REAL ESTATE PROPERTY ACQUISITIONS AND ACQUIRED INTANGIBLES

6 Months Ended

Jun. 30, 2023

Real Estate Property Acquisitions and Acquired Intangibles

REAL ESTATE PROPERTY ACQUISITIONS AND ACQUIRED INTANGIBLES

Upon acquisition of real estate properties, EastGroup applies the principles of FASB ASC 805, Business Combinations. The FASB Codification provides a framework for determining whether transactions should be accounted for as acquisitions of assets or businesses. Under the guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. Criteria considered in grouping similar assets include geographic location, market and operational risks and the physical characteristics of the assets. EastGroup determined that its real estate property acquisitions in 2022 and the first six months of 2023 are considered to be acquisitions of groups of similar identifiable assets; therefore, the acquisitions are not considered to be acquisitions of a business. As a result, the Company capitalized acquisition costs related to its 2022 and 2023 acquisitions.

The FASB Codification also provides guidance on how to properly determine the allocation of the purchase price among the individual components of both the tangible and intangible assets based on their respective fair values. 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. Land is valued using comparable land sales specific to the applicable market, provided by a third party. The Company determines whether any financing assumed is above or below market based upon comparison to similar financing terms for similar properties. The cost of the properties acquired may be adjusted based on indebtedness assumed from the seller that is determined to be above or below market rates.

The purchase price is also allocated among the following categories of intangible assets: the above or below market component of in-place leases and the value of leases in-place at the time of acquisition. 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 current market rents over the remaining term of the lease. The amounts allocated to above and below market lease intangibles 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. In-place lease intangibles are valued based upon management’s assessment of factors such as an estimate of foregone rents and avoided leasing costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. These intangible assets are included in Other assets on the Consolidated Balance Sheets and are amortized over the remaining term of the existing lease.

Amortization expense for in-place lease intangibles was $2,174,000 and $4,136,000 for the three and six months ended June 30, 2023, respectively, and $2,198,000 and $4,663,000 for the same periods in 2022. Amortization of above and below market lease intangibles increased rental income by $696,000 and $1,295,000 for the three and six months ended June 30, 2023, respectively, and $507,000 and $1,352,000 for the same periods in 2022.

During six months ended June 30, 2023, EastGroup acquired the following property:

REAL ESTATE PROPERTY ACQUIRED IN 2023

Location

Size

Date
Acquired

Cost (1)

(Square feet)

(In thousands)

Operating property acquired (2)

Craig Corporate Center

Las Vegas, NV

156,000

04/18/2023

34,365

(1)Cost is calculated in accordance with FASB ASC 805, Business Combinations, and represents the sum of the purchase price, closing costs and capitalized acquisition costs.

(2)Operating properties are defined as stabilized real estate properties (land including buildings and improvements) in the Company’s operating portfolio; included in Real estate properties on the Consolidated Balance Sheets.

The following table summarizes the allocation of the total consideration for the acquired assets and assumed liabilities in connection with the acquisition identified in the table above which was acquired during the six months ended June 30, 2023.


ACQUIRED ASSETS AND ASSUMED LIABILITIES IN 2023	Cost
	(In thousands)
Land	$	13,913
Buildings and building improvements	18,202
Tenant and other improvements	646

Total real estate properties acquired	32,761
In-place lease intangibles (1)	1,604



Total assets acquired, net of liabilities assumed	$	34,365

(1)In-place lease intangibles and above market lease intangibles are each included in Other assets on the Consolidated Balance Sheets. These costs are amortized over the remaining lives of the associated leases in place at the time of acquisition.

The lease in the property acquired during the six months ended June 30, 2023 had a remaining lease term at acquisition of approximately 10.1 years.

Also during the six months ended June 30, 2023, EastGroup purchased 116.7 acres of development land in three markets for $17,754,000.

During 2022, EastGroup acquired the following properties:


REAL ESTATE PROPERTIES ACQUIRED IN 2022	Location	Size	Date Acquired	Cost (1)
		(Square feet)		(In thousands)
Operating properties acquired (2)
Cebrian Distribution Center and Reed Distribution Center (3)	Sacramento, CA	329,000	06/01/2022	$	49,726
6th Street Business Center, Benicia Distribution Center 1-5, Ettie Business Center, Laura Alice Business Center, Preston Distribution Center, Sinclair Distribution Center, Transit Distribution Center and Whipple Business Center (3)	San Francisco, CA	1,377,000	06/01/2022	309,404
Total operating property acquisitions		1,706,000		359,130

Value-add properties acquired (4)
Cypress Preserve 1 & 2	Houston, TX	516,000	03/28/2022	54,462
Zephyr Distribution Center	San Francisco, CA	82,000	04/08/2022	29,017
Mesa Gateway Commerce Center	Phoenix, AZ	147,000	04/15/2022	18,315
Access Point 3	Greenville, SC	299,000	07/12/2022	21,127
Total value-add property acquisitions		1,044,000		122,921

Total acquired assets		2,750,000		$	482,051

(1)Cost is calculated in accordance with FASB ASC 805, Business Combinations, and represents the sum of the purchase price, closing costs and capitalized acquisition costs.

(3)The Company acquired these operating properties along with two land parcels, also in Sacramento, CA and San Francisco, CA, in connection with its acquisition of Tulloch Corporation in June 2022. Size and cost are presented on an aggregate basis for the properties located in Sacramento, CA and San Francisco, CA, respectively. In consideration for this acquisition, the Company assumed a $60,000,000 loan and issued 1,868,809 shares of the Company’s common stock. The acquisition date fair value of the loan assumed was $60,000,000, and the acquisition date fair value of the common shares, which was based on the closing share price on the acquisition date, was $303,756,000.

(4)Value-add properties are defined in Note 5.

The following table summarizes the allocation of the total consideration for the acquired assets and assumed liabilities in connection with the acquisitions identified in the table above which were acquired during the year ended December 31, 2022.


ACQUIRED ASSETS AND ASSUMED LIABILITIES IN 2022	Cost
	(In thousands)
Land	$	127,402
Buildings and building improvements	335,335
Tenant and other improvements	11,502

Total real estate properties acquired	474,239
In-place lease intangibles (1)	11,871

Below market lease intangibles (2)	(4,059)

Total assets acquired, net of liabilities assumed	$	482,051

(2)Below market lease intangibles are included in Other liabilities on the Consolidated Balance Sheets. These costs are amortized over the remaining lives of the associated leases in place at the time of acquisition.

The leases in the properties acquired during the year ended December 31, 2022 had a weighted average remaining lease term at acquisition of approximately 3.9 years.

Also during 2022, EastGroup purchased 456.3 acres of development land in 10 markets for $123,717,000. The land acquisitions in San Francisco and Sacramento were acquired in connection with the Company’s acquisition of Tulloch Corporation in June 2022.

Also in the year ended December 31, 2022, the Company acquired the 1% noncontrolling partnership interest in Speed Distribution Center in San Diego for $18,599,000. EastGroup continues to control and own 100% of the property.

The Company periodically reviews the recoverability of goodwill (at least annually) and the recoverability of other intangibles (on a quarterly basis) for possible impairment. No impairment of goodwill or other intangibles existed during the three and six month periods ended June 30, 2023 and 2022.