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EX-31.B - EXHIBIT 31.B - EASTGROUP PROPERTIES INCexhibit31bq32016.htm
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EX-32.A - EXHIBIT 32.A - EASTGROUP PROPERTIES INCexhibit32aq32016.htm
EX-31.A - EXHIBIT 31.A - EASTGROUP PROPERTIES INCexhibit31aq32016.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 SEPTEMBER 30, 2016                                       COMMISSION FILE NUMBER 1-07094


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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 October 20, 2016 was 32,904,064.

-1-



EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2016 


 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



-2-





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

 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate properties
$
2,089,680

 
2,049,007

Development
206,820

 
170,441

 
2,296,500

 
2,219,448

Less accumulated depreciation
(679,948
)
 
(657,454
)
 
1,616,552

 
1,561,994

Unconsolidated investment
7,707

 
8,004

Cash
33

 
48

Other assets
94,151

 
91,858

TOTAL ASSETS
$
1,718,443

 
1,661,904

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

 
 
 
 
LIABILITIES
 

 
 

Secured debt
$
260,910

 
350,285

Unsecured debt
553,035

 
528,210

Unsecured bank credit facilities
205,451

 
149,414

Accounts payable and accrued expenses
56,045

 
44,181

Other liabilities
37,972

 
30,613

Total Liabilities
1,113,413

 
1,102,703

 
 
 
 
EQUITY
 

 
 

Stockholders’ Equity:
 

 
 

Common shares; $.0001 par value; 70,000,000 shares authorized; 32,904,064 shares issued and outstanding at September 30, 2016 and 32,421,460 at December 31, 2015
3

 
3

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

 

Additional paid-in capital on common shares
918,807

 
887,207

Distributions in excess of earnings
(308,298
)
 
(328,892
)
Accumulated other comprehensive loss
(9,709
)
 
(3,456
)
Total Stockholders’ Equity
600,803

 
554,862

Noncontrolling interest in joint ventures
4,227

 
4,339

Total Equity
605,030

 
559,201

TOTAL LIABILITIES AND EQUITY
$
1,718,443

 
1,661,904

 
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
REVENUES
 
 
 
 
 
 
 
Income from real estate operations
$
63,178

 
58,520

 
186,628

 
173,922

Other income
12

 
33

 
68

 
67

 
63,190

 
58,553

 
186,696

 
173,989

EXPENSES
 
 
 
 
 

 
 

Expenses from real estate operations
18,552

 
16,795

 
54,130

 
49,255

Depreciation and amortization
19,361

 
18,232

 
57,756

 
54,358

General and administrative
2,328

 
3,179

 
10,663

 
11,529

Acquisition costs
161

 

 
161

 

 
40,402

 
38,206

 
122,710

 
115,142

OPERATING INCOME
22,788

 
20,347

 
63,986

 
58,847

OTHER INCOME (EXPENSE)
 
 
 
 
 

 
 

Interest expense
(8,841
)
 
(8,492
)
 
(27,078
)
 
(25,780
)
Gain on sales of real estate investments

 

 
42,313

 
2,903

Other
853

 
242

 
1,502

 
851

NET INCOME
14,800

 
12,097

 
80,723

 
36,821

Net income attributable to noncontrolling interest in joint ventures
(139
)
 
(129
)
 
(438
)
 
(390
)
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
14,661

 
11,968

 
80,285

 
36,431

Other comprehensive income (loss) - cash flow hedges
2,606

 
(5,140
)
 
(6,253
)
 
(4,553
)
TOTAL COMPREHENSIVE INCOME
$
17,267

 
6,828

 
74,032

 
31,878

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

 
 

Net income attributable to common stockholders
$
.45

 
.37

 
2.47

 
1.14

Weighted average shares outstanding
32,741

 
32,126

 
32,458

 
32,068

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

 
 

Net income attributable to common stockholders
$
.45

 
.37

 
2.47

 
1.13

Weighted average shares outstanding
32,823

 
32,248

 
32,519

 
32,160

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, 2015
$
3

 
887,207

 
(328,892
)
 
(3,456
)
 
4,339

 
559,201

Net income

 

 
80,285

 

 
438

 
80,723

Net unrealized change in fair value of interest rate swaps

 

 

 
(6,253
)
 

 
(6,253
)
Common dividends declared – $1.82 per share

 

 
(59,691
)
 

 

 
(59,691
)
Stock-based compensation, net of forfeitures

 
5,016

 

 

 

 
5,016

Issuance of 447,665 shares of common stock, common stock offering, net of expenses

 
29,643

 

 

 

 
29,643

Issuance of 2,564 shares of common stock, dividend reinvestment plan

 
172

 

 

 

 
172

Withheld 57,316 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock

 
(3,231
)
 

 

 

 
(3,231
)
Distributions to noncontrolling interest

 

 

 

 
(550
)
 
(550
)
BALANCE, SEPTEMBER 30, 2016
$
3

 
918,807

 
(308,298
)
 
(9,709
)
 
4,227

 
605,030


See accompanying Notes to Consolidated Financial Statements (unaudited).

-5-



EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
Nine Months Ended September 30,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income                                                                                                       
$
80,723

 
36,821

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

 
 

Depreciation and amortization                                                                                                       
57,756

 
54,358

Stock-based compensation expense                                                                                                       
3,959

 
5,185

Gain on sales of real estate investments and non-operating real estate
(43,046
)
 
(3,026
)
Changes in operating assets and liabilities:
 

 
 

Accrued income and other assets                                                                                                       
2,061

 
2,544

Accounts payable, accrued expenses and prepaid rent                                                                                                       
5,221

 
6,765

Other                                                                                                       
278

 
(87
)
NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                                                       
106,952

 
102,560

INVESTING ACTIVITIES
 

 
 

Real estate development                                                                                                       
(94,781
)
 
(75,768
)
Purchases of real estate                                                                                                       
(24,955
)
 

Real estate improvements                                                                                                       
(17,184
)
 
(17,753
)
Proceeds from sales of real estate investments and non-operating real estate                                                                                                       
77,298

 
5,156

Repayments on mortgage loans receivable                                                                                                       
91

 
87

Changes in accrued development costs                                                                                                       
7,469

 
159

Changes in other assets and other liabilities                                                                                                       
(11,995
)
 
(6,333
)
NET CASH USED IN INVESTING ACTIVITIES                                                                                                       
(64,057
)
 
(94,452
)
FINANCING ACTIVITIES
 

 
 

Proceeds from unsecured bank credit facilities                                                                                          
444,314

 
273,253

Repayments on unsecured bank credit facilities                                                                                                      
(388,569
)
 
(229,508
)
Repayments on secured debt
(89,295
)
 
(73,031
)
Proceeds from unsecured debt
105,000

 
75,000

Repayments on unsecured debt
(80,000
)
 

Debt issuance costs                                                                                                       
(1,165
)
 
(1,767
)
Distributions paid to stockholders (not including dividends accrued on unvested restricted stock)                                                                                                     
(60,418
)
 
(56,549
)
Proceeds from common stock offerings                                                                                                       
29,643

 
6,233

Proceeds from dividend reinvestment plan                                                                                                       
179

 
189

Other                                                                                                       
(2,599
)
 
(1,597
)
NET CASH USED IN FINANCING ACTIVITIES
(42,910
)
 
(7,777
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(15
)
 
331

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
48

 
11

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
33

 
342

SUPPLEMENTAL CASH FLOW INFORMATION
 

 
 

    Cash paid for interest, net of amount capitalized of $3,737 and $3,903
       for 2016 and 2015, respectively                                                                                                       
$
25,977

 
25,958


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 2015 annual report on Form 10-K and the notes thereto. Certain reclassifications have been made in the 2015 consolidated financial statements to conform to the 2016 presentation.

(2)
PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the accounts of EastGroup Properties, Inc., its wholly owned subsidiaries and its investment in any joint ventures in which the Company has a controlling interest. At December 31, 2015 and September 30, 2016, the Company had a controlling interest in two joint ventures: the 80% owned University Business Center and the 80% owned Castilian Research Center.  During the second quarter of 2016, Castilian Research Center was sold, and the joint venture is in the process of being terminated. 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 September 30, 2016 and December 31, 2015, 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 $15,855,000 and $47,273,000 for the three and nine months ended September 30, 2016, respectively, and $14,945,000 and $44,503,000 for the same periods in 2015.















-7-

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

The Company’s Real estate properties and Development at September 30, 2016 and December 31, 2015 were as follows:
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Real estate properties:
 
 
 
   Land                                                                  
$
306,518

 
301,435

   Buildings and building improvements                                          
1,420,227

 
1,393,688

   Tenant and other improvements                                                                  
362,935

 
353,884

Development                                                                  
206,820

 
170,441

 
2,296,500

 
2,219,448

   Less accumulated depreciation                                                                  
(679,948
)
 
(657,454
)
 
$
1,616,552

 
1,561,994


(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 related to such development activities. The internal costs are allocated to specific development properties based on development 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 $1,056,000 and $3,202,000 for the three and nine months ended September 30, 2016, respectively, and $944,000 and $3,129,000 for the same periods of 2015. Amortization of above and below market leases increased rental income by $121,000 and $370,000 for the three and nine months ended September 30, 2016, respectively, and $94,000 and $326,000 for the same periods of 2015.


-8-

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

During the nine months ended September 30, 2016, EastGroup acquired Parc North, a four-building complex in Fort Worth (Dallas), Texas, for $32 million. The buildings, which contain 446,000 square feet and are currently 42% leased, were recently developed by the seller and are considered to be in the lease-up phase of development. In addition, the Company acquired Flagler Center, a three-building, 358,000 square foot business distribution complex in Jacksonville, Florida, for $24 million.

The total cost for the properties acquired by the Company during the nine months ended September 30, 2016, was $55,939,000, of which $22,228,000 was allocated to Real estate properties and $30,984,000 was allocated to Development. EastGroup allocated $11,932,000 of the total purchase price to land using third party land valuations for the Dallas and Jacksonville 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: $3,187,000 to in-place lease intangibles and $342,000 to above market leases (both included in Other assets on the Consolidated Balance Sheets), and $802,000 to below market leases (included in Other liabilities on the Consolidated Balance Sheets).   

During the year ended December 31, 2015, the Company acquired Southpark Corporate Center and Springdale Business Center, both in Austin, Texas, for a total cost of $31,574,000, of which $28,648,000 was allocated to Real estate properties. EastGroup allocated $5,494,000 of the total purchase price to land using third party land valuations for the Austin market. Intangibles associated with the purchase of real estate were allocated as follows:  $3,453,000 to in-place lease intangibles (included in Other assets on the Consolidated Balance Sheets) and $527,000 to below market leases (included in Other liabilities on the Consolidated Balance Sheets).

The intangible assets, including in-place lease intangibles, above market leases and below market leases, are amortized over the remaining lives of the associated leases in place at the time of acquisition.

During the three and nine months ended September 30, 2016, EastGroup expensed acquisition costs of $161,000. The Company did not expense any acquisition-related costs during the three and nine months ended September 30, 2015.

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 September 30, 2016 and December 31, 2015.

(7)
REAL ESTATE SOLD AND 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 accordance with FASB 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, the Company would report a disposal of a component of an entity or a group of components of an entity 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, the Company would provide 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. EastGroup performs an analysis of properties sold to determine whether the sales qualify for discontinued operations presentation.

The Company did not classify any properties as held for sale as of September 30, 2016 and December 31, 2015.

The Company does not consider its sales in 2015 and the first nine months of 2016 to be disposals of a component of an entity or a group of components of an entity representing a strategic shift that has (or will have) a major effect on the entity's operations and financial results.

During the first quarter of 2016, EastGroup sold the following operating properties in separate transactions: Northwest Point Distribution and Service Centers in Houston and North Stemmons III in Dallas. The properties contain a combined 292,000 square feet and were sold for $18,850,000. EastGroup recognized gains on the sales of $11,332,000. Also during the first quarter of 2016, the Company sold a small parcel of land in Orlando for $673,000 and recognized a gain of $10,000.


-9-

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

During the second quarter of 2016, the Company sold the following operating properties in separate transactions: America Plaza, Lockwood Distribution Center, and West Loop Distribution Center 1 & 2 in Houston; North Stemmons II in Dallas; two of its four Interstate Commons Distribution Center buildings in Phoenix; and Castilian Research Center in Santa Barbara, California. The properties contain a combined 872,000 square feet and were sold for $55,210,000. EastGroup recognized gains on the sales of $30,981,000. Also during the second quarter of 2016, EastGroup sold a small parcel of land in Dallas for $644,000 and recognized a gain of $133,000.

During the third quarter of 2016, EastGroup did not sell any operating properties and sold approximately 20 acres of land in Houston, Dallas and Orlando in separate transactions for a total of $4,083,000 and recognized gains of $590,000.

EastGroup sold a small parcel of land in New Orleans during the first quarter of 2015 for $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 in Dallas containing 185,000 square feet, for $5,250,000 and recognized a gain of $2,903,000. The Company did not have any sales during the third quarter of 2015.

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 Gain on sales of real estate investments.

(8)
OTHER ASSETS
 
A summary of the Company’s Other assets follows:
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Leasing costs (principally commissions)                                                                                  
$
63,203

 
59,043

Accumulated amortization of leasing costs                                                       
(24,977
)
 
(23,455
)
Leasing costs (principally commissions), net of accumulated amortization
38,226

 
35,588

 
 
 
 
Straight-line rents receivable                                                                                  
27,657

 
26,482

Allowance for doubtful accounts on straight-line rents receivable
(249
)
 
(167
)
Straight-line rents receivable, net of allowance for doubtful accounts
27,408

 
26,315

 
 
 
 
Accounts receivable                                                                                  
4,935

 
5,615

Allowance for doubtful accounts on accounts receivable
(630
)
 
(394
)
Accounts receivable, net of allowance for doubtful accounts
4,305

 
5,221

 
 
 
 
Acquired in-place lease intangibles                                                                                  
19,053

 
19,061

Accumulated amortization of acquired in-place lease intangibles
(8,212
)
 
(8,205
)
Acquired in-place lease intangibles, net of accumulated amortization
10,841

 
10,856

 
 
 
 
Acquired above market lease intangibles                                                                                  
1,574

 
1,337

Accumulated amortization of acquired above market lease intangibles
(714
)
 
(684
)
Acquired above market lease intangibles, net of accumulated amortization
860

 
653

 
 
 
 
Mortgage loans receivable                                                                                  
4,784

 
4,875

Interest rate swap assets

 
400

Goodwill                                                                                  
990

 
990

Prepaid expenses and other assets                                                                                  
6,737

 
6,960

Total Other assets
$
94,151

 
91,858



-10-

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

(9)
DEBT

Secured debt decreased $89,375,000 during the nine months ended September 30, 2016.  The decrease primarily resulted from the repayment of two mortgage loans with a combined balance of $75,737,000 and regularly scheduled principal payments of $13,558,000.

Properties encumbered by EastGroup's Secured debt were disclosed in the Company's Form 10-K for the year ended December 31, 2015. During the nine months ended September 30, 2016, the Company closed collateral substitutions for two of its secured loans. The first collateral substitution was for a loan previously secured by America Plaza, Central Green, Glenmont, West Loop, World Houston 3-9, Interstate I-III, Rojas, Stemmons Circle and Venture. Colorado Crossing in Austin and Steele Creek 1 & 2 in Charlotte were substituted for America Plaza, Central Green, Glenmont and West Loop in Houston.

The second collateral substitution was for a loan previously secured by 40th Avenue, Beltway Crossing V, Centennial Park, Executive Airport, Ocean View, Techway Southwest IV, Wetmore 5-8 and World Houston 26, 28, 29 and 30. Interchange Park I in Charlotte was substituted for Techway Southwest IV in Houston.

Unsecured debt increased $24,825,000 during the nine months ended September 30, 2016, primarily due to the closing of senior unsecured term loans totaling $105 million, partially offset by the repayment of an $80 million unsecured term loan.

The Company closed a $65 million senior unsecured term loan on April 1, 2016 with a seven-year term and interest only payments. The loan bears interest at the annual rate of LIBOR plus an applicable margin (currently 1.65%) 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 2.863%.

EastGroup closed a $40 million senior unsecured term loan on July 29, 2016 with a five-year term and interest only payments. The loan bears interest at the annual rate of LIBOR plus an applicable margin (currently 1.10%) 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 2.335%.

In August 2016, EastGroup repaid (with no penalty) an $80 million unsecured term loan with an effectively fixed interest rate of 2.770% and an original maturity date of August 15, 2018. On the same day, the Company borrowed $80 million through its $300 million unsecured bank credit facility; the maturity date for the credit facility is July 30, 2019. The Company re-designated the interest rate swap that was previously applied to the $80 million unsecured term loan to the $80 million unsecured bank credit facility borrowing. The $80 million unsecured bank credit facility draw has an effectively fixed interest rate of 2.020% through the interest rate swap's maturity date of August 15, 2018.
 
Unsecured bank credit facilities increased $56,037,000 during the nine months ended September 30, 2016, mainly due to proceeds of $444,314,000 (including the $80 million draw on August 15, 2016) exceeding repayments of $388,569,000 during the period.

In connection with the adoption of ASU 2015-03, which is described in further detail in Note 17, the Company presents debt issuance costs as reductions of Secured debt, Unsecured debt and Unsecured bank credit facilities on the Consolidated Balance Sheets as detailed below.

-11-

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

 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Secured debt - fixed rate, carrying amount
$
262,081

 
351,401

Unamortized debt issuance costs
(1,171
)
 
(1,116
)
Secured debt
260,910

 
350,285

 
 
 
 
Unsecured debt - fixed rate, carrying amount (1)
555,000

 
530,000

Unamortized debt issuance costs
(1,965
)
 
(1,790
)
Unsecured debt
553,035

 
528,210

 
 
 
 
Unsecured bank credit facilities - variable rate, carrying amount
126,581

 
150,836

Unsecured bank credit facilities - fixed rate, carrying amount (1)
80,000

 

Unamortized debt issuance costs
(1,130
)
 
(1,422
)
Unsecured bank credit facilities
205,451

 
149,414

 
 
 
 
Total debt
$
1,019,396

 
1,027,909


(1)
These loans have a fixed interest rate or an effectively fixed interest rate due to interest rate swaps.

Scheduled principal payments on long-term debt, including Secured debt and Unsecured debt (not including Unsecured bank credit facilities), as of September 30, 2016 are as follows: 
Years Ending December 31,
 
(In thousands)
Remainder of 2016
 
$
3,485

2017
 
58,239

2018
 
61,316

2019
 
130,569

2020
 
114,097

2021 and beyond
 
449,375

       Total
 
$
817,081



(10)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
A summary of the Company’s Accounts payable and accrued expenses follows:
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Property taxes payable                                                                                  
$
27,084

 
16,055

Development costs payable                                                                                  
13,684

 
6,215

Property capital expenditures payable
3,466

 
2,818

Interest payable                                                                                  
3,603

 
3,704

Dividends payable on unvested restricted stock                                                            
1,430

 
2,157

Other payables and accrued expenses                                                                                  
6,778

 
13,232

 Total Accounts payable and accrued expenses
$
56,045

 
44,181


-12-

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

(11)
OTHER LIABILITIES
 
A summary of the Company’s Other liabilities follows:
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Security deposits                                                                                  
$
14,335

 
13,943

Prepaid rent and other deferred income                                                     
9,968

 
10,003

 
 
 
 
Acquired below-market lease intangibles
4,059

 
3,485

     Accumulated amortization of below-market lease intangibles
(1,629
)
 
(1,353
)
Acquired below-market lease intangibles, net of accumulated amortization
2,430

 
2,132

 
 
 
 
Interest rate swap liabilities
9,742

 
3,960

Prepaid tenant improvement reimbursements
1,481

 
493

Other liabilities                                                                                  
16

 
82

 Total Other liabilities
$
37,972

 
30,613


(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.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
Balance at beginning of period
$
(12,315
)
 
(1,770
)
 
(3,456
)
 
(2,357
)
    Change in fair value of interest rate swaps
2,606

 
(5,140
)
 
(6,253
)
 
(4,553
)
Balance at end of period
$
(9,709
)
 
(6,910
)
 
(9,709
)
 
(6,910
)

(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 change variable interest rates to fixed interest rates by using interest rate swaps. 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 September 30, 2016, the Company had seven interest rate swaps outstanding, all of which are used to hedge the variable cash flows associated with unsecured loans. All of the Company's interest rate swaps convert the related loans' LIBOR rate components to effectively fixed interest rates, and the Company has concluded that each of the hedging relationships is highly effective.


-13-

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

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 through interest expense as interest payments are made 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 the swap interest payments will be $3,534,000 over the next twelve months. These payments approximate the expected cash interest payments for the swaps. Since the interest payments on the swaps in combination with the associated debt have been effectively fixed, this estimate is not in addition to the Company's total expected combined interest payments or expense for 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 rates, 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 1, 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 resulted from 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 to the Company's financial statements.

As of September 30, 2016 and December 31, 2015, 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 September 30, 2016
 
Notional Amount as of December 31, 2015
 
 
(In thousands)
Interest Rate Swap
 
$80,000
 
$80,000
Interest Rate Swap
 
$75,000
 
$75,000
Interest Rate Swap
 
$75,000
 
$75,000
Interest Rate Swap
 
$65,000
 
Interest Rate Swap
 
$60,000
 
$60,000
Interest Rate Swap
 
$40,000
 
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 September 30, 2016 and December 31, 2015. See Note 18 for additional information on the fair value of the Company's interest rate swaps.
 
Derivatives
As of September 30, 2016
 
Derivatives
As of December 31, 2015
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
(In thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
    Interest rate swap assets
Other assets
 
$

 
Other assets
 
$
400

    Interest rate swap liabilities
Other liabilities
 
9,742

 
Other liabilities
 
3,960














-14-

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

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 nine months ended September 30, 2016 and 2015:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
 
 
 
 
 
 
 
Interest Rate Swaps:
 
 
 
 
 
 
 
  Amount of income (loss) recognized in Other comprehensive income (loss) on derivatives                                                                                                     
$
1,550

 
(6,261
)
 
(9,279
)
 
(7,723
)
  Amount of loss reclassified from Accumulated other comprehensive loss into Interest expense                                                                                               
(1,056
)
 
(1,121
)
 
(3,026
)
 
(3,170
)

See Note 12 for additional information on the Company's Accumulated other comprehensive income (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 September 30, 2016, the Company had no derivatives in a net asset position; the fair value of derivatives in a net liability position related to the Company's derivative agreements was $9,742,000. As of September 30, 2016, the Company has not posted any collateral related to these agreements. If the Company had breached any of the contractual provisions of the derivative contracts, it could have been required to settle its obligations under the agreements at their termination value of $10,039,000.

(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. 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.













-15-

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


Reconciliation of the numerators and denominators in the basic and diluted EPS computations is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
BASIC EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
 
 
 
 
  Numerator – net income attributable to common stockholders                                                                                                     
$
14,661

 
11,968

 
80,285

 
36,431

  Denominator – weighted average shares outstanding                                                                                                     
32,741

 
32,126

 
32,458

 
32,068

DILUTED EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
 
 
 
 
  Numerator – net income attributable to common stockholders                                                                                                     
$
14,661

 
11,968

 
80,285

 
36,431

Denominator:
 
 
 
 
 
 
 
    Weighted average shares outstanding                                                                                                     
32,741

 
32,126

 
32,458

 
32,068

    Unvested restricted stock                                                                                                     
82

 
122

 
61

 
92

      Total Shares                                                                                                     
32,823

 
32,248

 
32,519

 
32,160


(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 $706,000 and $4,371,000 for the three and nine months ended September 30, 2016, respectively, of which $232,000 and $839,000 were capitalized as part of the Company's development costs. For the three and nine months ended September 30, 2015, stock-based compensation cost for employees was $1,855,000 and $6,035,000, respectively, of which $410,000 and $1,231,000 were capitalized as part of the Company's development costs.

Stock-based compensation expense for directors was $161,000 and $427,000 for the three and nine months ended September 30, 2016, respectively, and $133,000 and $381,000 for the same periods of 2015.

In the second quarter of 2016, the Compensation Committee of the Company’s Board of Directors (the Committee) 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 Committee in its discretion and issued in the first quarter of 2017.  The number of shares to be issued on the grant date could range from zero to 44,848.  These shares would generally vest 20% on the date shares are determined and awarded and 20% per year on each January 1 for the subsequent four years.

Also in the second quarter of 2016, the Committee 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 2016 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, 2016. Any shares issued pursuant to this equity compensation plan will be determined by the Committee in its discretion and issued in the first quarter of 2017.  The number of shares to be issued on the grant date could range from zero to 47,275.  These shares would generally vest 25% on the date shares are determined and awarded and 25% per year on each January 1 for the subsequent three years.

Notwithstanding the foregoing, any shares issued to the Company’s Chief Financial Officer, N. Keith McKey, under these plans will become fully vested on the grant date of the awards which is expected to occur in the first quarter of 2017.

During the third quarter of 2016, 15,250 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 $70.62 per share, will vest 20% per year on January 1 in years 2017, 2018, 2019, 2020 and 2021.

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 nine months of 2016, the Company

-16-

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

withheld 57,316 shares to satisfy the tax obligations for those participants who elected this option as permitted under the applicable equity plan.  As of the vesting dates, the aggregate fair value of shares that vested during the first nine months of 2016 was $10,013,000.
 
Three Months Ended
 
Nine Months Ended
Award Activity:
September 30, 2016
 
September 30, 2016
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
Unvested at beginning of period
147,045

 
$
50.05

 
260,906

 
$
52.69

Granted
15,250

 
70.62

 
80,529

 
58.81

Forfeited 

 

 
(910
)
 
52.89

Vested 

 

 
(178,230
)
 
56.09

Unvested at end of period 
162,295

 
$
51.98

 
162,295

 
$
51.98


(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 the following ASUs 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 FASB issued further guidance in ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, that provides clarifying guidance in certain narrow areas and adds some practical expedients. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The effective date of ASU 2014-09 was extended by one year by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. 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 beginning with the Form 10-Q for the period ended March 31, 2018. The Company has not yet selected a transition method nor has it determined the effect of the standards on its ongoing financial reporting.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to Consolidation Analysis, under which all legal entities are subject to reevaluation under the revised consolidation model. The ASU modifies whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, and provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. EastGroup adopted ASU 2015-02 effective January 1, 2016, and the adoption of ASU 2015-02 had an immaterial impact on the Company's financial condition and results of operations.

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 was effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Entities are to 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. EastGroup adopted ASU 2015-03 effective January 1, 2016. Prior to adoption, the Company included debt issuance costs in Other assets on the Consolidated Balance Sheets. Beginning with the Form 10-Q for the period ended March 31, 2016, EastGroup changed its presentation of debt issuance costs for all periods presented; the Company now presents debt issuance costs as direct deductions from the carrying amounts of its debt liabilities both on the Balance Sheet and in the Notes to Consolidated Financial Statements. As a result of the adoption of ASU 2015-03, the Company adjusted its December 31, 2015 Balance Sheet as follows:

-17-

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

Balance Sheet Items as of December 31, 2015:
 
As Presented in the Company’s 2015 Form 10-K
 
As Presented in the Company’s Form 10-Q Beginning With the Period Ended March 31, 2016
 
 
(In thousands)
Other assets
 
$
96,186

 
91,858

Total assets
 
1,666,232

 
1,661,904

Secured debt
 
351,401

 
350,285

Unsecured debt
 
530,000

 
528,210

Unsecured bank credit facilities
 
150,836

 
149,414

Total liabilities
 
1,107,031

 
1,102,703

Total liabilities and equity
 
1,666,232

 
1,661,904


In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,which requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized costs on the balance sheet. EastGroup plans to adopt ASU 2016-01 effective January 1, 2018. The Company does not anticipate the adoption of ASU 2016-01 will have a material impact on the Company's financial condition or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged under ASU 2016-02. Public business entities are required to apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. EastGroup plans to adopt ASU 2016-02 effective January 1, 2019. The Company does not anticipate the adoption of ASU 2016-02 will have a material impact on the Company's financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU is intended to improve the accounting for share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment awards are simplified with the ASU, including income tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. EastGroup plans to adopt ASU 2016-09 effective January 1, 2017 and will provide the necessary disclosures beginning with its Form 10-Q for the period ending March 31, 2017. The Company does not anticipate the adoption of ASU 2016-09 will have a material impact on the Company's financial condition or results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses certain cash flow issues, including how debt prepayments or debt extinguishment costs and distributions received from equity method investees are presented. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, and the Company plans to adopt ASU 2016-15 effective January 1, 2017 and will provide the necessary disclosures beginning with its Form 10-Q for the period ending March 31, 2017. The Company does not anticipate the adoption of ASU 2016-15 will have a material impact on the Company's financial condition or results of operations.
   


-18-

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 September 30, 2016 and December 31, 2015.
 
September 30, 2016
 
December 31, 2015
 
Carrying Amount (1)
 
Fair Value
 
Carrying Amount (1)
 
Fair Value
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
33

 
33

 
48

 
48

   Mortgage loans receivable                                 
4,784

 
4,811

 
4,875

 
4,896

   Interest rate swap assets                             

 

 
400

 
400

Financial Liabilities:
 

 
 

 
 

 
 

Secured debt (2)
262,081

 
276,505

 
351,401

 
366,491

Unsecured debt (2)
555,000

 
542,134

 
530,000

 
509,326

 Unsecured bank credit facilities - variable rate (2)
126,581

 
126,568

 
150,836

 
150,670

 Unsecured bank credit facilities - fixed rate (2)
80,000

 
79,990

 

 

   Interest rate swap liabilities                                     
9,742

 
9,742

 
3,960

 
3,960

(1) Carrying amounts shown in the table are included on the Consolidated Balance Sheets under the indicated captions, except as explained in the notes below.
(2) Carrying amounts and fair values shown in the table exclude debt issuance costs (see Note 9 for additional information).


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

Cash and cash equivalents:  The carrying amounts approximate fair value due to the short maturity of those instruments.
Mortgage loans receivable (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), excluding the effects of debt issuance costs.
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), excluding the effects of debt issuance costs.
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), excluding the effects of debt issuance costs.
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.


-19-



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 a 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.

EastGroup believes its current operating cash flow and unsecured bank credit facilities provide the capacity to fund the operations of the Company, and the Company also believes it can issue common and/or preferred equity and obtain debt financing. During the first nine months of 2016, EastGroup closed two unsecured term loans totaling $105 million and issued 447,665 shares of common stock through its continuous common equity program, providing net proceeds to the Company of $29.6 million. EastGroup's financing and equity issuances are further described in Liquidity and Capital Resources.

The Company’s primary revenue source is rental income; as such, EastGroup’s greatest challenge is leasing space.  During the nine months ended September 30, 2016, leases expired on 5,144,000 square feet (14.8% of EastGroup’s total square footage of 34,767,000), and the Company was successful in renewing or re-leasing 88% of the expiring square feet.  In addition, EastGroup leased 1,458,000 square feet of other vacant space during this period.  During the first nine months of 2016, average rental rates on new and renewal leases increased by 11.6%.  Property net operating income (PNOI) from same properties, defined as operating properties owned during the entire current period and prior year reporting period, increased 3.8% for the quarter ended September 30, 2016, as compared to the same quarter in 2015. For the nine months ended September 30, 2016, PNOI from same properties increased 2.7% as compared to the same period in 2015.

EastGroup’s total leased percentage was 97.3% at September 30, 2016, compared to 96.6% at September 30, 2015.  Leases scheduled to expire for the remainder of 2016 were 1.9% of the portfolio on a square foot basis at September 30, 2016, and this percentage was reduced to 1.2% as of October 20, 2016.

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 nine months of 2016, EastGroup acquired 97 acres of development land in Charlotte, San Antonio and Dallas for $9.7 million. During the same period, the Company acquired Parc North, a four-building business distribution complex in Fort Worth (Dallas) for $32 million. The buildings, which contain 446,000 square feet and are currently 42% leased, were recently developed by the seller and are considered to be in the lease-up phase of development. In addition, the Company began construction of seven development projects containing 793,000 square feet in San Antonio, Dallas, Tampa, Orlando and Fort Myers.  EastGroup also transferred eight properties (728,000 square feet) in Houston, San Antonio, Tampa, Orlando and Phoenix from its development program to real estate properties with costs of $48.3 million at the date of transfer.  As of September 30, 2016, EastGroup’s development program consisted of 14 projects (2,176,000 square feet) located in Orlando, Tampa, Fort Myers, Charlotte, Dallas, San Antonio and Phoenix.  The projected total investment for the development projects, which were collectively 45% leased as of October 20, 2016, is $162 million, of which $41 million remained to be invested as of September 30, 2016.

Also during the nine months ended September 30, 2016, the Company acquired Flagler Center, a three-building, 358,000 square foot business distribution complex in Jacksonville, Florida, for $24 million.

During the nine months ended September 30, 2016, the Company sold 1,164,000 square feet of operating properties and 25 acres of land, generating gross sales proceeds of $79.5 million. EastGroup recognized $42,313,000 in Gain on sales of real estate investments and $733,000 in Gain on sales of non-operating real estate (included in Other on the Consolidated Statements of Income and Comprehensive Income) during the nine months ended September 30, 2016.
 
Typically, the Company initially funds its development and acquisition programs through its $335 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 2016, Moody's Investors Service affirmed EastGroup's issuer rating of Baa2 with a stable outlook. In April, 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

-20-



assigning rating agency. Each rating should be evaluated independently of any other rating. The Company intends to issue 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 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 nine months ended September 30, 2016 and 2015.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Income from real estate operations
$
63,178

 
58,520

 
186,628

 
173,922

Expenses from real estate operations
(18,552
)
 
(16,795
)
 
(54,130
)
 
(49,255
)
Noncontrolling interest in PNOI of consolidated 80% joint ventures
(190
)
 
(208
)
 
(618
)
 
(628
)
PNOI from 50% owned unconsolidated investment
231

 
213

 
676

 
629

PROPERTY NET OPERATING INCOME (PNOI)
$
44,667

 
41,730

 
132,556

 
124,668

 
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.









-21-



The following table presents reconciliations of Net Income to PNOI for the three and nine months ended September 30, 2016 and 2015.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
NET INCOME
$
14,800

 
12,097

 
80,723

 
36,821

Gain on sales of real estate investments

 

 
(42,313
)
 
(2,903
)
Gain on sales of non-operating real estate
(590
)
 

 
(733
)
 
(123
)
Interest income
(63
)
 
(65
)
 
(191
)
 
(195
)
Other income 
(12
)
 
(33
)
 
(68
)
 
(67
)
Interest rate swap ineffectiveness

 
5

 
5

 
5

Depreciation and amortization
19,361

 
18,232

 
57,756

 
54,358

Company's share of depreciation from unconsolidated investment
31

 
31

 
93

 
91

Interest expense 
8,841

 
8,492

 
27,078

 
25,780

General and administrative expense 
2,328

 
3,179

 
10,663

 
11,529

Acquisition costs 
161

 

 
161

 

Noncontrolling interest in PNOI of consolidated 80% joint ventures
(190
)
 
(208
)
 
(618
)
 
(628
)
PROPERTY NET OPERATING INCOME
$
44,667

 
41,730

 
132,556

 
124,668


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 nine months ended September 30, 2016 and 2015.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES,  INC. COMMON STOCKHOLDERS
$
14,661

 
11,968

 
80,285

 
36,431

Depreciation and amortization
19,361

 
18,232

 
57,756

 
54,358

Company's share of depreciation from unconsolidated investment 
31

 
31

 
93

 
91

Depreciation and amortization from noncontrolling interest
(49
)
 
(51
)
 
(159
)
 
(153
)
Gain on sales of real estate investments

 

 
(42,313
)
 
(2,903
)
FUNDS FROM OPERATIONS (FFO) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
34,004

 
30,180

 
95,662

 
87,824

Net income attributable to common stockholders per diluted share
$
.45

 
.37

 
2.47

 
1.13

Funds from operations (FFO) attributable to common stockholders
   per diluted share
1.04

 
.94

 
2.94

 
2.73

Diluted shares for earnings per share and funds from operations
32,823

 
32,248

 
32,519

 
32,160










-22-



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 third quarter of 2016 was $1.04 per share compared with $.94 per share for the same period of 2015, an increase of 10.6%. For the nine months ended September 30, 2016, FFO was $2.94 per share compared with $2.73 per share for the same period of 2015, an increase of 7.7%.

For the three months ended September 30, 2016, PNOI increased by $2,937,000, or 7.0%, compared to the same period in 2015. PNOI increased $1,805,000 from newly developed and redeveloped properties, $1,500,000 from same property operations and $782,000 from 2015 and 2016 acquisitions; PNOI decreased $1,115,000 from properties sold in 2015 and 2016.

For the nine months ended September 30, 2016, PNOI increased by $7,888,000, or 6.3%, compared to the same period in 2015. PNOI increased $5,065,000 from newly developed and redeveloped properties, $3,167,000 from same property operations and $1,956,000 from 2015 and 2016 acquisitions; PNOI decreased $2,208,000 from properties sold in 2015 and 2016.
  
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 3.8% for the three months ended September 30, 2016, and increased 2.7% for the nine months compared to the same periods in 2015.

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 September 30, 2016, was 96.3% compared to 95.9% for the same period of 2015. Same property average occupancy for the nine months ended September 30, 2016, was 96.1% compared to 96.2% for the same period of 2015.

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 $5.63 per square foot for the three months ended September 30, 2016, compared to $5.26 per square foot for the same period of 2015. The same property average rental rate was $5.58 per square foot for the nine months ended September 30, 2016, compared to $5.24 per square foot for the same period of 2015.

Occupancy is the percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage as of the close of the reporting period.  Occupancy at September 30, 2016, was 96.3%.  Quarter-end occupancy ranged from 95.7% to 96.1% over the previous four quarters ended September 30, 2015 to June 30, 2016.

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 (5.0% of total square footage) averaged 10.6% for the third quarter of 2016. For the nine months ended September 30, 2016, rental rate increases on new and renewal leases (17.2% of total square footage) averaged 11.6%.

Lease termination fee income for the three and nine months ended September 30, 2016 was $316,000 and $754,000 respectively, compared to $130,000 and $211,000 for the same periods of 2015. The Company recorded bad debt expense of $306,000 and $764,000 for the three and nine months ended September 30, 2016. The Company recorded bad debt expense of $324,000 and $662,000 for the three and nine months ended September 30, 2015.

-23-



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 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 related to such development activities. The internal costs are allocated to specific development properties based on development 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 does not believe any impairment charges should be recorded nor has it recorded any impairment charges 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 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 2015 taxable income to its stockholders and expects to distribute all of its taxable income in 2016.  Accordingly, no significant provision for income taxes was necessary in 2015, nor is any significant income tax provision expected to be necessary for 2016.


-24-



FINANCIAL CONDITION

EastGroup’s assets were $1,718,443,000 at September 30, 2016, an increase of $56,539,000 from December 31, 2015.  Liabilities increased $10,710,000 to $1,113,413,000, and equity increased $45,829,000 to $605,030,000 during the same period.  The following paragraphs explain these changes in detail.

Assets

Real Estate Properties
Real estate properties increased $40,673,000 during the nine months ended September 30, 2016, primarily due to the transfer of eight properties from Development, as detailed under Development below; the purchase of Flagler Center; and capital improvements at the Company's properties. These increases were partially offset by the operating property sales discussed below.

During the nine months ended September 30, 2016, EastGroup acquired Flagler Center, a three-building, 358,000 square foot complex in Jacksonville, Florida, for $24,011,000, of which $22,228,000 was allocated to Real estate properties. EastGroup allocated $7,317,000 of the total purchase price to land using third party land valuations for the Jacksonville market. 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 Flagler were allocated as follows: $2,020,000 to in-place lease intangibles and $342,000 to above market leases (both included in Other assets on the Consolidated Balance Sheets), and $579,000 to below market leases (included in Other liabilities on the Consolidated Balance Sheets).   

During the nine months ended September 30, 2016, the Company made capital improvements of $17,832,000 on existing and acquired properties (included in the Capital Expenditures table under Results of Operations).  Also, the Company incurred costs of $5,823,000 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.

EastGroup sold the following operating properties during the nine months ended September 30, 2016: Northwest Point Distribution and Service Centers, Lockwood Distribution Center, West Loop Distribution Center 1 & 2 and America Plaza in Houston; North Stemmons II and III in Dallas; two of its four Interstate Commons Distribution Center buildings in Phoenix; and Castilian Research Center in Santa Barbara, California (1,164,000 square feet combined).

Development
EastGroup’s investment in development at September 30, 2016 consisted of properties in lease-up and under construction of $121,368,000 and prospective development (primarily land) of $85,452,000.  The Company’s total investment in development at September 30, 2016 was $206,820,000 compared to $170,441,000 at December 31, 2015.  Total capital invested for development during the first nine months of 2016 was $94,781,000, which primarily consisted of costs of $81,961,000 and $2,678,000 as detailed in the Development Activity table below and costs of $5,823,000 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 $867,000 and $2,660,000 for the three and nine months ended September 30, 2016, respectively, compared to $1,223,000 and $3,265,000 in the same periods of 2015.

During the nine months ended September 30, 2016, EastGroup acquired Parc North, a four-building business distribution complex in Fort Worth (Dallas), Texas, for $31,928,000, of which $30,984,000 was allocated to Development. The Company allocated $4,615,000 of the total purchase price to land using third party land valuations for the Dallas market. 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: $1,167,000 to in-place lease intangibles (included in Other assets on the Consolidated Balance Sheets) and $223,000 to below market leases (included in Other liabilities on the Consolidated Balance Sheets). The buildings, which contain 446,000 square feet and are currently 42% leased, were recently developed by the seller and are considered to be in the lease-up phase of development.

EastGroup also purchased 97 acres of development land in Charlotte, San Antonio and Dallas for $9,658,000. Costs associated with these land acquisitions are included in the Development Activity table below. These increases were offset by the sale of 25 acres of land for $5,390,000 during the first nine months of 2016.

The Company transferred eight development properties to Real estate properties during the first nine months of 2016 with a total investment of $48,260,000 as of the date of transfer.

-25-



 
 
 
Costs Incurred
 
 
 
Anticipated Building Conversion Date
DEVELOPMENT ACTIVITY
 
 
Costs Transferred in 2016 (1)
 
For the Nine Months Ended
9/30/2016
 
Cumulative as of 9/30/2016
 
 
Estimated Total Costs
 
 
 
 
(In thousands)
 
 
LEASE-UP
Building Size (Square feet)
 
 
 
 
 
 
 
 
 
 
ParkView 1-3, Dallas, TX
276,000

 
$

 
2,594

 
19,850

 
22,000

 
10/16
South 35th Avenue, Phoenix, AZ (2)
124,000

 

 
440

 
1,611

 
1,900

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

 

 
8,449

 
15,209

 
17,200

 
02/17
Parc North 1-4, Dallas, TX (3)
446,000

 

 
31,835

 
31,835

 
36,000

 
02/17
Ten Sky Harbor, Phoenix, AZ
64,000

 

 
1,595

 
5,247

 
6,000

 
04/17
Steele Creek VI, Charlotte, NC
137,000

 

 
3,683

 
6,587

 
7,600

 
07/17
Total Lease-Up
1,248,000

 

 
48,596

 
80,339

 
90,700

 
 
UNDER CONSTRUCTION
 

 
 

 
 

 
 

 
 

 
 
Alamo Ridge III, San Antonio, TX
135,000

 

 
5,681

 
8,061

 
12,200

 
02/17
Madison IV & V, Tampa, FL
145,000

 
1,069

 
5,597

 
6,666

 
9,400

 
10/17
Horizon VII, Orlando, FL
109,000

 
2,344

 
2,875

 
5,219

 
8,000

 
11/17
Alamo Ridge IV, San Antonio, TX
97,000

 
843

 
2,863

 
3,706

 
6,000

 
12/17
CreekView 121 1 & 2, Dallas, TX
193,000

 
3,481

 
6,467

 
9,948

 
16,700

 
12/17
SunCoast 4, Fort Myers, FL
93,000

 
4,287

 
604

 
4,891

 
8,700

 
02/18
Eisenhauer Point 3, San Antonio, TX
71,000

 
808

 
482

 
1,290

 
5,400

 
03/18
Eisenhauer Point 4, San Antonio, TX
85,000

 
777

 
471

 
1,248

 
5,200

 
03/18
Total Under Construction
928,000

 
13,609

 
25,040

 
41,029

 
71,600

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

 
 

 
 

 
 

 
 
Phoenix, AZ
261,000

 

 
336

 
3,823

 
 
 
 
Tucson, AZ
70,000

 

 

 
417

 
 
 
 
Fort Myers, FL
570,000

 
(4,287
)
 
72

 
13,643

 
 
 
 
Orlando, FL
803,000

 
(2,344
)
 
593

 
18,620

 
 
 
 
Tampa, FL
148,000

 
(1,069
)
 
85

 
3,655

 
 
 
 
Jackson, MS
28,000

 

 

 
706

 
 
 
 
Charlotte, NC
756,000

 

 
4,770

 
9,191

 
 
 
 
Dallas, TX
439,000

 
(3,481
)
 
1,951

 
6,596

 
 
 
 
El Paso, TX
251,000

 

 

 
2,444

 
 
 
 
Houston, TX (4)
1,476,000

 

 
(3,573
)
 
21,014

 
 
 
 
San Antonio, TX
544,000

 
(2,428
)
 
4,091

 
5,343

 
 
 
 
Total Prospective Development
5,346,000

 
(13,609
)
 
8,325

 
85,452

 


 
 
 
7,522,000

 
$

 
81,961

 
206,820

 


 
 
DEVELOPMENTS COMPLETED AND TRANSFERRED TO REAL ESTATE PROPERTIES DURING 2016
Building Size (Square feet)
 
 

 
 

 
 

 
 

 
Building Conversion Date
Alamo Ridge I, San Antonio, TX
96,000

 
$

 
26

 
7,378

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

 

 
28

 
4,167

 
 
 
02/16
Madison II & III, Tampa, FL
127,000

 

 
(14
)
 
7,403

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

 

 
57

 
4,839

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

 

 
91

 
4,163

 
 
 
04/16
West Road IV, Houston, TX
65,000

 

 
642

 
5,327

 
 
 
06/16
Horizon III, Orlando, FL
109,000

 

 
1,217

 
7,332

 
 
 
07/16
Kyrene 202 VI, Phoenix, AZ
123,000

 

 
631

 
7,651

 
 
 
09/16
Total Transferred to Real Estate Properties
728,000

 
$

 
2,678

 
48,260

 
(5)
 
 

(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) This property was redeveloped from a manufacturing building to a multi-tenant distribution building.
(3) This project, which was recently developed by the seller, was acquired by EastGroup on 7/8/16 and is considered to be in the lease-up phase.
(4) Negative amount represents land sold and development infrastructure cost reimbursements.
(5) Represents cumulative costs at the date of transfer.






-26-



Accumulated Depreciation
Accumulated depreciation on real estate and development properties increased $22,494,000 during the first nine months of 2016 due primarily to depreciation expense, offset by the sale of 1.2 million square feet of operating properties during the period.

Other Assets
Other assets increased $2,293,000 during the first nine months of 2016.  A summary of Other assets follows:
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Leasing costs (principally commissions)                                                                                  
$
63,203

 
59,043

Accumulated amortization of leasing costs                                                       
(24,977
)
 
(23,455
)
Leasing costs (principally commissions), net of accumulated amortization
38,226

 
35,588

 
 
 
 
Straight-line rents receivable                                                                                  
27,657

 
26,482

Allowance for doubtful accounts on straight-line rents receivable
(249
)
 
(167
)
Straight-line rents receivable, net of allowance for doubtful accounts
27,408

 
26,315

 
 
 
 
Accounts receivable                                                                                  
4,935

 
5,615

Allowance for doubtful accounts on accounts receivable
(630
)
 
(394
)
Accounts receivable, net of allowance for doubtful accounts
4,305

 
5,221

 
 
 
 
Acquired in-place lease intangibles                                                                                  
19,053

 
19,061

Accumulated amortization of acquired in-place lease intangibles
(8,212
)
 
(8,205
)