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Section 1: 10-Q (10-Q 3.31.2018)

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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, 2018                                       COMMISSION FILE NUMBER 1-07094


393135630_egplogonewa01a02a01a02a01a13.jpg

EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND
13-2711135
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
 
 
400 W PARKWAY PLACE
 
SUITE 100
 
RIDGELAND, MISSISSIPPI
39157
(Address of principal executive offices)
(Zip code)
 
 
Registrant’s telephone number:  (601) 354-3555
 

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.   
Large Accelerated Filer (x)
 
Accelerated Filer ( )
 
Non-accelerated Filer ( )
 
 
 
 
(Do not check if a smaller reporting company)
Smaller Reporting Company ( )
 
Emerging Growth Company ( )
 
 
                   
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 20, 2018 was 34,944,419.

-1-



EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 2018 


 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



-2-





EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

 
March 31,
2018
 
December 31,
2017
ASSETS
 
 
 
Real estate properties
$
2,362,949

 
2,336,734

Development
238,843

 
242,014

 
2,601,792

 
2,578,748

Less accumulated depreciation
(760,142
)
 
(749,601
)
 
1,841,650

 
1,829,147

Unconsolidated investment
7,865

 
8,029

Cash
37

 
16

Other assets
113,233

 
116,029

TOTAL ASSETS
$
1,962,785

 
1,953,221

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

 
 
 
 
LIABILITIES
 

 
 

Unsecured bank credit facilities
$
201,561

 
195,709

Unsecured debt
713,122

 
713,061

Secured debt
196,809

 
199,512

Accounts payable and accrued expenses
46,830

 
64,967

Other liabilities
29,787

 
28,842

Total Liabilities
1,188,109

 
1,202,091

 
 
 
 
EQUITY
 

 
 

Stockholders’ Equity:
 

 
 

Common shares; $.0001 par value; 70,000,000 shares authorized; 34,944,419 shares issued and outstanding at March 31, 2018 and 34,758,167 at December 31, 2017
3

 
3

Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares issued

 

Additional paid-in capital
1,074,798

 
1,061,153

Distributions in excess of earnings
(310,707
)
 
(317,032
)
Accumulated other comprehensive income
8,954

 
5,348

Total Stockholders’ Equity
773,048

 
749,472

Noncontrolling interest in joint ventures
1,628

 
1,658

Total Equity
774,676

 
751,130

TOTAL LIABILITIES AND EQUITY
$
1,962,785

 
1,953,221

 
See accompanying Notes to Consolidated Financial Statements (unaudited).



-3-



EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
Three Months Ended
 
March 31,
 
2018
 
2017
REVENUES
 
 
 
Income from real estate operations
$
72,120

 
66,137

Other revenue
83

 
17

 
72,203

 
66,154

EXPENSES
 
 
 
Expenses from real estate operations
20,676

 
19,007

Depreciation and amortization
21,685

 
20,225

General and administrative
3,463

 
5,478

 
45,824

 
44,710

OPERATING INCOME
26,379

 
21,444

OTHER INCOME (EXPENSE)
 
 
 
Interest expense
(8,607
)
 
(8,686
)
Gain on sales of real estate investments
10,222

 

Other
754

 
215

NET INCOME
28,748

 
12,973

Net income attributable to noncontrolling interest in joint ventures
(35
)
 
(154
)
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
28,713

 
12,819

Other comprehensive income - cash flow hedges
3,606

 
1,410

TOTAL COMPREHENSIVE INCOME
$
32,319

 
14,229

BASIC PER COMMON SHARE DATA FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
Net income attributable to common stockholders
$
.83

 
.38

Weighted average shares outstanding
34,689

 
33,361

DILUTED PER COMMON SHARE DATA FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
Net income attributable to common stockholders
$
.83

 
.38

Weighted average shares outstanding
34,736

 
33,409

See accompanying Notes to Consolidated Financial Statements (unaudited).

-4-




EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)


 
Common Stock
 
Additional
Paid-In Capital
 
Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income
 
Noncontrolling Interest in Joint Ventures
 
Total
BALANCE, DECEMBER 31, 2017
$
3

 
1,061,153

 
(317,032
)
 
5,348

 
1,658

 
751,130

Net income

 

 
28,713

 

 
35

 
28,748

Net unrealized change in fair value of cash flow hedges

 

 

 
3,606

 

 
3,606

Common dividends declared – $.64 per share

 

 
(22,388
)
 

 

 
(22,388
)
Stock-based compensation, net of forfeitures

 
1,044

 

 

 

 
1,044

Issuance of 179,501 shares of common stock, common stock offering, net of expenses

 
14,602

 

 

 

 
14,602

Issuance of 667 shares of common stock, dividend reinvestment plan

 
54

 

 

 

 
54

Withheld 23,824 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock

 
(2,055
)
 

 

 

 
(2,055
)
Distributions to noncontrolling interest

 

 

 

 
(65
)
 
(65
)
BALANCE, MARCH 31, 2018
$
3

 
1,074,798

 
(310,707
)
 
8,954

 
1,628

 
774,676


See accompanying Notes to Consolidated Financial Statements (unaudited).

-5-



EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
Three Months Ended March 31,
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net income                                                                                                       
$
28,748

 
12,973

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization                                                                                                       
21,685

 
20,225

Stock-based compensation expense                                                                                                       
1,184

 
2,357

Net (gain) loss on sales of real estate investments and non-operating real estate
(10,308
)
 
40

Changes in operating assets and liabilities:
 

 
 

Accrued income and other assets                                                                                                       
2,239

 
1,625

Accounts payable, accrued expenses and prepaid rent                                                                                                       
(22,310
)
 
(13,671
)
Other                                                                                                       
476

 
264

NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                                                       
21,714

 
23,813

INVESTING ACTIVITIES
 

 
 

Real estate development                                                                                                       
(31,212
)
 
(22,178
)
Purchases of real estate                                                                                                       

 
(20,611
)
Real estate improvements                                                                                                       
(5,158
)
 
(4,250
)
Net proceeds from sales of real estate investments and non-operating real estate                                                                                                       
16,826

 
773

Repayments on mortgage loans receivable                                                                                                       
1,958

 
32

Changes in accrued development costs                                                                                                       
8,713

 
5,153

Changes in other assets and other liabilities                                                                                                       
(2,344
)
 
(3,286
)
NET CASH USED IN INVESTING ACTIVITIES                                                                                                       
(11,217
)
 
(44,367
)
FINANCING ACTIVITIES
 

 
 

Proceeds from unsecured bank credit facilities                                                                                          
91,387

 
84,734

Repayments on unsecured bank credit facilities                                                                                                      
(85,634
)
 
(76,518
)
Repayments on secured debt
(2,767
)
 
(3,526
)
Debt issuance costs                                                                                                       
(88
)
 
(87
)
Distributions paid to stockholders (not including dividends accrued on unvested restricted stock)                                                                                                     
(22,736
)
 
(21,515
)
Proceeds from common stock offerings                                                                                                       
14,466

 
39,456

Proceeds from dividend reinvestment plan                                                                                                       
57

 
57

Other                                                                                                       
(5,161
)
 
(2,525
)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(10,476
)
 
20,076

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
21

 
(478
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
16

 
522

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
37

 
44

SUPPLEMENTAL CASH FLOW INFORMATION
 

 
 

    Cash paid for interest, net of amount capitalized of $1,602 and $1,646
       for 2018 and 2017, respectively                                                                                                       
$
7,141

 
7,721


See accompanying Notes to Consolidated Financial Statements (unaudited).

-6-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



(1)
BASIS OF PRESENTATION
 
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 2017 annual report on Form 10-K and the notes thereto. Certain reclassifications have been made in the 2017 consolidated financial statements to conform to the 2018 presentation.

(2)
PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the accounts of EastGroup Properties, Inc., its wholly owned subsidiaries and its investment in any joint ventures in which the Company has a controlling interest. During the fourth quarter of 2017, EastGroup closed the acquisition of the 20% noncontrolling interest in two of the four University Business Center buildings; the Company now owns 100% of University Business Center 125 and 175. As of December 31, 2017 and March 31, 2018, EastGroup had an 80% controlling interest in University Business Center 120 and 130.

The Company records 100% of the assets, liabilities, revenues and expenses of the buildings held in joint ventures with the 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.

(3)
USE OF ESTIMATES
 
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.

(4)
REAL ESTATE PROPERTIES
 
EastGroup has one reportable segment – industrial properties.  These properties are concentrated in major Sunbelt markets of the United States, primarily in the states of Florida, Texas, Arizona, 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, 2018 and December 31, 2017, 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 $17,927,000 and $16,634,000 for the three months ended March 31, 2018 and 2017, respectively.












-7-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company’s Real estate properties and Development at March 31, 2018 and December 31, 2017 were as follows:
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Real estate properties:
 
 
 
   Land                                                                  
$
349,516

 
345,424

   Buildings and building improvements                                          
1,605,067

 
1,587,130

   Tenant and other improvements                                                                  
408,366

 
404,180

Development                                                                  
238,843

 
242,014

 
2,601,792

 
2,578,748

   Less accumulated depreciation                                                                  
(760,142
)
 
(749,601
)
 
$
1,841,650

 
1,829,147


(5)
DEVELOPMENT
 
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.  Effective January 1, 2018, the Company began transferring properties from Development to Real estate properties at the earlier of 90% occupancy or one year after completion of the shell construction (formerly, the Company transferred at the earlier of 80% occupancy or one year after completion of the shell construction). This change did not materially impact the comparability of the Company's financial statements. Upon transfer, capitalization of development costs, including interest expense, property taxes and internal personnel costs, ceases and depreciation commences on the entire property (excluding the land).

(6)
REAL ESTATE PROPERTY ACQUISITIONS AND ACQUIRED INTANGIBLES
 
Upon acquisition of real estate properties, EastGroup applies the principles of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations.

The FASB Codification provides a framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the 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 determined that its real estate property acquisitions in 2017 are considered to be acquisitions of groups of similar identifiable assets; therefore, the acquisitions are not considered to be acquisitions of a business. As a result, the Company capitalized acquisition costs related to its 2017 acquisitions. The Company did not acquire any operating properties during the first three months of 2018.

The FASB Codification also 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 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

-8-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 $1,012,000 and $1,121,000 for the three months ended March 31, 2018 and 2017, respectively. Amortization of above and below market leases increased rental income by $118,000 and $136,000 for the three months ended March 31, 2018 and 2017, respectively.

The Company did not acquire any operating properties during the first three months of 2018. During the year ended December 31, 2017, the Company acquired the following operating properties: Shiloh 400, Broadmoor Commerce Park and Hurricane Shoals 1 & 2 in Atlanta and Southpark Corporate Center 5-7 in Austin. The Company also acquired one development stage property, Progress Center 1 & 2 in Atlanta. At the time of acquisition, Progress Center 1 & 2 was classified in the lease-up phase of development. The total cost for the properties acquired by the Company was $65,243,000, of which $51,539,000 was allocated to Real estate properties and $10,312,000 was allocated to Development. EastGroup allocated $11,281,000 of the total purchase price to land using third party land valuations for the Atlanta and Austin markets. 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: $3,662,000 to in-place lease intangibles, $115,000 to above market leases, and $385,000 to below market leases.

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, 2018 and December 31, 2017.

(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.  The Company did not classify any properties as held for sale as of March 31, 2018 and December 31, 2017.

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 does not consider its sales in 2017 and the first three months of 2018 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 sold World Houston 18 and 56 Commerce Park during the first three months of 2018. The properties, which contain 214,000 square feet and are located in Houston and Tampa, were sold for $14.9 million and the Company recognized gains on the sales of $10.2 million. The Company also sold 11 acres of land in Houston for $2.6 million and recognized a gain of $86,000.

During the twelve months ended December 31, 2017, EastGroup sold Stemmons Circle and Techway Southwest I-IV. The properties, which contain 514,000 square feet and are located in Houston and Dallas, were sold for $38.0 million and the Company recognized gains on the sales of $21.9 million (There were no sales of operating properties in the first quarter of 2017). The Company also sold 19 acres of land in Dallas and El Paso for $3.8 million and recognized net gains of $293,000 (A net loss of $40,000 was recorded in the first quarter of 2017).

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,
2018
 
December 31,
2017
 
(In thousands)
Leasing costs (principally commissions)                                                                                  
$
72,343

 
72,722

Accumulated amortization of leasing costs                                                       
(27,404
)
 
(27,973
)
Leasing costs (principally commissions), net of accumulated amortization
44,939

 
44,749

 
 
 
 
Straight-line rents receivable                                                                                  
32,574

 
31,609

Allowance for doubtful accounts on straight-line rents receivable
(81
)
 
(48
)
Straight-line rents receivable, net of allowance for doubtful accounts
32,493

 
31,561

 
 
 
 
Accounts receivable                                                                                  
4,114

 
6,004

Allowance for doubtful accounts on accounts receivable
(616
)
 
(577
)
Accounts receivable, net of allowance for doubtful accounts
3,498

 
5,427

 
 
 
 
Acquired in-place lease intangibles                                                                                  
20,690

 
20,690

Accumulated amortization of acquired in-place lease intangibles
(9,986
)
 
(8,974
)
Acquired in-place lease intangibles, net of accumulated amortization
10,704

 
11,716

 
 
 
 
Acquired above market lease intangibles                                                                                  
1,550

 
1,550

Accumulated amortization of acquired above market lease intangibles
(850
)
 
(794
)
Acquired above market lease intangibles, net of accumulated amortization
700

 
756

 
 
 
 
Mortgage loans receivable                                                                                  
2,623

 
4,581

Interest rate swap assets
8,950

 
6,034

Goodwill                                                                                  
990

 
990

Prepaid expenses and other assets                                                                                  
8,336

 
10,215

Total Other assets
$
113,233

 
116,029



-9-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(9)
DEBT

The Company's debt is detailed below. EastGroup presents debt issuance costs as reductions of Unsecured bank credit facilities, Unsecured debt and Secured debt on the Consolidated Balance Sheets.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Unsecured bank credit facilities - variable rate, carrying amount
$
122,092

 
116,339

Unsecured bank credit facilities - fixed rate, carrying amount (1)
80,000

 
80,000

Unamortized debt issuance costs
(531
)
 
(630
)
Unsecured bank credit facilities
201,561

 
195,709

 
 
 
 
Unsecured debt - fixed rate, carrying amount (1)
715,000

 
715,000

Unamortized debt issuance costs
(1,878
)
 
(1,939
)
Unsecured debt
713,122

 
713,061

 
 
 
 
Secured debt - fixed rate, carrying amount (1)
197,580

 
200,354

Unamortized debt issuance costs
(771
)
 
(842
)
Secured debt
196,809

 
199,512

 
 
 
 
Total debt
$
1,111,492

 
1,108,282


(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 Unsecured debt and Secured debt (not including Unsecured bank credit facilities), as of March 31, 2018, are as follows: 
Years Ending December 31,
 
(In thousands)
Remainder of 2018
 
$
58,540

2019
 
130,569

2020
 
114,096

2021
 
129,563

2022
 
107,769

2023 and beyond
 
372,043

       Total
 
$
912,580


(10)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
A summary of the Company’s Accounts payable and accrued expenses follows:
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Property taxes payable                                                                                  
$
12,476

 
12,081

Development costs payable                                                                                  
18,412

 
9,699

Real estate improvements and capitalized leasing costs payable
4,443

 
3,957

Interest payable                                                                                  
4,899

 
3,744

Dividends payable on unvested restricted stock                                                            
1,017

 
1,365

Book overdraft (1)
1,658

 
20,902

Other payables and accrued expenses                                                                                  
3,925

 
13,219

 Total Accounts payable and accrued expenses
$
46,830

 
64,967


(1) Represents checks written before the end of the period which have not cleared the bank; therefore, the bank has not yet advanced cash to the Company. When the checks clear the bank, they will be funded through the Company's working cash line of credit.


-10-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(11)
OTHER LIABILITIES
 
A summary of the Company’s Other liabilities follows:
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Security deposits                                                                                  
$
16,688

 
16,668

Prepaid rent and other deferred income                                                     
10,647

 
9,352

 
 
 
 
Acquired below-market lease intangibles
4,135

 
4,135

     Accumulated amortization of below-market lease intangibles
(2,321
)
 
(2,147
)
Acquired below-market lease intangibles, net of accumulated amortization
1,814

 
1,988

 
 
 
 
Interest rate swap liabilities

 
695

Prepaid tenant improvement reimbursements
573

 
124

Other liabilities                                                                                  
65

 
15

 Total Other liabilities
$
29,787

 
28,842


(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 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,
 
2018
 
2017
 
(In thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME:
 
Balance at beginning of period
$
5,348

 
1,995

    Change in fair value of interest rate swaps - cash flow hedges
3,606

 
1,410

Balance at end of period
$
8,954

 
3,405


(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, 2018, 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.


-11-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in Other comprehensive income 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 related to derivatives will be reclassified to Interest expense as interest payments are made or received on the Company's variable-rate debt. The Company estimates the swap interest receipts will be $1,765,000 over the next twelve months. These receipts approximate the expected cash interest receipts due from counterparties for the swaps. Since the interest payments and receipts 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, 2018 and December 31, 2017, 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, 2018
 
Notional Amount as of December 31, 2017
 
 
(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, 2018 and December 31, 2017. See Note 16 for additional information on the fair value of the Company's interest rate swaps.
 
Derivatives
As of March 31, 2018
 
Derivatives
As of December 31, 2017
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
(In thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
    Interest rate swap assets
Other assets
 
$
8,950

 
Other assets
 
$
6,034

    Interest rate swap liabilities
Other liabilities
 

 
Other liabilities
 
695


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, 2018 and 2017:
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
(In thousands)
 
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
 
 
 
 
Interest Rate Swaps:
 
 
 
 
  Amount of income recognized in Other comprehensive income on derivatives                                                                                                     
$
3,662

 
637

 
  Amount of (income) loss reclassified from Accumulated other comprehensive income into Interest expense                                                                                               
(56
)
 
773

 


-12-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

See Note 12 for additional information on the Company's Accumulated other comprehensive income 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, 2018, the fair value of derivatives in an asset position related to these agreements was $8,950,000. As of March 31, 2018, 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 $9,036,000.

(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.


Reconciliation of the numerators and denominators in the basic and diluted EPS computations is as follows:
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(In thousands)
BASIC EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
  Numerator – net income attributable to common stockholders                                                                                                     
$
28,713

 
12,819

  Denominator – weighted average shares outstanding                                                                                                     
34,689

 
33,361

DILUTED EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 
 
 
  Numerator – net income attributable to common stockholders                                                                                                     
$
28,713

 
12,819

Denominator:
 
 
 
    Weighted average shares outstanding                                                                                                     
34,689

 
33,361

    Unvested restricted stock                                                                                                     
47

 
48

      Total Shares                                                                                                     
34,736

 
33,409



-13-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(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 $1,043,000 and $2,681,000 for the three months ended March 31, 2018 and 2017, respectively, of which $214,000 and $486,000 were capitalized as part of the Company's development costs. Stock-based compensation expense for directors was $355,000 and $162,000 for the three months ended March 31, 2018 and 2017, respectively.

In the second quarter of 2017, the Compensation Committee of the Company's Board of Directors (the Committee) approved an equity compensation plan for certain of its executive officers based upon certain annual performance measures for 2017, including funds from operations (FFO) per share, same property net operating income change, general and administrative costs, and fixed charge coverage. During the first quarter of 2018, the Committee measured the Company's performance for 2017 against bright-line tests established by the Committee on the grant date of May 10, 2017, and determined that 21,097 shares were earned. These shares, which have a grant date fair value of $78.18, vested 20% on the date shares were determined and will vest 20% per year on each January 1 for the subsequent four years. On the grant date of May 10, 2017, the Company began recognizing expense for its estimate of the shares that may have been earned pursuant to these awards; the shares are being expensed using the graded vesting attribution method which recognizes each separate vesting portion of the award as a separate award on a straight-line basis over the requisite service period.

Also in the second quarter of 2017, the Committee approved an equity compensation plan for certain of its executive officers based upon the achievement of individual goals for each of the officers included in the plan.  On March 1, 2018, the Committee evaluated the performance of the officers and, in its discretion, awarded 4,554 shares with a grant date fair value of $80.93. These shares vested 20% on the date shares were determined and awarded and will vest 20% per year on each January 1 for the subsequent four years. The Company began recognizing expense for the shares awarded on the grant date of March 1, 2018, and the shares will be expensed on a straight-line basis over the remaining service period.

Also in the second quarter of 2017, the Committee approved a long-term equity compensation plan for certain of the Company’s executive officers that includes three components based on total shareholder return and one component based only on continued service as of the vesting dates.

The three long-term equity compensation plan components based on total shareholder return are subject to bright-line tests that will compare the Company's total shareholder return to the NAREIT Equity Index and to the member companies of the NAREIT industrial index. The first plan measured the bright-line tests over the one-year period ended December 31, 2017. During the first quarter of 2018, the Committee measured the Company's performance for the one-year period against bright-line tests established by the Committee on the grant date of May 10, 2017.  The number of shares determined on the measurement date was 4,257.  These shares vested 100% on March 1, 2018, the date the earned shares were determined. On the grant date of May 10, 2017, the Company began recognizing expense for this plan based on the grant date fair value of the awards which was determined using a simulation pricing model developed to specifically accommodate the unique features of the award.

The second plan will measure the bright-line tests over the two-year period ending December 31, 2018. During the first quarter of 2019, the Committee will measure the Company's performance for the two-year period against bright-line tests established by the Committee on the grant date of May 10, 2017.  The number of shares to be earned on the measurement date could range from zero to 9,460.  These shares would vest 100% on the date the earned shares are determined. On the grant date of May 10, 2017, the Company began recognizing expense for this plan based on the grant date fair value of the awards which was determined using a simulation pricing model developed to specifically accommodate the unique features of the award.

The third plan will measure the bright-line tests over the three-year period ending December 31, 2019. During the first quarter of 2020, the Committee will measure the Company's performance for the three-year period against bright-line tests established by the Committee on the grant date of May 10, 2017.  The number of shares to be earned on the measurement date could range from zero to 18,917.  These shares would vest 75% on the date the earned shares are determined in the first quarter of 2020 and 25% on January 1, 2021. On the grant date of May 10, 2017, the Company began recognizing expense for this plan based on the grant date fair value of the awards which was determined using a simulation pricing model developed to specifically accommodate the unique features of the award.

The component of the long-term equity compensation plan based only on continued service as of the vesting dates was awarded on May 10, 2017. On that date, 5,406 shares were granted to certain executive officers subject only to continued service as of the vesting dates. These shares, which have a grant date fair value of $78.18 per share, vested 25% in the first quarter of 2018 and

-14-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

will vest 25% on January 1 in years 2019, 2020 and 2021. The shares are being expensed on a straight-line basis over the remaining service period.

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 2018, the Company withheld 23,824 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 2018 was $5,142,000.
 
Three Months Ended
 
Award Activity:
March 31, 2018
 
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
 
Unvested at beginning of period
152,926

 
$
63.22

 
Granted (1)
29,908

 
76.56

 
Forfeited 

 

 
Vested 
(59,547
)
 
63.77

 
Unvested at end of period 
123,287

 
$
66.20

 

(1) Includes shares granted in prior years for which performance conditions have been satisfied and the number of shares have been
determined.

(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, 2018 and December 31, 2017.
 
March 31, 2018
 
December 31, 2017
 
Carrying Amount (1)
 
Fair Value
 
Carrying Amount (1)
 
Fair Value
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
37

 
37

 
16

 
16

   Mortgage loans receivable                                 
2,623

 
2,589

 
4,581

 
4,569

   Interest rate swap assets                             
8,950

 
8,950

 
6,034

 
6,034

Financial Liabilities:
 

 
 

 
 

 
 

 Unsecured bank credit facilities - variable rate (2)
122,092

 
122,039

 
116,339

 
116,277

 Unsecured bank credit facilities - fixed rate (2)
80,000

 
80,001

 
80,000

 
80,003

Unsecured debt (2)
715,000

 
698,526

 
715,000

 
703,871

Secured debt (2)
197,580

 
201,732

 
200,354

 
206,408

   Interest rate swap liabilities                                     

 

 
695

 
695

(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.

-15-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.
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. The new standard was effective for the Company on January 1, 2018, and the Company used the modified retrospective approach upon adoption. The adoption of ASU 2014-09 did not have a material impact on the Company's financial condition or results of operations.
 
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 adopted ASU 2016-01 effective January 1, 2018. The adoption of ASU 2016-01 did not 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 while the adoption of ASU 2016-02 will impact the Company's accounting for office and ground leases, the Company anticipates the impact 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 includes 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. EastGroup plans to elect the practical expedient permitting lessors to make an accounting policy election by class of underlying asset to not separate non-lease components of a contract from the lease component to which they relate when specific criteria are met (the Company believes its leases meet the criteria). 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

-16-

EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies what constitutes a modification of a share-based payment award. The ASU is intended to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for public entities for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted ASU 2017-09 on January 1, 2018; the adoption of ASU 2017-09 did not have a material impact on its financial condition or results of operations, as the Company has not had any modifications to share-based payment awards. However, if the Company does have a modification to an award in the future, it will follow the guidance in ASU 2017-09.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU is intended to better align a company's financial reporting for hedging activities with the economic objectives of those activities. The transition method is a modified retrospective approach that will require the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to Accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year the entity adopts the ASU. The primary provision in the ASU that will require an adjustment to beginning retained earnings is the change in timing and income statement presentation for ineffectiveness related to cash flow and net investment hedges. As a result of the transition guidance in the ASU, cumulative ineffectiveness that has previously been recognized on cash flow and net investment hedges that are still outstanding and designated as of the date of adoption will be adjusted and removed from beginning retained earnings and placed in Accumulated other comprehensive income. ASU 2017-12 is effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted; however, the Company plans to adopt ASU 2017-12 on January 1, 2019. While the Company continues to assess all potential impacts of ASU 2017-12, it does not expect the adoption to have a material impact on the Company's financial condition or results of operations.

(19)
SUBSEQUENT EVENTS

In mid-April, EastGroup closed $60 million of senior unsecured private placement notes with an insurance company. The notes have a ten-year term and a fixed interest rate of 3.93% with semi-annual interest payments. The notes will not be and have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.
 



-17-



ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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”).


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 15,000 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 2018, EastGroup issued 179,501 shares of common stock through its continuous common equity program, providing net proceeds to the Company of $14.6 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, 2018, EastGroup executed leases on 1,856,000 square feet (5.0% of EastGroup’s total square footage of 37,472,000). During the first three months of 2018, average rental rates on new and renewal leases increased by 18.7%.  Property net operating income (PNOI) from same properties, defined as operating properties owned during the entire current period and prior year reporting period, increased 4.3% for the three months ended March 31, 2018, as compared to the same period in 2017.

EastGroup’s total leased percentage was 97.0% as of March 31, 2018 and March 31, 2017.  Leases scheduled to expire for the remainder of 2018 were 7.5% of the portfolio on a square foot basis at March 31, 2018, and this percentage was reduced to 6.2% as of April 20, 2018.

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 2018, EastGroup began construction of two development projects containing 169,000 square feet in Houston and Atlanta.  EastGroup also transferred three properties (347,000 square feet) in San Antonio, Tampa and Fort Lauderdale from its development program to real estate properties with costs of $29.9 million at the date of transfer.  As of March 31, 2018, EastGroup’s development program consisted of 17 projects (1,988,000 square feet) located in ten cities.  The projected total investment for the development projects, which were collectively 51% leased as of April 20, 2018, is $165 million, of which $41 million remained to be invested as of March 31, 2018.

-18-




Also in the first quarter of 2018, the Company sold 214,000 square feet of operating properties and 11 acres of land, generating gross proceeds of $17.5 million. EastGroup recognized $10,222,000 in Gain on sales of real estate investments and $86,000 in Gain on sales of non-operating real estate (included in Other on the Consolidated Statements of Income and Comprehensive Income).

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 May 2017, Moody's Investors Service affirmed EastGroup's issuer rating of Baa2 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 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, 2018 and 2017.
 
Three Months Ended
March 31,
 
2018
 
2017
 
(In thousands)
Income from real estate operations
$
72,120

 
66,137

Expenses from real estate operations
(20,676
)
 
(19,007
)
Noncontrolling interest in PNOI of consolidated 80% joint ventures
(79
)
 
(211
)
PNOI from 50% owned unconsolidated investment
217

 
224

PROPERTY NET OPERATING INCOME (PNOI)
$
51,582

 
47,143

 
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

-19-



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 following table presents reconciliations of Net Income to PNOI for the three months ended March 31, 2018 and 2017.
 
Three Months Ended
March 31,
 
2018
 
2017
 
(In thousands)
NET INCOME
$
28,748

 
12,973

(Gain) on sales of real estate investments
(10,222
)
 

(Gain) loss on sales of non-operating real estate
(86
)
 
40

(Gain) on sales of other
(427
)
 

Interest income
(55
)
 
(62
)
Other revenue
(83
)
 
(17
)
Depreciation and amortization
21,685

 
20,225

Company's share of depreciation from unconsolidated investment
31

 
31

Interest expense 
8,607

 
8,686

General and administrative expense 
3,463

 
5,478

Noncontrolling interest in PNOI of consolidated 80% joint ventures
(79
)
 
(211
)
PROPERTY NET OPERATING INCOME (PNOI)
$
51,582

 
47,143


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, 2018 and 2017.
 
Three Months Ended
March 31,
 
2018
 
2017
 
(In thousands, except per share data)
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES,  INC. COMMON STOCKHOLDERS
$
28,713

 
12,819

Depreciation and amortization
21,685

 
20,225

Company's share of depreciation from unconsolidated investment 
31

 
31

Depreciation and amortization from noncontrolling interest
(44
)
 
(55
)
(Gain) on sales of real estate investments
(10,222
)
 

FUNDS FROM OPERATIONS (FFO) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
40,163

 
33,020

Net income attributable to common stockholders per diluted share
$
0.83

 
0.38

Funds from operations (FFO) attributable to common stockholders
   per diluted share
$
1.16

 
0.99

Diluted shares for earnings per share and funds from operations
34,736

 
33,409








-20-




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 2018 was $1.16 per share compared with $.99 per share for the same period of 2017, an increase of 17.2%.

For the three months ended March 31, 2018, PNOI increased by $4,439,000, or 9.4%, compared to the same period in 2017. PNOI increased $2,634,000 from newly developed and redeveloped properties, $1,924,000 from same property operations and $506,000 from 2017 acquisitions; PNOI decreased $628,000 from operating properties sold in 2017 and 2018.

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 4.3% for the three months ended March 31, 2018, compared to the same period in 2017.

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 was 97.1% for the three months ended March 31, 2018, compared to 96.2% for the same period of 2017.

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, 2018, was 96.4%.  Quarter-end occupancy ranged from 94.9% to 96.4% over the previous four quarters ended March 31, 2017 to December 31, 2017.

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 (5.0% of total square footage) averaged 18.7% for the first quarter of 2018.

Lease termination fee income is included in Income from real estate operations. Lease termination fee income for the three months ended March 31, 2018 was $131,000 compared to $109,000 for the same period of 2017.

Bad debt expense is included in Expenses from real estate operations. The Company recorded bad debt expense of $90,000 and $50,000 for the three months ended March 31, 2018 and 2017, 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 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 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

-21-



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.

FINANCIAL CONDITION
EastGroup’s assets were $1,962,785,000 at March 31, 2018, an increase of $9,564,000 from December 31, 2017.  Liabilities decreased $13,982,000 to $1,188,109,000, and equity increased $23,546,000 to $774,676,000 during the same period.  The following paragraphs explain these changes in detail.

Assets

Real Estate Properties
Real estate properties increased $26,215,000 during the three months ended March 31, 2018, primarily due to the transfer of three properties from Development (as detailed under Development below) and capital improvements at the Company's properties.

During the three months ended March 31, 2018, the Company made capital improvements of $5,606,000 on existing and acquired properties (included in the Real Estate Improvements table under Results of Operations).  Also, the Company incurred costs of $2,074,000 on development projects subsequent to transfer to Real estate properties; the Company records these expenditures as development costs on the Consolidated Statements of Cash Flows.

During the three months ended March 31, 2018, the Company sold World Houston 18 in Houston and 56 Commerce Park in Tampa. The properties (214,000 square feet combined) were sold for $14.9 million and the Company recognized gains on the sales of $10.2 million.

Development
EastGroup’s investment in development at March 31, 2018 consisted of properties in lease-up and under construction of $124,381,000 and prospective development (primarily land) of $114,462,000.  The Company’s total investment in development at March 31, 2018 was $238,843,000 compared to $242,014,000 at December 31, 2017.  Total capital invested for development during the first three months of 2018 was $31,212,000, which primarily consisted of costs of $25,577,000 and $1,143,000 as detailed in the Development Activity table below and costs of $2,074,000 on development properties subsequent to transfer to Real estate properties. The capitalized costs incurred on development projects 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 $1,123,000 and $1,244,000 for the three months ended March 31, 2018 and 2017, respectively.

During the three months ended March 31, 2018, EastGroup sold 11 acres of development land in Houston for $2,577,000. The Company also transferred three development projects to Real estate properties during the first three months of 2018 with a total investment of $29,891,000 as of the date of transfer.

-22-



 
 
 
Costs Incurred
 
 
 
Anticipated Building Conversion Date
DEVELOPMENT ACTIVITY
 
 
Costs Transferred in 2018 (1)
 
For the Three Months Ended
3/31/2018
 
Cumulative as of 3/31/2018
 
 
Estimated Total Costs
 
 
 
 
(In thousands)
 
 
LEASE-UP
Building Size (Square feet)
 
 
 
 
 
 
 
 
 
 
Progress Center 1 & 2, Atlanta, GA (2)
132,000

 
$

 
143

 
10,476

 
11,100

 
04/18
SunCoast 4, Ft. Myers, FL
93,000

 

 
53

 
9,173

 
9,600

 
05/18
Eisenhauer Point 3, San Antonio, TX
71,000

 

 
215

 
6,374

 
6,800

 
06/18
Steele Creek VII, Charlotte, NC
120,000

 

 
582

 
8,379

 
9,000

 
09/18
Horizon XII, Orlando, FL
140,000

 

 
156

 
11,386

 
12,100

 
12/18
Kyrene 202 III, IV & V, Phoenix, AZ
166,000

 

 
863

 
12,406

 
13,800

 
02/19
Total Lease-Up
722,000

 

 
2,012

 
58,194

 
62,400

 
 
UNDER CONSTRUCTION
 

 
 

 
 

 
 

 
 

 
 
Country Club V, Tucson, AZ
300,000

 

 
5,513

 
19,464

 
24,200

 
05/18
Horizon X, Orlando, FL
104,000

 

 
3,351

 
6,901

 
7,700

 
06/18
CreekView 121 3 & 4, Dallas, TX
158,000

 

 
1,186

 
11,497

 
14,200

 
04/19
Eisenhauer Point 5, San Antonio, TX
98,000

 

 
1,006

 
6,810

 
7,500

 
04/19
Eisenhauer Point 6, San Antonio, TX
85,000

 

 
401

 
4,451

 
5,200

 
04/19
Falcon Field, Phoenix, AZ
96,000

 

 
3,289

 
6,236

 
9,000

 
05/19
West Road 5, Houston, TX
58,000

 
1,022

 
1,277

 
2,299

 
4,700

 
07/19
Airport Commerce Center 3, Charlotte, NC
96,000

 

 
257

 
1,990

 
7,300

 
09/19
Broadmoor 2, Atlanta, GA
111,000

 
705

 
303

 
1,008

 
7,400

 
10/19
Settlers Crossing 1, Austin, TX
77,000

 

 
1,127

 
2,683

 
7,400

 
10/19
Settlers Crossing 2, Austin, TX
83,000

 

 
1,175

 
2,848

 
8,000

 
10/19
Total Under Construction
1,266,000

 
1,727

 
18,885

 
66,187

 
102,600

 
 
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
Estimated Building Size (Square feet)
 
 

 
 

 
 

 
 

 
 
Ft. Myers, FL
570,000

 

 
50

 
14,162

 
 
 
 
Miami, FL
850,000

 

 
5,485

 
36,361

 
 
 
 
Orlando, FL
418,000

 

 
683

 
11,803

 
 
 
 
Tampa, FL
32,000

 

 

 
1,560

 
 
 
 
Atlanta, GA
85,000

 
(705
)
 
15

 
517

 
 
 
 
Jackson, MS
28,000

 

 

 
706

 
 
 
 
Charlotte, NC
655,000

 

 
104

 
6,833

 
 
 
 
Austin, TX
180,000

 

 
85

 
3,105

 
 
 
 
Dallas, TX
475,000

 

 
296

 
9,892

 
 
 
 
Houston, TX (3)
1,258,000

 
(1,022
)
 
(2,376
)
 
17,792

 
 
 
 
San Antonio, TX
995,000

 

 
338

 
11,731

 
 
 
 
Total Prospective Development
5,546,000

 
(1,727
)
 
4,680

 
114,462

 


 
 
 
7,534,000

 
$

 
25,577

 
238,843

 


 
 
COMPLETED DEVELOPMENT AND TRANSFERRED TO REAL ESTATE PROPERTIES DURING 2018
Building Size (Square feet)
 
 

 
 

 
 

 
 

 
Building Conversion Date
Alamo Ridge IV, San Antonio, TX
97,000

 
$

 
320

 
7,417

 
 
 
03/18
Oak Creek VII, Tampa, FL
116,000

 

 
601

 
6,732

 
 
 
03/18
Weston, Ft. Lauderdale, FL (4)
134,000

 

 
222

 
15,742

 
 
 
03/18
Total Transferred to Real Estate Properties
347,000

 
$

 
1,143

 
29,891

 
(5)
 
 

(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 was acquired by EastGroup on 12/12/17 during the lease-up phase.
(3) Negative amount represents land inventory costs transferred to Under Construction and land sold on 3/28/18.
(4) This project was acquired by EastGroup on 11/1/16 and underwent redevelopment.
(5) Represents cumulative costs at the date of transfer.


Accumulated Depreciation
Accumulated depreciation on real estate and development properties increased $10,541,000 during the first three months of 2018 due primarily to depreciation expense, offset by the sale of 214,000 square feet of operating properties during the period.


-23-



Other Assets
Other assets decreased $2,796,000 during the first three months of 2018.  A summary of Other assets follows:
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Leasing costs (principally commissions)                                                                                  
$
72,343

 
72,722

Accumulated amortization of leasing costs                                                       
(27,404
)
 
(27,973
)
Leasing costs (principally commissions), net of accumulated amortization
44,939

 
44,749

 
 
 
 
Straight-line rents receivable                                                                                  
32,574

 
31,609

Allowance for doubtful accounts on straight-line rents receivable
(81
)
 
(48
)
Straight-line rents receivable, net of allowance for doubtful accounts
32,493

 
31,561

 
 
 
 
Accounts receivable                                                                                  
4,114

 
6,004

Allowance for doubtful accounts on accounts receivable
(616
)
 
(577
)
Accounts receivable, net of allowance for doubtful accounts
3,498

 
5,427

 
 
 
 
Acquired in-place lease intangibles                                                                                  
20,690

 
20,690

Accumulated amortization of acquired in-place lease intangibles
(9,986
)
 
(8,974
)
Acquired in-place lease intangibles, net of accumulated amortization
10,704

 
11,716

 
 
 
 
Acquired above market lease intangibles                                                                                  
1,550

 
1,550

Accumulated amortization of acquired above market lease intangibles
(850
)
 
(794
)
Acquired above market lease intangibles, net of accumulated amortization
700

 
756

 
 
 
 
Mortgage loans receivable                                                                                  
2,623

 
4,581

Interest rate swap assets
8,950

 
6,034

Goodwill                                                                                  
990

 
990

Prepaid expenses and other assets                                                                                  
8,336

 
10,215

 Total Other assets
$
113,233

 
116,029


Liabilities
Unsecured bank credit facilities increased $5,852,000 during the three months ended March 31, 2018, mainly due to proceeds of $91,387,000 exceeding repayments of $85,634,000 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 $61,000 during the three months ended March 31, 2018, primarily due to the amortization of debt issuance costs.

Secured debt decreased $2,703,000 during the three months ended March 31, 2018.  The decrease resulted from regularly scheduled principal payments of $2,767,000 and amortization of premiums on Secured debt, offset by the amortization of debt issuance costs during the period.

Accounts payable and accrued expenses decreased $18,137,000 during the first three months of 2018.  A summary of the Company’s Accounts payable and accrued expenses follows:

-24-



 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Property taxes payable                                                                                  
$
12,476

 
12,081

Development costs payable                                                                                  
18,412

 
9,699

Real estate improvements and capitalized leasing costs payable
4,443

 
3,957

Interest payable                                                                                  
4,899

 
3,744

Dividends payable on unvested restricted stock                                                            
1,017

 
1,365

Book overdraft (1)
1,658

 
20,902

Other payables and accrued expenses                                                                                  
3,925

 
13,219

 Total Accounts payable and accrued expenses
$
46,830

 
64,967


(1) Represents unfunded outstanding checks for which the bank has not advanced cash to the Company.

Other liabilities increased $945,000 during the three months ended March 31, 2018.  A summary of the Company’s Other liabilities follows:
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Security deposits                                                                                  
$
16,688

 
16,668

Prepaid rent and other deferred income                                                     
10,647

 
9,352

 
 
 
 
Acquired below-market lease intangibles
4,135

 
4,135

     Accumulated amortization of below-market lease intangibles
(2,321
)
 
(2,147
)
Acquired below-market lease intangibles, net of accumulated amortization
1,814

 
1,988

 
 
 
 
Interest rate swap liabilities

 
695

Prepaid tenant improvement reimbursements
573

 
124

Other liabilities                                                                                  
65

 
15

 Total Other liabilities
$
29,787

 
28,842


Equity
Additional paid-in capital increased $13,645,000 during the three months ended March 31, 2018, 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 179,501 shares of common stock under its continuous common equity program with net proceeds to the Company of $14,602,000.

For the three months ended March 31, 2018, Distributions in excess of earnings decreased $6,325,000 as a result of Net Income Attributable to EastGroup Properties, Inc. Common Stockholders of $28,713,000 exceeding dividends on common stock of $22,388,000.

Accumulated other comprehensive income increased $3,606,000 during the three months ended March 31, 2018. The increase resulted from the change in fair value of the Company's interest rate swaps (cash flow hedges) which are further discussed in Note 13 in the Notes to Consolidated Financial Statements.


-25-



RESULTS OF OPERATIONS
(Comments are for the three months ended March 31, 2018, compared to the three months ended March 31, 2017.)

Net Income Attributable to EastGroup Properties, Inc. Common Stockholders for the three months ended March 31, 2018, was $28,713,000 ($.83 per basic and diluted share) compared to $12,819,000 ($.38 per basic and diluted share) for the same period in 2017.

PNOI for the three months ended March 31, 2018, increased by $4,439,000, or 9.4%, compared to the same period in 2017. PNOI increased $2,634,000 from newly developed and redeveloped properties, $1,924,000 from same property operations and $506,000 from 2017 acquisitions; PNOI decreased $628,000 from operating properties sold in 2017 and 2018. Lease termination fee income was $131,000 and $109,000 for the three months ended March 31, 2018 and 2017, respectively. The Company recorded bad debt expense of $90,000 and $50,000 during the three months ended March 31, 2018 and 2017, respectively. Straight-lining of rent increased Income from real estate operations by $1,019,000 and $591,000 for the three months ended March 31, 2018 and 2017, respectively.

EastGroup signed 23 leases with free rent concessions on 533,000 square feet during the three months ended March 31, 2018, with total free rent concessions of $618,000 over the lives of the leases. During the same period of 2017, the Company 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.

The Company’s percentage of leased square footage was 97.0% as of both March 31, 2018 and 2017.  Occupancy at March 31, 2018 was 96.4% compared to 95.6% at March 31, 2017.

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, 2018, was 97.1% compared to 96.2% for the same period of 2017.

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 $5.89 per square foot for the three months ended March 31, 2018, compared to $5.58 per square foot for the same period of 2017.

Interest expense decreased $79,000 for the three months ended March 31, 2018, compared to the same period in 2017. The following table presents the components of Interest expense for the three months ended March 31, 2018 and 2017:

-26-



 
Three Months Ended
March 31,
 
2018
 
2017
 
Increase
(Decrease)
 
(In thousands)
VARIABLE RATE INTEREST EXPENSE
 

 
 

 
 

Unsecured bank credit facilities interest - variable rate
(excluding amortization of facility fees and debt issuance costs)                                                                                                                                                   
$
793

 
547

 
246

Amortization of facility fees - unsecured bank credit facilities                                                                  
165

 
165

 

Amortization of debt issuance costs - unsecured bank credit facilities                                                                  
113

 
113

 

   Total variable rate interest expense                                                                  
1,071

 
825

 
246

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)
5,961

 
5,541

 
420

Secured debt interest
(excluding amortization of debt issuance costs)
2,573

 
3,367

 
(794
)
Amortization of debt issuance costs - unsecured debt 
135

 
119

 
16

Amortization of debt issuance costs - secured debt                                                                  
71

 
82

 
(11
)
   Total fixed rate interest expense                                                                  
9,138

 
9,507

 
(369
)
Total interest                                                                  
10,209

 
10,332

 
(123
)
Less capitalized interest                                                                  
(1,602
)
 
(1,646
)
 
44

TOTAL INTEREST EXPENSE 
$
8,607

 
8,686

 
(79
)
    
(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.
 
The Company's variable rate interest expense increased by $246,000 for the three months ended March 31, 2018, as compared to the same period in 2017. 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,
 
2018
 
2017
 
Increase
(Decrease)
 
(In thousands, except rates of interest)
Average borrowings on unsecured bank credit facilities - variable rate
$
123,484

 
124,384

 
(900
)
Weighted average variable interest rates 
(excluding amortization of facility fees and debt issuance costs) 
2.60
%
 
1.78
%
 
 


The Company's fixed rate interest expense decreased by $369,000 for the three months ended March 31, 2018, as compared to the same period in 2017. The changes resulting from the fixed rate unsecured bank credit facilities, unsecured debt and secured debt activity are described below.

Secured debt interest decreased by $794,000 during the three month period ended March 31, 2018, as compared to the same period in 2017 as a result of debt repayments and regularly scheduled principal payments. Regularly scheduled principal payments on secured debt were $2,767,000 during the three months ended March 31, 2018. During the year ended December 31, 2017, regularly scheduled principal payments on secured debt were $13,139,000. EastGroup did not repay any secured debt during the first three months of 2018. The details of the secured debt repaid in 2017 are shown in the following table:
SECURED DEBT REPAID IN 2017
 
Interest Rate
 
Date Repaid
 
Payoff Amount
 
 
 
 
 
 
(In thousands)
Arion 16, Broadway VI, Chino, East University I & II, Northpark I-IV, Santan 10 II, 55th Avenue and World Houston 1 & 2, 21 & 23
 
5.57%
 
08/07/2017
 
$
45,069


EastGroup did not obtain any new secured debt during 2017 or during the first three months of 2018.

-27-



The decrease in secured debt interest expense during the three months ended March 31, 2018 as compared to the same period last year was partially offset by a $420,000 increase in interest expense from fixed rate unsecured debt. The increase resulted from the Company's unsecured debt activity described below. EastGroup did not obtain any new unsecured debt in the first three months of 2018. The details of the unsecured debt obtained in 2017 are shown in the following table:
NEW UNSECURED DEBT IN 2017
 
Effective Interest Rate
 
Date Obtained
 
Maturity Date
 
Amount
 
 
 
 
 
 
 
 
(In thousands)
$60 Million Senior Unsecured Notes
 
3.460%
 
12/13/2017
 
12/13/2024
 
$
60,000


The increase in interest expense from the new unsecured debt was partially offset by the refinancing of two unsecured loans. In December 2017, the Company refinanced a $75 million unsecured term loan, resulting in a 30 basis point reduction in the loan's interest rate. The loan, which has a maturity date of December 20, 2020, now has an effectively fixed interest rate of 3.452%. In February 2018, EastGroup refinanced a $65 million unsecured term loan, resulting in a 55 basis point reduction in the loan's interest rate. The loan, which has a maturity date of April 1, 2023, now has an effectively fixed interest rate of 2.313%.

Interest costs during the period of construction of real estate properties are capitalized and offset against interest expense.  Capitalized interest decreased $44,000 for the three months ended March 31, 2018, as compared to the same period of 2017. The decrease is due to changes in development spending and borrowing rates.

Depreciation and amortization expense increased $1,460,000 for the three months ended March 31, 2018, as compared to the same period in 2017 primarily due to the operating properties acquired by the Company in 2017 and the properties transferred from Development in 2017 and 2018, partially offset by operating properties sold in 2017 and 2018.  

Gain on sales of real estate investments, which includes gains on the sales of operating properties, increased $10,222,000 for the three months ended March 31, 2018, as compared to the same period in 2017. The Company did not sell any operating properties during the first three months of 2017. During the first quarter of 2018, EastGroup sold the following operating properties in separate transactions: World Houston 18 in Houston and 56 Commerce Park in Tampa. The properties contain a combined 214,000 square feet and were sold for $14,910,000; EastGroup recognized gains on the sales of $10,222,000.































-28-



Real Estate Improvements
Real estate improvements for EastGroup's operating properties for the three months ended March 31, 2018 and 2017 were as follows:
 
 
 
Three Months Ended
March 31,
 
Estimated Useful Life
 
2018
 
2017
 
 
 
(In thousands)
Upgrade on Acquisitions                                            
40 yrs
 
$
5

 
15

Tenant Improvements:
 
 
 

 
 
New Tenants                                            
Lease Life
 
1,793

 
2,400

Renewal Tenants                                            
Lease Life
 
602

 
675

Other:
 
 
 

 
 
Building Improvements                                            
5-40 yrs
 
1,000

 
771

Roofs                                            
5-15 yrs
 
978

 
620

Parking Lots                                            
3-5 yrs
 
725

 
142

Other                                            
5 yrs
 
503

 
113

Total Real Estate Improvements (1)
 
 
$
5,606

 
4,736


(1)
Reconciliation of Total Real Estate Improvements to Real estate improvements on the Consolidated Statements of Cash Flows:
 
 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
Total Real Estate Improvements
 
$
5,606

 
4,736

Change in Real Estate Property Payables
 
(419
)
 
(466
)
Change in Prepaid Construction in Progress
 
(29
)