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| EGP > SEC Filings for EGP > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
OVERVIEW
EastGroup's goal is to maximize shareholder value by being a leading
provider in its markets of functional, flexible, and quality business
distribution space for location sensitive 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 believes that the slowdown in the economy has affected and will
continue to affect its operations. The Company is projecting a continued
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. 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 the operations of
the Company for the remainder of 2009 and 2010. The Company also believes that
it can obtain mortgage financing from insurance companies and financial
institutions and issue common equity as evidenced by the closing of a $67
million mortgage loan in May and the continuous equity offering program, which
provided net proceeds to the Company of $24.6 million in the second quarter, as
described in Liquidity and Capital Resources.
The Company's primary revenue is rental income; as such, EastGroup's
greatest challenge is leasing space. During the six months ended June 30, 2009,
leases on 2,783,000 square feet (10.6%) of EastGroup's total square footage of
26,361,000 expired, and the Company was successful in renewing or re-leasing 77%
of the expiring square feet. In addition, EastGroup leased 868,000 square feet
of other vacant space during this period. During the six months ended June 30,
2009, average rental rates on new and renewal leases decreased by 5.0%.
EastGroup's total leased percentage was 92.6% at June 30, 2009, compared to
95.6% at June 30, 2008. Leases scheduled to expire for the remainder of 2009
were 6.2% of the portfolio on a square foot basis at June 30, 2009, and this
figure was reduced to 4.7% as of August 4, 2009.
Property net operating income (PNOI) from same properties decreased 2.6%
for the quarter ended June 30, 2009, as compared to the same period in 2008. For
the six months ended June 30, 2009, PNOI from same properties decreased 2.8% as
compared to the same period in 2008.
The Company generates new sources of leasing revenue through its
acquisition and development programs. During the first six months of 2009,
EastGroup purchased one operating property, Arville Distribution Center, for
$11,050,000. This property, which contains 142,000 square feet, is located in
Las Vegas, Nevada, a new market for EastGroup.
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 no development starts in the first six months
of 2009 and currently does not have any plans to start construction on new
developments for the remainder of the year. During the six months ended June 30,
2009, the Company transferred seven properties (606,000 square feet) with
aggregate costs of $37.9 million at the date of transfer from development to
real estate properties. These properties, which were collectively 75.8% leased
as of August 4, 2009, are located in Phoenix, Arizona; Houston and San Antonio,
Texas; and Orlando and Tampa, Florida.
During the first six months of 2009, the Company funded its acquisition and
development programs through its $225 million lines of credit, the closing of a
$67 million mortgage, and the proceeds from its $24.6 million common stock
offering (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 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 increased or decreased based on market conditions. FFO
is not considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance, nor is it a
measure of the Company's liquidity or indicative of funds available to provide
for the Company's cash needs, including its ability to make distributions. In
addition, FFO, as reported by the Company, may not be comparable to FFO by other
REITs that do not define the term in accordance with the current NAREIT
definition. The Company's key drivers affecting FFO are changes in PNOI (as
discussed above), interest rates, the amount of leverage the Company employs and
general and administrative expense. The following table presents, on a
comparative basis for the three and six months ended June 30, 2009 and 2008,
reconciliations of PNOI and FFO Available to Common Stockholders to Net Income
Attributable to EastGroup Properties, Inc.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
2009 2008 2009 2008
----------------------------------------------------
(In thousands, except per share data)
Income from real estate operations............................................ $ 43,044 41,432 86,354 81,511
Expenses from real estate operations.......................................... (12,670) (11,526) (25,261) (22,365)
----------------------------------------------------
PROPERTY NET OPERATING INCOME................................................. 30,374 29,906 61,093 59,146
Equity in earnings of unconsolidated investment (before depreciation)......... 115 112 229 225
Income from discontinued operations (before depreciation and amortization).... - 65 - 190
Interest income............................................................... 32 27 156 64
Gain on sales of securities................................................... - - - 435
Other income.................................................................. 24 21 39 216
Interest expense.............................................................. (7,817) (7,509) (15,318) (14,882)
General and administrative expense............................................ (2,166) (2,018) (4,727) (4,099)
Noncontrolling interest in earnings (before depreciation and amortization).... (121) (188) (335) (393)
Gain on sale of non-operating real estate..................................... 7 5 15 12
Dividends on Series D preferred shares........................................ - (656) - (1,312)
----------------------------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS........................ 20,448 19,765 41,152 39,602
Depreciation and amortization from continuing operations...................... (13,310) (12,617) (26,354) (24,992)
Depreciation and amortization from discontinued operations.................... - (25) - (68)
Depreciation from unconsolidated investment................................... (33) (33) (66) (66)
Noncontrolling interest depreciation and amortization......................... 51 51 102 100
Gain on sale of depreciable real estate investments........................... - 1,949 - 1,949
----------------------------------------------------
NET INCOME AVAILABLE TO EASTGROUP PROPERTIES, INC.
COMMON STOCKHOLDERS........................................................ 7,156 9,090 14,834 16,525
Dividends on preferred shares................................................. - 656 - 1,312
----------------------------------------------------
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC.......................... $ 7,156 9,746 14,834 17,837
====================================================
Net income available to common stockholders per diluted share................. $ .28 .37 .59 .68
Funds from operations available to common stockholders per diluted share...... .80 .80 1.63 1.63
Diluted shares for earnings per share and funds from operations............... 25,413 24,647 25,244 24,238
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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 second quarter of 2009 was $.80 per share, the same as the second quarter of 2008. PNOI increased 1.6% primarily due to additional PNOI of $1,151,000 from newly developed properties and $63,000 from 2008 and 2009 acquisitions, offset by a decrease of $778,000 from same property operations.
For the six months ended June 30, 2009, FFO was $1.63 per share, the same as the first six months of 2008. PNOI increased 3.3% mainly due to additional PNOI of $2,940,000 from newly developed properties and $542,000 from 2008 and 2009 acquisitions, offset by a decrease of $1,590,000 from same property operations.
o Same property net operating income change represents the PNOI increase or decrease for the same operating properties owned during the entire current period and prior year reporting period. PNOI from same properties decreased 2.6% for the three months ended June 30, 2009, and decreased 2.8% for the six months.
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 June 30, 2009, was 91.2%. Quarter-end occupancy ranged from 91.2% to 95.0% over the period from June 30, 2008 to June 30, 2009.
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 decreases on new and renewal leases (6.5% of total square footage) averaged 5.0% for the second quarter of 2009. For the six months ended June 30, 2009, rental rate decreases on new and renewal leases (11.4% of total square footage) also averaged 5.0%.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's management considers the following accounting policies and estimates to be critical to the reported operations of the Company.
Real Estate Properties
The Company allocates the purchase price of acquired properties to net
tangible and identified intangible assets based on their respective fair values.
Goodwill is recorded when the purchase price exceeds the fair value of the
assets and liabilities acquired. Factors considered by management in allocating
the cost of the properties acquired include an estimate of carrying costs during
the expected lease-up periods considering current market conditions and costs to
execute similar leases. The allocation to tangible assets (land, building and
improvements) is based upon management's determination of the value of the
property as if it were vacant using discounted cash flow models. The purchase
price is also allocated among the following categories of intangible assets: the
above or below market component of in-place leases, the value of in-place
leases, and the value of customer relationships. The value allocable to the
above or below market component of an acquired in-place lease is determined
based upon the present value (using a discount rate 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 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 taxable income to its stockholders and expects to
distribute all of its taxable income in 2009. Accordingly, no provision for
income taxes was necessary in 2008, nor is it expected to be necessary for 2009.
FINANCIAL CONDITION
EastGroup's assets were $1,172,643,000 at June 30, 2009, an increase of $16,438,000 from December 31, 2008. Liabilities increased $1,195,000 to $744,024,000 and equity increased $15,243,000 to $428,619,000 during the same period. The paragraphs that follow explain these changes in detail.
ASSETS
Real Estate Properties
Real estate properties increased $58,153,000 during the six months ended
June 30, 2009, primarily due to the purchase of one operating property and the
transfer of seven properties from development, as detailed under Development
below.
Date
REAL ESTATE PROPERTY ACQUIRED IN 2009 Location Size Acquired Cost (1)
----------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
Arville Distribution Center.................. Las Vegas, NV 142,000 05/27/09 $ 11,050
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(1) Total cost of the property acquired was $11,050,000, of which $9,998,000
was allocated to real estate properties as indicated above. Intangibles
associated with the purchases of real estate were allocated as follows:
$663,000 to in-place lease intangibles and $389,000 to above market leases
(both included in Other Assets 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. During the first six months of 2009,
the Company expensed acquisition-related costs of $41,000 in connection
with the Arville acquisition.
The Company made capital improvements of $7,694,000 on existing and acquired properties (included in the Capital Expenditures table under Results of Operations). Also, the Company incurred costs of $2,551,000 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 June 30, 2009, was $130,677,000 compared
to $150,354,000 at December 31, 2008. Total capital invested for development
during the first six months of 2009 was $20,784,000, which consisted of costs of
$18,233,000 as detailed in the development activity table and costs of
$2,551,000 on developments transferred to Real Estate Properties during the
12-month period following transfer.
The Company transferred seven developments to Real Estate Properties during
the first six months of 2009 with a total investment of $37,910,000 as of the
date of transfer.
Costs Incurred
----------------------------------------------
Costs For the Cumulative
Transferred Six Months as of Estimated
DEVELOPMENT Size in 2009 (1) Ended 6/30/09 6/30/09 Total Costs
------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
SunCoast III, Fort Myers, FL........................ 93,000 $ - 294 7,012 7,900
Sky Harbor, Phoenix, AZ............................. 264,000 - 903 23,732 26,800
World Houston 26, Houston, TX....................... 59,000 - 649 3,467 3,600
12th Street Distribution Center, Jacksonville, FL... 150,000 - 241 5,091 5,300
Beltway Crossing VII, Houston, TX................... 95,000 - 818 5,031 5,900
Country Club III & IV, Tucson, AZ................... 138,000 - 2,003 10,050 11,200
Oak Creek IX, Tampa, FL............................ 86,000 - 688 4,888 5,500
Blue Heron III, West Palm Beach, FL................. 20,000 - 558 2,456 2,600
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Total Lease-up........................................ 905,000 - 6,154 61,727 68,800
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UNDER CONSTRUCTION
World Houston 29, Houston, TX....................... 70,000 - 2,826 4,712 4,900
World Houston 30, Houston, TX....................... 88,000 - 3,379 4,970 5,800
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Total Under Construction.............................. 158,000 - 6,205 9,682 10,700
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Costs Incurred
----------------------------------------------
Costs For the Cumulative
Transferred Six Months as of Estimated
DEVELOPMENT Size in 2009 (1) Ended 6/30/09 6/30/09 Total Costs
------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
. . .
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