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| EGP > SEC Filings for EGP > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
OVERVIEW
EastGroup's goal is to maximize shareholder value by being the leading
provider in its markets of functional, flexible, and quality business
distribution space for location sensitive tenants primarily in the 5,000 to
50,000 square foot range. The Company develops, acquires and operates
distribution facilities, the majority of which are clustered around major
transportation features in supply constrained submarkets in major Sunbelt
regions. The Company's core markets are in the states of Florida, Texas, Arizona
and California.
The Company believes that the slowdown in the economy has affected and will
continue to affect its operations. The Company is projecting a continued
decrease in occupancy, and there are no plans for development starts. The
current economic situation is also impacting lenders, and it is more difficult
to obtain financing. Loan proceeds as a percentage of property value is
decreasing, and long-term interest rates are increasing. The Company believes
that its current lines of credit provide the capacity to fund the operations of
the Company for the remainder of 2009 and 2010. The Company also believes that
it can obtain mortgage financing from insurance companies and financial
institutions as evidenced by the executed loan application for $67 million
described in Liquidity and Capital Resources.
The Company's primary revenue is rental income; as such, EastGroup's
greatest challenge is leasing space. During the three months ended March 31,
2009, leases on 1,286,000 square feet (5.0%) of EastGroup's total square footage
of 25,757,000 expired, and the Company was successful in renewing or re-leasing
73% of the expiring square feet. In addition, EastGroup leased 342,000 square
feet of other vacant space during this period. During the three months ended
March 31, 2009, average rental rates on new and renewal leases decreased by
5.0%.
EastGroup's total leased percentage was 93.4% at March 31, 2009, compared
to 94.9% at March 31, 2008. Leases scheduled to expire for the remainder of 2009
were 9.7% of the portfolio on a square foot basis at March 31, 2009, and this
figure was reduced to 7.0% as of May 6, 2009. Property net operating income
(PNOI) from same properties decreased 2.6% for the quarter ended March 31, 2009,
as compared to the same period in 2008.
EastGroup continues to see targeted development as a major contributor to
the Company's long-term growth. The Company mitigates risks associated with
development through a Board-approved maximum level of land held for development
and by adjusting development start dates according to leasing activity.
EastGroup's development activity has slowed considerably as a result of current
market conditions. The Company had no development starts in the first quarter of
2009 and currently does not have any plans to start construction on new
developments for the remainder of 2009. During the first quarter of 2009, the
Company transferred two properties (145,000 square feet) with aggregate costs of
$10.2 million at the date of transfer from development to real estate
properties. These properties, which were collectively 82.9% leased as of May 6,
2009, are located in Phoenix, Arizona, and San Antonio, Texas.
During the first quarter of 2009, the Company funded its development
program through its $225 million lines of credit (as discussed in Liquidity and
Capital Resources). As market conditions permit, EastGroup issues equity,
including preferred equity, and/or employs fixed-rate, non-recourse first
mortgage debt to replace the short-term bank borrowings.
EastGroup has one reportable segment-industrial properties. These
properties are primarily located in major Sunbelt regions of the United States,
have similar economic characteristics and also meet the other criteria that
permit the properties to be aggregated into one reportable segment. The
Company's chief decision makers use two primary measures of operating results in
making decisions: property net operating income (PNOI), defined as income from
real estate operations less property operating expenses (before interest expense
and depreciation and amortization), and funds from operations available to
common stockholders (FFO), defined as net income (loss) computed in accordance
with U.S. generally accepted accounting principles (GAAP), excluding gains or
losses from sales of depreciable real estate property, plus real estate related
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. The Company calculates FFO based on the
National Association of Real Estate Investment Trusts' (NAREIT) definition.
PNOI is a supplemental industry reporting measurement used to evaluate the
performance of the Company's real estate investments. The Company believes that
the exclusion of depreciation and amortization in the industry's calculation of
PNOI provides a supplemental indicator of the properties' performance since real
estate values have historically risen or fallen with market conditions. PNOI as
calculated by the Company may not be comparable to similarly titled but
differently calculated measures for other real estate investment trusts (REITs).
The major factors that influence PNOI are occupancy levels, acquisitions and
sales, development properties that achieve stabilized operations, rental rate
increases or decreases, and the recoverability of operating expenses. The
Company's success depends largely upon its ability to lease space and to recover
from tenants the operating costs associated with those leases.
Real estate income is comprised of rental income, pass-through income and
other real estate income including lease termination fees. Property operating
expenses are comprised of property taxes, insurance, utilities, repair and
maintenance expenses, management fees, other operating costs and bad debt
expense. Generally, the Company's most significant operating expenses are
property taxes and insurance. Tenant leases may be net leases in which the total
operating expenses are recoverable, modified gross leases in which some of the
operating expenses are recoverable, or gross leases in which no expenses are
recoverable (gross leases represent only a small portion of the Company's total
leases). Increases in property operating expenses are fully recoverable under
net leases and recoverable to a high degree under modified gross leases.
Modified gross leases often include base year amounts and expense increases over
these amounts are recoverable. The Company's exposure to property operating
expenses is primarily due to vacancies and leases for occupied space that limit
the amount of expenses that can be recovered.
The Company believes FFO is a meaningful supplemental measure of operating
performance for equity REITs. The Company believes that excluding depreciation
and amortization in the calculation of FFO is appropriate since real estate
values have historically increased or decreased based on market conditions. FFO
is not considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance, nor is it a
measure of the Company's liquidity or indicative of funds available to provide
for the Company's cash needs, including its ability to make distributions. The
Company's key drivers affecting FFO are changes in PNOI (as discussed above),
interest rates, the amount of leverage the Company employs and general and
administrative expense. The following table presents on a comparative basis for
the three months ended March 31, 2009 and 2008 reconciliations of PNOI and FFO
Available to Common Stockholders to Net Income Attributable to EastGroup
Properties, Inc.
Three Months Ended March 31,
--------------------------------
2009 2008
--------------------------------
(In thousands)
Income from real estate operations.............................................. $ 43,310 40,079
Expenses from real estate operations............................................ (12,591) (10,839)
--------------------------------
PROPERTY NET OPERATING INCOME................................................... 30,719 29,240
Equity in earnings of unconsolidated investment (before depreciation)........... 114 113
Income from discontinued operations (before depreciation and amortization)...... - 125
Interest income................................................................. 124 37
Gain on sales of securities..................................................... - 435
Other income.................................................................... 15 195
Interest expense................................................................ (7,501) (7,373)
General and administrative expense.............................................. (2,561) (2,081)
Noncontrolling interest in earnings (before depreciation and amortization)...... (214) (205)
Gain on sale of non-operating real estate....................................... 8 7
Dividends on Series D preferred shares.......................................... - (656)
--------------------------------
FUNDS FROM OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS.......................... 20,704 19,837
Depreciation and amortization from continuing operations........................ (13,044) (12,375)
Depreciation and amortization from discontinued operations...................... - (43)
Depreciation from unconsolidated investment..................................... (33) (33)
Noncontrolling interest depreciation and amortization........................... 51 49
--------------------------------
NET INCOME AVAILABLE TO EASTGROUP PROPERTIES, INC.
COMMON STOCKHOLDERS.......................................................... 7,678 7,435
Dividends on preferred shares................................................... - 656
--------------------------------
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC............................ $ 7,678 8,091
================================
Net income available to common stockholders per diluted share................... $ .31 .31
Funds from operations available to common stockholders per diluted share........ .83 .83
Diluted shares for earnings per share and funds from operations................. 25,070 23,829
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The Company analyzes the following performance trends in evaluating the progress of the Company:
o The FFO change per share represents the increase or decrease in FFO per share from the same quarter in the current year compared to the prior year. FFO per share for the first quarter of 2009 was $.83 per share, the same as the first quarter of 2008. Excluding gain on sales of securities of $435,000 and gain on involuntary conversion of $175,000 in the first quarter of 2008, FFO increased by 2.5% over the first quarter of 2008. PNOI increased 5.1% primarily due to additional PNOI of $1,787,000 from newly developed properties and $414,000 from 2008 acquisitions, offset by a decrease of $745,000 from same property growth.
o Same property net operating income change represents the PNOI increase or decrease for operating properties owned during the entire current period and prior year reporting period. PNOI from same properties decreased 2.6% for the first quarter of 2009 as compared to the same quarter last year. Occupancy for same properties decreased from 94.4% to 93.1%.
o Occupancy is the percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage as of the close of the reporting period. Occupancy at March 31, 2009, was 92.8%. Quarter-end occupancy ranged from 92.8% to 95.0% over the period from March 31, 2008 to March 31, 2009.
o Rental rate change represents the rental rate increase or decrease on new and renewal leases compared to the prior leases on the same space. Rental rate decreases on new and renewal leases (5.0% of total square footage) averaged 5.0% for the first quarter of 2009.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's management considers the following accounting policies and estimates to be critical to the reported operations of the Company.
Real Estate Properties
The Company allocates the purchase price of acquired properties to net
tangible and identified intangible assets based on their respective fair values.
Factors considered by management in allocating the cost of the properties
acquired include an estimate of carrying costs during the expected lease-up
periods considering current market conditions and costs to execute similar
leases. The allocation to tangible assets (land, building and improvements) is
based upon management's determination of the value of the property as if it were
vacant using discounted cash flow models. The remaining purchase price is
allocated among three categories of intangible assets consisting of the above or
below market component of in-place leases, the value of in-place leases and the
value of customer relationships. The value allocable to the above or below
market component of an acquired in-place lease is determined based upon the
present value (using a discount rate which reflects the risks associated with
the acquired leases) of the difference between (i) the contractual amounts to be
paid pursuant to the lease over its remaining term and (ii) management's
estimate of the amounts that would be paid using fair market rates over the
remaining term of the lease. The amounts allocated to above and below market
leases are included in Other Assets and Other Liabilities, respectively, on the
Consolidated Balance Sheets and are amortized to rental income over the
remaining terms of the respective leases. The total amount of intangible assets
is further allocated to in-place lease values and to customer relationship
values based upon management's assessment of their respective values. These
intangible assets are included in Other Assets on the Consolidated Balance
Sheets and are amortized over the remaining term of the existing lease, or the
anticipated life of the customer relationship, as applicable.
During the period in which a property is under development, costs
associated with development (i.e., land, construction costs, interest expense,
property taxes and other direct and indirect costs associated with development)
are aggregated into the total capitalized costs of the property. Included in
these costs are management's estimates for the portions of internal costs
(primarily personnel costs) that are deemed directly or indirectly related to
such development activities.
The Company reviews its real estate investments for impairment of value
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If any real estate investment is considered
permanently impaired, a loss is recorded to reduce the carrying value of the
property to its estimated fair value. Real estate assets to be sold are reported
at the lower of the carrying amount or fair value less selling costs. The
evaluation of real estate investments involves many subjective assumptions
dependent upon future economic events that affect the ultimate value of the
property. Currently, the Company's management is not aware of any impairment
issues nor has it experienced any significant impairment issues in recent years.
EastGroup currently has the intent and ability to hold its real estate
investments and to hold its land inventory for future development. In the event
of impairment, the property's basis would be reduced and the impairment would be
recognized as a current period charge on the Consolidated Statements of Income.
Valuation of Receivables
The Company is subject to tenant defaults and bankruptcies that could
affect the collection of outstanding receivables. In order to mitigate these
risks, the Company performs credit reviews and analyses on prospective tenants
before significant leases are executed. On a quarterly basis, the Company
evaluates outstanding receivables and estimates the allowance for doubtful
accounts. Management specifically analyzes aged receivables, customer
credit-worthiness, historical bad debts and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. The Company
believes that its allowance for doubtful accounts is adequate for its
outstanding receivables for the periods presented. In the event that the
allowance for doubtful accounts is insufficient for an account that is
subsequently written off, additional bad debt expense would be recognized as a
current period charge on the Consolidated Statements of Income.
Tax Status
EastGroup, a Maryland corporation, has qualified as a real estate
investment trust under Sections 856-860 of the Internal Revenue Code and intends
to continue to qualify as such. To maintain its status as a REIT, the Company is
required to distribute at least 90% of its ordinary taxable income to its
stockholders. The Company has the option of (i) reinvesting the sales price of
properties sold through tax-deferred exchanges, allowing for a deferral of
capital gains on the sale, (ii) paying out capital gains to the stockholders
with no tax to the Company, or (iii) treating the capital gains as having been
distributed to the stockholders, paying the tax on the gain deemed distributed
and allocating the tax paid as a credit to the stockholders. The Company
distributed all of its 2008 taxable income to its stockholders and expects to
distribute all of its taxable income in 2009. Accordingly, no provision for
income taxes was necessary in 2008, nor is it expected to be necessary for 2009.
FINANCIAL CONDITION
EastGroup's assets were $1,162,086,000 at March 31, 2009, an increase of
$5,881,000 from December 31, 2008. Liabilities increased $10,346,000 to
$753,175,000 and equity decreased $4,465,000 to $408,911,000 during the same
period. The paragraphs that follow explain these changes in detail.
ASSETS
Real Estate Properties
Real estate properties increased $14,757,000 during the three months ended
March 31, 2009, primarily due to the transfer of two properties from
development, as detailed under Development below.
The Company made capital improvements of $3,515,000 on existing and
acquired properties (included in the Capital Expenditures table under Results of
Operations). Also, the Company incurred costs of $1,061,000 on development
properties subsequent to transfer to Real Estate Properties; the Company records
these expenditures as development costs on the Consolidated Statements of Cash
Flows during the 12-month period following transfer.
Development
The investment in development at March 31, 2009, was $151,438,000 compared
to $150,354,000 at December 31, 2008. Total capital invested for development
during the first three months of 2009 was $12,327,000, which consisted of costs
of $11,266,000 as detailed in the development activity table and costs of
$1,061,000 on developments transferred to Real Estate Properties during the
12-month period following transfer.
The Company transferred two developments to Real Estate Properties during
the first quarter of 2009 with a total investment of $10,182,000 as of the date
of transfer.
Costs Incurred
----------------------------------------------
Costs For the Cumulative
Transferred Three Months as of Estimated
DEVELOPMENT Size in 2009 (1) Ended 3/31/09 3/31/09 Total Costs
------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
LEASE-UP
Beltway Crossing VI, Houston, TX.................... 128,000 $ - 149 5,756 6,700
Oak Creek VI, Tampa, FL............................ 89,000 - 42 5,629 6,100
Southridge VIII, Orlando, FL........................ 91,000 - 270 6,271 6,900
Techway SW IV, Houston, TX.......................... 94,000 - 365 5,208 6,400
SunCoast III, Fort Myers, FL........................ 93,000 - 136 6,854 8,400
Sky Harbor, Phoenix, AZ............................. 264,000 - 401 23,230 25,100
World Houston 26, Houston, TX....................... 59,000 - 151 2,969 3,600
12th Street Distribution Center, Jacksonville, FL... 150,000 - 104 4,954 5,300
Beltway Crossing VII, Houston, TX................... 95,000 - 320 4,533 5,900
Country Club III & IV, Tucson, AZ................... 138,000 - 1,453 9,500 11,200
Oak Creek IX, Tampa, FL............................ 86,000 - 567 4,767 5,500
----------------------------------------------------------------------------
Total Lease-up........................................ 1,287,000 - 3,958 79,671 91,100
----------------------------------------------------------------------------
UNDER CONSTRUCTION
Blue Heron III, West Palm Beach, FL................. 20,000 - 525 2,423 2,600
World Houston 28, Houston, TX....................... 59,000 - 1,814 4,194 4,900
World Houston 29, Houston, TX....................... 70,000 - 1,982 3,868 4,800
World Houston 30, Houston, TX....................... 88,000 - 2,423 4,014 5,800
----------------------------------------------------------------------------
Total Under Construction.............................. 237,000 - 6,744 14,499 18,100
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PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Tucson, AZ.......................................... 70,000 - - 417 3,500
Tampa, FL........................................... 249,000 - (128) 3,762 14,600
Orlando, FL......................................... 1,254,000 - 235 14,688 78,700
Fort Myers, FL...................................... 659,000 - (69) 14,945 48,100
Dallas, TX.......................................... 70,000 - 16 586 5,000
El Paso, TX......................................... 251,000 - - 2,444 9,600
Houston, TX......................................... 1,064,000 - 334 13,120 68,100
San Antonio, TX..................................... 595,000 - 145 5,584 37,500
Charlotte, NC....................................... 95,000 - 21 1,016 7,100
Jackson, MS......................................... 28,000 - - 706 2,000
----------------------------------------------------------------------------
Total Prospective Development......................... 4,335,000 - 554 57,268 274,200
----------------------------------------------------------------------------
5,859,000 $ - 11,256 151,438 383,400
============================================================================
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Costs Incurred
----------------------------------------------
Costs For the Cumulative
Transferred Three Months as of Estimated
DEVELOPMENT Size in 2009 (1) Ended 3/31/09 3/31/09 Total Costs
------------------------------------------------------------------------------------------------------------------------------------
(Square feet) (In thousands)
DEVELOPMENTS COMPLETED AND TRANSFERRED
TO REAL ESTATE PROPERTIES DURING 2009
40th Avenue Distribution Center, Phoenix, AZ........ 90,000 $ - - 6,539
Wetmore II, Building B, San Antonio, TX............. 55,000 - 10 3,643
--------------------------------------------------------------
Total Transferred to Real Estate Properties........... 145,000 $ - 10 10,182 (2)
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