10-K 1 egp1231201410k.htm 10-K EGP 12.31.2014 10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014                COMMISSION FILE NUMBER 1-07094


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.)
 
 
190 EAST CAPITOL STREET
 
SUITE 400
 
JACKSON, MISSISSIPPI
39201
(Address of principal executive offices)
(Zip code)
 
 
Registrant’s telephone number:  (601) 354-3555
 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SHARES OF COMMON STOCK, $.0001 PAR VALUE,
NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES (x) NO ( )
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  YES ( ) NO (x)
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  (x)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   (Check one):
Large Accelerated Filer (x)     Accelerated Filer ( )      Non-accelerated Filer ( )      Smaller Reporting Company ( )
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ( ) NO (x)
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2014, the last business day of the Registrant's most recently completed second fiscal quarter:  $1,954,758,000.

1



The number of shares of common stock, $.0001 par value, outstanding as of February 13, 2015 was 32,205,134.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III.

2




 
 
Page
PART I
 
  
PART II
 
 
PART III
 
 
PART IV
 
 



3



PART I

ITEM 1.  BUSINESS.

Organization
EastGroup Properties, Inc. (the Company or EastGroup) is an equity real estate investment trust (REIT) organized in 1969.  The Company has elected to be taxed and intends to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code (the Code), as amended.

Available Information
The Company maintains a website at eastgroup.net.  The Company posts its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files or furnishes such materials to the Securities and Exchange Commission (SEC).  In addition, the Company's website includes items related to corporate governance matters, including, among other things, the Company's corporate governance guidelines, charters of various committees of the Board of Directors, and the Company's code of business conduct and ethics applicable to all employees, officers and directors.  The Company intends to disclose on its website any amendment to, or waiver of, any provision of this code of business conduct and ethics applicable to the Company's directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC or the New York Stock Exchange.  Copies of these reports and corporate governance documents may be obtained, free of charge, from the Company's website.  Any shareholder also may obtain copies of these documents, free of charge, by sending a request in writing to: Investor Relations, EastGroup Properties, Inc., 190 East Capitol Street, Suite 400, Jackson, MS 39201-2152.

Administration
EastGroup maintains its principal executive office and headquarters in Jackson, Mississippi.  The Company also has regional offices in Orlando, Houston and Phoenix and asset management offices in Charlotte and Dallas.  EastGroup has property management offices in Jacksonville, Tampa, Fort Lauderdale and San Antonio.  Offices at these locations allow the Company to provide property management services to all of its Florida, Texas (except Austin and El Paso), Arizona, Mississippi and North Carolina properties, which together account for 80% of the Company’s total portfolio on a square foot basis.  In addition, the Company currently provides property administration (accounting of operations) for its entire portfolio.  The regional offices in Florida, Texas and Arizona provide oversight of the Company's development program.  As of February 13, 2015, EastGroup had 69 full-time employees and 2 part-time employees.

Operations
EastGroup is focused on the development, acquisition and operation of industrial properties in major Sunbelt markets throughout the United States with an emphasis in the states of Florida, Texas, Arizona, California and North Carolina.  The Company’s goal is to maximize shareholder value by being a leading provider of functional, flexible and quality business distribution space for location sensitive tenants primarily in the 5,000 to 50,000 square foot range.  EastGroup’s strategy for growth is based on the ownership of premier distribution facilities generally clustered near major transportation features in supply constrained submarkets.  Over 99% of the Company’s revenue consists of rental income from real estate properties.

During 2014, EastGroup increased its holdings in real estate properties through its acquisition and development programs.  The Company purchased three warehouse distribution complexes (635,000 square feet) and 40.1 acres of development land for a total of $56.3 million.  Also during 2014, the Company began construction of 17 development projects containing 1,543,000 square feet and transferred 10 properties (949,000 square feet) from its development program to real estate properties with costs of $59.5 million at the date of transfer.   

Typically, the Company initially funds its development and acquisition programs through its $250 million unsecured bank credit facilities. As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt to replace short-term bank borrowings. In March 2014, Moody's Investors Service affirmed the Company's issuer rating of Baa2 with a stable outlook. In October 2014, Fitch Ratings affirmed the Company's issuer rating of BBB with a stable outlook. A security rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. The Company intends to obtain primarily unsecured fixed rate debt in the future. The Company may also access the public debt market in the future as a means to raise capital.

EastGroup holds its properties as long-term investments but may determine to sell certain properties that no longer meet its investment criteria.  The Company may provide financing in connection with such sales of property if market conditions require.  In addition, the Company may provide financing to a partner or co-owner in connection with an acquisition of real estate in certain situations.

4




Subject to the requirements necessary to maintain EastGroup’s qualifications as a REIT, the Company may acquire securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over those entities.

The Company intends to continue to qualify as a REIT under the Code.  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.
 
EastGroup has no present intention of acting as an underwriter of offerings of securities of other issuers.  The strategies and policies set forth above were determined and are subject to review by EastGroup's Board of Directors, which may change such strategies or policies based upon its evaluation of the state of the real estate market, the performance of EastGroup's assets, capital and credit market conditions, and other relevant factors.  EastGroup provides annual reports to its stockholders, which contain financial statements audited by the Company’s independent registered public accounting firm.

Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an owner of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property.  Many such laws impose liability without regard to whether the owner knows of, or was responsible for, the presence of such hazardous or toxic substances.  The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to use such property as collateral in its borrowings.  EastGroup’s properties have been subjected to Phase I Environmental Site Assessments (ESAs) by independent environmental consultants and as necessary, have been subjected to Phase II ESAs.  These reports have not revealed any potential significant environmental liability.  Management of EastGroup is not aware of any environmental liability that would have a material adverse effect on EastGroup’s business, assets, financial position or results of operations.

ITEM 1A.  RISK FACTORS.

In addition to the other information contained or incorporated by reference in this document, readers should carefully consider the following risk factors.  Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on the Company's financial condition and the performance of its business.  The Company refers to itself as "we", "us" or "our" in the following risk factors.

Real Estate Industry Risks
We face risks associated with local real estate conditions in areas where we own properties.  We may be adversely affected by general economic conditions and local real estate conditions.  For example, an oversupply of industrial properties in a local area or a decline in the attractiveness of our properties to tenants would have a negative effect on us.  Other factors that may affect general economic conditions or local real estate conditions include:

population and demographic trends;
employment and personal income trends;
income and other tax laws;
changes in interest rates and availability and costs of financing;
increased operating costs, including insurance premiums, utilities and real estate taxes, due to inflation and other factors which may not necessarily be offset by increased rents;
changes in the price of oil; and
construction costs.

We may be unable to compete for properties and tenants.  The real estate business is highly competitive.  We compete for interests in properties with other real estate investors and purchasers, some of whom have greater financial resources, revenues and geographical diversity than we have.  Furthermore, we compete for tenants with other property owners.  All of our industrial properties are subject to significant local competition.  We also compete with a wide variety of institutions and other investors for capital funds necessary to support our investment activities and asset growth.

We are subject to significant regulation that constrains our activities.  Local zoning and land use laws, environmental statutes and other governmental requirements restrict our expansion, rehabilitation and reconstruction activities.  These regulations may prevent

5



us from taking advantage of economic opportunities.  Legislation such as the Americans with Disabilities Act may require us to modify our properties, and noncompliance could result in the imposition of fines or an award of damages to private litigants.  Future legislation may impose additional requirements.  We cannot predict what requirements may be enacted or what changes may be implemented to existing legislation.

Risks Associated with Our Properties
We may be unable to lease space.  When a lease expires, a tenant may elect not to renew it.  We may not be able to re-lease the property on similar terms, if we are able to re-lease the property at all.  The terms of renewal or re-lease (including the cost of required renovations and/or concessions to tenants) may be less favorable to us than the prior lease.  We also routinely develop properties with no pre-leasing.  If we are unable to lease all or a substantial portion of our properties, or if the rental rates upon such leasing are significantly lower than expected rates, our cash generated before debt repayments and capital expenditures and our ability to make expected distributions to stockholders may be adversely affected.

We have been and may continue to be affected negatively by tenant bankruptcies and leasing delays.  At any time, a tenant may experience a downturn in its business that may weaken its financial condition.  Similarly, a general decline in the economy may result in a decline in the demand for space at our industrial properties.  As a result, our tenants may delay lease commencement, fail to make rental payments when due, or declare bankruptcy.  Any such event could result in the termination of that tenant’s lease and losses to us, and distributions to investors may decrease.  We receive a substantial portion of our income as rents under mid-term and long-term leases.  If tenants are unable to comply with the terms of their leases because of rising costs or falling sales, we may deem it advisable to modify lease terms to allow tenants to pay a lower rent or a smaller share of taxes, insurance and other operating costs.  If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to the tenant.  We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises.  If a tenant becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the tenant.  A tenant’s default on its obligations to us could adversely affect our financial condition and the cash we have available for distribution.

We face risks associated with our property development.  We intend to continue to develop properties where market conditions warrant such investment.  Once made, our investments may not produce results in accordance with our expectations.  Risks associated with our current and future development and construction activities include:

the availability of favorable financing alternatives;
the risk that we may not be able to obtain land on which to develop or that due to the increased cost of land, our activities may not be as profitable;
construction costs exceeding original estimates due to rising interest rates and increases in the costs of materials and labor;
construction and lease-up delays resulting in increased debt service, fixed expenses and construction costs;
expenditure of funds and devotion of management's time to projects that we do not complete;
fluctuations of occupancy and rental rates at newly completed properties, which depend on a number of factors, including market and economic conditions, resulting in lower than projected rental rates and a corresponding lower return on our investment; and
complications (including building moratoriums and anti-growth legislation) in obtaining necessary zoning, occupancy and other governmental permits.

We face risks associated with property acquisitions.  We acquire individual properties and portfolios of properties and intend to continue to do so.  Our acquisition activities and their success are subject to the following risks:

when we are able to locate a desired property, competition from other real estate investors may significantly increase the purchase price;
acquired properties may fail to perform as expected;
the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates;
acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures;
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and as a result, our results of operations and financial condition could be adversely affected; and

6



we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, to the transferor with respect to unknown liabilities. As a result, if a claim were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow.

Coverage under our existing insurance policies may be inadequate to cover losses.  We generally maintain insurance policies related to our business, including casualty, general liability and other policies, covering our business operations, employees and assets as appropriate for the markets where our properties and business operations are located.  However, we would be required to bear all losses that are not adequately covered by insurance.  In addition, there may be certain losses that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so, including losses due to floods, wind, earthquakes, acts of war, acts of terrorism or riots.  If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, then we could lose the capital we invested in the properties, as well as the anticipated future revenue from the properties.  In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.

We face risks due to lack of geographic and real estate sector diversity.  Substantially all of our properties are located in the Sunbelt region of the United States with an emphasis in the states of Florida, Texas, Arizona, California and North Carolina. As of December 31, 2014, we owned operating properties totaling 6.2 million square feet in Houston, which represents 18.6% of the Company's total Real estate properties on a square foot basis.  A downturn in general economic conditions and local real estate conditions in these geographic regions, as a result of oversupply of or reduced demand for industrial properties, local business climate, business layoffs and changing demographics, would have a particularly strong adverse effect on us.  Our investments in real estate assets are concentrated in the industrial distribution sector.  This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities included other sectors of the real estate industry.

We face risks due to the illiquidity of real estate which may limit our ability to vary our portfolio.  Real estate investments are relatively illiquid.  Our ability to vary our portfolio in response to changes in economic and other conditions will therefore be limited.  In addition, because of our status as a REIT, the Internal Revenue Code limits our ability to sell our properties.  If we must sell an investment, we cannot ensure that we will be able to dispose of the investment on terms favorable to the Company.

We are subject to environmental laws and regulations.  Current and previous real estate owners and operators may be required under various federal, state and local laws, ordinances and regulations to investigate and clean up hazardous substances released at the properties they own or operate.  They may also be liable to the government or to third parties for substantial property or natural resource damage, investigation costs and cleanup costs.  Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances.  In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs the government incurs in connection with the contamination.  Contamination may adversely affect the owner’s ability to use, sell or lease real estate or to borrow using the real estate as collateral.  We have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of environmental conditions or violations with respect to the properties we currently or formerly owned.  Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed of, released from, or present at the property.  A conveyance of the property, therefore, may not relieve the owner or operator from liability.  Although ESAs have been conducted at our properties to identify potential sources of contamination at the properties, such ESAs do not reveal all environmental liabilities or compliance concerns that could arise from the properties.  Moreover, material environmental liabilities or compliance concerns may exist, of which we are currently unaware, that in the future may have a material adverse effect on our business, assets or results of operations.

Compliance with new laws or regulations related to climate change, including compliance with “green” building codes, may require us to make improvements to our existing properties.  Proposed legislation could also increase the costs of energy and utilities.  The cost of the proposed legislation may adversely affect our financial position, results of operations and cash flows.  We may be adversely affected by floods, hurricanes and other climate related events.

Financing Risks
We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk.  We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest.  In addition, certain of our mortgages will have significant outstanding principal balances on their maturity dates, commonly known as “balloon payments.”  Therefore, we will likely need to refinance at least a portion of our outstanding debt as it matures.  There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt.


7



We face risks associated with our dependence on external sources of capital.  In order to qualify as a REIT, we are required each year to distribute to our stockholders at least 90% of our ordinary taxable income, and we are subject to tax on our income to the extent it is not distributed.  Because of this distribution requirement, we may not be able to fund all future capital needs from cash retained from operations.  As a result, to fund capital needs, we rely on third-party sources of capital, which we may not be able to obtain on favorable terms, if at all.  Our access to third-party sources of capital depends upon a number of factors, including (i) general market conditions; (ii) the market’s perception of our growth potential; (iii) our current and potential future earnings and cash distributions; and (iv) the market price of our capital stock.  Additional debt financing may substantially increase our debt-to-total market capitalization ratio.  Additional equity financing may dilute the holdings of our current stockholders.

Covenants in our credit agreements could limit our flexibility and adversely affect our financial condition.  The terms of our various credit agreements and other indebtedness require us to comply with a number of customary financial and other covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage.  These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment obligations.  If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flow and our financial condition would be adversely affected.

Adverse changes in our credit ratings could impair our ability to obtain additional debt and equity financing on favorable terms, if at all. Our credit ratings are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analysis of us. Our credit ratings can affect the amount and type of capital we can access, as well as the terms of any financings we may obtain. There can be no assurance that we will be able to maintain our current credit ratings. In the event our current credit ratings deteriorate, it may be more difficult or expensive to obtain additional financing or refinance existing obligations and commitments. Also, a downgrade in our credit ratings would trigger additional costs or other potentially negative consequences under our current and future credit facilities and debt instruments.

Increases in interest rates would increase our interest expense. At December 31, 2014, we had $99.4 million of variable rate debt outstanding not protected by interest rate hedge contracts. We may incur additional variable rate debt in the future. If interest rates increase, then so would the interest expense on our unhedged variable rate debt, which would adversely affect our financial condition and results of operations. From time to time, we manage our exposure to interest rate risk with interest rate hedge contracts that effectively fix or cap a portion of our variable rate debt. In addition, we refinance fixed rate debt at times when we believe rates and terms are appropriate. Our efforts to manage these exposures may not be successful. Our use of interest rate hedge contracts to manage risk associated with interest rate volatility may expose us to additional risks, including a risk that a counterparty to a hedge contract may fail to honor its obligations. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Termination of interest rate hedge contracts typically involves costs, such as transaction fees or breakage costs.

A lack of any limitation on our debt could result in our becoming more highly leveraged.  Our governing documents do not limit the amount of indebtedness we may incur.  Accordingly, our Board of Directors may incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT.  We might become more highly leveraged as a result, and our financial condition and cash available for distribution to stockholders might be negatively affected and the risk of default on our indebtedness could increase.

Other Risks
The market value of our common stock could decrease based on our performance and market perception and conditions.  The market value of our common stock may be based primarily upon the market’s perception of our growth potential and current and future cash dividends and may be secondarily based upon the real estate market value of our underlying assets.  The market price of our common stock is influenced by the dividend on our common stock relative to market interest rates.  Rising interest rates may lead potential buyers of our common stock to expect a higher dividend rate, which would adversely affect the market price of our common stock.  In addition, rising interest rates would result in increased expense, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.

The state of the economy or other adverse changes in general or local economic conditions may adversely affect our operating results and financial condition. Turmoil in the global financial markets may have an adverse impact on the availability of credit to businesses generally and could lead to a further weakening of the U.S. and global economies.  Currently these conditions have not impaired our ability to access credit markets and finance our operations.  However, our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing, which could have an impact on our flexibility to react to changing economic and business conditions.  Furthermore, deteriorating economic conditions including business layoffs, downsizing, industry slowdowns and other similar factors that affect our customers could continue to negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio and in

8



the collateral securing any loan investments we may make.  Additionally, an adverse economic situation could have an impact on our lenders or customers, causing them to fail to meet their obligations to us.  No assurances can be given that the effects of an adverse economic situation will not have a material adverse effect on our business, financial condition and results of operations.

We may fail to qualify as a REIT. If we fail to qualify as a REIT, we will not be allowed to deduct distributions to stockholders in computing our taxable income and will be subject to federal income tax, including any applicable alternative minimum tax, at regular corporate rates.  In addition, we may be barred from qualification as a REIT for the four years following disqualification.  The additional tax incurred at regular corporate rates would significantly reduce the cash flow available for distribution to stockholders and for debt service.  Furthermore, we would no longer be required by the Internal Revenue Code to make any distributions to our stockholders as a condition of REIT qualification.  Any distributions to stockholders would be taxable as ordinary income to the extent of our current and accumulated earnings and profits. Corporate distributees, however, may be eligible for the dividends received deduction on the distributions, subject to limitations under the Internal Revenue Code.  To qualify as a REIT, we must comply with certain highly technical and complex requirements.  We cannot be certain we have complied with these requirements because there are few judicial and administrative interpretations of these provisions.  In addition, facts and circumstances that may be beyond our control may affect our ability to qualify as a REIT.  We cannot assure you that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to our qualification as a REIT or with respect to the federal income tax consequences of qualification.  We cannot assure you that we will remain qualified as a REIT.

There is a risk of changes in the tax law applicable to real estate investment trusts.  Since the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted.  Any such legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors.

We face possible adverse changes in tax laws.  From time to time, changes in state and local tax laws or regulations are enacted which may result in an increase in our tax liability. A shortfall in tax revenues for states and municipalities in which we operate may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income. These increased tax costs could adversely affect our financial condition, results of operations and the amount of cash available for the payment of dividends.

Our Charter contains provisions that may adversely affect the value of EastGroup stock.  Our charter prohibits any holder from acquiring more than 9.8% (in value or in number, whichever is more restrictive) of our outstanding equity stock (defined as all of our classes of capital stock, except our excess stock (of which there is none outstanding)) unless our Board of Directors grants a waiver.  The ownership limit may limit the opportunity for stockholders to receive a premium for their shares of common stock that might otherwise exist if an investor were attempting to assemble a block of shares in excess of 9.8% of the outstanding shares of equity stock or otherwise effect a change in control.  Also, the request of the holders of a majority or more of our common stock is necessary for stockholders to call a special meeting.  We also require advance notice by stockholders for the nomination of directors or the proposal of business to be considered at a meeting of stockholders.

The Company faces risks in attracting and retaining key personnel.  Many of our senior executives have strong industry reputations, which aid us in identifying acquisition and development opportunities and negotiating with tenants and sellers of properties.  The loss of the services of these key personnel could affect our operations because of diminished relationships with existing and prospective tenants, property sellers and industry personnel.  In addition, attracting new or replacement personnel may be difficult in a competitive market.
 
We have severance and change in control agreements with certain of our officers that may deter changes in control of the Company.  If, within a certain time period (as set in the officer’s agreement) following a change in control, we terminate the officer's employment other than for cause, or if the officer elects to terminate his or her employment with us for reasons specified in the agreement, we will make a severance payment equal to the officer's average annual compensation times an amount specified in the officer's agreement, together with the officer's base salary and vacation pay that have accrued but are unpaid through the date of termination.  These agreements may deter a change in control because of the increased cost for a third party to acquire control of us.

Our Board of Directors may authorize and issue securities without stockholder approval.  Under our Charter, the Board has the power to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as the Board of Directors may determine.  The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders' best interests.


9



Maryland business statutes may limit the ability of a third party to acquire control of us.  Maryland law provides protection for Maryland corporations against unsolicited takeovers by limiting, among other things, the duties of the directors in unsolicited takeover situations.  The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders rights plan, (c) make a determination under the Maryland Business Combination Act or the Maryland Control Share Acquisition Act, or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition.  Moreover, under Maryland law the act of a director of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director.  Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law.

The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including mergers, dispositions of 10 percent or more of its assets, certain issuances of shares of stock and other specified transactions, with an "interested stockholder" or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met.  An interested stockholder is generally a person owning or controlling, directly or indirectly, 10 percent or more of the voting power of the outstanding stock of the Maryland corporation.

The Maryland Control Share Acquisition Act provides that "control shares" of a corporation acquired in a "control share acquisition" shall have no voting rights except to the extent approved by a vote of two-thirds of the votes eligible to cast on the matter.  "Control Shares" means shares of stock that, if aggregated with all other shares of stock previously acquired by the acquirer, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of the voting power:  one-tenth or more but less than one-third, one-third or more but less than a majority, or a majority or more of all voting power.  A "control share acquisition" means the acquisition of control shares, subject to certain exceptions.

If voting rights of control shares acquired in a control share acquisition are not approved at a stockholders' meeting, then subject to certain conditions and limitations, the issuer may redeem any or all of the control shares for fair value.  If voting rights of such control shares are approved at a stockholders' meeting and the acquirer becomes entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights.

We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, and maintaining personal identifying information and customer and lease data. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of confidential customer data, including individually identifiable information relating to financial accounts. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems' improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. In some cases, it may be difficult to anticipate or immediately detect such incidents and the damage they cause. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a materially adverse effect on our business, financial condition and results of operations.

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.  PROPERTIES.

EastGroup owned 307 industrial properties and one office building at December 31, 2014.  These properties are located primarily in the Sunbelt states of Florida, Texas, Arizona, California and North Carolina, and the majority are clustered around major transportation features in supply constrained submarkets.  As of February 13, 2015, EastGroup’s portfolio was 96.3% leased and 96.0% occupied.  The Company has developed approximately 37% of its total portfolio (on a square foot basis), including real estate properties and development properties in lease-up and under construction.  The Company’s focus is the ownership of business distribution space (80% of the total portfolio) with the remainder in bulk distribution space (16%) and business service space (4%).  Business distribution space properties are typically multi-tenant buildings with a building depth of 200 feet or less, clear

10



height of 24-30 feet, office finish of 10-25% and truck courts with a depth of 100-120 feet.  See Consolidated Financial Statement Schedule III – Real Estate Properties and Accumulated Depreciation for a detailed listing of the Company’s properties.

At December 31, 2014, EastGroup did not own any single property with a book value that was 10% or more of total book value or with gross revenues that were 10% or more of total gross revenues.

The Company's lease expirations, excluding month-to-month leases of 287,000 square feet, for the next ten years are detailed below:
Years Ending December 31,
 
Number of Leases Expiring
 
Total Area of Leases Expiring
(in Square Feet)
 
Annualized Current Base Rent of Leases Expiring (1)
 
% of Total Base Rent of Leases Expiring
2015
 
293
 
4,712,000

 
$
25,866,000

 
15.2%
2016
 
329
 
6,222,000

 
$
32,730,000

 
19.2%
2017
 
253
 
5,619,000

 
$
30,693,000

 
18.0%
2018
 
190
 
4,106,000

 
$
22,014,000

 
12.9%
2019
 
121
 
3,285,000

 
$
15,505,000

 
9.1%
2020
 
90
 
2,666,000

 
$
14,350,000

 
8.4%
2021
 
38
 
2,253,000

 
$
11,911,000

 
7.0%
2022
 
23
 
1,235,000

 
$
5,714,000

 
3.3%
2023
 
12
 
696,000

 
$
3,736,000

 
2.2%
2024 and beyond
 
16
 
1,202,000

 
$
6,453,000

 
3.8%
(1)
Represents the monthly cash rental rates, excluding tenant expense reimbursements, as of December 31, 2014, multiplied by twelve months.


ITEM 3.  LEGAL PROCEEDINGS.

The Company is not presently involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company or its properties, other than routine litigation arising in the ordinary course of business or which is expected to be covered by the Company’s liability insurance.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable.


PART II.  OTHER INFORMATION

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s shares of common stock are listed for trading on the New York Stock Exchange under the symbol “EGP.”  The following table shows the high and low share prices for each quarter reported by the New York Stock Exchange during the past two years and the per share distributions paid for each quarter.

Shares of Common Stock Market Prices and Dividends
Quarter
 
Calendar Year 2014
 
Calendar Year 2013
 
High
 
Low
 
Distributions
 
High
 
Low
 
Distributions
First
 
$
63.66

 
56.40

 
$
0.54

 
$
58.66

 
53.55

 
$
0.53

Second
 
66.24

 
61.06

 
0.54

 
66.99

 
52.47

 
0.53

Third
 
65.82

 
59.86

 
0.57

 
63.78

 
54.98

 
0.54

Fourth
 
69.90

 
60.05

 
0.57

 
65.13

 
56.25

 
0.54

 
 
 

 
 

 
$
2.22

 
 

 
 

 
$
2.14



11



As of February 13, 2015, there were 542 holders of record of the Company’s 32,205,134 outstanding shares of common stock.  The Company distributed all of its 2014 and 2013 taxable income to its stockholders.  Accordingly, no significant provisions for income taxes were necessary.  The following table summarizes the federal income tax treatment for all distributions by the Company for the years 2014 and 2013.



Federal Income Tax Treatment of Share Distributions
 
Years Ended December 31,
2014
 
2013
Common Share Distributions:
 
 
 
Ordinary dividends
$
2.02398

 
1.91678

Nondividend distributions
0.08974

 
0.21054

Unrecaptured Section 1250 capital gain
0.09470

 
0.00270

Other capital gain
0.01158

 
0.00998

Total Common Distributions
$
2.22000

 
2.14000

 
Securities Authorized For Issuance Under Equity Compensation Plans
See Item 12 of this Annual Report on Form 10-K, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for certain information regarding the Company’s equity compensation plans.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
No shares of common stock were purchased by the Company or withheld by the Company to satisfy any tax withholding obligations during the three month period ended December 31, 2014.

12




Performance Graph
The following graph compares, over the five years ended December 31, 2014, the cumulative total shareholder return on EastGroup’s common stock with the cumulative total return of the Standard & Poor’s 500 Total Return Index (S&P 500 Total Return) and the FTSE Equity REIT index prepared by the National Association of Real Estate Investment Trusts (FTSE NAREIT Equity REITs).

The performance graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing, except to the extent that the Company specifically incorporates it by reference into such filing.


 
Fiscal years ended December 31,
2009
 
2010
 
2011
 
2012
 
2013
 
2014
EastGroup
$
100.00

 
116.71

 
125.99

 
162.24

 
181.21

 
205.17

FTSE NAREIT Equity REITs
100.00

 
127.96

 
138.57

 
163.60

 
167.64

 
218.17

S&P 500 Total Return
100.00

 
115.06

 
117.49

 
136.29

 
180.43

 
205.13


The information above assumes that the value of the investment in shares of EastGroup’s common stock and each index was $100 on December 31, 2009, and that all dividends were reinvested.







13



ITEM 6.   SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data for the Company derived from the audited consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.
 
Years Ended December 31,
2014
 
2013
 
2012
 
2011
 
2010
OPERATING DATA
(In thousands, except per share data)
REVENUES
 
 
 
 
 
 
 
 
 
Income from real estate operations                                                                                       
$
219,706

 
201,849

 
185,783

 
173,008

 
171,887

Other income                                                                                       
123

 
322

 
61

 
142

 
82

 
219,829

 
202,171

 
185,844

 
173,150

 
171,969

Expenses
 

 
 

 
 

 
 

 
 

Expenses from real estate operations
62,797

 
57,885

 
52,891

 
48,911

 
50,679

Depreciation and amortization
70,314

 
65,789

 
61,345

 
56,739

 
57,806

General and administrative
12,726

 
11,725

 
10,488

 
10,691

 
10,260

Acquisition costs
210

 
191

 
188

 
252

 
72

 
146,047

 
135,590

 
124,912

 
116,593

 
118,817

Operating income
73,782

 
66,581

 
60,932

 
56,557

 
53,152

Other income (expense)
 

 
 

 
 

 
 

 
 

Interest expense
(35,486
)
 
(35,192
)
 
(35,371
)
 
(34,709
)
 
(35,171
)
Gain on sales of real estate investments
9,188

 

 

 

 

Other
989

 
949

 
456

 
717

 
624

Income from continuing operations
48,473

 
32,338

 
26,017

 
22,565

 
18,605

Discontinued operations
 

 
 

 
 

 
 

 
 

Income from real estate operations

 
89

 
360

 
269

 
150

Gain on sales of nondepreciable real estate investments

 

 
167

 

 

Gain on sales of real estate investments

 
798

 
6,343

 

 

Income from discontinued operations

 
887

 
6,870

 
269

 
150

Net income
48,473

 
33,225

 
32,887

 
22,834

 
18,755

  Net income attributable to noncontrolling interest in joint ventures
(532
)
 
(610
)
 
(503
)
 
(475
)
 
(430
)
Net income attributable to EastGroup Properties, Inc. common stockholders
47,941

 
32,615

 
32,384

 
22,359

 
18,325

Other comprehensive income (loss) - Cash flow hedges
(3,986
)
 
2,021

 
(392
)
 

 
318

TOTAL COMPREHENSIVE INCOME
$
43,955

 
34,636

 
31,992

 
22,359

 
18,643

BASIC PER COMMON SHARE DATA FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 

 
 

 
 

 
 

 
 

Income from continuing operations
$
1.53

 
1.05

 
0.89

 
0.82

 
0.67

Income from discontinued operations

 
0.03

 
0.24

 
0.01

 
0.01

Net income attributable to common stockholders
$
1.53

 
1.08

 
1.13

 
0.83

 
0.68

Weighted average shares outstanding
31,341

 
30,162

 
28,577

 
26,897

 
26,752

DILUTED PER COMMON SHARE DATA FOR NET INCOMEATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS
 

 
 

 
 

 
 

 
 

Income from continuing operations
$
1.52

 
1.05

 
0.89

 
0.82

 
0.67

Income from discontinued operations

 
0.03

 
0.24

 
0.01

 
0.01

Net income attributable to common stockholders
$
1.52

 
1.08

 
1.13

 
0.83

 
0.68

Weighted average shares outstanding
31,452

 
30,269

 
28,677

 
26,971

 
26,824

AMOUNTS ATTRIBUTABLE TO EASTGROUP
PROPERTIES, INC. COMMON STOCKHOLDERS
 

 
 

 
 

 
 

 
 

Income from continuing operations
$
47,941

 
31,728

 
25,514

 
22,090

 
18,175

Income from discontinued operations

 
887

 
6,870

 
269

 
150

Net income attributable to common stockholders
$
47,941

 
32,615

 
32,384

 
22,359

 
18,325

OTHER PER SHARE DATA
 

 
 

 
 

 
 

 
 

Book value, at end of year
$
17.72

 
16.61

 
16.25

 
14.56

 
15.16

Common distributions declared
2.22

 
2.14

 
2.10

 
2.08

 
2.08

Common distributions paid
2.22

 
2.14

 
2.10

 
2.08

 
2.08

BALANCE SHEET DATA (AT END OF YEAR)
 

 
 

 
 

 
 

 
 

 Real estate investments, at cost (1)
$
2,087,821

 
1,938,960

 
1,780,098

 
1,669,460

 
1,528,048

 Real estate investments, net of accumulated depreciation (1)
1,487,295

 
1,388,847

 
1,283,851

 
1,217,655

 
1,124,861

Total assets
1,575,824

 
1,473,412

 
1,354,102

 
1,286,516

 
1,183,276

Secured debt, unsecured debt and unsecured bank credit facilities
933,177

 
893,745

 
813,926

 
832,686

 
735,718

Total liabilities
1,000,209

 
954,707

 
862,926

 
880,907

 
771,770

Noncontrolling interest in joint ventures
4,486

 
4,707

 
4,864

 
2,780

 
2,650

Total stockholders’ equity
571,129

 
513,998

 
486,312

 
402,829

 
408,856

(1)
Includes mortgage loans receivable and unconsolidated investment. See Notes 4 and 5 in the Notes to Consolidated Financial Statements. 



14



ITEM 7. 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 tenants (primarily in the 5,000 to 50,000 square foot range).  The Company develops, acquires and operates distribution facilities, the majority of which are clustered around major transportation features in supply constrained submarkets in major Sunbelt regions.  The Company’s core markets are in the states of Florida, Texas, Arizona, California and North Carolina.

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 issue common and/or preferred equity and obtain financing from financial institutions and insurance companies. The continuous common equity program provided net proceeds to the Company of $78.9 million during 2014. Also during 2014, the Company closed a $75 million unsecured term loan at an effective fixed interest rate of 2.846%. These transactions are discussed in Liquidity and Capital Resources.

The Company’s primary revenue is rental income; as such, EastGroup’s greatest challenge is leasing space.  During 2014, leases expired on 5,224,000 square feet (15.6%) of EastGroup’s total square footage of 33,398,000, and the Company was successful in renewing or re-leasing 88% of the expiring square feet.  In addition, EastGroup leased 1,738,000 square feet of other vacant space during the year.  During 2014, average rental rates on new and renewal leases increased by 7.9%.  Property net operating income (PNOI) from same properties, defined as operating properties owned during the entire current period and prior year reporting period, increased 2.3% for 2014 compared to 2013.

EastGroup’s total leased percentage was 96.7% at December 31, 2014 compared to 96.2% at December 31, 2013.  Leases scheduled to expire in 2015 were 14.1% of the portfolio on a square foot basis at December 31, 2014.  As of February 13, 2015, leases scheduled to expire during the remainder of 2015 were 11.6% of the portfolio on a square foot basis.

The Company generates new sources of leasing revenue through its acquisition and development programs.  During 2014, EastGroup acquired three operating properties (six buildings totaling 635,000 square feet) in Charlotte, Austin and Chino, California, for $51.7 million and 40.1 acres of development land in Dallas, Phoenix and Charlotte for $4.6 million.  EastGroup continues to see targeted development as a contributor to the Company’s long-term growth.  The Company mitigates risks associated with development through a Board-approved maximum level of land held for development and by adjusting development start dates according to leasing activity.  During 2014, the Company began construction of 17 development projects containing 1,543,000 square feet in Houston, Dallas, San Antonio, Charlotte, Orlando, Tampa and Phoenix.  Also in 2014, EastGroup transferred 10 properties (949,000 square feet) in Houston, San Antonio, Charlotte and Phoenix from its development program to real estate properties with costs of $59.5 million at the date of transfer.  As of December 31, 2014, EastGroup’s development program consisted of 20 buildings (1,801,000 square feet) located in Houston, Dallas, San Antonio, Orlando, Tampa, Charlotte, Phoenix and Denver.  The projected total cost for the development projects, which were collectively 31% leased as of February 13, 2015, is $132.5 million, of which $38.6 million remained to be invested as of December 31, 2014.

Typically, the Company initially funds its acquisition and development programs through its $250 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 to replace short-term bank borrowings. In March 2014, Moody's Investors Service affirmed the Company's issuer rating of Baa2 with a stable outlook. In October 2014, Fitch Ratings affirmed the Company's issuer rating of BBB with a stable outlook. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. The Company intends to obtain primarily unsecured fixed rate debt in the future. 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.

15




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 fiscal years ended December 31, 2014, 2013 and 2012.
 
Years Ended December 31,
2014
 
2013
 
2012
(In thousands)
Income from real estate operations                                                                                     
$
219,706

 
201,849

 
185,783

Expenses from real estate operations                                                                                     
(62,797
)
 
(57,885
)
 
(52,891
)
Noncontrolling interest in PNOI of consolidated 80% joint ventures
(848
)
 
(961
)
 
(990
)
PNOI from 50% owned unconsolidated investment
789

 
793

 
793

PROPERTY NET OPERATING INCOME                                                                                     
$
156,850

 
143,796

 
132,695


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 fiscal years ended December 31, 2014, 2013 and 2012.
 
Years Ended December 31,
2014
 
2013
 
2012
 
 
(In thousands)
 
 
NET INCOME                                                                                     
$
48,473

 
33,225

 
32,887

Interest income                                                                                     
(479
)
 
(530
)
 
(369
)
Gain on sales of real estate investments                                                                                 
(9,188
)
 

 

Company's share of interest expense from unconsolidated investment
242

 
293

 
304

Company's share of depreciation from unconsolidated investment
134

 
134

 
133

Other income                                                                                     
(123
)
 
(322
)
 
(61
)
Interest rate swap ineffectiveness
1

 
(29
)
 
269

Gain on sales of non-operating real estate                                                                                  
(98
)
 
(24
)
 

Income from discontinued operations                                                                                     

 
(887
)
 
(6,870
)
Depreciation and amortization from continuing operations
70,314

 
65,789

 
61,345

Interest expense                                                                                     
35,486

 
35,192

 
35,371

General and administrative expense                                                                                     
12,726

 
11,725

 
10,488

Acquisition costs                                                                                     
210

 
191

 
188

Noncontrolling interest in PNOI of consolidated 80% joint ventures
(848
)
 
(961
)
 
(990
)
PROPERTY NET OPERATING INCOME (PNOI)                                                                                     
$
156,850

 
143,796

 
132,695


16



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 expense.  The following table presents reconciliations of Net Income Attributable to EastGroup Properties, Inc. Common Stockholders to FFO Attributable to Common Stockholders for the three fiscal years ended December 31, 2014, 2013 and 2012.
 
Years Ended December 31,
2014
 
2013
 
2012
(In thousands, except per share data)
NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS                                                                                     
$
47,941

 
32,615

 
32,384

Depreciation and amortization from continuing operations
70,314

 
65,789

 
61,345

Depreciation and amortization from discontinued operations

 
130

 
929

Company's share of depreciation from unconsolidated investment
134

 
134

 
133

Depreciation and amortization from noncontrolling interest                                                                                     
(204
)
 
(240
)
 
(256
)
Gain on sales of real estate investments                                                                                     
(9,188
)
 
(798
)
 
(6,343
)
FUNDS FROM OPERATIONS (FFO) ATTRIBUTABLE TO COMMON STOCKHOLDERS                                                                                     
$
108,997

 
97,630

 
88,192

Net income attributable to common stockholders per diluted share
$
1.52

 
1.08

 
1.13

Funds from operations attributable to common stockholders per diluted share
3.47

 
3.23

 
3.08

Diluted shares for earnings per share and funds from operations
31,452

 
30,269

 
28,677


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 year compared to the prior year.  For 2014, FFO was $3.47 per share compared with $3.23 per share for 2013, an increase of 7.4% per share.

For the year ended December 31, 2014, PNOI increased by $13,054,000, or 9.1%, compared to 2013. PNOI increased $6,710,000 from newly developed properties, $3,650,000 from 2013 and 2014 acquisitions and $3,136,000 from same property operations.

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 2.3% for the year ended December 31, 2014, compared to 2013.

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 year ended December 31, 2014, was 95.3% compared to 94.5% for 2013.

The same property average rental rate 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 $5.19 per square foot for the year ended December 31, 2014, compared to $5.08 per square foot for 2013.

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 December 31, 2014 was 96.3%.  Quarter-end occupancy ranged from 95.0% to 96.2% over the period from December 31, 2013 to September 30, 2014.

Rental rate change represents the rental rate increase or decrease on new and renewal leases compared to the prior leases on the same space.  For the year 2014, rental rate increases on new and renewal leases (18.9% of total square footage) averaged 7.9%.

For the year 2014, lease termination fee income was $1,205,000 compared to $495,000 for 2013.  The Company recorded bad debt recoveries of $4,000 in 2014 and bad debt expense of $268,000 in 2013.

17



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s management considers the following accounting policies and estimates to be critical to the reported operations of the Company.

Real Estate Properties
The Company allocates the purchase price of acquired properties to net tangible and identified intangible assets based on their respective fair values.  Goodwill is recorded when the purchase price exceeds the fair value of the assets and liabilities acquired.  Factors considered by management in allocating the cost of the properties acquired include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases.  The allocation to tangible assets (land, building and improvements) is based upon management’s determination of the value of the property as if it were vacant using discounted cash flow models.  The purchase price is also allocated among the following categories of intangible assets:  the above or below market component of in-place leases, the value of in-place leases, and the value of customer relationships.  The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate 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.

During the period in which a property is under development, costs associated with development (i.e., land, construction costs, interest expense, property taxes and other direct and indirect costs associated with development) are aggregated into the total capitalized costs of the property.  Included in these costs are management’s estimates for the portions of internal costs (primarily personnel costs) that are deemed directly or indirectly related to such development activities. The internal costs are allocated to specific development properties based on construction 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 to be sold are reported at the lower of the carrying amount or fair value less selling costs.  The evaluation of real estate investments involves many subjective assumptions dependent upon future economic events that affect the ultimate value of the property.  Currently, the Company’s management knows of no impairment issues nor has it experienced any impairment issues in recent years.  EastGroup currently has the intent and ability to hold its real estate investments and to hold its land inventory for future development.  In the event of impairment, the property’s basis would be reduced, and the impairment would be recognized as a current period charge on the Consolidated Statements of Income 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 2014, 2013 and 2012 taxable income to its stockholders.  Accordingly, no significant provisions for income taxes were necessary.


18



FINANCIAL CONDITION

EastGroup’s assets were $1,575,824,000 at December 31, 2014, an increase of $102,412,000 from December 31, 2013.  Liabilities increased $45,502,000 to $1,000,209,000, and total equity increased $56,910,000 to $575,615,000 during the same period.  The following paragraphs explain these changes in detail.

Assets
Real Estate Properties
Real Estate Properties increased $116,414,000 during the year ended December 31, 2014, primarily due to the transfer of 10 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 offset by the sales of five operating properties (six buildings totaling 442,000 square feet) in Houston, Dallas, Tampa and Oklahoma City for $21,381,000 and 0.1 acres of land in Orlando for $141,000.
REAL ESTATE PROPERTIES ACQUIRED IN 2014
 
Location
 
Size
 
Date
Acquired
 
Cost (1)
 
 
 
 
(Square feet)
 
 
 
(In thousands)
Ridge Creek Distribution Center III
 
Charlotte, NC
 
270,000

 
05/12/2014
 
$
13,606

Colorado Crossing Distribution Center
 
Austin, TX
 
265,000

 
06/11/2014
 
24,358

Ramona Distribution Center
 
Chino, CA
 
100,000

 
12/19/2014
 
9,513

Total Acquisitions
 
 
 
635,000

 
 
 
$
47,477


(1)
Total cost of the properties acquired was $51,652,000, of which $47,477,000 was allocated to Real Estate Properties as indicated above.  Intangibles associated with the purchases of real estate were allocated as follows:  $5,074,000 to in-place lease intangibles, $4,000 to above market leases (both included in Other Assets on the Consolidated Balance Sheets) and $903,000 to below market leases (included in Other Liabilities on the Consolidated Balance Sheets).  All of these costs are amortized over the remaining lives of the associated leases in place at the time of acquisition. The Company paid cash of $48,805,000 for the properties and intangibles acquired, assumed a mortgage of $2,617,000 and recorded a premium of $230,000 to adjust the mortgage loan assumed to fair value.  

During 2014, the Company made capital improvements of $19,862,000 on existing and acquired properties (included in the Capital Expenditures table under Results of Operations).  Also, the Company incurred costs of $6,950,000 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.
 
Development
EastGroup’s investment in development at December 31, 2014 consisted of properties in lease-up and under construction of $93,886,000 and prospective development (primarily land) of $86,087,000.  The Company’s total investment in development at December 31, 2014 was $179,973,000 compared to $148,767,000 at December 31, 2013.  Total capital invested for development during 2014 was $97,696,000, which primarily consisted of costs of $69,983,000 and $20,763,000 as detailed in the development activity table below and costs of $6,950,000 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).

EastGroup capitalized internal development costs of $4,040,000 during the year ended December 31, 2014, compared to $3,730,000 during 2013. The increase in capitalized internal development costs in 2014 as compared to 2013 resulted from increased activity in the Company's development program in 2014.

During 2014, EastGroup purchased 40.1 acres of development land in Dallas, Charlotte and Phoenix for $4,613,000.  Costs associated with these acquisitions are included in the development activity table.  The Company transferred 10 development properties to Real Estate Properties during 2014 with a total investment of $59,540,000 as of the date of transfer.







19



DEVELOPMENT
 
 
 
Costs Incurred
 
 
 
 
 
 
 
Costs
Transferred
 in 2014 (1)
 
For the
Year Ended
12/31/14
 
Cumulative
as of
12/31/14
 
Estimated
Total Costs (2)
 
Building Completion Date
 
 
 
 
(In thousands)
 
 
LEASE-UP
 
Building Size (Square feet)
 
 
 
 
 
 
 
 
 
 
Horizon I, Orlando, FL
 
109,000

 
$

 
1,811

 
7,112

 
7,700

 
02/14
Steele Creek II, Charlotte, NC
 
71,000

 

 
1,582

 
4,923

 
5,600

 
03/14
World Houston 39, Houston, TX
 
94,000

 

 
3,420

 
5,056

 
5,700

 
06/14
Steele Creek III, Charlotte, NC
 
108,000

 
2,172

 
5,148

 
7,320

 
8,200

 
07/14
World Houston 41, Houston, TX
 
104,000

 
1,184

 
4,162

 
5,346

 
6,900

 
08/14
Horizon II, Orlando, FL
 
123,000

 
2,526

 
5,134

 
7,660

 
8,600

 
09/14
Ten West Crossing 6, Houston, TX
 
64,000

 
928

 
3,314

 
4,242

 
4,800

 
10/14
West Road I, Houston, TX
 
63,000

 
1,014

 
3,263

 
4,277

 
4,900

 
10/14
Kyrene 202 I, Phoenix, AZ
 
75,000

 
971

 
4,968

 
5,939

 
6,900

 
11/14
Kyrene 202 II, Phoenix, AZ
 
45,000

 
575

 
2,834

 
3,409

 
4,300

 
11/14
Rampart IV, Denver, CO
 
84,000

 

 
5,229

 
6,947

 
8,300

 
11/14
Total Lease-Up
 
940,000

 
9,370

 
40,865

 
62,231

 
71,900

 
 
UNDER CONSTRUCTION
 
 
 
 
 
 
 
 
 
 
 
Anticipated Building Completion Date
Alamo Ridge I, San Antonio, TX
 
96,000

 
1,341

 
4,134

 
5,475

 
6,700

 
01/15
Alamo Ridge II, San Antonio, TX
 
62,000

 
866

 
2,500

 
3,366

 
3,900

 
01/15
Steele Creek IV, Charlotte, NC
 
57,000

 
938

 
2,522

 
3,460

 
4,300

 
01/15
West Road III, Houston, TX
 
78,000

 
1,164

 
2,701

 
3,865

 
5,000

 
02/15
Thousand Oaks 4, San Antonio, TX
 
66,000

 
1,123

 
1,820

 
2,943

 
5,100

 
03/15
Madison II & III, Tampa, FL
 
127,000

 
951

 
2,729

 
3,680

 
8,000

 
04/15
Sky Harbor 6, Phoenix, AZ
 
31,000

 
807

 
813

 
1,620

 
3,100

 
04/15
Ten West Crossing 7, Houston, TX
 
68,000

 
962

 
2,208

 
3,170

 
4,900

 
04/15
ParkView 1-3, Dallas, TX
 
276,000

 
3,039

 
1,037

 
4,076

 
19,600

 
07/15
Total Under Construction
 
861,000

 
11,191

 
20,464

 
31,655

 
60,600

 
 
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)
 
Estimated Building Size (Square feet)
 
 
 
 
 
 
 
 
 
 
Phoenix, AZ
 
286,000

 
(2,353
)
 
1,443

 
3,463

 
21,600

 
 
Tucson, AZ
 
70,000

 

 

 
417

 
5,300

 
 
Fort Myers, FL
 
663,000

 

 

 
17,858

 
50,000

 
 
Orlando, FL
 
1,144,000

 
(2,526
)
 
1,703

 
23,851

 
82,600

 
 
Tampa, FL
 
392,000

 
(951
)
 
313

 
6,184

 
23,100

 
 
Jackson, MS
 
28,000

 

 

 
706

 
2,000

 
 
Charlotte, NC
 
384,000

 
(3,110
)
 
739

 
4,983

 
26,800

 
 
Dallas, TX
 
169,000

 
(3,039
)
 
3,439

 
1,649

 
11,200

 
 
El Paso, TX
 
251,000

 

 

 
2,444

 
11,300

 
 
Houston, TX
 
1,362,000

 
(6,864
)
 
415

 
21,710

 
92,200

 
 
San Antonio, TX
 
254,000

 
(3,330
)
 
602

 
2,822

 
16,700

 
 
Total Prospective Development
 
5,003,000

 
(22,173
)
 
8,654

 
86,087

 
342,800

 
 
 
 
6,804,000

 
$
(1,612
)
 
69,983

 
179,973

 
475,300

 
 
DEVELOPMENTS COMPLETED AND TRANSFERRED TO REAL ESTATE PROPERTIES DURING 2014
 
Building Size (Square feet)
 
 
 
 
 
 
 
 
 
Building Completion Date
Chandler Freeways, Phoenix, AZ
 
126,000

 
$

 

 
7,858

 
 
 
11/13
Steele Creek I, Charlotte, NC
 
71,000

 

 
(46
)
 
4,221

 
 
 
02/14
Ten West Crossing 3, Houston, TX
 
68,000

 

 
544

 
4,913

 
 
 
09/13
Thousand Oaks 3, San Antonio, TX
 
66,000

 

 
684

 
4,984

 
 
 
07/13
Ten West Crossing 2, Houston, TX
 
46,000

 

 
860

 
4,949

 
 
 
09/13
Ten West Crossing 4, Houston, TX
 
68,000

 

 
1,350

 
4,811

 
 
 
02/14
Ten West Crossing 5, Houston, TX
 
101,000

 

 
4,652

 
6,064

 
 
 
09/14
World Houston 37, Houston, TX
 
101,000

 

 
1,291

 
6,670

 
 
 
09/13
World Houston 40, Houston, TX
 
202,000

 

 
7,020

 
9,050

 
 
 
09/14
West Road II, Houston, TX
 
100,000

 
1,612

 
4,408

 
6,020

 
 
 
10/14
Total Transferred to Real Estate Properties
 
949,000

 
$
1,612

 
20,763

 
59,540

 
(3) 
 
 

(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)
Included in these costs are development obligations of $25.3 million and tenant improvement obligations of $2.6 million on properties under development.
(3)
Represents cumulative costs at the date of transfer.

20



Accumulated Depreciation
Accumulated depreciation on real estate and development properties increased $50,413,000 during 2014 due to depreciation expense, offset by accumulated depreciation on the properties sold during the year.

Other Assets
Other Assets increased $82,000 during 2014.  A summary of Other Assets follows:
 
December 31, 2014
 
December 31, 2013
 
(In thousands)
Leasing costs (principally commissions)
$
56,171

 
48,473

Accumulated amortization of leasing costs
(22,951
)
 
(18,855
)
Leasing costs (principally commissions), net of accumulated amortization
33,220

 
29,618

 
 
 
 
Straight-line rents receivable
25,013

 
24,030

Allowance for doubtful accounts on straight-line rents receivable
(102
)
 
(376
)
Straight-line rents receivable, net of allowance for doubtful accounts
24,911

 
23,654

 
 
 
 
Accounts receivable
4,459

 
4,863

Allowance for doubtful accounts on accounts receivable
(379
)
 
(349
)
Accounts receivable, net of allowance for doubtful accounts
4,080

 
4,514

 
 
 
 
Acquired in-place lease intangibles
20,118

 
16,793

Accumulated amortization of acquired in-place lease intangibles
(8,345
)
 
(5,366
)
Acquired in-place lease intangibles, net of accumulated amortization
11,773

 
11,427

 
 
 
 
Acquired above market lease intangibles
1,575

 
1,835

Accumulated amortization of acquired above market lease intangibles
(699
)
 
(659
)
Acquired above market lease intangibles, net of accumulated amortization
876

 
1,176

 
 
 
 
Mortgage loans receivable
4,991

 
8,894

Discount on mortgage loans receivable

 
(24
)
Mortgage loans receivable, net of discount
4,991

 
8,870

 
 
 
 
Loan costs
8,166

 
8,050

Accumulated amortization of loan costs
(4,454
)
 
(3,601
)
Loan costs, net of accumulated amortization
3,712

 
4,449

 
 
 
 
Interest rate swap assets
812

 
1,692

Goodwill
990

 
990

Escrow deposits for 1031 exchange
698

 

Prepaid expenses and other assets
7,446

 
7,037

 Total Other Assets
$
93,509

 
93,427



Liabilities
Secured Debt decreased $46,017,000 during the year ended December 31, 2014.  The decrease resulted from the repayment of two mortgages totaling $26,577,000, regularly scheduled principal payments of $22,269,000 and mortgage loan premium amortization of $18,000. The decreases were partially offset by a mortgage of $2,617,000 assumed by the Company in connection

21



with the acquisition of Ramona Distribution Center; the Company recorded a premium of $230,000 to adjust the mortgage loan assumed to fair value. This premium is being amortized over the remaining life of the mortgage.

Unsecured Debt increased $75,000,000 during 2014 as a result of the closing of a $75 million unsecured term loan in July 2014.
 
Unsecured Bank Credit Facilities increased $10,449,000 during 2014 as a result of advances of $350,214,000 exceeding repayments of $339,765,000. The Company’s credit facilities are described in greater detail under Liquidity and Capital Resources.
 
Accounts Payable and Accrued Expenses increased $2,335,000 during 2014.  A summary of the Company’s Accounts Payable and Accrued Expenses follows:
 
December 31,
2014
 
2013
(In thousands)
Property taxes payable                                                            
$
15,216

 
15,507

Development costs payable                                                            
7,920

 
7,679

Interest payable                                                            
3,500

 
3,658

Dividends payable on unvested restricted stock
2,096

 
1,928

Other payables and accrued expenses                                                            
10,707

 
8,332

 Total Accounts Payable and Accrued Expenses
$
39,439

 
37,104


Other Liabilities increased $3,735,000 during 2014.  A summary of the Company’s Other Liabilities follows:
 
December 31,
2014
 
2013
(In thousands)
Security deposits                                                            
$
12,803

 
11,359

Prepaid rent and other deferred income
8,971

 
10,101

 
 
 
 
Acquired below market lease intangibles
3,657

 
2,972

Accumulated amortization of acquired below market lease intangibles
(1,380
)
 
(874
)
Acquired below market lease intangibles, net of accumulated amortization
2,277

 
2,098

 
 
 
 
Interest rate swap liabilities
3,314

 
244

Prepaid tenant improvement reimbursements
212

 
40

Other liabilities                                                            
16

 
16

 Total Other Liabilities
$
27,593

 
23,858


Equity
Additional Paid-In Capital increased $83,800,000 during 2014.  The increase primarily resulted from the issuance of 1,246,400 shares of common stock under the Company's continuous common equity program with net proceeds to the Company of $78,868,000.  See Note 11 in the Notes to Consolidated Financial Statements for information related to the changes in Additional Paid-In Capital on common shares resulting from stock-based compensation.

During 2014, Distributions in Excess of Earnings increased $22,683,000 as a result of dividends on common stock of $70,624,000 exceeding Net Income Attributable to EastGroup Properties, Inc. Common Stockholders of $47,941,000.

Accumulated Other Comprehensive Income (Loss) decreased $3,986,000 during 2014. The decrease resulted from the change in fair value of the Company's interest rate swaps which are further discussed in Notes 12 and 13 in the Notes to Consolidated Financial Statements.




22



RESULTS OF OPERATIONS

2014 Compared to 2013

Net Income Attributable to EastGroup Properties, Inc. Common Stockholders for 2014 was $47,941,000 ($1.53 per basic and $1.52 per diluted share) compared to $32,615,000 ($1.08 per basic and diluted share) for 2013.  EastGroup recognized gains on sales of real estate investments of $9,188,000 during 2014 and $798,000 during 2013.

PNOI increased by $13,054,000, or 9.1%, for 2014 compared to 2013. PNOI increased $6,710,000 from newly developed properties, $3,650,000 from 2013 and 2014 acquisitions and $3,136,000 from same property operations. PNOI decreased $451,000 from 2014 dispositions. For the year 2014, lease termination fee income was $1,205,000 compared to $495,000 for 2013.  The Company recorded bad debt recoveries of $4,000 in 2014 and bad debt expense of $268,000 in 2013. Straight-lining of rent increased Income from real estate operations by $1,881,000 and $1,971,000 in 2014 and 2013, respectively.

The Company signed 157 leases with certain free rent concessions on 3,274,000 square feet during 2014 with total free rent concessions of $3,816,000, compared to 142 leases with free rent concessions on 3,787,000 square feet with total free rent concessions of $4,723,000 in 2013.

Property expense to revenue ratios, defined as Expenses from Real Estate Operations as a percentage of Income from Real Estate Operations, were 28.6% in 2014 compared to 28.7% in 2013.  The Company’s percentage of leased square footage was 96.7% at December 31, 2014, compared to 96.2% at December 31, 2013.  Occupancy at the end of 2014 was 96.3% compared to 95.5% at the end of 2013.

Interest Expense increased $294,000 for 2014 compared to 2013.  The following table presents the components of Interest Expense for 2014 and 2013:
 
Years Ended December 31,
2014
 
2013
 
Increase (Decrease)
(In thousands, except rates of interest)
Average unsecured bank credit facilities borrowings                                                                                 
$
96,162

 
112,971

 
(16,809
)
Weighted average variable interest rates (excluding loan cost amortization)
1.92
%
 
1.87
%
 
 

VARIABLE RATE INTEREST EXPENSE
 

 
 

 
 

Unsecured bank credit facilities interest (excluding loan cost amortization)
1,843

 
2,110

 
(267
)
Amortization of unsecured bank credit facilities costs                                                                                 
413

 
410

 
3

   Total variable rate interest expense                                                                                 
2,256

 
2,520

 
(264
)
FIXED RATE INTEREST EXPENSE
 

 
 

 
 

Secured debt interest (excluding loan cost amortization)
25,700

 
31,298

 
(5,598
)
Unsecured debt interest (1) (excluding loan cost amortization)
11,649

 
5,559

 
6,090

Amortization of secured debt costs                                                                                 
521

 
706

 
(185
)
Amortization of unsecured debt costs
302

 
173

 
129

   Total fixed rate interest expense                                                                                 
38,172

 
37,736

 
436

Total interest                                                                                 
40,428

 
40,256

 
172

Less capitalized interest                                                                                 
(4,942
)
 
(5,064
)
 
122

TOTAL INTEREST EXPENSE 
$
35,486

 
35,192

 
294


(1) Includes interest on the Company's 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.

EastGroup's variable rate interest expense decreased by $264,000 for 2014 as compared to 2013 primarily due to decreases in the Company's average unsecured bank credit facilities borrowings.

The Company's fixed rate interest expense increased by $436,000 for 2014 as compared to 2013. The increase was primarily due to increases in unsecured debt interest, offset by decreases in secured debt interest resulting from the Company's debt activity described below.

23



A summary of unsecured debt obtained in 2013 and 2014 follows:
 
 
 
 
 
 
 
 
Balance at December 31,
UNSECURED DEBT
 
Interest Rate
 
Date Obtained
 
Maturity Date
 
2014
 
2013
 
 
 
 
 
 
 
 
(In thousands)
$100 Million Senior Unsecured Notes (1)
 
3.800%
 
08/28/2013
 
08/28/2025
 
$
100,000

 
100,000

$75 Million Unsecured Term Loan (2)
 
3.752%
 
12/20/2013
 
12/20/2020
 
75,000

 
75,000

$75 Million Unsecured Term Loan (3)
 
2.846%
 
07/31/2014
 
07/31/2019
 
75,000

 

 
 
 
 
 
 
 
 
$
250,000

 
175,000


(1)
Principal payments due on the $100 million senior unsecured notes are as follows: $30 million on August 28, 2020, $50 million on August 28, 2023, and $20 million on August 28, 2025.
(2)
The interest rate on this unsecured term loan is comprised of LIBOR plus 140 basis points subject to a pricing grid for changes in the Company's coverage ratings. The Company entered into two interest rate swaps 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 3.752% as of December 31, 2014. See Note 13 in the Notes to Consolidated Financial Statements for additional information on the interest rate swaps.
(3)
The interest rate on this unsecured term loan is comprised of LIBOR plus 115 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 2.846% as of December 31, 2014. See Note 13 in the Notes to Consolidated Financial Statements for additional information on the interest rate swap.

The increase in unsecured debt interest was partially offset by decreases in secured debt interest resulting from regularly scheduled principal payments and debt repayments. Regularly scheduled principal payments on secured debt were $22,269,000 in 2014 and $24,420,000 in 2013. The details of the secured debt repaid in 2013 and 2014 are shown in the following table:
SECURED DEBT REPAID IN 2013 AND 2014
 
Interest Rate
 
Date Repaid
 
Payoff Amount
35th Avenue, Beltway I, Broadway V, Lockwood, Northwest Point,
Sunbelt, Techway Southwest I and World Houston 10, 11 & 14
 
4.75%
 
08/06/13
 
$
33,476,000

Airport Commerce Center I & II, Interchange Park, Ridge Creek
Distribution Center I, Southridge XII, Waterford Distribution Center and World Houston 24, 25 & 27
 
5.75%
 
12/06/13
 
50,057,000

Weighted Average/Total Amount for 2013                                                               
 
5.35%
 
 
 
83,533,000

Kyrene Distribution Center
 
9.00%
 
06/30/14
 
11,000

Americas Ten I, Kirby, Palm River North I, II & III, Shady Trail,
   Westlake I & II and World Houston 17
 
5.68%
 
07/10/14
 
26,565,000

Weighted Average/Total Amount for 2014                                                               
 
5.68%
 
 
 
26,576,000

Weighted Average/Total Amount for 2013 and 2014                                                         
 
5.43%
 
 
 
$
110,109,000


During 2013, EastGroup did not obtain any new secured debt; in 2014, the Company assumed the secured debt detailed in the following table:
NEW SECURED DEBT IN 2014
 
Effective Interest Rate
 
Date Obtained
 
Maturity Date
 
Amount
Ramona Distribution Center (1)
 
3.85%
 
12/19/14
 
11/30/26
 
$
2,847,000


(1)
In connection with the acquisition of Ramona Distribution Center, the Company assumed a mortgage of $2,617,000 and recorded a premium of $230,000 to adjust the mortgage loan assumed to fair value. This premium is being amortized over the remaining life of the mortgage.

Interest costs during the period of construction of real estate properties are capitalized and offset against interest expense. Capitalized interest decreased $122,000 for 2014 as compared to 2013 primarily due to decreases in the Company's overall borrowing interest rates in 2014 compared to 2013, partially offset by increased activity in the Company's development program in 2014 compared to 2013.

Depreciation and Amortization expense from continuing operations increased $4,525,000 for 2014 compared to 2013 primarily due to the operating properties acquired by the Company during 2013 and 2014 and the properties transferred from Development in 2013 and 2014.  


24



Capital Expenditures
Capital expenditures for EastGroup’s operating properties for the years ended December 31, 2014 and 2013 were as follows:
 
Estimated
Useful Life
 
Years Ended December 31,
 
2014
 
2013
 
 
(In thousands)
Upgrade on Acquisitions                                               
40 yrs
 
$
246

 
459

Tenant Improvements:
 
 
 

 
 
New Tenants                                               
Lease Life
 
7,984

 
8,124

   New Tenants (first generation) (1)
Lease Life
 
290

 
110

Renewal Tenants                                               
Lease Life
 
2,828

 
2,982

Other:
 
 
 

 
 

Building Improvements                                               
5-40 yrs
 
3,339

 
4,395

Roofs                                               
5-15 yrs
 
4,367

 
4,005

Parking Lots                                               
3-5 yrs
 
503

 
852

Other                                               
5 yrs
 
305

 
511

Total Capital Expenditures
 
 
$
19,862

 
21,438


(1)
First generation refers only to space that has never been occupied under EastGroup’s ownership.

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 years ended December 31, 2014 and 2013 were as follows:
 
Estimated
Useful Life
 
Years Ended December 31,
 
2014
 
2013
 
 
(In thousands)
Development                                               
Lease Life
 
$
2,866

 
3,895

New Tenants                                               
Lease Life
 
3,606

 
4,317

New Tenants (first generation) (1)
Lease Life
 
217

 
96

Renewal Tenants                                               
Lease Life
 
5,469

 
4,978

Total Capitalized Leasing Costs
 
 
$
12,158

 
13,286

Amortization of Leasing Costs (2)
 
 
$
8,284

 
7,354


(1)
First generation refers only to space that has never been occupied under EastGroup’s ownership.
(2)
Includes discontinued operations.

Discontinued Operations
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (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, which amends the requirements for reporting discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported 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, this ASU requires 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. Typically, when the Company disposes of operating properties, the sales are not considered 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 adopted the provisions of ASU 2014-08 as of January 1, 2014, and has applied the provisions prospectively.


25



Prior to the adoption of ASU 2014-08, the results of operations for the operating properties sold or held for sale during the reported periods were shown under Discontinued Operations on the Consolidated Statements of Income and Comprehensive Income.  Interest expense was not generally allocated to the properties held for sale or whose operations were included under Discontinued Operations unless the mortgage was required to be paid in full upon the sale of the property. ASU 2014-08 is described in further detail under Recent Accounting Pronouncements.

During 2014, the Company sold the following properties: Northpoint Commerce Center in Oklahoma City, Tampa West Distribution Center VI in Tampa, Clay Campbell Distribution Center and Kirby Business Center in Houston, and two of its three Ambassador Row Warehouses in Dallas. The results of operations and gains on sales for the properties sold during 2014 are reported under Income from Continuing Operations on the Consolidated Statements of Income and Comprehensive Income. The gains on sales are included in Gain on sales of real estate investments.

During 2013, the Company sold three properties: Tampa West Distribution Center V and VII and Tampa East Distribution Center II in Tampa. The results of operations and gains on sales for the properties sold in 2013 are reported under Discontinued Operations on the Consolidated Statements of Income and Comprehensive Income.  

See Notes 1(f) and 2 in the Notes to Consolidated Financial Statements for more information related to discontinued operations and gain on sales of real estate investments.  The following table presents the components of revenue and expense for the operating properties sold during 2013.  
DISCONTINUED OPERATIONS
 
Years Ended December 31,
2014
 
2013
 
 
(In thousands)
Income from real estate operations                                                                            
 
$

 
306

Expenses from real estate operations                                                                            
 

 
(87
)
Property net operating income from discontinued operations
 

 
219

Depreciation and amortization                                                                            
 

 
(130
)
Income from real estate operations                                                                            
 

 
89

Gain on sales of real estate investments                                                                            
 

 
798

Income from discontinued operations                                                                            
 
$

 
887



2013 Compared to 2012
Net Income Attributable to EastGroup Properties, Inc. Common Stockholders for 2013 was $32,615,000 ($1.08 per basic and diluted share) compared to $32,384,000 ($1.13 per basic and diluted share) for 2012.  EastGroup recognized gains on sales of real estate investments of $798,000 during 2013 and $6,510,000 during 2012.

PNOI increased by $11,072,000, or 8.3%, for 2013 compared to 2012. PNOI increased $5,903,000 from 2012 and 2013 acquisitions, $3,641,000 from newly developed properties, and $1,660,000 from same property operations. Lease termination fee income was $495,000 and $389,000 in 2013 and 2012, respectively. The Company recorded bad debt expense of $268,000 and $630,000 in 2013 and 2012, respectively. Straight-lining of rent increased Income from real estate operations by $1,971,000 and $1,572,000 in 2013 and 2012, respectively.

The Company signed 142 leases with certain free rent concessions on 3,787,000 square feet during 2013 with total free rent concessions of $4,723,000, compared to 147 leases with free rent concessions on 2,449,000 square feet with total free rent concessions of $2,845,000 in 2012.

Property expense to revenue ratios, defined as Expenses from Real Estate Operations as a percentage of Income from Real Estate Operations, were 28.7% in 2013 compared to 28.5% in 2012.  The Company’s percentage of leased square footage was 96.2% at December 31, 2013, compared to 95.1% at December 31, 2012.  Occupancy at the end of 2013 was 95.5% compared to 94.6% at the end of 2012.






26



Interest Expense decreased $179,000 in 2013 compared to 2012.  The following table presents the components of Interest Expense for 2013 and 2012:
 
Years Ended December 31,
2013
 
2012
 
Increase (Decrease)
(In thousands, except rates of interest)
Average unsecured bank credit facilities borrowings                                                                                 
$
112,971

 
85,113

 
27,858

Weighted average variable interest rates (excluding loan cost amortization)
1.87
%
 
1.61
%
 
 

VARIABLE RATE INTEREST EXPENSE
 

 
 

 
 

Unsecured bank credit facilities interest (excluding loan cost amortization)
$
2,110

 
1,371

 
739

Amortization of unsecured bank credit facilities costs                                                                                 
410

 
342

 
68

   Total variable rate interest expense                                                                                 
2,520

 
1,713

 
807

FIXED RATE INTEREST EXPENSE
 

 
 

 
 

Secured debt interest (excluding loan cost amortization)
31,298

 
34,733

 
(3,435
)
Unsecured debt interest (1) (excluding loan cost amortization)
5,559

 
2,724

 
2,835

Amortization of secured debt costs                                                                                 
706

 
780

 
(74
)
Amortization of unsecured debt costs
173

 
81

 
92

   Total fixed rate interest expense                                                                                 
37,736

 
38,318

 
(582
)
Total interest                                                                                 
40,256