ITEM 1. BUSINESS.
Organization
EastGroup Properties, Inc. (the "Company" or "EastGroup") is an equity real estate investment trust ("REIT") organized in 1969. The Company has elected to be taxed as a real estate investment trust under Sections 856-860 of the Internal Revenue Code (the Code), as amended, and intends to continue to qualify to be so taxed.
Administration
The Company is self-administered and maintains its principal executive offices in Jackson, Mississippi. As of March 9, 2001, EastGroup had 46 full-time and two part-time employees.
Current Operations
EastGroup is a self-administered equity real estate investment trust focused on the acquisition, ownership and development of industrial properties in major Sunbelt markets throughout the United States. Its strategy for growth is based on its property portfolio orientation toward premier distribution facilities located near major transportation centers. EastGroup's portfolio currently includes 17 million square feet with an additional 913,000 square feet of properties under development. EastGroup's press releases are available on the worldwide web at www.eastgroup.net.
During 2000, EastGroup expanded its portfolio by the transfer of eight properties (664,000 square feet) from industrial development to industrial properties with costs of $38,948,000, through acquisition of five properties (335,000 square feet) and an 18-acre land parcel with total costs of $13,628,000 and through capital improvements of $10,611,000 on existing properties. In addition to direct property acquisitions and developments, EastGroup seeks to grow its portfolio through the acquisition of other public and private real estate companies and REITs. In 2000, the Company invested $4,964,000 in the stock of REITs. The recycling of capital has been an important element of EastGroup's growth strategy. Through recycling, EastGroup seeks to improve the physical quality and location of its properties and increase the clustering of assets in core submarkets. During 2000, the Company sold one industrial property, one apartment complex and a parcel of land for net proceeds of $17,170,000 and also realized deferred gains of $94,000 from a 1999 sale for total gains for financial reporting purposes of approximately $8,771,000. In addition, the Company realized gains of $2,154,000 on its investments in Franklin Select Realty Trust (Franklin) and Pacific Gulf Properties (PAG) due to liquidating distributions from these companies. The Company expects further distributions from PAG in 2001 as PAG liquidates its assets intended for sale. See Management's Discussion and Analysis of Financial Condition and Results of Opertions.
The Company intends to continue to qualify as a REIT under the Code. Ordinary taxable income will continue to be paid to the stockholders. The Company has the option of (i) paying out capital gains to the stockholders with no tax to the Company, or (ii) paying a capital gains tax and retaining the gains on sales, 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 book value of the property sold and the retained portion of capital gains, if any, are generally reinvested by the Company.
EastGroup incurs short-term floating rate debt in connection with the acquisition of real estate and payment of costs of development projects, and attempts to replace floating rate debt with fixed-rate term loans secured by real property or to repay the debt with the proceeds of sales of equity securities as market conditions permit. EastGroup also may, in appropriate circumstances, acquire one or more properties in exchange for EastGroup's equity 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 so require, but it does not presently intend to make loans other than in connection with such transactions.
EastGroup has no present intentions of underwriting securities of other issuers. The strategies and policies set forth above were determined and are subject to review by EastGroup's Board of Directors, which may change such strategies or policies based upon its evaluation of the state of the real estate market, the performance of EastGroup's assets, capital and credit market conditions, and other relevant factors. EastGroup provides annual reports to its stockholders, which contain financial statements audited by the Company's independent public accountants.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether the owner knows of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to use such property as collateral in its borrowings. All of EastGroup's properties have been subjected to environmental audits by independent environmental consultants, which reports have not revealed any potential significant environmental liability. Management of EastGroup is not aware of any environmental liability that would have a material adverse effect on EastGroup's business, assets, financial position or results of operations.
ITEM 2.
ITEM 2. PROPERTIES.
The Company conducts its primary operations from approximately 11,000 square feet of rented office space located at 300 One Jackson Place, 188 East Capitol Street, Jackson, Mississippi. In March 1998, EastGroup acquired Ensign Properties, Inc., an independent industrial developer in Orlando. This acquisition allowed EastGroup to become self-managed in all of its Florida markets. It also significantly increased the Company's development capability in Florida. In September 1998, EastGroup opened a western regional office based in Phoenix, Arizona. This office manages the Company's operations in Arizona and California that total over 5.3 million square feet of industrial space.
At December 31, 2000, the Company did not own any single property that is 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
SHARES OF COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's shares of Common Stock are presently 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 SERIES A PREFERRED STOCK MARKET PRICES AND DIVIDENDS
The Company's shares of Series A 9.00% Cumulative Redeemable Preferred Stock are also listed for trading on the New York Stock Exchange and trade under the symbol "EGP PrA." The following table shows the high and low preferred 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.
As of March 9, 2001, there were approximately 1,300 holders of record of the Company's 15,859,022 outstanding shares of common stock. Approximately 91% of the Company's outstanding common shares are held by CEDE & Co., which is accounted for as a single shareholder of record for multiple common stock owners. CEDE & Co. is a national clearinghouse for the settlement of trades in corporate, municipal and mortgage-backed securities and performs asset services for its participating banks and broker/dealers. All of the $1.58 per common share total distributions paid in 2000 and the $1.48 per share distributions paid in 1999 were taxable as ordinary income for federal income tax purposes.
As of March 9, 2001, there were 70 holders of record of the Company's 1,725,000 outstanding shares of Series A preferred stock. Approximately 97% of the Company's outstanding Series A preferred shares are held by CEDE & Co., which is accounted for as a single shareholder of record for multiple preferred stock owners. All of the $2.25 per share Series A preferred stock distributions paid in both 2000 and 1999 were taxable as ordinary income for federal income tax purposes.
SHARES OF SERIES B PREFERRED STOCK MARKET PRICES AND DIVIDENDS
In September 1998, EastGroup entered into an agreement with Five Arrows Realty Securities II, L.L.C., an investment fund managed by Rothschild Realty, Inc., a member of the Rothschild Group, providing for the sale of up to 2,800,000 shares of Series B 8.75% Cumulative Convertible Preferred Stock at a net price of $24.50 per share. The Series B Preferred Stock, which is convertible into common stock at a conversion price of $22.00 per share, is entitled to quarterly dividends in arrears equal to the greater of $0.547 per share or the dividend on the number of shares of common stock into which a share of Series B Preferred Stock is convertible. In December 1998, the Company sold $10 million of the Series B Preferred Stock to Five Arrows and the remaining $60 million in September 1999. All of the $2.188 per share Series B distributions paid in 2000 and the $1.641 per share distributions paid in 1999 were taxable as ordinary income for federal income tax purposes.
The following table sets forth selected consolidated financial data for the Company and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.
(1) Represents previously capitalized start-up and organizational costs that were expensed on January 1, 1999 in accordance with the requirements of Statement of Position 98-5.
(2) EastGroup defines funds from operations (FFO), consistent with the National Association of Real Estate Investment Trusts (NAREIT) definition, as net income (loss)(computed in accordance with 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. Effective January 1, 2000, NAREIT clarified the definition of FFO to include gains from sales of nondepreciable real estate (land). Gains on land for 2000 have been included in FFO and gains on land for the previous years have not been included in FFO. Gains on land were $348,000 for 1999, $44,000 for 1998, $98,000 for 1997 and $243,000 for 1996. The Company believes that FFO is an appropriate measure of performance for equity real estate investment trusts. FFO is not considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available for the Company's cash needs, including the ability to make distributions.
(3) Does not include a 50% controlled joint venture investment of $4,367,000 at December 31, 1996 that was sold in 1997, or the $500,000 land purchase-leaseback sold in 1999.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Assets of EastGroup were $666,205,000 at December 31, 2000, an increase of $34,054,000 from December 31, 1999. Liabilities (excluding minority interests) increased $28,617,000 to $289,116,000; minority interests decreased $643,000 to $1,697,000; and stockholders' equity increased $6,080,000 to $375,392,000 during the same period. Book value per common share increased from $16.47 at December 31, 1999 to $16.55 at December 31, 2000.
Industrial properties increased $50,262,000 during the year ended December 31, 2000 as compared to 1999. This increase was primarily due to the transfer of eight properties from industrial development with total costs of $38,948,000, the acquisition of six properties for $13,628,000 (as detailed below), capital improvements of $10,180,000 and the reclassification of one property from real estate held for sale with costs of $2,749,000. These increases were offset by the reclassifications of four properties to real estate held for sale with costs of $15,243,000.
Industrial development increased $1,713,000 during the year ended December 31, 2000. This increase resulted primarily from development costs of $40,661,000 on development properties, offset by development properties transferred to industrial properties with costs of $38,948,000, as detailed below.
(1) The information provided above includes forward-looking data based on current construction schedules, the status of lease negotiations with potential tenants and other relevant factors currently available to the Company. There can be no assurance that any of these factors will not change or that any change will not affect the accuracy of such forward-looking data. Among the factors that could affect the accuracy of the forward-looking statements are weather or other natural occurrence, default or other failure of performance by contractors, increases in the price of construction materials or the unavailability of such materials, failure to obtain necessary permits or approvals from government entities, changes in local and/or national economic conditions, increased competition for tenants or other occurrences that could depress rental rates, and other factors not within the control of the Company.
Other real estate properties decreased by $6,919,000 as a result of the reclassification of an office building to real estate held for sale with costs of $7,037,000, offset by capital improvements of $118,000.
Real estate held for sale increased $8,551,000 primarily due to the reclassification of four industrial properties and one office building to real estate held for sale with total costs of $22,280,000 and to capital improvements of $313,000. These increases were offset by the sales of one industrial property, one apartment complex and one parcel of land with total costs of $11,293,000 and by the transfer of one industrial property to real estate properties with a cost of $2,749,000.
Accumulated depreciation on real estate properties and real estate held for sale increased $18,541,000 due to depreciation expense of $21,354,000, offset by the sale of two properties with total accumulated depreciation of $2,813,000.
Mortgage loans receivable increased $485,000 during 2000 as a result of advances of $4,609,000 offset by repayments of $4,124,000 that included the payoffs of the BayPointe loan of $1,965,000 and the Wilson Street loan of $2,100,000.
Investment in real estate investment trusts (REITs) decreased $7,640,000 primarily as a result of liquidating dividends from Franklin and the first liquidating dividend from PAG. The Company's basis in these shares decreased from $15,040,000 to zero. PAG has sold a significant portion of its assets and has announced that it intends to sell most of its remaining assets. Any further distributions received by the Company will be recorded as realized gains (see Liquidity and Capital Resources). These decreases were offset by the investment of $4,964,000 in other REIT shares and from an increase of $2,436,000 in the market value of the Company's investments in PAG and other REIT shares.
Other assets increased $5,939,000 primarily as a result of increases in tax deferred cash escrows of $3,525,000 and unamortized leasing commissions and loan costs of $1,731,000.
Mortgage notes payable increased $20,044,000 as a result of the Company's new $26,300,000 nonrecourse first mortgage loan and the University Business Center new loan of $11,500,000. These increases were offset by regularly scheduled principal payments of $3,839,000 and the repayment of $8,411,000 on the University Business Center Cigna note and $5,506,000 on the La Vista Apartments note paid off at the sale closing.
Notes payable to banks increased $7,000,000 as a result of borrowings of $182,519,000 offset by payments of $175,519,000. The Company's credit facilities are described in greater detail under Liquidity and Capital Resources.
Accounts payable and accrued expenses increased $1,622,000 primarily as a result of a net increase in payables due to timing differences.
Minority interest in operating partnership decreased from $650,000 to zero as a result of the repurchase of all outstanding limited partnership units during 2000.
Accumulated other comprehensive income increased $2,436,000 as a result of an increase in the market value of the Company's investments recorded in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," offset by liquidating dividends from Franklin and PAG.
As a result of the adoption of a new compensation plan, unearned compensation of $3,716,000 was recorded to show the effect of the initial incentive restricted stock issuance. This amount was offset by amortization of $372,000 to record the expense for 2000 associated with the plan. See Note 7 of the Notes to the Consolidated Financial Statements for disclosure as to this plan.
Undistributed earnings increased $1,531,000 as a result of net income of $36,512,000 exceeding dividends on common stock of $24,973,000 and dividends on preferred stock of $10,008,000.
RESULTS OF OPERATIONS
2000 Compared to 1999
Net income available to common shareholders for 2000 was $26,504,000 ($1.70 per basic share and $1.68 per diluted share) compared to net income available to common shareholders in 1999 of $32,229,000 ($2.01 per basic share and $1.99 per diluted share). Income before gain on real estate investments was $27,741,000 in 2000 compared to $23,416,000 in 1999. Gain on real estate investments was $8,771,000 in 2000 compared to $15,357,000 in 1999. Income before cumulative effect of change in accounting principle was $36,512,000 in 2000 compared to $38,773,000 in 1999. Cumulative effect of change in accounting principle was zero in 2000 and $418,000 in 1999. The paragraphs that follow describe the results of operations in greater detail.
Property net operating income (PNOI) from real estate properties, defined as income from real estate operations less property operating expenses (before interest expense and depreciation), increased by $8,168,000 or 12.9% for 2000, compared to 1999. PNOI by property type and percentage leased for industrial were as follows:
PNOI from industrial properties increased $9,167,000 for 2000 compared to 1999 primarily due to acquisitions, rental rate increases and development properties that achieved stabilized operations in 1999 and 2000. Industrial properties held throughout 2000 and 1999 showed an increase in PNOI of 3.2% for 2000.
Gain on securities increased $2,124,000 for 2000 compared to 1999 primarily due to the liquidating distributions from Franklin and PAG as discussed in the Financial Condition section.
Bank interest expense (excluding amortization of loan costs of $264,000 for 2000 and $251,000 for 1999) increased $1,550,000 from $6,843,000 in 1999 to $8,393,000 in 2000. Average bank borrowings were $107,221,000 in 2000 compared to $104,335,000 in 1999 with average interest rates of 7.83% in 2000 compared to 6.56% in 1999. Bank interest rates at December 31, 2000 were 8.00% on $92,000,000 and 8.75% on $10,000,000. Bank interest rates at December 31, 1999 were 7.50% on $77,000,000, 7.44% on $8,000,000 and 7.75% on $10,000,000. Interest costs incurred during the period of construction of real estate properties are capitalized and offset against the bank interest expense. The interest costs capitalized on real estate properties for 2000 were $2,060,000 compared to $1,834,000 for 1999. See Note 5 in the Notes to the Consolidated Financial Statements for disclosure relating to the Company's notes payable to banks.
Interest expense on real estate properties (excluding amortization of loan costs of $169,000 and $152,000 for 1999) decreased $472,000 from $12,276,000 in 1999 to $11,804,000 in 2000, primarily as a result of the payoffs of five mortgages in 1999 and two in 2000, offset by increases due to the issuance of one mortgage and assumption of one mortgage in 1999 and to the issuances of two mortgages in 2000. See Note 6 in the Notes to the Consolidated Financial Statements for details of these transactions.
Depreciation and amortization increased $3,210,000 in 2000 compared to 1999. This increase was primarily due to the industrial properties acquired in both 1999 and 2000 and development properties that achieved stabilized operations in 1999 and 2000, offset by the sales of several properties in 1999 and 2000, and the transfer of several properties to real estate held for sale (depreciation not taken on those properties in the category of "real estate held for sale").
The increase in general and administrative expenses of $1,088,000 for the year ended December 31, 2000 compared to 1999 is primarily due to compensation expense of $782,000 in 2000 for the Company's recently granted restricted stock awards. See Note 7 in the Notes to the Consolidated Financial Statements for disclosure as to this plan.
In 2000, the Company recognized gains of $8,771,000 consisting of the sale of two properties and one parcel of land and the recognition of a deferred gain. In 1999, the Company recognized gains of $15,357,000 consisting primarily of the sale of three properties, two parcels of land and a land purchase leaseback, a write-down of one property, and the recognition of other deferred gains. See Note 2 in the Notes to the Consolidated Financial Statements for details of these gains.
NAREIT has recommended supplemental disclosures concerning capital expenditures and leasing costs. Capital expenditures for the years ended December 31, 2000 and 1999 by category are as follows:
The Company's leasing costs are capitalized and included in other assets. The costs are amortized over the lives of the leases and are included in depreciation and amortization expense. A summary of these costs for the years ended December 31, 2000 and 1999 is as follows:
1999 Compared to 1998
Net income available to common shareholders for 1999 was $32,229,000 ($2.01 per basic share and $1.99 per diluted share) compared to net income available to common shareholders in 1998 of $27,266,000 ($1.67 per basic share and $1.66 per diluted share). Income before gain on real estate investments was $23,416,000 in 1999 compared to $19,623,000 in 1998. Gain on real estate investments was $15,357,000 in 1999 compared to $9,713,000 in 1998. Income before cumulative effect of change in accounting principle was $38,773,000 in 1999 compared to $29,336,000 in 1998. Cumulative effect of change in accounting principle was $418,000 for 1999 and zero for 1998. The paragraphs that follow describe the results of operations in greater detail.
PNOI from real estate properties, defined as income from real estate operations less property operating expenses (before interest expense and depreciation), increased by $8,395,000 or 15.27% for 1999, compared to 1998. PNOI by property type and percentage leased for industrial were as follows:
PNOI from industrial properties increased $12,951,000 for 1999 compared to 1998 primarily due to acquisitions, rental rate increases and development properties that achieved stabilized operations in 1998 and 1999. Industrial properties held throughout 1999 and 1998 showed an increase in PNOI of 5.8% for 1999.
PNOI from other properties decreased $4,556,000 for 1999 compared to 1998 primarily due to the sales of the Columbia Place Office Building and four apartment complexes in 1998 and the 8150 Leesburg Pike Office Building in July 1999.
Bank interest expense (excluding amortization of loan costs of $251,000 for 1999 and $375,000 for 1998) increased $175,000 from $6,668,000 in 1998 to $6,843,000 in 1999. Average bank borrowings were $104,335,000 in 1999 compared to $94,488,000 in 1998 with average interest rates of 6.56% in 1999 compared to 7.06% in 1998. Average bank borrowings increased primarily as a result of the Meridian acquisition and the acquisition and development of industrial properties. Bank interest rates at December 31, 1999 were 7.50% on $77,000,000, 7.44% on $8,000,000 and 7.75% on $10,000,000. The bank interest rate at December 31, 1998 was 6.96%. Interest costs incurred during the period of construction of real estate properties are capitalized and offset against the bank interest expense. The interest costs capitalized on real estate properties for 1999 were $1,834,000 compared to $822,000 for 1998.
Interest expense on real estate properties (excluding amortization of loan costs of $152,000 for 1999 and $146,000 for 1998) increased $1,695,000 from $10,581,000 in 1998 to $12,276,000 in 1999, primarily as a result of mortgages assumed in 1998 on two acquired properties and other mortgages assumed in the Meridian VIII merger, and from the issuance of two mortgages in 1999. These increases were offset by the payoffs of four mortgages in 1998 and five in 1999.
Depreciation and amortization increased $3,614,000 in 1999 compared to 1998. This increase was primarily due to the industrial properties acquired in both 1998 and 1999 and development properties that achieved stabilized operations in 1998 and 1999, offset by the sales of several properties in 1998 and 1999, and the transfer of several properties to real estate held for sale (depreciation not taken on those properties in the category of "real estate held for sale").
The increase in general and administrative expenses of $748,000 for the year ended December 31, 1999 was primarily due to an increase in general and administrative costs due to growth of the Company.
In 1999, the Company recognized gains of $15,357,000 consisting primarily of the sale of three properties, two parcels of land and a land purchase leaseback, a write-down of one property and the recognition of other deferred gains. In 1998, the Company recognized gains of $9,713,000 consisting primarily of the sale of eight properties and the recognition of other deferred gains. See Note 2 in the Notes to the Consolidated Financial Statements for details of these sales.
NAREIT has recommended supplemental disclosures concerning capital expenditures and leasing costs. Capital expenditures for the years ended December 31, 1999 and 1998 by category are as follows:
The Company's leasing costs are capitalized and included in other assets. The costs are amortized over the lives of the leases and are included in depreciation and amortization expense. A summary of these costs for the years ended December 31, 1999 and 1998 is as follows:
NEW ACCOUNTING PRONOUNCEMENTS
Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998 and, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The statement establishes accounting and reporting standards for derivative instruments and for hedging activities. All derivatives are required to be recognized as either assets or liabilities in the statement of financial position and measured at fair value. Changes in fair value will be reported either in earnings or outside of earnings depending on the intended use of the derivative and the resulting designation. Entities applying hedge accounting are required to establish at the inception of the hedge the method used to assess the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The Company has evaluated the effect of adopting this statement and believes the effect of adoption would have no impact to its financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $53,016,000 for the year ended December 31, 2000. Other sources of cash were primarily from collections on mortgage loan receivables, sales of real estate investments, liquidating distributions from REIT shares, bank borrowings, proceeds from two new mortgage notes and proceeds from exercise of stock options. The Company distributed $24,702,000 in common and $10,008,000 in preferred stock dividends. Other primary uses of cash were for advances on mortgage loan receivables, capital improvements at the various properties, construction and development of properties, purchases of real estate investments, purchase of REIT shares, bank debt payments and mortgage note payments. Total debt at December 31, 2000 and 1999 was as follows:
The Company has a three-year $150,000,000 unsecured revolving credit facility with a group of ten banks that matures in January 2002. The interest rate is based on the Eurodollar rate plus 1.25% and was 8.00% on $92,000,000 at December 31, 2000. An unused facility fee of .25% is also assessed on this note. In January 2001, the Company fixed a 6.75% interest rate for six months on $25 million of existing debt under this line. The remaining bank debt under this line has a 30-day rate which was 6.84% on $67,000,000 at March 9, 2001.
EastGroup has a one-year $10,000,000 unsecured revolving credit facility with Chase Bank of Texas that matured in January 2001. The loan was amended in January 2001 to reflect a new maturity date of January 2002. The interest rate is based on Chase Bank of Texas, National Association's prime rate less .75% and was 8.75% on a $10,000,000 balance at December 31, 2000. At March 9, 2001, the rate was 7.75% on $2,877,000.
The Company has a $15,000,000 unsecured discretionary line of credit with Chase Bank of Texas. The interest rate and maturity date for each loan proceeds are determined at the time of any advances by the Company and Chase. At December 31, 2000, the outstanding balance for this loan was zero. At March 9, 2001, the rate was 6.75% on $15,000,000.
In January 2001, EastGroup executed an application with Metropolitan Life Insurance Company for a $45 million nonrecourse mortgage loan with an interest rate of 7.25%, a 25-year amortization and a 10-year maturity. This loan will be secured by eight properties in Dallas, Houston and El Paso and is expected to close in March.
EastGroup's only debt maturing in 2001 was a $3.8 million mortgage due in March 2001. The Company repaid this note upon maturity by using bank debt.
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. Since September 30, 1998, a total of 827,700 shares have been repurchased for $14,170,000 (an average of $17.12 per share).
On June 20, 2000, Pacific Gulf Properties announced that it had entered into an agreement to sell all of its industrial properties and is marketing its multi-family assets with the disposition of its senior housing assets to be determined at a future date. EastGroup owns 487,100 shares of PAG. In December 2000, upon receipt of the initial liquidating distribution of $22.00 per share from PAG, the Company reduced its basis in PAG shares to zero and recorded a gain of $807,000. Based on publicly available estimates prepared by analysts who follow PAG, management estimates that the Company will receive an additional $6.40 per share in 2001 from PAG's distributions of cash as it sells its remaining assets.
Subsequent to December 31, 2000, EastGroup purchased World Houston 10 (107,000 square feet) for $5,712,000. The purchase was funded with cash escrows from tax deferred exchange transactions. As part of this transaction, the seller repaid $4,682,000 to the Company on the outstanding mortgage loan receivable and accrued interest for the World Houston 10 note.
Budgeted capital improvements for the year ending December 31, 2001 follow:
Budgeted industrial development costs are estimated to be $36,000,000 for the year.
The Company anticipates that its current cash balance, operating cash flows, and borrowings under the lines of credit will be adequate for the Company's (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) common stock repurchases.
INFLATION
In the last five years, inflation has not had a significant impact on the Company because of the relatively low inflation rate in the Company's geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation. In addition, the Company's leases typically have three to five year terms, which may enable the Company to replace existing leases with new leases at a higher base if rents on the existing leases are below the then-existing market rate.
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 interest rate risk management objective 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.
As the table above incorporates only those exposures that exist as of December 31, 2000, it does not consider those exposures or positions that could arise after that date. The Company's ultimate economic impact with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates.
Forward Looking Statements
In addition to historical information, certain sections of this Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company's hopes, expectations, intentions, beliefs, strategies regarding the future, the anticipated performance of development and acquisition properties, capital resources, profitability and portfolio performance. Forward-looking statements involve numerous risks and uncertainties. The following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: defaults or non-renewal of leases, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, environmental uncertainties, risks related to natural disasters, financial market fluctuations, changes in real estate and zoning laws and increases in real property tax rates. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements. See also the Company's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Registrant's Consolidated Balance Sheets as of December 31, 2000 and 1999, 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, 2000, 1999 and 1998 and the independent auditors' report thereon are included under Item 14 of this report and are incorporated herein by reference. Unaudited quarterly results of operations included in the notes to the consolidated financial statements are also incorporated herein by reference.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant's definitive proxy statement which will be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN COMMON STOCK OWNERS AND MANAGEMENT.
The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted, or the required information is included in the notes to the consolidated financial statements.
(3) Form 10-K Exhibits: (a) Articles of Incorporation (incorporated by reference to Appendix B to the Registrant's Proxy Statement dated April 24, 1997). (b) Bylaws of the Registrant (incorporated by reference to Appendix C to the Registrant's Proxy Statement dated April 24, 1997). (c) Articles Supplementary of the Company relating to the 9.00% Series A Cumulative Redeemable Preferred Stock of the Company (incorporated by reference to the Company's Form 8-A filed June 15, 1998). (d) Articles Supplementary of the Company relating to the Series B Cumulative Convertible Preferred Stock (incorporated by reference to the Company's Form 8-K filed on October 1, 1998). (e) Articles Supplementary of the Company relating to the Series C Preferred Stock (incorporated by reference to the Company's Form 8-A filed December 9, 1998). (f) Certificate of Correction to Articles Supplementary with respect to Series B Cumulative Convertible Preferred Stock (incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1998).
(10) Material Contracts: (a) EastGroup Properties 1994 Management Incentive Plan, As Amended (incorporated by reference to Appendix A of the Registrant's Proxy Statement for its Annual Meeting of Shareholders held on June 2, 1999). (b) EastGroup Properties 1991 Directors Stock Option Plan, As Amended (incorporated by reference to Exhibit B of the Registrant's proxy statement dated April 26, 1994).* (c) Form of Change in Control Agreement that Registrant has entered into with certain executive officers (Leland R. Speed, David H. Hoster II and N. Keith McKey) (incorporated by reference to the Registrant's 1996 Annual Report on Form 10-K).* (d) Investment Agreement dated as of September 25, 1998 between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (e) Operating Agreement dated September 25, 1998 between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (f) Agreement and Waiver between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (g) Credit Agreement dated January 13, 1999 among EastGroup Properties, L.P.; EastGroup Properties, Inc.; Chase Bank of Texas, National Association, as Arranger, Book Manager and Administrative Agent; First Union National Bank, as Syndication Agent; PNC Bank, National Association, as Documentation Agent; AmSouth Bank (successor to Deposit Guaranty National Bank), as Co-Agent; and the Lenders (incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1998). (21) Subsidiaries of Registrant (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(28) Agreement of Registrant to furnish the Commission with copies of instruments defining the rights of holders of long-term debt (incorporated by reference to Exhibit 28(e) of the Registrant's 1986 Annual Report on Form 10-K).
(99) Rights Agreement dated as of December 3, 1998 between the Company and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to the Company's Form 8-A filed December 9, 1998).
(b) None
*Indicates management or compensatory agreement.
INDEPENDENT AUDITORS' REPORT
THE DIRECTORS AND STOCKHOLDERS EASTGROUP PROPERTIES, INC.:
We have audited the consolidated financial statements of EastGroup Properties, Inc. and subsidiaries, as listed in the accompanying index. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
Jackson, Mississippi KPMG LLP March 2, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998
(1) Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of EastGroup Properties, Inc. (the Company or EastGroup), its wholly-owned subsidiaries and its investment in any joint ventures. At December 31, 2000 and 1999, the Company had two joint ventures: the 80% owned University Business Center and the 80% owned IBG Wiegman Road Associates. At December 31, 1998, the Company had four joint ventures: the 75% owned 56th Street Commerce Park, the 75% owned JetPort Commerce Park, the 80% owned University Business Center, and the 80% owned IBG Wiegman Road Associates. 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. All significant intercompany transactions and accounts have been eliminated in consolidation.
(b) Federal Income Taxes
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. The Company distributed all of its 2000, 1999 and 1998 taxable income to its stockholders. Accordingly, no provision for federal income taxes was necessary. Distributions paid per common share for federal income tax purposes were:
Distributions paid per share of Series A Preferred for federal income tax purposes for the years ended December 31, 2000, 1999, and 1998 were $2.25, $2.25, and $.725, respectively, paid as ordinary income with no return of capital.
Distributions paid per share of Series B Convertible Preferred for federal income tax purposes for the years ended December 31, 2000 and 1999 were $2.188 and $1.641, paid as ordinary income with no return of capital. No dividends were paid in 1998 on the Series B Preferred.
The Company's income differs for tax and financial reporting purposes principally because of (1) the timing of the deduction for the provision for possible losses and losses on investments, (2) the timing of the recognition of gains or losses from the sale of investments, (3) different depreciation methods and lives, and (4) mortgage loans having a different basis for tax and financial reporting purposes, thereby producing different gains upon collection of these loans.
(c) Income Recognition
Rental income from real estate operations is recognized on a straight-line basis.
Interest income on mortgage loans is recognized based on the accrual method unless a significant uncertainty of collection exists. If a significant uncertainty exists, interest income is recognized as collected. Certain mortgage loan discounts are amortized over the lives of the loans using a method that does not differ materially from the interest method.
The Company recognizes gains on sales of real estate in accordance with the principles set forth in Statement of Financial Accounting Standards No. 66 (SFAS 66), "Accounting for Sales of Real Estate." Upon closing of real estate transactions, the provisions of SFAS 66 require consideration for the transfer of rights of ownership to the purchaser, receipt of an adequate cash down payment from the purchaser and adequate continuing investment by the purchaser. If the requirements for recognizing gains have not been met, the sale and related costs are recorded, but the gain is deferred and recognized by the installment method as collections are received.
(d) Real Estate Properties
Real estate properties are carried at cost less accumulated depreciation. Cost includes the carrying amount of the Company's investment plus any additional consideration paid, liabilities assumed, costs of securing title (not to exceed fair market value in the aggregate) and improvements made subsequent to acquisition. Depreciation of buildings and other improvements, including personal property, is computed using the straight-line method over estimated useful lives of 25 to 40 years for buildings and 3 to 10 years for other 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. Geographically, the Company's investments are concentrated in the major sunbelt market areas of the southeastern and southwestern United States, primarily in the states of California, Florida, Texas and Arizona.
(e) Real Estate Held for Sale
Real estate properties that are currently offered for sale or are under contract to sell have been shown separately on the consolidated balance sheets as "real estate held for sale." Such assets are carried at the lower of current carrying amount or fair market value less estimated selling costs and are not depreciated while they are held for sale.
(f) Investment in Real Estate Investment Trusts
Marketable equity securities owned by the Company are categorized as available-for-sale securities, as defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses are reflected as a net amount in a separate component of stockholders' equity until realized. Since the Company did not exercise significant influence over its investment in REITs, these investments were accounted for under the cost method. The costs of these investments were adjusted to fair market value with an equity adjustment to account for unrealized gains/losses as indicated above.
(g) Allowance for Possible Losses and Impairment Losses
The Company measures impaired and restructured loans at the present value of expected future cash flows, discounted at the loan's effective interest rate or, as a practical expedient, at the loan's market price or the fair value of collateral if the loan is collateral dependent.
The Company applies SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by the Company be reviewed for impairment of value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less selling costs.
(h) Amortization
Debt origination costs are deferred and amortized using the straight-line method over the term of the loan. Leasing commissions are deferred and amortized using the straight-line method over the term of the lease.
(i) Goodwill
In March 1998, EastGroup acquired Ensign Properties, Inc., the largest independent industrial developer in Orlando. A portion of the total acquisition price for Ensign included goodwill, which represents the excess of the purchase price and related costs over the fair value assigned to the net tangible assets. The Company amortizes goodwill on a straight-line basis over 20 years. The Company will periodically review the recoverability of goodwill. The measurement of possible impairment is based primarily on the ability to recover the balance of the unamortized basis. In management's opinion, no material impairment existed at December 31, 2000, 1999, and 1998. Amortization expense for goodwill was $61,000 in 2000 and 1999 and $51,000 in 1998.
(j) Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
(k) Reclassifications
Certain reclassifications have been made in the 1999 and 1998 financial statements to conform to the 2000 presentation.
(l) Earnings Per Share
The Company applies SFAS No. 128 "Earnings Per Share," which requires companies to present basic earnings per share (EPS) and diluted EPS.
Basic EPS represents the amount of earnings for the year 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 shareholders by the weighted average number of common shares outstanding.
Diluted EPS represents the amount of earnings for the year available to each share of common stock outstanding during the 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's diluted EPS is calculated by totaling net income available to common shareholders plus dividends on dilutive convertible preferred shares and limited partnership (LP) dividends and dividing it by the weighted average number of common shares outstanding plus the dilutive effect of stock options related to outstanding employee stock options, LP units, nonvested restricted stock and convertible preferred stock, had the options or conversions been exercised. The dilutive effect of stock options and 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 assuming proceeds from the exercise of options are used to purchase common stock at the average market price during the period. The treasury stock method was also used assuming conversion of the convertible preferred stock.
(m) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses during the reporting period, and to disclose material contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
(n) Stock Based Compensation
The Company applies SFAS No. 123, "Accounting for Stock-Based Compensation." This standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. Companies are given the choice of either recognizing related compensation cost by adopting the fair value method, or to continue to use the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," while supplementally disclosing the pro forma effect on net income and net income per share using the new measurement criteria. The Company elected to continue to follow the requirements of APB No. 25, and accordingly, there was no effect on the results of operations.
The Company also accounts for restricted stock in accordance with APB No. 25, and accordingly, compensation expense is recognized over the expected vesting period using the straight-line method.
(o) Capitalized Development Costs
During the industrial development stage, costs associated with development (i.e., land, construction costs, interest expense during construction, property taxes, etc.) are aggregated into the total capitalization of the property. As the property becomes occupied, interest, depreciation and property taxes for the percentage occupied only is expensed as incurred. When the property becomes 80% occupied or one year after completion of the construction, whichever comes first, the property is no longer considered a development property and becomes an industrial property. When the property becomes classified as an industrial property, the entire property is depreciated accordingly, and interest and property taxes are expensed.
(2) Real Estate Owned
At December 31, 2000, the Company is offering for sale the Nobel Business Center in Hercules, California with a carrying amount of $2,393,000; the 109th Street Warehouse in Dallas, Texas with a carrying amount of $976,000; the LA Corporate Center in Los Angeles, California with a carrying amount of $6,334,000; the Ethan Allen Distribution Center in Los Angeles, California with a carrying amount of $11,934,000; the Delp Distribution Center III in Memphis, Tennessee with a carrying amount of $647,000; and 4.46 acres of land in the World Houston Business Park with a carrying amount of $690,000. No loss is anticipated on the sale of these properties. The results of operations for real estate held for sale at December 31, 2000, amounted to $1,820,000, $1,586,000, and $1,314,000, respectively, for the years ended December 31, 2000, 1999, and 1998. The results of operations for real estate held for sale at December 31, 1999, amounted to $258,000 and $293,000, respectively, for the years ended December 31, 1999 and 1998.
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 2000 was $2,060,000, compared to $1,834,000 for 1999 and $822,000 for 1998.
A summary of gains (losses) on real estate investments for the years ended December 31, 2000, 1999 and 1998 follows:
The following schedule indicates approximate future minimum rental receipts under noncancelable leases for the real estate properties by year as of December 31, 2000 (in thousands):
Future Minimum Rental Receipts Under Noncancelable Leases
Years Ended December 31, -------------------------
2001 $73,110 2002 60,848 2003 47,562 2004 31,853 2005 20,920 Thereafter 51,176 ---------------- Total minimum receipts $285,469 ================
Ground Leases
As of December 31, 2000, the Company owned two properties in Florida and two properties in Texas 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. Total lease expense amounts for the years ended December 31, 2000, 1999 and 1998 were $567,000, $511,000 and $490,000, respectively. Payments are subject to increases at 5 to 10 year intervals based upon the agreed or appraised fair market value of the leased premises on the adjustment date. The following schedule indicates approximate future minimum lease payments for these properties by year as of December 31, 2000 (in thousands):
Future Minimum Ground Lease Payments
Years Ended December 31, --------------------------
2001 $ 594 2002 594 2003 594 2004 594 2005 594 Thereafter 17,620 ---------------- Total minimum payments $20,590 ================
(3) Mortgage Loans Receivable
Included in the two industrial loans held at December 31, 2000 is $4,565,000 for World Houston 10 which was repaid in January 2001. The weighted average interest rate on the remaining loans is approximately 9.0%.
Deferred gains recognized on the payoff of mortgage notes receivable were zero in 2000, $1,515,000 in 1999 and $383,000 in 1998.
(4) Investment in Real Estate Investment Trusts
During 2000, the Company received liquidating dividends from Franklin Select Realty Trust and the first liquidating dividend from Pacific Gulf Properties. The liquidating dividends received reduced the basis in these investments to zero with the remainder recorded as gain on securities in the accompanying 2000 consolidated statement of income. Pacific Gulf Properties has announced that it is selling most of its assets and any further distributions received by the Company will be recorded as realized gains when received.
(5) Notes Payable to Banks
The Company has a three-year $150,000,000 unsecured revolving credit facility with a group of ten banks that matures in January 2002. The interest rate is based on the Eurodollar rate plus 1.25% and was 8.00% on $92,000,000 at December 31, 2000 and 7.50% on $77,000,000 and 7.44% on $8,000,000 at December 31, 1999. An unused facility fee of .25% is also assessed on this note.
EastGroup has a one-year $10,000,000 unsecured revolving credit facility with Chase Bank of Texas that matured in January 2001. The loan was amended in January 2001 to reflect a new maturity date of January 2002. The interest rate is based on Chase Bank of Texas, National Association's prime rate less .75% and was 8.75% on $10,000,000 at December 31, 2000 and 7.75% on $10,000,000 at December 31, 1999.
The Company has a $15,000,000 unsecured discretionary line of credit with Chase Bank of Texas. The interest rate and maturity date for each loan proceeds are determined at the time of any advances by the Company and Chase. At December 31, 2000 and 1999, the outstanding balance for this loan was zero.
Total loan commitment fees of $37,500 were paid in 2000, $37,500 in 1999, and $136,500 in 1998.
Average bank borrowings were $107,221,000 in 2000 compared to $104,335,000 in 1999 with average interest rates of 7.83% in 2000 compared to 6.56% in 1999. Amortization of bank loan costs were $264,000 in 2000 and $251,000 in 1999. Average interest rates including amortization of loan costs were 8.07% for 2000 and 6.80% for 1999.
(6) Mortgage Notes Payable
Approximate principal payments due during the next five years as of December 31, 2000 are as follows (in thousands):
2001 $7,920 2002 12,452 2003 8,248 2004 8,993 2005 22,756
(7) Stockholders' Equity
Management Incentive Plan-Stock Options/Incentive Awards
In 1994, the Company adopted the 1994 Management Incentive Plan, and the Plan was amended in 1999. As amended, the Plan includes stock options (50% vested after one year and the other 50% after two years), an annual incentive award and restricted stock awards.
Stock option activity for the 1994 plan is as follows:
The annual incentive award program began in 1995 and the Compensation Committee determines awards based on actual funds from operations per share ("FFO") compared to goals set for the year. The 2000, 1999 and 1998 awards were expensed in these years and approximated $448,000, $435,000 and $469,000, respectively. The awards were payable 60% in cash and 40% in stock of the Company for 2000 and 1999 and two-thirds in cash and one-third in stock in 1998.
On December 5, 2000, under the 1994 Management Incentive Plan, the Compensation Committee granted 181,250 shares of restricted stock to all employees, effective January 1, 2000. The purpose of the plan is to act as a retention device since it allows participants to benefit from dividends as well as potential stock appreciation. The stock price on the grant date was $20.50. The restricted period for the stock is 10 years and vesting is 20% at the end of the sixth year through the tenth year or, if certain performance goals are achieved, vesting could reach up to 40% at the end of the fourth year with 10% at the end of the fifth year through the tenth year. The Company recorded $3,716,000 as additional paid-in capital when the shares were granted, offset by unearned compensation of the same amount. The unearned compensation was deducted from stockholders' equity and is being amortized 10% each year over the restricted period. Compensation expense of $372,000 was recognized in 2000. During the restricted period, the Company will accrue dividends and will hold the certificates for the shares; however, the employee can vote the shares. Share certificates and dividends will be delivered to the employee as they vest.
Directors Stock Option Plan
The Company has a Directors Stock Option Plan, as amended in 1994, under which an aggregate of 150,000 shares of common stock were reserved for issuance upon exercise of any options granted. An additional 150,000 shares were reserved in 2000. Under the Directors plan, each Non-Employee Director is granted an initial 7,500 options and 2,250 additional options on the date of any Annual Meeting at which the Director is reelected to the Board.
Series A 9.00% Cumulative Redeemable Preferred Stock
In June 1998, EastGroup sold 1,725,000 shares of Series A 9.00% Cumulative Redeemable Preferred Stock at $25.00 per share in a public offering. Net proceeds of approximately $41,357,000 were used to repay advances outstanding on the Company's line of credit. The preferred stock, which may be redeemed by the Company at $25.00 per share, plus accrued and unpaid dividends, on or after June 19, 2003, has no stated maturity, sinking fund or mandatory redemption and is not convertible into any other securities of the Company.
The Company declared dividends per share of Series A Preferred of $2.25, $2.25 and $1.20 in 2000, 1999 and 1998, respectively.
Series B 8.75% Cumulative Convertible Preferred Stock
In September 1998, EastGroup entered into an agreement with Five Arrows Realty Securities II, L.L.C. (Five Arrows), an investment fund managed by Rothschild Realty, Inc., a member of the Rothschild Group, providing for the sale of 2,800,000 shares of Series B 8.75% Cumulative Convertible Preferred Stock at a net price of $24.50 per share. In December 1998, EastGroup sold $10,000,000 of the Series B Preferred Stock to Five Arrows. The Company sold the remaining $60,000,000 to Five Arrows in September 1999. In connection with this offering, EastGroup has entered into certain related agreements with Five Arrows, providing, among other things, for certain registration rights with respect to the Series B Preferred Stock.
The Series B Preferred Stock, which is convertible into common stock at a conversion price of $22.00 per share, is entitled to quarterly dividends in arrears equal to the greater of $0.547 per share or the dividend on the number of shares of common stock into which a share of Series B Preferred Stock is convertible.
The Company declared dividends per share of Series B Preferred of $2.188 in both 2000 and 1999.
Common Stock Repurchase Plan
During the third quarter 1998, EastGroup's Board of Directors authorized the repurchase of up to 500,000 shares of its outstanding common stock. In September 1999, EastGroup's Board of Directors authorized the repurchase of an additional 500,000 shares of its outstanding common stock and an additional 500,000 shares in December 1999. The shares may be purchased from time to time in the open market or in privately negotiated transactions. For the year ended December 31, 2000, the Company repurchased 10,000 shares for $190,000 and a total of 827,700 shares for $14,170,000 (an average of $17.12 per share) since September 30, 1998.
Shareholder Rights Plan
In December 1998, EastGroup adopted a Shareholder Rights Plan designed to enhance the ability of all of the Company's stockholders to realize the long-term value of their investment. Under the Plan, Rights were distributed as a dividend on each share of Common Stock (one Right for each share of Common Stock) held as of the close of business on December 28, 1998. A Right was also delivered with all shares of Common Stock issued after December 28, 1998 and 1.1364 Rights were delivered with all shares of EastGroup's Series B Cumulative Convertible Preferred Stock issued after December 28, 1998. The Rights will expire at the close of business on December 3, 2008.
Each whole Right will entitle the holder to buy one one-thousandth (1/1000) of a newly issued share of EastGroup's Series C Preferred Stock at an exercise price of $70.00. The Rights attach to and trade with the shares of the Company's Common Stock and Series B Preferred Stock. No separate Rights Certificates will be issued unless an event triggering the Rights occurs. The Rights will detach from the Common Stock and Series B Preferred Stock and will initially become exercisable for shares of Series C Preferred Stock if a person or group acquires beneficial ownership of, or commences a tender or exchange offer which would result in such person or group beneficially owning 15% or more of EastGroup's Common Stock, except through a tender or exchange offer for all shares which the Board determines to be fair and otherwise in the best interest of EastGroup and its shareholders. The Rights will also detach from the Common Stock and Series B Preferred Stock if the Board determines that a person holding at least 9.8% of EastGroup's Common Stock intends to cause EastGroup to take certain actions adverse to it and its shareholders or that such holder's ownership would have a material adverse effect on EastGroup.
If any person becomes the beneficial owner of 15% or more of EastGroup's Common Stock and the Board of Directors does not within 10 days thereafter redeem the Rights, or a 9.8% holder is determined by the Board to be an adverse person, each Right not owned by such person or related parties will then enable its holder to purchase, at the Right's then-current exercise price, EastGroup Common Stock (or, in certain circumstances as determined by the Board, a combination of cash, property, common stock or other securities) having a value of twice the Right's exercise price.
Under certain circumstances, if EastGroup is acquired in a merger or similar transaction with another person, or sells more than 50% of its assets, earning power or cash flow to another entity, each Right that has not previously been exercised will entitle its holder to purchase, at the Right's then-current exercise price, common stock of such other entity having a value of twice the Right's exercise price.
EastGroup will generally be entitled to redeem the Rights at $0.0001 per Right at any time until the 10th day following public announcement that a 15% position has been acquired, or until the Board has determined a 9.8% holder to be an adverse person. Prior to such time, the Board of Directors may extend the redemption period.
Dividend Reinvestment Plan
The Company has a dividend reinvestment plan that allows stockholders to reinvest cash distributions in new shares of the Company.
Fair Value of Stock Options
In accordance with SFAS No. 123, the following additional disclosures are required related to options granted after January 1, 1995. The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for 2000, 1999, and 1998, respectively: risk-free interest rates of 5.04%, 6.49%, and 5.54%; dividend yields of 12.13%, 9.75%, and 7.64%; volatility factors of 19.3%, 17.0%, and 15.5%, and expected option lives of five years for all years presented.
The Company applies APB No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined based on fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS No. 123, the Company's net income and net income per basic share would have been reduced to the pro forma amounts indicated below:
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 are as follows:
The Series B Preferred Stock, which is convertible into common stock at a conversion price of $22.00 per share, was not included in the computation of diluted earnings per share for the years ended December 31, 2000 and 1998 due its antidilutive effect.
Comprehensive Income
Comprehensive income comprises net income plus all other changes in equity from nonowner sources. The components of comprehensive income for 2000, 1999 and 1998 are presented in the Company's Consolidated Statements of Stockholders' Equity. The unrealized change in investment securities in 2000 and 1999 is net of the 2000 and 1999 realized gains on real estate investment trust securities included in net income as shown below:
(8) Acquisitions
Ensign Properties, Inc. Acquisition
In March 1998, EastGroup acquired Ensign Properties, Inc., an independent industrial developer in Orlando. This acquisition, which was accounted for under the purchase method of accounting, allowed EastGroup to become self-managed in its Florida markets. The purchase price of the acquisition amounting to approximately $1,800,000 was allocated primarily to goodwill, development costs, leasing commissions and other prepaid costs. The operating results of Ensign Properties, Inc. have been included in the consolidated statements of income subsequent to the date of acquisition. The pro forma impact related to the acquisition would be immaterial to the consolidated financial statements.
Meridian VIII Acquisition
On June 1, 1998, the merger of Meridian VIII into a wholly-owned subsidiary of EastGroup was completed. The acquisition was accounted for by using the purchase method of accounting. For financial reporting purposes, the acquired assets of Meridian VIII were assigned new cost basis amounts based on the allocation of the purchase price of the assets. In general, the purchase price to the Company consisted of the cash paid for Meridian VIII and the Company's previous investment in Meridian VIII. The shares of Meridian VIII owned by the Company were retired at the merger date. The operating results of Meridian VIII have been included in the consolidated statements of income subsequent to the date of acquisition.
Pursuant to the terms of its merger agreement with Meridian VIII, EastGroup's wholly-owned subsidiary exercised options to acquire a sufficient number of common and preferred shares of Meridian VIII such that it owned 90% of all outstanding common and preferred shares. Prior to the exercise of the options, EastGroup's subsidiary beneficially owned approximately 83.2% of the outstanding voting securities of Meridian VIII. Following the exercise of the options, Meridian VIII was merged into EastGroup's wholly-owned subsidiary, with all outstanding common shares of Meridian VIII not held by EastGroup receiving, as a result of the merger, $8.50 per share in cash and all preferred shares of Meridian VIII not held by EastGroup receiving $10.00 per share in cash. The consideration paid to the remaining common and preferred shareholders of Meridian VIII was equivalent to that paid by EastGroup in its tender offer for Meridian VIII's common and preferred shares which was completed in April 1998. The total purchase price to EastGroup was approximately $102,000,000 which included the assumption of Meridian VIII's outstanding indebtedness. As a result of the merger, Meridian VIII's common and preferred shares have been removed from registration under the Securities Exchange Act of 1934 and ceased to be listed on the American Stock Exchange effective as of June 1, 1998.
The increase in net assets at the acquisition date, based on estimated relative fair values, resulting from the acquisition was as follows (in thousands):
The purchase price of the net assets acquired consisted of the following (in thousands):
The following unaudited pro forma combined results of operations give effect to the Meridian VIII merger as if it had occurred on January 1, 1998:
In management's opinion, the unaudited pro forma combined results of operations are not necessarily indicative of the actual results that would have occurred had the transaction been consummated at the beginning of 1998 or of future operations of the combined companies under the ownership and management of the Company.
(9) Quarterly Results of Operations - Unaudited
The above quarterly earnings per share calculations are based on the weighted average number of common shares outstanding during each quarter for earnings per common share and the weighted average number of outstanding common shares and common share equivalents during each quarter for the earnings per common share, assuming dilution. The annual earnings per share calculations are based on the weighted average number of common shares outstanding during each year for earnings per common share and the weighted average number of outstanding common shares and common share equivalents during each year for earnings per common share, assuming dilution.
(10) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2000 and 1999. SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate 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.
Investment in Real Estate Investment Trusts: The carrying amount is the fair value of this equity investment based on quoted market prices.
Mortgage Loans: The fair value of performing mortgage loans is either estimated using discounted cash flows at current interest rates for loans with similar terms and maturities or based on the estimated value of the underlying collateral adjusted for the borrower's payment history and financial strength. The fair value for nonperforming loans is based on the underlying collateral value.
Mortgage Notes Payable: The fair value of the Company's mortgage notes payable is estimated based on the quoted market prices for similar issues or by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company's bankers.
Notes Payable to Banks: The carrying amounts approximate fair value because of the variable rates of interest on the debt.
(11) SEGMENT REPORTING
The Company's reportable segments consist of industrial properties and an other category that includes office buildings, apartments and other real estate. The Company's chief decision makers use two primary measures of operating results in making decisions, such as allocating resources: property net operating income (PNOI), defined as real estate operating revenues less real estate operating expenses (before interest expense and depreciation), and funds from operations (FFO), defined as net income (loss) (computed in accordance with 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. Effective January 1, 2000, NAREIT clarified the definition of FFO to include gains from sales of nondepreciable real estate (land). Gains on land for 2000 have been included in FFO and gains on land from previous years have not been included in FFO. Gains on land were $348,000 for 1999 and $44,000 for 1998. The Company uses FFO as a measure of the performance of its industry as an equity real estate investment trust. FFO is not considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make distributions. The table below presents on a comparative basis for the three fiscal years reported PNOI by operating segment, followed by reconciliations of PNOI to FFO and FFO to net income.
(12) ACCOUNTING CHANGE
Organization Costs
In April 1998, Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities," was issued. This SOP provides guidance on the financial reporting of start-up costs and organization costs, and requires that these costs be expensed as incurred effective for fiscal years beginning after December 15, 1998. Unamortized organization costs of $418,000 were written off in first quarter 1999 and accounted for as a cumulative effect of a change in accounting principle. The accounting change reduced basic and diluted earnings per share $.03 and $.02, respectively, in 1999.
(13) Subsequent Events
Subsequent to December 31, 2000, EastGroup purchased World Houston 10 (107,000 square feet) for $5,712,000. The purchase was funded with cash escrows from tax deferred exchange transactions. As part of this transaction, the seller repaid $4,682,000 to the Company on the outstanding mortgage loan receivable and accrued interest for the World Houston 10 note.
(14) Related Party Transactions
EastGroup and Parkway Properties, Inc. currently share the services and expenses of the Company's Chairman of the Board and his administrative assistant.
In July 1999, EastGroup acquired the remaining 25% ownership interests in Jetport Commerce Park and 56th Street Commerce Park in Tampa from our partner, an officer of the Company, Anthony J. Bruno, for $3,588,000 giving the Company 100% ownership of these two complexes.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
THE DIRECTORS AND STOCKHOLDERS EASTGROUP PROPERTIES, INC.:
Under date of March 2, 2001, we reported on the consolidated balance sheets of EastGroup Properties, Inc., and subsidiaries, as of December 31, 2000 and 1999, 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, 2000, which are included in the 2000 Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedules as listed in Item 14 (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.
Jackson, Mississippi KPMG LLP March 2, 2001
(1) Includes 20% minority interest in University Business Center and IBG Wiegman Road Associates totaling $7,998,000 at December 31, 2000 and $7,962,000 at December 31, 1999. Includes 25% minority interest in JetPort Commerce Park and 56th Street Commerce Park and 20% minority interest in University Business Center and IBG Wiegman Road Associates totaling $10,089,000 at December 31, 1998.
(2) Does not include the $500,000 land purchase-leaseback held for sale at December 31, 1998.
Changes in the accumulated depreciation on real estate properties follow:
(b) The aggregate cost for federal income tax purposes is approximately $522,900,000. The federal income tax return for the year ended December 31, 2000 has not been filed and, accordingly, the income tax basis of real estate properties as of December 31, 2000 is based on preliminary data.
(c) Reference is made to impairment losses on real estate investments in the notes to consolidated financial statements.
(d) The Company computes depreciation using the straight-line method over the estimated useful lives of the buildings (25 to 40 years) and other improvements (3 to 10 years).
(e) The investment is not producing income to the Company as of December 31, 2000.
(f) EastGroup has a $44,945,000, nonrecourse first mortgage loan with Metropolitan Life secured by Industry Distribution Center, Shaw Commerce Center, Kingsview Industrial Center, Dominguez Distribution Center, Walnut Business Center and Washington Distribution Center.
(g) The Company has an $11,905,000 nonrecourse first mortgage loan with Prudential Life secured by East University I & II, 55th Avenue Distribution Center, 7th Street Distribution Center and Ethan Allen Distribution Center.
(h) EastGroup has a $26,282,000, nonrecourse first mortgage loan with New York Life secured by World Houston Distribution Centers 3 through 9, Central Green Distribution Center and America Plaza Distribution Center.
Notes:
(a) Changes in mortgage loans follow:
(b) The aggregate cost for federal income tax purposes is approximately $9,191,000. The federal income tax return for the year ended December 31, 2000 has not been filed and, accordingly, the income tax basis of mortgage loans as of December 31, 2000 is based on preliminary data.
(c) Reference is made to allowance for possible losses on real estate investments in the notes to consolidated financial statements.
(d) Interest or principal in arrears for three months or less is disregarded in computing principal amount of loans subject to delinquent principal or interest.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EASTGROUP PROPERTIES, INC.
By: /s/ David H. Hoster II David H. Hoster II, Chief Executive Officer, President & Director March 14, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
* * D. Pike Aloian, Director Alexander G. Anagnos, Director March 9, 2001 March 9, 2001
* * H. C. Bailey, Jr., Director Fredric H. Gould, Director March 9, 2001 March 9, 2001
* * David M. Osnos, Director John N. Palmer, Director March 9, 2001 March 9, 2001
* /s/ N. Keith McKey Leland R. Speed, Chairman of the Board * By N. Keith McKey, Attorney-in-fact (Principal Executive Officer) March 9, 2001
/s/ Bruce Corkern Bruce Corkern, Sr. Vice President & Controller (Principal Accounting Officer) March 14, 2001
/s/ N. Keith McKey N. Keith McKey, Executive Vice-President, Chief Financial Officer and Secretary (Principal Financial Officer) March 14, 2001
EXHIBIT INDEX
The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table:
(3) Form 10-K Exhibits:
(a) Articles of Incorporation (incorporated by reference to Appendix B to the Registrant's Proxy Statement dated April 24, 1997). (b) Bylaws of the Registrant (incorporated by reference to Appendix C to the Registrant's Proxy Statement dated April 24, 1997). (c) Articles Supplementary of the Company relating to the 9.00% Series A Cumulative Redeemable Preferred Stock of the Company (incorporated by reference to the Company's Form 8-A filed June 15, 1998). (d) Articles Supplementary of the Company relating to the Series B Cumulative Convertible Preferred Stock (incorporated by reference to the Company's Form 8-K filed on October 1, 1998). (e) Articles Supplementary of the Company relating to the Series C Preferred Stock (incorporated by reference to the Company's Form 8-A filed December 9, 1998). (f) Certificate of Correction to Articles Supplementary with respect to Series B Cumulative Convertible Preferred Stock (incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1998).
(10) Material Contracts:
(a) EastGroup Properties 1994 Management Incentive Plan, As Amended (incorporated by reference to Appendix A of the Registrant's Proxy Statement for its Annual Meeting of Shareholders held on June 2, 1999). (b) EastGroup Properties 1991 Directors Stock Option Plan, As Amended (incorporated by reference to Exhibit B of the Registrant's Proxy Statement dated April 26, 1994).* (c) Form of Change in Control Agreement that Registrant has entered into with certain executive officers (Leland R. Speed, David H. Hoster II and N.Keith McKey) (incorporated by reference to the Registrant's 1996 Annual Report on Form 10-K).* (d) Investment Agreement dated as of September 25, 1998 between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (e) Operating Agreement dated September 25, 1998 between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (f) Agreement and Waiver between the Company and Five Arrows Realty Securities II, L.L.C.(incorporated by reference to the Company's Form 8-K filed October 1, 1998). (g) Credit Agreement dated January 13, 1999 among EastGroup Properties, L.P.; EastGroup Properties, Inc.; Chase Bank of Texas, National Association, as Arranger, Book Manager and Administrative Agent; First Union National Bank, as Syndication Agent; PNC Bank, National Association, as Documentation Agent; AmSouth Bank (successor to Deposit Guaranty National Bank), as Co-Agent; and the Lenders (incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1998).
(22) Subsidiaries of Registrant (filed herewith).
(23) Consent of KPMG LLP (filed herewith).
(24) Powers of attorney (filed herewith).
(29) Agreement of Registrant to furnish the Commission with copies of instruments defining the rights of holders of long-term debt (incorporated by reference to Exhibit 28(e) of the Registrant's 1986 Annual Report on Form 10-K).
(99) Rights Agreement dated as of December 3, 1998 between the Company and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to the Company's Form 8-A filed December 9, 1998).
(b) None
*Indicates management or compensatory agreement.