Company allocates the purchase price of acquired properties to net tangible and identified intangible assets based on their respective fair values.  Goodwill is recorded when the purchase price exceeds the fair value of the assets and liabilities acquired.  Factors considered by management in allocating the cost of the properties acquired include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases.  The allocation to tangible assets (land, building and improvements) is based upon management’s determination of the value of the property as if it were vacant using discounted cash flow models.  The purchase price is also allocated among the following categories of intangible assets:  the above or below market component of in-place leases, the value of in-place leases, and the value of customer relationships.  The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate reflecting the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the amounts that would be paid using fair market rates over the remaining term of the lease.  The amounts allocated to above and below market leases are included in Other Assets and Other Liabilities, respectively, on the Consolidated Balance Sheets and are amortized to rental income over the remaining terms of the respective leases.  The total amount of intangible assets is further allocated to in-place lease values and customer relationship values based upon management’s assessment of their respective values.  These intangible assets are included in Other Assets on the Consolidated Balance Sheets and are amortized over the remaining term of the existing lease or the anticipated life of the customer relationship, as applicable.

During the period in which a property is under development, costs associated with development (i.e., land, construction costs, interest expense, property taxes and other direct and indirect costs associated with development) are aggregated into the total capitalized costs of the property.  Included in these costs are management’s estimates for the portions of internal costs (primarily personnel costs) deemed directly or indirectly related to such development activities. The internal costs are allocated to specific development properties based on construction activity.

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 knows of no impairment issues nor has it experienced any impairment issues in recent years.  EastGroup currently has the intent and ability to hold its real estate investments and to hold its land inventory for future development.  In the event of impairment, the property’s basis would be reduced, and the impairment would be recognized as a current period charge on the Consolidated Statements of Income and Comprehensive Income.

Valuation of Receivables
The Company is subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables.  In order to mitigate these risks, the Company performs credit reviews and analyses on prospective tenants before significant leases are executed and on existing tenants before properties are acquired.  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 its allowance for doubtful accounts is adequate for its outstanding receivables for the periods presented.  In the event the allowance for doubtful accounts is insufficient for an account that is subsequently written off, additional bad debt expense would be recognized as a current period charge on the Consolidated Statements of Income and Comprehensive Income.

Tax Status
EastGroup, a Maryland corporation, has qualified as a real estate investment trust under Sections 856-860 of the Internal Revenue Code and intends to continue to qualify as such.  To maintain its status as a REIT, the Company is required to distribute at least 90% of its ordinary taxable income to its stockholders.  If the Company has a capital gain, it has the option of (i) deferring recognition of the capital gain through a tax-deferred exchange, (ii) declaring and paying a capital gain dividend on any recognized net capital gain resulting in no corporate level tax, or (iii) retaining and paying corporate income tax on its net long-term capital gain, with shareholders reporting their proportional share of the undistributed long-term capital gain and receiving a credit or refund of their share of the tax paid by the Company.  The Company distributed all of its 2014 taxable income to its stockholders and expects to distribute all of its taxable income in 2015.  Accordingly, no significant provision for income taxes was necessary in 2014, nor is any significant income tax provision expected to be necessary for 2015.

-22-



FINANCIAL CONDITION

EastGroup’s assets were $1,603,483,000 at June 30, 2015, an increase of $27,659,000 from December 31, 2014.  Liabilities increased $36,852,000 to $1,037,061,000, and equity decreased $9,193,000 to $566,422,000 during the same period.  The following paragraphs explain these changes in detail.

Assets

Real Estate Properties
Real Estate Properties increased $37,988,000 during the six months ended June 30, 2015, primarily due to capital improvements at the Company’s properties and the transfer of five properties from Development, as detailed under Development below.  These increases were partially offset by the sale of the Ambassador Row Warehouse (185,000 square feet) in Dallas and 1.5 acres of land in New Orleans for $5,420,000.

During the six months ended June 30, 2015, the Company made capital improvements of $12,683,000 on existing and acquired properties (included in the Capital Expenditures table under Results of Operations).  Also, the Company incurred costs of $2,052,000 on development properties subsequent to transfer to Real Estate Properties; the Company records these expenditures as development costs on the Consolidated Statements of Cash Flows.

 
Development
EastGroup’s investment in development at June 30, 2015 consisted of properties in lease-up and under construction of $113,259,000 and prospective development (primarily land) of $84,884,000.  The Company’s total investment in development at June 30, 2015 was $198,143,000 compared to $179,973,000 at December 31, 2014.  Total capital invested for development during the first six months of 2015 was $48,226,000, which primarily consisted of costs of $45,990,000 as detailed in the development activity table below and costs of $2,052,000 on development properties subsequent to transfer to Real Estate Properties. The capitalized costs incurred on development properties subsequent to transfer to Real Estate Properties include capital improvements at the properties and do not include other capitalized costs associated with development (i.e., interest expense, property taxes and internal personnel costs).

The Company capitalized internal development costs of $1,115,000 and $2,042,000 for the three and six months ended June 30, 2015, respectively, compared to $1,033,000 and $2,180,000 in the same periods of 2014.

The Company transferred five development properties to Real Estate Properties during the first six months of 2015 with a total investment of $28,128,000 as of the date of transfer.
























-23-



 
 
 
Costs Incurred
 
 
 
 
DEVELOPMENT
 
 
Costs Transferred in 2015 (1)
 
For the Six Months Ended
6/30/2015
 
Cumulative as of 6/30/2015
 
 
Estimated Total Costs
 
Anticipated Building Conversion Date
 
 
 
(In thousands)
 
 
LEASE-UP
Building Size (Square feet)
 
 
 
 
 
 
 
 
 
 
World Houston 41, Houston, TX
104,000

 
$

 
923

 
6,269

 
7,400

 
08/15
Horizon II, Orlando, FL
123,000

 

 
207

 
7,867

 
8,600

 
09/15
West Road I, Houston, TX
63,000

 

 
368

 
4,645

 
5,100

 
09/15
Sky Harbor 6, Phoenix, AZ
31,000

 

 
1,037

 
2,657

 
3,100

 
10/15
Ten West Crossing 6, Houston, TX
64,000

 

 
212

 
4,454

 
4,800

 
10/15
Kyrene 202 I, Phoenix, AZ
75,000

 

 
123

 
6,062

 
6,900

 
11/15
Rampart IV, Denver, CO
84,000

 

 
495

 
7,442

 
8,600

 
11/15
Alamo Ridge I, San Antonio, TX
96,000

 

 
1,356

 
6,831

 
7,300

 
02/16
Alamo Ridge II, San Antonio, TX
62,000

 

 
374

 
3,740

 
3,900

 
02/16
Steele Creek IV, Charlotte, NC
57,000

 

 
311

 
3,771

 
4,300

 
02/16
West Road III, Houston, TX
78,000

 

 
694

 
4,559

 
5,000

 
03/16
Ten West Crossing 7, Houston, TX
68,000

 

 
657

 
3,827

 
4,900

 
04/16
Thousand Oaks 4, San Antonio, TX
66,000

 

 
1,470

 
4,413

 
5,100

 
04/16
Madison II & III, Tampa, FL
127,000

 

 
3,165

 
6,845

 
8,000

 
05/16
Total Lease-Up
1,098,000

 

 
11,392

 
73,382

 
83,000

 
 
UNDER CONSTRUCTION
 

 
 

 
 

 
 

 
 

 
 
World Houston 42, Houston, TX
94,000

 
1,289

 
3,642

 
4,931

 
5,700

 
07/15
Oak Creek VIII, Tampa, FL
108,000

 
2,255

 
294

 
2,549

 
7,500

 
01/16
Horizon IV, Orlando, FL
123,000

 
2,616

 
1,444

 
4,060

 
10,200

 
02/16
Kyrene 202 VI, Phoenix, AZ
123,000

 
1,515

 
3,977

 
5,492

 
9,500

 
08/16
ParkView 1-3, Dallas, TX
276,000

 

 
9,167

 
13,243

 
19,600

 
08/16
West Road IV, Houston, TX
65,000

 
1,292

 
2,711

 
4,003

 
5,400

 
08/16
Horizon III, Orlando, FL
109,000

 
2,399

 
965

 
3,364

 
7,800

 
01/17
Eisenhauer Point 1 & 2, San Antonio, TX
201,000

 
1,880

 
355

 
2,235

 
13,500

 
02/17
Total Under Construction
1,099,000

 
13,246

 
22,555

 
39,877

 
79,200

 
 
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Estimated Building Size (Square feet)
 
 

 
 

 
 

 
 

 
 
Phoenix, AZ
226,000

 
(1,515
)
 
1,710

 
3,658

 
19,700

 
 
Tucson, AZ
70,000

 

 

 
417

 
5,300

 
 
Fort Myers, FL
663,000

 

 

 
17,858

 
50,000

 
 
Orlando, FL
912,000

 
(5,015
)
 
625

 
19,461

 
64,600

 
 
Tampa, FL
291,000

 
(2,255
)
 
352

 
4,281

 
18,200

 
 
Jackson, MS
28,000

 

 

 
706

 
2,000

 
 
Charlotte, NC
384,000

 

 
277

 
5,260

 
26,800

 
 
Dallas, TX
519,000

 

 
5,982

 
7,631

 
34,400

 
 
El Paso, TX
251,000

 

 

 
2,444

 
11,300

 
 
Houston, TX
1,203,000

 
(2,581
)
 
(1,431
)
(2)
17,698

 
81,100

 
 
San Antonio, TX
611,000

 
(1,880
)
 
4,528

 
5,470

 
40,300

 
 
Total Prospective Development
5,158,000

 
(13,246
)
 
12,043

 
84,884

 
353,700

 
 
 
7,355,000

 
$

 
45,990

 
198,143

 
515,900

 
 
DEVELOPMENTS COMPLETED AND TRANSFERRED TO REAL ESTATE PROPERTIES DURING 2015
Building Size (Square feet)
 
 

 
 

 
 

 
 

 
Building Conversion Date
Horizon I, Orlando, FL
109,000

 
$

 
(16
)
 
7,096

 
 
 
02/15
Kyrene 202 II, Phoenix, AZ
45,000

 

 
61

 
3,470

 
 
 
02/15
Steele Creek II, Charlotte, NC
71,000

 

 
22

 
4,945

 
 
 
03/15
Steele Creek III, Charlotte, NC
108,000

 

 
(179
)
 
7,141

 
 
 
02/15
World Houston 39, Houston, TX
94,000

 

 
420

 
5,476

 
 
 
06/15
Total Transferred to Real Estate Properties
427,000

 
$

 
308

 
28,128

 
(3)
 
 
(1) Represents costs transferred from Prospective Development (primarily land) to Under Construction during the period. Negative amounts represent land inventory costs transferred to Under Construction.
(2) Represents year-to-date costs incurred for Houston development land, net of development infrastructure cost reimbursements.
(3) Represents cumulative costs at the date of transfer.

-24-



Accumulated Depreciation
Accumulated depreciation on real estate and development properties increased $26,810,000 during the first six months of 2015 due primarily to depreciation expense, offset by the sale of one operating property during the period.

Other Assets
Other Assets decreased $1,897,000 during the first six months of 2015.  A summary of Other Assets follows:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Leasing costs (principally commissions)                                                                                  
$
56,784

 
56,171

Accumulated amortization of leasing costs                                                       
(22,486
)
 
(22,951
)
Leasing costs (principally commissions), net of accumulated amortization
34,298

 
33,220

 
 
 
 
Straight-line rents receivable                                                                                  
25,647

 
25,013

Allowance for doubtful accounts on straight-line rents receivable
(272
)
 
(102
)
Straight-line rents receivable, net of allowance for doubtful accounts
25,375

 
24,911

 
 
 
 
Accounts receivable                                                                                  
2,820

 
4,459

Allowance for doubtful accounts on accounts receivable
(310
)
 
(379
)
Accounts receivable, net of allowance for doubtful accounts
2,510

 
4,080

 
 
 
 
Acquired in-place lease intangibles                                                                                  
18,322

 
20,118

Accumulated amortization of acquired in-place lease intangibles
(8,734
)
 
(8,345
)
Acquired in-place lease intangibles, net of accumulated amortization
9,588

 
11,773

 
 
 
 
Acquired above market lease intangibles                                                                                  
1,444

 
1,575

Accumulated amortization of acquired above market lease intangibles
(686
)
 
(699
)
Acquired above market lease intangibles, net of accumulated amortization
758

 
876

 
 
 
 
Loan costs                                                                                  
8,140

 
8,166

Accumulated amortization of loan costs                                                         
(4,474
)
 
(4,454
)
Loan costs, net of accumulated amortization                                                     
3,666

 
3,712

 
 
 
 
Mortgage loans receivable                                                                                  
4,934

 
4,991

Interest rate swap assets
1,585

 
812

Escrow deposits for 1031 exchange

 
698

Receivable for development infrastructure cost reimbursements
2,020

 

Goodwill                                                                                  
990

 
990

Prepaid expenses and other assets                                                                                  
5,888

 
7,446

 Total Other Assets
$
91,612

 
93,509


Liabilities
Secured Debt decreased $68,062,000 during the six months ended June 30, 2015.  The decrease resulted from the repayment of one mortgage loan with a balance of $57,450,000, regularly scheduled principal payments of $10,592,000 and mortgage loan premium amortization of $20,000.

Unsecured Debt increased $75,000,000 during the six months ended June 30, 2015 as a result of the closing of a $75 million unsecured term loan in March 2015.

Unsecured Bank Credit Facilities increased $33,927,000 during the six months ended June 30, 2015; the Company’s credit facilities are described in greater detail under Liquidity and Capital Resources.


-25-



Accounts Payable and Accrued Expenses decreased $4,273,000 during the first six months of 2015.  A summary of the Company’s Accounts Payable and Accrued Expenses follows:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Property taxes payable                                                                                  
$
15,688

 
15,216

Development costs payable                                                                                  
7,773