UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 COMMISSION FILE NUMBER 1-07094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
190 EAST CAPITOL STREET
SUITE 400
JACKSON, MISSISSIPPI 39201
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (601) 354-3555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SHARES OF COMMON STOCK, $.0001 PAR VALUE,
NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES (x) NO ( )
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. YES ( ) NO (x)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES (x) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (x)
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)
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
June 30, 2008, the last business day of the Registrant's most recently completed
second fiscal quarter: $1,038,074,000.
The number of shares of common stock, $.0001 par value, outstanding as of
February 25, 2009 was 25,066,494.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2009 Annual Meeting of
Shareholders are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS.
Organization
EastGroup Properties, Inc. (the Company or EastGroup) is an equity real
estate investment trust (REIT) organized in 1969. The Company has elected to be
taxed and intends to continue to qualify as a REIT under Sections 856-860 of the
Internal Revenue Code (the Code), as amended.
Available Information
The Company maintains a website at www.eastgroup.net. The Company posts its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after it electronically files or furnishes such materials to the
Securities and Exchange Commission (SEC). In addition, the Company's website
includes items related to corporate governance matters, including, among other
things, the Company's corporate governance guidelines, charters of various
committees of the Board of Directors, and the Company's code of business conduct
and ethics applicable to all employees, officers and directors. The Company
intends to disclose on its website any amendment to, or waiver of, any provision
of this code of business conduct and ethics applicable to the Company's
directors and executive officers that would otherwise be required to be
disclosed under the rules of the SEC or the New York Stock Exchange. Copies of
these reports and corporate governance documents may be obtained, free of
charge, from the Company's website. Any shareholder also may obtain copies of
these documents, free of charge, by sending a request in writing to: Investor
Relations, EastGroup Properties, Inc., 190 East Capitol Street, Suite 400,
Jackson, MS 39201-2152.
Administration
EastGroup maintains its principal executive office and headquarters in
Jackson, Mississippi. The Company also has regional offices in Phoenix, Orlando
and Houston and an asset management office in Charlotte. EastGroup has property
management offices in Jacksonville, Tampa, Fort Lauderdale and San Antonio.
Offices at these locations allow the Company to directly manage all of its
Florida (except Fort Myers), Arizona, Mississippi, and Houston and San Antonio,
Texas properties, which together account for 63% of the Company's total
portfolio on a square foot basis. In addition, the Company currently provides
property administration (accounting of operations) for its entire portfolio. The
regional offices in Arizona, Florida and Texas also provide development
capability and oversight in those states. As of February 25, 2009, EastGroup had
69 full-time employees and one part-time employee.
Operations
EastGroup is focused on the development, acquisition and operation of
industrial properties in major Sunbelt markets throughout the United States with
an emphasis in the states of Florida, Texas, Arizona and California. The
Company's goal is to maximize shareholder value by being the leading provider of
functional, flexible, and quality business distribution space for location
sensitive tenants primarily in the 5,000 to 50,000 square foot range.
EastGroup's strategy for growth is based on ownership of premier distribution
facilities generally clustered near major transportation features in supply
constrained submarkets. Over 99% of the Company's revenue is generated from
renting real estate.
During 2008, EastGroup increased its ownership in real estate properties
through its development and acquisition programs. The Company purchased five
operating properties (669,000 square feet), one property for re-development
(150,000 square feet) and 125 acres of developable land for a combined cost of
$58.2 million. Also during 2008, EastGroup transferred 16 properties (1,391,000
square feet) with aggregate costs of $84.3 million at the date of transfer from
development to real estate properties.
EastGroup incurs short-term floating rate bank debt in connection with the
acquisition and development of real estate and, as market conditions permit,
replaces floating rate debt with equity, including preferred equity, and/or
fixed-rate term loans secured by real property. EastGroup also may, in
appropriate circumstances, acquire one or more properties in exchange for
EastGroup securities.
EastGroup holds its properties as long-term investments, but may determine
to sell certain properties that no longer meet its investment criteria. The
Company may provide financing in connection with such sales of property if
market conditions require. In addition, the Company may provide financing to a
partner or co-owner in connection with an acquisition of real estate in certain
situations.
Subject to the requirements necessary to maintain our qualifications as a
REIT, EastGroup may acquire securities of entities engaged in real estate
activities or securities of other issuers, including for the purpose of
exercising control over those entities.
The Company intends to continue to qualify as a REIT under the Code. To
maintain its status as a REIT, the Company is required to distribute 90% of its
ordinary taxable income to its shareholders. The Company has the option of (i)
reinvesting the sales price of properties sold through tax-deferred exchanges,
allowing for a deferral of capital gains on the sale, (ii) paying out capital
gains to the stockholders with no tax to the Company, or (iii) treating the
capital gains as having been distributed to the stockholders, paying the tax on
the gain deemed distributed and allocating the tax paid as a credit to the
stockholders.
EastGroup has no present intention of acting as an underwriter of offerings
of securities of other issuers. The strategies and policies set forth above were
determined and are subject to review by EastGroup's Board of Directors, which
may change such strategies or policies based upon its evaluation of the state of
the real estate market, the performance of EastGroup's assets, capital and
credit market conditions, and other relevant factors. EastGroup provides annual
reports to its stockholders, which contain financial statements audited by the
Company's independent registered public accounting firm.
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Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an
owner of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. Many such laws
impose liability without regard to whether the owner knows of, or was
responsible for, the presence of such hazardous or toxic substances. The
presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to use such property as collateral in its borrowings. EastGroup's
properties have been subjected to Phase I Environmental Site Assessments (ESAs)
by independent environmental consultants. These reports have not revealed any
potential significant environmental liability. Management of EastGroup is not
aware of any environmental liability that would have a material adverse effect
on EastGroup's business, assets, financial position or results of operations.
ITEM 1A. RISK FACTORS.
In addition to the other information contained or incorporated by reference
in this document, readers should carefully consider the following risk factors.
Any of these risks or the occurrence of any one or more of the uncertainties
described below could have a material adverse effect on the Company's financial
condition and the performance of its business. The Company refers to itself as
"we" or "our" in the following risk factors.
Real Estate Industry Risks
We face risks associated with local real estate conditions in areas where
we own properties. We may be adversely affected by general economic conditions
and local real estate conditions. For example, an oversupply of industrial
properties in a local area or a decline in the attractiveness of our properties
to tenants would have a negative effect on us. Other factors that may affect
general economic conditions or local real estate conditions include:
o population and demographic trends;
o employment and personal income trends;
o income tax laws;
o changes in interest rates and availability and costs of financing;
o increased operating costs, including insurance premiums, utilities and
real estate taxes, due to inflation and other factors which may not
necessarily be offset by increased rents; and
o construction costs.
We may be unable to compete with our larger competitors and other
alternatives available to tenants or potential tenants of our properties. The
real estate business is highly competitive. We compete for interests in
properties with other real estate investors and purchasers, many of whom have
greater financial resources, revenues, and geographical diversity than we have.
Furthermore, we compete for tenants with other property owners. All of our
industrial properties are subject to significant local competition. We also
compete with a wide variety of institutions and other investors for capital
funds necessary to support our investment activities and asset growth.
We are subject to significant regulation that inhibits our activities.
Local zoning and land use laws, environmental statutes and other governmental
requirements restrict our expansion, rehabilitation and reconstruction
activities. These regulations may prevent us from taking advantage of economic
opportunities. Legislation such as the Americans with Disabilities Act may
require us to modify our properties and noncompliance could result in the
imposition of fines or an award of damages to private litigants. Future
legislation may impose additional requirements. We cannot predict what
requirements may be enacted or what changes may be implemented to existing
legislation.
Risks Associated with Our Properties
We may be unable to lease space. When a lease expires, a tenant may elect
not to renew it. We may not be able to re-lease the property on similar terms,
if we are able to re-lease the property at all. The terms of renewal or re-lease
(including the cost of required renovations and/or concessions to tenants) may
be less favorable to us than the prior lease. We also develop some properties
with no pre-leasing. If we are unable to lease all or a substantial portion of
our properties, or if the rental rates upon such leasing are significantly lower
than expected rates, our cash generated before debt repayments and capital
expenditures, and our ability to make expected distributions to stockholders,
may be adversely affected.
We have been and may continue to be affected negatively by tenant
bankruptcies and leasing delays. At any time, a tenant may experience a downturn
in its business that may weaken its financial condition. Similarly, a general
decline in the economy may result in a decline in the demand for space at our
industrial properties. As a result, our tenants may delay lease commencement,
fail to make rental payments when due, or declare bankruptcy. Any such event
could result in the termination of that tenant's lease and losses to us, and
distributions to investors may decrease. We receive a substantial portion of our
income as rents under long-term leases. If tenants are unable to comply with the
terms of their leases because of rising costs or falling sales, we may deem it
advisable to modify lease terms to allow tenants to pay a lower rent or a
smaller share of taxes, insurance and other operating costs. If a tenant becomes
insolvent or bankrupt, we cannot be sure that we could recover the premises from
the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy
proceeding relating to the tenant. We also cannot be sure that we would receive
rent in the proceeding sufficient to cover our expenses
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with respect to the premises. If a tenant becomes bankrupt, the federal
bankruptcy code will apply and, in some instances, may restrict the amount and
recoverability of our claims against the tenant. A tenant's default on its
obligations to us could adversely affect our financial condition and the cash we
have available for distribution.
We face risks associated with our property development. We intend to
continue to develop properties where market conditions warrant such investment.
Once made, our investments may not produce results in accordance with our
expectations. Risks associated with our current and future development and
construction activities include:
o the availability of favorable financing alternatives;
o the risk that we may not be able to obtain land on which to develop or
that due to the increased cost of land, our activities may not be as
profitable, especially in certain land constrained areas;
o construction costs exceeding original estimates due to rising interest
rates and increases in the costs of materials and labor;
o construction and lease-up delays resulting in increased debt service,
fixed expenses and construction costs;
o expenditure of funds and devotion of management's time to projects
that we do not complete;
o occupancy rates and rents at newly completed properties may fluctuate
depending on a number of factors, including market and economic
conditions, resulting in lower than projected rental rates and a
corresponding lower return on our investment; and
o complications (including building moratoriums and anti-growth
legislation) in obtaining necessary zoning, occupancy and other
governmental permits.
We face risks associated with property acquisitions. We acquire individual
properties and portfolios of properties, and intend to continue to do so. Our
acquisition activities and their success are subject to the following risks:
o when we are able to locate a desired property, competition from other
real estate investors may significantly increase the purchase price;
o acquired properties may fail to perform as expected;
o the actual costs of repositioning or redeveloping acquired properties
may be higher than our estimates;
o acquired properties may be located in new markets where we face risks
associated with an incomplete knowledge or understanding of the local
market, a limited number of established business relationships in the
area and a relative unfamiliarity with local governmental and
permitting procedures;
o we may be unable to quickly and efficiently integrate new
acquisitions, particularly acquisitions of portfolios of properties,
into our existing operations, and as a result, our results of
operations and financial condition could be adversely affected; and
o we may acquire properties subject to liabilities and without any
recourse, or with only limited recourse, to the transferor with
respect to unknown liabilities. As a result, if a claim were asserted
against us based upon ownership of those properties, we might have to
pay substantial sums to settle it, which could adversely affect our
cash flow.
Coverage under our existing insurance policies may be inadequate to cover
losses. We generally maintain insurance policies related to our business,
including casualty, general liability and other policies, covering our business
operations, employees and assets as appropriate for the markets where each of
our properties and business operations are located. However, we would be
required to bear all losses that are not adequately covered by insurance. In
addition, there may be certain losses that are not generally insured against or
that are not generally fully insured against because it is not deemed
economically feasible or prudent to do so, including losses due to floods, wind,
earthquakes, acts of war, acts of terrorism or riots. If an uninsured loss or a
loss in excess of insured limits occurs with respect to one or more of our
properties, then we could lose the capital we invested in the properties, as
well as the anticipated future revenue from the properties. In addition, if the
damaged properties are subject to recourse indebtedness, we would continue to be
liable for the indebtedness, even if these properties were irreparably damaged.
We face risks due to lack of geographic and real estate sector diversity.
Substantially all of our properties are located in the Sunbelt region of the
United States with an emphasis in the states of Florida, Texas, Arizona and
California. A downturn in general economic conditions and local real estate
conditions in these geographic regions, as a result of oversupply of or reduced
demand for industrial properties, local business climate, business layoffs and
changing demographics, would have a particularly strong adverse effect on us.
Our investments in real estate assets are concentrated in the industrial
distribution sector. This concentration may expose us to the risk of economic
downturns in this sector to a greater extent than if our business activities
included a more significant portion of other sectors of the real estate
industry.
We face risks due to the illiquidity of real estate which may limit our
ability to vary our portfolio. Real estate investments are relatively illiquid.
Our ability to vary our portfolio in response to changes in economic and other
conditions will therefore be limited. In addition, the Internal Revenue Code
limits our ability to sell our properties. If we must sell an investment, we
cannot ensure that we will be able to dispose of the investment at terms
favorable to the Company.
We face possible environmental liabilities. Current and previous real
estate owners and operators may be required under various federal, state and
local laws, ordinances and regulations to investigate and clean up hazardous
substances released at the properties they own or operate. They may also be
liable to the government or to third parties for substantial property or natural
resource damage, investigation costs and cleanup costs. Such laws often impose
liability without regard to whether the owner or operator knew of, or was
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responsible for, the release or presence of such hazardous substances. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs the government incurs in
connection with the contamination. Contamination may adversely affect the
owner's ability to use, sell or lease real estate or to borrow using the real
estate as collateral. We have no way of determining at this time the magnitude
of any potential liability to which we may be subject arising out of
environmental conditions or violations with respect to the properties we
currently or formerly owned. Environmental laws today can impose liability on a
previous owner or operator of a property that owned or operated the property at
a time when hazardous or toxic substances were disposed of, released from, or
present at, the property. A conveyance of the property, therefore, may not
relieve the owner or operator from liability. Although ESAs have been conducted
at our properties to identify potential sources of contamination at the
properties, such ESAs do not reveal all environmental liabilities or compliance
concerns that could arise from the properties. Moreover, material environmental
liabilities or compliance concerns may exist, of which we are currently unaware,
that in the future may have a material adverse effect on our business, assets or
results of operations.
Financing Risks
We face risks associated with the use of debt to fund acquisitions and
developments, including refinancing risk. We are subject to the risks normally
associated with debt financing, including the risk that our cash flow will be
insufficient to meet required payments of principal and interest. We anticipate
that a portion of the principal of our debt will not be repaid prior to
maturity. Therefore, we will likely need to refinance at least a portion of our
outstanding debt as it matures. There is a risk that we may not be able to
refinance existing debt or that the terms of any refinancing will not be as
favorable as the terms of the existing debt.
We face risks related to "balloon payments." Certain of our mortgages will
have significant outstanding principal balances on their maturity dates,
commonly known as "balloon payments." There can be no assurance whether we will
be able to refinance such balloon payments on the maturity of the loans, which
may force disposition of properties on disadvantageous terms or require
replacement with debt with higher interest rates, either of which would have an
adverse impact on our financial performance and ability to pay dividends to
investors.
We face risks associated with our dependence on external sources of
capital. In order to qualify as a REIT, we are required each year to distribute
to our stockholders at least 90% of our REIT taxable income, and we are subject
to tax on our income to the extent it is not distributed. Because of this
distribution requirement, we may not be able to fund all future capital needs
from cash retained from operations. As a result, to fund capital needs, we rely
on third-party sources of capital, which we may not be able to obtain on
favorable terms, if at all. Our access to third-party sources of capital depends
upon a number of factors, including (i) general market conditions; (ii) the
market's perception of our growth potential; (iii) our current and potential
future earnings and cash distributions; and (iv) the market price of our capital
stock. Additional debt financing may substantially increase our debt-to-total
capitalization ratio. Additional equity financing may dilute the holdings of our
current stockholders.
Covenants in our credit agreements could limit our flexibility and
adversely affect our financial condition. The terms of our various credit
agreements and other indebtedness require us to comply with a number of
customary financial and other covenants, such as maintaining debt service
coverage and leverage ratios and maintaining insurance coverage. These covenants
may limit our flexibility in our operations, and breaches of these covenants
could result in defaults under the instruments governing the applicable
indebtedness even if we had satisfied our payment obligations. If we are unable
to refinance our indebtedness at maturity or meet our payment obligations, the
amount of our distributable cash flow and our financial condition would be
adversely affected.
Fluctuations in interest rates may adversely affect our operations and
value of our stock. As of December 31, 2008, we had approximately $110 million
of variable interest rate debt. As of December 31, 2008, the weighted average
interest rate on our variable rate debt was 1.23%. We may incur additional
indebtedness in the future that bears interest at a variable rate or we may be
required to refinance our existing debt at higher rates. Accordingly, increases
in interest rates could adversely affect our financial condition, our ability to
pay expected distributions to stockholders and the value of our stock.
A lack of any limitation on our debt could result in our becoming more
highly leveraged. Our governing documents do not limit the amount of
indebtedness we may incur. Accordingly, our Board of Directors may incur
additional debt and would do so, for example, if it were necessary to maintain
our status as a REIT. We might become more highly leveraged as a result, and our
financial condition and cash available for distribution to stockholders might be
negatively affected and the risk of default on our indebtedness could increase.
Other Risks
The market value of our common stock could decrease based on our
performance and market perception and conditions. The market value of our common
stock may be based primarily upon the market's perception of our growth
potential and current and future cash dividends, and may be secondarily based
upon the real estate market value of our underlying assets. The market price of
our common stock is influenced by the dividend on our common stock relative to
market interest rates. Rising interest rates may lead potential buyers of our
common stock to expect a higher dividend rate, which would adversely affect the
market price of our common stock. In addition, rising interest rates would
result in increased expense, thereby adversely affecting cash flow and our
ability to service our indebtedness and pay dividends.
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The recent market disruptions may adversely affect our operating results
and financial condition. The continuation or intensification of the turmoil in
the global financial markets may have an adverse impact on the availability of
credit to businesses generally and could lead to a further weakening of the U.S.
and global economies. Currently these conditions have not impaired our ability
to access credit markets and finance our operations. However, our ability to
access the capital markets may be restricted at a time when we would like, or
need, to raise financing, which could have an impact on our flexibility to react
to changing economic and business conditions. Furthermore, deteriorating
economic conditions including business layoffs, downsizing, industry slowdowns
and other similar factors that affect our customers could negatively impact
commercial real estate fundamentals and result in lower occupancy, lower rental
rates and declining values in our real estate portfolio and in the collateral
securing any loan investments we may make. Additionally, the economic situation
could have an impact on our lenders or customers, causing them to fail to meet
their obligations to us. No assurances can be given that the effects of the
current crisis will not have a material adverse effect on our business,
financial condition and results of operations.
We may fail to qualify as a REIT. If we fail to qualify as a REIT, we will
not be allowed to deduct distributions to stockholders in computing our taxable
income and will be subject to federal income tax, including any applicable
alternative minimum tax, at regular corporate rates. In addition, we may be
barred from qualification as a REIT for the four years following
disqualification. The additional tax incurred at regular corporate rates would
significantly reduce the cash flow available for distribution to stockholders
and for debt service. Furthermore, we would no longer be required by the
Internal Revenue Code to make any distributions to our stockholders as a
condition of REIT qualification. Any distributions to stockholders would be
taxable as ordinary income to the extent of our current and accumulated earnings
and profits, although such dividend distributions would be subject to a top
federal tax rate of 15% through 2010. Corporate distributees, however, may be
eligible for the dividends received deduction on the distributions, subject to
limitations under the Internal Revenue Code. To qualify as a REIT, we must
comply with certain highly technical and complex requirements. We cannot be
certain we have complied with these requirements because there are few judicial
and administrative interpretations of these provisions. In addition, facts and
circumstances that may be beyond our control may affect our ability to qualify
as a REIT. We cannot assure you that new legislation, regulations,
administrative interpretations or court decisions will not change the tax laws
significantly with respect to our qualification as a REIT or with respect to the
federal income tax consequences of qualification. We cannot assure you that we
will remain qualified as a REIT.
There is a risk of changes in the tax law applicable to real estate
investment trusts. Since the Internal Revenue Service, the United States
Treasury Department and Congress frequently review federal income tax
legislation, we cannot predict whether, when or to what extent new federal tax
laws, regulations, interpretations or rulings will be adopted. Any of such
legislative action may prospectively or retroactively modify our tax treatment
and, therefore, may adversely affect taxation of us and/or our investors.
Our Charter contains provisions that may adversely affect the value of
shareholders' stock. Our charter prohibits any holder from acquiring more than
9.8% (in value or in number, whichever is more restrictive) of our outstanding
equity stock (defined as all of our classes of capital stock, except our excess
stock (of which there is none outstanding)) unless our Board of Directors grants
a waiver. The ownership limit may limit the opportunity for stockholders to
receive a premium for their shares of common stock that might otherwise exist if
an investor were attempting to assemble a block of shares in excess of 9.8% of
the outstanding shares of equity stock or otherwise effect a change in control.
Also, the request of the holders of a majority or more of our common stock is
necessary for stockholders to call a special meeting. We also require advance
notice by stockholders for the nomination of directors or the proposal of
business to be considered at a meeting of stockholders.
The Company faces risks in attracting and retaining key personnel. Many of
our senior executives have strong industry reputations, which aid us in
identifying acquisition and development opportunities and negotiating with
tenants and sellers of properties. The loss of the services of these key
personnel could affect our operations because of diminished relationships with
existing and prospective tenants, property sellers and industry personnel. In
addition, attracting new or replacement personnel may be difficult in a
competitive market.
We have severance and change in control agreements with certain of our
officers that may deter changes in control of the Company. If, within a certain
time period (as set in the officer's agreement) following a change in control,
we terminate the officer's employment other than for cause, or if the officer
elects to terminate his or her employment with us for reasons specified in the
agreement, we will make a severance payment equal to the officer's average
annual compensation times an amount specified in the officer's agreement,
together with the officer's base salary and vacation pay that have accrued but
are unpaid through the date of termination. These agreements may deter a change
in control because of the increased cost for a third party to acquire control of
us.
Our Board of Directors may authorize and issue securities without
stockholder approval. Under our Charter, the Board has the power to classify and
reclassify any of our unissued shares of capital stock into shares of capital
stock with such preferences, rights, powers and restrictions as the Board of
Directors may determine. The authorization and issuance of a new class of
capital stock could have the effect of delaying or preventing someone from
taking control of us, even if a change in control were in our stockholders' best
interests.
Maryland business statutes may limit the ability of a third party to
acquire control of us. Maryland law provides protection for Maryland
corporations against unsolicited takeovers by limiting, among other things, the
duties of the directors in unsolicited takeover situations. The duties of
directors of Maryland corporations do not require them to (a) accept, recommend
or respond to any proposal by a person seeking to acquire control of the
corporation, (b) authorize the corporation to redeem any rights under, or modify
or render inapplicable, any stockholders rights plan, (c) make a determination
under the Maryland Business Combination Act or the Maryland Control Share
Acquisition Act, or (d) act or fail to act solely because of the effect of the
act or failure to act may have on an acquisition or potential acquisition of
control of the corporation or the amount or type of consideration that may be
offered or paid to the stockholders in an acquisition. Moreover, under Maryland
law the act of a director of a Maryland corporation relating to or affecting an
acquisition or potential acquisition of control is not subject to any higher
duty or greater scrutiny than is applied to any other act of a director.
Maryland law also contains a statutory presumption that an act of a director of
a Maryland corporation satisfies the applicable standards of conduct for
directors under Maryland law.
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The Maryland Business Combination Act provides that unless exempted, a
Maryland corporation may not engage in business combinations, including mergers,
dispositions of 10 percent or more of its assets, certain issuances of shares of
stock and other specified transactions, with an "interested stockholder" or an
affiliate of an interested stockholder for five years after the most recent date
on which the interested stockholder became an interested stockholder, and
thereafter unless specified criteria are met. An interested stockholder is
generally a person owning or controlling, directly or indirectly, 10 percent or
more of the voting power of the outstanding stock of the Maryland corporation.
The Maryland Control Share Acquisition Act provides that "control shares"
of a corporation acquired in a "control share acquisition" shall have no voting
rights except to the extent approved by a vote of two-thirds of the votes
eligible to cast on the matter. "Control Shares" means shares of stock that, if
aggregated with all other shares of stock previously acquired by the acquirer,
would entitle the acquirer to exercise voting power in electing directors within
one of the following ranges of the voting power: one-tenth or more but less than
one-third, one-third or more but less than a majority or a majority or more of
all voting power. A "control share acquisition" means the acquisition of control
shares, subject to certain exceptions.
If voting rights of control shares acquired in a control share acquisition
are not approved at a stockholders' meeting, then subject to certain conditions
and limitations, the issuer may redeem any or all of the control shares for fair
value. If voting rights of such control shares are approved at a stockholders'
meeting and the acquirer becomes entitled to vote a majority of the shares of
stock entitled to vote, all other stockholders may exercise appraisal rights.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
EastGroup owned 222 industrial properties and one office building at
December 31, 2008. These properties are located primarily in the Sunbelt states
of Florida, Texas, Arizona and California, and the majority are clustered around
major transportation features in supply constrained submarkets. As of February
25, 2009, EastGroup's portfolio is currently 93.5% leased and 92.7% occupied.
The Company has developed approximately 33% of its total portfolio, including
real estate properties and development properties in lease-up and under
construction. The Company's focus is the ownership of business distribution
space (77% of the total portfolio) with the remainder in bulk distribution space
(18%) and business service space (5%). Business distribution space properties
are typically multi-tenant buildings with a building depth of 200 feet or less,
clear height of 20-24 feet, office finish of 10-25% and truck courts with a
depth of 100-120 feet. See Consolidated Financial Statement Schedule III - Real
Estate Properties and Accumulated Depreciation for a detailed listing of the
Company's properties.
At December 31, 2008, EastGroup did not own any single property that was
10% or more of total book value or 10% or more of total gross revenues and thus
is not subject to the requirements of Items 14 and 15 of Form S-11.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material litigation nor, to
its knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business or which is expected to be covered by the Company's liability
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
7
PART II. OTHER INFORMATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's shares of Common Stock are listed for trading on the New York
Stock Exchange under the symbol "EGP." The following table shows the high and
low share prices for each quarter reported by the New York Stock Exchange during
the past two years and per share distributions paid for each quarter.
Shares of Common Stock Market Prices and Dividends
Calendar Year 2008 Calendar Year 2007
--------------------------------------------------------------------------------------------------
Quarter High Low Distributions High Low Distributions
--------------------------------------------------------------------------------------------------
First $ 48.07 39.09 $ .52 $ 57.55 50.27 $ .50
Second 51.07 42.12 .52 52.00 43.24 .50
Third 50.00 40.52 .52 46.28 38.49 .50
Fourth 48.53 22.30 .52 48.86 40.44 .50
------------- --------------
$ 2.08 $ 2.00
============= ==============
As of February 25, 2009, there were 785 holders of record of the Company's
25,066,494 outstanding shares of common stock. The Company distributed all of
its 2008 and 2007 taxable income to its stockholders. Accordingly, no provision
for income taxes was necessary. The following table summarizes the federal
income tax treatment for all distributions by the Company for the years 2008 and
2007.
Federal Income Tax Treatment of Share Distributions
Years Ended December 31,
---------------------------
2008 2007
---------------------------
Common Share Distributions:
Ordinary Income......................................... $ 2.0758 1.7449
Return of capital....................................... - .1273
Unrecaptured Section 1250 long-term capital gain........ .0042 .0236
Other long-term capital gain............................ - .1042
---------------------------
Total Common Distributions.................................. $ 2.0800 2.0000
===========================
Securities Authorized For Issuance Under Equity Compensation Plans
See Item 12 of this Annual Report on Form 10-K, "Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters," for
certain information regarding the Company's equity compensation plans.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Total Number Average Total Number of Shares Maximum Number of Shares
of Shares Price Paid Purchased as Part of Publicly That May Yet Be Purchased
Period Purchased Per Share Announced Plans or Programs Under the Plans or Programs
-----------------------------------------------------------------------------------------------------------------------------
10/01/08 thru 10/31/08 - - - 672,300
11/01/08 thru 11/30/08 - - - 672,300
12/01/08 thru 12/31/08 2,631 (1) $ 35.58 - 672,300 (2)
----------------------------------------------------------------
Total 2,631 $ 35.58 -
================================================================
(1) As permitted under the Company's equity compensation plans, these shares
were withheld by the Company to satisfy the tax withholding obligations for
those employees who elected this option in connection with the vesting of
shares of restricted stock. Shares withheld for tax withholding obligations
do not affect the total number of remaining shares available for repurchase
under the Company's common stock repurchase plan.
(2) EastGroup's Board of Directors has authorized the repurchase of up to
1,500,000 shares of its outstanding common stock. The shares may be
purchased from time to time in the open market or in privately negotiated
transactions. Under the common stock repurchase plan, the Company has
purchased a total of 827,700 shares for $14,170,000 (an average of $17.12
per share) with 672,300 shares still authorized for repurchase. The Company
has not repurchased any shares under this plan since 2000.
8
Performance Graph
The following graph compares, over the five years ended December 31, 2008,
the cumulative total shareholder return on EastGroup's Common Stock with the
cumulative total return of the Standard & Poor's 500 Index (S&P 500) and the
Equity REIT index prepared by the National Association of Real Estate Investment
Trusts (NAREIT Equity).
The performance graph and related information shall not be deemed
"soliciting material" or be deemed to be "filed" with the SEC, nor shall such
information be incorporated by reference into any future filing, except to the
extent that the Company specifically incorporates it by reference into such
filing.
[GRAPHIC OMITTED]
Fiscal years ended December 31,
---------------------------------------------------------------------
2003 2004 2005 2006 2007 2008
---------------------------------------------------------------------
EastGroup $ 100.00 124.96 154.19 190.26 155.37 138.62
NAREIT Equity 100.00 131.58 147.59 199.33 168.05 104.65
S&P 500 100.00 110.87 116.32 134.69 142.09 89.52
The information above assumes that the value of the investment in shares of
EastGroup's Common Stock and each index was $100 on December 31, 2003, and that
all dividends were reinvested.
9
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data for the
Company derived from the audited consolidated financial statements and should be
read in conjunction with the consolidated financial statements and notes thereto
included elsewhere in this report.
Years Ended December 31,
----------------------------------------------------------------
2008 2007 2006 2005 2004
----------------------------------------------------------------
(In thousands, except per share data)
OPERATING DATA
Revenues
Income from real estate operations.......................... $ 168,327 150,083 132,417 119,831 108,559
Other income................................................ 248 92 182 413 356
----------------------------------------------------------------
168,575 150,175 132,599 120,244 108,915
----------------------------------------------------------------
Expenses
Expenses from real estate operations........................ 47,374 40,926 37,014 34,154 30,462
Depreciation and amortization............................... 51,221 47,738 41,198 37,462 31,078
General and administrative.................................. 8,547 8,295 7,401 6,874 6,711
----------------------------------------------------------------
107,142 96,959 85,613 78,490 68,251
----------------------------------------------------------------
Operating income.............................................. 61,433 53,216 46,986 41,754 40,664
Other income (expense)
Equity in earnings of unconsolidated investment............. 316 285 287 450 69
Gain on sales of non-operating real estate.................. 321 2,602 123 - -
Gain on sales of securities................................. 435 - - - -
Interest income............................................. 293 306 142 247 121
Interest expense............................................ (30,192) (27,314) (24,616) (23,444) (20,349)
Minority interest in joint ventures......................... (626) (609) (600) (484) (490)
----------------------------------------------------------------
Income from continuing operations............................. 31,980 28,486 22,322 18,523 20,015
Discontinued operations
Income from real estate operations.......................... 130 288 1,185 2,504 1,862
Gain on sales of real estate investments.................... 2,032 960 5,727 1,164 1,450
----------------------------------------------------------------
Income from discontinued operations........................... 2,162 1,248 6,912 3,668 3,312
----------------------------------------------------------------
Net income ................................................... 34,142 29,734 29,234 22,191 23,327
Preferred dividends-Series D................................ 1,326 2,624 2,624 2,624 2,624
Costs on redemption of Series D preferred shares............ 682 - - - -
----------------------------------------------------------------
Net income available to common stockholders................... $ 32,134 27,110 26,610 19,567 20,703
================================================================
BASIC PER COMMON SHARE DATA
Income from continuing operations........................... $ 1.22 1.10 .88 .74 .84
Income from discontinued operations......................... .09 .05 .31 .17 .16
----------------------------------------------------------------
Net income available to common stockholders................. $ 1.31 1.15 1.19 .91 1.00
================================================================
Weighted average shares outstanding......................... 24,503 23,562 22,372 21,567 20,771
================================================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations........................... $ 1.21 1.09 .87 .72 .82
Income from discontinued operations......................... .09 .05 .30 .17 .16
----------------------------------------------------------------
Net income available to common stockholders................. $ 1.30 1.14 1.17 .89 .98
================================================================
Weighted average shares outstanding......................... 24,653 23,781 22,692 21,892 21,088
================================================================
OTHER PER SHARE DATA
Book value (at end of year)................................. $ 16.39 15.51 16.28 15.06 15.14
Common distributions declared............................... 2.08 2.00 1.96 1.94 1.92
Common distributions paid................................... 2.08 2.00 1.96 1.94 1.92
BALANCE SHEET DATA (AT END OF YEAR)
Real estate investments, at cost ........................... $ 1,409,476 1,270,691 1,091,653 1,024,459 904,312
Real estate investments, net of accumulated depreciation.... 1,099,125 1,001,559 860,547 818,032 729,250
Total assets................................................ 1,156,205 1,055,833 911,787 863,538 768,664
Mortgage and bank loans payable............................. 695,692 600,804 446,506 463,725 390,105
Total liabilities........................................... 742,829 651,136 490,842 496,972 414,974
Minority interest in joint ventures......................... 2,536 2,312 2,148 1,702 1,884
Total stockholders' equity.................................. 410,840 402,385 418,797 364,864 351,806
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
EastGroup's goal is to maximize shareholder value by being the leading
provider in its markets of functional, flexible, and quality business
distribution space for location sensitive tenants primarily in the 5,000 to
50,000 square foot range. The Company develops, acquires and operates
distribution facilities, the majority of which are clustered around major
transportation features in supply constrained submarkets in major Sunbelt
regions. The Company's core markets are in the states of Florida, Texas, Arizona
and California.
The Company expects the slowdown in the economy to affect its operations.
The Company is projecting a decrease in occupancy, and there are no plans for
development starts. The current economic situation is also impacting lenders,
and it is more difficult to obtain financing. The Company believes that its
lines of credit provide the capacity to fund debt maturities and the operations
of the Company for 2009 and 2010.
The Company's primary revenue is rental income; as such, EastGroup's
greatest challenge is leasing space. During 2008, leases on 4,223,000 square
feet (16.5%) of EastGroup's total square footage of 25,612,000 expired, and the
Company was successful in renewing or re-leasing 83% of that total. In addition,
EastGroup leased 1,354,000 square feet of other vacant space during the year.
During 2008, average rental rates on new and renewal leases increased by 11.1%.
EastGroup's total leased percentage was 94.8% at December 31, 2008 compared
to 96.0% at December 31, 2007. Leases scheduled to expire in 2009 were 14.6% of
the portfolio on a square foot basis at December 31, 2008, and this figure was
reduced to 12.2% as of February 25, 2009. Property net operating income (PNOI)
from same properties increased 0.3% for 2008 as compared to 2007. Excluding
termination fees of $798,000 and $1,149,000 in 2008 and 2007, respectively, PNOI
from same properties increased 0.6%. Excluding termination fees, the fourth
quarter of 2008 was the twenty-second consecutive quarter of improved same
property operations.
The Company generates new sources of leasing revenue through its
acquisition and development programs. During 2008, EastGroup purchased five
operating properties (669,000 square feet), one property for re-development
(150,000 square feet), and 125 acres of development land for a combined cost of
$58.2 million. The five operating properties and 9.9 acres of development land
are located in metropolitan Charlotte, North Carolina, where the Company now
owns over 1.6 million square feet. The property acquired for re-development is
located in Jacksonville, Florida, and the remaining development land is located
in Orlando (94.3 acres), San Antonio (12.7 acres), and Houston (8.1 acres).
EastGroup continues to see targeted development as a major contributor to
the Company's long-term growth. The Company mitigates risks associated with
development through a Board-approved maximum level of land held for development
and by adjusting development start dates according to leasing activity.
EastGroup's development activity has slowed considerably as a result of current
market conditions. The Company had one development start in the fourth quarter
of 2008 and does not currently have any plans to start construction on new
developments in 2009. During 2008, the Company transferred 16 properties
(1,391,000 square feet) with aggregate costs of $84.3 million at the date of
transfer from development to real estate properties. These properties, which
were collectively 91.8% leased as of February 25, 2009, are located in Fort
Myers, Orlando, and Tampa, Florida; Phoenix, Arizona; Houston and San Antonio,
Texas; and Denver, Colorado.
During 2008, the Company initially funded its acquisition and development
programs through its $225 million lines of credit (as discussed in Liquidity and
Capital Resources). As market conditions permit, EastGroup issues equity,
including preferred equity, and/or employs fixed-rate, non-recourse first
mortgage debt to replace the short-term bank borrowings.
EastGroup has one reportable segment-industrial properties. These
properties are primarily located in major Sunbelt regions of the United States,
have similar economic characteristics and also meet the other criteria that
permit the properties to be aggregated into one reportable segment. The
Company's chief decision makers use two primary measures of operating results in
making decisions: property net operating income (PNOI), defined as income from
real estate operations less property operating expenses (before interest expense
and depreciation and amortization), and funds from operations available to
common stockholders (FFO), defined as net income (loss) computed in accordance
with U.S. generally accepted accounting principles (GAAP), excluding gains or
losses from sales of depreciable real estate property, plus real estate related
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. The Company calculates FFO based on the
National Association of Real Estate Investment Trusts' (NAREIT) definition.
PNOI is a supplemental industry reporting measurement used to evaluate the
performance of the Company's real estate investments. The Company believes that
the exclusion of depreciation and amortization in the industry's calculation of
PNOI provides a supplemental indicator of the properties' performance since real
estate values have historically risen or fallen with market conditions. PNOI as
calculated by the Company may not be comparable to similarly titled but
differently calculated measures for other real estate investment trusts (REITs).
The major factors that influence PNOI are occupancy levels, acquisitions and
sales, development properties that achieve stabilized operations, rental rate
increases or decreases, and the recoverability of operating expenses. The
Company's success depends largely upon its ability to lease space and to recover
from tenants the operating costs associated with those leases.
Real estate income is comprised of rental income, pass-through income and
other real estate income including lease termination fees. Property operating
expenses are comprised of property taxes, insurance, utilities, repair and
maintenance expenses, management fees, other operating costs and bad debt
expense. Generally, the Company's most significant operating expenses are
property taxes and insurance. Tenant leases may be net leases in which the total
operating expenses are recoverable, modified gross leases in which some of the
operating expenses are recoverable, or gross leases in which no expenses are
recoverable (gross leases represent only a small portion of the Company's total
leases). Increases in property operating expenses are fully recoverable under
net leases and recoverable to a high degree under modified gross leases.
Modified gross leases often include base year amounts and expense increases over
these amounts are recoverable. The Company's exposure to property operating
expenses is primarily due to vacancies and leases for occupied space that limit
the amount of expenses that can be recovered.
The Company believes FFO is a meaningful supplemental measure of operating
performance for equity REITs. The Company believes that excluding depreciation
and amortization in the calculation of FFO is appropriate since real estate
values have historically
11
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. The Company's key drivers
affecting FFO are changes in PNOI (as discussed above), interest rates, the
amount of leverage the Company employs and general and administrative expense.
The following table presents the reconciliations of PNOI and FFO Available to
Common Stockholders to Net Income for three fiscal years.
Years Ended December 31,
---------------------------------------
2008 2007 2006
---------------------------------------
(In thousands, except per share data)
Income from real estate operations............................................ $ 168,327 150,083 132,417
Expenses from real estate operations.......................................... (47,374) (40,926) (37,014)
---------------------------------------
PROPERTY NET OPERATING INCOME................................................. 120,953 109,157 95,403
Equity in earnings of unconsolidated investment (before depreciation)......... 448 417 419
Income from discontinued operations (before depreciation and amortization).... 201 608 2,204
Interest income............................................................... 293 306 142
Gain on sales of securities................................................... 435 - -
Other income.................................................................. 248 92 182
Interest expense.............................................................. (30,192) (27,314) (24,616)
General and administrative expense............................................ (8,547) (8,295) (7,401)
Minority interest in earnings (before depreciation and amortization).......... (827) (783) (751)
Gain on sales of land and non-operating real estate........................... 321 2,602 791
Dividends on Series D preferred shares........................................ (1,326) (2,624) (2,624)
Costs on redemption of Series D preferred shares.............................. (682) - -
---------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS........................ 81,325 74,166 63,749
Depreciation and amortization from continuing operations...................... (51,221) (47,738) (41,198)
Depreciation and amortization from discontinued operations.................... (71) (320) (1,019)
Depreciation from unconsolidated investment................................... (132) (132) (132)
Minority interest depreciation and amortization............................... 201 174 151
Gain on sales of depreciable real estate investments.......................... 2,032 960 5,059
---------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................................... 32,134 27,110 26,610
Dividends on Series D preferred shares........................................ 1,326 2,624 2,624
Costs on redemption of Series D preferred shares.............................. 682 - -
---------------------------------------
NET INCOME.................................................................... $ 34,142 29,734 29,234
=======================================
Net income available to common stockholders per diluted share................. $ 1.30 1.14 1.17
Funds from operations available to common stockholders per diluted share...... 3.30 3.12 2.81
Diluted shares for earnings per share and funds from operations............... 24,653 23,781 22,692
12
The Company analyzes the following performance trends in evaluating the progress
of the Company:
o The FFO change per share represents the increase or decrease in FFO per
share from the same quarter in the current year compared to the prior year.
FFO per share for the fourth quarter of 2008 was $.85 per share compared
with $.86 per share for the same period of 2007, a decrease of 1.2% per
share. FFO for the fourth quarter of 2008 included gain on sales of land
and non-operating real estate of $8,000 as compared to $2,579,000 in the
same period of 2007. Excluding these gains for both periods, FFO per share
increased 11.8%. The fourth quarter of 2008 was the eighteenth consecutive
quarter of increased FFO (excluding gain on sales of land and non-operating
real estate) as compared to the previous year's quarter. PNOI increased
11.2% primarily due to additional PNOI of $1,865,000 from newly developed
properties, $740,000 from 2007 and 2008 acquisitions, and $587,000 from
same property growth.
For the year 2008, FFO was $3.30 per share compared with $3.12 per share
for 2007, an increase of 5.8% per share. Gain on sales of land and
non-operating real estate was $321,000 ($.01 per share) for 2008 and
$2,602,000 ($.11 per share) for 2007. Costs on redemption of preferred
shares was $682,000 ($.03 per share) for 2008. Gain on sales of securities
was $435,000 ($.02 per share) for 2008. PNOI increased 10.8% due to
additional PNOI of $7,966,000 from newly developed properties, $3,660,000
from 2007 and 2008 acquisitions and $282,000 from same property growth.
o Same property net operating income change represents the PNOI increase or
decrease for operating properties owned during the entire current period
and prior year reporting period. PNOI from same properties increased 2.1%
for the fourth quarter. Excluding termination fees of $68,000 and $133,000
in the fourth quarters of 2008 and 2007, respectively, PNOI from same
properties increased 2.4% for the quarter. Excluding termination fees, the
fourth quarter of 2008 was the twenty-second consecutive quarter of
improved same property operations. For the year 2008, PNOI from same
properties increased 0.3%. Excluding termination fees of $798,000 and
$1,149,000 for 2008 and 2007, respectively, PNOI from same properties
increased 0.6%.
o Occupancy is the percentage of leased square footage for which the lease
term has commenced as compared to the total leasable square footage as of
the close of the reporting period. Occupancy at December 31, 2008 was
93.8%. Occupancy has ranged from 93.8% to 95.4% in the previous four
quarters.
o Rental rate change represents the rental rate increase or decrease on new
and renewal leases compared to the prior leases on the same space. Rental
rate increases on new and renewal leases (3.7% of total square footage)
averaged 4.5% for the fourth quarter of 2008. For the year, rental rate
increases on new and renewal leases (18.9% of total square footage)
averaged 11.1%.
o Development starts were $48 million in 2008, and there are no planned
development starts for 2009.
13
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's management considers the following accounting policies and
estimates to be critical to the reported operations of the Company.
Real Estate Properties
The Company allocates the purchase price of acquired properties to net
tangible and identified intangible assets based on their respective fair values.
Factors considered by management in allocating the cost of the properties
acquired include an estimate of carrying costs during the expected lease-up
periods considering current market conditions and costs to execute similar
leases. The allocation to tangible assets (land, building and improvements) is
based upon management's determination of the value of the property as if it were
vacant using discounted cash flow models. The remaining purchase price is
allocated among three categories of intangible assets consisting of the above or
below market component of in-place leases, the value of in-place leases and the
value of customer relationships. The value allocable to the above or below
market component of an acquired in-place lease is determined based upon the
present value (using a discount rate which reflects the risks associated with
the acquired leases) of the difference between (i) the contractual amounts to be
paid pursuant to the lease over its remaining term and (ii) management's
estimate of the amounts that would be paid using fair market rates over the
remaining term of the lease. The amounts allocated to above and below market
leases are included in Other Assets and Other Liabilities, respectively, on the
Consolidated Balance Sheets and are amortized to rental income over the
remaining terms of the respective leases. The total amount of intangible assets
is further allocated to in-place lease values and to customer relationship
values based upon management's assessment of their respective values. These
intangible assets are included in Other Assets on the Consolidated Balance
Sheets and are amortized over the remaining term of the existing lease, or the
anticipated life of the customer relationship, as applicable.
During the period in which a property is under development, costs
associated with development (i.e., land, construction costs, interest expense,
property taxes and other direct and indirect costs associated with development)
are aggregated into the total capitalized costs of the property. Included in
these costs are management's estimates for the portions of internal costs
(primarily personnel costs) that are deemed directly or indirectly related to
such development activities.
The Company reviews its real estate investments for impairment of value
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If any real estate investment is considered
permanently impaired, a loss is recorded to reduce the carrying value of the
property to its estimated fair value. Real estate assets to be sold are reported
at the lower of the carrying amount or fair value less selling costs. The
evaluation of real estate investments involves many subjective assumptions
dependent upon future economic events that affect the ultimate value of the
property. Currently, the Company's management is not aware of any impairment
issues nor has it experienced any significant impairment issues in recent years.
EastGroup currently has the intent and ability to hold its real estate
investments and to hold its land inventory for future development. In the event
of impairment, the property's basis would be reduced and the impairment would be
recognized as a current period charge on the Consolidated Statements of Income.
Valuation of Receivables
The Company is subject to tenant defaults and bankruptcies that could
affect the collection of outstanding receivables. In order to mitigate these
risks, the Company performs credit reviews and analyses on prospective tenants
before significant leases are executed. On a quarterly basis, the Company
evaluates outstanding receivables and estimates the allowance for doubtful
accounts. Management specifically analyzes aged receivables, customer
credit-worthiness, historical bad debts and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. The Company
believes that its allowance for doubtful accounts is adequate for its
outstanding receivables for the periods presented. In the event that the
allowance for doubtful accounts is insufficient for an account that is
subsequently written off, additional bad debt expense would be recognized as a
current period charge on the Consolidated Statements of Income.
Tax Status
EastGroup, a Maryland corporation, has qualified as a real estate
investment trust under Sections 856-860 of the Internal Revenue Code and intends
to continue to qualify as such. To maintain its status as a REIT, the Company is
required to distribute at least 90% of its ordinary taxable income to its
stockholders. The Company has the option of (i) reinvesting the sales price of
properties sold through tax-deferred exchanges, allowing for a deferral of
capital gains on the sale, (ii) paying out capital gains to the stockholders
with no tax to the Company, or (iii) treating the capital gains as having been
distributed to the stockholders, paying the tax on the gain deemed distributed
and allocating the tax paid as a credit to the stockholders. The Company
distributed all of its 2008, 2007 and 2006 taxable income to its stockholders.
Accordingly, no provision for income taxes was necessary.
14
FINANCIAL CONDITION
EastGroup's assets were $1,156,205,000 at December 31, 2008, an increase of
$100,372,000 from December 31, 2007. Liabilities increased $91,693,000 to
$742,829,000 and stockholders' equity increased $8,455,000 to $410,840,000
during the same period. The paragraphs that follow explain these changes in
detail.
ASSETS
Real Estate Properties
Real estate properties increased $137,316,000 during the year ended
December 31, 2008, primarily due to the purchase of five operating properties in
a single transaction and the transfer of 16 properties from development, as
detailed under Development below. These increases were offset by the disposition
of two operating properties, North Stemmons I and Delp Distribution Center III,
during the year. In addition, EastGroup sold 41 acres of residential land in San
Antonio, Texas, for $841,000 with no gain or loss. This property was acquired as
part of the Company's Alamo Ridge industrial land acquisition in September 2007.
Date
Real Estate Properties Acquired in 2008 Location Size Acquired Cost (1)
------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
Airport Commerce Center I & II,
Interchange Park, Ridge Creek III and
Waterford Distribution Center.............. Charlotte, NC 669,000 02/29/08 $ 39,018
(1) Total cost of the properties acquired was $41,913,000, of which $39,018,000
was allocated to real estate properties as indicated above and $855,000 was
allocated to development. Intangibles associated with the purchases of real
estate were allocated as follows: $2,143,000 to in-place lease intangibles,
$252,000 to above market leases (both included in Other Assets on the
Consolidated Balance Sheets) and $355,000 to below market leases (included
in Other Liabilities on the Consolidated Balance Sheets). All of these
costs are amortized over the remaining lives of the associated leases in
place at the time of acquisition.
The Company made capital improvements of $15,210,000 on existing and
acquired properties (included in the Capital Expenditures table under Results of
Operations). Also, the Company incurred costs of $4,116,000 on development
properties subsequent to transfer to real estate properties; the Company records
these expenditures as development costs on the Consolidated Statements of Cash
Flows during the 12-month period following transfer.
Development
The investment in development at December 31, 2008 was $150,354,000
compared to $152,963,000 at December 31, 2007. Total capital invested for
development during 2008 was $85,441,000, which primarily consisted of costs of
$81,642,000 as detailed in the development activity table and costs of
$4,116,000 on developments transferred to real estate properties during the
12-month period following transfer.
During 2007, the Company executed a ten-year lease for a 404,000 square
foot build-to-suit development in its Southridge Commerce Park in Orlando. In
March 2008, construction on this project (Southridge XII) was completed, and the
tenant, United Stationers Supply Company, occupied the space. In connection with
this transaction, EastGroup entered into contracts with United Stationers to
purchase two of its existing properties in Jacksonville and Tampa. In July 2008,
EastGroup closed on the first contract for the acquisition of 12th Street
Distribution Center, a 150,000 square foot building in Jacksonville. The Company
purchased the vacant property for $3,776,000 and is re-developing it for
multi-tenant use for a projected total investment of $4,900,000. In August 2008,
EastGroup closed the second contract for the acquisition of a 128,000 square
foot warehouse in Tampa through its taxable REIT subsidiary. The Company then
sold the building, recognizing a gain of $294,000.
During 2008, EastGroup purchased 125 acres of developable land for a total
cost of $13,368,000. Costs associated with these acquisitions are included in
the development activity table. The Company transferred 16 developments to Real
Estate Properties during 2008 with a total investment of $84,251,000 as of the
date of transfer.
15
Costs Incurred
----------------------------------------------
Costs For the Cumulative Estimated
Transferred Year Ended as of Total
DEVELOPMENT Size in 2008 (1) 12/31/08 12/31/08 Costs (2)
------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
40th Avenue Distribution Center, Phoenix, AZ......... 89,000 $ - 1,392 6,539 6,900
Wetmore II, Building B, San Antonio, TX.............. 55,000 - 750 3,633 3,900
Beltway Crossing VI, Houston, TX..................... 128,000 - 2,084 5,607 6,700
Oak Creek VI, Tampa, FL............................. 89,000 - 1,682 5,587 6,100
Southridge VIII, Orlando, FL......................... 91,000 - 1,961 6,001 6,900
Techway SW IV, Houston, TX........................... 94,000 - 2,875 4,843 6,100
SunCoast III, Fort Myers, FL......................... 93,000 - 2,543 6,718 8,400
Sky Harbor, Phoenix, AZ.............................. 264,000 - 8,821 22,829 25,100
World Houston 26, Houston, TX........................ 59,000 1,110 1,708 2,818 3,300
12th Street Distribution Center, Jacksonville, FL.... 150,000 - 4,850 4,850 4,900
----------------------------------------------------------------------------
Total Lease-up......................................... 1,112,000 1,110 28,666 69,425 78,300
----------------------------------------------------------------------------
UNDER CONSTRUCTION
Beltway Crossing VII, Houston, TX.................... 95,000 2,123 2,090 4,213 5,900
Country Club III & IV, Tucson, AZ.................... 138,000 2,552 5,495 8,047 11,200
Oak Creek IX, Tampa, FL.............................. 86,000 1,369 2,831 4,200 5,500
Blue Heron III, West Palm Beach, FL.................. 20,000 863 1,035 1,898 2,600
World Houston 28, Houston, TX........................ 59,000 733 1,647 2,380 4,800
World Houston 29, Houston, TX........................ 70,000 849 1,037 1,886 4,800
World Houston 30, Houston, TX........................ 88,000 1,591 - 1,591 5,800
----------------------------------------------------------------------------
Total Under Construction............................... 556,000 10,080 14,135 24,215 40,600
----------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Tucson, AZ........................................... 70,000 (2,552) 924 417 3,500
Tampa, FL............................................ 249,000 (1,369) 682 3,890 14,600
Orlando, FL.......................................... 1,254,000 - 10,691 14,453 78,700
West Palm Beach, FL.................................. - (863) 52 - -
Fort Myers, FL....................................... 659,000 - 2,195 15,014 48,100
Dallas, TX........................................... 70,000 - 570 570 5,000
El Paso, TX.......................................... 251,000 - - 2,444 9,600
Houston, TX.......................................... 1,064,000 (6,406) 4,643 12,786 68,100
San Antonio, TX...................................... 595,000 - 2,873 5,439 37,500
Charlotte, NC........................................ 95,000 - 995 995 7,100
Jackson, MS.......................................... 28,000 - 1 706 2,000
----------------------------------------------------------------------------
Total Prospective Development.......................... 4,335,000 (11,190) 23,626 56,714 274,200
----------------------------------------------------------------------------
6,003,000 $ - 66,427 150,354 393,100
============================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING 2008
Beltway Crossing IV, Houston, TX..................... 55,000 $ - 5 3,365
Beltway Crossing III, Houston, TX.................... 55,000 - 14 2,866
Southridge XII, Orlando, FL.......................... 404,000 - 3,421 18,521
Arion 18, San Antonio, TX............................ 20,000 - 638 2,593
Southridge VII, Orlando, FL.......................... 92,000 - 414 6,500
Wetmore II, Building C, San Antonio, TX.............. 69,000 - 185 3,682
Interstate Commons III, Phoenix, AZ.................. 38,000 - 45 3,093
SunCoast I, Fort Myers, FL........................... 63,000 - 149 5,225
World Houston 27, Houston, TX........................ 92,000 - 1,765 4,248
Wetmore II, Building D, San Antonio, TX.............. 124,000 - 4,965 7,950
World Houston 24, Houston, TX........................ 93,000 - 739 5,904
Centennial Park, Denver, CO.......................... 68,000 - 690 5,437
World Houston 25, Houston, TX........................ 66,000 - 536 3,730
Beltway Crossing V, Houston, TX...................... 83,000 - 984 4,730
Wetmore II, Building A, San Antonio, TX.............. 34,000 - 576 3,377
Oak Creek A & B, Tampa, FL........................... 35,000 - 89 3,030
-------------------------------------------------------------
Total Transferred to Real Estate Properties............ 1,391,000 $ - 15,215 84,251 (3)
=============================================================
(1) Represents costs transferred from Prospective Development (primarily land)
to Under Construction (or subsequently to Lease-up) during the period.
(2) Included in these costs are development obligations of $11.1 million and
tenant improvement obligations of $2.0 million on properties under development.
(3) Represents cumulative costs at the date of transfer.
16
Accumulated depreciation on real estate and development properties
increased $41,219,000 during 2008, primarily due to depreciation expense on real
estate properties, offset by accumulated depreciation related to North Stemmons
I and Delp Distribution Center III, which were disposed of during the year.
Mortgage loans receivable, net of discount, (included in Other Assets on
the Consolidated Balance Sheets) increased $4,042,000 during 2008. In August
2008, EastGroup closed on the sale of the United Stationers Tampa building and
advanced the buyer $4,994,000 in a first mortgage recourse loan. In September,
EastGroup received a principal payment of $844,000. The mortgage loan has a
five-year term and calls for monthly interest payments (interest accruals and
payments begin January 1, 2009) through the maturity date of August 8, 2013,
when a balloon payment for the remaining principal balance of $4,150,000 is due.
At the inception of the loan, EastGroup recognized a discount on the loan of
$198,000 and recognized amortization of the discount of $117,000 during 2008. In
addition, EastGroup received principal payments of $27,000 on the second
mortgage loan on the Madisonville land in Kentucky, which the Company sold in
2006.
A summary of Other Assets is presented in Note 5 in the Notes to
Consolidated Financial Statements.
LIABILITIES
Mortgage notes payable increased $120,446,000 during the year ended
December 31, 2008. EastGroup closed on two mortgage loans during the year: a
$78,000,000 mortgage loan in the first quarter and a $59,000,000 mortgage loan
in the fourth quarter. These increases were offset by regularly scheduled
principal payments of $16,434,000 and mortgage loan premium amortization of
$120,000.
Notes payable to banks decreased $25,558,000 during 2008 as a result of
repayments of $357,202,000 exceeding advances of $331,644,000. The Company's
credit facilities are described in greater detail under Liquidity and Capital
Resources.
See Note 8 in the Notes to Consolidated Financial Statements for a summary
of Accounts Payable and Accrued Expenses. See Note 9 in the Notes to
Consolidated Financial Statements for a summary of Other Liabilities.
STOCKHOLDERS' EQUITY
During the second quarter, the Company sold 1,198,700 shares of its common
stock to Merrill Lynch, Pierce, Fenner & Smith Incorporated. The net proceeds
were $57.2 million. The Company used the proceeds to repay indebtedness
outstanding under its revolving credit facility and for other general corporate
purposes.
On July 2, 2008, EastGroup redeemed all 1,320,000 shares of its 7.95%
Series D Cumulative Redeemable Preferred Stock at a redemption price of $25.00
per share plus accrued and unpaid dividends of $.011 per share for the period
from July 1, 2008, through and including the redemption date, for an aggregated
redemption price of $25.011 per Series D Preferred Share. Original issuance
costs of $674,000 and additional redemption costs of $8,000 were charged against
net income available to common stockholders in conjunction with the redemption
of these shares.
Distributions in excess of earnings increased $19,633,000 as a result of
dividends on common and preferred stock of $53,093,000 and costs on the
redemption of Series D Preferred Shares of $682,000 exceeding net income for
financial reporting purposes of $34,142,000. See Note 11 in the Notes to
Consolidated Financial Statements for information related to the changes in
additional paid-in capital resulting from stock-based compensation.
RESULTS OF OPERATIONS
2008 Compared to 2007
Net income available to common stockholders for 2008 was $32,134,000 ($1.31
per basic share and $1.30 per diluted share) compared to $27,110,000 ($1.15 per
basic share and $1.14 per diluted share) for 2007. Diluted earnings per share
(EPS) for 2008 included a $.10 per share gain on sales of real estate properties
compared to $.15 per share in 2007.
PNOI increased by $11,796,000, or 10.8%, for 2008 compared to 2007,
primarily due to additional PNOI of $7,966,000 from newly developed properties,
$3,660,000 from 2007 and 2008 acquisitions and $282,000 from same property
growth. Expense to revenue ratios were 28.1% in 2008 compared to 27.3% in 2007.
The Company's percentage of leased square footage was 94.8% at December 31,
2008, compared to 96.0% at December 31, 2007. Occupancy at the end of 2008 was
93.8% compared to 95.4% at the end of 2007.
During 2008, EastGroup purchased a 128,000 square foot warehouse in Tampa
as part of the Orlando build-to-suit transaction with United Stationers. The
Company acquired and then re-sold the building through its taxable REIT
subsidiary and recognized a gain of $294,000. For the year, EastGroup recognized
gain on sales of non-operating real estate of $321,000 in 2008 compared to
$2,602,000 in 2007.
The following table presents the components of interest expense for 2008
and 2007:
17
Years Ended December 31,
--------------------------- Increase
2008 2007 (Decrease)
------------------------------------------
(In thousands, except rates of interest)
Average bank borrowings....................................... $ 125,647 96,513 29,134
Weighted average variable interest rates
(excluding loan cost amortization) ...................... 3.94% 6.36%
VARIABLE RATE INTEREST EXPENSE
Variable rate interest (excluding loan cost amortization)..... 4,944 6,139 (1,195)
Amortization of bank loan costs............................... 295 353 (58)
------------------------------------------
Total variable rate interest expense.......................... 5,239 6,492 (1,253)
------------------------------------------
FIXED RATE INTEREST EXPENSE
Fixed rate interest (excluding loan cost amortization)........ 31,219 26,350 4,869
Amortization of mortgage loan costs........................... 680 558 122
------------------------------------------
Total fixed rate interest expense............................. 31,899 26,908 4,991
------------------------------------------
Total interest................................................ 37,138 33,400 3,738
Less capitalized interest..................................... (6,946) (6,086) (860)
------------------------------------------
TOTAL INTEREST EXPENSE........................................ $ 30,192 27,314 2,878
==========================================
Interest costs incurred during the period of construction of real estate
properties are capitalized and offset against interest expense. The Company's
weighted average variable interest rates in 2008 were lower than in 2007. A
summary of the Company's weighted average interest rates on mortgage debt at
year-end for the past several years is presented below:
WEIGHTED AVERAGE
MORTGAGE DEBT AS OF: INTEREST RATE
------------------------------------------------------------------------
December 31, 2004............................. 6.74%
December 31, 2005............................. 6.31%
December 31, 2006............................. 6.21%
December 31, 2007............................. 6.06%
December 31, 2008............................. 5.96%
The increase in mortgage interest expense in 2008 was primarily due to the
new mortgages detailed in the table below.
MATURITY
NEW MORTGAGES IN 2007 AND 2008 INTEREST RATE DATE DATE AMOUNT
-------------------------------------------------------------------------------------------------------------------------------
Broadway VI, World Houston 1 & 2, 21 & 23, Arion 16,
Ethan Allen, Northpark I-IV, South 55th Avenue, East
University I & II and Santan 10 II........................ 5.570% 08/08/07 09/05/17 $ 75,000,000
Beltway II, III & IV, Eastlake, Fairgrounds I-IV,
Nations Ford I-IV, Techway Southwest III,
Westinghouse, Wetmore I-IV and World
Houston 15 & 22........................................... 5.500% 03/19/08 04/05/15 78,000,000
Southridge XII, Airport Commerce Center I & II,
Interchange Park, Ridge Creek III, World Houston 24,
25 & 27 and Waterford Distribution Center................. 5.750% 12/09/08 01/05/14 59,000,000
------------- -------------
Weighted Average/Total Amount............................. 5.594% $ 212,000,000
============= =============
Mortgage principal payments were $16,434,000 in 2008 and $26,963,000 in
2007. EastGroup had no mortgage maturities in 2008. In 2007, the Company repaid
two mortgages totaling $14,220,000. These repayments were included in the
mortgage principal payments for 2007. The details of these two mortgages are
shown in the following table:
INTEREST DATE PAYOFF
MORTGAGE LOANS REPAID IN 2007 RATE REPAID AMOUNT
-----------------------------------------------------------------------------------------------------
World Houston 1 & 2................................ 7.770% 04/12/07 $ 4,023,000
E. University I & II, Broadway VI, 55th Avenue
and Ethan Allen.................................. 8.060% 05/25/07 10,197,000
------------ --------------
Weighted Average/Total Amount.................... 7.978% $ 14,220,000
============ ==============
19
Depreciation and amortization for continuing operations increased
$3,483,000 for 2008 as compared to 2007. This increase was primarily due to
properties acquired and transferred from development during 2007 and 2008.
Operating property acquisitions and transferred developments were $125 million
in 2008 and $127 million in 2007.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent for
continuing operations increased income by $933,000 in 2008 as compared to
$824,000 in 2007.
Capital Expenditures
Capital expenditures for operating properties for the years ended December
31, 2008 and 2007 were as follows:
Years Ended December 31,
Estimated --------------------------
Useful Life 2008 2007
------------------------------------------
(In thousands)
Upgrade on Acquisitions.................. 40 yrs $ 63 141
Tenant Improvements:
New Tenants........................... Lease Life 7,554 7,326
New Tenants (first generation) (1).... Lease Life 244 495
Renewal Tenants....................... Lease Life 1,504 1,963
Other:
Building Improvements................. 5-40 yrs 2,685 1,719
Roofs................................. 5-15 yrs 1,874 3,273
Parking Lots.......................... 3-5 yrs 907 765
Other................................. 5 yrs 379 199
--------------------------
Total capital expenditures......... $ 15,210 15,881
==========================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
Capitalized Leasing Costs
The Company's leasing costs (principally commissions) are capitalized and
included in Other Assets. The costs are amortized over the terms of the
associated leases and are included in depreciation and amortization expense.
Capitalized leasing costs for the years ended December 31, 2008 and 2007 were as
follows:
Years Ended December 31,
Estimated --------------------------
Useful Life 2008 2007
------------------------------------------
(In thousands)
Development.............................. Lease Life $ 3,115 3,108
New Tenants.............................. Lease Life 2,370 2,805
New Tenants (first generation) (1)....... Lease Life 58 212
Renewal Tenants.......................... Lease Life 2,626 2,124
-------------------------
Total capitalized leasing costs.... $ 8,169 8,249
=========================
Amortization of leasing costs (2)........ $ 5,882 5,339
=========================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
(2) Includes discontinued operations.
Discontinued Operations
The results of operations, including interest expense (if applicable), for
the operating properties sold or held for sale during the periods reported are
shown under Discontinued Operations on the Consolidated Statements of Income.
During 2008, the Company disposed of two operating properties (North Stemmons I
and Delp Distribution Center III) and recognized gain on sales of real estate
investments of $2,032,000.
During 2007, the Company sold one operating property and recognized a gain
of $603,000. In addition, the Company recognized a deferred gain of $357,000
from a previous sale. See Notes 1(f) and 2 in the Notes to Consolidated
Financial Statements for more information related to discontinued operations and
gain on the sales of these properties. The following table presents the
components of revenue and expense for the operating properties sold or held for
sale during 2008 and 2007.
19
Years Ended December 31,
--------------------------
Discontinued Operations 2008 2007
-------------------------------------------------------------------------------------------------
(In thousands)
Income from real estate operations............................... $ 276 887
Expenses from real estate operations............................. (75) (279)
--------------------------
Property net operating income from discontinued operations..... 201 608
Depreciation and amortization.................................... (71) (320)
--------------------------
Income from real estate operations............................... 130 288
Gain on sales of real estate investments..................... 2,032 960
--------------------------
Income from discontinued operations.............................. $ 2,162 1,248
==========================
2007 Compared to 2006
Net income available to common stockholders for 2007 was $27,110,000 ($1.15
per basic share and $1.14 per diluted share) compared to $26,610,000 ($1.19 per
basic share and $1.17 per diluted share) for 2006. EPS for 2007 included a $.15
per share gain on sales of real estate properties compared to $.26 per share in
2006.
PNOI increased by $13,754,000, or 14.4%, for 2007 compared to 2006,
primarily due to additional PNOI of $5,671,000 from newly developed properties,
$4,813,000 from 2006 and 2007 acquisitions and $3,345,000 from same property
growth. Included in same property growth was $1,149,000 in lease termination
fees for 2007 compared to $410,000 for 2006. Expense to revenue ratios were
27.3% in 2007 compared to 28.0% in 2006. The Company's percentage of leased
square footage was 96.0% at December 31, 2007, compared to 96.6% at December 31,
2006. Occupancy at the end of 2007 was 95.4% compared to 95.9% at the end of
2006.
During the fourth quarter of 2007, EastGroup recorded a gain on the sale of
land in lieu of condemnation at Arion Business Park of $2,572,000. For the year,
the Company recognized gain on sales of non-operating real estate of $2,602,000
in 2007 compared to $123,000 in 2006.
The following table presents the components of interest expense for 2007
and 2006:
Years Ended December 31,
--------------------------- Increase
2007 2006 (Decrease)
------------------------------------------
(In thousands, except rates of interest)
Average bank borrowings....................................... $ 96,513 91,314 5,199
Weighted average variable interest rates
(excluding loan cost amortization) ...................... 6.36% 6.12%
VARIABLE RATE INTEREST EXPENSE
Variable rate interest (excluding loan cost amortization)..... 6,139 5,584 555
Amortization of bank loan costs............................... 353 355 (2)
------------------------------------------
Total variable rate interest expense.......................... 6,492 5,939 553
------------------------------------------
FIXED RATE INTEREST EXPENSE
Fixed rate interest (excluding loan cost amortization)........ 26,350 22,549 3,801
Amortization of mortgage loan costs........................... 558 464 94
------------------------------------------
Total fixed rate interest expense............................. 26,908 23,013 3,895
------------------------------------------
Total interest................................................ 33,400 28,952 4,448
Less capitalized interest..................................... (6,086) (4,336) (1,750)
------------------------------------------
TOTAL INTEREST EXPENSE........................................ $ 27,314 24,616 2,698
==========================================
Interest costs incurred during the period of construction of real estate
properties are capitalized and offset against interest expense. The Company's
weighted average variable interest rates in 2007 were higher than in 2006. A
summary of the Company's weighted average interest rates on mortgage debt at
year-end for the past several years is presented below:
WEIGHTED AVERAGE
MORTGAGE DEBT AS OF: INTEREST RATE
------------------------------------------------------------------------
December 31, 2003............................. 6.92%
December 31, 2004............................. 6.74%
December 31, 2005............................. 6.31%
December 31, 2006............................. 6.21%
December 31, 2007............................. 6.06%
20
The increase in mortgage interest expense in 2007 was primarily due to the
new mortgages detailed in the table below.
MATURITY
NEW MORTGAGES IN 2006 AND 2007 INTEREST RATE DATE DATE AMOUNT
-------------------------------------------------------------------------------------------------------------------------------
Huntwood and Wiegman Distribution Centers.................. 5.680% 08/08/06 09/05/16 $ 38,000,000
Alamo Downs, Arion 1-15 & 17, Rampart I, II & III,
Santan 10 and World Houston 16........................... 5.970% 10/17/06 11/05/16 78,000,000
Broadway VI, World Houston 1 & 2, 21 & 23, Arion 16,
Ethan Allen, Northpark I-IV, South 55th Avenue, East
University I & II and Santan 10 II....................... 5.570% 08/08/07 09/05/17 75,000,000
-------------- --------------
Weighted Average/Total Amount............................ 5.755% $ 191,000,000
============== ==============
Mortgage principal payments were $26,963,000 in 2007 and $45,071,000 in
2006. Included in these principal payments are repayments of two mortgages
totaling $14,220,000 in 2007 and three mortgages totaling $35,929,000 in 2006.
The details of these mortgages are shown in the following table:
INTEREST DATE PAYOFF
MORTGAGE LOANS REPAID IN 2006 AND 2007 RATE REPAID AMOUNT
-----------------------------------------------------------------------------------------------------
Huntwood Distribution Center....................... 7.990% 08/08/06 $ 10,557,000
Wiegman Distribution Center........................ 7.990% 08/08/06 4,872,000
Arion Business Park................................ 4.450% 10/16/06 20,500,000
World Houston 1 & 2................................ 7.770% 04/12/07 4,023,000
E. University I & II, Broadway VI, 55th Avenue
and Ethan Allen.................................. 8.060% 05/25/07 10,197,000
------------ --------------
Weighted Average/Total Amount.................... 6.539% $ 50,149,000
============ ==============
Depreciation and amortization for continuing operations increased
$6,540,000 for 2007 compared to 2006. This increase was primarily due to
properties acquired and transferred from development during 2006 and 2007.
Property acquisitions and transferred developments were $127 million in 2007 and
$58 million in 2006.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent for
continuing operations increased income by $824,000 in 2007 as compared to
$994,000 in 2006.
Capital Expenditures
Capital expenditures for operating properties for the years ended December
31, 2007 and 2006 were as follows:
Years Ended December 31,
Estimated --------------------------
Useful Life 2007 2006
------------------------------------------
(In thousands)
Upgrade on Acquisitions.................. 40 yrs $ 141 351
Tenant Improvements:
New Tenants........................... Lease Life 7,326 7,240
New Tenants (first generation) (1).... Lease Life 495 688
Renewal Tenants....................... Lease Life 1,963 731
Other:
Building Improvements................. 5-40 yrs 1,719 1,818
Roofs................................. 5-15 yrs 3,273 1,803
Parking Lots.......................... 3-5 yrs 765 686
Other................................. 5 yrs 199 153
--------------------------
Total capital expenditures......... $ 15,881 13,470
==========================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
Capitalized Leasing Costs
The Company's leasing costs (principally commissions) are capitalized and
included in Other Assets. The costs are amortized over the terms of the
associated leases and are included in depreciation and amortization expense.
Capitalized leasing costs for the years ended December 31, 2007 and 2006 were as
follows:
21
Years Ended December 31,
Estimated --------------------------
Useful Life 2007 2006
------------------------------------------
(In thousands)
Development............................ Lease Life $ 3,108 2,110
New Tenants............................ Lease Life 2,805 2,557
New Tenants (first generation) (1)..... Lease Life 212 112
Renewal Tenants........................ Lease Life 2,124 1,987
--------------------------
Total capitalized leasing costs.. $ 8,249 6,766
==========================
Amortization of leasing costs (2)...... $ 5,339 4,304
==========================
(1) First generation refers to space that has never been occupied under
EastGroup's ownership.
(2) Includes discontinued operations.
Discontinued Operations
The results of operations, including interest expense (if applicable), for
the properties sold or held for sale during the periods reported are shown under
Discontinued Operations on the Consolidated Statements of Income. During 2007,
the Company sold one operating property and recognized a gain of $603,000. In
addition, the Company recognized deferred gains of $357,000 from previous sales.
During 2006, the Company sold certain real estate investments and
recognized total gains from discontinued operations of $5,727,000. See Notes
1(f) and 2 in the Notes to Consolidated Financial Statements for more
information related to discontinued operations and gain on the sales of these
properties. The following table presents the components of revenue and expense
for the years 2007 and 2006 for the real estate investments sold during 2008,
2007 and 2006.
Years Ended December 31,
--------------------------
Discontinued Operations 2007 2006
---------------------------------------------------------------------------------------------
(In thousands)
Income from real estate operations.............................. $ 887 3,180
Expenses from real estate operations............................ (279) (976)
--------------------------
Property net operating income from discontinued operations.... 608 2,204
Depreciation and amortization................................... (320) (1,019)
--------------------------
Income from real estate operations.............................. 288 1,185
Gain on sales of real estate investments...................... 960 5,727
--------------------------
Income from discontinued operations............................. $ 1,248 6,912
==========================
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements, which provides guidance for using fair value to measure assets and
liabilities. SFAS No. 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value but does not expand the use
of fair value in any new circumstances. As required under SFAS No. 133, the
Company accounts for its interest rate swap cash flow hedge on the Tower
Automotive mortgage at fair value. The provisions of Statement 157, with the
exception of nonfinancial assets and liabilities, were effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The application of Statement 157 to
the Company in 2008 had an immaterial impact on the Company's overall financial
position and results of operations.
The FASB deferred for one year Statement 157's fair value measurement
requirements for nonfinancial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis. These provisions
are included in FASB Staff Position (FSP) FAS 157-2 and are effective for fiscal
years beginning after November 15, 2008. The Company has determined that the
adoption of these provisions in 2009 had an immaterial impact on the Company's
overall financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations, which retains the fundamental requirements in SFAS No. 141 and
requires the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree be measured at fair value as of the
acquisition date. In addition, Statement 141R requires that any goodwill
acquired in the business combination be measured as a residual, and it provides
guidance in determining what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The Statement also requires that acquisition-related costs
be recognized as expenses in the periods in which the costs are incurred and the
services are received. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and may
not be applied before that date. The adoption of Statement 141R in 2009 had an
immaterial impact on the Company's overall financial position and results of
operations.
Also in December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, which is an amendment of
Accounting Research Bulletin (ARB) No. 51. Statement 160 provides guidance for
entities that prepare consolidated financial
22
statements that have an outstanding noncontrolling interest in one or more
subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, and may not be applied before that date. The adoption
of Statement 160 in 2009 had an immaterial impact on the Company's overall
financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, which is an amendment of FASB Statement No.
133. SFAS No. 161 requires all entities with derivative instruments to disclose
information regarding how and why the entity uses derivative instruments and how
derivative instruments and related hedged items affect the entity's financial
position, financial performance, and cash flows. The Statement is effective
prospectively for periods beginning on or after November 15, 2008.
During 2008, the FASB issued FSP FAS 142-3, which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 requires an entity
to disclose information that enables financial statement users to assess the
extent to which the expected future cash flows associated with the asset are
affected by the entity's intent and/or ability to renew or extend the
arrangement. The intent of this Staff Position is to improve the consistency
between the useful life of a recognized intangible asset under Statement 142 and
the period of expected cash flows used to measure the fair value of the asset
under Statement 141R and other U.S. generally accepted accounting principles.
FSP FAS 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The adoption of FSP FAS 142-3 in 2009 had an immaterial impact on the
Company's overall financial position and results of operations.
Also in 2008, the Emerging Issues Task Force (EITF) issued EITF 08-6,
Equity Method Investment Accounting Considerations, which applies to all
investments accounted for under the equity method and clarifies the accounting
for certain transactions and impairment considerations involving those
investments. EITF 08-6 is effective for financial statements issued for fiscal
years beginning on or after December 15, 2008, and interim periods within those
fiscal years. The adoption of EITF 08-6 in 2009 had an immaterial impact on the
Company's overall financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $83,610,000 for the year
ended December 31, 2008. The primary other sources of cash were from bank
borrowings, proceeds from mortgage notes, proceeds from common stock offerings,
proceeds from sales of land and real estate investments, and proceeds from sales
of securities. The Company distributed $52,192,000 in common and $1,982,000 in
preferred stock dividends during 2008. Other primary uses of cash were for bank
debt repayments, construction and development of properties, purchases of real
estate, the redemption of the Company's Series D Preferred Stock, principal
payments on mortgage notes payable, capital improvements at various properties,
purchases of securities, and advances on mortgage loans receivable.
Total debt at December 31, 2008 and 2007 is detailed below. The Company's
bank credit facilities have certain restrictive covenants, such as maintaining
debt service coverage and leverage ratios and maintaining insurance coverage,
and the Company was in compliance with all of its debt covenants at December 31,
2008 and 2007.
December 31,
--------------------------
2008 2007
--------------------------
(In thousands)
Mortgage notes payable - fixed rate......... $ 585,806 465,360
Bank notes payable - floating rate.......... 109,886 135,444
--------------------------
Total debt............................... $ 695,692 600,804
==========================
EastGroup has a four-year, $200 million unsecured revolving credit facility
with a group of seven banks that matures in January 2012. The Company
customarily uses this line of credit for acquisitions and developments. The
interest rate on the facility is based on the LIBOR index and varies according
to total liability to total asset value ratios (as defined in the credit
agreement), with an annual facility fee of 15 to 20 basis points. The interest
rate on each tranche is usually reset on a monthly basis and is currently LIBOR
plus 70 basis points with an annual facility fee of 20 basis points. The line of
credit has an option for a one-year extension at the Company's request.
Additionally, there is a provision under which the line may be expanded by $100
million contingent upon obtaining increased commitments from existing lenders or
commitments from additional lenders. At December 31, 2008, the weighted average
interest rate was 1.23% on a balance of $107,000,000. At February 25, 2009, the
Company's weighted average interest rate was 1.12% on a balance of $146,000,000.
The Company had an additional $54,000,000 remaining on this line of credit on
February 25, 2009.
The Company also has a four-year, $25 million unsecured revolving credit
facility with PNC Bank, N.A. that matures in January 2012. This credit facility
is customarily used for working capital needs. The interest rate on this working
cash line is based on the LIBOR index and varies according to total liability to
total asset value ratios (as defined in the credit agreement). Under this
facility, the Company's current interest rate is LIBOR plus 75 basis points with
no annual facility fee. At December 31, 2008, the interest rate was 1.19% on a
balance of $2,886,000. At February 25, 2009, the Company's interest rate was
1.23% on a balance of $5,529,000. The Company had an additional $19,471,000
remaining on this line of credit on February 25, 2009.
The current economic situation is impacting lenders, and it is more
difficult to obtain financing. Loan proceeds as a percentage of property value
is decreasing, and long-term interest rates are increasing. The Company believes
that its current lines of credit provide the capacity to fund debt maturities
and the operations of the Company for 2009 and 2010. The Company also believes
that it can still obtain mortgage financing from insurance companies and
financial institutions.
As market conditions permit, EastGroup issues equity, including preferred
equity, and/or employs fixed-rate, non-recourse first mortgage debt to replace
the short-term bank borrowings.
23
During the first quarter of 2008, the Company closed on a $78 million,
non-recourse first mortgage loan secured by properties containing 1.6 million
square feet. The loan has a fixed interest rate of 5.50%, a 7-year term and an
amortization schedule of 20 years. The proceeds of this note were used to reduce
variable rate bank borrowings.
During the second quarter, EastGroup sold 1,198,700 shares of its common
stock to Merrill Lynch, Pierce, Fenner & Smith Incorporated. The net proceeds
were $57.2 million after deducting the underwriting discount and other offering
expenses. The Company used the proceeds to repay indebtedness outstanding under
its revolving credit facility and for other general corporate purposes.
During the third quarter, the Company redeemed all 1,320,000 shares of its
7.95% Series D Cumulative Redeemable Preferred Stock. The redemption took place
on July 2, 2008, at a redemption price of $25.00 per share ($33,000,000) plus
accrued and unpaid dividends of $.011 per share for the period from July 1,
2008, through and including the redemption date, for an aggregated redemption
price of $25.011 per Series D Preferred Share. Original issuance costs of
$674,000 and additional redemption costs of $8,000 were charged against net
income available to common stockholders in conjunction with the redemption of
these shares.
During the fourth quarter, EastGroup closed on a $59 million, limited
recourse first mortgage loan secured by properties containing 1.3 million square
feet. The loan has a fixed interest rate of 5.75%, a 5-year term and a 20-year
amortization schedule. The loan has a recourse liability of $5 million which
will be released based on the secured properties generating certain base rent
amounts subsequent to January 1, 2011. The proceeds of this mortgage loan were
used to reduce variable rate bank borrowings.
Contractual Obligations
EastGroup's fixed, non-cancelable obligations as of December 31, 2008 were
as follows:
Payments Due by Period
------------------------------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
------------------------------------------------------------------------------
(In thousands)
Fixed Rate Debt Obligations (1)....... $ 585,806 49,168 102,971 115,349 318,318
Interest on Fixed Rate Debt........... 120,503 17,811 35,813 32,391 34,488
Variable Rate Debt Obligations (2).... 109,886 - - 109,886 -
Operating Lease Obligations:
Office Leases...................... 1,670 303 714 653 -
Ground Leases...................... 19,432 720 1,440 1,440 15,832
Development Obligations (3)........... 11,125 11,125 - - -
Tenant Improvements (4)............... 8,169 8,169 - - -
Purchase Obligations (5).............. 4,344 4,344 - - -
------------------------------------------------------------------------------
Total.............................. $ 860,935 91,640 140,938 259,719 368,638
==============================================================================
(1) These amounts are included on the Consolidated Balance Sheets. A portion of
this debt is backed by a letter of credit totaling $9,473,000 at December
31, 2008. The letter of credit expired in January 2009 in connection with
the repayment of the variable rate demand note on the Tower Automotive
Center. A portion of this debt also has a recourse liability of $5 million
which will be released based on the secured properties generating certain
base rent amounts subsequent to January 1, 2011.
(2) The Company's variable rate debt changes depending on the Company's cash
needs and, as such, both the principal amounts and the interest rates are
subject to variability. At December 31, 2008, the weighted average interest
rate was 1.23% on the variable rate debt due in January 2012.
(3) Represents commitments on properties under development, except for tenant
improvement obligations.
(4) Represents tenant improvement allowance obligations.
(5) At December 31, 2008, EastGroup was under contract to purchase 36 acres of
developable land in Orlando, Florida, as a second phase of the 2008 Sand
Lake land acquisition. This transaction is expected to close in the fourth
quarter of 2009.
The Company anticipates that its current cash balance, operating cash
flows, borrowings under its lines of credit, proceeds from new mortgage debt
and/or proceeds from the issuance of equity instruments will be adequate for (i)
operating and administrative expenses, (ii) normal repair and maintenance
expenses at its properties, (iii) debt service obligations, (iv) distributions
to stockholders, (v) capital improvements, (vi) purchases of properties, (vii)
development, and (viii) any other normal business activities of the Company,
both in the short- and long-term.
INFLATION AND OTHER ECONOMIC CONSIDERATIONS
Most of the Company's leases include scheduled rent increases.
Additionally, most of the Company's leases require the tenants to pay their pro
rata share of operating expenses, including real estate taxes, insurance and
common area maintenance, thereby reducing the Company's exposure to increases in
operating expenses resulting from inflation.
EastGroup's financial results are affected by general economic conditions
in the markets in which the Company's properties are located. An economic
recession, or other adverse changes in general or local economic conditions,
could result in the inability of some of the Company's existing tenants to make
lease payments and may impact our ability to (i) renew leases or re-lease space
as leases expire, or (ii) lease development space. In addition, an economic
downturn or recession could also lead to an increase in overall vacancy rates or
decline in rents we can charge to re-lease properties upon expiration of current
leases. In all of these cases, our cash flow would be adversely affected.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate changes primarily as a result of
its lines of credit and long-term debt maturities. This debt is used to maintain
liquidity and fund capital expenditures and expansion of the Company's real
estate investment portfolio and operations. The Company's objective for interest
rate risk management is to limit the impact of interest rate changes on earnings
and cash flows and to lower its overall borrowing costs. To achieve its
objectives, the Company borrows at fixed rates but also has several variable
rate bank lines as discussed under Liquidity and Capital Resources. The table
below presents the principal payments due and weighted average interest rates
for both the fixed rate and variable rate debt.
2009 2010 2011 2012 2013 Thereafter Total Fair Value
-----------------------------------------------------------------------------------------
Fixed rate debt (1) (in thousands).... $ 49,168 18,185 84,786 62,117 53,232 318,318 585,806 555,096 (2)
Weighted average interest rate........ 6.50% 5.89% 7.00% 6.61% 5.06% 5.63% 5.96%
Variable rate debt (in thousands)..... $ - - - 109,886 - - 109,886 109,886
Weighted average interest rate........ - - - 1.23% - - 1.23%
(1) The fixed rate debt shown above includes the Tower Automotive mortgage. See
below for additional information on the Tower mortgage.
(2) The fair value of the Company's fixed rate debt is estimated based on the
quoted market prices for similar issues or by discounting expected cash
flows at the rates currently offered to the Company for debt of the same
remaining maturities, as advised by the Company's bankers.
As the table above incorporates only those exposures that existed as of
December 31, 2008, it does not consider those exposures or positions that could
arise after that date. If the weighted average interest rate on the variable
rate bank debt as shown above changes by 10% or approximately 12 basis points,
interest expense and cash flows would increase or decrease by approximately
$135,000 annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $9,365,000 Tower Automotive Center
recourse mortgage, which is summarized in the table below. Under the swap
agreement, the Company effectively pays a fixed rate of interest over the term
of the agreement without the exchange of the underlying notional amount. This
swap is designated as a cash flow hedge and is considered to be fully effective
in hedging the variable rate risk associated with the Tower mortgage loan.
Changes in the fair value of the swap are recognized in accumulated other
comprehensive loss. The Company does not hold or issue this type of derivative
contract for trading or speculative purposes.
Current Maturity Fair Value Fair Value
Type of Hedge Notional Amount Date Reference Rate Fixed Rate at 12/31/08 at 12/31/07
-------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $9,365 12/31/10 1 month LIBOR 4.03% ($522) ($56)
On January 2, 2009, the mortgage note payable of $9,365,000 on the Tower
Automotive Center was repaid and replaced with another mortgage note payable for
the same amount. The previous recourse mortgage was a variable rate demand note,
and EastGroup had entered into a swap agreement to fix the LIBOR rate. In the
fourth quarter of 2008, the bond spread over LIBOR required to re-market the
notes increased from a historical range of 3 to 25 basis points to a range of
100 to 500 basis points. Due to the volatility of the bond spread costs,
EastGroup redeemed the note and replaced it with a recourse mortgage with a bank
on the same payment terms except for the interest rate. The effective interest
rate on the previous note was 5.30% until the fourth quarter of 2008 when the
weighted average rate was 8.02%. The effective rate on the new note, including
the swap, is 6.03%.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report may be deemed "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements, which generally are not
historical in nature. All statements that address operating performance, events
or developments that the Company expects or anticipates will occur in the
future, including statements relating to rent and occupancy growth, development
activity, the acquisition or sale of properties, general conditions in the
geographic areas where the Company operates and the availability of capital, are
forward-looking statements. Forward-looking statements are inherently subject to
known and unknown risks and uncertainties, many of which the Company cannot
predict, including, without limitation: changes in general economic conditions;
the extent of tenant defaults or of any early lease terminations; the Company's
ability to lease or re-lease space at current or anticipated rents; changes in
the supply of and demand for industrial/warehouse properties; increases in
interest rate levels; increases in operating costs; the availability of
financing; natural disasters and the Company's ability to obtain adequate
insurance; changes in governmental regulation, tax rates and similar matters;
and other risks associated with the development and acquisition of properties,
including risks that development projects may not be completed on schedule,
development or operating costs may be greater than anticipated, or that
acquisitions may not close as scheduled, and those additional factors discussed
under "Item 1A. Risk Factors." Although the Company believes that the
expectations reflected in the forward-looking statements are based upon
reasonable assumptions at the time made, the Company can give no assurance that
such expectations will be achieved. The Company assumes no obligation whatsoever
to
25
publicly update or revise any forward-looking statements. See also the Company's
reports to be filed from time to time with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Registrant's Consolidated Balance Sheets as of December 31, 2008 and
2007, and its Consolidated Statements of Income, Changes in Stockholders' Equity
and Cash Flows and Notes to Consolidated Financial Statements for the years
ended December 31, 2008, 2007 and 2006 and the Report of the Independent
Registered Public Accounting Firm thereon are included under Item 15 of this
report and are incorporated herein by reference. Unaudited quarterly results of
operations included in the Notes to Consolidated Financial Statements are also
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(i) Disclosure Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2008, the Company's disclosure controls and procedures were effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
(ii) Internal Control Over Financial Reporting.
(a) Management's annual report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). EastGroup's Management Report on Internal Control Over
Financial Reporting is set forth in Part IV, Item 15 of this Form 10-K on page
31 and is incorporated herein by reference.
(b) Report of the independent registered public accounting firm.
The report of KPMG LLP, the Company's independent registered public
accounting firm, on the Company's internal control over financial reporting is
set forth in Part IV, Item 15 of this Form 10-K on page 31 and is incorporated
herein by reference.
(c) Changes in internal control over financial reporting.
There was no change in the Company's internal control over financial
reporting during the Company's fourth fiscal quarter ended December 31, 2008
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Not applicable.
26
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information regarding directors is incorporated herein by reference
from the section entitled "Proposal One: Election of Directors" in the Company's
definitive Proxy Statement ("2009 Proxy Statement") to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, for
EastGroup's Annual Meeting of Stockholders to be held on May 27, 2009. The 2009
Proxy Statement will be filed within 120 days after the end of the Company's
fiscal year ended December 31, 2008.
The information regarding executive officers is incorporated herein by
reference from the section entitled "Executive Officers" in the Company's 2009
Proxy Statement.
The information regarding compliance with Section 16(a) of the Exchange Act
is incorporated herein by reference from the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's 2009 Proxy
Statement.
Information regarding EastGroup's code of business conduct and ethics found
in the subsection captioned "Available Information" in Item 1 of Part I hereof
is also incorporated herein by reference into this Item 10.
The information regarding the Company's audit committee, its members and
the audit committee financial experts is incorporated herein by reference from
the subsection entitled "Audit Committee" in the section entitled "Board
Committees and Meetings" in the Company's 2009 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information included under the following captions in the Company's 2009
Proxy Statement is incorporated herein by reference: "Compensation Discussion
and Analysis," "Summary Compensation Table," "Grants of Plan-Based Awards in
2008," "Outstanding Equity Awards at 2008 Fiscal Year-End," "Option Exercises
and Stock Vested in 2008," "Potential Payments upon Termination or Change in
Control," "Director Compensation" and "Compensation Committee Interlocks and
Insider Participation." The information included under the heading "Compensation
Committee Report" in the Company's 2009 Proxy Statement is incorporated herein
by reference; however, this information shall not be deemed to be "soliciting
material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, or
to the liabilities of Section 18 of the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the sections entitled
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management and Directors" in the Company's 2009 Proxy Statement.
The following table summarizes the Company's equity compensation plan
information as of December 31, 2008.
Equity Compensation Plan Information
(a) (b) (c)
Plan category Number of securities to be Weighted-average Number of securities remaining
issued upon exercise of exercise price of available for future issuance
outstanding options, outstanding options, under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected in
column (a))
Equity compensation
plans approved by
security holders 93,686 $21.65 1,723,558
Equity compensation
plans not approved
by security holders - - -
------------------------------------------------------------------------------------------
Total 93,686 $21.65 1,723,558
==========================================================================================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information regarding transactions with related parties and director
independence is incorporated herein by reference from the sections entitled
"Independent Directors" and "Certain Transactions and Relationships" in the
Company's 2009 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information regarding principal auditor fees and services is
incorporated herein by reference from the section entitled "Independent
Registered Public Accounting Firm" in the Company's 2009 Proxy Statement.
27
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Index to Financial Statements:
Page
(a) (1) Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm 30
Management Report on Internal Control Over Financial Reporting 31
Report of Independent Registered Public Accounting Firm 31
Consolidated Balance Sheets - December 31, 2008 and 2007 32
Consolidated Statements of Income - Years ended December 31, 2008, 2007 and 2006 33
Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2008, 2007 and 2006 34
Consolidated Statements of Cash Flows - Years ended December 31, 2008, 2007 and 2006 35
Notes to Consolidated Financial Statements 36
(2) Consolidated Financial Statement Schedules:
Schedule III - Real Estate Properties and Accumulated Depreciation 53
Schedule IV - Mortgage Loans on Real Estate 60
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted, or
the required information is included in the Notes to Consolidated Financial
Statements.
(3) Exhibits required by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation (incorporated by reference to
Appendix B to the Company's Proxy Statement for its Annual
Meeting of Stockholders held on June 5, 1997).
(b) Bylaws of the Company (incorporated by reference to Exhibit
3.1 to the Company's Form 8-K filed December 10, 2008).
(c) Articles Supplementary of the Company relating to the
reclassification of the Series C Preferred Stock and the
7.95% Series D Cumulative Redeemable Preferred Stock to the
Company's common stock (incorporated by reference to Exhibit
3.2 to the Company's Form 8-K filed December 10, 2008).
(10) Material Contracts (*Indicates management or compensatory
agreement):
(a) EastGroup Properties, Inc. 1991 Directors Stock Option Plan,
as Amended (incorporated by reference to Exhibit B to the
Company's Proxy Statement for its Annual Meeting of
Stockholders held on December 8, 1994).*
(b) EastGroup Properties, Inc. 1994 Management Incentive Plan,
as Amended and Restated (incorporated by reference to
Appendix A to the Company's Proxy Statement for its Annual
Meeting of Stockholders held on June 2, 1999).*
(c) Amendment No. 1 to the Amended and Restated 1994 Management
Incentive Plan (incorporated by reference to Exhibit 10(c)
to the Company's Form 8-K filed January 8, 2007).*
(d) EastGroup Properties, Inc. 2000 Directors Stock Option Plan
(incorporated by reference to Appendix A to the Company's
Proxy Statement for its Annual Meeting of Stockholders held
on June 1, 2000).*
(e) EastGroup Properties, Inc. 2004 Equity Incentive Plan
(incorporated by reference to Appendix D to the Company's
Proxy Statement for its Annual Meeting of Stockholders held
on May 27, 2004).*
(f) Amendment No. 1 to the 2004 Equity Incentive Plan
(incorporated by reference to Exhibit 10(f) to the Company's
Form 10-K for the year ended December 31, 2006). *
28
(g) Amendment No. 2 to the 2004 Equity Incentive Plan
(incorporated by reference to Exhibit 10(d) to the Company's
Form 8-K filed January 8, 2007).*
(h) EastGroup Properties, Inc. 2005 Directors Equity Incentive
Plan (incorporated by reference to Appendix B to the
Company's Proxy Statement for its Annual Meeting of
Stockholders held on June 2, 2005).*
(i) Amendment No. 1 to the 2005 Directors Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed June 6, 2006).*
(j) Amendment No. 2 to the 2005 Directors Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed June 3, 2008).*
(k) Form of Severance and Change in Control Agreement that the
Company has entered into with Leland R. Speed, David H.
Hoster II and N. Keith McKey (incorporated by reference to
Exhibit 10(a) to the Company's Form 8-K filed January 7,
2009).*
(l) Form of Severance and Change in Control Agreement that the
Company has entered into with John F. Coleman, William D.
Petsas, Brent W. Wood and C. Bruce Corkern (incorporated by
reference to Exhibit 10(b) to the Company's Form 8-K filed
January 7, 2009).*
(m) Compensation Program for Non-Employee Directors (a written
description thereof is set forth in Item 5.02 of the
Company's Form 8-K filed June 3, 2008).*
(n) Annual Cash Bonus and 2008 Annual Long-Term Incentive
Performance Goals (a written description thereof is set
forth in Item 5.02 of the Company's Form 8-K filed June 3,
2008).*
(o) Multi-Year Long-Term Incentive Performance Goals (a written
description thereof is set forth in Item 1.01 of the
Company's Form 8-K filed June 6, 2006).*
(p) Second Amended and Restated Credit Agreement Dated January
4, 2008 among EastGroup Properties, L.P.; EastGroup
Properties, Inc.; PNC Bank, National Association, as
Administrative Agent; Regions Bank and SunTrust Bank as
Co-Syndication Agents; Wells Fargo Bank, National
Association as Documentation Agent; and PNC Capital Markets
LLC, as Sole Lead Arranger and Sole Bookrunner; and the
Lenders thereunder (incorporated by reference to Exhibit
10.1 to the Company's Form 8-K filed January 10, 2008).
(21) Subsidiaries of EastGroup Properties, Inc. (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(31) Rule 13a-14(a)/15d-14(a) Certifications (pursuant to Section 302
of the Sarbanes-Oxley Act of 2002)
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
(32) Section 1350 Certifications (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002)
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
We have audited the accompanying consolidated balance sheets of EastGroup
Properties, Inc. and subsidiaries (the Company) as of December 31, 2008 and
2007, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EastGroup
Properties, Inc. and subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company's internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated February 26, 2009, expressed an unqualified opinion on the effectiveness
of the Company's internal control over financial reporting.
/s/ KPMG LLP
Jackson, Mississippi
February 26, 2009
30
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
EastGroup's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer,
EastGroup conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on EastGroup's evaluation under the framework in Internal
Control - Integrated Framework, management concluded that our internal control
over financial reporting was effective as of December 31, 2008.
/s/ EASTGROUP PROPERTIES, INC.
Jackson, Mississippi
February 26, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
We have audited EastGroup Properties, Inc. and subsidiaries' (the Company)
internal control over financial reporting as of December 31, 2008, based on the
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management Report
on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company's internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, EastGroup Properties, Inc. and subsidiaries maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of EastGroup Properties, Inc. and subsidiaries as of December 31, 2008
and 2007, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2008, and our report dated February 26, 2009,
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Jackson, Mississippi
February 26, 2009
31
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------------------------
2008 2007
---------------------------------------------------
(In thousands, except for share and per share data)
ASSETS
Real estate properties....................................................... $ 1,252,282 1,114,966
Development.................................................................. 150,354 152,963
---------------------------------------------------
1,402,636 1,267,929
Less accumulated depreciation.............................................. (310,351) (269,132)
---------------------------------------------------
1,092,285 998,797
Unconsolidated investment.................................................... 2,666 2,630
Cash......................................................................... 293 724
Other assets................................................................. 60,961 53,682
---------------------------------------------------
TOTAL ASSETS............................................................... $ 1,156,205 1,055,833
===================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable....................................................... $ 585,806 465,360
Notes payable to banks....................................................... 109,886 135,444
Accounts payable & accrued expenses.......................................... 32,838 34,179
Other liabilities............................................................ 14,299 16,153
---------------------------------------------------
742,829 651,136
---------------------------------------------------
---------------------------------------------------
Minority interest in joint ventures.......................................... 2,536 2,312
---------------------------------------------------
STOCKHOLDERS' EQUITY
Series C Preferred Shares; $.0001 par value; no shares authorized at
December 31, 2008 and 600,000 shares authorized at December 31, 2007;
no shares issued........................................................... - -
Series D 7.95% Cumulative Redeemable Preferred Shares and additional
paid-in capital; $.0001 par value; 1,320,000 shares authorized and issued
at December 31, 2007; stated liquidation preference of $33,000 at
December 31, 2007; redeemed July 2, 2008................................... - 32,326
Common shares; $.0001 par value; 70,000,000 shares authorized at
December 31, 2008 and 68,080,000 at December 31, 2007; 25,070,401
shares issued and outstanding at December 31, 2008 and
23,808,768 at December 31, 2007............................................ 3 2
Excess shares; $.0001 par value; 30,000,000 shares authorized;
no shares issued........................................................... - -
Additional paid-in capital on common shares.................................. 528,452 467,573
Distributions in excess of earnings.......................................... (117,093) (97,460)
Accumulated other comprehensive loss......................................... (522) (56)
---------------------------------------------------
410,840 402,385
---------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $ 1,156,205 1,055,833
===================================================
See accompanying Notes to Consolidated Financial Statements.
32
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------------------
2008 2007 2006
----------------------------------------------------
(In thousands, except per share data)
REVENUES
Income from real estate operations...................................... $ 168,327 150,083 132,417
Other income............................................................ 248 92 182
----------------------------------------------------
168,575 150,175 132,599
----------------------------------------------------
EXPENSES
Expenses from real estate operations.................................... 47,374 40,926 37,014
Depreciation and amortization........................................... 51,221 47,738 41,198
General and administrative.............................................. 8,547 8,295 7,401
----------------------------------------------------
107,142 96,959 85,613
----------------------------------------------------
OPERATING INCOME.......................................................... 61,433 53,216 46,986
OTHER INCOME (EXPENSE)
Equity in earnings of unconsolidated investment......................... 316 285 287
Gain on sales of non-operating real estate.............................. 321 2,602 123
Gain on sales of securities............................................. 435 - -
Interest income......................................................... 293 306 142
Interest expense........................................................ (30,192) (27,314) (24,616)
Minority interest in joint ventures..................................... (626) (609) (600)
----------------------------------------------------
INCOME FROM CONTINUING OPERATIONS......................................... 31,980 28,486 22,322
----------------------------------------------------
DISCONTINUED OPERATIONS
Income from real estate operations...................................... 130 288 1,185
Gain on sales of real estate investments................................ 2,032 960 5,727
----------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS ...................................... 2,162 1,248 6,912
----------------------------------------------------
NET INCOME................................................................ 34,142 29,734 29,234
Preferred dividends-Series D............................................ 1,326 2,624 2,624
Costs on redemption of Series D preferred shares........................ 682 - -
----------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS............................... $ 32,134 27,110 26,610
====================================================
BASIC PER COMMON SHARE DATA
Income from continuing operations....................................... $ 1.22 1.10 .88
Income from discontinued operations..................................... .09 .05 .31
----------------------------------------------------
Net income available to common stockholders............................. $ 1.31 1.15 1.19
====================================================
Weighted average shares outstanding..................................... 24,503 23,562 22,372
====================================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations....................................... $ 1.21 1.09 .87
Income from discontinued operations..................................... .09 .05 .30
----------------------------------------------------
Net income available to common stockholders............................. $ 1.30 1.14 1.17
====================================================
Weighted average shares outstanding..................................... 24,653 23,781 22,692
====================================================
Dividends declared per common share....................................... $ 2.08 2.00 1.96
====================================================
See accompanying Notes to Consolidated Financial Statements.
33
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Distributions Other
Preferred Common Paid-In In Excess Comprehensive
Stock Stock Capital Of Earnings Income (Loss) Total
---------------------------------------------------------------------------------
(In thousands, except for share and per share data)
BALANCE, DECEMBER 31, 2005........................ $ 32,326 2 390,155 (57,930) 311 364,864
Comprehensive income
Net income...................................... - - - 29,234 - 29,234
Net unrealized change in fair value of
interest rate swap............................ - - - - 3 3
-----------
Total comprehensive income.................... 29,237
-----------
Common dividends declared - $1.96 per share....... - - - (45,695) - (45,695)
Preferred dividends declared - $1.9876 per share.. - - - (2,624) - (2,624)
Issuance of 1,437,500 shares of common stock,
common stock offering, net of expenses ......... - - 68,112 - - 68,112
Stock-based compensation, net of forfeitures...... - - 2,943 - - 2,943
Issuance of 118,269 shares of common stock,
options exercised............................... - - 2,154 - - 2,154
Issuance of 6,236 shares of common stock,
dividend reinvestment plan...................... - - 305 - - 305
9,392 shares withheld to satisfy tax withholding
obligations in connection with the vesting of
restricted stock................................ - - (499) - - (499)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006........................ 32,326 2 463,170 (77,015) 314 418,797
Comprehensive income
Net income...................................... - - - 29,734 - 29,734
Net unrealized change in fair value of
interest rate swap............................ - - - - (370) (370)
-----------
Total comprehensive income.................... 29,364
-----------
Common dividends declared - $2.00 per share....... - - - (47,555) - (47,555)
Preferred dividends declared - $1.9876 per share.. - - - (2,624) - (2,624)
Stock-based compensation, net of forfeitures...... - - 3,198 - - 3,198
Issuance of 67,150 shares of common stock,
options exercised............................... - - 1,475 - - 1,475
Issuance of 6,281 shares of common stock,
dividend reinvestment plan...................... - - 279 - - 279
11,382 shares withheld to satisfy tax withholding
obligations in connection with the vesting of
restricted stock................................ - - (549) - - (549)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2007........................ 32,326 2 467,573 (97,460) (56) 402,385
Comprehensive income
Net income...................................... - - - 34,142 - 34,142
Net unrealized change in fair value of
interest rate swap............................ - - - - (466) (466)
-----------
Total comprehensive income.................... 33,676
-----------
Common dividends declared - $2.08 per share....... - - - (51,767) - (51,767)
Preferred dividends declared - $1.0048 per share.. - - - (1,326) - (1,326)
Redemption of 1,320,000 shares of Series D
preferred stock................................. (32,326) - - (682) - (33,008)
Stock-based compensation, net of forfeitures...... - - 3,176 - - 3,176
Issuance of 1,198,700 shares of common stock,
common stock offering, net of expenses.......... - 1 57,178 - - 57,179
Issuance of 25,720 shares of common stock,
options exercised............................... - - 526 - - 526
Issuance of 6,627 shares of common stock,
dividend reinvestment plan...................... - - 281 - - 281
7,150 shares withheld to satisfy tax withholding
obligations in connection with the vesting of
restricted stock ............................... - - (282) - - (282)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2008........................ $ - 3 528,452 (117,093) (522) 410,840
=================================================================================
See accompanying Notes to Consolidated Financial Statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
2008 2007 2006
-----------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income.......................................................................... $ 34,142 29,734 29,234
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization from continuing operations.......................... 51,221 47,738 41,198
Depreciation and amortization from discontinued operations........................ 71 320 1,019
Minority interest depreciation and amortization................................... (201) (174) (151)
Amortization of mortgage loan premiums............................................ (120) (117) (403)
Gain on sales of land and real estate investments................................. (2,353) (3,562) (5,850)
Gain on sales of securities....................................................... (435) - -
Amortization of discount on mortgage loan receivable.............................. (117) - -
Stock-based compensation expense.................................................. 2,265 2,220 2,125
Equity in earnings of unconsolidated investment, net of distributions............. (36) (35) 23
Changes in operating assets and liabilities:
Accrued income and other assets................................................. (787) 3,506 (4,603)
Accounts payable, accrued expenses and prepaid rent............................. (40) 6,709 4,141
-----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. 83,610 86,339 66,733
-----------------------------------------
INVESTING ACTIVITIES
Real estate development............................................................. (85,441) (112,960) (77,666)
Purchases of real estate............................................................ (46,282) (57,838) (19,539)
Real estate improvements............................................................ (15,210) (15,881) (13,470)
Proceeds from sales of land and real estate investments............................. 11,728 6,357 38,412
Advances on mortgage loans receivable............................................... (4,994) - (185)
Repayments on mortgage loans receivable............................................. 871 30 23
Purchases of securities............................................................. (7,534) - -
Proceeds from sales of securities................................................... 7,969 - -
Changes in other assets and other liabilities....................................... (13,289) (3,786) (2,792)
-----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................................. (152,182) (184,078) (75,217)
-----------------------------------------
FINANCING ACTIVITIES
Proceeds from bank borrowings....................................................... 331,644 332,544 191,689
Repayments on bank borrowings....................................................... (357,202) (226,166) (279,387)
Proceeds from mortgage notes payable................................................ 137,000 75,000 116,000
Principal payments on mortgage notes payable........................................ (16,434) (26,963) (45,071)
Debt issuance costs................................................................. (2,372) (701) (1,048)
Distributions paid to stockholders.................................................. (54,174) (50,680) (47,843)
Redemption of Series D preferred shares............................................. (33,008) - -
Proceeds from common stock offerings................................................ 57,179 - 68,112
Proceeds from exercise of stock options............................................. 526 1,475 2,154
Proceeds from dividend reinvestment plan............................................ 281 279 305
Other............................................................................... 4,701 (7,265) 2,598
-----------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................................. 68,141 97,523 7,509
-----------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS................................................. (431) (216) (975)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...................................... 724 940 1,915
-----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................ $ 293 724 940
=========================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amount capitalized of $6,946, $6,086 and $4,336
for 2008, 2007 and 2006, respectively............................................. $ 29,573 25,838 23,870
Fair value of common stock awards issued to employees and directors, net of
forfeitures....................................................................... 1,255 1,443 3,234
See accompanying Notes to Consolidated Financial Statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of EastGroup
Properties, Inc., its wholly-owned subsidiaries and its investment in any joint
ventures in which the Company has a controlling interest. At December 31, 2008,
2007 and 2006, the Company had a controlling interest in two joint ventures: the
80% owned University Business Center and the 80% owned Castilian Research
Center. The Company records 100% of the joint ventures' assets, liabilities,
revenues and expenses with minority interests provided for in accordance with
the joint venture agreements. The equity method of accounting is used for the
Company's 50% undivided tenant-in-common interest in Industry Distribution
Center II. All significant intercompany transactions and accounts have been
eliminated in consolidation.
(b) Income Taxes
EastGroup, a Maryland corporation, has qualified as a real estate
investment trust (REIT) under Sections 856-860 of the Internal Revenue Code and
intends to continue to qualify as such. To maintain its status as a REIT, the
Company is required to distribute 90% of its ordinary taxable income to its
stockholders. The Company has the option of (i) reinvesting the sales price of
properties sold through tax-deferred exchanges, allowing for a deferral of
capital gains on the sale, (ii) paying out capital gains to the stockholders
with no tax to the Company, or (iii) treating the capital gains as having been
distributed to the stockholders, paying the tax on the gain deemed distributed
and allocating the tax paid as a credit to the stockholders. The Company
distributed all of its 2008, 2007 and 2006 taxable income to its stockholders.
Accordingly, no provision for income taxes was necessary. The following table
summarizes the federal income tax treatment for all distributions by the Company
for the years ended 2008, 2007 and 2006.
Federal Income Tax Treatment of Share Distributions
Years Ended December 31,
-----------------------------------------
2008 2007 2006
-----------------------------------------
Common Share Distributions:
Ordinary income....................................... $ 2.0758 1.7449 1.3660
Return of capital..................................... - .1273 -
Unrecaptured Section 1250 long-term capital gain...... .0042 .0236 .4160
Other long-term capital gain.......................... - .1042 .1780
-----------------------------------------
Total Common Distributions.............................. $ 2.0800 2.0000 1.9600
=========================================
Series D Preferred Share Distributions:
Ordinary income....................................... $ 1.0024 1.8608 1.3852
Unrecaptured Section 1250 long-term capital gain...... .0024 .0234 .4220
Other long-term capital gain.......................... - .1034 .1804
-----------------------------------------
Total Preferred D Distributions......................... $ 1.0048 1.9876 1.9876
=========================================
EastGroup adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109, on January 1, 2007. With few
exceptions, the Company's 2004 and earlier tax years are closed for examination
by U.S. federal, state and local tax authorities. In accordance with the
provisions of FIN 48, the Company had no significant uncertain tax positions as
of December 31, 2008 and 2007.
The Company's income may differ for tax and financial reporting purposes
principally because of (1) the timing of the deduction for the provision for
possible losses and losses on investments, (2) the timing of the recognition of
gains or losses from the sale of investments, (3) different depreciation methods
and lives, (4) real estate properties having a different basis for tax and
financial reporting purposes, (5) mortgage loans having a different basis for
tax and financial reporting purposes, thereby producing different gains upon
collection of these loans, and (6) differences in book and tax allowances and
timing for stock-based compensation expense.
(c) Income Recognition
Minimum rental income from real estate operations is recognized on a
straight-line basis. The straight-line rent calculation on leases includes the
effects of rent concessions and scheduled rent increases, and the calculated
straight-line rent income is recognized over the lives of the individual leases.
The Company maintains allowances for doubtful accounts receivable, including
straight-line rent receivable, based upon estimates determined by management.
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.
Revenue is recognized on payments received from tenants for early
terminations after all criteria have been met in accordance with Statement of
Financial Accounting Standards (SFAS) No. 13, Accounting for Leases.
The Company recognizes gains on sales of real estate in accordance with the
principles set forth in SFAS No. 66, Accounting for Sales of Real Estate. Upon
closing of real estate transactions, the provisions of SFAS No. 66 require
consideration for the transfer of rights of ownership to the purchaser, receipt
of an adequate cash down payment from the purchaser, adequate continuing
investment by the purchaser
36
and no substantial continuing involvement by the Company. If the requirements
for recognizing gains have not been met, the sale and related costs are
recorded, but the gain is deferred and recognized by a method other than the
full accrual method.
The Company recognizes interest income on mortgage loans on the accrual
method unless a significant uncertainty of collection exists. If a significant
uncertainty exists, interest income is recognized as collected. Discounts on
mortgage loans receivable are amortized over the lives of the loans using a
method that does not differ materially from the interest method. The Company
evaluates the collectability of both interest and principal on each of its loans
to determine whether the loans are impaired. A loan is considered to be impaired
when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the existing contractual
terms. When a loan is considered to be impaired, the amount of loss is
calculated by comparing the recorded investment to the value determined by
discounting the expected future cash flows at the loan's effective interest rate
or to the fair value of the underlying collateral (if the loan is
collateralized) less costs to sell. As of December 31, 2008 and 2007, there was
no significant uncertainty of collection; therefore, interest income was
recognized, and the discount on mortgage loans receivable was amortized. In
addition, the Company determined that no allowance for collectability of the
mortgage notes receivable was necessary.
(d) Real Estate Properties
EastGroup has one reportable segment-industrial properties. These
properties are concentrated in major Sunbelt markets of the United States,
primarily in the states of Florida, Texas, Arizona and California, have similar
economic characteristics and also meet the other criteria that permit the
properties to be aggregated into one reportable segment. The Company reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows (including
estimated future expenditures necessary to substantially complete the asset)
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Real estate properties held for investment are reported at the lower
of the carrying amount or fair value. As of December 31, 2008 and 2007, the
Company determined that no impairment charges on the Company's real estate
properties were necessary. Depreciation of buildings and other improvements,
including personal property, is computed using the straight-line method over
estimated useful lives of generally 40 years for buildings and 3 to 15 years for
improvements and personal property. Building improvements are capitalized, while
maintenance and repair expenses are charged to expense as incurred. Significant
renovations and improvements that extend the useful life of or improve the
assets are capitalized. Depreciation expense for continuing and discontinued
operations was $42,166,000, $39,688,000 and $35,428,000 for 2008, 2007 and 2006,
respectively.
(e) Development
During the period in which a property is under development, costs
associated with development (i.e., land, construction costs, interest expense,
property taxes and other direct and indirect costs associated with development)
are aggregated into the total capitalized costs of the property. Included in
these costs are management's estimates for the portions of internal costs
(primarily personnel costs) that are deemed directly or indirectly related to
such development activities. As the property becomes occupied, costs are
capitalized only for the portion of the building that remains vacant. When the
property becomes 80% occupied or one year after completion of the shell
construction (whichever comes first), capitalization of development costs
ceases. The properties are then transferred to real estate properties, and
depreciation commences on the entire property (excluding the land).
(f) Real Estate Held for Sale
The Company considers a real estate property to be held for sale when it
meets the criteria established under SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, including when it is probable that the
property will be sold within a year. A key indicator of probability of sale is
whether the buyer has a significant amount of earnest money at risk. Real estate
properties that are held for sale are reported at the lower of the carrying
amount or fair value less estimated costs to sell and are not depreciated while
they are held for sale. In accordance with the guidelines established under SFAS
No. 144, the results of operations for the operating properties sold or held for
sale during the reported periods are shown under Discontinued Operations on the
Consolidated Statements of Income. Interest expense is not generally allocated
to the properties that are held for sale or whose operations are included under
Discontinued Operations unless the mortgage is required to be paid in full upon
the sale of the property.
(g) Derivative Instruments and Hedging Activities
The Company applies SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which requires that all derivatives be recognized as either
assets or liabilities on the Consolidated Balance Sheets and measured at fair
value. Changes in fair value are to be reported either in earnings or as a
component of stockholders' equity depending on the intended use of the
derivative and the resulting designation. Entities applying hedge accounting are
required to establish, at the inception of the hedge, the method used to assess
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. The Company has an interest
rate swap agreement, which is summarized in Note 6.
(h) Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
(i) Amortization
Debt origination costs are deferred and amortized over the term of each
loan using the effective interest method. Amortization of loan costs for
continuing operations was $975,000, $911,000 and $819,000 for 2008, 2007 and
2006, respectively.
37
Leasing costs are deferred and amortized using the straight-line method
over the term of the lease. Leasing costs amortization expense for continuing
and discontinued operations was $5,882,000, $5,339,000 and $4,304,000 for 2008,
2007 and 2006, respectively. Amortization expense for in-place lease intangibles
is disclosed in Business Combinations and Acquired Intangibles.
(j) Business Combinations and Acquired Intangibles
Upon acquisition of real estate properties, the Company applies the
principles of SFAS No. 141, Business Combinations, to determine the allocation
of the purchase price among the individual components of both the tangible and
intangible assets based on their respective fair values. The Company determines
whether any financing assumed is above or below market based upon comparison to
similar financing terms for similar properties. The cost of the properties
acquired may be adjusted based on indebtedness assumed from the seller that is
determined to be above or below market rates. Factors considered by management
in allocating the cost of the properties acquired include an estimate of
carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases. The allocation to tangible
assets (land, building and improvements) is based upon management's
determination of the value of the property as if it were vacant using discounted
cash flow models.
The remaining purchase price is allocated among three categories of
intangible assets consisting of the above or below market component of in-place
leases, the value of in-place leases and the value of customer relationships.
The value allocable to the above or below market component of an acquired
in-place lease is determined based upon the present value (using a discount rate
which reflects the risks associated with the acquired leases) of the difference
between (i) the contractual amounts to be paid pursuant to the lease over its
remaining term and (ii) management's estimate of the amounts that would be paid
using fair market rates over the remaining term of the lease. The amounts
allocated to above and below market leases are included in Other Assets and
Other Liabilities, respectively, on the Consolidated Balance Sheets and are
amortized to rental income over the remaining terms of the respective leases.
The total amount of intangible assets is further allocated to in-place lease
values and to customer relationship values based upon management's assessment of
their respective values. These intangible assets are included in Other Assets on
the Consolidated Balance Sheets and are amortized over the remaining term of the
existing lease or the anticipated life of the customer relationship, as
applicable. Amortization expense for in-place lease intangibles was $3,244,000,
$3,031,000 and $2,485,000 for 2008, 2007 and 2006, respectively. Amortization of
above and below market leases was immaterial for all periods presented.
Projected amortization of in-place lease intangibles for the next five years as
of December 31, 2008 is as follows:
Years Ending December 31, (In thousands)
--------------------------------------------------------------
2009...................................... $ 1,990
2010...................................... 1,157
2011...................................... 614
2012...................................... 313
2013...................................... 150
During 2008, EastGroup purchased five operating properties, one property
for re-development, and 125 acres of developable land. The Company purchased
these real estate investments for a total cost of $58,202,000, of which
$39,018,000 was allocated to real estate properties and $17,144,000 to
development. In accordance with SFAS No. 141, intangibles associated with the
purchase of real estate were allocated as follows: $2,143,000 to in-place lease
intangibles, $252,000 to above market leases (both included in Other Assets on
the Consolidated Balance Sheets) and $355,000 to below market leases (included
in Other Liabilities on the Consolidated Balance Sheets). These costs are
amortized over the remaining lives of the associated leases in place at the time
of acquisition.
Also in 2008, EastGroup acquired one non-operating property as part of the
Orlando build-to-suit transaction with United Stationers. The Company purchased
and then sold this building through its taxable REIT subsidiary and recognized a
gain of $294,000.
The total cost of the seven operating properties acquired in 2007 was
$57,246,000, of which $53,952,000 was allocated to real estate properties. In
accordance with SFAS No. 141, intangibles associated with the purchases of real
estate were allocated as follows: $3,661,000 to in-place lease intangibles,
$246,000 to above market leases and $613,000 to below market leases. Also in
2007, EastGroup acquired one property for re-development and 140.6 acres of
developable land for $16,405,000.
The Company periodically reviews the recoverability of goodwill (at least
annually) and the recoverability of other intangibles (on a quarterly basis) for
possible impairment. In management's opinion, no material impairment of goodwill
and other intangibles existed at December 31, 2008 and 2007.
(k) Stock-Based Compensation
The Company has a management incentive plan that was approved by
shareholders and adopted in 2004, which authorizes the issuance of common stock
to employees in the form of options, stock appreciation rights, restricted
stock, deferred stock units, performance shares, stock bonuses, and stock.
Typically, the Company issues new shares to fulfill stock grants or upon the
exercise of stock options.
Under the modified prospective application method, the Company continues to
recognize compensation cost on a straight-line basis over the service period for
awards that precede the adoption of SFAS No. 123 (Revised 2004), Share-Based
Payment, on January 1, 2006. (Prior to the adoption of SFAS No. 123R, the
Company had adopted the fair value recognition provisions of SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of SFAS No. 123, Accounting for Stock-Based Compensation, prospectively to all
awards granted, modified, or settled after January 1, 2002.) The cost for
performance-based awards after January 1, 2006 is determined using the graded
vesting attribution method which recognizes each separate vesting portion of the
award as a separate award on a straight-line basis
38
over the requisite service period. This method accelerates the expensing of the
award compared to the straight-line method. The cost for market-based awards
after January 1, 2006 and awards that only require service are expensed on a
straight-line basis over the requisite service periods.
The total compensation cost for service and performance based awards is
based upon the fair market value of the shares on the grant date, adjusted for
estimated forfeitures. The grant date fair value for awards that are subject to
a market condition are determined using a simulation pricing model developed to
specifically accommodate the unique features of the awards.
During the restricted period for awards not subject to contingencies, the
Company accrues dividends and holds the certificates for the shares; however,
the employee can vote the shares. For shares subject to contingencies, dividends
are accrued based upon the number of shares expected to vest. Share certificates
and dividends are delivered to the employee as they vest.
(l) Earnings Per Share
Basic earnings per share (EPS) represents the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period. The Company's basic EPS is calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding.
Diluted EPS represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of common shares
for all dilutive potential common shares outstanding during the reporting
period. The Company calculates diluted EPS by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
plus the dilutive effect of nonvested restricted stock and stock options had the
options been exercised. The dilutive effect of stock options and their
equivalents (such as nonvested restricted stock) was determined using the
treasury stock method which assumes exercise of the options as of the beginning
of the period or when issued, if later, and assumes proceeds from the exercise
of options are used to purchase common stock at the average market price during
the period.
(m) Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles (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.
(n) Risks and Uncertainties
The state of the overall economy can significantly impact the Company's
operational performance and thus, impact its financial position. Should
EastGroup experience a significant decline in operational performance, it may
affect the Company's ability to make distributions to its shareholders and
service debt or meet other financial obligations.
(o) New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which provides guidance for using fair value to measure assets and liabilities.
SFAS No. 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value but does not expand the use of fair
value in any new circumstances. As required under SFAS No. 133, the Company
accounts for its interest rate swap cash flow hedge on the Tower Automotive
mortgage at fair value. The provisions of Statement 157, with the exception of
nonfinancial assets and liabilities, were effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The application of Statement 157 to the Company in
2008 had an immaterial impact on the Company's overall financial position and
results of operations.
The FASB deferred for one year Statement 157's fair value measurement
requirements for nonfinancial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis. These provisions
are included in FASB Staff Position (FSP) FAS 157-2 and are effective for fiscal
years beginning after November 15, 2008. The Company has determined that the
adoption of these provisions in 2009 had an immaterial impact on the Company's
overall financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations, which retains the fundamental requirements in SFAS No. 141 and
requires the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree be measured at fair value as of the
acquisition date. In addition, Statement 141R requires that any goodwill
acquired in the business combination be measured as a residual, and it provides
guidance in determining what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The Statement also requires that acquisition-related costs
be recognized as expenses in the periods in which the costs are incurred and the
services are received. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and may
not be applied before that date. The adoption of Statement 141R in 2009 had an
immaterial impact on the Company's overall financial position and results of
operations.
Also in December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, which is an amendment of
Accounting Research Bulletin (ARB) No. 51. Statement 160 provides guidance for
entities that prepare consolidated financial statements that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008, and may not
be applied before that date. The adoption of Statement 160 in 2009 had an
immaterial impact on the Company's overall financial position and results of
operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, which is an amendment of FASB Statement No.
133. SFAS No. 161 requires all entities with derivative instruments to disclose
information regarding how and why the entity uses derivative instruments and how
derivative instruments and related hedged items affect the entity's financial
position, financial performance, and cash flows. The Statement is effective
prospectively for periods beginning on or after November 15, 2008.
During 2008, the FASB issued FSP FAS 142-3, which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill
39
and Other Intangible Assets. FSP FAS 142-3 requires an entity to disclose
information that enables financial statement users to assess the extent to which
the expected future cash flows associated with the asset are affected by the
entity's intent and/or ability to renew or extend the arrangement. The intent of
this Staff Position is to improve the consistency between the useful life of a
recognized intangible asset under Statement 142 and the period of expected cash
flows used to measure the fair value of the asset under Statement 141R and other
U.S. generally accepted accounting principles. FSP FAS 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The adoption of FSP FAS 142-3 in
2009 had an immaterial impact on the Company's overall financial position and
results of operations.
Also in 2008, the Emerging Issues Task Force (EITF) issued EITF 08-6,
Equity Method Investment Accounting Considerations, which applies to all
investments accounted for under the equity method and clarifies the accounting
for certain transactions and impairment considerations involving those
investments. EITF 08-6 is effective for financial statements issued for fiscal
years beginning on or after December 15, 2008, and interim periods within those
fiscal years. The adoption of EITF 08-6 in 2009 had an immaterial impact on the
Company's overall financial position and results of operations.
(p) Reclassifications
Certain reclassifications have been made in the 2007 and 2006 consolidated
financial statements to conform to the 2008 presentation.
(2) REAL ESTATE OWNED
The Company's real estate properties at December 31, 2008 and 2007 were as
follows:
December 31,
--------------------------------
2008 2007
--------------------------------
(In thousands)
Real estate properties:
Land.................................................. $ 187,617 175,496
Buildings and building improvements................... 867,506 763,980
Tenant and other improvements......................... 197,159 175,490
Development............................................. 150,354 152,963
--------------------------------
1,402,636 1,267,929
Less accumulated depreciation......................... (310,351) (269,132)
--------------------------------
$ 1,092,285 998,797
================================
The Company is currently developing the properties detailed below. Costs
incurred include capitalization of interest costs during the period of
construction. The interest costs capitalized on real estate properties for 2008
were $6,946,000 compared to $6,086,000 for 2007 and $4,336,000 for 2006.
Total capital investment for development during 2008 was $85,441,000, which
primarily consisted of costs of $81,642,000 as detailed in the development
activity table and costs of $4,116,000 for improvements on developments
transferred to Real Estate Properties during the 12-month period following
transfer.
Costs Incurred
------------------------------------------
Costs For the Cumulative
Transferred Year Ended as of Estimated
Size in 2008 (1) 12/31/08 12/31/08 Total Costs (2)
---------------------------------------------------------------------------
DEVELOPMENT (Unaudited) (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
40th Avenue Distribution Center, Phoenix, AZ......... 89,000 $ - 1,392 6,539 6,900
Wetmore II, Building B, San Antonio, TX.............. 55,000 - 750 3,633 3,900
Beltway Crossing VI, Houston, TX..................... 128,000 - 2,084 5,607 6,700
Oak Creek VI, Tampa, FL............................. 89,000 - 1,682 5,587 6,100
Southridge VIII, Orlando, FL......................... 91,000 - 1,961 6,001 6,900
Techway SW IV, Houston, TX........................... 94,000 - 2,875 4,843 6,100
SunCoast III, Fort Myers, FL......................... 93,000 - 2,543 6,718 8,400
Sky Harbor, Phoenix, AZ.............................. 264,000 - 8,821 22,829 25,100
World Houston 26, Houston, TX........................ 59,000 1,110 1,708 2,818 3,300
12th Street Distribution Center, Jacksonville, FL.... 150,000 - 4,850 4,850 4,900
---------------------------------------------------------------------------
Total Lease-up......................................... 1,112,000 1,110 28,666 69,425 78,300
---------------------------------------------------------------------------
40
Costs Incurred
------------------------------------------
Costs For the Cumulative
Transferred Year Ended as of Estimated
Size in 2008 (1) 12/31/08 12/31/08 Total Costs (2)
---------------------------------------------------------------------------
DEVELOPMENT (Unaudited) (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
UNDER CONSTRUCTION
Beltway Crossing VII, Houston, TX.................... 95,000 2,123 2,090 4,213 5,900
Country Club III & IV, Tucson, AZ.................... 138,000 2,552 5,495 8,047 11,200
Oak Creek IX, Tampa, FL.............................. 86,000 1,369 2,831 4,200 5,500
Blue Heron III, West Palm Beach, FL.................. 20,000 863 1,035 1,898 2,600
World Houston 28, Houston, TX........................ 59,000 733 1,647 2,380 4,800
World Houston 29, Houston, TX........................ 70,000 849 1,037 1,886 4,800
World Houston 30, Houston, TX........................ 88,000 1,591 - 1,591 5,800
---------------------------------------------------------------------------
Total Under Construction............................... 556,000 10,080 14,135 24,215 40,600
---------------------------------------------------------------------------
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Tucson, AZ........................................... 70,000 (2,552) 924 417 3,500
Tampa, FL............................................ 249,000 (1,369) 682 3,890 14,600
Orlando, FL.......................................... 1,254,000 - 10,691 14,453 78,700
West Palm Beach, FL.................................. - (863) 52 - -
Fort Myers, FL....................................... 659,000 - 2,195 15,014 48,100
Dallas, TX........................................... 70,000 - 570 570 5,000
El Paso, TX.......................................... 251,000 - - 2,444 9,600
Houston, TX.......................................... 1,064,000 (6,406) 4,643 12,786 68,100
San Antonio, TX...................................... 595,000 - 2,873 5,439 37,500
Charlotte, NC........................................ 95,000 - 995 995 7,100
Jackson, MS.......................................... 28,000 - 1 706 2,000
---------------------------------------------------------------------------
Total Prospective Development.......................... 4,335,000 (11,190) 23,626 56,714 274,200
---------------------------------------------------------------------------
6,003,000 $ - 66,427 150,354 393,100
===========================================================================
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING 2008
Beltway Crossing IV, Houston, TX..................... 55,000 $ - 5 3,365
Beltway Crossing III, Houston, TX.................... 55,000 - 14 2,866
Southridge XII, Orlando, FL.......................... 404,000 - 3,421 18,521
Arion 18, San Antonio, TX............................ 20,000 - 638 2,593
Southridge VII, Orlando, FL.......................... 92,000 - 414 6,500
Wetmore II, Building C, San Antonio, TX.............. 69,000 - 185 3,682
Interstate Commons III, Phoenix, AZ.................. 38,000 - 45 3,093
SunCoast I, Fort Myers, FL........................... 63,000 - 149 5,225
World Houston 27, Houston, TX........................ 92,000 - 1,765 4,248
Wetmore II, Building D, San Antonio, TX.............. 124,000 - 4,965 7,950
World Houston 24, Houston, TX........................ 93,000 - 739 5,904
Centennial Park, Denver, CO.......................... 68,000 - 690 5,437
World Houston 25, Houston, TX........................ 66,000 - 536 3,730
Beltway Crossing V, Houston, TX...................... 83,000 - 984 4,730
Wetmore II, Building A, San Antonio, TX.............. 34,000 - 576 3,377
Oak Creek A & B, Tampa, FL........................... 35,000 - 89 3,030
-----------------------------------------------------------
Total Transferred to Real Estate Properties............ 1,391,000 $ - 15,215 84,251 (3)
===========================================================
(1) Represents costs transferred from Prospective Development (primarily land)
to Under Construction (or subsequently to Lease-up) during the period.
(2) Included in these costs are development obligations of $11.1 million and
tenant improvement obligations of $2.0 million on properties under
development.
(3) Represents cumulative costs at the date of transfer.
In 2008, two operating properties, North Stemmons I in Dallas and Delp
Distribution Center III in Memphis, were transferred to real estate held for
sale and were then disposed of.
Also during 2008, EastGroup acquired one non-operating property (128,000
square feet) as part of the Orlando build-to-suit transaction with United
Stationers. The Company purchased and then sold the building through its taxable
REIT subsidiary and recognized a gain of $294,000. In addition, EastGroup sold
41 acres of residential land in San Antonio, Texas, for $841,000 with no gain or
loss. This property was acquired as part of the Company's Alamo Ridge industrial
land acquisition in September 2007.
41
In 2007, one Memphis property, Delp Distribution Center I, was transferred
to real estate held for sale and was subsequently sold. Also during 2007, the
Company received proceeds of $3,050,000 for the sale of land in lieu of
condemnation at Arion Business Park in San Antonio.
Real estate properties that are held for sale are reported at the lower of
the carrying amount or fair value less estimated costs to sell and are not
depreciated while they are held for sale. In accordance with the guidelines
established under SFAS No. 144, the results of operations for the properties
sold or held for sale during the reported periods are shown under Discontinued
Operations on the Consolidated Statements of Income. No interest expense was
allocated to the properties that are held for sale or whose operations are
included under Discontinued Operations. A summary of gain on sales of real
estate for the years ended December 31, 2008, 2007 and 2006 follows:
Gain on Sales of Real Estate
Net Discount
Date Sales on Note Deferred Recognized
Real Estate Properties Location Size Sold Price Basis Receivable Gain Gain
------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
2008
North Stemmons I................... Dallas, TX 123,000 SF 05/12/08 $ 4,633 2,684 - - 1,949
United Stationers Tampa Building... Tampa, FL 128,000 SF 08/08/08 5,717 5,225 198 - 294
Delp Distribution Center III....... Memphis, TN 20,000 SF 08/20/08 589 506 - - 83
Alamo Ridge residential land....... San Antonio, TX 41.0 Acres 09/08/08 762 762 - - -
Deferred gain recognized from
previous sales................. 27
----------------------------------------------------
$11,701 9,177 198 - 2,353
====================================================
2007
Delp Distribution Center I......... Memphis, TN 152,000 SF 10/11/07 $ 3,080 2,477 - - 603
Arion Business Park land........... San Antonio, TX 13.1 Acres 10/11/07 2,890 318 - - 2,572
Deferred gain recognized from
previous sales................. 387
----------------------------------------------------
$ 5,970 2,795 - - 3,562
====================================================
2006
Madisonville land.................. Madisonville, KY 1.2 Acres 01/05/06 $ 804 27 - 162 615
Senator I & II/Southeast Crossing.. Memphis, TN 534,000 SF 03/09/06 14,870 14,466 - - 404
Dallas land........................ Dallas, TX 0.1 Acre 03/16/06 66 13 - - 53
Lamar Distribution Center I........ Memphis, TN 125,000 SF 06/30/06 2,980 2,951 - - 29
Crowfarn Distribution Center....... Memphis, TN 106,000 SF 12/14/06 2,650 2,263 - - 387
Auburn Facility.................... Auburn Hills, MI 114,000 SF 12/28/06 17,251 12,698 - 329 4,224
Fort Myers land.................... Fort Myers, FL 0.8 Acre 12/29/06 267 144 - - 123
Deferred gain recognized from
previous sale.................. 15
----------------------------------------------------
$38,888 32,562 - 491 5,850
====================================================
The following schedule indicates approximate future minimum rental receipts
under non-cancelable leases for real estate properties by year as of December
31, 2008:
Future Minimum Rental Receipts Under Non-cancelable Leases
Years Ending December 31, (In thousands)
--------------------------------------------------------------
2009...................................... $ 127,090
2010...................................... 102,816
2011...................................... 77,383
2012...................................... 56,227
2013...................................... 37,855
Thereafter................................ 67,833
--------------
Total minimum receipts................. $ 469,204
==============
Ground Leases
As of December 31, 2008, the Company owned two properties in Florida, two
properties in Texas and one property in Arizona that are subject to ground
leases. These leases have terms of 40 to 50 years, expiration dates of August
2031 to November 2037, and renewal options of 15 to 35 years, except for the one
lease in Arizona which is automatically and perpetually renewed annually. Total
lease expenditures for the years ended December 31, 2008, 2007 and 2006 were
$717,000, $708,000 and $707,000, respectively. Payments are subject to increases
at 3 to 10 year intervals based upon the agreed or appraised fair market value
of the leased premises on the adjustment
42
date or the Consumer Price Index percentage increase since the base rent date.
The following schedule indicates approximate future minimum lease payments for
these properties by year as of December 31, 2008:
Future Minimum Ground Lease Payments
Years Ending December 31, (In thousands)
--------------------------------------------------------------
2009...................................... $ 720
2010...................................... 720
2011...................................... 720
2012...................................... 720
2013...................................... 720
Thereafter................................ 15,832
--------------
Total minimum payments................. $ 19,432
==============
(3) UNCONSOLIDATED INVESTMENT
In November 2004, the Company acquired a 50% undivided tenant-in-common
interest in Industry Distribution Center II, a 309,000 square foot warehouse
distribution building in the City of Industry (Los Angeles), California. The
building was constructed in 1998 and is 100% leased through December 2014 to a
single tenant who owns the other 50% interest in the property. This investment
is accounted for under the equity method of accounting and had a carrying value
of $2,666,000 at December 31, 2008. At the end of May 2005, EastGroup and the
property co-owner closed a non-recourse first mortgage loan secured by Industry
Distribution Center II. The $13.3 million loan has a 25-year term and an
interest rate of 5.31% through June 30, 2015, when the rate will adjust on an
annual basis according to the "A" Moody's Daily Long-Term Corporate Bond Yield
Average. The lender has the option to call the note on June 30, 2015.
EastGroup's share of this mortgage was $6,159,000 at December 31, 2008 and
$6,309,000 at December 31, 2007.
(4) MORTGAGE LOANS RECEIVABLE
In connection with the sale of a property in 2008, EastGroup advanced the
buyer $4,994,000 in a first mortgage recourse loan. In September, EastGroup
received a principal payment of $844,000. The mortgage loan has a five-year term
and calls for monthly interest payments (interest accruals and payments begin
January 1, 2009) through the maturity date of August 8, 2013, when a balloon
payment for the remaining principal balance of $4,150,000 is due. At the
inception of the loan, EastGroup recognized a discount on the loan of $198,000
and recognized amortization of the discount of $117,000 during 2008. Mortgage
loans receivable, net of discount, are included in Other Assets on the
Consolidated Balance Sheets.
(5) OTHER ASSETS
A summary of the Company's Other Assets follows:
December 31,
--------------------------
2008 2007
--------------------------
(In thousands)
Leasing costs (principally commissions), net of accumulated amortization.... $ 20,866 18,693
Straight-line rent receivable, net of allowance for doubtful accounts....... 14,914 14,016
Accounts receivable, net of allowance for doubtful accounts................. 4,094 3,587
Acquired in-place lease intangibles, net of accumulated amortization
of $5,626 and $5,308 for 2008 and 2007, respectively...................... 4,369 5,303
Mortgage loans receivable, net of discount of $81 and $0 for 2008 and
2007, respectively........................................................ 4,174 132
Loan costs, net of accumulated amortization................................. 4,246 2,848
Goodwill.................................................................... 990 990
Prepaid expenses and other assets........................................... 7,308 8,113
--------------------------
$ 60,961 53,682
==========================
43
(6) NOTES PAYABLE TO BANKS
The Company has a four-year, $200 million unsecured revolving credit
facility with a group of seven banks that matures in January 2012. The Company
customarily uses this line of credit for acquisitions and developments. The
interest rate on this facility is based on the LIBOR index and varies according
to total liability to total asset value ratios (as defined in the credit
agreement), with an annual facility fee of 15 to 20 basis points. The interest
rate on each tranche is usually reset on a monthly basis and is currently LIBOR
plus 70 basis points with an annual facility fee of 20 basis points. The line of
credit has an option for a one-year extention at the Company's request.
Additionally, there is a provision under which the line may be expanded by $100
million contingent upon obtaining increased commitments from existing lenders or
commitments from additional lenders. At December 31, 2008, the weighted average
interest rate was 1.23% on a balance of $107,000,000. The Company had an
additional $93,000,000 remaining on this line of credit at that date.
The Company also has a four-year, $25 million unsecured revolving credit
facility with PNC Bank, N.A. that matures in January 2012. This facility is
customarily used for working capital needs. The interest rate on this working
cash line is based on LIBOR and varies according to total liability to total
asset value ratios (as defined in the credit agreement). Under this facility,
the Company's current interest rate is LIBOR plus 75 basis points with no annual
facility fee. At December 31, 2008, the interest rate was 1.19% on a balance of
$2,886,000. The Company had an additional $22,114,000 remaining on this line of
credit at that date.
Average bank borrowings were $125,647,000 in 2008 compared to $96,513,000
in 2007 with weighted average interest rates of 3.94% in 2008 compared to 6.36%
in 2007. Weighted average interest rates including amortization of loan costs
were 4.17% for 2008 and 6.73% for 2007. Amortization of bank loan costs was
$295,000, $353,000 and $355,000 for 2008, 2007 and 2006, respectively.
The Company's bank credit facilities have certain restrictive covenants,
such as maintaining debt service coverage and leverage ratios, and the Company
was in compliance with all of its debt covenants at December 31, 2008.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $9,365,000 Tower Automotive Center
recourse mortgage (See Notes 7 and 19). Under the swap agreement, the Company
effectively pays a fixed rate of interest over the term of the agreement without
the exchange of the underlying notional amount. This swap is designated as a
cash flow hedge and is considered to be fully effective in hedging the variable
rate risk associated with the Tower mortgage loan. Changes in the fair value of
the swap are recognized in accumulated other comprehensive income (loss). The
Company does not hold or issue this type of derivative contract for trading or
speculative purposes. The interest rate swap agreement is summarized as follows:
Current Fair Value Fair Value
Type of Hedge Notional Amount Maturity Date Reference Rate Fixed Rate at 12/31/08 at 12/31/07
----------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
Swap $9,365 (1) 12/31/10 1 month LIBOR 4.03% ($522) ($56)
(1) This mortgage is backed by a letter of credit totaling $9,473,000 at
December 31, 2008. The letter of credit expired in January 2009 in
connection with the repayment of the variable rate demand note on the Tower
Automotive Center (See Note 19).
44
(7) MORTGAGE NOTES PAYABLE
A summary of Mortgage Notes Payable follows:
Carrying Amount Balance at
Monthly of Securing December 31,
P&I Maturity Real Estate at --------------------
Property Rate Payment Date December 31, 2008 2008 2007
------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Dominguez, Kingsview, Walnut, Washington,
Industry Distribution Center I and Shaw............... 6.800% 358,770 03/01/09 (1) $ 52,025 31,716 33,787
Oak Creek Distribution Center I......................... 8.875% 52,109 09/01/09 5,477 452 1,010
Tower Automotive Center (recourse) (2).................. 6.030% Semiannual 01/15/11 8,897 9,365 9,710
Interstate I, II & III, Venture, Stemmons Circle,
Glenmont I & II, West Loop I & II, Butterfield Trail
and Rojas............................................. 7.250% 325,263 05/01/11 40,687 38,549 39,615
America Plaza, Central Green and World Houston 3-9...... 7.920% 191,519 05/10/11 24,568 23,873 24,264
University Business Center (120 & 130 Cremona).......... 6.430% 81,856 05/15/12 9,166 4,483 5,154
University Business Center (125 & 175 Cremona).......... 7.980% 88,607 06/01/12 12,581 9,738 10,012
Oak Creek Distribution Center IV........................ 5.680% 31,253 06/01/12 6,267 3,990 4,134
Airport Distribution, Southpointe, Broadway I, III &
IV, Southpark, 51st Avenue, Chestnut, Main Street,
Interchange Business Park, North Stemmons I land
and World Houston 12 & 13............................. 6.860% 279,149 09/01/12 38,892 35,289 36,184
Interstate Distribution Center - Jacksonville........... 5.640% 31,645 01/01/13 6,213 4,612 4,724
Broadway V, 35th Avenue, Sunbelt, Beltway I,
Lockwood, Northwest Point, Techway Southwest I
and World Houston 10, 11 & 14......................... 4.750% 259,403 09/05/13 42,350 39,839 41,028
Southridge XII, Airport Commerce Center I & II,
Interchange Park, Ridge Creek III, World Houston 24,
25 & 27 and Waterford Distribution Center (3)......... 5.750% 414,229 01/05/14 71,844 59,000 -
Kyrene Distribution Center I............................ 9.000% 11,246 07/01/14 2,209 591 669
World Houston 17, Kirby, Americas Ten I, Shady Trail,
Palm River North I, II & III and Westlake I & II (4).. 5.680% 175,479 10/10/14 27,982 29,415 29,837
Beltway II, III & IV, Eastlake, Fairgrounds I-IV,
Nations Ford I-IV, Techway Southwest III,
Westinghouse, Wetmore I-IV and World Houston 15 & 22.. 5.500% 536,552 04/05/15 76,133 76,544 -
Country Club I, Lake Pointe, Techway Southwest II and
World Houston 19 & 20................................. 4.980% 256,952 12/05/15 21,784 35,316 36,605
Huntwood and Wiegman Distribution Centers............... 5.680% 265,275 09/05/16 22,730 35,546 36,676
Alamo Downs, Arion 1-15 & 17, Rampart I, II & III,
Santan 10 and World Houston 16........................ 5.970% 557,467 11/05/16 58,999 73,502 75,731
Broadway VI, World Houston 1 & 2, 21 & 23, Arion 16,
Ethan Allen, Northpark I-IV, South 55th Avenue,
East University I & II and Santan 10 II............... 5.570% 518,885 09/05/17 60,118 72,354 74,485
Blue Heron Distribution Center II....................... 5.390% 16,176 02/29/20 5,172 1,632 1,735
----------------------------------
$ 594,094 585,806 465,360
==================================
(1) This mortgage was repaid on February 13, 2009.
(2) The Tower Automotive mortgage has a variable interest rate based on the
one-month LIBOR. EastGroup has an interest rate swap agreement that fixes
the rate at 4.03% for the 8-year term. Interest and related fees resulted
in an effective interest rate of 5.30% until the fourth quarter of 2008
when the weighted average rate was 8.02% (See Note 19). Semiannual
principal payments are made on this note; interest is paid monthly (See
Note 6). The principal amounts of these payments increase incrementally as
the loan approaches maturity.
(3) This mortgage has a recourse liability of $5 million which will be released
based on the secured properties generating certain base rent amounts
subsequent to January 1, 2011.
(4) Interest only was paid on this note until November 2006.
The Company's mortgage notes payable have certain restrictive covenants,
such as maintaining debt service coverage and leverage ratios and maintaining
insurance coverage, and the Company was in compliance with all of its debt
covenants at December 31, 2008.
The Company currently intends to repay its debt obligations, both in the
short- and long-term, through its operating cash flows, borrowings under its
lines of credit, proceeds from new mortgage debt and/or proceeds from the
issuance of equity instruments. Principal payments due during the next five
years as of December 31, 2008 are as follows:
45
Years Ending December 31, (In thousands)
------------------------------------------------------------
2009...................................... $ 49,168
2010...................................... 18,185
2011...................................... 84,786
2012...................................... 62,117
2013...................................... 53,232
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's Accounts Payable and Accrued Expenses follows:
December 31,
------------------------
2008 2007
------------------------
(In thousands)
Property taxes payable............................ $ 11,136 9,744
Development costs payable......................... 7,127 13,022
Interest payable.................................. 2,453 2,689
Dividends payable................................. 1,257 2,337
Other payables and accrued expenses............... 10,865 6,387
------------------------
$ 32,838 34,179
========================
(9) OTHER LIABILITIES
A summary of the Company's Other Liabilities follows:
December 31,
------------------------
2008 2007
------------------------
(In thousands)
Security deposits................................. $ 7,560 7,529
Prepaid rent and other deferred income............ 5,430 6,911
Other liabilities................................. 1,309 1,713
------------------------
$ 14,299 16,153
========================
(10) COMMON STOCK ACTIVITY
The following table presents the common stock activity for the three years
ended December 31, 2008:
Years Ended December 31,
------------------------------------------------
2008 2007 2006
------------------------------------------------
Common Shares
Shares outstanding at beginning of year........... 23,808,768 23,701,275 22,030,682
Common stock offerings............................ 1,198,700 - 1,437,500
Stock options exercised........................... 25,720 67,150 118,269
Dividend reinvestment plan........................ 6,627 6,281 6,236
Incentive restricted stock granted................ 35,222 44,646 118,334
Incentive restricted stock forfeited.............. (2,520) (2,250) (3,756)
Director common stock awarded..................... 5,034 3,048 3,402
Restricted stock withheld for tax obligations..... (7,150) (11,382) (9,392)
------------------------------------------------
Shares outstanding at end of year................. 25,070,401 23,808,768 23,701,275
================================================
Common Stock Issuances
During the second quarter of 2008, EastGroup sold 1,198,700 shares of its
common stock to Merrill Lynch, Pierce, Fenner & Smith Incorporated. The net
proceeds were $57.2 million after deducting the underwriting discount and other
offering expenses. The Company used the proceeds to repay indebtedness
outstanding under its revolving credit facility and for other general corporate
purposes.
During the third quarter of 2006, EastGroup closed on the sale of 1,437,500
shares of its common stock. The net proceeds from the offering of the shares
were $68.1 million after deducting the underwriting discount and other offering
expenses.
46
Dividend Reinvestment Plan
The Company has a dividend reinvestment plan that allows stockholders to
reinvest cash distributions in new shares of the Company.
Common Stock Repurchase Plan
EastGroup's Board of Directors has authorized the repurchase of up to
1,500,000 shares of its outstanding common stock. The shares may be purchased
from time to time in the open market or in privately negotiated transactions.
Under the common stock repurchase plan, the Company has purchased a total of
827,700 shares for $14,170,000 (an average of $17.12 per share) with 672,300
shares still authorized for repurchase. The Company has not repurchased any
shares under this plan since 2000.
Shareholder Rights Plan
In December 1998, EastGroup adopted a Shareholder Rights Plan. The Plan
expired on December 3, 2008.
(11) STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123R on January 1, 2006. The rule 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. The Company's adoption of
SFAS No. 123R had no material impact on its overall financial position or
results of operations. Prior to the adoption of SFAS No. 123R, the Company
adopted the fair value recognition provisions of SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No.
123, Accounting for Stock-Based Compensation, prospectively to all awards
granted, modified, or settled after January 1, 2002.
Management Incentive Plan
The Company has a management incentive plan which was approved by the
shareholders and adopted in 2004. This plan authorizes the issuance of up to
1,900,000 shares of common stock to employees in the form of options, stock
appreciation rights, restricted stock (limited to 570,000 shares), deferred
stock units, performance shares, stock bonuses and stock. Total shares available
for grant were 1,686,723; 1,715,523; and 1,751,796 at December 31, 2008, 2007
and 2006, respectively. Typically, the Company issues new shares to fulfill
stock grants or upon the exercise of stock options.
Stock-based compensation was $2,931,000, $3,043,000 and $2,788,000 for
2008, 2007 and 2006, respectively, of which $866,000, $978,000 and $768,000 were
capitalized as part of the Company's development costs for the respective years.
Restricted Stock
The purpose of the restricted stock plan is to act as a retention device
since it allows participants to benefit from dividends on shares as well as
potential stock appreciation. Vesting generally occurs from 2 1/2 years to nine
years from the date of grant for awards subject to service only. Restricted
stock is granted to executive officers subject to the satisfaction of certain
annual performance goals and multi-year market conditions as determined by the
Compensation Committee. Restricted stock is granted to non-executive officers
and other employees subject only to continued service. Under the modified
prospective application method, the Company continues to recognize compensation
cost on a straight-line basis over the service period for awards that precede
the adoption of SFAS No. 123R. The cost for performance-based awards after
January 1, 2006 is amortized using the graded vesting attribution method which
recognizes each separate vesting portion of the award as a separate award on a
straight-line basis over the requisite service period. This method accelerates
the expensing of the award compared to the straight-line method. The cost for
market-based awards after January 1, 2006 and awards that only require service
is amortized on a straight-line basis over the requisite service periods.
The total compensation expense for service and performance based awards is
based upon the fair market value of the shares on the grant date, adjusted for
estimated forfeitures. The grant date fair value for awards that are subject to
a market condition (total shareholder return) was determined using a simulation
pricing model developed to specifically accommodate the unique features of the
awards.
In the second quarter of 2008, the Company granted shares to executive
officers contingent upon the attainment of certain annual performance goals.
These goals are for the period ended December 31, 2008, and any shares to be
issued upon attainment of these goals will be determined by the Compensation
Committee in the first quarter of 2009. The number of shares to be issued could
range from zero to 44,802. These shares will vest 20% on the date shares are
determined and awarded and 20% per year on each January 1 for the subsequent
four years. The weighted average grant date fair value for these shares is
$47.65.
In March 2008, 34,668 shares were awarded based on the attainment of the
2007 annual performance goals at a weighted average grant date fair value of
$49.14 per share. These shares vested 20% on March 6, 2008, and will vest 20%
per year on January 1, 2009, 2010, 2011 and 2012. Also during 2008, an
additional 554 shares were awarded to non-executive officers at a weighted
average grant date fair value of $29.73. These shares are subject only to
continued service as of the vesting date and vest 50% per year on January 1,
2009 and 2010.
In the second quarter of 2006, the Company granted shares to executive
officers contingent upon the attainment of certain annual performance goals and
multi-year market conditions. The weighted average grant date fair value for
shares to be awarded under the multi-year market conditions was $26.34 per share
with a total cost of approximately $2.1 million. The number of shares to be
issued could range from zero to 40,314. These shares will vest over four years
following evaluation of the three-year performance measurement period ended
December 31, 2008.
47
During 2008, the Compensation Committee approved the full vesting of the
restricted shares of the Company's President and CEO, David H. Hoster II, upon
his retirement on or after January 1, 2012, to the extent the performance period
has been completed as of such retirement date.
During the restricted period for awards no longer subject to contingencies,
the Company accrues dividends and holds the certificates for the shares;
however, the employee can vote the shares. For shares subject to contingencies,
dividends are accrued based upon the number of shares expected to be awarded.
Share certificates and dividends are delivered to the employee as they vest. As
of December 31, 2008, there was $3,462,000 of unrecognized compensation cost
related to nonvested restricted stock compensation that is expected to be
recognized over a weighted average period of 3.06 years.
Following is a summary of the total restricted shares granted, forfeited
and delivered (vested) to employees with the related weighted average grant date
fair value share prices for 2008, 2007 and 2006. The table does not include the
shares granted in 2008 or 2006 that are contingent on performance goals or
market conditions. Of the shares that vested in 2008, 2007 and 2006, 7,150
shares, 11,382 shares and 9,392 shares, respectively, were withheld by the
Company to satisfy the tax obligations for those employees who elected this
option as permitted under the applicable equity plan. As shown in the table
below, the fair value of shares that were granted during 2008, 2007 and 2006 was
$1,720,000, $1,961,000 and $4,511,000 respectively. As of the vesting date, the
fair value of shares that vested during 2008, 2007 and 2006 was $3,343,000,
$4,350,000, and $4,849,000, respectively.
Restricted Stock Activity: Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------
2008 2007 2006
------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Grant Date Shares Grant Date Shares Grant Date
Fair Value Fair Value Fair Value
------------------------------------------------------------------------------
Nonvested at beginning of year.... 144,089 $ 31.65 196,671 $ 28.66 177,444 $ 23.01
Granted (1)....................... 35,222 48.83 44,646 43.93 118,334 38.12
Forfeited......................... (2,520) 26.51 (2,250) 23.52 (3,756) 22.07
Vested............................ (89,106) 33.37 (94,978) 31.42 (95,351) 30.15
----------- ----------- --------------
Nonvested at end of year.......... 87,685 36.95 144,089 31.65 196,671 28.66
=========== =========== ==============
(1) Includes shares granted in prior years for which performance conditions
have been satisfied and the number of shares have been determined.
Following is a vesting schedule of the total nonvested shares as of December 31,
2008:
Nonvested Shares Vesting Schedule Number of Shares
----------------------------------------------------------------
2009...................................... 49,629
2010...................................... 16,957
2011...................................... 14,169
2012...................................... 6,930
-----------------
Total Nonvested Shares.................... 87,685
=================
Employee Stock Options
The Company has not granted stock options to employees since 2002.
Outstanding employee stock options vested equally over a two-year period;
accordingly, all options are now vested. The intrinsic value realized by
employees from the exercise of options during 2008, 2007 and 2006 was $585,000,
$1,492,000 and $3,641,000, respectively. There were no employee stock options
granted or forfeited during the years presented. Following is a summary of the
total employee stock options exercised and expired with related weighted average
exercise share prices for 2008, 2007 and 2006.
Stock Option Activity: Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2008 2007 2006
---------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------
Outstanding at beginning of year.... 76,656 $ 20.49 135,056 $ 21.10 251,075 $ 19.80
Exercised........................... (21,220) 20.43 (58,400) 21.89 (116,019) 18.29
----------- ----------- ------------
Outstanding at end of year.......... 55,436 20.51 76,656 20.49 135,056 21.10
=========== =========== ============
Exercisable at end of year.......... 55,436 $ 20.51 76,656 $ 20.49 135,056 $ 21.10
Employee outstanding stock options at December 31, 2008, all exercisable:
-----------------------------------------------------------------------------------------------
Weighted Average
Remaining Weighted Average Intrinsic
Exercise Price Range Number Contractual Life Exercise Price Value
-----------------------------------------------------------------------------------------------
$ 18.50-25.30 55,436 0.7 years $ 20.51 $835,000
48
Directors Equity Plan
The Company has a directors equity plan that was approved by shareholders
and adopted in 2005 (the 2005 Plan), which authorizes the issuance of up to
50,000 shares of common stock through awards of shares and restricted shares
granted to nonemployee directors of the Company. The 2005 Plan replaced prior
plans under which directors were granted stock option awards. Outstanding grants
under prior plans will be fulfilled under those plans.
Directors were issued 5,034 shares, 3,048 shares and 3,402 shares of common
stock for 2008, 2007 and 2006, respectively. In addition, in 2005, 481 shares of
restricted stock at $41.57 were granted, of which 360 shares were vested as of
December 31, 2008. The restricted stock vests 25% per year for four years. As of
December 31, 2008, there was $2,500 of unrecognized compensation cost related to
nonvested restricted stock compensation that is expected to be recognized over a
weighted average period of 0.50 years. There were 36,835 shares available for
grant under the 2005 Plan at December 31, 2008.
Stock-based compensation expense for directors was $200,000, $155,000 and
$105,000 for 2008, 2007 and 2006, respectively. The intrinsic value realized by
directors from the exercise of options was $120,000, $218,000 and $70,000 for
2008, 2007 and 2006, respectively.
There were no director stock options granted or expired during the years
presented below. Following is a summary of the total director stock options
exercised with related weighted average exercise share prices for 2008, 2007 and
2006.
Stock Option Activity: Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2008 2007 2006
---------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------
Outstanding at beginning of year.... 42,750 $ 23.01 51,500 $ 22.93 53,750 $ 22.58
Exercised........................... (4,500) 20.63 (8,750) 22.49 (2,250) 14.58
----------- ----------- ------------
Outstanding at end of year.......... 38,250 23.29 42,750 23.01 51,500 22.93
=========== =========== ============
Exercisable at end of year.......... 38,250 $ 23.29 42,750 $ 23.01 51,500 $ 22.93
Director outstanding stock options at December 31, 2008, all exercisable:
----------------------------------------------------------------------------------------------
Weighted Average Weighted Average Intrinsic
Exercise Price Range Number Remaining Exercise Price Value
Contractual Life
----------------------------------------------------------------------------------------------
$ 20.25-26.60 38,250 2.7 years $ 23.29 $470,000
(12) REDEMPTION OF SERIES D PREFERRED SHARES
On July 2, 2008, EastGroup redeemed all 1,320,000 shares of its 7.95%
Series D Cumulative Redeemable Preferred Stock at a redemption price of $25.00
per share ($33,000,000) plus accrued and unpaid dividends of $.011 per share for
the period from July 1, 2008, through and including the redemption date, for an
aggregated redemption price of $25.011 per Series D Preferred Share. Original
issuance costs of $674,000 and additional redemption costs of $8,000 were
charged against net income available to common stockholders in conjunction with
the redemption of these shares.
The Company declared dividends of $1.0048 per Series D Preferred share for
2008 and $1.9876 per share for the years 2007 and 2006.
(13) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in
equity from non-owner sources. The components of accumulated other comprehensive
income (loss) for 2008, 2007 and 2006 are presented in the Company's
Consolidated Statements of Changes in Stockholders' Equity and are summarized
below.
----------------------------------
2008 2007 2006
----------------------------------
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year..................................... $ (56) 314 311
Change in fair value of interest rate swap................... (466) (370) 3
-----------------------------------
Balance at end of year........................................... $ (522) (56) 314
===================================
49
(14) EARNINGS PER SHARE
The Company applies SFAS No. 128, Earnings Per Share, which requires
companies to present basic EPS and diluted EPS. Reconciliation of the numerators
and denominators in the basic and diluted EPS computations is as follows:
Reconciliation of Numerators and Denominators
----------------------------------
2008 2007 2006
----------------------------------
(In thousands)
BASIC EPS COMPUTATION
Numerator-net income available to common stockholders.......... $ 32,134 27,110 26,610
Denominator-weighted average shares outstanding................ 24,503 23,562 22,372
DILUTED EPS COMPUTATION
Numerator-net income available to common stockholders.......... $ 32,134 27,110 26,610
Denominator:
Weighted average shares outstanding.......................... 24,503 23,562 22,372
Common stock options......................................... 54 87 143
Nonvested restricted stock................................... 96 132 177
----------------------------------
Total Shares.............................................. 24,653 23,781 22,692
==================================
(15) QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
2008 Quarter Ended (1) 2007 Quarter Ended (1)
--------------------------------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
--------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues............................... $ 40,833 41,564 43,426 44,117 35,977 37,078 39,137 41,176
Expenses............................... (32,824) (33,808) (35,644) (35,684) (29,467) (30,992) (31,811) (32,612)
--------------------------------------------------------------------------------
Income from continuing operations...... 8,009 7,756 7,782 8,433 6,510 6,086 7,326 8,564
Income from discontinued operations.... 82 1,990 90 - 77 46 388 737
--------------------------------------------------------------------------------
Net income............................. 8,091 9,746 7,872 8,433 6,587 6,132 7,714 9,301
Preferred dividends - Series D......... (656) (656) (14) - (656) (656) (656) (656)
Costs on redemption of Series D
Preferred shares.................... - - (682) - - - - -
--------------------------------------------------------------------------------
Net income available to common
stockholders........................ $ 7,435 9,090 7,176 8,433 5,931 5,476 7,058 8,645
================================================================================
BASIC PER SHARE DATA(2)
Net income available to common
stockholders........................ $ .31 .37 .29 .34 .25 .23 .30 .37
================================================================================
Weighted average shares outstanding.... 23,684 24,488 24,908 24,923 23,531 23,550 23,562 23,605
================================================================================
DILUTED PER SHARE DATA(2)
Net income available to common
stockholders........................ $ .31 .37 .29 .34 .25 .23 .30 .36
================================================================================
Weighted average shares outstanding.... 23,829 24,647 25,069 25,059 23,769 23,776 23,778 23,819
================================================================================
(1) Certain reclassifications have been made to the quarterly data previously
disclosed due to the disposal of properties in 2008 and 2007 whose results
of operations were reclassified to discontinued operations in the
consolidated financial statements.
(2) The above quarterly earnings per share calculations are based on the
weighted average number of common shares outstanding during each quarter
for basic earnings per share and the weighted average number of outstanding
common shares and common share equivalents during each quarter for diluted
earnings per share. The annual earnings per share calculations in the
Consolidated Statements of Income are based on the weighted average number
of common shares outstanding during each year for basic earnings per share
and the weighted average number of outstanding common shares and common
share equivalents during each year for diluted earnings per share. The sum
of quarterly financial data may vary from the annual data due to rounding.
(16) DEFINED CONTRIBUTION PLAN
EastGroup maintains a 401(k) plan for its employees. The Company makes
matching contributions of 50% of the employee's contribution (limited to 10% of
compensation as defined by the plan) and may also make annual discretionary
contributions. The Company's total expense for this plan was $467,000, $429,000
and $378,000 for 2008, 2007 and 2006, respectively.
50
(17) LEGAL MATTERS
The Company is not presently involved in any material litigation nor, to
its knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business or which is expected to be covered by the Company's liability
insurance.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 157, Fair Value Measurements, defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. SFAS No. 157
also provides guidance for using fair value to measure financial assets and
liabilities. The Statement requires disclosure of the level within the fair
value hierarchy in which the fair value measurements fall, including
measurements using quoted prices in active markets for identical assets or
liabilities (Level 1), quoted prices for similar instruments in active markets
or quoted prices for identical or similar instruments in markets that are not
active (Level 2), and significant valuation assumptions that are not readily
observable in the market (Level 3). The Company's interest rate swap is reported
at fair value and is shown on the Consolidated Balance Sheets under Other
Liabilities. The fair value of the interest rate swap is determined by
estimating the expected cash flows over the life of the swap using the
mid-market rate and price environment as of the last trading day of the year.
This market information is considered a Level 2 input as defined by SFAS No.
157.
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments in accordance with SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, at December 31, 2008 and
2007.
--------------------------------------------------
2008 2007
--------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------
(In thousands)
Financial Assets
Cash and cash equivalents...... $ 293 293 724 724
Mortgage loans receivable,
net of discount.............. 4,174 4,189 132 133
Financial Liabilities
Mortgage notes payable......... 585,806 555,096 465,360 470,335
Notes payable to banks......... 109,886 101,484 135,444 135,444
Carrying amounts shown in the table are included in the Consolidated Balance
Sheets under the indicated captions, except as indicated in the notes below.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents: The carrying amounts approximate fair value because
of the short maturity of those instruments.
Mortgage loans receivable, net of discount: The fair value is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Mortgage notes payable: The fair value of the Company's mortgage notes payable
is estimated based on the quoted market prices for similar issues or by
discounting expected cash flows at the rates currently offered to the Company
for debt of the same remaining maturities, as advised by the Company's bankers.
Notes payable to banks: For 2008, the fair value of the Company's notes payable
to banks is estimated by discounting expected cash flows at current market
rates. For 2007, the carrying amounts approximate fair value because the
associated credit spread approximates market.
(19) SUBSEQUENT EVENTS
On January 2, 2009, the mortgage note payable of $9,365,000 on the Tower
Automotive Center was repaid and replaced with another mortgage note payable for
the same amount. The previous recourse mortgage was a variable rate demand note,
and EastGroup had entered into a swap agreement to fix the LIBOR rate. In the
fourth quarter of 2008, the bond spread over LIBOR required to re-market the
notes increased from a historical range of 3 to 25 basis points to a range of
100 to 500 basis points. Due to the volatility of the bond spread costs,
EastGroup redeemed the note and replaced it with a recourse mortgage with a bank
on the same payment terms except for the interest rate. The effective interest
rate on the previous note was 5.30% until the fourth quarter of 2008 when the
weighted average rate was 8.02%. The effective rate on the new note, including
the swap, is 6.03%.
During the fourth quarter of 2008, EastGroup acquired 94.3 acres of
developable land in Orlando for $9.1 million. The Company is currently under
contract to purchase an additional 36.0 acres in a second phase of this
acquisition for $5 million. This transaction is expected to close during the
fourth quarter of 2009.
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULES
THE BOARD OF DIRECTORS AND STOCKHOLDERS
EASTGROUP PROPERTIES, INC.:
Under date of February 26, 2009, we reported on the consolidated balance
sheets of EastGroup Properties, Inc. and subsidiaries as of December 31, 2008
and 2007, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2008, which are included in the 2008 Annual Report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed in Item 15(a)(2) of Form 10-K. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Jackson, Mississippi
February 26, 2009
52
SCHEDULE III
REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2008 (In thousands)
Gross Amount at
Initial Cost which Carried at
to the Company Close of Period
--------------------- --------------------------
Costs
Capitalized Accumulated
Buildings and Subsequent to Buildings and Depreciation Year Year
Description Encumbrances Land Improvements Acquisition Land Improvements Total Dec. 31, 2008 Acquired Constructed
------------------------------------------------------------------------------------------------------------------------------------
Real Estate
Properties (c):
Industrial:
FLORIDA
Jacksonville
Deerwood $ - 1,147 1,799 1,417 1,147 3,216 4,363 1,550 1989 1978
Phillips - 1,375 2,961 3,471 1,375 6,432 7,807 3,079 1994 1984/95
Lake Pointe (l) 15,946 3,442 6,450 4,629 3,442 11,079 14,521 6,111 1993 1986/87
Ellis - 540 7,513 901 540 8,414 8,954 2,608 1997 1977
Westside - 1,170 12,400 3,933 1,170 16,333 17,503 5,964 1997 1984
Beach - 476 1,899 559 476 2,458 2,934 796 2000 2000
Interstate Dist. 4,612 1,879 5,700 298 1,879 5,998 7,877 1,664 2005 1990
Orlando
Chancellor - 291 1,711 97 291 1,808 2,099 731 1996/97 1996/97
Exchange I - 603 2,414 1,563 603 3,977 4,580 2,083 1994 1975
Exchange II - 300 945 73 300 1,018 1,318 381 2002 1976
Exchange III - 320 997 17 320 1,014 1,334 379 2002 1980
Sunbelt
Center (j) 7,525 1,474 5,745 4,502 1,474 10,247 11,721 4,954 1989/97/98 1974/87/97/98
John Young I - 497 2,444 622 497 3,066 3,563 1,066 1997/98 1997/98
John Young II - 512 3,613 138 512 3,751 4,263 1,516 1998 1999
Altamonte I - 1,518 2,661 1,195 1,518 3,856 5,374 1,917 1999 1980/82
Altamonte II - 745 2,618 550 745 3,168 3,913 876 2003 1975
Sunport I - 555 1,977 595 555 2,572 3,127 886 1999 1999
Sunport II - 597 3,271 1,115 597 4,386 4,983 2,208 1999 2001
Sunport III - 642 3,121 451 642 3,572 4,214 1,256 1999 2002
Sunport IV - 642 2,917 593 642 3,510 4,152 776 1999 2004
Sunport V - 750 2,509 1,854 750 4,363 5,113 1,083 1999 2005
Sunport VI - 672 - 3,306 672 3,306 3,978 387 1999 2006
Southridge I - 373 - 4,445 373 4,445 4,818 965 2003 2006
Southridge II - 342 - 4,147 342 4,147 4,489 516 2003 2007
Southridge III - 547 - 4,899 547 4,899 5,446 295 2003 2007
Southridge IV - 506 - 4,327 506 4,327 4,833 465 2003 2006
Southridge V - 382 - 4,152 382 4,152 4,534 682 2003 2006
Southridge VI - 571 - 4,753 571 4,753 5,324 318 2003 2007
Southridge VII - 520 - 5,995 520 5,995 6,515 227 2003 2008
Southridge
XII (p) 15,115 2,025 - 16,825 2,025 16,825 18,850 374 2005 2008
Tampa
56th Street - 843 3,567 2,451 843 6,018 6,861 3,496 1993 1981/86/97
Jetport - 1,575 6,591 3,007 1,575 9,598 11,173 4,922 1993-99 1974-85
Westport - 980 3,800 2,108 980 5,908 6,888 2,886 1994 1983/87
Benjamin I & II - 843 3,963 597 883 4,520 5,403 2,063 1997 1996
Benjamin III - 407 1,503 298 407 1,801 2,208 1,101 1999 1988
Palm River
Center - 1,190 4,625 1,227 1,190 5,852 7,042 2,689 1997/98 1990/97/98
Palm River
North I & III (k) 5,486 1,005 4,688 1,644 1,005 6,332 7,337 2,136 1998 2000
Palm River
North II (k) 5,035 634 4,418 339 634 4,757 5,391 1,739 1997/98 1999
Palm River
South I - 655 3,187 348 655 3,535 4,190 748 2000 2005
Palm River
South II - 655 - 4,264 655 4,264 4,919 804 2000 2006
Walden I - 337 3,318 307 337 3,625 3,962 1,234 1997/98 2001
Walden II - 465 3,738 541 465 4,279 4,744 1,635 1998 1998
Oak Creek I 452 1,109 6,126 229 1,109 6,355 7,464 1,987 1998 1998
Oak Creek II - 647 3,603 451 647 4,054 4,701 1,110 2003 2001
Oak Creek III - 439 - 3,150 556 3,033 3,589 324 2005 2007
Oak Creek IV 3,990 805 6,472 (2) 805 6,470 7,275 1,008 2005 2001
Oak Creek V - 724 - 5,610 916 5,418 6,334 268 2005 2007
Oak Creek A - 185 - 1,230 185 1,230 1,415 - 2005 2008
Oak Creek B - 227 - 1,388 227 1,388 1,615 - 2005 2008
Airport Commerce - 1,257 4,012 698 1,257 4,710 5,967 1,566 1998 1998
Westlake (k) 6,990 1,333 6,998 1,001 1,333 7,999 9,332 3,204 1998 1998/99
Expressway II - 1,013 3,247 175 1,013 3,422 4,435 1,007 2003 2001
Expressway I - 915 5,346 343 915 5,689 6,604 1,385 2002 2004
Fort Myers
SunCoast I - 911 - 4,422 928 4,405 5,333 157 2005 2008
SunCoast II - 911 - 4,729 928 4,712 5,640 303 2005 2007
Fort Lauderdale/
Pompano Beach area
Linpro - 613 2,243 1,157 616 3,397 4,013 1,869 1996 1986
Cypress Creek - - 2,465 1,303 - 3,768 3,768 1,635 1997 1986
Lockhart - - 3,489 1,936 - 5,425 5,425 2,204 1997 1986
Interstate Commerce - 485 2,652 439 485 3,091 3,576 1,351 1998 1988
Sample 95 - 2,202 8,785 2,107 2,202 10,892 13,094 4,257 1996/98 1990/99
Blue Heron - 975 3,626 1,619 975 5,245 6,220 1,811 1999 1986
Blue Heron II 1,632 1,385 4,222 756 1,385 4,978 6,363 1,191 2004 1988
Executive Airport - 1,991 4,857 4,758 1,991 9,615 11,606 1,919 2001 2004/06
NORTH CAROLINA
Charlotte
NorthPark (f) 18,241 2,758 15,932 148 2,758 16,080 18,838 2,579 2006 1987-89
Westinghouse (o) 4,674 765 4,303 290 765 4,593 5,358 403 2007 1983
Lindbergh - 470 3,401 118 470 3,519 3,989 435 2007 2001/03
Nations
Ford (o) 17,670 3,924 16,171 163 3,924 16,334 20,258 2,545 2007 1989/94
Airport
Commerce (p) 9,315 1,454 10,136 26 1,454 10,162 11,616 361 2008 2001/02
Interchange
Park (p) 7,169 986 7,949 5 986 7,954 8,940 297 2008 1989
Ridge Creek (p) 11,605 1,284 13,163 25 1,284 13,188 14,472 317 2008 2006
Waterford (p) 3,247 654 3,392 3 654 3,395 4,049 84 2008 2000
CALIFORNIA
San Francisco area
Wiegman (m) 13,356 2,197 8,788 1,042 2,308 9,719 12,027 3,311 1996 1986/87
Huntwood (m) 22,190 3,842 15,368 771 3,842 16,139 19,981 5,967 1996 1988
San Clemente - 893 2,004 92 893 2,096 2,989 652 1997 1978
Yosemite - 259 7,058 827 259 7,885 8,144 2,480 1999 1974/87
Los Angeles area
Kingsview (e) 1,460 643 2,573 30 643 2,603 3,246 861 1996 1980
Dominguez (e) 5,023 2,006 8,025 1,135 2,006 9,160 11,166 3,688 1996 1977
Main Street (i) 3,938 1,606 4,103 537 1,606 4,640 6,246 1,658 1999 1999
Walnut (e) 3,808 2,885 5,274 306 2,885 5,580 8,465 2,072 1996 1966/90
Washington (e) 3,172 1,636 4,900 515 1,636 5,415 7,051 1,805 1997 1996/97
Ethan Allen (f) 12,408 2,544 10,175 95 2,544 10,270 12,814 3,620 1998 1980
Industry I (e) 10,622 10,230 12,373 1,008 10,230 13,381 23,611 4,595 1998 1959
Industry III - - 3,012 (214) - 2,798 2,798 662 2007 1992
Chestnut (i) 3,325 1,674 3,465 134 1,674 3,599 5,273 1,066 1998 1999
Los Angeles
Corporate Center - 1,363 5,453 1,951 1,363 7,404 8,767 2,782 1996 1986
Santa Barbara
University Bus.
Center 14,221 5,517 22,067 3,316 5,520 25,380 30,900 9,153 1996 1987/88
Castilian - 2,719 1,410 4,825 2,719 6,235 8,954 238 2005 2007
Fresno
Shaw (e) 7,631 2,465 11,627 2,872 2,465 14,499 16,964 5,457 1998 1978/81/87
San Diego
Eastlake (o) 9,771 3,046 6,888 1,267 3,046 8,155 11,201 2,960 1997 1989
TEXAS
Dallas
Interstate
I & II (h) 4,651 1,746 4,941 1,781 1,746 6,722 8,468 4,103 1988 1978
Interstate
III (h) 1,761 519 2,008 680 519 2,688 3,207 1,020 2000 1979
Interstate IV - 416 2,481 126 416 2,607 3,023 610 2004 2002
Venture (h) 3,760 1,452 3,762 1,633 1,452 5,395 6,847 3,059 1988 1979
Stemmons
Circle (h) 1,484 363 2,014 323 363 2,337 2,700 1,091 1998 1977
Ambassador Row - 1,156 4,625 1,587 1,156 6,212 7,368 3,110 1998 1958/65
North
Stemmons II - 150 583 183 150 766 916 271 2002 1971
North
Stemmons III - 380 2,066 2 380 2,068 2,448 124 2007 1974
Shady Trail (k) 3,116 635 3,621 469 635 4,090 4,725 861 2003 1998
Houston
Northwest
Point (j) 6,243 1,243 5,640 2,841 1,243 8,481 9,724 4,017 1994 1984/85
Lockwood (j) 5,146 749 5,444 1,822 749 7,266 8,015 2,403 1997 1968/69
West Loop (h) 3,776 905 4,383 1,587 905 5,970 6,875 2,475 1997/2000 1980
World Houston
1 & 2 (f) 7,339 660 5,893 1,026 660 6,919 7,579 2,750 1998 1996
World Houston
3, 4 & 5 (g) 4,811 1,025 6,413 328 1,025 6,741 7,766 2,777 1998 1998
World
Houston 6 (g) 2,179 425 2,423 62 425 2,485 2,910 937 1998 1998
World Houston
7 & 8 (g) 5,537 680 4,584 3,305 680 7,889 8,569 3,120 1998 1998
World
Houston 9 (g) 4,811 800 4,355 1,460 800 5,815 6,615 1,489 1998 1998
World
Houston 10 (j) 3,852 933 4,779 287 933 5,066 5,999 1,282 2001 1999
World
Houston 11 (j) 3,323 638 3,764 773 638 4,537 5,175 1,338 1999 1999
World
Houston 12 (i) 1,864 340 2,419 198 340 2,617 2,957 834 2000 2002
World
Houston 13 (i) 1,926 282 2,569 203 282 2,772 3,054 1,328 2000 2002
World
Houston 14 (j) 2,406 722 2,629 397 722 3,026 3,748 1,033 2000 2003
World
Houston 15 (o) 5,560 731 - 5,643 731 5,643 6,374 707 2000 2007
World
Houston 16 (n) 4,654 519 4,248 159 519 4,407 4,926 977 2000 2005
World
Houston 17 (k) 2,723 373 1,945 758 373 2,703 3,076 451 2000 2004
World
Houston 18 - 323 1,512 27 323 1,539 1,862 278 2005 1995
World
Houston 19 (l) 3,710 373 2,256 750 373 3,006 3,379 1,026 2000 2004
World
Houston 20 (l) 4,493 1,008 1,948 1,136 1,008 3,084 4,092 826 2000 2004
World
Houston 21 (f) 3,786 436 - 3,474 436 3,474 3,910 277 2000/03 2006
World
Houston 22 (o) 4,052 436 - 4,209 436 4,209 4,645 301 2000 2007
World
Houston 23 (f) 7,684 910 - 7,026 910 7,026 7,936 469 2000 2007
World
Houston 24 (p) 4,864 837 - 5,229 837 5,229 6,066 197 2005 2008
World
Houston 25 (p) 3,303 508 - 3,611 508 3,611 4,119 58 2005 2008
World
Houston 27 (p) 4,382 837 - 4,627 837 4,627 5,464 44 2005 2008
America Plaza (g) 3,449 662 4,660 463 662 5,123 5,785 1,943 1998 1996
Central Green (g) 3,086 566 4,031 97 566 4,128 4,694 1,505 1999 1998
Glenmont (h) 4,685 936 6,161 1,434 937 7,594 8,531 2,702 1998 1999/2000
Techway I (j) 3,804 729 3,765 1,431 729 5,196 5,925 1,430 2000 2001
Techway II (l) 4,999 550 3,689 314 550 4,003 4,553 1,102 2000 2004
Techway III (o) 5,038 597 - 5,178 751 5,024 5,775 570 1999 2006
Beltway I (j) 4,646 458 5,712 1,066 458 6,778 7,236 1,997 2002 2001
Beltway II (o) 2,761 415 - 2,750 415 2,750 3,165 211 2005 2007
Beltway III (o) 2,990 460 - 2,968 460 2,968 3,428 170 2005 2008
Beltway IV (o) 3,004 460 - 2,984 460 2,984 3,444 285 2005 2008
Beltway V - 701 - 4,106 701 4,106 4,807 71 2005 2008
Kirby (k) 3,058 530 3,153 297 530 3,450 3,980 568 2004 1980
Clay Campbell - 742 2,998 304 742 3,302 4,044 784 2005 1982
El Paso
Butterfield
Trail (h) 14,798 - 22,144 4,800 - 26,944 26,944 11,845 1997/2000 1987/95
Rojas (h) 3,634 900 3,659 2,058 900 5,717 6,617 3,207 1999 1986
Americas
Ten I (k) 3,007 526 2,778 1,052 526 3,830 4,356 1,256 2001 2003
San Antonio
Alamo Downs (n) 7,768 1,342 6,338 541 1,342 6,879 8,221 2,028 2004 1986/2002
Arion (n) 35,171 4,143 31,432 1,649 4,143 33,081 37,224 7,996 2005 1988-2000/06
Arion 14 (n) 3,486 423 - 3,266 423 3,266 3,689 339 2005 2006
Arion 16 (f) 3,775 427 - 3,472 427 3,472 3,899 209 2005 2007
Arion 17 (n) 3,671 616 - 3,269 616 3,269 3,885 290 2005 2007
Arion 18 - 418 - 2,205 418 2,205 2,623 90 2005 2008
Wetmore (o) 11,956 1,494 10,804 1,409 1,494 12,213 13,707 2,618 2005 1998/99
Wetmore Phase II,
Building A - 412 - 2,965 412 2,965 3,377 119 2006 2008
Wetmore Phase II,
Building C - 546 - 3,158 546 3,158 3,704 47 2006 2008
Wetmore Phase II,
Building D - 1,056 - 7,019 1,056 7,019 8,075 111 2006 2008
Fairgrounds (o) 9,068 1,644 8,209 542 1,644 8,751 10,395 847 2007 1985/86
ARIZONA
Phoenix area
Broadway I (i) 3,016 837 3,349 597 837 3,946 4,783 1,658 1996 1971
Broadway II - 455 482 125 455 607 1,062 300 1999 1971
Broadway III (i) 1,635 775 1,742 76 775 1,818 2,593 728 2000 1983
Broadway IV (i) 1,424 380 1,652 226 380 1,878 2,258 717 2000 1986
Broadway V (j) 972 353 1,090 71 353 1,161 1,514 405 2002 1980
Broadway VI (f) 2,755 599 1,855 391 599 2,246 2,845 748 2002 1979
Kyrene 591 850 2,044 378 850 2,422 3,272 1,063 1999 1981
Kyrene II - 640 2,409 577 640 2,986 3,626 1,120 1999 2001
Metro - 1,927 7,708 4,385 1,927 12,093 14,020 4,555 1996 1977/79
35th Avenue (j) 1,922 418 2,381 194 418 2,575 2,993 841 1997 1967
Estrella - 628 4,694 820 628 5,514 6,142 1,594 1998 1988
51st Avenue (i) 1,763 300 2,029 467 300 2,496 2,796 922 1998 1987
East University
I and II (f) 5,818 1,120 4,482 407 1,120 4,889 6,009 1,879 1998 1987/89
55th Avenue (f) 5,177 912 3,717 717 917 4,429 5,346 1,637 1998 1987
Interstate
Commons I - 798 3,632 434 798 4,066 4,864 1,536 1999 1988
Interstate
Commons II - 320 2,448 268 320 2,716 3,036 822 1999 2000
Interstate
Commons III - 242 - 2,866 242 2,866 3,108 85 2000 2008
Southpark (i) 2,664 918 2,738 570 918 3,308 4,226 939 2001 2000
Airport Commons - 1,000 1,510 393 1,000 1,903 2,903 563 2003 1971
Santan 10 I (n) 3,526 846 2,647 239 846 2,886 3,732 772 2001 2005
Santan 10 II (f) 5,371 1,088 - 4,459 1,088 4,459 5,547 437 2004 2007
Tucson
Country Club I (l) 6,168 506 3,564 1,547 506 5,111 5,617 1,313 1997/2003 1994/2003
Country Club II - 442 3,381 3 442 3,384 3,826 209 2007 2000
Airport Dist. (i) 4,471 1,103 4,672 1,317 1,103 5,989 7,092 2,076 1998 1995
Southpointe (i) 4,371 - 3,982 2,950 - 6,932 6,932 2,231 1999 1989
Benan - 707 1,842 394 707 2,236 2,943 656 2005 2001
TENNESSEE
Memphis
Air Park I - 250 1,916 718 250 2,634 2,884 809 1998 1975
LOUISIANA
New Orleans
Elmwood - 2,861 6,337 2,773 2,861 9,110 11,971 4,728 1997 1979
Riverbend - 2,592 17,623 2,037 2,592 19,660 22,252 7,896 1997 1984
COLORADO
Denver
Rampart I (n) 5,437 1,023 3,861 870 1,023 4,731 5,754 2,526 1988 1987
Rampart II (n) 3,869 230 2,977 888 230 3,865 4,095 2,011 1996/97 1996/97
Rampart III (n) 5,920 1,098 3,884 1,283 1,098 5,167 6,265 1,853 1997/98 1999
Concord - 1,050 4,774 17 1,050 4,791 5,841 320 2007 2000
Centennial - 750 3,319 1,597 750 4,916 5,666 91 2007 1990
OKLAHOMA
Oklahoma City
Northpointe - 777 3,113 670 998 3,562 4,560 1,055 1998 1996/97
Tulsa
Braniff - 1,066 4,641 2,045 1,066 6,686 7,752 3,098 1996 1974
MISSISSIPPI
Interchange (i) 4,533 343 5,007 1,840 343 6,847 7,190 2,921 1997 1981
Tower 9,365 - 9,958 1,189 17 11,130 11,147 2,250 2001 2002
Metro Airport I - 303 1,479 914 303 2,393 2,696 726 2001 2003
---------------------------------------------------------------------------------------
585,447 186,719 747,993 317,570 187,617 1,064,665 1,252,282 310,243
---------------------------------------------------------------------------------------
Industrial
Development (d):
FLORIDA
12th Street
(redevelopment) - 841 2,974 1,035 841 4,009 4,850 - 2008 1985
Oak Creek VI - 642 - 4,945 812 4,775 5,587 60 2005 n/a
Oak Creek IX - 618 - 3,582 781 3,419 4,200 - 2005 n/a
Oak Creek land - 1,946 - 1,944 2,374 1,516 3,890 - 2005 n/a
Southridge VIII - 531 - 5,470 531 5,470 6,001 - 2003 n/a
Southridge land - 1,395 - 3,530 1,395 3,530 4,925 - 2003 n/a
Sand Lake
Phase I land - 9,111 - 417 9,111 417 9,528 - 2008 n/a
Blue Heron III - 450 - 1,448 450 1,448 1,898 - 2004 n/a
SunCoast III - 1,720 - 4,998 1,767 4,951 6,718 - 2006 n/a
SunCoast land - 10,926 - 4,088 11,180 3,834 15,014 - 2006 n/a
NORTH CAROLINA
Airport Comm.
Center - 855 - 140 855 140 995 - 2008 n/a
TEXAS
North Stemmons
land (i) 359 537 - 33 537 33 570 - 2001 n/a
Techway IV - 535 - 4,308 674 4,169 4,843 - 1999 n/a
World
Houston 26 - 445 - 2,373 445 2,373 2,818 - 2005 n/a
World
Houston 28 - 550 - 1,830 550 1,830 2,380 - 2005 n/a
World
Houston 29 - 782 - 1,104 782 1,104 1,886 - 2007 n/a
World
Houston 30 - 981 - 610 981 610 1,591 - 2007 n/a
Beltway VI - 618 - 4,989 618 4,989 5,607 - 2005 n/a
Beltway VII - 765 - 3,448 765 3,448 4,213 - 2005 n/a
World
Houston land - 3,636 - 1,041 3,636 1,041 4,677 - 2000/05/06/08 n/a
Beltway land - 721 - 246 721 246 967 - 2005 n/a
Beltway
Phase II land - 1,841 - 468 1,841 468 2,309 - 2007 n/a
Lee Road land - 4,214 - 619 4,214 619 4,833 - 2007 n/a
Americas Ten
II & III - 1,365 - 1,079 1,365 1,079 2,444 - 2001 n/a
Wetmore Phase II,
Building B - 505 - 3,128 505 3,128 3,633 34 2006 n/a
Alamo Ridge land - 2,288 - 881 2,288 881 3,169 - 2007 n/a
Thousand Oaks land - 2,173 - 97 2,173 97 2,270 - 2008 n/a
ARIZONA
40th Street - 703 - 5,836 703 5,836 6,539 14 2004 n/a
Sky Harbor land - 5,840 - 16,989 5,840 16,989 22,829 - 2006 n/a
Airport Dist. II - 300 - 117 300 117 417 - 2000 n/a
Country Club III & IV - 1,407 - 6,640 1,407 6,640 8,047 - 2007 n/a
MISSISSIPPI
Metro Airport II - 307 - 399 307 399 706 - 2001 n/a
---------------------------------------------------------------------------------------
359 59,548 2,974 87,832 60,749 89,605 150,354 108
---------------------------------------------------------------------------------------
Total real estate
owned (a)(b) $585,806 246,267 750,967 405,402 248,366 1,154,270 1,402,636 310,351
=======================================================================================
(a) Changes in Real Estate Properties follow:
Years Ended December 31,
---------------------------------------------
2008 2007 2006
---------------------------------------------
(In thousands)
Balance at beginning of year.......................... $ 1,267,929 1,088,896 1,021,841
Purchase of real estate properties.................... 44,030 54,543 18,690
Development of real estate properties................. 85,441 112,960 77,666
Improvements to real estate properties................ 15,210 15,881 13,470
Carrying amount of investments sold................... (10,385) (3,791) (42,485)
Write-off of improvements............................. 411 (560) (213)
Other................................................. - - (73)
---------------------------------------------
Balance at end of year (1) ........................... $ 1,402,636 1,267,929 1,088,896
=============================================
(1) Includes 20% minority interests in Castilian Research Center of $1,791,000
at December 31, 2008 and $1,784,000 at December 31, 2007 and in University
Business Center of $6,180,000 and $6,031,000, respectively.
Changes in the accumulated depreciation on real estate properties follow:
Years Ended December 31,
---------------------------------------------
2008 2007 2006
---------------------------------------------
(In thousands)
Balance at beginning of year.......................... $ 269,132 231,106 206,427
Depreciation expense.................................. 42,166 39,688 35,428
Accumulated depreciation on assets sold............... (1,358) (1,102) (10,630)
Other................................................. 411 (560) (119)
---------------------------------------------
Balance at end of year ............................... $ 310,351 269,132 231,106
=============================================
(b) The estimated aggregate cost of real estate properties at December 31, 2008
for federal income tax purposes was approximately $1,347,885,000 before
estimated accumulated tax depreciation of $197,050,000. The federal income tax
return for the year ended December 31, 2008 has not been filed and, accordingly,
this estimate is based on preliminary data.
(c) The Company computes depreciation using the straight-line method over the
estimated useful lives of the buildings (generally 40 years) and improvements
(generally 3 to 15 years).
(d) The Company transfers development properties to real estate properties the
earlier of 80% occupancy or one year after completion of the shell construction.
(e) EastGroup has a $31,716,000 non-recourse first mortgage loan with
Metropolitan Life secured by Dominguez, Kingsview, Walnut, Washington, Industry
Distribution Center I and Shaw.
(f) EastGroup has a $72,354,000 non-recourse first mortgage loan with Prudential
Life secured by Broadway VI, World Houston 1 & 2, 21 & 23, Arion 16, Ethan
Allen, Northpark I-IV, South 55th Avenue, East University I & II and Santan 10
II.
(g) EastGroup has a $23,873,000 non-recourse first mortgage loan with New York
Life secured by America Plaza, Central Green and World Houston 3-9.
(h) EastGroup has a $38,549,000 non-recourse first mortgage loan with
Metropolitan Life secured by Interstate I, II & III, Venture, Stemmons Circle,
Glenmont I & II, West Loop I & II, Butterfield Trail and Rojas.
(i) EastGroup has a $35,289,000 non-recourse first mortgage loan with
Metropolitan Life secured by Airport Distribution, Southpointe, Broadway I, III
& IV, Southpark, 51st Avenue, Chestnut, Main Street, Interchange Business Park,
North Stemmons I land and World Houston 12 & 13.
(j) EastGroup has a $39,839,000 non-recourse first mortgage loan with Prudential
Life secured by Broadway V, 35th Avenue, Sunbelt, Freeport (aka Beltway Crossing
I), Lockwood, Northwest Point, Techway Southwest I and World Houston 10, 11 &
14.
(k) EastGroup has a $29,415,000 non-recourse first mortgage loan with New York
Life secured by World Houston 17, Kirby, Americas Ten I, Shady Trail, Palm River
North I, II & III and Westlake I & II.
(l) EastGroup has a $35,316,000 non-recourse first mortgage loan with Prudential
Life secured by Country Club Commerce Center I, Lake Pointe, Techway Southwest
II and World Houston 19 & 20.
(m) EastGroup has a $35,546,000 non-recourse first mortgage loan with Prudential
Life secured by Huntwood and Wiegman.
(n) EastGroup has a $73,502,000 non-recourse first mortgage loan with Prudential
Life secured by Alamo Downs, Arion 1-15 & 17, Rampart I, II & III, Santan 10 and
World Houston 16.
52
(o) EastGroup has a $76,544,000 non-recourse first mortgage loan with Prudential
Life secured by Beltway II, III & IV, Eastlake, Fairgrounds I-IV, Nations Ford
I-IV, Techway Southwest III, Westinghouse, Wetmore I-IV and World Houston 15 &
22.
(p) EastGroup has a $59,000,000 limited recourse first mortgage loan with
Prudential Life secured by Southridge XII, Airport Commerce Center I & II,
Interchange Park, Ridge Creek III, World Houston 24, 25 & 27 and Waterford
Distribution Center. The loan has a recourse liability of $5 million which will
be released based on the secured properties generating certain base rent amounts
subsequent to January 1, 2011.
53
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2008
Number of Interest Maturity Periodic
Loans Rate Date Payment Terms
-------------------------------------------------------------------------------
First mortgage loan: Interest accrued and due monthly
United Stationers Tampa Building, (beginning 01/01/09); balloon payment
Florida 1 6.0% (e) 08/2013 of $4,150,000 due at maturity
Second mortgage loan:
Madisonville land, Kentucky 1 7.0% 01/2012 Principal and interest due monthly
---------
Total mortgage loans (c) 2
=========
Principal
Face Amount Carrying Amount of Loans
of Mortgages Amount of Subject to Delinquent
Dec. 31, 2008 Mortgages Principal or Interest (d)
------------------------------------------------------------------------
(In thousands)
First mortgage loan:
United Stationers Tampa Building,
Florida $ 4,150 4,069 -
Second mortgage loan:
Madisonville land, Kentucky 105 105 -
------------------------------------------------------------------------
Total mortgage loans $ 4,255 4,174 (a)(b) -
========================================================================
(a) Changes in mortgage loans follow:
Years Ended December 31,
----------------------------------------
2008 2007 2006
----------------------------------------
(In thousands)
Balance at beginning of year............................... $ 132 162 -
Advances on mortgage notes receivable...................... 4,994 - 185
Payments on mortgage notes receivable...................... (871) (30) (23)
Discount on mortgage note receivable....................... (198) - -
Amortization of discount on mortgage note receivable....... 117 - -
----------------------------------------
Balance at end of year..................................... $ 4,174 132 162
========================================
(b) The aggregate cost for federal income tax purposes is approximately
$4,150,000. The federal income tax return for the year ended December 31, 2008,
has not been filed and, accordingly, the income tax basis of mortgage loans as
of December 31, 2008, is based on preliminary data.
(c) Reference is made to allowance for possible losses on mortgage loans
receivable in the Notes to Consolidated Financial Statements.
(d) Interest in arrears for three months or less is disregarded in computing
principal amount of loans subject to delinquent interest.
(e) This mortgage loan has a stated interest rate of 6.0% and an effective
interest rate of 6.5%. A discount on mortgage note receivable of $198,000 was
recognized at the inception of the loan and is shown in the table in footnote
(a) above.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EASTGROUP PROPERTIES, INC.
By: /s/ DAVID H. HOSTER II
------------------------
David H. Hoster II
Chief Executive Officer, President & Director
February 26, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
* *
------------------------------- -------------------------------
D. Pike Aloian, Director H. C. Bailey, Jr., Director
February 26, 2009 February 26, 2009
* *
------------------------------- -------------------------------
Hayden C. Eaves III, Director Fredric H. Gould, Director
February 26, 2009 February 26, 2009
* *
------------------------------- -------------------------------
Mary Elizabeth McCormick, Director David M. Osnos, Director
February 26, 2009 February 26, 2009
* /s/ N. KEITH MCKEY
------------------------------- -------------------------------
Leland R. Speed, Chairman of the Board * By N. Keith McKey
(Principal Executive Officer) Attorney-in-fact
February 26, 2009 February 26, 2009
/s/ BRUCE CORKERN
-------------------------------
Bruce Corkern, Sr. Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
February 26, 2009
/s/ N. KEITH MCKEY
-------------------------------
N. Keith McKey, Executive Vice-President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial Officer)
February 26, 2009
59
EXHIBIT INDEX
The following exhibits are included in this Form 10-K or are incorporated by
reference as noted in the following table:
(3) Exhibits required by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation (incorporated by reference to Appendix
B to the Company's Proxy Statement for its Annual Meeting of
Stockholders held on June 5, 1997).
(b) Bylaws of the Company (incorporated by reference to Exhibit 3.1
to the Company's Form 8-K filed December 10, 2008).
(c) Articles Supplementary of the Company relating to the
reclassification of the Series C Preferred Stock and the 7.95%
Series D Cumulative Redeemable Preferred Stock to the Company's
common stock (incorporated by reference to Exhibit 3.2 to the
Company's Form 8-K filed December 10, 2008).
(10) Material Contracts (*Indicates management or compensatory agreement):
(a) EastGroup Properties, Inc. 1991 Directors Stock Option Plan, as
Amended (incorporated by reference to Exhibit B to the Company's
Proxy Statement for its Annual Meeting of Stockholders held on
December 8, 1994).*
(b) EastGroup Properties, Inc. 1994 Management Incentive Plan, as
Amended and Restated (incorporated by reference to Appendix A to
the Company's Proxy Statement for its Annual Meeting of
Stockholders held on June 2, 1999).*
(c) Amendment No. 1 to the Amended and Restated 1994 Management
Incentive Plan (incorporated by reference to Exhibit 10(c) to the
Company's Form 8-K filed January 8, 2007).*
(d) EastGroup Properties, Inc. 2000 Directors Stock Option Plan
(incorporated by reference to Appendix A to the Company's Proxy
Statement for its Annual Meeting of Stockholders held on June 1,
2000).*
(e) EastGroup Properties, Inc. 2004 Equity Incentive Plan
(incorporated by reference to Appendix D to the Company's Proxy
Statement for its Annual Meeting of Stockholders held on May 27,
2004).*
(f) Amendment No. 1 to the 2004 Equity Incentive Plan (incorporated
by reference to Exhibit 10(f) to the Company's Form 10-K for the
year ended December 31, 2006).*
(g) Amendment No. 2 to the 2004 Equity Incentive Plan (incorporated
by reference to Exhibit 10(d) to the Company's Form 8-K filed
January 8, 2007).*
(h) EastGroup Properties, Inc. 2005 Directors Equity Incentive Plan
(incorporated by reference to Appendix B to the Company's Proxy
Statement for its Annual Meeting of Stockholders held on June 2,
2005).*
(i) Amendment No. 1 to the 2005 Directors Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's Form
8-K filed June 6, 2006).*
(j) Amendment No. 2 to the 2005 Directors Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's Form
8-K filed June 3, 2008).*
(k) Form of Severance and Change in Control Agreement that the
Company has entered into with Leland R. Speed, David H. Hoster II
and N. Keith McKey (incorporated by reference to Exhibit 10(a) to
the Company's Form 8-K filed January 7, 2009).*
(l) Form of Severance and Change in Control Agreement that the
Company has entered into with John F. Coleman, William D. Petsas,
Brent W. Wood and C. Bruce Corkern (incorporated by reference to
Exhibit 10(b) to the Company's Form 8-K filed January 7, 2009).*
(m) Compensation Program for Non-Employee Directors (a written
description thereof is set forth in Item 5.02 of the Company's
Form 8-K filed June 3, 2008).*
(n) Annual Cash Bonus and 2008 Annual Long-Term Incentive Performance
Goals (a written description thereof is set forth in Item 5.02 of
the Company's Form 8-K filed June 3, 2008).*
(o) Multi-Year Long-Term Incentive Performance Goals (a written
description thereof is set forth in Item 1.01 of the Company's
Form 8-K filed June 6, 2006).*
60
(p) Second Amended and Restated Credit Agreement Dated January 4,
2008 among EastGroup Properties, L.P.; EastGroup Properties,
Inc.; PNC Bank, National Association, as Administrative Agent;
Regions Bank and SunTrust Bank as Co-Syndication Agents; Wells
Fargo Bank, National Association as Documentation Agent; and PNC
Capital Markets LLC, as Sole Lead Arranger and Sole Bookrunner;
and the Lenders thereunder (incorporated by reference to Exhibit
10.1 to the Company's Form 8-K filed January 10, 2008).
(21) Subsidiaries of EastGroup Properties, Inc. (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(31) Rule 13a-14(a)/15d-14(a) Certifications (pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002)
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
(32) Section 1350 Certifications (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002)
(a) David H. Hoster II, Chief Executive Officer
(b) N. Keith McKey, Chief Financial Officer
61