|
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
OVERVIEW
EastGroup’s goal is to maximize shareholder value by being a leading provider in its markets of functional, flexible and quality business distribution space for location sensitive customers (primarily in the 10,000 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
nine
months of 2017, EastGroup issued
1,037,605
shares of common stock through its continuous common equity program, providing net proceeds to the Company of
$79 million
. The Company has also executed a commitment letter for $60 million of senior unsecured private placement notes which it expects to close during fourth quarter 2017. 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
nine
months ended
September 30, 2017
, leases expired on 5,565,000 square feet (15.0% of EastGroup’s total square footage of 37,051,000), and the Company was successful in renewing or re-leasing 84% of the expiring square feet. In addition, EastGroup leased 1,831,000 square feet of other vacant space during this period. During the first
nine
months of
2017
, average rental rates on new and renewal leases increased by 17.1%. Property net operating income (PNOI) from same properties, defined as operating properties owned during the entire current period and prior year reporting period, increased 2.5% for the
nine
months ended
September 30, 2017
, as compared to the same period in
2016
.
EastGroup’s total leased percentage was 97.4% at
September 30, 2017
, compared to 97.3% at
September 30, 2016
. Leases scheduled to expire for the remainder of
2017
were 1.0% of the portfolio on a square foot basis at
September 30, 2017
, and this percentage was reduced to 0.6% as of
October 20, 2017
.
The Company generates new sources of leasing revenue through its development and acquisition programs. The Company mitigates risks associated with development through a Board-approved maximum level of land held for development and by adjusting development start dates according to leasing activity.
During the first
nine
months of
2017
, EastGroup acquired
77
acres of development land in San Antonio, Austin, Atlanta and Charlotte for
$11.7 million
. In addition, the Company began construction of eight development projects containing 987,000 square feet in Dallas, San Antonio, Phoenix, Tampa, Orlando and Charlotte. EastGroup also transferred
12
properties (
2,197,000
square feet) in Dallas, San Antonio, Las Vegas, Orlando, Tampa, Charlotte and Phoenix from its development program to real estate properties with costs of
$160.1 million
at the date of transfer. As of
September 30, 2017
, EastGroup’s development program consisted of 13 projects (1,682,000 square feet) located in 9 cities. The projected total investment for the development projects, which were collectively 43% leased as of
October 20, 2017
, is $138 million, of which $51 million remained to be invested as of
September 30, 2017
.
Also during the
nine
months ended
September 30, 2017
, the Company acquired three operating properties containing
421,000
square feet in Atlanta and Austin for
$36.5 million
.
Typically, the Company initially funds its development and acquisition programs through its $335 million unsecured bank credit facilities (as discussed in
Liquidity and Capital Resources
). As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, to replace short-term bank borrowings. In May, 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 and nine
months ended
September 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Income from real estate operations
|
$
|
68,712
|
|
|
63,178
|
|
|
202,704
|
|
|
186,628
|
|
Expenses from real estate operations
|
(20,109
|
)
|
|
(18,552
|
)
|
|
(59,360
|
)
|
|
(54,130
|
)
|
Noncontrolling interest in PNOI of consolidated 80% joint ventures
|
(145
|
)
|
|
(190
|
)
|
|
(493
|
)
|
|
(618
|
)
|
PNOI from 50% owned unconsolidated investment
|
224
|
|
|
231
|
|
|
673
|
|
|
676
|
|
PROPERTY NET OPERATING INCOME (PNOI)
|
$
|
48,682
|
|
|
44,667
|
|
|
143,524
|
|
|
132,556
|
|
Income from real estate operations
is comprised of rental income, expense reimbursement pass-through income and other real estate income including lease termination fees.
Expenses from real estate operations
is comprised of property taxes, insurance, utilities, repair and maintenance expenses, management fees, other operating costs and bad debt expense. Generally, the Company’s most significant operating expenses are property taxes and insurance. Tenant leases may be net leases in which the total operating expenses are recoverable, modified gross leases in which some of the operating expenses are recoverable, or gross leases in which no expenses are recoverable (gross leases represent only a small portion of the Company’s total leases). Increases in property operating expenses are fully recoverable under net leases and recoverable to a high degree under modified gross leases. Modified gross leases often include base year amounts and expense increases over these amounts are recoverable. The Company’s exposure to property operating expenses is primarily due to vacancies and leases for occupied space that limit the amount of expenses that can be recovered.
The following table presents reconciliations of Net Income to PNOI for the
three and nine
months ended
September 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
NET INCOME
|
$
|
15,972
|
|
|
14,800
|
|
|
65,922
|
|
|
80,723
|
|
Gain on sales of real estate investments
|
—
|
|
|
—
|
|
|
(21,855
|
)
|
|
(42,313
|
)
|
(Gain) loss on sales of non-operating real estate
|
—
|
|
|
(590
|
)
|
|
40
|
|
|
(733
|
)
|
Interest income
|
(62
|
)
|
|
(63
|
)
|
|
(185
|
)
|
|
(191
|
)
|
Other income
|
(34
|
)
|
|
(12
|
)
|
|
(90
|
)
|
|
(68
|
)
|
Interest rate swap ineffectiveness
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Depreciation and amortization
|
21,011
|
|
|
19,361
|
|
|
62,101
|
|
|
57,756
|
|
Company's share of depreciation from unconsolidated investment
|
31
|
|
|
31
|
|
|
93
|
|
|
93
|
|
Interest expense
|
8,704
|
|
|
8,841
|
|
|
26,405
|
|
|
27,078
|
|
General and administrative expense
|
3,205
|
|
|
2,328
|
|
|
11,586
|
|
|
10,663
|
|
Acquisition costs
|
—
|
|
|
161
|
|
|
—
|
|
|
161
|
|
Noncontrolling interest in PNOI of consolidated 80% joint ventures
|
(145
|
)
|
|
(190
|
)
|
|
(493
|
)
|
|
(618
|
)
|
PROPERTY NET OPERATING INCOME
|
$
|
48,682
|
|
|
44,667
|
|
|
143,524
|
|
|
132,556
|
|
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 and nine
months ended
September 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands, except per share data)
|
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
|
$
|
15,884
|
|
|
14,661
|
|
|
65,593
|
|
|
80,285
|
|
Depreciation and amortization
|
21,011
|
|
|
19,361
|
|
|
62,101
|
|
|
57,756
|
|
Company's share of depreciation from unconsolidated investment
|
31
|
|
|
31
|
|
|
93
|
|
|
93
|
|
Depreciation and amortization from noncontrolling interest
|
(56
|
)
|
|
(49
|
)
|
|
(160
|
)
|
|
(159
|
)
|
Gain on sales of real estate investments
|
—
|
|
|
—
|
|
|
(21,855
|
)
|
|
(42,313
|
)
|
FUNDS FROM OPERATIONS (FFO) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$
|
36,870
|
|
|
34,004
|
|
|
105,772
|
|
|
95,662
|
|
Net income attributable to common stockholders per diluted share
|
$
|
.46
|
|
|
.45
|
|
|
1.93
|
|
|
2.47
|
|
Funds from operations (FFO) attributable to common stockholders
per diluted share
|
$
|
1.08
|
|
|
1.04
|
|
|
3.12
|
|
|
2.94
|
|
Diluted shares for earnings per share and funds from operations
|
34,290
|
|
|
32,823
|
|
|
33,905
|
|
|
32,519
|
|
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
third
quarter of
2017
was
$1.08
per share compared with
$1.04
per share for the same period of
2016
, an increase of 3.8%. For the
nine
months ended
September 30, 2017
, FFO was
$3.12
per share compared with
$2.94
per share for the same period of
2016
, an increase of 6.1%.
|
|
|
•
|
For the three months ended
September 30, 2017
, PNOI increased by $4,015,000, or 9.0%, compared to the same period in
2016
. PNOI increased $2,483,000 from newly developed and redeveloped properties, $1,342,000 from same property operations and $917,000 from 2016 and 2017 acquisitions; PNOI decreased $658,000 from operating properties sold in 2016 and 2017.
|
For the
nine
months ended
September 30, 2017
, PNOI increased by $10,968,000, or 8.3%, compared to the same period in
2016
. PNOI increased $7,503,000 from newly developed and redeveloped properties, $3,157,000 from same property operations and $2,628,000 from 2016 and 2017 acquisitions; PNOI decreased $2,157,000 from operating properties sold in 2016 and 2017.
|
|
•
|
The same property net operating income change represents the PNOI increase or decrease for the same operating properties owned during the entire current period and prior year reporting period. PNOI from same properties increased 3.1% for the three months ended
September 30, 2017
, and increased 2.5% for the
nine
months ended
September 30, 2017
, compared to the same periods in
2016
.
|
|
|
•
|
Same property average occupancy represents the average month-end percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage for the same operating properties owned during the entire current period and prior year reporting period. Same property average occupancy was 96.4% for the three months ended
September 30, 2017
, compared to 96.1% for the same period of
2016
. Same property average occupancy for the
nine
months ended
September 30, 2017
, was 96.6% compared to 96.3% for the same period of
2016
.
|
|
|
•
|
Occupancy is the percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage as of the close of the reporting period. Occupancy at
September 30, 2017
, was 95.6%. Quarter-end occupancy ranged from 94.9% to 96.8% over the previous four quarters ended
September 30, 2016
to June 30, 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 (4.6% of total square footage) averaged 20.9% for the
third
quarter of
2017
. For the
nine
months ended
September 30, 2017
, rental rate increases on new and renewal leases (17.6% of total square footage) averaged 17.1%.
|
|
|
•
|
Lease termination fee income is included in
Income from real estate operations.
Lease termination fee income for the
three and nine
months ended
September 30, 2017
was $65,000 and $198,000 respectively, compared to $316,000 and $754,000 for the same periods of
2016
.
|
|
|
•
|
Bad debt expense is included in
Expenses from real estate operations.
The Company recorded bad debt expense of $134,000 and $332,000 for the
three and nine
months ended
September 30, 2017
, respectively, compared to $306,000 and $764,000 for the same periods of 2016.
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s management considers the following accounting policies and estimates to be critical to the reported operations of the Company.
Real Estate Properties
The Company applied the principles of Accounting Standards Codification (ASC) 805,
Business Combinations,
when accounting for purchase of real estate until its adoption of Accounting Standards Update (ASU) 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business,
which was effective October 1, 2016. ASU 2017-01 provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. EastGroup has determined that some of its real estate property acquisitions may be considered to be acquisitions of groups of similar identifiable assets; therefore, the acquisitions are not considered to be acquisitions of a business.
The Financial Accounting Standards Board (FASB) Codification provides guidance on how to properly determine the allocation of the purchase price among the individual components of both the tangible and intangible assets based on their respective fair values. Goodwill for business combinations is recorded when the purchase price exceeds the fair value of the assets and liabilities acquired. Factors considered by management in allocating the cost of the properties acquired include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. The allocation to tangible assets (land, building and improvements) is based upon management’s determination of the value of the property as if it were vacant using discounted cash flow models. The Company determines whether any financing assumed is above or below market based upon comparison to similar financing terms for similar properties. The cost of the properties acquired may be adjusted based on indebtedness assumed from the seller that is determined to be above or below market rates.
The purchase price is also allocated among the following categories of intangible assets: the above or below market component of in-place leases, the value of in-place leases, and the value of customer relationships. The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate reflecting the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above and below market leases are included in
Other assets
and
Other liabilities
, respectively, on the Consolidated Balance Sheets and are amortized to rental income over the remaining terms of the respective leases. The total amount of intangible assets is further allocated to in-place lease values and customer relationship values based upon management’s assessment of their respective values. These intangible assets are included in
Other assets
on the Consolidated Balance Sheets and are amortized over the remaining term of the existing lease, or the anticipated life of the customer relationship, as applicable.
For properties under development and properties acquired in the development stage, costs associated with development (i.e., land, construction costs, interest expense, property taxes and other costs associated with development) are aggregated into the total capitalized costs of the property. Included in these costs are management’s estimates for the portions of internal costs (primarily personnel costs) deemed related to such development activities. The internal costs are allocated to specific development properties based on development activity.
The Company reviews its real estate investments for impairment of value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any real estate investment is considered permanently impaired, a loss is recorded to reduce the carrying value of the property to its estimated fair value. Real estate assets classified as held for sale are reported at the lower of the carrying amount or fair value less estimated costs of sale. The evaluation of real estate investments involves many subjective assumptions dependent upon future economic events that affect the ultimate value of the property. Currently, the Company’s management has not identified any impairment charges which should be recorded nor has it recorded any impairment charges in recent years. In the event of impairment, the property’s basis would be reduced, and the impairment would be recognized as a current period charge on the Consolidated Statements of Income and Comprehensive Income.
Valuation of Receivables
The Company is subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables. In order to mitigate these risks, the Company performs credit reviews and analyses on prospective tenants before significant leases are executed and on existing tenants before properties are acquired. On a quarterly basis, the Company evaluates outstanding receivables and estimates the allowance for doubtful accounts. Management specifically analyzes aged receivables, customer credit-worthiness, historical bad debts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. The Company believes its allowance for doubtful accounts is adequate for its outstanding receivables for the periods presented. In the event the allowance for doubtful accounts is insufficient for an account that is subsequently written off, additional bad debt expense would be recognized as a current period charge on the Consolidated Statements of Income and Comprehensive Income.
Tax Status
EastGroup, a Maryland corporation, has qualified as a real estate investment trust under Sections 856-860 of the Internal Revenue Code and intends to continue to qualify as such. To maintain its status as a REIT, the Company is required to distribute at least 90% of its ordinary taxable income to its stockholders. If the Company has a capital gain, it has the option of (i) deferring recognition of the capital gain through a tax-deferred exchange, (ii) declaring and paying a capital gain dividend on any recognized net capital gain resulting in no corporate level tax, or (iii) retaining and paying corporate income tax on its net long-term capital gain, with shareholders reporting their proportional share of the undistributed long-term capital gain and receiving a credit or refund of their share of the tax paid by the Company. The Company distributed all of its 2016 taxable income to its stockholders and expects to distribute all of its taxable income in 2017. Accordingly, no significant provision for income taxes was necessary in 2016, nor is any significant income tax provision expected to be necessary for 2017.
FINANCIAL CONDITION
EastGroup’s assets were
$1,893,993,000
at
September 30, 2017
,
an increase
of $
68,229,000
from
December 31, 2016
. Liabilities
decreased
$
16,079,000
to
$1,167,819,000
, and equity
increased
$
84,308,000
to $
726,174,000
during the same period. The following paragraphs explain these changes in detail.
Assets
Real Estate Properties
Real estate properties
increased
$
192,944,000
during the
nine
months ended
September 30, 2017
, primarily due to the transfer of
twelve
properties from
Development
(as detailed under
Development
below), the purchase of the operating properties detailed below and capital improvements at the Company's properties. These increases were partially offset by the operating property sales discussed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
REAL ESTATE PROPERTIES ACQUIRED IN 2017
|
|
Location
|
|
Size
|
|
Date
Acquired
|
|
Cost
(1)
|
|
|
|
|
(Square feet)
|
|
|
|
(In thousands)
|
Shiloh 400
|
|
Atlanta, GA
|
|
238,000
|
|
|
02/07/2017
|
|
$
|
18,712
|
|
Broadmoor Commerce Park
|
|
Atlanta, GA
|
|
84,000
|
|
|
04/26/2017
|
|
5,363
|
|
Southpark Corporate Center 5-7
|
|
Austin, TX
|
|
99,000
|
|
|
05/12/2017
|
|
9,590
|
|
Total Acquisitions
|
|
|
|
421,000
|
|
|
|
|
$
|
33,665
|
|
|
|
(1)
|
Total cost of the properties acquired was
$36,475,000
, of which
$33,665,000
was allocated to Real estate properties as indicated above. The Company allocated
$5,700,000
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 in the Notes to Consolidated Financial Statements for additional information on ASC 820). Intangibles associated with the purchases of real estate were allocated as follows:
$3,016,000
to in-place lease intangibles and
$114,000
to above market leases (both included in Other assets on the Consolidated Balance Sheets), and
$320,000
to below market leases (included in Other liabilities on the Consolidated Balance Sheets).
|
During the
nine
months ended
September 30, 2017
, the Company made capital improvements of
$19,203,000
on existing and acquired properties (included in the Capital Expenditures table under
Results of Operations
). Also, the Company incurred costs of
$8,600,000
on development properties subsequent to transfer to
Real estate properties
; the Company records these expenditures as development costs on the Consolidated Statements of Cash Flows.
During the
nine
months ended
September 30, 2017
, the Company sold Stemmons Circle in Dallas and Techway Southwest I-IV in Houston. The properties (514,000 square feet combined) were sold for $38.0 million and the Company recognized gains on the sales of $21.9 million.
Development
EastGroup’s investment in development at
September 30, 2017
consisted of properties in lease-up and under construction of $87,007,000 and prospective development (primarily land) of
$117,190,000
. The Company’s total investment in development at
September 30, 2017
was $
204,197,000
compared to $
293,908,000
at
December 31, 2016
. Total capital invested for development during the first
nine
months of
2017
was
$80,462,000
, which primarily consisted of costs of
$55,578,000
and
$14,819,000
as detailed in the
Development Activity
table below and costs of
$8,600,000
on development properties subsequent to transfer to
Real estate properties
. The capitalized costs incurred on development properties subsequent to transfer to
Real estate properties
include capital improvements at the properties and do not include other capitalized costs associated with development (i.e., interest expense, property taxes and internal personnel costs).
The Company capitalized internal development costs of
$1,056,000
and
$3,650,000
for the
three and nine
months ended
September 30, 2017
, respectively, compared to
$867,000
and
$2,660,000
in the same periods of
2016
.
During the
nine
months ended
September 30, 2017
, EastGroup purchased
77
acres of development land in San Antonio, Austin, Atlanta and Charlotte for
$11,729,000
. Costs associated with these land acquisitions are included in the
Development Activity
table below. These increases were offset by the sale of five acres of land for $850,000 and the transfer of
twelve
development projects to
Real estate properties
during the first
nine
months of
2017
with a total investment of
$160,108,000
as of the date of transfer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Incurred
|
|
|
|
Anticipated Building Conversion Date
|
DEVELOPMENT ACTIVITY
|
|
|
Costs Transferred in 2017
(1)
|
|
For the Nine Months Ended
9/30/2017
|
|
Cumulative as of 9/30/2017
|
|
Estimated Total Costs
|
|
|
|
|
(In thousands)
|
|
|
LEASE-UP
|
Building Size (Square feet)
|
|
|
|
|
|
|
|
|
|
|
Alamo Ridge IV, San Antonio, TX
|
97,000
|
|
|
$
|
—
|
|
|
1,073
|
|
|
6,018
|
|
|
6,600
|
|
|
03/18
|
Eisenhauer Point 3, San Antonio, TX
|
71,000
|
|
|
—
|
|
|
2,107
|
|
|
4,855
|
|
|
5,900
|
|
|
06/18
|
SunCoast 4, Ft. Myers, FL
|
93,000
|
|
|
—
|
|
|
2,390
|
|
|
8,645
|
|
|
9,100
|
|
|
06/18
|
Weston, Ft. Lauderdale, FL
(2)
|
134,000
|
|
|
—
|
|
|
1,009
|
|
|
15,290
|
|
|
15,900
|
|
|
07/18
|
Steele Creek VII, Charlotte, NC
|
120,000
|
|
|
2,393
|
|
|
5,195
|
|
|
7,588
|
|
|
8,600
|
|
|
09/18
|
Total Lease-Up
|
515,000
|
|
|
2,393
|
|
|
11,774
|
|
|
42,396
|
|
|
46,100
|
|
|
|
UNDER CONSTRUCTION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Country Club V, Tucson, AZ
|
300,000
|
|
|
—
|
|
|
4,098
|
|
|
7,393
|
|
|
24,200
|
|
|
03/18
|
Horizon XII, Orlando, FL
|
140,000
|
|
|
3,825
|
|
|
5,163
|
|
|
8,988
|
|
|
12,100
|
|
|
11/18
|
Oak Creek VII, Tampa, FL
|
116,000
|
|
|
2,153
|
|
|
3,725
|
|
|
5,878
|
|
|
7,200
|
|
|
11/18
|
Kyrene 202 III, IV & V, Phoenix, AZ
|
166,000
|
|
|
2,280
|
|
|
4,248
|
|
|
6,528
|
|
|
13,800
|
|
|
01/19
|
CreekView 121 3 & 4, Dallas, TX
|
158,000
|
|
|
3,701
|
|
|
3,458
|
|
|
7,159
|
|
|
14,200
|
|
|
02/19
|
Eisenhauer Point 5, San Antonio, TX
|
98,000
|
|
|
1,253
|
|
|
2,515
|
|
|
3,768
|
|
|
7,500
|
|
|
03/19
|
Eisenhauer Point 6, San Antonio, TX
|
85,000
|
|
|
878
|
|
|
1,750
|
|
|
2,628
|
|
|
5,200
|
|
|
03/19
|
Horizon X, Orlando, FL
|
104,000
|
|
|
2,101
|
|
|
168
|
|
|
2,269
|
|
|
8,000
|
|
|
04/19
|
Total Under Construction
|
1,167,000
|
|
|
16,191
|
|
|
25,125
|
|
|
44,611
|
|
|
92,200
|
|
|
|
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
|
Estimated Building Size (Square feet)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phoenix, AZ
|
96,000
|
|
|
(2,280
|
)
|
|
120
|
|
|
1,733
|
|
|
|
|
|
Tucson, AZ
(3)
|
—
|
|
|
—
|
|
|
(417
|
)
|
|
—
|
|
|
|
|
|
Ft. Myers, FL
|
570,000
|
|
|
—
|
|
|
361
|
|
|
14,004
|
|
|
|
|
|
Miami, FL
|
850,000
|
|
|
—
|
|
|
2,511
|
|
|
29,755
|
|
|
|
|
|
Orlando, FL
|
418,000
|
|
|
(5,926
|
)
|
|
791
|
|
|
10,994
|
|
|
|
|
|
Tampa, FL
|
32,000
|
|
|
(2,153
|
)
|
|
17
|
|
|
1,545
|
|
|
|
|
|
Atlanta, GA
|
107,000
|
|
|
—
|
|
|
675
|
|
|
675
|
|
|
|
|
|
Jackson, MS
|
28,000
|
|
|
—
|
|
|
—
|
|
|
706
|
|
|
|
|
|
Charlotte, NC
|
748,000
|
|
|
(2,393
|
)
|
|
1,357
|
|
|
8,267
|
|
|
|
|
|
Austin, TX
|
340,000
|
|
|
—
|
|
|
5,825
|
|
|
5,825
|
|
|
|
|
|
Dallas, TX
|
491,000
|
|
|
(3,701
|
)
|
|
538
|
|
|
9,159
|
|
|
|
|
|
El Paso, TX
|
251,000
|
|
|
—
|
|
|
—
|
|
|
2,444
|
|
|
|
|
|
Houston, TX
(4)
|
1,476,000
|
|
|
—
|
|
|
(227
|
)
|
|
21,147
|
|
|
|
|
|
San Antonio, TX
|
965,000
|
|
|
(2,131
|
)
|
|
7,128
|
|
|
10,936
|
|
|
|
|
|
Total Prospective Development
|
6,372,000
|
|
|
(18,584
|
)
|
|
18,679
|
|
|
117,190
|
|
|
|
|
|
|
|
8,054,000
|
|
|
$
|
—
|
|
|
55,578
|
|
|
204,197
|
|
|
|
|
|
|
DEVELOPMENTS COMPLETED AND TRANSFERRED TO REAL ESTATE PROPERTIES DURING 2017
|
Building Size (Square feet)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building Conversion Date
|
Eisenhauer Point 1 & 2, San Antonio, TX
|
201,000
|
|
|
$
|
—
|
|
|
19
|
|
|
15,795
|
|
|
|
|
01/17
|
South 35th Avenue, Phoenix, AZ
(5)
|
125,000
|
|
|
—
|
|
|
—
|
|
|
1,664
|
|
|
|
|
01/17
|
Alamo Ridge III, San Antonio, TX
|
135,000
|
|
|
—
|
|
|
28
|
|
|
10,587
|
|
|
|
|
02/17
|
Parc North 1-4, Dallas, TX
(6)
|
446,000
|
|
|
—
|
|
|
132
|
|
|
32,252
|
|
|
|
|
02/17
|
Madison IV & V, Tampa, FL
|
145,000
|
|
|
—
|
|
|
549
|
|
|
8,074
|
|
|
|
|
03/17
|
Jones Corporate Park, Las Vegas, NV
(7)
|
416,000
|
|
|
—
|
|
|
275
|
|
|
39,815
|
|
|
|
|
04/17
|
Ten Sky Harbor, Phoenix, AZ
|
64,000
|
|
|
—
|
|
|
100
|
|
|
5,365
|
|
|
|
|
04/17
|
Steele Creek VI, Charlotte, NC
|
137,000
|
|
|
—
|
|
|
519
|
|
|
7,525
|
|
|
|
|
04/17
|
Horizon V, Orlando, FL
|
141,000
|
|
|
—
|
|
|
4,814
|
|
|
9,249
|
|
|
|
|
05/17
|
Horizon VII, Orlando, FL
|
109,000
|
|
|
—
|
|
|
1,375
|
|
|
8,266
|
|
|
|
|
06/17
|
Eisenhauer Point 4, San Antonio, TX
|
85,000
|
|
|
—
|
|
|
2,544
|
|
|
5,197
|
|
|
|
|
07/17
|
CreekView 121 1 & 2, Dallas, TX
|
193,000
|
|
|
—
|
|
|
4,464
|
|
|
16,319
|
|
|
|
|
08/17
|
Total Transferred to Real Estate Properties
|
2,197,000
|
|
|
$
|
—
|
|
|
14,819
|
|
|
160,108
|
|
|
(8)
|
|
|
See next page for Development Activity table footnotes.
(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 11/1/16 and underwent redevelopment.
(3) Negative amount represents land inventory costs transferred to Real Estate Properties for storage yard and parking lot expansion.
(4) Negative amount represents West Road retention ponds and infrastructure conveyed to West Harris County Municipal Utility District.
(5) This property was redeveloped from a manufacturing building to a multi-tenant distribution building.
(6) This project, which was recently developed by the seller, was acquired by EastGroup on 7/8/16 during the lease-up phase.
(7) This project, which was recently developed by the seller, was acquired by EastGroup on 11/15/16 during the lease-up phase.
(8) Represents cumulative costs at the date of transfer.
Accumulated Depreciation
Accumulated depreciation on real estate and development properties
increased
$
38,316,000
during the first
nine
months of
2017
due primarily to depreciation expense, offset by the sale of 514,000 square feet of operating properties during the period.
Other Assets
Other assets
increased
$
3,669,000
during the first
nine
months of
2017
. A summary of
Other assets
follows:
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Leasing costs (principally commissions)
|
$
|
70,322
|
|
|
65,521
|
|
Accumulated amortization of leasing costs
|
(26,266
|
)
|
|
(26,340
|
)
|
Leasing costs (principally commissions), net of accumulated amortization
|
44,056
|
|
|
39,181
|
|
|
|
|
|
Straight-line rents receivable
|
30,739
|
|
|
28,369
|
|
Allowance for doubtful accounts on straight-line rents receivable
|
(158
|
)
|
|
(76
|
)
|
Straight-line rents receivable, net of allowance for doubtful accounts
|
30,581
|
|
|
28,293
|
|
|
|
|
|
Accounts receivable
|
3,907
|
|
|
6,824
|
|
Allowance for doubtful accounts on accounts receivable
|
(566
|
)
|
|
(809
|
)
|
Accounts receivable, net of allowance for doubtful accounts
|
3,341
|
|
|
6,015
|
|
|
|
|
|
Acquired in-place lease intangibles
|
21,814
|
|
|
21,231
|
|
Accumulated amortization of acquired in-place lease intangibles
|
(9,664
|
)
|
|
(8,642
|
)
|
Acquired in-place lease intangibles, net of accumulated amortization
|
12,150
|
|
|
12,589
|
|
|
|
|
|
Acquired above market lease intangibles
|
1,549
|
|
|
1,594
|
|
Accumulated amortization of acquired above market lease intangibles
|
(738
|
)
|
|
(736
|
)
|
Acquired above market lease intangibles, net of accumulated amortization
|
811
|
|
|
858
|
|
|
|
|
|
Mortgage loans receivable
|
4,656
|
|
|
4,752
|
|
Interest rate swap assets
|
4,183
|
|
|
4,546
|
|
Goodwill
|
990
|
|
|
990
|
|
Prepaid expenses and other assets
|
7,731
|
|
|
7,606
|
|
Total
Other assets
|
$
|
108,499
|
|
|
104,830
|
|
Liabilities
Unsecured bank credit facilities
increased
$
25,653,000
during the
nine
months ended
September 30, 2017
, mainly due to proceeds of
$281,342,000
exceeding repayments of
$255,988,000
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
$340,000
during the
nine
months ended
September 30, 2017
, primarily due to the amortization of debt issuance costs.
Secured debt
decreased
$
55,327,000
during the
nine
months ended
September 30, 2017
. The
decrease
resulted from the repayment of one mortgage loan and with a balance of
$45,069,000
, regularly scheduled principal payments of
$10,409,000
and amortization of premiums on
Secured debt
, offset by the amortization of debt issuance costs during the period.
Accounts payable and accrued expenses
increased
$14,129,000
during the first
nine
months of
2017
. A summary of the Company’s
Accounts payable and accrued expenses
follows:
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Property taxes payable
|
$
|
31,408
|
|
|
14,186
|
|
Development costs payable
|
11,876
|
|
|
9,844
|
|
Property capital expenditures payable
|
3,924
|
|
|
2,304
|
|
Interest payable
|
4,329
|
|
|
3,822
|
|
Dividends payable on unvested restricted stock
|
1,237
|
|
|
1,530
|
|
Book overdraft
(1)
|
7,565
|
|
|
14,452
|
|
Other payables and accrued expenses
|
6,491
|
|
|
6,563
|
|
Total
Accounts payable and accrued expenses
|
$
|
66,830
|
|
|
52,701
|
|
(1)
Represents unfunded outstanding checks for which the bank has not advanced cash to the Company.
Other liabilities
decreased
$
874,000
during the
nine
months ended
September 30, 2017
. A summary of the Company’s
Other liabilities
follows:
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Security deposits
|
$
|
16,361
|
|
|
14,782
|
|
Prepaid rent and other deferred income
|
8,702
|
|
|
9,795
|
|
|
|
|
|
Acquired below-market lease intangibles
|
4,071
|
|
|
4,012
|
|
Accumulated amortization of below-market lease intangibles
|
(1,968
|
)
|
|
(1,662
|
)
|
Acquired below-market lease intangibles, net of accumulated amortization
|
2,103
|
|
|
2,350
|
|
|
|
|
|
Interest rate swap liabilities
|
1,552
|
|
|
2,578
|
|
Prepaid tenant improvement reimbursements
|
256
|
|
|
343
|
|
Other liabilities
|
16
|
|
|
16
|
|
Total
Other liabilities
|
$
|
28,990
|
|
|
29,864
|
|
Equity
Additional paid-in capital
increased
$
82,274,000
during the
nine
months ended
September 30, 2017
, primarily due to the issuance of common stock under the Company's continuous common equity program (as discussed in
Liquidity and Capital Resources)
and
stock-based compensation (as discussed in Note 15 in the Notes to Consolidated Financial Statements). EastGroup issued
1,037,605
shares of common stock under its continuous common equity program with net proceeds to the Company of
$78,956,000
.
For the
nine
months ended
September 30, 2017
,
Distributions in excess of earnings
decreased
$
1,263,000
as a result of
Net Income Attributable to EastGroup Properties, Inc. Common Stockholders
of
$65,593,000
exceeding dividends on common stock of $
64,330,000
.
Accumulated other comprehensive income
increased
$650,000
during the
nine
months ended
September 30, 2017
. 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.
RESULTS OF OPERATIONS
(Comments are for the
three and nine
months ended
September 30, 2017
, compared to the
three and nine
months ended
September 30, 2016
.)
Net Income Attributable to EastGroup Properties, Inc. Common Stockholders
for the
three and nine
months ended
September 30, 2017
, was
$15,884,000
(
$.46
per basic and diluted share) and
$65,593,000
(
$1.94
per basic and
$1.93
per diluted share), respectively, compared to
$14,661,000
(
$.45
per basic and diluted share) and
$80,285,000
(
$2.47
per basic and diluted share) for the same periods in
2016
.
PNOI for the three months ended
September 30, 2017
, increased by $4,015,000, or 9.0%, compared to the same period in
2016
. PNOI increased $2,483,000 from newly developed and redeveloped properties, $1,342,000 from same property operations and $917,000 from 2016 and 2017 acquisitions; PNOI decreased $658,000 from operating properties sold in 2016 and 2017. Lease termination fee income was $65,000 and $316,000 for the three months ended
September 30, 2017
and
2016
, respectively. The Company recorded bad debt expense of $134,000 and $306,000 during the three months ended
September 30, 2017
and
2016
, respectively. Straight-lining of rent increased
Income from real estate operations
by $1,235,000 and $697,000 for the three months ended
September 30, 2017
and
2016
, respectively.
PNOI for the
nine
months ended
September 30, 2017
, increased by $10,968,000, or 8.3%, compared to the same period in
2016
. PNOI increased $7,503,000 from newly developed and redeveloped properties, $3,157,000 from same property operations and $2,628,000 from 2016 and 2017 acquisitions; PNOI decreased $2,157,000 from operating properties sold in 2016 and 2017. Lease termination fee income was $198,000 and $754,000 for the
nine
months ended
September 30, 2017
and
2016
, respectively. The Company recorded bad debt expense of $332,000 and $764,000 during the
nine
months ended
September 30, 2017
and
2016
, respectively. Straight-lining of rent increased
Income from real estate operations
by $2,674,000 and $1,921,000 for the
nine
months ended
September 30, 2017
and
2016
, respectively.
EastGroup signed 35 leases with free rent concessions on 845,000 square feet during the three months ended
September 30, 2017
, with total free rent concessions of $1,387,000 over the lives of the leases. During the same period of
2016
, the Company signed 29 leases with free rent concessions on 1,153,000 square feet with total free rent concessions of $1,657,000 over the lives of the leases. Free rent concessions during this period in 2016 included a 99 month, 404,000 square foot lease in Orlando with three months of free rent negotiated into the lease. In addition, free rent concessions during the third quarter of 2016 included free rent on leases assumed with the Flagler and Parc North acquisitions. Excluding the Orlando lease and the leases on properties acquired during the quarter, the Company signed leases with free rent concessions on 507,000 square feet with total free rent concessions of $711,000 over the lives of the leases.
During the
nine
months ended
September 30, 2017
, EastGroup signed 112 leases with free rent concessions on 3,179,000 square feet with total free rent concessions of $4,484,000 over the lives of the leases. During the same period of
2016
, EastGroup signed 112 leases with free rent concessions on 3,251,000 square feet with total free rent concessions of $4,290,000 over the lives of the leases.
Property expense to revenue ratios, defined as
Expenses from real estate operations
as a percentage of
Income from real estate operations
, were 29.3% for both the
three and nine
months ended
September 30, 2017
, respectively compared to 29.4% and 29.0% for the same periods in 2016. The Company’s percentage of leased square footage was 97.4% at
September 30, 2017
, compared to 97.3% at
September 30, 2016
. Occupancy at
September 30, 2017
was 95.6% compared to 96.3% at
September 30, 2016
.
Same property average occupancy represents the average month-end percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage for the same operating properties owned during the entire current period and prior year reporting period. Same property average occupancy for the
three and nine
months ended
September 30, 2017
, was 96.4% and 96.6%, respectively, compared to 96.1% and 96.3% for the same periods of
2016
.
The same property average rental rate calculated in accordance with GAAP represents the average annual rental rates of leases in place for the same operating properties owned during the entire current period and prior year reporting period. The same property average rental rate was $5.83 and $5.77 per square foot for the
three and nine
months ended
September 30, 2017
, compared to $5.52 and $5.48 per square foot for the same periods of
2016
.
Interest expense
decreased
$137,000
and
$673,000
for the
three and nine
months ended
September 30, 2017
, compared to the same periods in
2016
. The following table presents the components of
Interest expense
for the
three and nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
Increase
(Decrease)
|
|
2017
|
|
2016
|
|
Increase
(Decrease)
|
|
(In thousands)
|
VARIABLE RATE INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured bank credit facilities interest - variable rate
(excluding amortization of facility fees and debt issuance costs)
|
$
|
591
|
|
|
228
|
|
|
363
|
|
|
1,681
|
|
|
1,001
|
|
|
680
|
|
Amortization of facility fees - unsecured bank credit facilities
|
169
|
|
|
169
|
|
|
—
|
|
|
501
|
|
|
502
|
|
|
(1
|
)
|
Amortization of debt issuance costs - unsecured bank credit facilities
|
113
|
|
|
113
|
|
|
—
|
|
|
339
|
|
|
337
|
|
|
2
|
|
Total variable rate interest expense
|
873
|
|
|
510
|
|
|
363
|
|
|
2,521
|
|
|
1,840
|
|
|
681
|
|
FIXED RATE INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured bank credit facilities interest - fixed rate
(1)
(excluding amortization of facility fees and debt issuance costs)
|
407
|
|
|
208
|
|
|
199
|
|
|
1,208
|
|
|
208
|
|
|
1,000
|
|
Unsecured debt interest
(1)
(excluding amortization of debt issuance costs)
|
5,606
|
|
|
4,899
|
|
|
707
|
|
|
16,721
|
|
|
14,383
|
|
|
2,338
|
|
Secured debt interest
(excluding amortization of debt issuance costs)
|
2,904
|
|
|
4,158
|
|
|
(1,254
|
)
|
|
9,592
|
|
|
13,494
|
|
|
(3,902
|
)
|
Amortization of debt issuance costs - unsecured debt
|
119
|
|
|
336
|
|
|
(217
|
)
|
|
358
|
|
|
588
|
|
|
(230
|
)
|
Amortization of debt issuance costs - secured debt
|
79
|
|
|
114
|
|
|
(35
|
)
|
|
247
|
|
|
302
|
|
|
(55
|
)
|
Total fixed rate interest expense
|
9,115
|
|
|
9,715
|
|
|
(600
|
)
|
|
28,126
|
|
|
28,975
|
|
|
(849
|
)
|
Total interest
|
9,988
|
|
|
10,225
|
|
|
(237
|
)
|
|
30,647
|
|
|
30,815
|
|
|
(168
|
)
|
Less capitalized interest
|
(1,284
|
)
|
|
(1,384
|
)
|
|
100
|
|
|
(4,242
|
)
|
|
(3,737
|
)
|
|
(505
|
)
|
TOTAL INTEREST EXPENSE
|
$
|
8,704
|
|
|
8,841
|
|
|
(137
|
)
|
|
26,405
|
|
|
27,078
|
|
|
(673
|
)
|
|
|
(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
$363,000
and
$681,000
for the
three and nine
months ended
September 30, 2017
, respectively, as compared to the same periods in
2016
. The Company's average unsecured bank credit facilities borrowings and weighted average variable interest rates during both periods are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
Increase
(Decrease)
|
|
2017
|
|
2016
|
|
Increase
(Decrease)
|
|
(In thousands, except rates of interest)
|
Average borrowings on unsecured bank credit
facilities - variable rate
|
$
|
104,928
|
|
|
59,981
|
|
|
44,947
|
|
|
112,632
|
|
|
92,248
|
|
|
20,384
|
|
Weighted average variable interest rates
(excluding amortization of facility fees and debt issuance costs)
|
2.24
|
%
|
|
1.52
|
%
|
|
|
|
|
2.00
|
%
|
|
1.45
|
%
|
|
|
|
The Company's fixed rate interest expense decreased by
$600,000
and
$849,000
for the
three and nine
months ended
September 30, 2017
, respectively, as compared to the same periods in
2016
. 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
$1,254,000
and
$3,902,000
during the
three and nine
month periods ended
September 30, 2017
, respectively, as compared to the same periods in
2016
as a result of debt repayments and regularly scheduled principal payments. Regularly scheduled principal payments on secured debt were
$10,409,000
during the
nine
months ended
September 30, 2017
. During the year ended December 31, 2016, regularly scheduled principal payments on secured debt were $17,037,000. The details of the secured debt repaid in 2016 and 2017 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
SECURED DEBT REPAID IN 2016 AND 2017
|
|
Interest Rate
|
|
Date Repaid
|
|
Payoff Amount
|
|
|
|
|
|
|
(In thousands)
|
Huntwood and Wiegman I
|
|
5.68%
|
|
08/05/2016
|
|
$
|
24,543
|
|
Alamo Downs, Arion 1-15 & 17, Rampart I-IV, Santan 10 I and
World Houston 16
|
|
5.97%
|
|
09/06/2016
|
|
51,194
|
|
Weighted Average/Total Amount for 2016
|
|
5.88%
|
|
|
|
$
|
75,737
|
|
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
|
|
Weighted Average/Total Amount for 2016 and 2017
|
|
5.76%
|
|
|
|
$
|
120,806
|
|
EastGroup did not obtain any new secured debt during 2016 or during the first
nine
months of 2017.
The decreases in secured debt interest expense were partially offset by increases in interest expense from fixed rate unsecured bank credit facilities and unsecured debt. The Company's interest expense from fixed rate unsecured bank credit facilities increased by
$199,000
and
$1,000,000
during the
three and nine
months ended
September 30, 2017
, respectively, as compared to the same periods in
2016
. In August 2016, EastGroup repaid (with no penalty) an $80 million unsecured term loan with an effectively fixed interest rate of 2.770% and an original maturity date of August 15, 2018. On the same day, the Company borrowed $80 million through its $300 million unsecured bank credit facility; the maturity date for the credit facility is July 30, 2019. The Company re-designated the interest rate swap that was previously applied to the $80 million unsecured term loan to the $80 million unsecured bank credit facility borrowing. The $80 million unsecured bank credit facility draw has an effectively fixed interest rate of 2.020% through the interest rate swap's maturity date of August 15, 2018.
The Company's interest expense from unsecured debt increased
$707,000
and
$2,338,000
during the
three and nine
months ended
September 30, 2017
, respectively, compared to the same periods of 2016 as a result of the Company's unsecured debt activity described below. EastGroup did not obtain any new unsecured debt in the first nine months of 2017. The details of the unsecured debt obtained in 2016 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
NEW UNSECURED DEBT IN 2016
|
|
Effective Interest Rate
|
|
Date Obtained
|
|
Maturity Date
|
|
Amount
|
|
|
|
|
|
|
|
|
(In thousands)
|
$65 Million Unsecured Term Loan
(1)
|
|
2.863%
|
|
04/01/2016
|
|
04/01/2023
|
|
$
|
65,000
|
|
$40 Million Unsecured Term Loan
(2)
|
|
2.335%
|
|
07/29/2016
|
|
07/30/2021
|
|
40,000
|
|
$60 Million Senior Unsecured Notes
|
|
3.480%
|
|
12/15/2016
|
|
12/15/2024
|
|
60,000
|
|
$40 Million Senior Unsecured Notes
|
|
3.750%
|
|
12/15/2016
|
|
12/15/2026
|
|
40,000
|
|
Weighted Average/Total Amount for 2016
|
|
3.114%
|
|
|
|
|
|
$
|
205,000
|
|
|
|
(1)
|
The interest rate on this unsecured term loan is comprised of LIBOR plus 165 basis points subject to a pricing grid for changes in the Company's coverage ratings. The Company entered into an interest rate swap to convert the loan's LIBOR rate to a fixed interest rate, providing the Company a weighted average effective interest rate on the term loan of 2.863% as of
September 30, 2017
. See Note 13 in the Notes to Consolidated Financial Statements for additional information on the interest rate swaps.
|
|
|
(2)
|
The interest rate on this unsecured term loan is comprised of LIBOR plus 110 basis points subject to a pricing grid for changes in the Company's coverage ratings. The Company entered into an interest rate swap to convert the loan's LIBOR rate to a fixed interest rate, providing the Company a weighted average effective interest rate on the term loan of 2.335% as of
September 30, 2017
. See Note 13 in the Notes to Consolidated Financial Statements for additional information on the interest rate swaps.
|
Interest costs during the period of construction of real estate properties are capitalized and offset against interest expense. Capitalized interest decreased
$100,000
for the three months and increased
$505,000
for the nine months ended
September 30, 2017
, as compared to the same periods of
2016
. The variances are due to changes in development spending and borrowing rates.
Depreciation and amortization
expense increased $1,650,000 and $4,345,000 for the
three and nine
months ended
September 30, 2017
, respectively, as compared to the same periods in
2016
primarily due to the operating properties acquired by the Company in 2016 and 2017 and the properties transferred from
Development
in 2016 and 2017, partially offset by operating properties sold in 2016 and 2017.
Gain on sales of real estate investments,
which includes gains on the sales of operating properties, decreased $20,458,000 for the nine months ended
September 30, 2017
, respectively, as compared to the same period in 2016. There were no sales during the three months ended
September 30, 2017
and 2016. The following paragraphs explain the changes in detail.
The Company did not sell any operating properties during the first or third quarters of 2017. During the second quarter of 2017, EastGroup sold the following operating properties in separate transactions: Stemmons Circle in Dallas and Techway Southwest I-IV in Houston. The properties contain a combined 514,000 square feet and were sold for $38,031,000; EastGroup recognized gains on the sales of $21,855,000.
During the first quarter of 2016, EastGroup sold the following operating properties in separate transactions: Northwest Point Distribution and Service Centers in Houston and North Stemmons III in Dallas. The properties contain a combined 292,000 square feet and were sold for $18,850,000. EastGroup recognized gains on the sales of $11,332,000.
During the second quarter of 2016, the Company sold the following operating properties in separate transactions: America Plaza, Lockwood Distribution Center, and West Loop Distribution Center 1 & 2 in Houston; North Stemmons II in Dallas; two of its four Interstate Commons Distribution Center buildings in Phoenix; and Castilian Research Center in Santa Barbara, California. The properties contain a combined 872,000 square feet and were sold for $55,210,000. EastGroup recognized gains on the sales of $30,981,000.
During the third quarter of 2016, the Company did not sell any operating properties.
Real Estate Improvements
Real Estate Improvements for EastGroup's operating properties for the
three and nine
months ended
September 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
Estimated Useful Life
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
Upgrade on Acquisitions
|
40 yrs
|
|
$
|
98
|
|
|
65
|
|
|
157
|
|
|
352
|
|
Tenant Improvements:
|
|
|
|
|
|
|
|
|
|
|
|
New Tenants
|
Lease Life
|
|
2,906
|
|
|
3,470
|
|
|
8,189
|
|
|
7,379
|
|
Renewal Tenants
|
Lease Life
|
|
1,002
|
|
|
671
|
|
|
2,732
|
|
|
2,008
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Building Improvements
|
5-40 yrs
|
|
688
|
|
|
1,451
|
|
|
2,132
|
|
|
3,928
|
|
Roofs
|
5-15 yrs
|
|
1,209
|
|
|
680
|
|
|
3,421
|
|
|
2,512
|
|
Parking Lots
|
3-5 yrs
|
|
903
|
|
|
768
|
|
|
1,639
|
|
|
1,047
|
|
Other
|
5 yrs
|
|
696
|
|
|
273
|
|
|
933
|
|
|
606
|
|
Total Real Estate Improvements
(1)
|
|
|
$
|
7,502
|
|
|
7,378
|
|
|
19,203
|
|
|
17,832
|
|
|
|
(1)
|
Reconciliation of Total Real Estate Improvements to
Real estate improvements
on the Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Total Real Estate Improvements
|
|
$
|
19,203
|
|
|
17,832
|
|
Change in Real Estate Property Payables
|
|
(825
|
)
|
|
(241
|
)
|
Real Estate Improvements on the
Consolidated Statements of Cash Flows
|
|
$
|
18,378
|
|
|
17,591
|
|
Capitalized Leasing Costs
The Company’s leasing costs (principally commissions) are capitalized and included in
Other assets
. The costs are amortized over the terms of the associated leases and are included in
Depreciation and amortization
expense. Capitalized leasing costs for the
three and nine
months ended
September 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
Estimated Useful Life
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
Development
|
Lease Life
|
|
$
|
1,196
|
|
|
803
|
|
|
3,624
|
|
|
2,659
|
|
New Tenants
|
Lease Life
|
|
1,489
|
|
|
1,425
|
|
|
5,264
|
|
|
4,447
|
|
Renewal Tenants
|
Lease Life
|
|
829
|
|
|
1,491
|
|
|
3,926
|
|
|
3,710
|
|
Total Capitalized Leasing Costs
|
|
|
$
|
3,514
|
|
|
3,719
|
|
|
12,814
|
|
|
10,816
|
|
Amortization of Leasing Costs
|
|
|
$
|
2,587
|
|
|
2,450
|
|
|
7,576
|
|
|
7,281
|
|
Real Estate Sold and Held for Sale/Discontinued Operations
The Company considers a real estate property to be held for sale when it meets the criteria established under ASC 360,
Property, Plant and Equipment,
including when it is probable that the property will be sold within a year. Real estate properties held for sale are reported at the lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale.
In accordance with FASB ASU 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,
the Company would report a disposal of a component of an entity or a group of components of an entity in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, the Company would provide additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. EastGroup performs an analysis of properties sold to determine whether the sales qualify for discontinued operations presentation.
The Company did not classify any properties as held for sale as of
September 30, 2017
and
December 31, 2016
.
The Company does not consider its sales in 2016 and the first
nine
months of 2017 to be disposals of a component of an entity or a group of components of an entity representing a strategic shift that has (or will have) a major effect on the entity's operations and financial results.
During the first
nine
months of
2017
, the Company sold Stemmons Circle and Techway Southwest I-IV. The properties, which contain
514,000
square feet located in Dallas and Houston, were sold for
$38.0 million
and the Comany recognized net gains on the sales of
$21.9 million
. The Company also sold
5
acres of land in Dallas for
$850,000
and recognized a loss of
$40,000
.
During 2016, EastGroup sold the following operating properties: Northwest Point Distribution and Service Centers, North Stemmons II and III, America Plaza, Lockwood Distribution Center, West Loop Distribution Center 1 & 2, two of its four Interstate Commons Distribution Center buildings, Castilian Research Center and Memphis I. The properties, which contain
1,256,000
square feet and are located in Houston, Dallas, Phoenix, Santa Barbara and Memphis, were sold for $75.7 million and the Company recognized net gains on the sales of $42.2 million. The Company also sold 25 acres of land in Dallas, Orlando and Houston for
$5.4 million
and recognized gains on sales of
$733,000
.
The gains and losses on the sales of land are included in
Other
, and the gains and losses on the sales of operating properties are included in
Gain on sales of real estate investments
. See Note 7 in the Notes to Consolidated Financial Statements for more information related to discontinued operations and gains and losses on sales of real estate investments.
RECENT ACCOUNTING PRONOUNCEMENTS
EastGroup has evaluated all ASUs recently released by the FASB through the date the financial statements were issued and determined that the following ASUs apply to the Company.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB issued further guidance in ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,
that provides clarifying guidance in certain narrow areas and adds some practical expedients. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The effective date of ASU 2014-09 was extended by one year by ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.
The new standard is effective for the Company on January 1, 2018, and the Company plans to use the modified retrospective approach upon adoption. The Company has made significant progress in evaluating the effect of ASU 2014-09 on its consolidated financial statements and related disclosures beginning with the Form 10-Q for the period ending March 31, 2018. The Company has completed its inventory of its sources of revenue and does not believe there will be a material financial statement impact or that its pattern of revenue recognition will be materially impacted by the adoption of ASU 2014-09.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
which requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized costs on the balance sheet. EastGroup plans to adopt ASU 2016-01 effective January 1, 2018. The Company does not anticipate the adoption of ASU 2016-01 will have a material impact on the Company's financial condition or results of operations.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The Company is a lessee on a limited number of leases, including office and ground leases, and 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 changes for the Company related to lessor accounting include bifurcating its revenue into lease and non-lease components and the new standard's narrow definition of initial direct costs for leases. The new definition will result in certain costs (primarily legal costs related to lease negotiations) being expensed rather than capitalized upon adoption of the new standard. Public business entities are required to apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. EastGroup plans to adopt ASU 2016-02 effective January 1, 2019. The Company is continuing the process of evaluating and quantifying the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures beginning with the Form 10-Q for the period ending March 31, 2019.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The ASU is intended to improve the accounting for share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment awards are simplified with the ASU, including income tax consequences, classification of awards as equity or liabilities and classification on the Consolidated Statements of Cash Flows. ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those fiscal years; early adoption is permitted. EastGroup adopted ASU 2016-09 effective January 1, 2017. As a result, the Company elected to reverse compensation cost of any forfeited awards when they occur and will continue to classify the cash flows resulting from remitting cash to the tax authorities for the payment of taxes on the vesting of share-based payment awards as a financing activity on the Consolidated Statements of Cash Flows. In addition, upon vesting of share-based payments, the Company will withhold up to the maximum individual statutory tax rate and classify the entire award as equity. The adoption of ASU 2016-09 did not have a material impact on the Company's financial condition or results of operations.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which addresses certain cash flow issues, including how debt prepayments or debt extinguishment costs and distributions received from equity method investees are presented. ASU 2016-15 is effective for public business entities for annual
periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, and the Company has adopted ASU 2016-15 effective January 1, 2017. The adoption of ASU 2016-15 did not have a material impact on the Company's financial condition or results of operations.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The ASU is intended to provide a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. The Company has determined that some of its real estate property acquisitions may be considered to be acquisitions of groups of similar identifiable assets; therefore, the acquisitions are not considered to be acquisitions of a business. EastGroup adopted ASU 2017-01 for transactions beginning on October 1, 2016. As a result, the Company has capitalized acquisition costs related to its fourth quarter 2016 and first quarter 2017 acquisitions as they were determined not to be acquisitions of a business.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Others (Topic 350): Simplifying the Test for Goodwill Impairment,
which simplifies the measurement of goodwill impairment by eliminating the requirement of performing a hypothetical purchase price allocation to measure goodwill impairment. The Company adopted ASU 2017-04 effective January 1, 2017, and is applying the new guidance for goodwill impairment tests with measurement dates after January 1, 2017. The adoption of ASU 2017-04 did not have a material impact on the Company's financial condition or results of operations.
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 plans to adopt ASU 2017-09 on January 1, 2018, and it does not anticipate that the adoption of ASU 2017-09 will have a material impact on its financial condition or results of operations, as the Company does not expect to have 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $
122,706,000
for the
nine
months ended
September 30, 2017
. The primary other sources of cash were borrowings on unsecured bank credit facilities, proceeds from common stock offerings and proceeds from the sales of real estate investments and non-operating real estate. The Company distributed $
64,623,000
in common stock dividends during the
nine
months ended
September 30, 2017
. Other primary uses of cash were for repayments on unsecured bank credit facilities and secured debt, the construction and development of properties, purchases of real estate and capital improvements at various properties.
Total debt at
September 30, 2017
and
December 31, 2016
is detailed below. The Company’s unsecured bank credit facilities and unsecured debt instruments have certain restrictive covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage, and the Company was in compliance with all of its debt covenants at
September 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Unsecured bank credit facilities - variable rate, carrying amount
|
$
|
137,374
|
|
|
112,020
|
|
Unsecured bank credit facilities - fixed rate, carrying amount
(1)
|
80,000
|
|
|
80,000
|
|
Unamortized debt issuance costs
|
(731
|
)
|
|
(1,030
|
)
|
Unsecured bank credit facilities
|
216,643
|
|
|
190,990
|
|
|
|
|
|
Unsecured debt - fixed rate, carrying amount
(1)
|
655,000
|
|
|
655,000
|
|
Unamortized debt issuance costs
|
(1,822
|
)
|
|
(2,162
|
)
|
Unsecured debt
|
653,178
|
|
|
652,838
|
|
|
|
|
|
Secured debt - fixed rate, carrying amount
(1)
|
203,093
|
|
|
258,594
|
|
Unamortized debt issuance costs
|
(915
|
)
|
|
(1,089
|
)
|
Secured debt
|
202,178
|
|
|
257,505
|
|
|
|
|
|
Total debt
|
$
|
1,071,999
|
|
|
1,101,333
|
|
|
|
(1)
|
These loans have a fixed interest rate or an effectively fixed interest rate due to interest rate swaps.
|
EastGroup has a $300 million unsecured revolving credit facility with a group of nine banks that matures in July 2019. The credit facility contains options for a one-year extension (at the Company's election) and a $150 million expansion (with agreement by all parties). The interest rate on each tranche is usually reset on a monthly basis and as of
September 30, 2017
, was LIBOR plus 100 basis points with an annual facility fee of 20 basis points. The margin and facility fee are subject to changes in the Company's credit ratings. The Company has designated an interest rate swap to an $80 million unsecured bank credit facility draw that effectively fixes the interest rate on the $80 million draw to 2.020% through the interest rate swap's maturity date of August 15, 2018. As of
September 30, 2017
, EastGroup had an additional $121,000,000 of variable rate borrowings on this unsecured bank credit facility with a weighted average interest rate of 2.235%.
The Company also has a $35 million unsecured revolving credit facility that matures in July 2019. This credit facility automatically extends for one year if the extension option in the $300 million revolving credit facility is exercised. The interest rate is reset on a daily basis and as of
September 30, 2017
, was LIBOR plus 100 basis points with an annual facility fee of 20 basis points. The margin and facility fee are subject to changes in the Company's credit ratings. At
September 30, 2017
, the interest rate was 2.232% on a balance of $16,374,000.
As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, to replace the short-term bank borrowings. The Company believes its current operating cash flow and unsecured bank credit facilities provide the capacity to fund the operations of the Company. The Company also believes it can obtain debt financing and issue common and/or preferred equity. For future debt issuances, the Company intends to issue primarily unsecured fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps. The Company may also access the public debt market in the future as a means to raise capital.
In August, EastGroup repaid (with no penalty) a mortgage loan with a balance of $45.1 million, an interest rate of 5.57% and an original maturity date of September 5, 2017. The loan was collateralized by 1.4 million square feet of operating properties.
In September, the Company executed a commitment letter for $60 million of senior unsecured private placement notes with an insurance company. The notes, which are expected to close in mid-December, have a seven-year term and a fixed interest rate of 3.46% 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.
On March 6, 2017, EastGroup filed a prospectus supplement pursuant to which the Company may issue and sell up to 10,000,000 shares of its common stock from time to time. The Company previously sold an aggregate of 2,228,203 shares of common stock under the original sales agency financing agreements pursuant to a prospectus supplement dated February 14, 2014. During the
nine
months ended
September 30, 2017
, EastGroup issued and sold
1,037,605
shares of common stock under its continuous equity program at an average price of $77.10 per share with gross proceeds to the Company of $80,000,000. The Company incurred
offering-related costs of $1,044,000 during the
nine
months, resulting in net proceeds to the Company of
$78,956,000
. As of
October 23, 2017
, the Company has 6,734,192 shares of common stock remaining to sell under the program.
The Company anticipates that its current cash balance, operating cash flows, borrowings under its unsecured bank credit facilities, proceeds from new debt and/or proceeds from the issuance of equity instruments will be adequate for (i) operating and administrative expenses, (ii) normal repair and maintenance expenses at its properties, (iii) debt service obligations, (iv) maintaining compliance with its debt covenants, (v) distributions to stockholders, (vi) capital improvements, (vii) purchases of properties, (viii) development, and (ix) any other normal business activities of the Company, both in the short-term and long-term.
Contractual Obligations
EastGroup’s fixed, non-cancelable obligations as of
December 31, 2016
, did not materially change during the
nine
months ended
September 30, 2017
, except for the changes in
Unsecured bank credit facilities
and
Secured debt
discussed above.
INFLATION AND OTHER ECONOMIC CONSIDERATIONS
Most of the Company's leases include scheduled rent increases. Additionally, most of the Company's leases require the tenants to pay their pro rata share of operating expenses, including real estate taxes, insurance and common area maintenance, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation. In the event inflation causes increases in the Company’s general and administrative expenses or the level of interest rates, such increased costs would not be passed through to tenants and could adversely affect the Company’s results of operations.
EastGroup's financial results are affected by general economic conditions in the markets in which the Company's properties are located. The state of the economy, or other adverse changes in general or local economic conditions, could result in the inability of some of the Company's existing tenants to make lease payments and may therefore increase bad debt expense. It may also impact the Company’s ability to (i) renew leases or re-lease space as leases expire, or (ii) lease development space. In addition, an economic downturn or recession could also lead to an increase in overall vacancy rates or a decline in rents the Company can charge to re-lease properties upon expiration of current leases. In all of these cases, EastGroup’s cash flows would be adversely affected.