REAL ESTATE PROPERTIES

6 Months Ended

Jun. 30, 2019

Real Estate Investment Property, Net [Abstract]

REAL ESTATE PROPERTIES

EastGroup has one reportable segment – industrial properties. These properties are primarily located in major Sunbelt regions of the United States. The Company’s properties have similar economic characteristics and as a result, have been aggregated into one reportable segment.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows (including estimated future expenditures necessary to substantially complete the asset) expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the periods ended June 30, 2019 and June 30, 2018, the Company did not identify any impairment charges which should be recorded.

Depreciation of buildings and other improvements is computed using the straight-line method over estimated useful lives of generally 40 years for buildings and 3 to 15 years for improvements. Building improvements are capitalized, while maintenance and repair expenses are charged to expense as incurred. Significant renovations and improvements that improve or extend the useful life of the assets are capitalized. Depreciation expense was $22,519,000 and $42,266,000 for the three and six months ended June 30, 2019, respectively, and $18,898,000 and $36,825,000 for the same periods in 2018.

The Company’s Real estate properties and Development and value-add properties at June 30, 2019 and December 31, 2018 were as follows:



	June 30, 2019			December 31, 2018
	(In thousands)
Real estate properties:
Land	$	416,415		380,684
Buildings and building improvements	1,836,077			1,732,592
Tenant and other improvements	456,562			440,205
Right of use assets — Ground leases (operating) ⁽¹⁾	12,488			—
Development and value-add properties ⁽²⁾	285,525			263,664
	3,007,067			2,817,145
Less accumulated depreciation	(847,562		)	(814,915	)
	$	2,159,505		2,002,230


(1)	See below and in Note 20 for information regarding the Company’s right of use assets for ground leases.

(2)

Value-add properties are defined as properties that are either acquired but not stabilized or can be converted to a higher and better use. Acquired properties meeting either of the following two conditions are considered value-add properties: (1) Less than 75% occupied as of the acquisition date (or will be less than 75% occupied within one year of acquisition date based on near term lease roll), or (2) 20% or greater of the acquisition cost will be spent to redevelop the property.

Ground Leases

On January 1, 2019, EastGroup adopted the principles of FASB Accounting Standards Codification (“ASC”) 842, Leases, as further discussed in Note 20. In connection with the adoption, the Company recorded right of use assets for its ground leases, which are classified as operating leases, using the effective date transition option; under this option, prior years are not restated. As of January 1, 2019, the Company recorded right of use assets for its ground leases of $10,226,000. In April 2019, the Company acquired Logistics Center 6 & 7 in Dallas, which is located on land under a ground lease. The Company recorded a right of use asset of $2,679,000 in connection with this acquisition. As of June 30, 2019, the unamortized balance of the Company’s right of use assets for its ground leases was $12,488,000. The right of use assets for ground leases are included in Real estate properties on the Consolidated Balance Sheets.

As of June 30, 2019, the Company operated two properties in Florida, three properties in Texas and one property in Arizona that are subject to ground leases. These leases have terms of 40 to 50 years, expiration dates of August 2031 to October 2058, and renewal options of 15 to 35 years, except for the one lease in Arizona which is automatically and perpetually renewed annually. The Company has included renewal options in the lease terms for calculating the ground lease assets and liabilities as the Company is reasonably certain it will exercise these options. Total ground lease expenditures were $246,000 and $444,000 for the three and six months ended June 30, 2019, respectively, and $197,000 and $392,000 for the same periods in 2018. Payments are subject to increases at 3 to 10 year intervals based upon the agreed or appraised fair market value of the leased premises on the adjustment date or the Consumer Price Index percentage increase since the base rent date. These future changes in payments will be considered variable payments and will not impact the assessment of the asset or liability unless there is a significant event that triggers reassessment, such as amendment with a change in the terms of the lease. The weighted-average remaining lease term as of June 30, 2019, for the ground leases is 44 years. The following schedule indicates approximate future minimum ground lease payments for these properties by year as of June 30, 2019:

Future Minimum Ground Lease Payments



Years Ending December 31,	(In thousands)
2019 - Remainder of year	$	485
2020	970
2021	970
2022	970
2023	975
Thereafter	39,914
Total minimum payments	44,284
Imputed interest ⁽¹⁾	(31,564		)
Amortization	(232		)
Total ground leases	$	12,488

(1)

As the Company’s leases do not provide an implicit rate, in order to calculate the present value of the remaining ground lease payments, the Company used its incremental borrowing rate, adjusted for a number of factors, including the long-term nature of the ground leases, the Company’s estimated borrowing costs, and the estimated fair value of the underlying land, to determine the imputed interest for its ground leases. The Company elected to use the portfolio approach as all of its ground leases in place as of January 1, 2019, have similar characteristics and determined 7.3% as the appropriate rate as of January 1, 2019, for all leases in place at that time. For the ground lease acquired during April 2019, the Company used its incremental borrowing rate, adjusted for the factors discussed above, which was determined to be 8.0%.

As noted above, the Company adopted the new lease accounting guidance effective January 1, 2019. Since the Company has applied the provisions on a prospective basis, the following represents approximate future minimum ground lease payments by year as of December 31, 2018, as applicable under ASC 840, Leases, prior to the adoption of ASC 842.

Future Minimum Ground Lease Payments



Years Ending December 31,	(In thousands)
2019	$	791
2020	791
2021	791
2022	791
2023	791
Thereafter	30,751
	$	34,706

At December 31, 2018, the Company had the same ground leases in place as mentioned above, with the exception of the ground lease associated with Logistics Center 6 & 7 which was executed in April 2019, and recorded ground lease expenditures of $783,000 for the year.