EASTGROUP PROPERTIES INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
MARCH 31, 2017
COMMISSION FILE NUMBER 1-07094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND
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13-2711135
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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190 EAST CAPITOL STREET
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SUITE 400
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JACKSON, MISSISSIPPI
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39201
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(Address of principal executive offices)
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(Zip code)
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Registrant’s telephone number: (601) 354-3555
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (x) NO ( )
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES (x) NO ( )
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer (x)
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Accelerated Filer ( )
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Non-accelerated Filer ( )
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(Do not check if a smaller reporting company)
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Smaller Reporting Company ( )
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Emerging Growth Company ( )
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ( )
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ( ) NO (x)
The number of shares of common stock, $.0001 par value, outstanding as of
April 21, 2017
was
33,897,304
.
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1
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EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED
MARCH 31, 2017
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Page
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2
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EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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March 31,
2017 |
December 31,
2016 |
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ASSETS
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Real estate properties
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$
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2,207,734
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2,113,073
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Development
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244,313
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293,908
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2,452,047
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2,406,981
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Less accumulated depreciation
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(710,875
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)
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(694,250
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)
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1,741,172
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1,712,731
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Unconsolidated investment
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7,724
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7,681
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Cash
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44
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522
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Other assets
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107,490
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104,830
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TOTAL ASSETS
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$
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1,856,430
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1,825,764
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LIABILITIES AND EQUITY
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LIABILITIES
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Unsecured bank credit facilities
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$
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199,305
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190,990
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Unsecured debt
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652,950
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652,838
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Secured debt
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253,986
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257,505
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Accounts payable and accrued expenses
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43,730
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52,701
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Other liabilities
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31,478
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29,864
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Total Liabilities
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1,181,449
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1,183,898
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EQUITY
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Stockholders’ Equity:
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Common shares; $.0001 par value; 70,000,000 shares authorized; 33,897,304 shares issued and outstanding at March 31, 2017 and 33,332,213 at December 31, 2016
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3
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3
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Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares issued
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—
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—
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Additional paid-in capital on common shares
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989,009
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949,318
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Distributions in excess of earnings
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(321,775
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(313,655
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Accumulated other comprehensive income
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3,405
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1,995
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Total Stockholders’ Equity
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670,642
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637,661
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Noncontrolling interest in joint ventures
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4,339
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4,205
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Total Equity
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674,981
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641,866
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TOTAL LIABILITIES AND EQUITY
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$
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1,856,430
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1,825,764
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See accompanying Notes to Consolidated Financial Statements (unaudited).
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3
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EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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Three Months Ended
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March 31,
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2017
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2016
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REVENUES
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Income from real estate operations
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$
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66,137
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61,568
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Other income
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17
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21
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66,154
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61,589
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EXPENSES
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Expenses from real estate operations
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19,007
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17,820
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Depreciation and amortization
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20,225
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19,162
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General and administrative
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5,478
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5,312
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44,710
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42,294
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OPERATING INCOME
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21,444
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19,295
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OTHER INCOME (EXPENSE)
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Interest expense
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(8,686
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(9,065
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Gain on sales of real estate investments
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—
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11,332
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Other
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215
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268
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NET INCOME
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12,973
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21,830
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Net income attributable to noncontrolling interest in joint ventures
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(154
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(119
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NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
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12,819
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21,711
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Other comprehensive income (loss) - cash flow hedges
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1,410
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(5,397
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TOTAL COMPREHENSIVE INCOME
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$
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14,229
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16,314
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BASIC PER COMMON SHARE DATA FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
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Net income attributable to common stockholders
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$
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.38
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.67
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Weighted average shares outstanding
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33,361
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32,254
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DILUTED PER COMMON SHARE DATA FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
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Net income attributable to common stockholders
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$
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.38
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.67
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Weighted average shares outstanding
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33,409
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32,307
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See accompanying Notes to Consolidated Financial Statements (unaudited).
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4
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EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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Common Stock
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Additional
Paid-In Capital
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Distributions in Excess of Earnings
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Accumulated Other Comprehensive Income
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Noncontrolling Interest in Joint Ventures
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Total
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BALANCE, DECEMBER 31, 2016
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$
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3
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949,318
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(313,655
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1,995
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4,205
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641,866
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Net income
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—
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—
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12,819
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—
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154
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12,973
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Net unrealized change in fair value of interest rate swaps
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—
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—
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—
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1,410
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—
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1,410
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Common dividends declared – $.62 per share
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—
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—
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(20,939
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—
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—
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(20,939
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Stock-based compensation, net of forfeitures
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—
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2,683
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—
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—
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—
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2,683
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Issuance of 544,144 shares of common stock, common stock offering, net of expenses
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—
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39,456
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—
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—
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—
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39,456
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Issuance of 782 shares of common stock, dividend reinvestment plan
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—
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57
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—
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—
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—
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57
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Withheld 33,695 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock
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—
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(2,505
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—
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—
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—
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(2,505
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Distributions to noncontrolling interest
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—
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—
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—
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—
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(120
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(120
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Contributions from noncontrolling interest
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—
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—
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—
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—
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100
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100
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BALANCE, MARCH 31, 2017
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$
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3
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989,009
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(321,775
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)
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3,405
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4,339
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674,981
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See accompanying Notes to Consolidated Financial Statements (unaudited).
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5
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EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
(IN THOUSANDS)
(UNAUDITED)
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Three Months Ended March 31,
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2017
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2016
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OPERATING ACTIVITIES
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Net income
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$
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12,973
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21,830
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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20,225
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19,162
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Stock-based compensation expense
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2,357
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2,790
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Gain, net of loss, on sales of real estate investments and non-operating real estate
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40
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(11,342
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)
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Changes in operating assets and liabilities:
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Accrued income and other assets
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1,625
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1,504
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Accounts payable, accrued expenses and prepaid rent
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(13,671
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)
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(15,267
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Other
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264
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(24
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NET CASH PROVIDED BY OPERATING ACTIVITIES
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23,813
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18,653
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INVESTING ACTIVITIES
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Real estate development
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(22,178
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(16,598
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Purchases of real estate
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(20,611
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)
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—
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Real estate improvements
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(4,270
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)
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(6,054
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)
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Net proceeds from sales of real estate investments and non-operating real estate
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773
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18,974
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Repayments on mortgage loans receivable
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32
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30
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Changes in accrued development costs
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5,153
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(724
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Changes in other assets and other liabilities
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(3,266
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)
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(2,392
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)
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NET CASH USED IN INVESTING ACTIVITIES
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(44,367
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)
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(6,764
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)
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FINANCING ACTIVITIES
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Proceeds from unsecured bank credit facilities
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84,734
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76,646
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Repayments on unsecured bank credit facilities
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(76,518
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)
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(60,309
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)
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Repayments on secured debt
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(3,526
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)
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(4,656
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)
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Debt issuance costs
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(87
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)
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(289
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)
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Distributions paid to stockholders (not including dividends accrued on unvested restricted stock)
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(21,515
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)
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(20,413
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)
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Proceeds from common stock offerings
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39,456
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—
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Proceeds from dividend reinvestment plan
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57
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64
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Other
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(2,525
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(2,968
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
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20,076
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(11,925
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DECREASE IN CASH AND CASH EQUIVALENTS
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(478
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)
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(36
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)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
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522
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48
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CASH AND CASH EQUIVALENTS AT END OF PERIOD
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$
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44
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12
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SUPPLEMENTAL CASH FLOW INFORMATION
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Cash paid for interest, net of amount capitalized of $1,646 and $1,162
for 2017 and 2016, respectively |
$
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7,721
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8,835
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See accompanying Notes to Consolidated Financial Statements (unaudited).
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6
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EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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(1)
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BASIS OF PRESENTATION
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The accompanying unaudited financial statements of EastGroup Properties, Inc. (“EastGroup” or “the Company”) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the financial statements contained in the
2016
annual report on Form 10-K and the notes thereto. Certain reclassifications have been made in the
2016
consolidated financial statements to conform to the
2017
presentation.
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(2)
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PRINCIPLES OF CONSOLIDATION
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The consolidated financial statements include the accounts of EastGroup Properties, Inc., its wholly owned subsidiaries and its investment in any joint ventures in which the Company has a controlling interest. At
March 31, 2017
and
December 31, 2016
, the Company had a controlling interest in
one
joint venture, the
80%
owned University Business Center. EastGroup previously owned
80%
of Castilian Research Center. During the second quarter of 2016, Castilian Research Center was sold, and the joint venture was subsequently terminated. The Company records
100%
of the joint ventures' assets, liabilities, revenues and expenses with noncontrolling interests provided for in accordance with the joint venture agreements. The equity method of accounting is used for the Company’s
50%
undivided tenant-in-common interest in Industry Distribution Center II. All significant intercompany transactions and accounts have been eliminated in consolidation.
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(3)
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USE OF ESTIMATES
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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, 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.
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(4)
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REAL ESTATE PROPERTIES
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EastGroup has one reportable segment – industrial properties. These properties are concentrated in major Sunbelt markets of the United States, primarily in the states of Florida, Texas, Arizona, California and North Carolina, have similar economic characteristics and also meet the other criteria that permit the properties to be aggregated into one reportable segment.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows (including estimated future expenditures necessary to substantially complete the asset) expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of
March 31, 2017
and
December 31, 2016
, the Company did not identify any impairment charges which should be recorded.
Depreciation of buildings and other improvements is computed using the straight-line method over estimated useful lives of generally
40
years for buildings and
3
to
15
years for improvements. Building improvements are capitalized, while maintenance and repair expenses are charged to expense as incurred. Significant renovations and improvements that improve or extend the useful life of the assets are capitalized. Depreciation expense was $
16,634,000
and
$15,666,000
for the
three
months ended
March 31, 2017
and 2016, respectively.
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7
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EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company’s
Real estate properties
and
Development
at
March 31, 2017
and
December 31, 2016
were as follows:
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March 31,
2017 |
December 31,
2016 |
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(In thousands)
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Real estate properties:
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Land
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$
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320,555
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308,931
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Buildings and building improvements
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1,506,363
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1,435,309
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Tenant and other improvements
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380,816
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368,833
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Development
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244,313
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293,908
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|
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2,452,047
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2,406,981
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Less accumulated depreciation
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(710,875
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)
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(694,250
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)
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$
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1,741,172
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1,712,731
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(5)
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DEVELOPMENT
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For properties under development and properties acquired in the development stage, costs associated with development (i.e., land, construction costs, interest expense, property taxes and other direct and indirect costs associated with development) are aggregated into the total capitalized costs of the property. Included in these costs are management’s estimates for the portions of internal costs (primarily personnel costs) deemed related to such development activities. The internal costs are allocated to specific development properties based on development activity. As the property becomes occupied, depreciation commences on the occupied portion of the building, and costs are capitalized only for the portion of the building that remains vacant. When the property becomes
80%
occupied or
one
year after completion of the shell construction (whichever comes first), capitalization of development costs, including interest expense, property taxes and internal personnel costs, ceases. The properties are then transferred to
Real estate properties
, and depreciation commences on the entire property (excluding the land).
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(6)
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REAL ESTATE PROPERTY ACQUISITIONS AND ACQUIRED INTANGIBLES
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Upon acquisition of real estate properties, EastGroup applies the principles of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805,
Business Combinations.
Prior to the Company's adoption of Accounting Standards Update (ASU) 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business,
effective October 1, 2016, acquisition-related costs were recognized as expenses in the periods in which the costs were incurred and the services were received.
As discussed in Note 18, beginning with acquisitions after October 1, 2016, the Company follows the guidance in ASU 2017-01, which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. EastGroup has determined that its real estate property acquisition in the first quarter of 2017 is considered to be an acquisition of a group of similar identifiable assets; therefore, the acquisition is not considered to be an acquisition of a business. As a result, the Company has capitalized acquisition costs related to its first quarter 2017 acquisition.
The FASB Codification provides guidance on how to properly determine the allocation of the purchase price among the individual components of both the tangible and intangible assets based on their respective fair values. Goodwill for business combinations is recorded when the purchase price exceeds the fair value of the assets and liabilities acquired. Factors considered by management in allocating the cost of the properties acquired include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. The allocation to tangible assets (land, building and improvements) is based upon management’s determination of the value of the property as if it were vacant using discounted cash flow models. The Company determines whether any financing assumed is above or below market based upon comparison to similar financing terms for similar properties. The cost of the properties acquired may be adjusted based on indebtedness assumed from the seller that is determined to be above or below market rates.
The purchase price is also allocated among the following categories of intangible assets: the above or below market component of in-place leases, the value of in-place leases, and the value of customer relationships. The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate reflecting the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of the amounts that would be paid using fair market rates over the remaining
-
8
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
term of the lease. The amounts allocated to above and below market leases are included in
Other assets
and
Other liabilities
, respectively, on the Consolidated Balance Sheets and are amortized to rental income over the remaining terms of the respective leases. The total amount of intangible assets is further allocated to in-place lease values and customer relationship values based upon management’s assessment of their respective values. These intangible assets are included in
Other assets
on the Consolidated Balance Sheets and are amortized over the remaining term of the existing lease, or the anticipated life of the customer relationship, as applicable.
Amortization expense for in-place lease intangibles was
$1,121,000
and
$1,111,000
for the
three
months ended
March 31, 2017
and 2016, respectively. Amortization of above and below market leases increased rental income by $
136,000
and
$125,000
for the
three
months ended
March 31, 2017
and 2016, respectively.
During the three months ended
March 31, 2017
, EastGroup acquired Shiloh 400 in Atlanta, Georgia, for
$20,347,000
of which
$18,712,000
was allocated to
Real estate properties.
EastGroup allocated
$3,092,000
of the total purchase price to land using third party land valuations for the Atlanta market. The market values are considered to be Level 3 inputs as defined by ASC 820,
Fair Value Measurement
(see Note 16 for additional information on ASC 820). Intangibles associated with the purchase of real estate were allocated as follows:
$1,801,000
to in-place lease intangibles and
$2,000
to above market leases (both included in
Other assets
on the Consolidated Balance Sheets), and
$168,000
to below market leases (included in
Other liabilities
on the Consolidated Balance Sheets).
During the year ended
December 31, 2016
, EastGroup acquired the following development-stage properties: Parc North in Fort Worth (Dallas), Weston Commerce Park in Weston (South Florida), and Jones Corporate Park in Las Vegas. At the time of acquisition, the properties were classified as under construction or in the lease-up phase of development. In addition, the Company acquired Flagler Center, a
three
-building business distribution complex in Jacksonville, Florida.
The properties purchased in
2016
were acquired for a total cost of
$112,158,000
, of which
$22,228,000
was allocated to
Real estate properties
and
$84,490,000
was allocated to
Development
. EastGroup allocated
$29,164,000
of the total purchase price to land using third party land valuations for the Dallas, South Florida, Las Vegas and Jacksonville markets. The market values are considered to be Level 3 inputs as defined by ASC 820. Intangibles associated with the purchase of real estate were allocated as follows:
$5,941,000
to in-place lease intangibles and
$393,000
to above market leases (included in
Other assets
on the Consolidated Balance Sheets), and
$894,000
to below market leases (included in
Other liabilities
on the Consolidated Balance Sheets).
The intangible assets, including in-place lease intangibles, above market leases and below market leases, are amortized over the remaining lives of the associated leases in place at the time of acquisition.
The Company periodically reviews the recoverability of goodwill (at least annually) and the recoverability of other intangibles (on a quarterly basis) for possible impairment. In management’s opinion, no impairment of goodwill or other intangibles existed at
March 31, 2017
and
December 31, 2016
.
|
(7)
|
REAL ESTATE SOLD AND HELD FOR SALE/DISCONTINUED OPERATIONS
|
The Company considers a real estate property to be held for sale when it meets the criteria established under ASC 360,
Property, Plant and Equipment,
including when it is probable that the property will be sold within a year. Real estate properties held for sale are reported at the lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale.
In accordance with FASB ASU 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,
the Company would report a disposal of a component of an entity or a group of components of an entity in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, the Company would provide additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. EastGroup performs an analysis of properties sold to determine whether the sales qualify for discontinued operations presentation.
The Company did not classify any properties as held for sale as of March 31, 2017 and December 31, 2016.
-
9
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company does not consider its sales in 2016 and the first three months of 2017 to be disposals of a component of an entity or a group of components of an entity representing a strategic shift that has (or will have) a major effect on the entity's operations and financial results.
The Company did not sell any operating properties during the first
three
months of
2017
. During the first quarter of 2017, the Company sold
5
acres of land in Dallas for
$850,000
and recognized a loss of
$40,000
.
During 2016, EastGroup sold the following operating properties: Northwest Point Distribution and Service Centers, North Stemmons II and III, America Plaza, Lockwood Distribution Center, West Loop Distribution Center 1 & 2, two of its four Interstate Commons Distribution Center buildings, Castilian Research Center and Memphis I. The properties, which contain
1,256,000
square feet and are located in Houston, Dallas, Phoenix, Santa Barbara and Memphis, were sold for
$75.7 million
and the Company recognized net gains on the sales of
$42.2 million
. The Company also sold
25
acres of land in Houston, Dallas and Orlando for
$5.4 million
and recognized gains on sales of
$733,000
.
The results of operations and gains and losses on sales for the properties sold during the periods presented are reported in continuing operations on the Consolidated Statements of Income and Comprehensive Income. The gains and losses on the sales of land are included in
Other
, and the gains on the sales of operating properties are included in
Gain on sales of real estate investments
.
|
(8)
|
OTHER ASSETS
|
A summary of the Company’s
Other assets
follows:
|
|
March 31,
2017 |
December 31,
2016 |
||||
|
|
(In thousands)
|
|||||
|
Leasing costs (principally commissions)
|
$
|
67,572
|
|
65,521
|
|
|
|
Accumulated amortization of leasing costs
|
(25,548
|
)
|
(26,340
|
)
|
||
|
Leasing costs (principally commissions), net of accumulated amortization
|
42,024
|
|
39,181
|
|
||
|
Straight-line rents receivable
|
28,908
|
|
28,369
|
|
||
|
Allowance for doubtful accounts on straight-line rents receivable
|
(79
|
)
|
(76
|
)
|
||
|
Straight-line rents receivable, net of allowance for doubtful accounts
|
28,829
|
|
28,293
|
|
||
|
Accounts receivable
|
4,075
|
|
6,824
|
|
||
|
Allowance for doubtful accounts on accounts receivable
|
(565
|
)
|
(809
|
)
|
||
|
Accounts receivable, net of allowance for doubtful accounts
|
3,510
|
|
6,015
|
|
||
|
Acquired in-place lease intangibles
|
21,911
|
|
21,231
|
|
||
|
Accumulated amortization of acquired in-place lease intangibles
|
(8,642
|
)
|
(8,642
|
)
|
||
|
Acquired in-place lease intangibles, net of accumulated amortization
|
13,269
|
|
12,589
|
|
||
|
Acquired above market lease intangibles
|
1,455
|
|
1,594
|
|
||
|
Accumulated amortization of acquired above market lease intangibles
|
(644
|
)
|
(736
|
)
|
||
|
Acquired above market lease intangibles, net of accumulated amortization
|
811
|
|
858
|
|
||
|
Mortgage loans receivable
|
4,720
|
|
4,752
|
|
||
|
Interest rate swap assets
|
5,243
|
|
4,546
|
|
||
|
Goodwill
|
990
|
|
990
|
|
||
|
Prepaid expenses and other assets
|
8,094
|
|
7,606
|
|
||
|
Total
Other assets
|
$
|
107,490
|
|
104,830
|
|
|
-
10
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
(9)
|
|
Unsecured bank credit facilities
increased
$
8,315,000
during the
three
months ended
March 31, 2017
, mainly due to proceeds of
$84,734,000
exceeding repayments of
$76,518,000
and the amortization of debt issuance costs during the period.
Unsecured debt
increased
$112,000
during the
three
months ended
March 31, 2017
, primarily due to the amortization of debt issuance costs.
Secured debt
decreased
$
3,519,000
during the
three
months ended
March 31, 2017
. The
decrease
resulted from regularly scheduled principal payments of
$3,526,000
and amortization of premiums on
Secured debt
, offset by the amortization of debt issuance costs during the period.
The Company presents debt issuance costs as reductions of
Secured debt, Unsecured debt
and
Unsecured bank credit facilities
on the Consolidated Balance Sheets as detailed below.
|
|
March 31,
2017 |
December 31,
2016 |
||||
|
|
(In thousands)
|
|||||
|
Unsecured bank credit facilities - variable rate, carrying amount
|
$
|
120,236
|
|
112,020
|
|
|
|
Unsecured bank credit facilities - fixed rate, carrying amount
(1)
|
80,000
|
|
80,000
|
|
||
|
Unamortized debt issuance costs
|
(931
|
)
|
(1,030
|
)
|
||
|
Unsecured bank credit facilities
|
199,305
|
|
190,990
|
|
||
|
Unsecured debt - fixed rate, carrying amount
(1)
|
655,000
|
|
655,000
|
|
||
|
Unamortized debt issuance costs
|
(2,050
|
)
|
(2,162
|
)
|
||
|
Unsecured debt
|
652,950
|
|
652,838
|
|
||
|
Secured debt - fixed rate, carrying amount
(1)
|
255,060
|
|
258,594
|
|
||
|
Unamortized debt issuance costs
|
(1,074
|
)
|
(1,089
|
)
|
||
|
Secured debt
|
253,986
|
|
257,505
|
|
||
|
Total debt
|
$
|
1,106,241
|
|
1,101,333
|
|
|
|
(1)
|
These loans have a fixed interest rate or an effectively fixed interest rate due to interest rate swaps.
|
Scheduled principal payments on long-term debt, including
Secured debt
and
Unsecured debt
(not including
Unsecured bank credit facilities
), as of
March 31, 2017
are as follows:
|
Years Ending December 31,
|
(In thousands)
|
|||
|
Remainder of 2017
|
$
|
54,703
|
|
|
|
2018
|
61,316
|
|
||
|
2019
|
130,569
|
|
||
|
2020
|
114,096
|
|
||
|
2021
|
129,563
|
|
||
|
2022 and beyond
|
419,813
|
|
||
|
Total
|
$
|
910,060
|
|
|
-
11
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
(10)
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
A summary of the Company’s
Accounts payable and accrued expenses
follows:
|
|
March 31,
2017 |
December 31,
2016 |
||||
|
|
(In thousands)
|
|||||
|
Property taxes payable
|
$
|
11,043
|
|
14,186
|
|
|
|
Development costs payable
|
14,997
|
|
9,844
|
|
||
|
Property capital expenditures payable
|
4,582
|
|
2,304
|
|
||
|
Interest payable
|
4,481
|
|
3,822
|
|
||
|
Dividends payable on unvested restricted stock
|
954
|
|
1,530
|
|
||
|
Book overdraft
(1)
|
2,015
|
|
14,452
|
|
||
|
Other payables and accrued expenses
|
5,658
|
|
6,563
|
|
||
|
Total
Accounts payable and accrued expenses
|
$
|
43,730
|
|
52,701
|
|
|
(1)
Represents unfunded outstanding checks for which the bank has not advanced cash to the Company.
|
(11)
|
OTHER LIABILITIES
|
A summary of the Company’s
Other liabilities
follows:
|
|
March 31,
2017 |
December 31,
2016 |
||||
|
|
(In thousands)
|
|||||
|
Security deposits
|
$
|
15,301
|
|
14,782
|
|
|
|
Prepaid rent and other deferred income
|
11,392
|
|
9,795
|
|
||
|
Acquired below-market lease intangibles
|
4,162
|
|
4,012
|
|
||
|
Accumulated amortization of below-market lease intangibles
|
(1,829
|
)
|
(1,662
|
)
|
||
|
Acquired below-market lease intangibles, net of accumulated amortization
|
2,333
|
|
2,350
|
|
||
|
Interest rate swap liabilities
|
1,865
|
|
2,578
|
|
||
|
Prepaid tenant improvement reimbursements
|
572
|
|
343
|
|
||
|
Other liabilities
|
15
|
|
16
|
|
||
|
Total
Other liabilities
|
$
|
31,478
|
|
29,864
|
|
|
|
(12)
|
COMPREHENSIVE INCOME
|
Total Comprehensive Income
is comprised of net income plus all other changes in equity from non-owner sources and is presented on the Consolidated Statements of Income and Comprehensive Income. The components of
Accumulated other comprehensive income (loss)
are presented in the Company's Consolidated Statement of Changes in Equity and are summarized below. See Note 13 for information regarding the Company's interest rate swaps.
|
Three Months Ended
March 31, |
||||||
|
2017
|
2016
|
|||||
|
(In thousands)
|
||||||
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
|
||||||
|
Balance at beginning of period
|
$
|
1,995
|
|
(3,456
|
)
|
|
|
Change in fair value of interest rate swaps
|
1,410
|
|
(5,397
|
)
|
||
|
Balance at end of period
|
$
|
3,405
|
|
(8,853
|
)
|
|
-
12
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
(13)
|
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
|
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risk, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and, to a limited extent, the use of derivative instruments.
Specifically, the Company has entered into derivative instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative instruments, described below, are used to manage differences in the amount, timing and duration of the Company's known or expected cash payments principally related to certain of the Company's borrowings.
The Company's objective in using interest rate derivatives is to change variable interest rates to fixed interest rates by using interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
As of
March 31, 2017
, the Company had
seven
interest rate swaps outstanding, all of which are used to hedge the variable cash flows associated with unsecured loans. All of the Company's interest rate swaps convert the related loans' LIBOR rate components to effectively fixed interest rates, and the Company has concluded that each of the hedging relationships is highly effective.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in
Other comprehensive income (loss)
and is subsequently reclassified into earnings through interest expense as interest payments are made in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives, which is immaterial for the periods reported, is recognized directly in earnings (included in
Other
on the Consolidated Statements of Income and Comprehensive Income).
Amounts reported in
Other comprehensive income (loss)
related to derivatives will be reclassified to
Interest expense
as interest payments are made on the Company's variable-rate debt. The Company estimates the swap interest payments will be
$1,266,000
over the next twelve months. These payments approximate the expected cash interest payments for the swaps. Since the interest payments on the swaps in combination with the associated debt have been effectively fixed, this estimate is not in addition to the Company's total expected combined interest payments or expense for the next twelve months.
The Company's valuation methodology for over-the-counter (“OTC”) derivatives is to discount cash flows based on Overnight Index Swap (“OIS”) rates. Uncollateralized or partially-collateralized trades are discounted at OIS rates, but include appropriate economic adjustments for funding costs (i.e., a LIBOR-OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. The Company calculates its derivative valuations using mid-market prices.
As of
March 31, 2017
and
December 31, 2016
, the Company had the following outstanding interest rate derivatives that are designated as cash flow hedges of interest rate risk:
|
Interest Rate Derivative
|
Notional Amount as of March 31, 2017
|
Notional Amount as of December 31, 2016
|
||
|
(In thousands)
|
||||
|
Interest Rate Swap
|
$80,000
|
$80,000
|
||
|
Interest Rate Swap
|
$75,000
|
$75,000
|
||
|
Interest Rate Swap
|
$75,000
|
$75,000
|
||
|
Interest Rate Swap
|
$65,000
|
$65,000
|
||
|
Interest Rate Swap
|
$60,000
|
$60,000
|
||
|
Interest Rate Swap
|
$40,000
|
$40,000
|
||
|
Interest Rate Swap
|
$15,000
|
$15,000
|
||
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of
March 31, 2017
and
December 31, 2016
. See Note 16 for additional information on the fair value of the Company's interest rate swaps.
-
13
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Derivatives
As of March 31, 2017
|
Derivatives
As of December 31, 2016
|
||||||||||
|
Balance Sheet Location
|
Fair Value
|
Balance Sheet Location
|
Fair Value
|
||||||||
|
(In thousands)
|
|||||||||||
|
Derivatives designated as cash flow hedges:
|
|||||||||||
|
Interest rate swap assets
|
Other assets
|
$
|
5,243
|
|
Other assets
|
$
|
4,546
|
|
|||
|
Interest rate swap liabilities
|
Other liabilities
|
1,865
|
|
Other liabilities
|
2,578
|
|
|||||
The table below presents the effect of the Company's derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the
three
months ended
March 31, 2017
and 2016:
|
Three Months Ended
March 31, |
|||||||
|
|
2017
|
2016
|
|||||
|
|
(In thousands)
|
||||||
|
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
|
|
|
|||||
|
Interest Rate Swaps:
|
|||||||
|
Amount of income (loss) recognized in
Other comprehensive income (loss)
on derivatives
|
$
|
637
|
|
(6,324
|
)
|
||
|
Amount of loss reclassified from
Accumulated other comprehensive income (loss)
into
Interest expense
|
(773
|
)
|
(927
|
)
|
|||
See Note 12 for additional information on the Company's
Accumulated other comprehensive income (loss)
resulting from its interest rate swaps.
Derivative financial agreements expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company believes it minimizes the credit risk by transacting with financial institutions the Company regards as credit-worthy.
The Company has an agreement with its derivative counterparties containing a provision stating that the Company could be declared in default on its derivative obligations if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender.
As of
March 31, 2017
, the fair value of derivatives in an asset position related to these agreements was
$5,243,000
, and the fair value of derivatives in a liability position related to these agreements was
$1,865,000
. As of
March 31, 2017
, the Company has not posted any collateral related to these arrangements. If the Company had breached any of the contractual provisions of the derivative contracts, it could have been required to settle its obligations under the agreements at their termination value. The swap termination value of derivatives in an asset position was an asset in the amount of
$5,278,000
, and the swap termination value of derivatives in a liability position was a liability in the amount of
$1,905,000
.
|
(14)
|
EARNINGS PER SHARE
|
The Company applies ASC 260,
Earnings Per Share
, which requires companies to present basic and diluted earnings per share (EPS). Basic EPS represents the amount of earnings for the period attributable to each share of common stock outstanding during the reporting period. The Company’s basic EPS is calculated by dividing
Net Income Attributable to EastGroup Properties, Inc. Common Stockholders
by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of common stock. These unvested restricted shares, although classified as issued and outstanding, are considered forfeitable until the restrictions lapse and will not be included in the basic EPS calculation until the shares are vested.
Diluted EPS represents the amount of earnings for the period attributable to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The Company calculates diluted EPS by dividing
Net Income Attributable to EastGroup Properties, Inc. Common Stockholders
by the weighted average number of common shares outstanding plus the dilutive effect of unvested restricted stock. The dilutive effect of unvested restricted stock is determined using the treasury stock method.
-
14
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Reconciliation of the numerators and denominators in the basic and diluted EPS computations is as follows:
|
Three Months Ended
|
||||||
|
|
March 31,
|
|||||
|
|
2017
|
2016
|
||||
|
|
(In thousands)
|
|||||
|
BASIC EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
|
|
|
||||
|
Numerator – net income attributable to common stockholders
|
$
|
12,819
|
|
21,711
|
|
|
|
Denominator – weighted average shares outstanding
|
33,361
|
|
32,254
|
|
||
|
DILUTED EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
|
||||||
|
Numerator – net income attributable to common stockholders
|
$
|
12,819
|
|
21,711
|
|
|
|
Denominator:
|
||||||
|
Weighted average shares outstanding
|
33,361
|
|
32,254
|
|
||
|
Unvested restricted stock
|
48
|
|
53
|
|
||
|
Total Shares
|
33,409
|
|
32,307
|
|
||
|
(15)
|
STOCK-BASED COMPENSATION
|
EastGroup applies the provisions of ASC 718,
Compensation - Stock Compensation,
to account for its stock-based compensation plans. ASC 718 requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements and that the cost be measured on the fair value of the equity or liability instruments issued.
Stock-based compensation cost for employees was
$2,681,000
and
$3,014,000
for the
three
months ended
March 31, 2017
and 2016, respectively, of which
$486,000
and
$357,000
were capitalized as part of the Company's development costs. Stock-based compensation expense for directors was $
162,000
and
$133,000
for the
three
months ended
March 31, 2017
and 2016, respectively.
In March 2017, the Compensation Committee of the Company's Board of Directors (the Committee) evaluated the Company's performance compared to certain annual performance measures (primarily funds from operations (FFO) per share and total shareholder return) for the year ended December 31, 2016. Based on the evaluation,
36,571
shares were awarded to the Company’s executive officers at the grant date (March 2, 2017) fair value of
$74.80
per share. These shares vested
20%
on the date shares were determined and awarded and will vest
20%
per year on January 1 in years 2018, 2019, 2020 and 2021. The shares are being expensed on a straight-line basis over the remaining service period.
Also in March 2017, the Committee evaluated the Company’s total shareholder return, both on an absolute basis for 2016 as well as on a relative basis compared to the NAREIT Equity Index, NAREIT Industrial Index and Russell 2000 Index for the five-year period ended December 31, 2016. Based on the evaluation,
33,289
shares were awarded to the Company’s executive officers at the grant date (March 2, 2017) fair value of
$74.80
per share. These shares vested
25%
on the date shares were determined and awarded and will vest
25%
per year on January 1 in years 2018, 2019 and 2020. The shares are being expensed on a straight-line basis over the remaining service period.
Notwithstanding the foregoing, the shares issued to the Company’s Chief Financial Officer, N. Keith McKey, under these plans became fully vested on the grant date of the awards in the first quarter of 2017.
Following is a summary of the total restricted shares granted, forfeited and delivered (vested) to participants with the related weighted average grant date fair value share prices. Of the shares that vested in the first
three
months of
2017
, the Company withheld
33,695
shares to satisfy the tax obligations for those participants who elected this option as permitted under the applicable equity plan. As of the vesting dates, the aggregate fair value of shares that vested during the first
three
months of
2017
was
$6,441,000
.
-
15
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Three Months Ended
|
|||||||
|
Award Activity:
|
March 31, 2017
|
||||||
|
|
Shares
|
Weighted Average Grant Date Fair Value
|
|||||
|
Unvested at beginning of period
|
162,191
|
|
$
|
51.98
|
|
||
|
Granted
|
69,860
|
|
74.80
|
|
|||
|
Forfeited
|
(16,000
|
)
|
36.98
|
|
|||
|
Vested
|
(86,728
|
)
|
61.62
|
|
|||
|
Unvested at end of period
|
129,323
|
|
$
|
59.70
|
|
||
|
(16)
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
ASC 820,
Fair Value Measurement,
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also provides guidance for using fair value to measure financial assets and liabilities. The Codification requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments in accordance with ASC 820
at
March 31, 2017
and
December 31, 2016
.
|
|
March 31, 2017
|
December 31, 2016
|
||||||||||
|
|
Carrying Amount
(1)
|
Fair Value
|
Carrying Amount
(1)
|
Fair Value
|
||||||||
|
|
(In thousands)
|
|||||||||||
|
Financial Assets:
|
|
|
|
|
||||||||
|
Cash and cash equivalents
|
$
|
44
|
|
44
|
|
522
|
|
522
|
|
|||
|
Mortgage loans receivable
|
4,720
|
|
4,720
|
|
4,752
|
|
4,747
|
|
||||
|
Interest rate swap assets
|
5,243
|
|
5,243
|
|
4,546
|
|
4,546
|
|
||||
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
||||
|
Unsecured bank credit facilities - variable rate
(2)
|
120,236
|
|
120,127
|
|
112,020
|
|
111,923
|
|
||||
|
Unsecured bank credit facilities - fixed rate
(2)
|
80,000
|
|
79,999
|
|
80,000
|
|
79,998
|
|
||||
|
Unsecured debt
(2)
|
655,000
|
|
630,892
|
|
655,000
|
|
623,147
|
|
||||
|
Secured debt
(2)
|
255,060
|
|
263,226
|
|
258,594
|
|
266,585
|
|
||||
|
Interest rate swap liabilities
|
1,865
|
|
1,865
|
|
2,578
|
|
2,578
|
|
||||
(1) Carrying amounts shown in the table are included on the Consolidated Balance Sheets under the indicated captions, except as explained in the notes below.
(2) Carrying amounts and fair values shown in the table exclude debt issuance costs (see Note 9 for additional information).
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents:
The carrying amounts approximate fair value due to the short maturity of those instruments.
Mortgage loans receivable (included in Other assets on the Consolidated Balance Sheets):
The fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities (Level 2 input).
Interest rate swap assets (included in Other assets on the Consolidated Balance Sheets):
The instruments are recorded at fair value based on models using inputs, such as interest rate yield curves, LIBOR swap curves and OIS curves, observable for substantially the full term of the contract (Level 2 input). See Note 13 for additional information on the Company's interest rate swaps.
Unsecured bank credit facilities:
The fair value of the Company’s unsecured bank credit facilities is estimated by discounting expected cash flows at current market rates (Level 2 input), excluding the effects of debt issuance costs.
Unsecured debt:
The fair value of the Company’s unsecured debt is estimated by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company’s bankers (Level 2 input), excluding the effects of debt issuance costs.
-
16
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Secured debt:
The fair value of the Company’s secured debt is estimated by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company’s bankers (Level 2 input), excluding the effects of debt issuance costs.
Interest rate swap liabilities (included in Other liabilities on the Consolidated Balance Sheets):
The instruments are recorded at fair value based on models using inputs, such as interest rate yield curves, LIBOR swap curves and OIS curves, observable for substantially the full term of the contract (Level 2 input). See Note 13 for additional information on the Company's interest rate swaps.
|
(17)
|
RISKS AND UNCERTAINTIES
|
The state of the overall economy can significantly impact the Company’s operational performance and thus impact its financial position. Should EastGroup experience a significant decline in operational performance, it may affect the Company’s ability to make distributions to its shareholders, service debt, or meet other financial obligations.
|
(18)
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
EastGroup has evaluated all ASUs recently released by the FASB through the date the financial statements were issued and determined that the following ASUs apply to the Company.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB issued further guidance in ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,
that provides clarifying guidance in certain narrow areas and adds some practical expedients. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The effective date of ASU 2014-09 was extended by one year by ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.
The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method, and the Company is evaluating which transition method it will elect. The Company is also in the process of evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures beginning with the Form 10-Q for the period ending March 31, 2018. EastGroup has performed an initial impact assessment and continues to evaluate its revenue streams and the potential impact of the new standard. In particular, the Company is evaluating the impact the new standard will have on revenue streams due under leases that are deemed to be non-lease components, such as common area maintenance reimbursements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
which requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized costs on the balance sheet. EastGroup plans to adopt ASU 2016-01 effective January 1, 2018. The Company does not anticipate the adoption of ASU 2016-01 will have a material impact on the Company's financial condition or results of operations.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The Company is a lessee on a limited number of leases, including office and ground leases, and the Company anticipates the related impact of ASU 2016-02 will not be material to its overall financial condition and results of operations. Lessor accounting is largely unchanged under ASU 2016-02. The Company's primary revenue is rental income; as such, the Company is a lessor on a significant number of leases. The Company is continuing to evaluate the potential impacts of the ASU and believes it will continue to account for its leases in substantially the same manner. The most significant change for the Company related to lessor accounting relates to the new standard's narrow definition of initial direct costs for leases; the new definition will result in certain costs (primarily legal costs related to lease negotiations) being expensed rather than capitalized upon adoption of the new standard. Public business entities are required to apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. EastGroup plans to adopt ASU 2016-02 effective January 1, 2019. The Company is continuing the process of evaluating and quantifying the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures beginning with the Form 10-Q for the period ending March 31, 2019.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The ASU is intended to improve the accounting for share-based payments and affects all
-
17
-
EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment awards are simplified with the ASU, including income tax consequences, classification of awards as equity or liabilities and classification on the Consolidated Statements of Cash Flows. ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those fiscal years; early adoption is permitted. EastGroup adopted ASU 2016-09 effective January 1, 2017. As a result, the Company elected to reverse compensation cost of any forfeited awards when they occur and will continue to classify the cash flows resulting from remitting cash to the tax authorities for the payment of taxes on the vesting of share-based payment awards as a financing activity on the Consolidated Statements of Cash Flows. In addition, upon vesting of share-based payments, the Company will withhold up to the maximum individual statutory tax rate and classify the entire award as equity. The adoption of ASU 2016-09 did not have a material impact on the Company's financial condition or results of operations.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which addresses certain cash flow issues, including how debt prepayments or debt extinguishment costs and distributions received from equity method investees are presented. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, and the Company has adopted ASU 2016-15 effective January 1, 2017. The adoption of ASU 2016-15 did not have a material impact on the Company's financial condition or results of operations.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The ASU is intended to provide a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. The Company has determined that some of its real estate property acquisitions may be considered to be acquisitions of groups of similar identifiable assets; therefore, the acquisitions are not considered to be acquisitions of a business. ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those fiscal years; early adoption is permitted and may be applied to transactions that have not been reported in financial statements that have been issued or made available for issuance. EastGroup adopted ASU 2017-01 for transactions beginning on October 1, 2016. As a result, the Company has capitalized acquisition costs related to its fourth quarter 2016 and first quarter 2017 acquisitions as they were determined not to be acquisitions of a business.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Others (Topic 350): Simplifying the Test for Goodwill Impairment,
which simplifies the measurement of goodwill impairment by eliminating the requirement of performing a hypothetical purchase price allocation to measure goodwill impairment. ASU 2017-04 is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, and the Company has adopted ASU 2017-04 effective January 1, 2017, and will apply the new guidance for goodwill impairment tests with measurement dates after January 1, 2017. The adoption of ASU 2017-04 did not have a material impact on the Company's financial condition or results of operations.
|
(19)
|
SUBSEQUENT EVENTS
|
Subsequent to quarter end, EastGroup acquired
30
acres of land in the Round Rock submarket of Austin for
$5.3 million
. EastGroup's plans for future development of the land include a master-planned, multi-phased development project to be named Settlers Crossing which will consist of
four
business distribution buildings totaling approximately
340,000
square feet.
-
18
-
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
OVERVIEW
EastGroup’s goal is to maximize shareholder value by being a leading provider in its markets of functional, flexible and quality business distribution space for location sensitive customers (primarily in the 5,000 to 50,000 square foot range). The Company develops, acquires and operates distribution facilities, the majority of which are clustered around major transportation features in supply constrained submarkets in major Sunbelt regions. The Company’s core markets are in the states of Florida, Texas, Arizona, California and North Carolina.
EastGroup believes its current operating cash flow and unsecured bank credit facilities provide the capacity to fund the operations of the Company, and the Company also believes it can issue common and/or preferred equity and obtain debt financing. During the first three months of 2017, EastGroup issued
544,144
shares of common stock through its continuous common equity program, providing net proceeds to the Company of $39.5 million. EastGroup's financing and equity issuances are further described in
Liquidity and Capital Resources
.
The Company’s primary revenue source is rental income; as such, EastGroup’s greatest challenge is leasing space. During the
three
months ended
March 31, 2017
, leases expired on 2,420,000 square feet (6.7% of EastGroup’s total square footage of 36,242,000), and the Company was successful in renewing or re-leasing 92% of the expiring square feet. In addition, EastGroup leased 574,000 square feet of other vacant space during this period. During the first
three
months of
2017
, average rental rates on new and renewal leases increased by 17.4%. Property net operating income (PNOI) from same properties, defined as operating properties owned during the entire current period and prior year reporting period, increased 3.7% for the quarter ended
March 31, 2017
, as compared to the same quarter in
2016
.
EastGroup’s total leased percentage was 97.0% at
March 31, 2017
, compared to 96.7% at
March 31, 2016
. Leases scheduled to expire for the remainder of
2017
were 6.5% of the portfolio on a square foot basis at
March 31, 2017
, and this percentage was reduced to 5.6% as of
April 21, 2017
.
The Company generates new sources of leasing revenue through its development and acquisition programs. The Company mitigates risks associated with development through a Board-approved maximum level of land held for development and by adjusting development start dates according to leasing activity.
During the first
three
months of
2017
, EastGroup acquired
two
acres of development land in Charlotte for
$659,000
. In addition, the Company began construction of three development projects containing 376,000 square feet in Tampa, Orlando and Charlotte. EastGroup also transferred
five
properties (
1,052,000
square feet) in Dallas, San Antonio, Tampa, and Phoenix from its development program to real estate properties with costs of
$68.4 million
at the date of transfer. As of
March 31, 2017
, EastGroup’s development program consisted of 15 projects (2,216,000 square feet) located in 10 cities. The projected total investment for the development projects, which were collectively 55% leased as of
April 21, 2017
, is $187 million, of which $53 million remained to be invested as of
March 31, 2017
.
Also during the
three
months ended
March 31, 2017
, the Company acquired Shiloh 400, a 100% leased,
238,000
square foot business distribution complex in Atlanta, for
$20.3 million
.
Typically, the Company initially funds its development and acquisition programs through its $335 million unsecured bank credit facilities (as discussed in
Liquidity and Capital Resources
). As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, to replace short-term bank borrowings. In March 2016, Moody's Investors Service affirmed EastGroup's issuer rating of Baa2 with a stable outlook. In April 2016, Fitch Ratings affirmed EastGroup's issuer rating of BBB with a stable outlook. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. For future debt issuances, the Company intends to issue primarily unsecured fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps. The Company may also access the public debt market in the future as a means to raise capital.
EastGroup has one reportable segment – industrial properties. These properties are primarily located in major Sunbelt regions of the United States, have similar economic characteristics and also meet the other criteria permitting the properties to be aggregated into one reportable segment. The Company’s chief decision makers use two primary measures of operating results in making decisions: (1) property net operating income (PNOI), defined as
Income from real estate operations
less
Expenses from real estate operations
(including market-based internal management fee expense) plus the Company's share of income and property operating
-
19
-
expenses from its less-than-wholly-owned real estate investments, and (2) funds from operations attributable to common stockholders (FFO), defined as net income (loss) attributable to common stockholders computed in accordance with U.S. generally accepted accounting principles (GAAP), excluding gains or losses from sales of depreciable real estate property and impairment losses, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The Company calculates FFO based on the National Association of Real Estate Investment Trusts’ (NAREIT) definition.
PNOI is a supplemental industry reporting measurement used to evaluate the performance of the Company’s real estate investments. The Company believes the exclusion of depreciation and amortization in the industry’s calculation of PNOI provides a supplemental indicator of the properties’ performance since real estate values have historically risen or fallen with market conditions. PNOI as calculated by the Company may not be comparable to similarly titled but differently calculated measures for other real estate investment trusts (REITs). The major factors influencing PNOI are occupancy levels, acquisitions and sales, development properties that achieve stabilized operations, rental rate increases or decreases, and the recoverability of operating expenses. The Company’s success depends largely upon its ability to lease space and to recover from tenants the operating costs associated with those leases.
PNOI is comprised of
Income from real estate operations
, less
Expenses from real estate operations
plus the Company's share of income and property operating expenses from its less-than-wholly-owned real estate investments. PNOI was calculated as follows for the
three
months ended
March 31, 2017
and
2016
.
|
|
Three Months Ended
March 31, |
|||||
|
|
2017
|
2016
|
||||
|
|
(In thousands)
|
|||||
|
Income from real estate operations
|
$
|
66,137
|
|
61,568
|
|
|
|
Expenses from real estate operations
|
(19,007
|
)
|
(17,820
|
)
|
||
|
Noncontrolling interest in PNOI of consolidated 80% joint ventures
|
(211
|
)
|
(201
|
)
|
||
|
PNOI from 50% owned unconsolidated investment
|
224
|
|
230
|
|
||
|
PROPERTY NET OPERATING INCOME (PNOI)
|
$
|
47,143
|
|
43,777
|
|
|
Income from real estate operations
is comprised of rental income, expense reimbursement pass-through income and other real estate income including lease termination fees.
Expenses from real estate operations
is comprised of property taxes, insurance, utilities, repair and maintenance expenses, management fees, other operating costs and bad debt expense. Generally, the Company’s most significant operating expenses are property taxes and insurance. Tenant leases may be net leases in which the total operating expenses are recoverable, modified gross leases in which some of the operating expenses are recoverable, or gross leases in which no expenses are recoverable (gross leases represent only a small portion of the Company’s total leases). Increases in property operating expenses are fully recoverable under net leases and recoverable to a high degree under modified gross leases. Modified gross leases often include base year amounts and expense increases over these amounts are recoverable. The Company’s exposure to property operating expenses is primarily due to vacancies and leases for occupied space that limit the amount of expenses that can be recovered.
-
20
-
The following table presents reconciliations of Net Income to PNOI for the
three
months ended
March 31, 2017
and
2016
.
|
|
Three Months Ended
March 31, |
|||||
|
|
2017
|
2016
|
||||
|
|
(In thousands)
|
|||||
|
NET INCOME
|
$
|
12,973
|
|
21,830
|
|
|
|
(Gain) on sales of real estate investments
|
—
|
|
(11,332
|
)
|
||
|
(Gain) loss on sales of non-operating real estate
|
40
|
|
(10
|
)
|
||
|
Interest income
|
(62
|
)
|
(64
|
)
|
||
|
Other income
|
(17
|
)
|
(21
|
)
|
||
|
Interest rate swap ineffectiveness
|
—
|
|
5
|
|
||
|
Depreciation and amortization
|
20,225
|
|
19,162
|
|
||
|
Company's share of depreciation from unconsolidated investment
|
31
|
|
31
|
|
||
|
Interest expense
|
8,686
|
|
9,065
|
|
||
|
General and administrative expense
|
5,478
|
|
5,312
|
|
||
|
Noncontrolling interest in PNOI of consolidated 80% joint ventures
|
(211
|
)
|
(201
|
)
|
||
|
PROPERTY NET OPERATING INCOME
|
$
|
47,143
|
|
43,777
|
|
|
The Company believes FFO is a meaningful supplemental measure of operating performance for equity REITs. The Company believes excluding depreciation and amortization in the calculation of FFO is appropriate since real estate values have historically increased or decreased based on market conditions. FFO is not considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company’s financial performance, nor is it a measure of the Company’s liquidity or indicative of funds available to provide for the Company’s cash needs, including its ability to make distributions. In addition, FFO, as reported by the Company, may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition. The Company’s key drivers affecting FFO are changes in PNOI (as discussed above), interest rates, the amount of leverage the Company employs and general and administrative expenses. The following table presents reconciliations of Net Income Attributable to EastGroup Properties, Inc. Common Stockholders to FFO Attributable to Common Stockholders for the
three
months ended
March 31, 2017
and
2016
.
|
|
Three Months Ended
March 31, |
|||||
|
|
2017
|
2016
|
||||
|
|
(In thousands, except per share data)
|
|||||
|
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
|
$
|
12,819
|
|
21,711
|
|
|
|
Depreciation and amortization
|
20,225
|
|
19,162
|
|
||
|
Company's share of depreciation from unconsolidated investment
|
31
|
|
31
|
|
||
|
Depreciation and amortization from noncontrolling interest
|
(55
|
)
|
(54
|
)
|
||
|
(Gain) on sales of real estate investments
|
—
|
|
(11,332
|
)
|
||
|
FUNDS FROM OPERATIONS (FFO) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$
|
33,020
|
|
29,518
|
|
|
|
Net income attributable to common stockholders per diluted share
|
$
|
.38
|
|
.67
|
|
|
|
Funds from operations (FFO) attributable to common stockholders
per diluted share
|
$
|
.99
|
|
.91
|
|
|
|
Diluted shares for earnings per share and funds from operations
|
33,409
|
|
32,307
|
|
||
-
21
-
The Company analyzes the following performance trends in evaluating the progress of the Company:
|
•
|
The FFO change per share represents the increase or decrease in FFO per share from the current period compared to the same period in the prior year. FFO per share for the
first
quarter of
2017
was
$.99
per share compared with
$.91
per share for the same period of
2016
, an increase of 8.8%.
|
|
•
|
For the three months ended
March 31, 2017
, PNOI increased by $3,366,000, or 7.7%, compared to the same period in
2016
. PNOI increased $2,100,000 from newly developed and redeveloped properties, $1,579,000 from same property operations and $673,000 from 2016 and 2017 acquisitions; PNOI decreased $944,000 from operating properties sold in 2016.
|
|
•
|
The same property net operating income change represents the PNOI increase or decrease for the same operating properties owned during the entire current period and prior year reporting period. PNOI from same properties increased 3.7% for the three months ended
March 31, 2017
, compared to the same period in
2016
.
|
|
•
|
Same property average occupancy represents the average month-end percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage for the same operating properties owned during the entire current period and prior year reporting period. Same property average occupancy for the three months ended
March 31, 2017
, was 96.7% compared to 95.9% for the same period of
2016
.
|
|
•
|
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
March 31, 2017
, was 95.6%. Quarter-end occupancy ranged from 95.7% to 96.8% over the previous four quarters ended
March 31, 2016
to December 31, 2016.
|
|
•
|
Rental rate change represents the rental rate increase or decrease on new and renewal leases compared to the prior leases on the same space. Rental rate increases on new and renewal leases (7.7% of total square footage) averaged 17.4% for the
first
quarter of
2017
.
|
|
•
|
Lease termination fee income for the
three
months ended
March 31, 2017
was $109,000 compared to $183,000 for the same period of
2016
. The Company recorded bad debt expense of $50,000 and $124,000 for the
three
months ended
March 31, 2017
and 2016, respectively.
|
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 applied the principles of Accounting Standards Codification (ASC) 805,
Business Combinations,
when accounting for purchase of real estate until its adoption of Accounting Standards Update (ASU) 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business,
which was effective October 1, 2016. ASU 2017-01 provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. EastGroup has determined that some of its real estate property acquisitions may be considered to be acquisitions of groups of similar identifiable assets; therefore, the acquisitions are not considered to be acquisitions of a business.
The Financial Accounting Standards Board (FASB) Codification provides guidance on how to properly determine the allocation of the purchase price among the individual components of both the tangible and intangible assets based on their respective fair values. Goodwill for business combinations is recorded when the purchase price exceeds the fair value of the assets and liabilities acquired. Factors considered by management in allocating the cost of the properties acquired include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. The allocation to tangible assets (land, building and improvements) is based upon management’s determination of the value of the property as if it were vacant using discounted cash flow models. The Company determines whether any financing assumed is above or below market based upon comparison to similar financing terms for similar properties. The cost of the properties acquired may be adjusted based on indebtedness assumed from the seller that is determined to be above or below market rates.
The purchase price is also allocated among the following categories of intangible assets: the above or below market component of in-place leases, the value of in-place leases, and the value of customer relationships. The value allocable to the above or below
-
22
-
market component of an acquired in-place lease is determined based upon the present value (using a discount rate reflecting the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above and below market leases are included in
Other assets
and
Other liabilities
, respectively, on the Consolidated Balance Sheets and are amortized to rental income over the remaining terms of the respective leases. The total amount of intangible assets is further allocated to in-place lease values and customer relationship values based upon management’s assessment of their respective values. These intangible assets are included in
Other assets
on the Consolidated Balance Sheets and are amortized over the remaining term of the existing lease, or the anticipated life of the customer relationship, as applicable.
For properties under development and properties acquired in the development stage, costs associated with development (i.e., land, construction costs, interest expense, property taxes and other costs associated with development) are aggregated into the total capitalized costs of the property. Included in these costs are management’s estimates for the portions of internal costs (primarily personnel costs) deemed related to such development activities. The internal costs are allocated to specific development properties based on development activity.
The Company reviews its real estate investments for impairment of value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any real estate investment is considered permanently impaired, a loss is recorded to reduce the carrying value of the property to its estimated fair value. Real estate assets classified as held for sale are reported at the lower of the carrying amount or fair value less estimated costs of sale. 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 has not identified any impairment charges which should be recorded nor has it recorded any impairment charges in recent years. In the event of impairment, the property’s basis would be reduced, and the impairment would be recognized as a current period charge on the Consolidated Statements of Income and Comprehensive Income.
Valuation of Receivables
The Company is subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables. In order to mitigate these risks, the Company performs credit reviews and analyses on prospective tenants before significant leases are executed and on existing tenants before properties are acquired. On a quarterly basis, the Company evaluates outstanding receivables and estimates the allowance for doubtful accounts. Management specifically analyzes aged receivables, customer credit-worthiness, historical bad debts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. The Company believes its allowance for doubtful accounts is adequate for its outstanding receivables for the periods presented. In the event the allowance for doubtful accounts is insufficient for an account that is subsequently written off, additional bad debt expense would be recognized as a current period charge on the Consolidated Statements of Income and Comprehensive Income.
Tax Status
EastGroup, a Maryland corporation, has qualified as a real estate investment trust under Sections 856-860 of the Internal Revenue Code and intends to continue to qualify as such. To maintain its status as a REIT, the Company is required to distribute at least 90% of its ordinary taxable income to its stockholders. If the Company has a capital gain, it has the option of (i) deferring recognition of the capital gain through a tax-deferred exchange, (ii) declaring and paying a capital gain dividend on any recognized net capital gain resulting in no corporate level tax, or (iii) retaining and paying corporate income tax on its net long-term capital gain, with shareholders reporting their proportional share of the undistributed long-term capital gain and receiving a credit or refund of their share of the tax paid by the Company. The Company distributed all of its 2016 taxable income to its stockholders and expects to distribute all of its taxable income in 2017. Accordingly, no significant provision for income taxes was necessary in 2016, nor is any significant income tax provision expected to be necessary for 2017.
-
23
-
FINANCIAL CONDITION
EastGroup’s assets were
$1,856,430,000
at
March 31, 2017
,
an increase
of $
30,666,000
from
December 31, 2016
. Liabilities
decreased
$
2,449,000
to
$1,181,449,000
, and equity
increased
$
33,115,000
to $
674,981,000
during the same period. The following paragraphs explain these changes in detail.
Assets
Real Estate Properties
Real estate properties
increased
$
94,661,000
during the
three
months ended
March 31, 2017
, primarily due to the transfer of
five
properties from
Development
, as detailed under
Development
below; the purchase of Shiloh 400 in Atlanta; and capital improvements at the Company's properties.
During the three months ended
March 31, 2017
, EastGroup acquired Shiloh 400, a
238,000
square foot complex in Atlanta, Georgia, for
$20,347,000
, of which
$18,712,000
was allocated to
Real estate properties
. EastGroup allocated
$3,092,000
of the total purchase price to land using third party land valuations for the Atlanta market. The market values are considered to be Level 3 inputs as defined by ASC 820,
Fair Value Measurement
(see Note 16 in the Notes to Consolidated Financial Statements for additional information on ASC 820). Intangibles associated with the purchase of Shiloh 400 were allocated as follows:
$1,801,000
to in-place lease intangibles and
$2,000
to above market leases (both included in
Other assets
on the Consolidated Balance Sheets), and
$168,000
to below market leases (included in
Other liabilities
on the Consolidated Balance Sheets).
During the
three
months ended
March 31, 2017
, the Company made capital improvements of
$4,736,000
on existing and acquired properties (included in the Capital Expenditures table under
Results of Operations
). Also, the Company incurred costs of
$2,171,000
on development properties subsequent to transfer to
Real estate properties
; the Company records these expenditures as development costs on the Consolidated Statements of Cash Flows.
EastGroup did not sell any operating properties during the
three
months ended
March 31, 2017
.
Development
EastGroup’s investment in development at
March 31, 2017
consisted of properties in lease-up and under construction of $133,681,000 and prospective development (primarily land) of
$110,632,000
. The Company’s total investment in development at
March 31, 2017
was $
244,313,000
compared to $
293,908,000
at
December 31, 2016
. Total capital invested for development during the first
three
months of
2017
was
$22,178,000
, which primarily consisted of costs of
$18,049,000
and
$728,000
as detailed in the
Development Activity
table below and costs of
$2,171,000
on development properties subsequent to transfer to
Real estate properties
. The capitalized costs incurred on development properties subsequent to transfer to
Real estate properties
include capital improvements at the properties and do not include other capitalized costs associated with development (i.e., interest expense, property taxes and internal personnel costs).
The Company capitalized internal development costs of
$1,244,000
and
$891,000
for the
three
months ended
March 31, 2017
and 2016, respectively.
During the three months ended
March 31, 2017
, EastGroup purchased
two
acres of development land in Charlotte for
$659,000
. Costs associated with this land acquisition are included in the
Development Activity
table below. These increases were offset by the sale of five acres of land for $850,000 and the transfer of
five
development projects to
Real estate properties
during the first
three
months of
2017
with a total investment of
$68,372,000
as of the date of transfer.
-
24
-
|
|
|
Costs Incurred
|
|
Anticipated Building Conversion Date
|
|||||||||||||
|
DEVELOPMENT ACTIVITY
|
Costs Transferred in 2017
(1)
|
For the Three Months Ended
3/31/2017
|
Cumulative as of 3/31/2017
|
Estimated Total Costs
|
|||||||||||||
|
|
(In thousands)
|
||||||||||||||||
|
LEASE-UP
|
Building Size (Square feet)
|
|
|
|
|
||||||||||||
|
Jones Corporate Park, Las Vegas, NV
(2)
|
416,000
|
|
$
|
—
|
|
275
|
|
39,815
|
|
43,700
|
|
04/17
|
|||||
|
Ten Sky Harbor, Phoenix, AZ
|
64,000
|
|
—
|
|
100
|
|
5,365
|
|
6,800
|
|
04/17
|
||||||
|
Steele Creek VI, Charlotte, NC
|
137,000
|
|
—
|
|
542
|
|
7,548
|
|
8,200
|
|
05/17
|
||||||
|
Horizon VII, Orlando, FL
|
109,000
|
|
—
|
|
950
|
|
7,841
|
|
8,700
|
|
06/17
|
||||||
|
Alamo Ridge IV, San Antonio, TX
|
97,000
|
|
—
|
|
299
|
|
5,244
|
|
6,000
|
|
03/18
|
||||||
|
Total Lease-Up
|
823,000
|
|
—
|
|
2,166
|
|
65,813
|
|
73,400
|
|
|||||||
|
UNDER CONSTRUCTION
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Horizon V, Orlando, FL
|
141,000
|
|
—
|
|
4,664
|
|
9,099
|
|
9,900
|
|
06/17
|
||||||
|
Eisenhauer Point 4, San Antonio, TX
|
85,000
|
|
—
|
|
1,150
|
|
3,803
|
|
5,600
|
|
07/17
|
||||||
|
CreekView 121 1 & 2, Dallas, TX
|
193,000
|
|
—
|
|
2,878
|
|
14,733
|
|
16,700
|
|
08/17
|
||||||
|
Country Club V, Tucson, AZ
|
300,000
|
|
—
|
|
385
|
|
3,680
|
|
24,200
|
|
02/18
|
||||||
|
Eisenhauer Point 3, San Antonio, TX
|
71,000
|
|
—
|
|
1,190
|
|
3,938
|
|
5,400
|
|
04/18
|
||||||
|
SunCoast 4, Ft. Myers, FL
|
93,000
|
|
—
|
|
1,249
|
|
7,504
|
|
8,700
|
|
05/18
|
||||||
|
Weston, Ft. Lauderdale, FL
(3)
|
134,000
|
|
—
|
|
226
|
|
14,507
|
|
15,900
|
|
05/18
|
||||||
|
Steele Creek VII, Charlotte, NC
|
120,000
|
|
2,393
|
|
1,939
|
|
4,332
|
|
8,600
|
|
07/18
|
||||||
|
Horizon XII, Orlando, FL
|
140,000
|
|
3,825
|
|
222
|
|
4,047
|
|
11,200
|
|
09/18
|
||||||
|
Oak Creek VII, Tampa, FL
|
116,000
|
|
2,153
|
|
72
|
|
2,225
|
|
7,200
|
|
09/18
|
||||||
|
Total Under Construction
|
1,393,000
|
|
8,371
|
|
13,975
|
|
67,868
|
|
113,400
|
|
|||||||
|
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
|
Estimated Building Size (Square feet)
|
|
|
|
|
|
|
|
|
||||||||
|
Phoenix, AZ
|
261,000
|
|
—
|
|
64
|
|
3,957
|
|
|||||||||
|
Tucson, AZ
(4)
|
—
|
|
—
|
|
(417
|
)
|
—
|
|
|||||||||
|
Ft. Myers, FL
|
570,000
|
|
—
|
|
—
|
|
13,643
|
|
|||||||||
|
Miami, FL
|
850,000
|
|
—
|
|
645
|
|
27,889
|
|
|||||||||
|
Orlando, FL
|
522,000
|
|
(3,825
|
)
|
291
|
|
12,595
|
|
|||||||||
|
Tampa, FL
|
32,000
|
|
(2,153
|
)
|
—
|
|
1,528
|
|
|||||||||
|
Jackson, MS
|
28,000
|
|
—
|
|
—
|
|
706
|
|
|||||||||
|
Charlotte, NC
|
748,000
|
|
(2,393
|
)
|
953
|
|
7,863
|
|
|||||||||
|
Dallas, TX
(5)
|
648,000
|
|
—
|
|
(282
|
)
|
12,040
|
|
|||||||||
|
El Paso, TX
|
251,000
|
|
—
|
|
—
|
|
2,444
|
|
|||||||||
|
Houston, TX
|
1,476,000
|
|
—
|
|
1
|
|
21,375
|
|
|||||||||
|
San Antonio, TX
|
544,000
|
|
—
|
|
653
|
|
6,592
|
|
|||||||||
|
Total Prospective Development
|
5,930,000
|
|
(8,371
|
)
|
1,908
|
|
110,632
|
|
|
|
|||||||
|
|
8,146,000
|
|
$
|
—
|
|
18,049
|
|
244,313
|
|
|
|
||||||
|
DEVELOPMENTS COMPLETED AND TRANSFERRED TO REAL ESTATE PROPERTIES DURING 2017
|
Building Size (Square feet)
|
|
|
|
|
|
|
|
|
Building Conversion Date
|
|||||||
|
Eisenhauer Point 1 & 2, San Antonio, TX
|
201,000
|
|
$
|
—
|
|
19
|
|
15,795
|
|
01/17
|
|||||||
|
South 35th Avenue, Phoenix, AZ
(6)
|
125,000
|
|
—
|
|
—
|
|
1,664
|
|
01/17
|
||||||||
|
Alamo Ridge III, San Antonio, TX
|
135,000
|
|
—
|
|
28
|
|
10,587
|
|
02/17
|
||||||||
|
Parc North 1-4, Dallas, TX
(7)
|
446,000
|
|
—
|
|
132
|
|
32,252
|
|
02/17
|
||||||||
|
Madison IV & V, Tampa, FL
|
145,000
|
|
—
|
|
549
|
|
8,074
|
|
03/17
|
||||||||
|
Total Transferred to Real Estate Properties
|
1,052,000
|
|
$
|
—
|
|
728
|
|
68,372
|
|
(8)
|
|||||||
(1)
Represents costs transferred from Prospective Development (primarily land) to Under Construction during the period. Negative amounts represent land inventory costs transferred to Under Construction.
(2) This project, which was recently developed by the seller, was acquired by EastGroup on 11/15/16 and is considered to be in the lease-up phase.
(3) This project, which was acquired by EastGroup on 11/1/16, is being redeveloped.
(4) Negative amount represents land inventory costs transferred to Real Estate Properties for storage yard and parking lot expansion.
(5) Negative amount represents North Stemmons land sold on 3/23/17.
(6) This property was redeveloped from a manufacturing building to a multi-tenant distribution building.
(7) This project, which was recently developed by the seller, was acquired by EastGroup on 7/8/16 during the lease-up phase.
(8) Represents cumulative costs at the date of transfer.
-
25
-
Accumulated Depreciation
Accumulated depreciation on real estate and development properties
increased
$
16,625,000
during the first
three
months of
2017
due primarily to depreciation expense.
Other Assets
Other assets
increased
$
2,660,000
during the first
three
months of
2017
. A summary of
Other assets
follows:
|
|
March 31,
2017 |
December 31,
2016 |
||||
|
|
(In thousands)
|
|||||
|
Leasing costs (principally commissions)
|
$
|
67,572
|
|
65,521
|
|
|
|
Accumulated amortization of leasing costs
|
(25,548
|
)
|
(26,340
|
)
|
||
|
Leasing costs (principally commissions), net of accumulated amortization
|
42,024
|
|
39,181
|
|
||
|
Straight-line rents receivable
|
28,908
|
|
28,369
|
|
||
|
Allowance for doubtful accounts on straight-line rents receivable
|
(79
|
)
|
(76
|
)
|
||
|
Straight-line rents receivable, net of allowance for doubtful accounts
|
28,829
|
|
28,293
|
|
||
|
Accounts receivable
|
4,075
|
|
6,824
|
|
||
|
Allowance for doubtful accounts on accounts receivable
|
(565
|
)
|
(809
|
)
|
||
|
Accounts receivable, net of allowance for doubtful accounts
|
3,510
|
|
6,015
|
|
||
|
Acquired in-place lease intangibles
|
21,911
|
|
21,231
|
|
||
|
Accumulated amortization of acquired in-place lease intangibles
|
(8,642
|
)
|
(8,642
|
)
|
||
|
Acquired in-place lease intangibles, net of accumulated amortization
|
13,269
|
|
12,589
|
|
||
|
Acquired above market lease intangibles
|
1,455
|
|
1,594
|
|
||
|
Accumulated amortization of acquired above market lease intangibles
|
(644
|
)
|
(736
|
)
|
||
|
Acquired above market lease intangibles, net of accumulated amortization
|
811
|
|
858
|
|
||
|
Mortgage loans receivable
|
4,720
|
|
4,752
|
|
||
|
Interest rate swap assets
|
5,243
|
|
4,546
|
|
||
|
Goodwill
|
990
|
|
990
|
|
||
|
Prepaid expenses and other assets
|
8,094
|
|
7,606
|
|
||
|
Total
Other assets
|
$
|
107,490
|
|
104,830
|
|
|
Liabilities
Unsecured bank credit facilities
increased
$
8,315,000
during the
three
months ended
March 31, 2017
, mainly due to proceeds of
$84,734,000
exceeding repayments of
$76,518,000
and the amortization of debt issuance costs during the period. The Company’s credit facilities are described in greater detail under
Liquidity and Capital Resources
.
Unsecured debt
increased
$112,000
during the
three
months ended
March 31, 2017
primarily due to the amortization of debt issuance costs.
Secured debt
decreased
$
3,519,000
during the
three
months ended
March 31, 2017
. The
decrease
resulted from regularly scheduled principal payments of
$3,526,000
and amortization of premiums on
Secured debt
, offset by the amortization of debt issuance costs during the period.
-
26
-
Accounts payable and accrued expenses
decreased
$
8,971,000
during the first
three
months of
2017
. A summary of the Company’s
Accounts payable and accrued expenses
follows:
|
|
March 31,
2017 |
December 31,
2016 |
||||
|
|
(In thousands)
|
|||||
|
Property taxes payable
|
$
|
11,043
|
|
14,186
|
|
|
|
Development costs payable
|
14,997
|
|
9,844
|
|
||
|
Property capital expenditures payable
|
4,582
|
|
2,304
|
|
||
|
Interest payable
|
4,481
|
|
3,822
|
|
||
|
Dividends payable on unvested restricted stock
|
954
|
|
1,530
|
|
||
|
Book overdraft
(1)
|
2,015
|
|
14,452
|
|
||
|
Other payables and accrued expenses
|
5,658
|
|
6,563
|
|
||
|
Total
Accounts payable and accrued expenses
|
$
|
43,730
|
|
52,701
|
|
|
(1)
Represents unfunded outstanding checks for which the bank has not advanced cash to the Company.
Other liabilities
increased
$
1,614,000
during the
three
months ended
March 31, 2017
. A summary of the Company’s
Other liabilities
follows:
|
|
March 31,
2017 |
December 31,
2016 |
||||
|
|
(In thousands)
|
|||||
|
Security deposits
|
$
|
15,301
|
|
14,782
|
|
|
|
Prepaid rent and other deferred income
|
11,392
|
|
9,795
|
|
||
|
Acquired below-market lease intangibles
|
4,162
|
|
4,012
|
|
||
|
Accumulated amortization of below-market lease intangibles
|
(1,829
|
)
|
(1,662
|
)
|
||
|
Acquired below-market lease intangibles, net of accumulated amortization
|
2,333
|
|
2,350
|
|
||
|
Interest rate swap liabilities
|
1,865
|
|
2,578
|
|
||
|
Prepaid tenant improvement reimbursements
|
572
|
|
343
|
|
||
|
Other liabilities
|
15
|
|
16
|
|
||
|
Total
Other liabilities
|
$
|
31,478
|
|
29,864
|
|
|
Equity
Additional paid-in capital
increased
$
39,691,000
during the
three
months ended
March 31, 2017
, primarily due to the issuance of common stock under the Company's continuous common equity program (as discussed in
Liquidity and Capital Resources)
and
stock-based compensation (as discussed in Note 15 in the Notes to Consolidated Financial Statements). EastGroup issued
544,144
shares of common stock under its continuous common equity program with net proceeds to the Company of $39,456,000.
For the
three
months ended
March 31, 2017
,
Distributions in excess of earnings
increased
$
8,120,000
as a result of dividends on common stock of $
20,939,000
exceeding
Net Income Attributable to EastGroup Properties, Inc. Common Stockholders
of $12,819,000.
Accumulated other comprehensive income
increased
$1,410,000
during the
three
months ended
March 31, 2017
. The increase resulted from the change in fair value of the Company's interest rate swaps which are further discussed in Note 13 in the Notes to Consolidated Financial Statements.
-
27
-
RESULTS OF OPERATIONS
(Comments are for the
three
months ended
March 31, 2017
, compared to the
three
months ended
March 31, 2016
.)
Net Income Attributable to EastGroup Properties, Inc. Common Stockholders
for the
three
months ended
March 31, 2017
, was
$12,819,000
(
$.38
per basic and diluted share) compared to
$21,711,000
(
$.67
per basic and diluted share) for the same period in
2016
.
PNOI for the three months ended
March 31, 2017
, increased by $3,366,000, or 7.7%, compared to the same period in
2016
. PNOI increased $2,100,000 from newly developed and redeveloped properties, $1,579,000 from same property operations and $673,000 from 2016 and 2017 acquisitions; PNOI decreased $944,000 from operating properties sold in 2016. Lease termination fee income was $109,000 and $183,000 for the three months ended
March 31, 2017
and
2016
, respectively. The Company recorded bad debt expense of $50,000 and $124,000 during the three months ended
March 31, 2017
and
2016
, respectively. Straight-lining of rent increased
Income from real estate operations
by $591,000 and $876,000 for the three months ended
March 31, 2017
and
2016
, respectively.
During the three months ended
March 31, 2017
, EastGroup signed 40 leases with free rent concessions on 1,253,000 square feet with total free rent concessions of $1,617,000 over the lives of the leases. During the same period of 2016, EastGroup signed 41 leases with free rent concessions on 876,000 square feet with total free rent concessions of $920,000 over the lives of the leases.
Property expense to revenue ratios, defined as
Expenses from real estate operations
as a percentage of
Income from real estate operations
, were 28.7% and 28.9% for the
three
months ended
March 31, 2017
and 2016, respectively. The Company’s percentage of leased square footage was 97.0% at
March 31, 2017
, compared to 96.7% at
March 31, 2016
. Occupancy at
March 31, 2017
was 95.6% compared to 95.7% at
March 31, 2016
.
Same property average occupancy represents the average month-end percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage for the same operating properties owned during the entire current period and prior year reporting period. Same property average occupancy for the three months ended
March 31, 2017
, was 96.7% compared to 95.9% for the same period of
2016
.
The same property average rental rate calculated in accordance with GAAP represents the average annual rental rates of leases in place for the same operating properties owned during the entire current period and prior year reporting period. The same property average rental rate was $5.74 per square foot for the three months ended
March 31, 2017
, compared to $5.45 per square foot for the same period of
2016
.
Interest expense
decreased
$379,000
for the
three
months ended
March 31, 2017
, compared to the same period in
2016
. The following table presents the components of
Interest expense
for the
three
months ended
March 31, 2017
and
2016
:
-
28
-
|
|
Three Months Ended
March 31, |
||||||||
|
|
2017
|
2016
|
Increase
(Decrease)
|
||||||
|
|
(In thousands)
|
||||||||
|
VARIABLE RATE INTEREST EXPENSE
|
|
|
|
|
|
|
|||
|
Unsecured bank credit facilities interest - variable rate
(excluding amortization of facility fees and debt issuance costs)
|
$
|
547
|
|
547
|
|
—
|
|
||
|
Amortization of facility fees - unsecured bank credit facilities
|
165
|
|
166
|
|
(1
|
)
|
|||
|
Amortization of debt issuance costs - unsecured bank credit facilities
|
113
|
|
112
|
|
1
|
|
|||
|
Total variable rate interest expense
|
825
|
|
825
|
|
—
|
|
|||
|
FIXED RATE INTEREST EXPENSE
|
|
|
|
|
|
|
|||
|
Unsecured bank credit facilities interest - fixed rate
(1)
(excluding amortization of facility fees and debt issuance costs)
|
398
|
|
—
|
|
398
|
|
|||
|
Unsecured debt interest
(1)
(excluding amortization of debt issuance costs)
|
5,541
|
|
4,501
|
|
1,040
|
|
|||
|
Secured debt interest
(excluding amortization of debt issuance costs)
|
3,367
|
|
4,700
|
|
(1,333
|
)
|
|||
|
Amortization of debt issuance costs - unsecured debt
|
119
|
|
112
|
|
7
|
|
|||
|
Amortization of debt issuance costs - secured debt
|
82
|
|
89
|
|
(7
|
)
|
|||
|
Total fixed rate interest expense
|
9,507
|
|
9,402
|
|
105
|
|
|||
|
Total interest
|
10,332
|
|
10,227
|
|
105
|
|
|||
|
Less capitalized interest
|
(1,646
|
)
|
(1,162
|
)
|
(484
|
)
|
|||
|
TOTAL INTEREST EXPENSE
|
$
|
8,686
|
|
9,065
|
|
(379
|
)
|
||
|
(1)
|
Includes interest on the Company's unsecured bank credit facilities and unsecured debt with fixed interest rates per the debt agreements or effectively fixed interest rates due to interest rate swaps, as discussed in Note 13 in the Notes to Consolidated Financial Statements.
|
There was no change in the Company's variable rate interest expense for the
three
months ended
March 31, 2017
, as compared to the same period in
2016
. The Company's average unsecured bank credit facilities borrowings and weighted average variable interest rates during both periods are shown in the following table:
|
|
Three Months Ended
March 31, |
||||||||
|
|
2017
|
2016
|
Increase
(Decrease) |
||||||
|
|
(In thousands, except rates of interest)
|
||||||||
|
Average borrowings on unsecured bank credit
facilities - variable rate
|
$
|
124,384
|
|
154,122
|
|
(29,738
|
)
|
||
|
Weighted average variable interest rates
(excluding amortization of facility fees and debt issuance costs)
|
1.78
|
%
|
1.43
|
%
|
|
|
|||
The Company's fixed rate interest expense increased by $
105,000
for the
three
months ended
March 31, 2017
, as compared to the same period in
2016
, as a result of the fixed rate unsecured bank credit facilities, unsecured debt and secured debt activity described below.
In August 2016, EastGroup repaid (with no penalty) an $80 million unsecured term loan with an effectively fixed interest rate of 2.770% and an original maturity date of August 15, 2018. On the same day, the Company borrowed $80 million through its $300 million unsecured bank credit facility; the maturity date for the credit facility is July 30, 2019. The Company re-designated the interest rate swap that was previously applied to the $80 million unsecured term loan to the $80 million unsecured bank credit facility borrowing. The $80 million unsecured bank credit facility draw has an effectively fixed interest rate of 2.020% through the interest rate swap's maturity date of August 15, 2018.
-
29
-
The Company's unsecured debt interest increased during the
three
months ended
March 31, 2017
, compared to the same period of 2016 as a result of the Company's unsecured debt activity described below. EastGroup did not obtain any new unsecured debt in the first three months of 2017. The details of the unsecured debt obtained in 2016 are shown in the following table:
|
NEW UNSECURED DEBT IN 2016
|
Effective Interest Rate
|
Date Obtained
|
Maturity Date
|
Amount
|
||||||
|
(In thousands)
|
||||||||||
|
$65 Million Unsecured Term Loan
(1)
|
2.863%
|
04/01/2016
|
04/01/2023
|
$
|
65,000
|
|
||||
|
$40 Million Unsecured Term Loan
(2)
|
2.335%
|
07/29/2016
|
07/30/2021
|
40,000
|
|
|||||
|
$60 Million Senior Unsecured Notes
|
3.480%
|
12/15/2016
|
12/15/2024
|
60,000
|
|
|||||
|
$40 Million Senior Unsecured Notes
|
3.750%
|
12/15/2016
|
12/15/2026
|
40,000
|
|
|||||
|
Weighted Average/Total Amount for 2016
|
3.114%
|
$
|
205,000
|
|
||||||
|
(1)
|
The interest rate on this unsecured term loan is comprised of LIBOR plus 165 basis points subject to a pricing grid for changes in the Company's coverage ratings. The Company entered into an interest rate swap to convert the loan's LIBOR rate to a fixed interest rate, providing the Company a weighted average effective interest rate on the term loan of 2.863% as of
March 31, 2017
. See Note 13 in the Notes to Consolidated Financial Statements for additional information on the interest rate swaps.
|
|
(2)
|
The interest rate on this unsecured term loan is comprised of LIBOR plus 110 basis points subject to a pricing grid for changes in the Company's coverage ratings. The Company entered into an interest rate swap to convert the loan's LIBOR rate to a fixed interest rate, providing the Company a weighted average effective interest rate on the term loan of 2.335% as of
March 31, 2017
. See Note 13 in the Notes to Consolidated Financial Statements for additional information on the interest rate swaps.
|
Secured debt interest decreased during the three month period ended
March 31, 2017
, as compared to the same period in 2016 as a result of debt repayments and regularly scheduled principal payments. Regularly scheduled principal payments on secured debt were
$3,526,000
during the
three
months ended
March 31, 2017
. During the year ended December 31, 2016, regularly scheduled principal payments on secured debt were $17,037,000. EastGroup did not repay any secured debt during the first three months of 2017. The details of the secured debt repaid in 2016 are shown in the following table:
|
SECURED DEBT REPAID IN 2016
|
Interest Rate
|
Date Repaid
|
Payoff Amount
|
|||||
|
(In thousands)
|
||||||||
|
Huntwood and Wiegman I
|
5.68%
|
08/05/2016
|
$
|
24,543
|
|
|||
|
Alamo Downs, Arion 1-15 & 17, Rampart I-IV, Santan 10 I and
World Houston 16
|
5.97%
|
09/06/2016
|
51,194
|
|
||||
|
Weighted Average/Total Amount for 2016
|
5.88%
|
$
|
75,737
|
|
||||
EastGroup did not obtain any new secured debt during 2016 or during the first
three
months of 2017.
Interest costs during the period of construction of real estate properties are capitalized and offset against interest expense. Capitalized interest increased
$484,000
for the
three
months ended
March 31, 2017
, as compared to the same period of
2016
.
Depreciation and amortization
expense increased $1,063,000 for the
three
months ended
March 31, 2017
, as compared to the same period in
2016
primarily due to the operating properties acquired by the Company in 2016 and 2017 and the properties transferred from
Development
in 2016 and 2017, partially offset by operating properties sold in 2016.
Gain on sales of real estate investments,
which includes gains on the sales of operating properties, decreased $11,332,000 for the three months ended
March 31, 2017
, as compared to the same period in 2016. The Company did not sell any operating properties during the first three months of 2017. During the first quarter of 2016, EastGroup sold the following operating properties in separate transactions: Northwest Point Distribution and Service Centers in Houston and North Stemmons III in Dallas. The properties contain a combined 292,000 square feet and were sold for $18,850,000. EastGroup recognized gains on the sales of $11,332,000.
-
30
-
Capital Expenditures
Capital expenditures for EastGroup's operating properties for the
three
months ended
March 31, 2017
and
2016
were as follows:
|
|
|
Three Months Ended
March 31, |
||||||
|
|
Estimated Useful Life
|
2017
|
2016
|
|||||
|
|
|
(In thousands)
|
||||||
|
Upgrade on Acquisitions
|
40 yrs
|
$
|
15
|
|
39
|
|
||
|
Tenant Improvements:
|
|
|
|
|||||
|
New Tenants
|
Lease Life
|
2,400
|
|
2,309
|
|
|||
|
Renewal Tenants
|
Lease Life
|
675
|
|
491
|
|
|||
|
Other:
|
|
|
|
|||||
|
Building Improvements
|
5-40 yrs
|
771
|
|
1,300
|
|
|||
|
Roofs
|
5-15 yrs
|
620
|
|
1,413
|
|
|||
|
Parking Lots
|
3-5 yrs
|
142
|
|
173
|
|
|||
|
Other
|
5 yrs
|
113
|
|
201
|
|
|||
|
Total Capital Expenditures
(1)
|
|
$
|
4,736
|
|
5,926
|
|
||
|
(1)
|
Reconciliation of Total Capital Expenditures to
Real estate improvements
on the Consolidated Statements of Cash Flows:
|
|
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
||||||
|
(In thousands)
|
|||||||
|
Total Capital Expenditures
|
$
|
4,736
|
|
5,926
|
|
||
|
Change in Real Estate Property Payables
|
(466
|
)
|
128
|
|
|||
|
Real Estate Improvements
|
$
|
4,270
|
|
6,054
|
|
||
Capitalized Leasing Costs
The Company’s leasing costs (principally commissions) are capitalized and included in
Other assets
. The costs are amortized over the terms of the associated leases and are included in
Depreciation and amortization
expense. Capitalized leasing costs for the
three
months ended
March 31, 2017
and
2016
were as follows:
|
|
|
Three Months Ended
March 31, |
||||||
|
|
Estimated Useful Life
|
2017
|
2016
|
|||||
|
|
|
(In thousands)
|
||||||
|
Development
|
Lease Life
|
$
|
1,251
|
|
817
|
|
||
|
New Tenants
|
Lease Life
|
2,195
|
|
1,612
|
|
|||
|
Renewal Tenants
|
Lease Life
|
1,890
|
|
1,270
|
|
|||
|
Total Capitalized Leasing Costs
|
|
$
|
5,336
|
|
3,699
|
|
||
|
Amortization of Leasing Costs
|
|
$
|
2,470
|
|
2,385
|
|
||
Real Estate Sold and Held for Sale/Discontinued Operations
The Company considers a real estate property to be held for sale when it meets the criteria established under ASC 360,
Property, Plant and Equipment,
including when it is probable that the property will be sold within a year. Real estate properties held for sale are reported at the lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale.
In accordance with FASB ASU 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,
the Company would report a disposal of a component of an entity or a group of components of an entity in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, the Company would provide additional disclosures about both discontinued
-
31
-
operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. EastGroup performs an analysis of properties sold to determine whether the sales qualify for discontinued operations presentation.
The Company did not classify any properties as held for sale as of
March 31, 2017
and
December 31, 2016
.
The Company does not consider its sales in 2016 and the first quarter of 2017 to be disposals of a component of an entity or a group of components of an entity representing a strategic shift that has (or will have) a major effect on the entity's operations and financial results.
During the first quarter of 2017, the Company sold five acres of land in Dallas for $850,000 and recognized a loss of $40,000. The Company did not sell any operating properties during the first
three
months of
2017
.
During 2016, EastGroup sold the following operating properties: Northwest Point Distribution and Service Centers, North Stemmons II and III, America Plaza, Lockwood Distribution Center, West Loop Distribution Center 1 & 2, two of its four Interstate Commons Distribution Center buildings, Castilian Research Center and Memphis I. The properties, which contain
1,256,000
square feet and are located in Houston, Dallas, Phoenix, Santa Barbara and Memphis, were sold for $75.7 million and the Company recognized net gains on the sales of $42.2 million. The Company also sold 25 acres of land in Dallas, Orlando and Houston for
$5.4 million
and recognized gains on sales of
$733,000
.
The gains and losses on the sales of land are included in
Other
, and the gains on the sales of operating properties are included in
Gain on sales of real estate investments
. See Note 7 in the Notes to Consolidated Financial Statements for more information related to discontinued operations and gains and losses on sales of real estate investments.
RECENT ACCOUNTING PRONOUNCEMENTS
EastGroup has evaluated all ASUs recently released by the FASB through the date the financial statements were issued and determined that the following ASUs apply to the Company.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB issued further guidance in ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,
that provides clarifying guidance in certain narrow areas and adds some practical expedients. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The effective date of ASU 2014-09 was extended by one year by ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.
The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method, and the Company is evaluating which transition method it will elect. The Company is also in the process of evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures beginning with the Form 10-Q for the period ending March 31, 2018. EastGroup has performed an initial impact assessment and continues to evaluate its revenue streams and the potential impact of the new standard. In particular, the Company is evaluating the impact the new standard will have on revenue streams due under leases that are deemed to be non-lease components, such as common area maintenance reimbursements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
which requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized costs on the balance sheet. EastGroup plans to adopt ASU 2016-01 effective January 1, 2018. The Company does not anticipate the adoption of ASU 2016-01 will have a material impact on the Company's financial condition or results of operations.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The Company is a lessee on a limited number of leases, including office and ground leases, and the Company anticipates the related impact of ASU 2016-02 will not be material to its overall financial condition and results of operations. Lessor accounting is largely unchanged under ASU 2016-02.
-
32
-
The Company's primary revenue is rental income; as such, the Company is a lessor on a significant number of leases. The Company is continuing to evaluate the potential impacts of the ASU and believes it will continue to account for its leases in substantially the same manner. The most significant change for the Company related to lessor accounting relates to the new standard's narrow definition of initial direct costs for leases; the new definition will result in certain costs (primarily legal costs related to lease negotiations) being expensed rather than capitalized upon adoption of the new standard. Public business entities are required to apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. EastGroup plans to adopt ASU 2016-02 effective January 1, 2019. The Company is continuing the process of evaluating and quantifying the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures beginning with the Form 10-Q for the period ending March 31, 2019.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The ASU is intended to improve the accounting for share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment awards are simplified with the ASU, including income tax consequences, classification of awards as equity or liabilities and classification on the Consolidated Statements of Cash Flows. ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those fiscal years; early adoption is permitted. EastGroup adopted ASU 2016-09 effective January 1, 2017. As a result, the Company elected to reverse compensation cost of any forfeited awards when they occur and will continue to classify the cash flows resulting from remitting cash to the tax authorities for the payment of taxes on the vesting of share-based payment awards as a financing activity on the Consolidated Statements of Cash Flows. In addition, upon vesting of share-based payments, the Company will withhold up to the maximum individual statutory tax rate and classify the entire award as equity. The adoption of ASU 2016-09 did not have a material impact on the Company's financial condition or results of operations.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which addresses certain cash flow issues, including how debt prepayments or debt extinguishment costs and distributions received from equity method investees are presented. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, and the Company has adopted ASU 2016-15 effective January 1, 2017. The adoption of ASU 2016-15 did not have a material impact on the Company's financial condition or results of operations.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The ASU is intended to provide a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. The Company has determined that some of its real estate property acquisitions may be considered to be acquisitions of groups of similar identifiable assets; therefore, the acquisitions are not considered to be acquisitions of a business. ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those fiscal years; early adoption is permitted and may be applied to transactions that have not been reported in financial statements that have been issued or made available for issuance. EastGroup adopted ASU 2017-01 for transactions beginning on October 1, 2016. As a result, the Company has capitalized acquisition costs related to its fourth quarter 2016 and first quarter 2017 acquisitions as they were determined not to be acquisitions of a business.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Others (Topic 350): Simplifying the Test for Goodwill Impairment,
which simplifies the measurement of goodwill impairment by eliminating the requirement of performing a hypothetical purchase price allocation to measure goodwill impairment. ASU 2017-04 is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, and the Company has adopted ASU 2017-04 effective January 1, 2017, and will apply the new guidance for goodwill impairment tests with measurement dates after January 1, 2017. The adoption of ASU 2017-04 did not have a material impact on the Company's financial condition or results of operations.
-
33
-
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $
23,813,000
for the
three
months ended
March 31, 2017
. The primary other sources of cash were borrowings on unsecured bank credit facilities and proceeds from common stock offerings. The Company distributed $
21,515,000
in common stock dividends during the
three
months ended
March 31, 2017
. Other primary uses of cash were for repayments on unsecured bank credit facilities, the construction and development of properties, and purchases of real estate.
Total debt at
March 31, 2017
and
December 31, 2016
is detailed below. The Company’s unsecured bank credit facilities and unsecured debt instruments have certain restrictive covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage, and the Company was in compliance with all of its debt covenants at
March 31, 2017
and
December 31, 2016
.
|
|
March 31,
2017 |
December 31,
2016 |
||||
|
|
(In thousands)
|
|||||
|
Unsecured bank credit facilities - variable rate, carrying amount
|
$
|
120,236
|
|
112,020
|
|
|
|
Unsecured bank credit facilities - fixed rate, carrying amount
(1)
|
80,000
|
|
80,000
|
|
||
|
Unamortized debt issuance costs
|
(931
|
)
|
(1,030
|
)
|
||
|
Unsecured bank credit facilities
|
199,305
|
|
190,990
|
|
||
|
Unsecured debt - fixed rate, carrying amount
(1)
|
655,000
|
|
655,000
|
|
||
|
Unamortized debt issuance costs
|
(2,050
|
)
|
(2,162
|
)
|
||
|
Unsecured debt
|
652,950
|
|
652,838
|
|
||
|
Secured debt - fixed rate, carrying amount
(1)
|
255,060
|
|
258,594
|
|
||
|
Unamortized debt issuance costs
|
(1,074
|
)
|
(1,089
|
)
|
||
|
Secured debt
|
253,986
|
|
257,505
|
|
||
|
Total debt
|
$
|
1,106,241
|
|
1,101,333
|
|
|
|
(1)
|
These loans have a fixed interest rate or an effectively fixed interest rate due to interest rate swaps.
|
EastGroup has a $300 million unsecured revolving credit facility with a group of nine banks that matures in July 2019. The credit facility contains options for a one-year extension (at the Company's election) and a $150 million expansion (with agreement by all parties). The interest rate on each tranche is usually reset on a monthly basis and as of
March 31, 2017
, was LIBOR plus 100 basis points with an annual facility fee of 20 basis points. The margin and facility fee are subject to changes in the Company's credit ratings. The Company has designated an interest rate swap to an $80 million unsecured bank credit facility draw that effectively fixes the interest rate on the $80 million draw to 2.020% through the interest rate swap's maturity date of August 15, 2018. As of
March 31, 2017
, EastGroup had an additional $102,000,000 of variable rate borrowings on this unsecured bank credit facility with a weighted average interest rate of 1.936%.
The Company also has a $35 million unsecured revolving credit facility that matures in July 2019. This credit facility automatically extends for one year if the extension option in the $300 million revolving credit facility is exercised. The interest rate is reset on a daily basis and as of
March 31, 2017
, was LIBOR plus 100 basis points with an annual facility fee of 20 basis points. The margin and facility fee are subject to changes in the Company's credit ratings. At
March 31, 2017
, the interest rate was 1.983% on a balance of $18,236,000.
As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, to replace the short-term bank borrowings. The Company believes its current operating cash flow and unsecured bank credit facilities provide the capacity to fund the operations of the Company. The Company also believes it can obtain debt financing and issue common and/or preferred equity. For future debt issuances, the Company intends to issue primarily unsecured fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps. The Company may also access the public debt market in the future as a means to raise capital.
On March 6, 2017, EastGroup filed a prospectus supplement disclosing it had entered into amended and restated Sales Agency Financing Agreements with Raymond James & Associates, Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; and BNY
-
34
-
Mellon Capital Markets, LLC and a new Sales Agency Financing Agreement with Jefferies LLC pursuant to which the Company may issue and sell up to 10,000,000 shares of its common stock from time to time. The Company previously sold an aggregate of 2,228,203 shares of common stock under the original sales agency financing agreements pursuant to a prospectus supplement dated February 14, 2014. During the
three
months ended
March 31, 2017
, EastGroup issued and sold
544,144
shares of common stock under its continuous equity program at an average price of $73.51 per share with gross proceeds to the Company of $40,000,000. The Company incurred offering-related costs of $544,000 during the
three
months, resulting in net proceeds to the Company of
$39,456,000
. As of
April 24, 2017
, the Company has 7,227,653 shares of common stock remaining to sell under the program.
The Company anticipates that its current cash balance, operating cash flows, borrowings under its unsecured bank credit facilities, proceeds from new debt and/or proceeds from the issuance of equity instruments will be adequate for (i) operating and administrative expenses, (ii) normal repair and maintenance expenses at its properties, (iii) debt service obligations, (iv) maintaining compliance with its debt covenants, (v) distributions to stockholders, (vi) capital improvements, (vii) purchases of properties, (viii) development, and (ix) any other normal business activities of the Company, both in the short-term and long-term.
Contractual Obligations
EastGroup’s fixed, non-cancelable obligations as of
December 31, 2016
, did not materially change during the
three
months ended
March 31, 2017
, except for the increase in
Unsecured bank credit facilities
and the decrease in
Secured debt
discussed above.
INFLATION AND OTHER ECONOMIC CONSIDERATIONS
Most of the Company's leases include scheduled rent increases. Additionally, most of the Company's leases require the tenants to pay their pro rata share of operating expenses, including real estate taxes, insurance and common area maintenance, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation. In the event inflation causes increases in the Company’s general and administrative expenses or the level of interest rates, such increased costs would not be passed through to tenants and could adversely affect the Company’s results of operations.
EastGroup's financial results are affected by general economic conditions in the markets in which the Company's properties are located. The state of the economy, or other adverse changes in general or local economic conditions, could result in the inability of some of the Company's existing tenants to make lease payments and may therefore increase bad debt expense. It may also impact the Company’s ability to (i) renew leases or re-lease space as leases expire, or (ii) lease development space. In addition, an economic downturn or recession could also lead to an increase in overall vacancy rates or a decline in rents the Company can charge to re-lease properties upon expiration of current leases. In all of these cases, EastGroup’s cash flows would be adversely affected.
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
The Company is exposed to interest rate changes primarily as a result of its unsecured bank credit facilities and long-term debt maturities. This debt is used to maintain liquidity and fund capital expenditures and expansion of the Company’s real estate investment portfolio and operations. The Company’s objective for interest rate risk management is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company has two variable rate unsecured bank credit facilities as discussed under
Liquidity and Capital Resources
. As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, to replace the short-term bank borrowings. The Company's interest rate swaps are discussed in Note 13 in the Notes to Consolidated Financial Statements. The table below presents the principal payments due and weighted average interest rates, which include the impact of interest rate swaps, for both the fixed-rate and variable-rate debt as of
March 31, 2017
.
-
35
-
|
|
April – December 2017
|
2018
|
2019
|
2020
|
2021
|
Thereafter
|
Total
|
Fair Value
|
|||||||||||||||||
|
Unsecured bank credit facilities - variable rate
(in thousands)
|
$
|
—
|
|
—
|
|
120,236
|
|
(1)
|
—
|
|
—
|
|
—
|
|
120,236
|
|
120,127
|
|
(2)
|
||||||
|
Weighted average interest rate
|
—
|
|
—
|
|
1.94
|
%
|
(3)
|
—
|
|
—
|
|
—
|
|
1.94
|
%
|
|
|||||||||
|
Unsecured bank credit facilities - fixed rate
(in thousands)
|
$
|
—
|
|
—
|
|
80,000
|
|
—
|
|
—
|
|
—
|
|
80,000
|
|
79,999
|
|
(4)
|
|||||||
|
Weighted average interest rate
|
—
|
|
—
|
|
2.02
|
%
|
—
|
|
—
|
|
—
|
|
2.02
|
%
|
|||||||||||
|
Unsecured debt - fixed rate
(in thousands)
|
$
|
—
|
|
50,000
|
|
75,000
|
|
105,000
|
|
40,000
|
|
385,000
|
|
655,000
|
|
630,892
|
|
(4)
|
|||||||
|
Weighted average interest rate
|
—
|
|
3.91
|
%
|
2.85
|
%
|
3.77
|
%
|
2.34
|
%
|
3.47
|
%
|
3.41
|
%
|
|
||||||||||
|
Secured debt - fixed rate
(in thousands)
|
$
|
54,703
|
|
11,316
|
|
55,569
|
|
9,096
|
|
89,563
|
|
34,813
|
|
255,060
|
|
263,226
|
|
(4)
|
|||||||
|
Weighted average interest rate
|
5.52
|
%
|
5.21
|
%
|
7.01
|
%
|
4.43
|
%
|
4.55
|
%
|
4.08
|
%
|
5.25
|
%
|
|
||||||||||
|
(1)
|
The variable-rate unsecured bank credit facilities mature in July 2019 and as of
March 31, 2017
, have balances of $102,000,000 on the $300 million unsecured bank credit facility and $18,236,000 on the $35 million unsecured bank credit facility.
|
|
(2)
|
The fair value of the Company’s variable rate debt is estimated by discounting expected cash flows at current market rates, excluding the effects of debt issuance costs.
|
|
(3)
|
Represents the weighted average interest rate for the Company's variable rate unsecured bank credit facilities as of
March 31, 2017
.
|
|
(4)
|
The fair value of the Company’s fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, is estimated by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company’s bankers, excluding the effects of debt issuance costs.
|
As the table above incorporates only those exposures that existed as of
March 31, 2017
, it does not consider those exposures or positions that could arise after that date. If the weighted average interest rate on the variable rate unsecured bank credit facilities, as shown above, changes by 10% or approximately 19 basis points, interest expense and cash flows would increase or decrease by approximately $233,000 annually. This does not include variable-rate debt that has been effectively fixed through the use of interest rate swaps.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “will,” “anticipates,” “expects,” “believes,” “intends,” “plans,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that the Company expects or anticipates will occur in the future, including statements relating to rent and occupancy growth, development activity, the acquisition or sale of properties, general conditions in the geographic areas where the Company operates and the availability of capital, are forward-looking statements. Forward-looking statements are inherently subject to known and unknown risks and uncertainties, many of which the Company cannot predict, including, without limitation: changes in general economic conditions; the extent of tenant defaults or of any early lease terminations; the Company's ability to lease or re-lease space at current or anticipated rents; the availability of financing; the failure to maintain credit ratings with rating agencies; changes in the supply of and demand for industrial/warehouse properties; increases in interest rate levels; increases in operating costs; natural disasters, terrorism, riots and acts of war, and the Company's ability to obtain adequate insurance; changes in governmental regulation, tax rates and similar matters; and other risks associated with the development and acquisition of properties, including risks that development projects may not be completed on schedule, development or operating costs may be greater than anticipated or acquisitions may not close as scheduled, and those additional factors discussed under “Item 1A. Risk Factors” in Part II of this report and in the Company’s Annual Report on Form 10-K. Although the Company believes the expectations reflected in the forward-looking statements are based upon reasonable assumptions at the time made, the Company can give no assurance that such expectations will be achieved. The Company assumes no obligation whatsoever to publicly update or revise any forward-looking statements. See also the information contained in the Company’s reports filed or to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
-
36
-
|
ITEM 4.
|
CONTROLS AND PROCEDURES.
|
(i) Disclosure Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
March 31, 2017
, the Company’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
(ii) Changes in Internal Control Over Financial Reporting.
There was no change in the Company's internal control over financial reporting during the Company's
first
fiscal quarter ended
March 31, 2017
, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
|
ITEM 1A.
|
RISK FACTORS.
|
There have been no material changes to the risk factors disclosed in EastGroup’s Form 10-K for the year ended
December 31, 2016
, except to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors. For a full description of these risk factors, please refer to “Item 1A. Risk Factors” in the
2016
Annual Report on Form 10-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
Period
|
Total Number
of Shares Purchased
|
Average Price Paid Per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
|
|||||||||
|
01/01/17 thru 01/31/17
|
17,617
|
(1)
|
$
|
73.89
|
|
—
|
|
—
|
|
||||
|
02/01/17 thru 02/28/17
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||
|
03/01/17 thru 03/31/17
|
16,078
|
(1)
|
74.82
|
|
—
|
|
—
|
|
|||||
|
Total
|
33,695
|
|
$
|
74.34
|
|
—
|
|
|
|
||||
|
(1)
|
As permitted under the Company's equity compensation plans, these shares were withheld by the Company to satisfy the tax withholding obligations for those employees who elected this option in connection with the vesting of shares of restricted stock.
|
|
ITEM 4.
|
MINE SAFETY DISCLOSURES.
|
Not applicable.
-
37
-
|
ITEM 6.
|
EXHIBITS.
|
|
(a)
|
Form 10-Q Exhibits:
|
|||
|
(3
|
)
|
Articles of Incorporation and Bylaws
|
||
|
(b) Amended and Restated Bylaws of EastGroup Properties, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed March 3, 2017).
|
||||
|
(10
|
)
|
Material Contracts (*Indicates management or compensatory arrangement):
|
||
|
(a) EastGroup Properties, Inc. 2013 Equity Incentive Plan, as amended and restated as of March 3, 2017 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed March 3, 2017).*
|
||||
|
(b) Amended and Restated Sales Agency Financing Agreement dated March 6, 2017 between EastGroup Properties, Inc. and BNY Mellon Capital Markets, LLC (incorporated by reference to Exhibit 1.1 to the Company's Form 8-K filed March 10, 2017).
|
||||
|
(c) Amended and Restated Sales Agency Financing Agreement dated March 6, 2017 between EastGroup Properties, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 1.2 to the Company's Form 8-K filed March 10, 2017).
|
||||
|
(d) Amended and Restated Sales Agency Financing Agreement dated March 6, 2017 between EastGroup Properties, Inc. and Raymond James & Associates, Inc. (incorporated by reference to Exhibit 1.3 to the Company's Form 8-K filed March 10, 2017).
|
||||
|
(e) Sales Agency Financing Agreement dated March 6, 2017 between EastGroup Properties, Inc. and Jefferies LLC (incorporated by reference to Exhibit 1.4 to the Company's Form 8-K filed March 10, 2017).
|
||||
|
|
(31
|
)
|
Rule 13a-14(a)/15d-14(a) Certifications (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
|
|
|
|
|
(a)
|
Marshall A. Loeb, Chief Executive Officer
|
|
|
|
|
(b)
|
N. Keith McKey, Chief Financial Officer
|
|
|
|
(32
|
)
|
Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
|
|
|
(a)
|
Marshall A. Loeb, Chief Executive Officer
|
|
|
|
|
(b)
|
N. Keith McKey, Chief Financial Officer
|
|
|
(99
|
)
|
Material United States Federal Income Tax Considerations (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed March 6, 2017).
|
||
|
|
(101
|
)
|
The following materials from EastGroup Properties, Inc.’s Quarterly Report on Form 10-Q for
|
|
|
|
|
the quarter ended March 31, 2017, formatted in XBRL (eXtensible Business Reporting Language):
|
||
|
|
|
(i) consolidated balance sheets, (ii) consolidated statements of income and comprehensive income,
|
||
|
|
|
(iii) consolidated statement of changes in equity, (iv) consolidated statements of cash flows, and
|
||
|
|
|
(v) the notes to the consolidated financial statements.
|
||
-
38
-
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.
Date:
April 24, 2017
|
|
EASTGROUP PROPERTIES, INC.
|
|
|
|
|
|
/s/ BRUCE CORKERN
|
|
|
Bruce Corkern, CPA
|
|
|
Senior Vice President, Controller and
|
|
|
Chief Accounting Officer
|
|
|
|
|
|
/s/ N. KEITH MCKEY
|
|
|
N. Keith McKey
|
|
|
Executive Vice President,
|
|
|
Chief Financial Officer, Treasurer and Secretary
|
-
39
-
TABLE OF CONTENTS
Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 4. Mine Safety DisclosuresItem 6. Exhibits