REAL ESTATE PROPERTIES

12 Months Ended

Dec. 31, 2019

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



	December 31,
	2019			2018
	(In thousands)
Real estate properties:
Land	$	452,698		380,684
Buildings and building improvements	1,907,963			1,732,592
Tenant and other improvements	471,909			440,205
Right of use assets — Ground leases (operating) ⁽¹⁾	11,997			—
Development and value-add properties ⁽²⁾	419,999			263,664
	3,264,566			2,817,145
Less accumulated depreciation	(871,139		)	(814,915	)
	$	2,393,427		2,002,230


(1)	See Ground Leases discussion below and in Note 1(o) 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.

EastGroup acquired operating properties during 2019, 2018 and 2017 as discussed in Note 1(j).

The Company sold operating properties during 2019, 2018 and 2017 as shown in the table below. The results of operations and gains and losses on sales for the properties sold during the periods presented are reported in continuing operations on the Consolidated Statements of Income and Comprehensive Income. The gains and losses on sales are included in Gain on sales of real estate investments.

The Company did not classify any properties as held for sale as of December 31, 2019 and 2018.

Sales of Real Estate

A summary of Gain on sales of real estate investments for the years ended December 31, 2019, 2018 and 2017 follows:



Real Estate Properties	Location	Size (in Square Feet)	Date Sold	Net Sales Price		Basis	Recognized Gain
				(In thousands)
2019
World Houston 5	Houston, TX	51,000	01/29/2019	$	3,679	1,354	2,325
Altamonte Commerce Center	Orlando, FL	186,000	05/20/2019	14,423		5,342	9,081
University Business Center 130 ⁽¹⁾	Santa Barbara, CA	40,000	11/07/2019	11,083		2,729	8,354
Southpointe Distribution Center	Tucson, AZ	207,000	12/03/2019	13,699		2,281	11,418
University Business Center 125 & 175	Santa Barbara, CA	133,000	12/11/2019	23,675		13,785	9,890
Total for 2019				$	66,559	25,491	41,068
2018
World Houston 18	Houston, TX	33,000	01/26/2018	$	2,289	1,211	1,078
56 Commerce Park	Tampa, FL	181,000	03/20/2018	12,032		2,888	9,144
35th Avenue Distribution Center	Phoenix, AZ	125,000	07/26/2018	7,683		3,632	4,051
Total for 2018				$	22,004	7,731	14,273
2017
Stemmons Circle	Dallas, TX	99,000	05/12/2017	$	5,051	1,329	3,722
Techway Southwest I-IV	Houston, TX	415,000	06/19/2017	32,506		14,373	18,133
Total for 2017				$	37,557	15,702	21,855


(1)	EastGroup owned 80% of University Business Center 130 through a joint venture. The information shown for this transaction also includes the 20% attributable to the Company's noncontrolling interest partner.

The table above includes sales of operating properties; the Company also sold parcels of land during the years presented. During the year ended December 31, 2019, the Company sold (through eminent domain procedures) a small parcel of land (0.2 acres) in San Diego for $185,000 and recognized a gain on the sale of $83,000. During the year ended December 31, 2018, EastGroup sold a parcel of land in Houston for $2,577,000 and recognized a gain on the sale of $86,000. During the year ended December 31, 2017, EastGroup sold parcels of land in El Paso and Dallas for $3,778,000 and recognized net gains on the sales of $293,000. The net gains on sales of land are included in Other on the Consolidated Statements of Income and Comprehensive Income.

Development and Value-Add Properties

The Company’s development and value-add program as of December 31, 2019, was comprised of the properties detailed in the table below. Costs incurred include capitalization of interest costs during the period of construction. The interest costs capitalized on development projects for 2019 were $8,453,000 compared to $6,334,000 for 2018 and $5,765,000 for 2017. In addition, EastGroup capitalized internal development costs of $6,918,000 during the year ended December 31, 2019, compared to $4,696,000 during 2018 and $4,754,000 in 2017.

Total capital invested for development and value-add properties during 2019 was $318,288,000, which primarily consisted of costs of $265,609,000 as detailed in the Development and Value-Add Properties Activity table below, $47,415,000 as detailed in the Development and Value-Add Properties Transferred to Real Estate Properties During 2019 table below and costs of $5,264,000 on projects subsequent to transfer to Real estate properties. The capitalized costs incurred on development projects subsequent to transfer to Real estate properties include capital improvements at the properties and do not include other capitalized costs associated with development (i.e., interest expense, property taxes and internal personnel costs).



DEVELOPMENT AND VALUE-ADD PROPERTIES ACTIVITY		Costs Incurred						Anticipated Building Conversion Date
DEVELOPMENT AND VALUE-ADD PROPERTIES ACTIVITY		Costs Transferred in 2019 ⁽¹⁾			For the Year Ended 12/31/19	Cumulative as of 12/31/19	Projected Total Costs ⁽²⁾	Anticipated Building Conversion Date
		(In thousands)
	(Unaudited)						(Unaudited)	(Unaudited)
LEASE-UP	Building Size (Square feet)
Logistics Center 6 & 7, Dallas, TX ⁽³⁾	142,000	$	—		15,735	15,735	16,400	01/20
Settlers Crossing 1, Austin, TX	77,000	—			2,999	9,259	10,200	01/20
Settlers Crossing 2, Austin, TX	83,000	—			1,360	8,475	9,200	01/20
Parc North 5, Dallas, TX	100,000	—			1,736	8,689	9,200	02/20
Airport Commerce Center 3, Charlotte, NC	96,000	—			2,763	8,556	9,100	03/20
Horizon VIII & IX, Orlando, FL	216,000	4,967			11,634	16,601	18,800	04/20
Ten West Crossing 8, Houston, TX	132,000	—			3,174	9,764	10,900	04/20
Tri-County Crossing 1 & 2, San Antonio, TX	203,000	—			6,491	15,386	16,700	04/20
CreekView 121 5 & 6, Dallas, TX	139,000	—			7,546	13,151	16,200	06/20
Parc North 6, Dallas, TX	96,000	2,552			5,738	8,290	10,100	07/20
Arlington Tech Centre 1 & 2, Dallas, TX ⁽³⁾	151,000	—			13,277	13,277	15,100	08/20
Gateway 5, Miami, FL	187,000	11,944			11,161	23,105	23,500	09/20
Grand Oaks 75 2, Tampa, FL ⁽³⁾	150,000	—			13,115	13,115	13,600	09/20
Southwest Commerce Center, Las Vegas, NV ⁽³⁾	196,000	—			26,613	26,613	30,100	10/20
SunCoast 6, Ft. Myers, FL	81,000	3,915			4,019	7,934	9,200	10/20
Rocky Point 2, San Diego, CA ⁽³⁾	109,000	—			19,275	19,275	20,600	12/20
Steele Creek IX, Charlotte, NC	125,000	1,766			7,354	9,120	9,800	12/20
Total Lease-Up	2,283,000	25,144			153,990	226,345	248,700
UNDER CONSTRUCTION
SunCoast 8, Ft. Myers, FL	77,000	4,361			123	4,484	9,000	05/20
Gilbert Crossroads A & B, Phoenix, AZ	140,000	3,221			10,729	13,950	16,000	01/21
Hurricane Shoals 3, Atlanta, GA	101,000	3,890			2,739	6,629	8,800	03/21
Interstate Commons 2, Phoenix, AZ ⁽³⁾	142,000	—			9,882	9,882	11,800	03/21
Tri-County Crossing 3 & 4, San Antonio, TX	203,000	2,334			6,364	8,698	14,700	05/21
World Houston 44, Houston, TX	134,000	1,546			3,244	4,790	9,100	05/21
Ridgeview 1 & 2, San Antonio, TX	226,000	2,499			4,032	6,531	18,500	06/21
Creekview 121 7 & 8, Dallas, TX	137,000	5,489			1,310	6,799	16,300	07/21
Northwest Crossing 1-3, Houston, TX	278,000	6,109			5,426	11,535	25,700	07/21
Settlers Crossing 3 & 4, Austin, TX	173,000	4,030			4,059	8,089	18,400	07/21
LakePort 1-3, Dallas, TX	194,000	3,542			4,520	8,062	22,500	09/21
Total Under Construction	1,805,000	37,021			52,428	89,449	170,800
PROSPECTIVE DEVELOPMENT (PRIMARILY LAND)	Estimated Building Size (Square feet)
Phoenix, AZ	178,000	(3,221		)	785	4,373
Ft. Myers, FL	329,000	(8,276		)	2,457	7,503
Miami, FL	463,000	(11,944		)	9,798	34,185
Orlando, FL	—	(4,967		)	323	1,075
Tampa, FL	349,000	—			4,241	5,801
Atlanta, GA	—	(3,890		)	3,164	—
Jackson, MS	28,000	—			—	706
Charlotte, NC	475,000	(1,766		)	1,884	7,327
Austin, TX	—	(4,030		)	288	—
Dallas, TX	997,000	(11,583		)	18,979	19,588
Houston, TX	1,223,000	(13,126		)	16,135	19,448
San Antonio, TX	373,000	(5,987		)	1,137	4,199
Total Prospective Development	4,415,000	(68,790		)	59,191	104,205
	8,503,000	$	(6,625	)	265,609	419,999
The Development and Value-Add Properties Activity table is continued on the following page.



DEVELOPMENT AND VALUE-ADD PROPERTIES TRANSFERRED TO REAL ESTATE PROPERTIES DURING 2019		Costs Incurred
		Costs Transferred in 2019 ⁽¹⁾		For the Year Ended 12/31/19	Cumulative as of 12/31/19
	(Unaudited)	(In thousands)					(Unaudited)
	Building Size (Square feet)						Building Conversion Date
	Building Size (Square feet)						Building Conversion Date
Siempre Viva I, San Diego, CA ⁽³⁾	115,000	$	—	—	14,075		01/19
CreekView 121 3 & 4, Dallas, TX	158,000	—		1,739	15,539		03/19
Horizon VI, Orlando, FL	148,000	—		3,682	11,907		03/19
Horizon XI, Orlando, FL	135,000	—		507	9,230		04/19
Falcon Field, Phoenix, AZ	97,000	—		181	8,413		05/19
Gateway 1, Miami, FL	200,000	—		3,402	23,643		05/19
SunCoast 5, Ft. Myers, FL	81,000	—		1,335	7,870		05/19
Steele Creek V, Charlotte, NC	54,000	—		2,223	5,537		07/19
Broadmoor 2, Atlanta, GA	111,000	—		1,478	7,892		11/19
Eisenhauer Point 9, San Antonio, TX	82,000	1,154		5,175	6,329		11/19
World Houston 43, Houston, TX	86,000	1,041		5,381	6,422		11/19
Eisenhauer Point 7 & 8, San Antonio, TX	336,000	—		9,790	22,880		12/19
World Houston 45, Houston, TX	160,000	4,430		12,522	16,952		12/19
Total Transferred to Real Estate Properties	1,763,000	$	6,625	47,415	156,689	⁽⁴⁾


(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 $59.3 million and tenant improvement obligations of $7.5 million on properties under development.


(3)	Represents value-add projects acquired by EastGroup.


(4)	Represents cumulative costs at the date of transfer.

Ground Leases

On January 1, 2019, EastGroup adopted the principles of FASB Accounting Standards Codification (“ASC”) 842, Leases, as discussed in Note 1(o). 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 December 31, 2019, the unamortized balance of the Company’s right of use assets for its ground leases was $11,997,000. The right of use assets for ground leases are included in Real estate properties on the Consolidated Balance Sheets.

As of December 31, 2019, the Company owned 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 for the years ended December 31, 2019, 2018 and 2017 were $966,000, $783,000 and $760,000, respectively. 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 December 31, 2019, for the ground leases is 43 years. The following schedule indicates approximate future minimum ground lease payments for these properties by year as of December 31, 2019:

Future Minimum Ground Lease Payments as of December 31, 2019



Years Ending December 31,	(In thousands)
2020	$	970
2021	970
2022	970
2023	975
2024	999
Thereafter	38,916
Total minimum payments	43,800
Imputed interest ⁽¹⁾	(31,752		)
Total ground leases	$	12,048

(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 obtained 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 as of December 31, 2018



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 obtained in April 2019.