1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-7094 EASTGROUP PROPERTIES (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.) 300 ONE JACKSON PLACE 188 EAST CAPITOL STREET 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 BENEFICIAL INTEREST, $1.00 PAR VALUE, NEW YORK STOCK EXCHANGE SECURITIES REGISTERED UNDER TO SECTION 12(g) OF THE ACT: NONE 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) 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) The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 10, 1997 was $244,685,000. The number of shares of beneficial interest, $1.00 par value, outstanding as of March 10, 1997 was 8,442,243. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III. 1
2 PART I ITEM 1. BUSINESS. ORIGINAL ORGANIZATION On March 20, 1997, the Trust announced that its Board of Trustees approved a three-for-two share split in the form of a share dividend of one share for every two shares outstanding. The share dividend will be distributed on April 7, 1997 to shareholders of record as of March 31, 1997. All share and per share amounts in these financial statements have been retroactively restated for the share split. EastGroup Properties (the "Trust", the "Registrant" or "EastGroup") is an equity oriented real estate investment trust ("REIT") established under the laws of the State of Maryland on July 16, 1969. The Registrant commenced its operations in December 1969 under the name Third ICM Realty. In 1971, the Registrant had its initial public offering, and the name of the Trust was changed in 1971 to ICM Realty. At the Annual Meeting held in 1983, the shareholders approved the change of name to EastGroup Properties. In January 1994, the Trust completed the public offering of 2,625,000 shares of beneficial interest at $13.33 per share and received net proceeds of $32,164,000. On May 14, 1996, LNH was merged with and into the Trust. EastGroup issued 927,366 of its shares as a result of the merger. On June 19, 1996, Copley Properties, Inc. was merged into the Trust. EastGroup issued 3,238,343 of its shares as a result of the merger. In February 1997, the Trust completed the public offering of 2,100,000 shares of beneficial interest at $17.917 and received net proceeds of approximately $36,725,000. The Registrant has elected to be taxed as a real estate investment trust under Sections 856-860 of the Internal Revenue Code, as amended, and intends to continue to qualify to be so taxed. If in any taxable year the Registrant should not qualify as a real estate investment trust, the Registrant would be taxed as a corporation and distributions to its shareholders would not be deductible by the Trust in computing its federal taxable income. ADMINISTRATION The Trust is self administered and maintains its principal executive offices in Jackson, Mississippi. As of March 10, 1997, EastGroup had 26 full time and 2 part-time employees. Current Operations EastGroup is a self-administered REIT which focuses on the ownership, acquisition and selective development of industrial properties primarily in major Sunbelt markets, with an emphasis on the states of Florida, Texas, Arizona and California. As of December 31, 1996, EastGroup's portfolio includes 27 industrial properties comprising over 4.9 million square feet of leasable space. As of December 31, 1996, the industrial portfolio and the office portfolio were each 97% leased. In addition to direct property acquisitions, EastGroup also seeks to grow its portfolio through the acquisition of other public and private real estate companies and REITs which EastGroup believes are undervalued. On June 19, 1996, EastGroup completed the acquisition (the "Copley Acquisition") of Copley Properties, Inc. ("Copley"), which significantly expanded EastGroup's industrial portfolio. The Copley Acquisition added 11 properties (nine industrial properties and two office buildings), totaling over 2 million square feet of leasable space, principally in Arizona and California. The Copley Acquisition was completed for an aggregate consideration of approximately $116 million, consisting of the issuance of approximately 3.2 million shares (in exchange for the 85% of Copley's outstanding shares not already owned by EastGroup), the assumption of approximately $60 million in Copley's existing indebtedness, the cost of the 15% interest 2
3 in Copley held by EastGroup prior to the Copley Acquisition and the expenses incurred in connection with the Copley Acquisition. Also, in May 1996, EastGroup completed the acquisition of LNH REIT, Inc. ("LNH"), a former EastGroup affiliate (the "LNH Acquisition"), for aggregate consideration of approximately $18 million, consisting of the issuance of 927,366 shares (in exchange for the 77% of LNH's outstanding shares not already owned by EastGroup), the cost of the 23% interest in LNH held by EastGroup prior to the LNH Acquisition and the expenses incurred in connection with the LNH Acquisition. Management of EastGroup is currently completing the repositioning of EastGroup's portfolio to focus on industrial properties, primarily in the Sunbelt region of the United States. Accordingly, since January 1, 1996, EastGroup has sold four apartment communities and other non-core assets for an aggregate sales price of approximately $25.6 million. The sales proceeds have been applied principally to reduce indebtedness and acquire industrial properties. Additionally, in August and September 1996, respectively, EastGroup acquired Walnut Business Center, an industrial complex in Fullerton, California, and Braniff Park West, an industrial complex in Tulsa, Oklahoma, for total consideration of approximately $13.9 million. EastGroup plans to dispose of its two shopping center properties which were acquired in the LNH Acquisition, as market conditions permit. The Registrant intends to continue to qualify as a real estate investment trust under the Internal Revenue Code, as amended. Ordinary taxable income will continue to be paid to the shareholders. The Registrant has the option of paying out capital gains to the shareholders with no tax to the Registrant or paying a capital gains tax and retaining the gains on sales. The book value of the property sold and the retained portion of capital gains, if any, are generally reinvested by the Registrant, which considers many factors in making these investments, such as type of property, location, current yield, potential for appreciation and others. EastGroup incurs short-term floating rate debt in connection with the acquisition of real estate, and attempts to replace floating rate debt with fixed rate term loans secured by real property as market conditions permit. EastGroup also may, in appropriate circumstances, acquire one or more properties in exchange for EastGroup's equity securities. EastGroup holds its properties as long term investments but may determine to sell certain properties that no longer meet its investment criteria; EastGroup may provide financing in connection with such sales of property if market conditions so require, but it does not presently intend to make other loans. EastGroup has no present intentions of underwriting securities of other issuers or repurchasing or reacquiring its shares. The strategies and policies set forth above were determined, and are subject to review by, EastGroup's Board of Trustees which may change such strategies or policies based upon their 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 shareholders which contain financial statements audited by EastGroup's independent public accountants. ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether the owner knew 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. All of EastGroup's properties have been subjected to environmental audits by independent environmental consultants. With the exception of one property commonly known as Cowesett Corners Shopping Center, 300 Cowesett Road at Route 2, Warwick, Rhode Island ("Cowesett"), portions of which are used for purposes of operating a dry-cleaning business and paint store, these environmental audit reports have not revealed any potential significant environmental liability, nor is 3
4 management of EastGroup aware of any environmental liability with respect to the properties that such management believes would have a material adverse effect on EastGroup's business, assets or results of operations. Preliminary environmental studies performed at the Cowesett property indicated that certain hazardous materials have been released at Cowesett in connection with the dry-cleaning operations conducted on part of the property by parties unrelated to EastGroup. Environmental studies included a Phase II investigation of the Cowesett property. Based upon these studies, management of EastGroup believes that the hazardous materials have been contained. EastGroup is continuing to investigate the need for remediation at the Cowesett property and based on current information, management of EastGroup believes that the cost of such remediation is approximately $630,000. EastGroup owns a 50% joint venture interest in Cowesett, and any costs with respect to environmental conditions at Cowesett will be shared equally with its joint venture partner. At December 31, 1996, the Trust accrued $315,000 related to this environmental liability. No assurance can be given that existing environmental studies with respect to any of the properties reveal all environmental liabilities or that any prior owner of any such property did not create any material environmental condition not known to EastGroup. ITEM 2. PROPERTIES. The operations of the Registrant are conducted from approximately 12,000 square feet of rented office space located at 300 One Jackson Place, 188 East Capitol Street, Jackson, Mississippi. The Trust shares this office space with another company. The Registrant does not own or lease properties other than those carried as part of its real estate investment portfolio shown on Financial Statement Schedule III. At December 31, 1996, the Trust does not have any single property that is 10% or more of total book value or 10% or more of total gross revenues and thus is not subject to the requirements of item 14 and 15 of Form S-11. ITEM 3. LEGAL PROCEEDINGS. The Trust is not presently involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Trust or its properties, other than routine litigation arising in the ordinary course of business or which is expected to be covered by the Trust's liability insurance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 4
5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. SHARES OF BENEFICIAL INTEREST MARKET PRICES AND DIVIDENDS The Trust's shares of beneficial interest are presently 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 (restated to give effect to the share split) reported by the New York Stock Exchange during the past two years and per share distributions paid (restated to give effect to the share split) for each quarter. <TABLE> <CAPTION> Calendar 1996 Calendar 1995 ------------- ------------- Distri- Distri- Quarter High Low butions High Low butions - ------- ---- --- ------- ---- --- ------- <S> <C> <C> <C> <C> <C> <C> First $15.50 13.83 $ .31 $13.08 11.50 $ .30 Second 14.92 14.33 .31 13.33 12.25 .30 Third 16.50 13.83 .33 13.83 12.67 .31 Fourth 18.33 16.08 .33 14.92 13.50 .32 ------ ------ $ 1.28 $ 1.23 ====== ====== </TABLE> As of March 10, 1997, there were 1,412 holders of record of the Trust's shares of beneficial interest. Approximately 87% of the Trust's outstanding shares are held by CEDE & Co., which is accounted for as a single shareholder of record for multiple beneficial owners. In 1996 and 1995, the distributions paid per share of $1.28 and $1.23 were all taxable as ordinary income for federal income tax purposes, and none of such distributions represented a return of capital. 5
6 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The following table sets forth selected consolidated financial data for the Trust and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. <TABLE> <CAPTION> Year Ended December 31, ----------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands, except per share data) <S> <C> <C> <C> <C> <C> OPERATING DATA: Revenues Income from real estate operations $37,143 28,386 23,194 13,771 11,079 Land rents 158 217 398 856 979 Interest 1,718 1,036 1,054 1,174 1,305 Other 746 625 249 287 332 ------- ------- ------- ------- ------- 39,765 30,264 24,895 16,088 13,695 ------- ------- ------- ------- ------- Expenses Operating expenses from real estate operations 13,262 11,575 9,741 6,159 5,271 Interest expense 8,930 6,287 3,905 3,415 2,832 Depreciation and amortization 7,759 5,613 4,323 2,874 2,338 Minority interests in joint ventures 289 220 163 78 - General and administrative expenses 2,356 2,180 2,046 1,531 1,297 Stock appreciation rights and incentive compensation expense (recovery) - - (129) 320 357 Provision for (recovery of) possible losses - - - (144) 1,675 ------- ------- ------- ------- ------- 32,596 25,875 20,049 14,233 13,770 ------- ------- ------- ------- ------- Income (loss) before gains (losses) on investments 7,169 4,389 4,846 1,855 (75) ------- ------- ------- ------- ------- Gains (losses) on investments Real estate 5,334 3,322 2,322 3,408 (3,598) Real estate investment trust securities 6 - - 1,152 - ------- ------- ------- ------- ------- Net income (loss) $12,509 7,711 7,168 6,415 (3,673) ======= ======= ======= ======= ======= PER SHARE DATA: Net income (loss) $1.44 1.22 1.16 1.74 (1.00) Book value (at end of period) 13.78 13.06 12.98 13.22 12.76 Cash distributions declared 1.28 1.23 .87 1.07 1.01 Cash distributions paid 1.28 1.23 1.16 1.03 1.01 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,677 6,338 6,170 3,690 3,688 </TABLE> 6
7 <TABLE> <CAPTION> Year Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands, except per share data) <S> <C> <C> <C> <C> <C> OTHER DATA: Funds from operations reconcilement: Net income (loss) $ 12,509 7,711 7,168 6,415 (3,673) Add: Depreciation and amortization 7,759 5,613 4,323 2,874 2,338 Stock appreciation rights and incentive compensation expense (recovery) - - (129) 320 357 Real estate investment trust dividends received 77 182 60 75 72 Provision for (recovery of) possible losses - - - (144) 1,675 Less: Gains on investments, net (5,340) (3,322) (2,322) (4,560) 3,598 Equity in earnings of real estate investment trust (43) (203) (123) (67) (153) Other (142) (134) (64) (18) - -------- ----- ----- ----- ----- Funds from operations (1) $ 14,820 9,847 8,913 4,895 4,214 ======== ===== ===== ===== ===== Cash flows provided by (used in): Operating activities $ 13,996 9,746 8,448 5,276 4,381 Investing activities (577) (5,721) (46,831) (19,073) (9,226) Financing activities (13,007) (4,300) 35,994 16,324 1,887 BALANCE SHEET DATA (AT END OF PERIOD): Real estate investments, at cost (2) $293,147 162,939 166,927 116,102 94,713 Real estate investments, net of accumulated depreciation and allowance for losses(2) 269,585 143,733 151,039 101,621 81,908 Total assets 281,455 157,955 154,860 107,508 85,529 Mortgage, bond and bank loans payable 129,078 71,562 68,229 53,203 35,643 Total liabilities 136,129 75,055 72,684 58,707 38,496 Total shareholders' equity 145,326 82,900 82,176 48,801 47,033 <FN> (1) The Trust generally considers funds from operations (FFO) to be an appropriate supplemental measure of the performance of an equity REIT because it is predicated on a cash flow analysis, as opposed to a measure predicated on generally accepted accounting principles, which gives effect to non-cash items such as depreciation. FFO, as defined by the National Association of Real Estate Investment Trusts and as followed by the Trust, represents net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. Since the definition of FFO is a guideline, computation of FFO may vary from one REIT to another. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Trust's operating performance or as an alternative to cash flow as a measure of liquidity. In addition, FFO is not necessarily indicative of cash available to fund cash needs. The National Association of Real Estate Investment Trusts ('NAREIT") recommended changes in the </TABLE> 7
8 computation of funds from operations for fiscal periods beginning in 1996 ("new definition"). The only adjustment to EastGroup's computation for prior years was for amortization of deferred financing costs which include mortgage broker fees, legal fees, title insurance, engineering and environmental reports and other costs. There were no costs involved in reducing interest rates. The effect on prior years of EastGroup adopting the new definitions follows: <TABLE> <CAPTION> Funds From Operations --------------------- (In thousands) Year Ended Financing Cost New December 31, As Reported Adjustment Definition ------------ ----------- ---------- ---------- <S> <C> <C> <C> 1995 $ 10,159 312 9,847 1994 9,071 158 8,913 1993 5,131 236 4,895 1992 4,241 27 4,214 (2) Does not include a 50% controlled joint venture investment of $4,367,000 at December 31, 1996. </TABLE> 8
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL CONDITION (Comments are for the balance sheet dated December 31, 1996, compared to December 31, 1995.) Assets of EastGroup Properties ("EastGroup" or the "Trust") were $281,455,000 at December 31, 1996, an increase of $123,500,000 from December 31, 1995. Liabilities increased $61,074,000 to $136,129,000 during the same period. Book value per share increased from $13.06 at December 31, 1995 to $13.78 at December 31, 1996. During 1996, the Trust acquired the entities described below, which were accounted for by the purchase method of accounting. For financial reporting purposes, the assets of the company acquired are assigned new cost basis amounts based on the allocation of the purchase price of the assets to the Trust. In general, the purchase price to the Trust consists of the new shares issued at the market price of the Trust's shares on the date of the merger and the previous investment the Trust had in LNH and Copley. The shares of LNH and Copley owned by the Trust were retired at the merger date. The operating results of LNH and Copley have been included in the consolidated statements of operations subsequent to the dates of acquisition. On May 14, 1996, the merger of LNH REIT, Inc. ("LNH") with EGP-LNH Corporation, a wholly-owned subsidiary of the Trust, was completed. Under the terms of the merger, each LNH share was converted into the right to receive .55065 EastGroup shares (.3671 pre-split). The Trust issued 927,366 shares as a result of the merger. On June 19, 1996, Copley was merged into the Trust. Under the terms of the merger, each Copley share was converted into the right to receive 1.06002 EastGroup shares (.70668 pre-split). EastGroup issued 3,238,343 of its shares as a result of the merger. The increase in net assets at the acquisition dates, based on relative fair values, resulting from the mergers was as follows (in thousands): <TABLE> <CAPTION> LNH Copley -------- -------- <S> <C> <C> Real estate properties $ 6,243 113,192 Investment in joint venture 4,298 -- Mortgage loans 5,614 880 Land 521 3,280 Investment in real estate investment trust 1,050 -- Cash 1,200 1,550 Accounts receivable and other assets 425 305 Mortgage notes payable -- (59,681) Minority interest (783) (1,740) Accounts payable and other liabilities (713) (1,063) -------- -------- $ 17,855 56,723 ======== ======== </TABLE> The Trust's purchase price of the net assets acquired consisted of the following (in thousands): <TABLE> <CAPTION> LNH Copley ------- ------- <S> <C> <C> Shares of beneficial interest (927,366 and 3,238,343 shares) $13,640 47,658 Cash in lieu of fractional shares (369 and 390 shares) 5 6 Merger expenses 292 2,866 Prior investment in LNH and Copley 3,918 6,193 ------- ------- $17,855 56,723 ======= ======= </TABLE> 9
10 Real estate properties and real estate held for sale (excluding the investment in a 50% controlled joint venture) increased $123,955,000 during the year ended December 31, 1996 as a result of the following (in thousands): <TABLE> <S> <C> Real estate acquired: Copley merger $ 113,192 LNH merger 6,243 Walnut Business Center 8,159 Braniff Park West 5,706 Capital improvements on Trust properties 5,774 Development costs: Rampart Distribution II 673 Chancellor 1,022 Reclass from land and LPLB Rampart land 229 LNH land 27 Real estate sold: Garden Villa - January 1996 (3,830) BayGreen - September and October 1996 (1,689) Pin Oaks - November 1996 (2,704) EastGate - November 1996 (1,432) Plantations - December 1996 (7,415) --------- $ 123,955 ========= </TABLE> 10
11 The Trust acquired Walnut Business Center, a 234,070 square foot industrial complex in Fullerton, California in August 1996 and Braniff Park West, a 259,352 square foot industrial complex in Tulsa, Oklahoma in September 1996. In addition, the Trust is developing the Rampart Distribution Center II, a 66,000 square foot industrial building on land adjacent to Rampart Distribution Center I in Denver, Colorado, at an estimated cost of approximately $3,250,000, and the Chancellor Distribution Center, a 51,100 square foot industrial building on land adjacent to the rear of Exchange Distribution Center in Orlando, Florida, at an estimated cost of approximately $1,900,000. At December 31, 1996, the Trust is continuing to reposition its portfolio to focus on industrial properties. As a result of this repositioning, the Trust is offering for sale the two shopping center interests and the land acquired in the LNH merger and reclassified these assets to held for sale. Also, the Trust currently has a contract to sell the Santa Fe Energy Office Building in Houston, Texas, for approximately $13,000,000 and a purchase option agreement with money at risk on the Estelle tract of land in New Orleans, Louisiana for approximately $1,693,000. These properties were classified as held for sale effective December 31, 1996. Accumulated depreciation on real estate properties and real estate held for sale increased $4,356,000 due to depreciation expense of $7,266,000, offset by the sale of properties with accumulated depreciation of $2,910,000 consisting of the Garden Villa Apartments with $1,115,000, BayGreen Industrial Park with $10,000, Pin Oaks Apartments with $1,029,000, EastGate Apartments with $106,000, and Plantations Apartments with $650,000. The increase in investment in joint venture is due to the joint venture acquired in the LNH merger of $4,298,000. This joint venture investment consists solely of a 144,264 square foot shopping center in Warwick, Rhode Island which is currently being offered for sale. The Trust accounts for its 50% investment in the joint venture using the equity method and the cost of the investment is adjusted by the Trust's share of the joint venture's results of operations less any distributions. Mortgage loans receivable increased $6,495,000 during 1996. The Trust acquired four loans in the LNH merger which were recorded at $5,614,000, and two loans in the Copley merger which were recorded at $880,000. At the date of the mergers, the loans had a principal balance of $7,983,000. The notes were discounted and the difference between the present value of the loans and the face amount is being amortized over the life of the loans. Mortgage loans decreased $338,000 due to principal payments received and $200,000 due to the writedown of the Plus Park mortgage note receivable to the fair value of the collateral. Also, mortgage loans increased $418,000 due to the amortization of loan discounts and $121,000 due to advances on mortgage loans. Investments in real estate investment trusts decreased from $10,787,000 at December 31, 1995 to $934,000 at December 31, 1996. This decrease was primarily due to the investment in LNH of $3,918,000, and the investment in Copley of $6,193,000, which were allocated to the purchase price of the assets as a result of the mergers discussed previously. The Trust incurred $292,000 in merger costs for LNH and $2,866,000 in merger costs for Copley which were allocated to the purchase price of the assets as a result of the mergers. Also, the Trust acquired 300,000 shares of Liberte' stock received in the LNH merger, and sold all of this stock for $1,056,000. The Trust recognized a gain of $6,000 for financial reporting purposes on this sale. Prior to the May 14, 1996 merger of 11
12 LNH, the Trust recognized $43,000 of equity in earnings of LNH and $88,000 of unrealized gains, offset by $77,000 of LNH dividends received. Prior to the June 19, 1996 merger of Copley, the Trust recognized unrealized gains of $1,322,000 recorded on the Trust's available-for-sale securities (Copley) in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At the merger dates, the balance of unrealized gains on Copley of $1,940,000 and $138,000 of unrealized gains on LNH was offset against unrealized gains in shareholders' equity. The investment in real estate investment trusts of $934,000 at December 31, 1996 represents purchases of stock in another real estate investment trust. Total land and land purchase-leaseback investments decreased $242,000 during 1996. Increases were due to land acquired in the LNH merger of $521,000 and land acquired in the Copley merger of $3,280,000. These increases were more than offset by the sale of the Bellevue land purchase-leaseback investment ("Bellevue"), the sale of the Taco Bell land purchase-leaseback investment ("Taco Bell"), the sale of the Southwyck and Wellington parcels of land acquired in the LNH merger and the Sample I-95 land acquired in the Copley merger. In April 1996, the Trust sold Bellevue in Bellevue, Nebraska for $472,000 and recognized a gain of $472,000 for financial reporting purposes. The Trust had written off this investment in 1994 as a result of the loss of the property's largest tenant. In May 1996, the Trust sold Taco Bell in Madisonville, Kentucky for $142,000 and recognized a gain of $130,000. In June 1996, the Trust sold the Southwyck parcel of land in Houston, Texas for $149,000 and recognized a gain of $52,000. In July 1996, the Trust sold the Sample I-95 land in Pompano Beach, Florida for $3,267,000 and recognized a loss of $13,000. In September 1996, the Trust sold the Wellington parcel of land in Houston, Texas for $601,000 and recognized a gain of $204,000. Also the Trust reclassified the Rampart land in Denver, Colorado of $229,000 to industrial development, and the Silvermill parcel of land in Houston, Texas of $27,000 to land held for sale. Other assets increased $2,722,000 primarily as a result of $1,910,000 placed in escrow from the Plantation Apartments sale. The Trust plans to replace the property in a tax deferred exchange. The remaining increase of $812,000 is a result of normal business operations. Mortgage notes payable increased $47,913,000 during 1996, including increases of $59,681,000 due to the merger with Copley and the $19,000,000 mortgage notes payable placed on the Huntwood and Wiegman properties in August 1996. These increases were offset by regularly scheduled principal payments of $1,695,000, the repayment of the $3,132,000 first mortgage on the Garden Villa Apartments sold January 31, 1996, the repayment of $20,715,000 of Copley mortgages and the repayment of the $5,226,000 first mortgage on the Plantations Apartments sold December 19, 1996. Notes payable to banks increased from $4,359,000 at December 31, 1995 to $13,962,000 at December 31, 1996, as a result of borrowings of $60,374,000 and payments of $50,771,000. As of December 31, 1996, the acquisition line had a balance of $9,028,000 and the working capital line had a balance of $4,934,000. Accounts payable and accrued expenses increased $797,000 during the year ended December 31, 1996, compared to December 31, 1995. Of this amount, $713,000 was recorded in the LNH merger and $1,063,000 was recorded in the Copley merger. Also, accounts payable and other liabilities decreased $979,000 as a result of normal business operations. 12
13 Minority interests increased $2,232,000 during the year ended December 31, 1996 compared to December 31, 1995. Of this amount, $783,000 was recorded in the LNH merger and $1,740,000 was recorded in the Copley merger. Also, minority interests in joint ventures decreased $291,000 as a result of normal business operations. Shares of beneficial interest increased 4,201,481 shares as a result of 927,366 shares issued in the LNH merger, 3,238,343 shares issued in the Copley merger, 31,500 stock options exercised, 12,750 shares retired, 9,640 shares issued in payment of incentive compensation and 7,382 shares issued in the Trust's new dividend reinvestment plan. Unrealized gain on securities decreased $667,000 as a result of the LNH and Copley mergers. Undistributed earnings increased from $9,657,000 at December 31, 1995 to $10,997,000 at December 31, 1996, as a result of net income for financial reporting purposes of $12,509,000 exceeding dividends of $11,169,000. RESULTS OF OPERATIONS 1996 COMPARED TO 1995 Net income for 1996 was $12,509,000 ($1.44 per share) compared to net income in 1995 of $7,711,000 ($1.22 per share). Income before gain on investments was $7,169,000 in 1996 compared to $4,389,000 in 1995. Gain on investments was $5,340,000 in 1996 compared to $3,322,000 in 1995. The results of operations include the results of operations for LNH from May 14, 1996 through December 31, 1996, and the results of operations for Copley from June 19, 1996 through December 31, 1996. Property net operating income (PNOI) from real estate properties, defined as income from real estate operations less property operating expenses (before interest expense and depreciation), increased by $7,070,000 or 42% for 1996, compared to 1995. Property net operating income (loss) and percentage leased by property type were as follows: <TABLE> <CAPTION> PNOI Year Ended Percent December 31, Leased ------------ ------ 1996 1995 12-31-96 ---- ---- -------- (In thousands) <S> <C> <C> <C> Industrial $14,327 7,968 97% Office Buildings 4,454 3,200 97% Apartments 4,824 5,657 97% Other 276 (14) - ------- ------ Total PNOI $23,881 16,811 ======= ====== </TABLE> PNOI from industrial properties increased $6,359,000 for 1996 compared to 1995. Industrial properties held throughout the year, showed an increase in PNOI of 3.6% for the year ended December 31, 1996. PNOI from industrial properties increased $5,432,000 for 13
14 the year, as a result of the industrial properties received in the mergers with LNH and Copley discussed previously. Also contributing to this increase in PNOI from industrial properties was the acquisition of Jetport 515 Commerce Park in September 1995, Walnut Business Center in August 1996, Braniff Park West in September 1996, and the development of a 36,400 square foot distribution building at the Phillips Distribution Center completed in August 1995. In addition, the increase in PNOI from industrial properties was primarily due to improved operations at Rampart Distribution Center, Lake Pointe Business Park, Deerwood Distribution Center, JetPort Commerce Park and Northwest Distribution Center. PNOI from the Trust's office buildings increased $1,254,000 for 1996 compared to 1995. The increase for the year ended December 31, 1996 is due primarily to the PNOI of $1,218,000 from the office buildings received in the merger with Copley discussed previously, and a slight improvement in operations from office properties held throughout 1996 compared to 1995. These increases were offset by the sale of the Cascade VII office building in September 1995. Office properties held throughout the year ending December 31, 1996 and 1995 showed an increase in PNOI of 3.9% for 1996 compared to 1995. PNOI from the Trust's apartment properties decreased $833,000 for 1996 compared to 1995. This decrease is primarily attributable to the sale of the SunChase Apartments in October 1995, the Garden Villa Apartments in January 1996, the Pin Oaks and EastGate Apartments in November 1996 and the Plantations Apartments in December 1996, offset by the acceptance of a deed in lieu of foreclosure on the EastGate Apartments in April 1995. Apartment properties held throughout the years ended December 31, 1996 and 1995 showed an increase in PNOI of 1.2%. Interest income on mortgage loans increased $608,000 for 1996 compared to 1995. The following is a breakdown of interest income for the year ended December 31, 1996 compared to 1995: <TABLE> <CAPTION> Year Ended December 31, ---------------------------- 1996 1995 --------- -------- (In thousands) <S> <C> <C> Interest income from: Land mortgage loans $ 566 - Apartment mortgage loans 514 537 Motel mortgage loans 403 340 Other mortgage loans 147 10 25% joint venture mortgage loans 14 149 ------- ------- $ 1,644 1,036 ======= ======= </TABLE> Interest income from land mortgage loans increased as a result of interest income on loans received in the mergers with LNH and Copley discussed previously. Due to uncertainty of collection, interest income from the motel mortgage loans is recorded as received, and the 14
15 notes have been written down to their net realizable value. Interest income from the wrap mortgage loans decreased as a result of the foreclosure in April 1995 of the EastGate mortgage. Interest income from the 25% joint venture mortgage loans decreased as a result of repayments of these notes. The LNH loans were discounted to allocated fair value at the merger date. This discount is being amortized over the life of the loans and amounted to $287,000 for the year ended December 31, 1996. Interest expense increased $2,643,000 from 1995 to 1996. Average bank borrowings were $11,572,000 in 1996 compared to $22,874,000 in 1995 with average interest rates of 7.3% in 1996 compared to 8.8% in 1995. Bank interest rates at December 31, 1996 and 1995 were 7.48% (LIBOR plus 1.85%) and 7.94%, respectively. Interest expense on real estate properties increased as a result of the following new mortgages and mortgages assumed in the Copley merger: <TABLE> <CAPTION> NEW MORTGAGES DATE OF INTEREST MATURITY AMOUNT OF LOAN PROPERTY RATE DATE MORTGAGE - -------- ---------------------------- ------ ------ ----------- (In thousands) <S> <C> <C> <C> <C> 6-27-95 Exchange Distribution Center 8.375% 8-1-05 $ 2,500 7-27-95 WestPort Commerce Center 8.000% 8-1-05 3,350 8-01-95 LaVista Crossing Apartments 8.688% 9-1-05 5,950 9-12-95 JetPort Commerce Park 8.125% 10-1-05 4,000 9-29-95 LakePointe Business Park 8.125% 10-1-05 11,000 12-15-95 Plantations Apartments 7.625% 12-1-05 5,300 8-22-96 Huntwood Associates 7.990% 8-22-06 13,000 8-22-96 Wiegman Associates 7.990% 8-22-06 6,000 -------- $51,100 ======== </TABLE> <TABLE> <CAPTION> MORTGAGES ASSUMED IN COPLEY MERGER: DATE OF ASSUMPTION INTEREST MATURITY AMOUNT OF OF LOAN PROPERTY RATE DATE MORTGAGE - -------- ---------------------------- ------ --------- ---------- (In thousands) <S> <C> <C> <C> <C> 6-19-96 University Business Center 9.060% 4-01-00 $ 9,261 6-19-96 University Business Center 9.370% 1-01-97 8,250 6-19-96 Wiegman Associates 8.750% 10-01-97 973 6-19-96 Columbia Place 8.875% 12-31-09 10,139 6-19-96 Dominguez Properties 9.000% 1-01-97 5,175 6-19-96 Metro Business Park 9.250% 3-01-97 3,411 6-19-96 Metro Business Park 8.000% 4-01-98 1,757 -------- $38,966 ======== </TABLE> 15
16 These increases were offset by the repayment of the Exchange Drive Warehouse mortgage payable of $565,000 and the JetPort mortgage payable of $636,000 in September 1995, and the repayment of the underlying first mortgage on the Country Club wrap mortgage note of $2,267,000 on August 3, 1995. The mortgages assumed in the Copley merger are net of principal repayments of $20,715,000, repaid shortly after the merger date. Gains on investments resulted from the following sales in 1996 and 1995: <TABLE> <CAPTION> DECEMBER 31, 1996 - ------------------ DISCOUNTED NET SALES RECOGNIZED DATE SOLD BASIS PRICE GAIN (LOSS) - --------- ----- ----------- ----------- (In thousands) <S> <C> <C> <C> <C> REAL ESTATE PROPERTIES: 1-96 Garden Villa Apartments $ 2,715 4,068 1,353 9-96 BayGreen Industrial Park 1,679 1,677 (2) 11-96 Pin Oaks Apartments 1,675 4,235 2,560 11-96 EastGate Apartments 1,326 1,753 427 12-96 Plantations Apartments 6,765 7,116 351 LAND PURCHASE-LEASEBACKS: 4-96 Bellevue -- 472 472 5-96 Taco Bell 12 142 130 LAND: 6-96 Southwyck parcel 97 149 52 7-96 Sample I-95 land 3,280 3,267 (13) 9-96 Wellington parcel 397 601 204 SECURITIES: Various Liberte' stock 1,050 1,056 6 MORTGAGE LOANS: 12-96 Writedown of Plus Park 200 -- (200) ------- ------- ------- $19,196 24,536 5,340 ======= ======= ======= </TABLE> 16
17 <TABLE> <CAPTION> DECEMBER 31, 1995 - ------------------ DISCOUNTED NET SALES RECOGNIZED DATE SOLD BASIS PRICE GAIN (LOSS) - --------- ----- ----------- ----------- (In thousands) <S> <C> <C> <C> <C> LAND PURCHASE-LEASEBACKS: 2-95 Winchester Ranch $ 450 862 412 6-95 Iroquois 320 1,495 1,175 REAL ESTATE PROPERTIES: 6-95 Cascade Office Building - writedown 136 -- (136) 9-95 Cascade Office Building 1,486 1,486 -- 10-95 Sunchase Apartments 2,515 4,396 1,881 12-95 2100 Exchange 549 539 (10) ------ ------ ------ $5,456 8,778 3,322 ====== ====== ====== </TABLE> The Liberte' stock and the Southwyck parcel were investments received in the LNH merger on May 14, 1996. The gain on sale of the BayGreen Industrial Park and the Sample I-95 land are gains on investments received in the Copley merger on June 19, 1996. NAREIT has recommended supplemental disclosures concerning capital expenditures, leasing costs, and straight-line rents. The Trust expenses apartment unit turnover cost such as carpet, painting and small appliances. Capital expenditures for the years ended December 31, 1996 and 1995 by category are as follows: <TABLE> <CAPTION> Years Ended December 31, ------------------- 1996 1995 ------- -------- ( In thousands) <S> <C> <C> Upgrades on acquisitions $ 90 981 Major Renovation/New Development 4,562 1,499 Tenant improvements: New tenants 959 1,367 Renewal tenants 852 221 Other 1,006 318 ------- ------- $ 7,469 4,386 ======= ======= </TABLE> 17
18 Leasing costs are capitalized and included in other assets. The costs are amortized over the life of the leases using the straight-line method and are included in depreciation and amortization expense. A summary of these costs is as follows: <TABLE> <CAPTION> Years Ended December 31, ------------------------- 1996 1995 -------- ------- (In thousands) <S> <C> <C> Capitalized leasing costs: New Tenants $ 528 493 Renewal Tenants 290 269 ----- ------ $ 818 762 ===== ====== Amortization of leasing costs $ 493 378 ===== ====== </TABLE> Straight-line rent (decreased) increased rental income by ($51,000) and $17,000 for the years ended December 31, 1996 and 1995. This resulted from income recorded on the straight line method as compared to when cash was actually received. Rental income from real estate operations is principally recognized based on the terms of the operating leases, which does not differ materially from recognizing rental income on a straight-line basis. 1995 Compared to 1994 Net income for 1995 was $7,711,000 ($1.22 per share) compared to net income in 1994 of $7,168,000 ($1.16 per share). Income before gains on investments was $4,389,000 in 1995 compared to $4,846,000 in 1994. Gains on investments were $3,322,000 in 1995 compared to $2,322,000 in 1994. PNOI increased by $3,358,000 or 25% for 1995 compared to 1994. PNOI (loss) and percentage leased by property type were as follows: <TABLE> <CAPTION> PNOI Year Ended Percent December 31, Leased ------------ ------ 1995 1994 12-31-95 ---- ---- -------- (In thousands) <S> <C> <C> <C> Industrial $ 7,968 5,441 98% Office Buildings 3,200 3,373 96% Apartments 5,657 4,663 95% Other (14) (24) - ------- ------ Total PNOI $16,811 13,453 ======= ====== </TABLE> PNOI from industrial properties increased $2,527,000 for 1995 compared to 1994. This increase is primarily the result of the acquisition of Exchange Distribution Center 18
19 ("Exchange") in May 1994, Jetport 516 Commerce Park ("JetPort 516") in May 1994, Phillips in July 1994, Northwest Point Business Park ("Northwest") in September 1994, Westport in October 1994 and Baxter Warehouse ("Baxter") in December 1994. Industrial properties held throughout the year ended December 31, 1995 and 1994 showed an increase in PNOI of 15.8% for 1995 compared to 1994. Contributing to this increase in PNOI from industrial properties were improved operations at Rampart Distribution Center ("Rampart"), Sunbelt Distribution Center ("Sunbelt") and Lake Pointe Business Park ("Lake Pointe"). PNOI for the Trust's apartment properties increased $994,000 for 1995 compared to 1994. This increase is primarily attributable to the acquisition of Plantations at Killearn ("Plantations") in April 1994, Hampton House Apartments ("Hampton") in August 1994, Grande Pointe Apartments ("Grande Pointe") in September 1994 and the deed in lieu of foreclosure on the EastGate Apartments in April 1995. PNOI from the Trust's office buildings decreased $173,000 for 1995 compared to 1994. This decrease is primarily the result of reduced occupancy at 8150 Leesburg Pike ("Leesburg Pike"), offset by the acquisition of the Santa Fe Energy Building ("Santa Fe") in February 1994. Land rents decreased $181,000 for 1995 compared to 1994, primarily as a result of the sales of the Parklane on Peachtree, Iroquois, and Winchester Ranch land purchase-leaseback investments and the deed in lieu of foreclosure on the EastGate Apartments land purchase-leaseback investment. These decreases were offset by the acquisition in 1994 of two small commercial parcels at a foreclosure sale. The Trust held mortgages on two commercial parcels which were additional collateral for the Madison Square land purchase-leaseback investment written off in 1992. Equity in earnings from LNH of $203,000 was recorded during 1995, compared to $123,000 for 1994. Interest income on mortgage loans decreased $5,000 for 1995 compared to 1994. The following is a breakdown of interest income for 1995 compared to 1994. <TABLE> <CAPTION> Year Ended December 31, ------------ 1995 1994 ---- ---- (In thousands) <S> <C> <C> Interest income from: 25% joint venture mortgage loans $ 149 117 Motel mortgage loans 340 211 Wrap mortgage loans 537 709 Other mortgage loans 10 4 ------ ----- $1,036 1,041 ====== ===== </TABLE> Interest income from the 25% joint venture mortgage loans increased for the year ended December 31, 1995 as a result of income from additional mortgage loans made by the Trust to the co-owner of WestPort and Exchange in October 1994 and May 1994. On July 28, 1995, the Trust received a payment of $813,000 on the WestPort mortgage loan, on September 14, 1995 the Trust received a payment of $360,000 on the JetPort mortgage loan and on September 30, 1995, the Trust received a payment of $591,000 on the Exchange mortgage loans. Interest income from the motel mortgage loans is recorded as received, and the notes have been written down to their net realizable value. Interest income from the wrap mortgage loans decreased as a result of the foreclosure in April 1995 of the EastGate mortgage. Interest expense increased $2,382,000 from 1994 to 1995. Average bank borrowings were $22,874,000 in 1995 compared to $11,086,000 in 1994 with average interest rates of 8.8% in 1995 compared to 7.9% in 1994. Bank interest rates at year end were 7.94% for 1995 and 8.5% for 1994. Interest expense on real estate properties increased as a result of the acquisition of Northwest in September 1994 with a mortgage of $4,321,000 which was assumed, and the acquisition of JetPort 516 in May 1994 with a mortgage of $657,000 which was assumed. Also contributing to this increase were the new mortgages of $6,000,000 on Sutton House Apartments ("Sutton House") on May 25, 1994, $2,400,000 on 56th Street on July 21, 19
20 1994, and new mortgages of $32,100,000 in 1995. These increases were offset by the repayment of the Exchange Drive warehouse mortgage payable of $565,000 and the JetPort mortgage payable of $636,000. The Trust repaid the underlying first mortgage on the Country Club wrap mortgage note of $2,267,000 on August 3, 1995. The Trust used the proceeds from the new LaVista mortgage plus borrowings on the bank line for this repayment. Depreciation and amortization increased $1,290,000 for 1995 compared to 1994, primarily as a result of the property acquisitions in 1994. At the Trust's annual meeting on December 16, 1994, the shareholders approved the implementation of a new incentive compensation plan which eliminated stock appreciation rights and incentive compensation units. Stock appreciation rights expense (recovery), which was adjusted quarterly based on fluctuations in the Trust's quoted share price, was $0 for 1995 and ($129,000) for 1994. As discussed above, the Trust sold its Winchester Ranch land purchase-leaseback investment in February 1995 and its Iroquois land purchase-leaseback investment in June 1995 and recognized gains of $1,587,000. Also, the Trust wrote down its investment in the Cascade VII office building in Columbus, Ohio by $136,000 to its estimated net realizable value and sold this investment in September 1995 for cash of $1,450,000 and a mortgage note receivable of $150,000. No additional gain or loss was recognized on this transaction. In October 1995, the Trust sold the Sunchase Apartments in Corpus Christi, Texas for $4,580,000 and recognized a gain of $1,881,000 on the sale. Also, the Trust sold one of the Exchange Drive Warehouses in Dallas, Texas for $570,000 and recognized a loss of $10,000 on the sale. In April 1994, the Trust sold its Parklane on Peachtree land purchase-leaseback investment for $3,500,000 and used the proceeds to acquire the Plantations at Killearn Apartments through a tax deferred exchange. The Trust recognized a gain of $2,494,000 on the sale. The real estate investment trust industry has recommended supplemental disclosures concerning capital expenditures, leasing costs, financing costs and straight-line rents. The Trust expenses apartment unit turnover cost such as carpet, painting and small appliances. Capital expenditures for the years ended December 31, 1995 and 1994 by category are as follows: <TABLE> <CAPTION> Year Ended December 31, ------------ 1995 1994 ---- ---- (In thousands) <S> <C> <C> Upgrades on acquisitions $ 981 965 New development costs 1,071 - Major renovation 428 1,420 Tenant improvements: New tenants 1,367 540 Renewal tenants 221 588 Other 318 889 ------ ----- $4,386 4,402 ====== ===== </TABLE> For the years ended December 31, 1995 and 1994, the Trust capitalized $762,000 and $787,000 of leasing costs, which included $ 493,000 and $ 338,000 related to new tenants and $269,000 and $ 449,000 related to renewal tenants, and $777,000 of financing costs and included these amounts in other assets. For the year ended December 31, 1995, the Trust amortized $378,000 related to capitalized leasing costs and included these amounts in depreciation and amortization expense and capitalized $311,000 related to financing costs and included these amounts in interest expense. Leasing costs are amortized over the life of the lease and financing costs are amortized over the life of the loan. 20
21 Rental income included straight-line rent of $17,000 and $138,000 for the years ended December 31, 1995 and 1994. This resulted from income recorded on the straight line method as compared to when cash was actually received. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $13,996,000 for the year ended December 31, 1996. The Trust distributed $11,169,000 in dividends. Other sources of cash were collections on mortgage loan receivables, sales of real estate investments, mortgage borrowings and bank borrowings. Primary uses of cash were for capital improvements at the various properties, purchases of real estate investments, bank debt payments, mortgage note payments and purchases of real estate investment trust shares. Total debt at December 31, 1996 is as follows: <TABLE> <CAPTION> December 31, ------------------------ 1996 1995 ---------- -------- (In thousands) <S> <C> <C> Mortgage notes payable - fixed rate $115,116 67,203 Bank notes payable - floating rate 13,962 4,359 -------- -------- Total debt $129,078 71,562 ======== ======== </TABLE> The Trust currently has a working capital line of credit of $20,000,000 and an acquisition line of credit of $15,000,000 available for the acquisition of properties and other working capital requirements. The interest rate on both the working capital line and the acquisition line at December 31, 1996 was LIBOR plus 1.85% (or 7.48%). There is also a .125% fee on the unused amount of the $20 million credit line and the $15 million acquisition credit line. As of December 31, 1996, the acquisition line had a balance of $9,028,000 and the working capital line had a balance of $4,934,000. Also, the working capital line and the acquisition line mature April 30, 1997 and April 30, 1999, respectively. On March 27, 1997, the interest rate on both the working capital line and the acquisition line was reduced to LIBOR plus 1.75%. Budgeted capital expenditures for the year ending December 31, 1997 are as follows: <TABLE> <CAPTION> (In thousands) ------------- <S> <C> Upgrades on acquisitions $ 330 Major renovations/New development 3,512 Tenant Improvements: New Tenants 1,009 Renewal Tenants 169 Other 918 ------------- $ 5,938 ============= </TABLE> 21
22 The Trust anticipates that its current cash balance, operating cash flows and borrowings (including borrowings under the working capital line of credit) will be adequate to pay the Trust's (i) operating and administrative expenses, (ii) debt service obligations, (iii) distributions to shareholders, (iv) capital improvements, and (v) normal repair and maintenance expenses at its properties both in the short and long term. On February 4, 1997, the Trust announced the offering of 1,875,000 shares of Beneficial Interest under its existing shelf registration statement. The shares were sold to institutional investors. The net proceeds of the offering (approximately $32,775,000, net of underwriting commissions and expenses) were used for the repayment of approximately $30,000,000 of outstanding indebtedness and to fund working capital requirements, including the acquisition of industrial properties. On February 28, 1997, the underwriter notified the Trust of its intention to exercise its over-allotment option to purchase an additional 225,000 shares. This transaction closed on February 28, 1997 and the Trust used the net proceeds of $3,950,000 for working capital requirements. The Trust has entered into contracts to purchase two industrial properties in Houston, Texas. The total investment in these properties is estimated to be $9,200,000 and are scheduled to close in the second quarter of 1997. On March 20, 1997, the Trust purchased Interchange A in Jackson, Mississippi for a total investment of approximately $1,090,000. On March 20, 1997, the Trust announced that its Board of Trustees approved a three-for-two share split in the form of a share dividend of one share for every two shares outstanding. The share dividend will be distributed on April 7, 1997 to shareholders of record as of March 31, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Registrant's Consolidated Balance Sheets as of December 31, 1996 and 1995, and its Consolidated Statements of Operations, Changes in Shareholders' Equity and Cash Flows and Notes to Consolidated Financial Statements for the years ended December 31, 1996, 1995 and 1994 and the independent auditors' report thereon are included under Item 14 of this report and are incorporated herein by reference. Unaudited quarterly results of operations included in the notes to the consolidated financial statements are also incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 22
23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Registrant's definitive proxy statement which will be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. FORWARD-LOOKING STATEMENTS In addition to historical information, certain sections of this Annual Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Trust's capital resources, profitability and portfolio performance. Forward-looking statements involve numerous risks and uncertainties. The following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: defaults or non-renewal of leases, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"), environmental uncertainties, risks related to natural disasters, financial market fluctuations, changes in real estate and zoning laws and increases in real property tax rates. The success of the Trust also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Annual Report. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof. The Trust assumes no obligation to update forward-looking statements. See also the Trust's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. 23
24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. <TABLE> <CAPTION> Page ---- <S> <C> (a)(1) Consolidated financial statements Independent Auditors' Report 27 Consolidated Balance Sheets - December 31, 1996 and 1995 28 Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994 29 Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1996, 1995 and 1994 30 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 31 Notes to Consolidated Financial Statements 32 (2)(a) Consolidated financial statement schedules Schedule III - Real estate properties and accumulated depreciation 48 Schedule IV - Mortgage loans on real estate 53 </TABLE> All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted, or the required information is included in the notes to the financial statements. EXHIBIT INDEX ------------- The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table: <TABLE> <CAPTION> (3) Form 10-K exhibits: <S> <C> (3) (a) Restated Declaration of Trust (incorporated by reference to Exhibit 1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (No. 33-65337) filed February 27, 1996) (b) Amendment to Restated Declaration of Trust (incorporated by reference to Appendix E of the Registration Statement on Form S-4 (No. 333-01815). (c) Trustees Regulations of the Registrant (incorporated by reference to Exhibit 3 of the Registrant's 1980 Annual Report on Form 10-K). (d) Amendment to the Registrant's Trustees Regulations (incorporated by reference to Exhibit 3 of the Registrant's 1980 Annual Report on Form 10-K) (e) Amendment to Registrant's Trustees Regulations (incorporated by reference to Exhibit 3(d) of the Registrant's 1983 Annual Report on Form 10-K). (10) (a) EastGroup Properties 1994 Management Incentive Plan (incorporated by reference to Appendix D of the Registrant's Registration Statement on Form S-4 (No. 333-01815).* (b) EastGroup Properties 1991 Trustees Stock Option Plan, As Amended (incorporated by reference to Exhibit B of the Registrant's proxy statement dated April 26, 1994).* (c) Agreement and Plan of Merger among EastGroup Properties, EastGroup-LNH Corporation and LNH REIT, Inc. (incorporated by reference to Appendix A of the Registrant's Registration Statement on Form S-4 (No. 33-65337) filed December 22, 1995). (d) Agreement and Plan of Merger between Copley Properties, Inc. and EastGroup Properties (incorporated by reference to Exhibit IX to Amendment No. 9 to the Registrant's Statement on Schedule 13D dated February 12, 1996). (e) Form of Change in Control Agreement that Registrant has entered into with each executive officer (filed herewith)* (11) Statement re: Computation of per share earnings (filed herewith) (21) Subsidiaries of Registrant (filed herewith) (23) Consent of KPMG Peat Marwick LLP (filed herewith) (24) Powers of attorney (filed herein) (27) Financial Data Schedule (filed herewith) </TABLE> 24
25 (28) Agreement of Registrant to furnish the Commission with copies of instruments defining the rights of holders of long-term debt (incorporated by reference to Exhibit 28(e) of the Registrant's 1986 Annual Report on Form 10-K) *Indicates management or compensatory agreement. (b) No reports on Form 8-K have been filed during the quarter ended December 31, 1996 25
26 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Independent Auditors' Report 27 Consolidated Balance Sheets as of December 31, 1996 and 1995 28 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 29 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 30 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 31 Notes to Consolidated Financial Statements 32 </TABLE> 26
27 INDEPENDENT AUDITORS' REPORT THE TRUSTEES AND SHAREHOLDERS EASTGROUP PROPERTIES: We have audited the consolidated financial statements of EastGroup Properties and subsidiaries, a Maryland real estate investment trust, as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EastGroup Properties and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. Jackson, Mississippi KPMG Peat Marwick LLP March 21, 1997 27
28 <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS December 31, ------------ 1996 1995 ---- ---- (In thousands, except share data) ASSETS <S> <C> <C> Real estate properties: Industrial $ 186,908 76,099 Industrial development 1,925 -- Office buildings 38,912 29,847 Apartments 37,494 45,831 --------- --------- 265,239 151,777 Less accumulated depreciation (22,703) (18,105) --------- --------- 242,536 133,672 Real estate held for sale: Land 585 558 Operating properties 14,293 3,827 Less accumulated depreciation (859) (1,101) Investment in joint venture 4,367 -- --------- --------- 18,386 3,284 Mortgage loans 12,503 6,008 Land and land purchase-leasebacks 527 769 Investment in real estate investment trusts 934 10,787 Cash and cash equivalents 438 26 Other assets 6,131 3,409 --------- --------- $ 281,455 157,955 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Mortgage notes payable $ 115,116 67,203 Notes payable to banks 13,962 4,359 Accounts payable and accrued expenses 2,893 2,096 Minority interests 3,141 909 Other liabilities 1,017 488 --------- --------- 136,129 75,055 --------- --------- SHAREHOLDERS' EQUITY Shares of beneficial interest, par value $1.00 per share; authorized 20,000,000 shares; issued 10,548,965 shares in 1996 and 6,347,484 shares in 1995 10,549 6,348 Additional paid-in capital 123,780 66,228 Undistributed earnings 10,997 9,657 Unrealized gain on securities -- 667 --------- --------- 145,326 82,900 --------- --------- $ 281,455 157,955 ========= ========= </TABLE> See accompanying notes to consolidated financial statements 28
29 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- (In thousands, except per share data) <S> <C> <C> <C> REVENUES Income from real estate operations $37,143 28,386 23,194 Land rents 158 217 398 Equity in earnings of real estate investment trust 43 203 123 Interest: Mortgage loans 1,644 1,036 1,041 Other 74 - 13 Other 703 422 126 ------- ------- ------- 39,765 30,264 24,895 ------- ------- ------- EXPENSES Operating expenses from real estate operations 13,262 11,575 9,741 Interest expense 8,930 6,287 3,905 Depreciation and amortization 7,759 5,613 4,323 Minority interests in joint ventures 289 220 163 General and administrative expenses 2,356 2,180 2,046 Stock appreciation rights recovery - - (129) ------- ------ ------- 32,596 25,875 20,049 ------- ------- ------- Income before gains on investments 7,169 4,389 4,846 ------- ------- ------- GAINS ON INVESTMENTS Real estate 5,334 3,322 2,322 Real estate investment trust securities 6 - - ------- ------- ------- 5,340 3,322 2,322 ------- ------- ------- NET INCOME $12,509 7,711 7,168 ======= ======= ======= NET INCOME PER SHARE OF BENEFICIAL INTEREST $ 1.44 1.22 1.16 ======= ======= ======= WEIGHTED AVERAGE SHARES OUTSTANDING 8,677 6,338 6,170 ======= ======= ======= </TABLE> See accompanying notes to consolidated financial statements 29
30 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Shares of Additional Unrealized Beneficial Paid-In Undistributed Gain on Interest Capital Earnings Securities Total -------- ------- -------- ---------- ----- (In thousands, except share and per share data) <S> <C> <C> <C> <C> <C> BALANCE, DECEMBER 31, 1993 $ 3,692 37,026 8,083 - 48,801 Net income - - 7,168 - 7,168 Cash dividends declared, $.87 per share - - (5,528) - (5,528) Exercise of 117,000 options 117 848 - - 965 Purchase and retirement of 69,999 shares (70) (754) - - (824) Issuance of 17,096 shares, incentive compensation 17 175 - - 192 Issuance of 2,625,000 shares in public offering 2,625 29,539 - - 32,164 Issuance of 1,044,132 shares in Eastover Corporation merger 1,044 10,645 - - 11,689 Retire 1,092,267 shares in Eastover Corporation merger (1,092) (11,380) - - (12,472) Change in unrealized gain on securities - - - 21 21 ------- ------- ------ ------ ------- BALANCE, DECEMBER 31, 1994 6,333 66,099 9,723 21 82,176 Net income - - 7,711 - 7,711 Cash dividends declared, $1.23 per share - - (7,777) - (7,777) Exercise of 22,500 options 23 217 - - 240 Purchase and retirement of 7,500 shares (8) (88) - - (96) Change in unrealized gain on securities - - - 646 646 ------- ------- ------ ------ ------- BALANCE, DECEMBER 31, 1995 6,348 66,228 9,657 667 82,900 Net income - - 12,509 - 12,509 Cash dividends declared, $1.28 per share - - (11,169) - (11,169) Exercise of 31,500 options 32 321 - - 353 Purchase and retirement of 12,750 shares (13) (137) - - (150) Issuance of 9,640 shares, incentive compensation 10 118 - - 128 Issuance of 927,366 shares in LNH merger 927 12,713 - - 13,640 Issuance of 3,238,343 shares in Copley merger 3,238 44,420 - - 47,658 Issuance of 7,382 shares in dividend reinvestment plan 7 117 - - 124 Change in unrealized gain on securities - - - (667) (667) -------- ------- ------ ------- -------- BALANCE, DECEMBER 31, 1996 $ 10,549 123,780 10,997 - 145,326 ======== ======= ====== ======= ======== </TABLE> See accompanying notes to consolidated financial statements 30
31 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- (In thousands) OPERATING ACTIVITIES: <S> <C> <C> <C> Net income $ 12,509 7,711 7,168 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of deferred leasing costs 7,759 5,613 4,323 Stock appreciation rights recovery - - (129) Gains on investments, net (5,340) (3,322) (2,322) Real estate investment trust: Equity in earnings (43) (203) (123) Dividends received 77 182 60 Other (142) (134) (64) Changes in operating assets and liabilities: Accrued income and other assets (122) 834 251 Accounts payable, accrued expenses and prepaid rent (702) (935) (716) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 13,996 9,746 8,448 ------- ------- ------- INVESTING ACTIVITIES: Advances on mortgage loans receivable (121) (150) (1,862) Payments on mortgage loans receivable, net of amortization of loan discounts (80) 1,950 581 Sales of real estate investments 23,480 8,778 3,491 Sales of real estate investment trust securities 1,056 - - Real estate improvements (7,469) (4,386) (4,241) Purchases of real estate (13,865) (806) (44,584) Purchases of real estate investment trusts shares (934) (9,263) - Return of capital dividends - 87 197 Cash balances of acquired companies 2,750 - 28 Merger expenses (3,169) - (144) Change in other assets and other liabilities (2,225) (1,931) (297) ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES (577) (5,721) (46,831) -------- ------- ------- FINANCING ACTIVITIES: Proceeds from bank borrowings 60,374 30,272 44,620 Proceeds from mortgage notes payable 19,000 32,100 7,800 Principal payments on bank borrowings (50,771) (54,584) (35,152) Principal payments on mortgage notes payable (30,768) (4,455) (6,240) Distributions paid to shareholders (11,169) (7,777) (7,339) Purchases of shares of beneficial interest (150) (96) (824) Proceeds on exercise of stock options 353 240 965 Net proceeds from issuance of shares of beneficial interest - - 32,164 Proceeds from dividend reinvestment plan 124 - - ------- ------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (13,007) (4,300) 35,994 ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 412 (275) (2,389) Cash and cash equivalents at beginning of year 26 301 2,690 ------- ------- ------- Cash and cash equivalents at end of year $ 438 26 301 ======= ======= ======= Supplemental Cash Flow Information: Debt assumed by buyer of real estate $ 8,359 - 2,211 Cash paid for interest 8,444 5,926 3,958 Debt assumed by the Trust in purchase of real estate - - 4,813 Net liabilities assumed in Eastover merger - - 638 Fair value of shares issued in Copley merger 47,658 - - Fair value of shares issued in LNH merger 13,640 - - </TABLE> See accompanying notes to consolidated financial statements 31
32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of EastGroup Properties ("the Trust"), its wholly-owned subsidiaries and its investment in five joint ventures. At December 31, 1996, the five properties in the joint ventures included the 75% owned 56th Street Commerce Park, JetPort Commerce Park, and WestPort Commerce Center, the 80% owned University Business Center and the 77.78% owned Liberty Corners Shopping Center. Each joint venture's assets, liabilities, revenues and expenses are recorded by the Trust with minority interests provided for the percentage not owned. All significant intercompany transactions and accounts have been eliminated in consolidation. The Trust's investment in Cowesett Corners Shopping Center (a 50% owned joint venture) is not consolidated, but accounted for using the equity method of accounting. (b) Federal Income Taxes EastGroup Properties, a Maryland real estate investment trust, has qualified as a real estate investment trust under Sections 856-860 of the Internal Revenue Code, and it intends to continue to qualify as such. The Trust distributed to its shareholders all of its 1996, 1995 and 1994 taxable income. Accordingly, no provision for federal income taxes was necessary. Distributions paid per share for federal income tax purposes follow: <TABLE> <CAPTION> Years Ended December 31, -------------------------- 1996 1995 1994 ---- ---- ---- <S> <C> <C> <C> Ordinary income $1.28 1.23 1.16 </TABLE> The Trust's income differs for tax and financial reporting purposes principally because of (1) the timing of the deduction for the provision for possible losses and losses on investments, (2) the timing of the recognition of gains or losses from the sale of investments, (3) different depreciation methods and lives, and (4) mortgage loans having a different basis for tax and financial reporting purposes, producing different gains upon collection of these receivables. (c) Income Recognition Rental income from real estate operations is principally recognized based on the terms of the operating leases, which does not differ materially from recognizing rental income on a straight line basis. Interest income on mortgage loans is recognized on the accrual method, unless there is a significant uncertainty of collection. If a significant uncertainty exists, interest income is recognized as collected. Certain mortgage loan discounts are being amortized over the life of the loans using a method that does not differ materially from the interest method. Income from land purchase-leaseback investments, including fixed and percentage rents, is recorded under the operating method, as earned. The Trust recognizes gains on sales of real estate in accordance with the principles set forth in Statement of Financial Accounting Standards No. 66 ("SFAS 66"), "Accounting for Sales of Real Estate". The provisions of SFAS 66, require upon closing, consideration of the transfer of rights of ownership to the purchaser, receipt from the purchaser of an adequate cash down payment and adequate continuing investment by the purchaser. If the requirements for recognizing gains have not been met, the sale and related costs are recorded, but the gain is deferred and recognized on the installment method as collections are received. 32
33 (d) Land Purchase-Leasebacks Land purchase-leasebacks are investments in which the Trust owns the land underlying income producing buildings and other improvements and leases it to the owner of the improvements. Generally, the terms of a land lease provide for a fixed minimum rental and an additional contingent rental equal to a percentage of the gross income of the property in excess of a base amount. In addition, the Trust generally shares in the net proceeds of any refinancing of mortgage indebtedness on the property, except to the extent that the proceeds are reinvested in the property. Upon the termination of a land lease, the improvements become the property of the Trust. (e) Real Estate Properties Real estate properties are carried at cost less accumulated depreciation. Cost includes the carrying amount of the Trust's investment plus any additional consideration paid, liabilities assumed, costs of securing title (not to exceed fair market value in the aggregate) and improvements made subsequent to acquisition. Depreciation of buildings and other improvements, including personal property, is computed using the straight-line method over estimated useful lives of 25 to 40 years for buildings and 3 to 10 years for other improvements and personal property. Maintenance and repair expenses are charged to expense as incurred, while building improvements are capitalized. Apartment turnover costs such as carpet, painting and small appliances are expensed. Geographically, the Trust's investments are concentrated in the major sunbelt market areas of the southeastern and southwestern United States, with a special emphasis in the states of California, Florida, Texas and Arizona. (f) Real Estate Held for Sale Real estate properties that are currently being offered for sale or under contract to sell have been shown separately on the financial statements as Real Estate Held for Sale. Such assets are carried at the lower of current carrying amount or fair value, less estimated selling costs. (g) Marketable Equity Securities On January 1, 1994, the Trust adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities (SFAS 115)." Accordingly, as of December 31, 1995, certain marketable securities, including those held by equity method investees, are carried at fair value with the unrealized gains of $667,000, presented as a separate component of shareholders' equity. At December 31, 1996, the amount of unrealized gains was not material to the financial statements. (h) Investments in Real Estate Investment Trusts At December 31, 1995 and 1994, the equity method of accounting was used to account for the investment in LNH REIT, Inc. ("LNH"). As of those dates, the Trust did not have voting control over this company, but did have the ability to exercise significant influence on operating and financial policies. Under the equity method, the Trust has accrued its share of LNH's unrealized security gains in accordance with SFAS 115. On May 14, 1996, LNH was merged with EastGroup-LNH Corporation, a wholly-owned subsidiary of the Trust. (i) Allowance for Possible losses The Trust provides an allowance for possible losses on real estate and mortgage loan investments for financial reporting purposes which, in the opinion of the Trustees, is adequate to absorb possible losses determined in accordance with generally accepted accounting principles. The adequacy of the allowance or the need for an allowance is evaluated quarterly based on a review of investments and properties on an individual basis. 33
34 If the estimated net realizable value of an underlying property or mortgage loan is less than the carrying amount of the Trust's investments, the difference is included in the allowance. Although the assumptions and projections upon which estimates of net realizable value or fair market value are based reflect the Trustees' best judgment, there can be no assurance that the projected events will actually occur. Therefore, adjustments to the allowance for possible losses may be required in subsequent periods. (j) Amortization Debt origination costs are deferred and amortized using the straight-line method over the term of the loan. Leasing commissions are deferred and amortized using the straight-line method over the term of the lease. (k) Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. (l) Reclassifications Certain reclassifications have been made in the 1995 and 1994 financial statements to conform to the 1996 presentation. (m) Share Split On March 20, 1997, the Trust announced that its Board of Trustees approved a three-for-two share split in the form of a share dividend of one share for every two shares outstanding. The share dividend will be distributed on April 7, 1997 to shareholders of record as of March 31, 1997. All share and per share amounts in these financial statements have been retroactively restated for the share split. (n) Accounting Change Effective January 1, 1996, the Trust adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by the Trust be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement requires that the majority of long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Implementation of this statement did not have a material impact on the Trust's financial statements. (o) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 34
35 (2) Real Estate Owned A summary of gains (losses) on real estate investments for the years ended December 31, 1996, 1995 and 1994 follows: <TABLE> <CAPTION> Discounted Recognized Net Gain Basis Sales Price (Loss) ----- ----------- ------ (In thousands) <S> <C> <C> <C> 1996 Real estate properties: Garden Villa Apartments $2,715 4,068 1,353 Southwyck Land 97 149 52 Pompano Beach Land 3,280 3,267 (13) Baygreen Industrial Center 1,679 1,677 (2) Wellington Land 397 601 204 Pin Oaks Apartments 1,675 4,235 2,560 Eastgate Apartments 1,326 1,753 427 Plantations Apartments 6,765 7,116 351 Land purchase leasebacks: Bellevue - 472 472 Taco Bell 12 142 130 Mortgage loan writedown 200 - (200) ------- ------ ------ $18,146 23,480 5,334 ======= ====== ====== 1995 Real estate properties: Cascade Office Building $ 1,486 1,486 - Sunchase Apartments 2,515 4,396 1,881 2100 Exchange Warehouse 549 539 (10) Cascade Office Building - writedown 136 - (136) Land purchase leasebacks: Winchester 450 862 412 Iroquois 320 1,495 1,175 ------- ------- ------- $ 5,456 8,778 3,322 ======= ======= ======= 1994 Real estate properties: North Shore - 5 lots $ 2,053 2,310 257 Land purchase - leasebacks: Parklane on Peachtree Apartments 997 3,491 2,494 Bellevue Plaza writedown 429 - (429) ------- ------- ------- $ 3,479 5,801 2,322 ======= ======= ======= </TABLE> The following is a schedule by year of approximate future minimum rental receipts under noncancelable leases for the real estate properties as of December 31, 1996 (in thousands): <TABLE> <CAPTION> Year Ending December 31, ------------ <S> <C> 1997 $ 32,101 1998 26,884 1999 19,919 2000 15,090 2001 11,834 Later Years 36,992 -------- TOTAL MINIMUM RECEIPTS $ 142,820 ========= </TABLE> 35
36 At December 31, 1996, the Trust is continuing to reposition its portfolio to focus on industrial properties. The Trust has a purchase option agreement with money at risk on the Estelle tract of land in New Orleans, Louisiana with a carrying amount of $558,000. If the purchase option is exercised, the sale is expected to close in August 1997. The Trust has a contract to sell the Santa Fe Energy Office Building in Houston, Texas with a carrying amount of $10,083,000, scheduled for closing in June 1997. The Trust is offering for sale the Silvermill undeveloped land in Houston, Texas with a carrying amount of $27,000, the Liberty Corners Shopping Center in Liberty, Missouri with a carrying amount of $3,351,000, and the Cowesett Corners Shopping Center (a 50% controlled joint venture investment) in Warwick, Rhode Island with a carrying amount of $4,367,000. The Trust anticipates selling these two shopping centers and the undeveloped land in 1997. The Trust anticipates selling each property for a gain. The results of operations for the five properties amounted to $1,604,000 for the year ended December 31, 1996. The Trust is currently developing the Rampart Distribution Center II in Denver, Colorado, for $3,250,000, and the Chancellor Distribution Center in Orlando, Florida for $1,900,000. Interest cost incurred during the period of construction of real estate properties is capitalized. The interest cost capitalized on real estate properties for the years ended December 31, 1996 and 1995 was $19,000 and $10,000, respectively. Preliminary environmental studies performed at the Cowesett property indicated that certain hazardous materials have been released at Cowesett in connection with the dry-cleaning operations conducted on part of the property by parties unrelated to EastGroup. Such environmental studies included a Phase II investigation of the Cowesett property. Based upon these studies, management of EastGroup believes that the hazardous materials have been contained. EastGroup is continuing to investigate the need for remediation at the Cowesett property and based on current information, management of EastGroup believes that the cost of such remediation is approximately $630,000. EastGroup owns a 50% joint venture interest in Cowesett, and any costs with respect to environmental conditions at Cowesett will be shared equally with its joint venture partner. At December 31, 1996, the Trust accrued $315,000 related to this environmental liability. No assurance can be given that existing environmental studies with respect to any of the properties reveal all environmental liabilities or that any prior owner of any such property did not create any material environmental condition not known to EastGroup. (3) Land and Land Purchase-leasebacks Fixed land rentals required to be paid to the Trust in each of the next five years and in the aggregate thereafter in connection with the Trust's land purchase-leaseback investments held as of December 31, 1996 are $86,000 in 1997, $88,000 in 1998, $91,000 in 1999, $62,000 in 2000, $59,000 in 2001 and $4,870,000 in the aggregate thereafter. In the case of one land purchase-leaseback investment carried at an aggregate amount of $500,000 as of December 31, 1996, the land tenant has an option to purchase the land on a formula basis set forth in the lease, but in no event would the purchase price be less than the cost of the land to the Trust. The Trust held a first mortgage loan of $2,685,000 as of December 31, 1996 on a property in which the Trust had a land purchase-leaseback investment. The Trust's land purchase-leaseback investments are subordinate to senior mortgage loans encumbering the properties. 36
37 (4) Mortgage Loans and Allowance for Possible Losses A summary of mortgage loans follows: <TABLE> <CAPTION> December 31, ------------ 1996 1995 ---- ---- (In thousands) <S> <C> <C> First mortgage loans: Industrial (2 loans) $ 841 181 Apartment (1 loan) 2,685 2,553 Motels (4 loans) 2,957 3,073 Shopping Center (1 loan) 1,636 - Undeveloped Land (3 loans) 4,053 - Other (4 loans) 331 201 -------- ------- $ 12,503 6,008 ======== ======= </TABLE> In 1994, the Trust charged off $500,000 of the motel loans against the allowance for possible losses. The net carrying value of the motel loans was further decreased by an additional $422,000 during 1994. This decrease represented a bankruptcy settlement accrued in 1994 and was related to the property collateralizing the motel loans. That property was owned by the Trust and the bankruptcy settlement was recorded as deferred income because of the collection difficulties with the motel loans and because all gains on the sale of the properties collateralizing the motel loans were deferred when the loans were made because the gain recognition criteria of SFAS 66 were not met when the properties were sold and have not been met since. In 1995, two of the motel mortgages were restructured and no loss was recorded. At December 31, 1996, the carrying value of two impaired motel mortgage loans was $1,700,000. The borrower on one motel mortgage loan is currently in bankruptcy, however, interest payments are current and the Trust feels that the underlying collateral is sufficient to cover the loan's value if necessary. Interest income recorded on the motel mortgages was $403,000 for 1996, $340,000 for 1995, and $211,000 for 1994. In April 1995, the land tenant on the EastGate Apartment land purchase-leaseback investment gave the Trust a deed in lieu of foreclosure because of its inability to meet all of the obligations of the property. The land purchase-leaseback had a carrying value of $225,000 and the mortgage loan had a carrying value of $1,009,000. On November 27, 1996, the Trust sold Eastgate for $1,753,000 and recognized a gain of $427,000. During 1996, the Trust wrote down the Plus Park motel mortgage note receivable $200,000 to reflect the value of the underlying collateral. This amount is recognized as a loss on real estate investments. A summary of activity in the allowance for possible losses follows: <TABLE> <CAPTION> Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- (In thousands) <S> <C> <C> <C> Balance at beginning of period $ - - 500 Amounts charged-off - - (500) ------- ----- ----- Balance at end of period $ - - - ======= ===== ===== </TABLE> 37
38 (5) Investment in Real Estate Investment Trusts The investment in real estate investment trusts ("REIT") consists of the following: <TABLE> <CAPTION> December 31, 1996 December 31, 1995 ---------------------- ----------------------- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- <S> <C> <C> <C> <C> Equity method investee: LNH REIT, Inc. $ - - 3,976 3,928 --- ----- ------- ------- Non-equity method investee: Copley Properties, Inc. - - 6,811 6,811 Other 934 1,001 - - ---- ----- ------- -------- $934 1,001 10,787 10,739 ==== ===== ======== ======== </TABLE> The investment in LNH was purchased at amounts less than the Trust's pro rata share of the LNH's book value. This difference of $1,515,000 was assigned to LNH's principal assets and was recognized in operations as those underlying assets were sold. On May 14, 1996, the Trust and LNH jointly announced that LNH's shareholders approved the merger of LNH with and into EastGroup-LNH Corporation, a wholly-owned subsidiary of the Trust, and that the merger was consummated immediately after the LNH shareholder meeting. Under the terms of the merger, each LNH share was converted into the right to receive .55065 EastGroup shares (.3671 pre-split). The Trust issued 927,366 of its shares as a result of the merger. On June 19, 1996, the Trust and Copley Properties, Inc. (Copley) jointly announced that their respective shareholders approved an Agreement and Plan of Merger under which Copley was merged with the Trust. The merger became effective immediately after the shareholder meetings on that date. Under the terms of the merger, each Copley share was converted into the right to receive 1.06002 EastGroup shares (.70668 pre-split). The Trust issued 3,238,343 of its shares as a result of the merger. (6) Notes Payable to Banks The Trust has a line of credit from a commercial bank in the amount of $20,000,000 which is secured by the outstanding stock of two of the Trust's wholly-owned subsidiaries. Borrowings under the credit line at December 31, 1996 were $4,934,000 and the interest rate was LIBOR plus 1.85% (7.475% at December 31, 1996). The line of credit expires April 30, 1997. Total loan commitment fees of $50,000, $35,000 and $25,000 were paid in 1996, 1995 and 1994 for this line of credit. At December 31, 1996, the Trust had $9,028,000 outstanding under a $15,000,000 acquisition line of credit from a commercial bank. The acquisition line had an interest rate of LIBOR plus 1.85% at December 31, 1996 and matures on April 30, 1999. The line is collateralized by four properties of the Trust with an aggregate carrying value of $25,901,000 at December 31, 1996. Total loan commitment fees of $37,500, $66,000 and $169,000 were paid in 1996, 1995 and 1994 for this line of credit. On March 27, 1997, the interest rate on both the working capital line and the acquisition line was reduced to LIBOR plus 1.75%. Average bank borrowings were $11,572,000 in 1996 compared to $22,874,000 in 1995, with average interest rates of 7.3% in 1996 compared to 8.8% in 1995. 38
39 <TABLE> <CAPTION> (7) Mortgage Notes Payable A summary of mortgage notes payable follows: December 31, ------------ 1996 1995 ---- ---- (In thousands) <S> <C> <C> Garden Villa Apartments mortgage, interest at 8.25%, principal and interest due $24,041 monthly, repaid January 1996 $ - 3,135 Interstate Distribution Center #1 Warehouse mortgage, interest at 9.25%, principal and interest due $10,827 monthly, maturing June 1, 2009, secured by real estate with a carrying amount of $2,714,000 at December 31, 1996 866 914 Interstate Distribution Center #2 Warehouse mortgage, interest at 9.25%, principal and interest due $12,844 monthly, maturing June 1, 2009, secured by real estate with a carrying amount of $3,147,000 at December 31, 1996 1,088 1,139 8150 Leesburg Pike Office Building mortgage, interest at 8.5%, principal and interest due $52,304 monthly, maturing June 15, 2005, secured by real estate with a carrying amount of $13,138,000 at December 31, 1996 3,775 4,068 Sunbelt Center Warehouse mortgage, interest at 10%, principal and interest due $39,958 monthly, maturing September 1, 1997, secured by real estate with a carrying amount of $5,580,000 at December 31, 1996 4,148 4,204 Deerwood Warehouse mortgage, interest at 8.375%, principal and interest due $16,339 monthly, maturing July 1, 2003, secured by real estate with a carrying amount of $2,808,000 at December 31, 1996 1,754 1,798 Doral Club Apartments mortgage, interest at 8.625%, principal and interest due $36,494 monthly, maturing October 31, 2003, secured by real estate with a carrying amount of $5,953,000 at December 31, 1996 4,300 4,359 Nobel Center mortgage, interest at 7.5%, principal and interest due $27,915 monthly, maturing on January 15, 1997, secured by real estate with a carrying amount of $2,895,000 at December 31, 1996 2,536 2,667 North Shore Improvement Bonds, interest rates range from 6.3% to 7.75% and mature serially in various amounts through September 2, 2016, secured by land underlying Nobel Center with a carrying amount of $2,895,000 at December 31, 1996 432 441 </TABLE> 39
40 <TABLE> <CAPTION> December 31, ------------ 1996 1995 ---- ---- (In thousands) <S> <C> <C> Sutton House Apartments mortgage, interest at 8%, principal and interest due $45,257 monthly, maturing October 31, 2003, secured by real estate with a carrying amount of $7,829,000 at December 31, 1996 5,826 5,894 Northwest Point Warehouse mortgage, interest at 7.75%, principal and interest due $32,857 monthly, maturing March 1, 2001, secured by real estate with a carrying amount of $6,691,000 at December 31, 1996 4,170 4,238 56th Street Warehouse mortgage, interest at 8.875%, principal and interest due $21,816 monthly, maturing August 1, 2004, secured by real estate with a carrying amount of $2,643,000 at December 31, 1996 2,274 2,331 Exchange Distribution Warehouse mortgage, interest at 8.375%, principal and interest due $21,498 monthly, maturing August 1, 2005, secured by real estate with a carrying amount of $3,173,000 at December 31, 1996 2,432 2,484 LaVista Apartments mortgage, interest at 8.688%, principal and interest due $48,667 monthly, maturing September 1, 2005, secured by real estate with a carrying amount of $7,181,000 at December 31, 1996 5,862 5,933 Westport Commerce Center mortgage, interest at 8%, principal and interest due $28,021 monthly, maturing August 1, 2005, secured by real estate with a carrying amount of $4,652,000 at December 31, 1996 3,254 3,327 LakePointe Business Park mortgage, interest at 8.125%, principal and interest due $81,675 monthly, maturing October 1, 2005, secured by real estate with a carrying amount of $10,019,000 at December 31, 1996 10,887 10,985 JetPort, JetPort 515 & 516 mortgage, interest at 8.125%, principal and interest due $33,769 monthly, maturing October 1, 2005, secured by real estate with a carrying amount of $4,792,000 at December 31, 1996 3,902 3,986 Plantation Apartments mortgage, interest at 7.625%, principal and interest due $39,599 monthly, repaid December 1996 - 5,300 Columbia Place mortgage, interest at 8.875%, principal and interest due $93,292 monthly, maturing December 31, 2009, secured by real estate with a carrying amount of $11,884,000 at December 31, 1996 10,046 - Dominguez Distribution Center mortgage, interest at 9%, principal and interest due $46,156 monthly, maturing January 1, 1997, secured by real estate with a carrying amount of $9,911,000 at December 31, 1996 5,138 - </TABLE> 40
41 <TABLE> <CAPTION> December 31, ------------ 1996 1995 ---- ---- (In thousands) <S> <C> <C> Metro Business Park mortgage, interest at 9.25%, principal and interest due $30,850 monthly, maturing March 1, 1997, secured by real estate with a carrying amount of $4,462,000 at December 31, 1996 3,383 - Metro Business Park mortgage, interest at 8%, principal and interest due $15,892 monthly, maturing April 1, 1998, secured by real estate with a carrying amount of $5,067,000 at December 31, 1996 1,731 - University Business Center mortgage, interest at 9.06%, principal and interest due $85,841 monthly, maturing April 1, 2000, secured by real estate with a carrying amount of $15,805,000 at December 31, 1996 9,163 - University Business Center mortgage, interest at 9.37%, interest only, maturing January 1, 1997, secured by real estate with a carrying amount of $11,583,000 at December 31, 1996 8,250 - Wiegman mortgage, interest at 8.75%, principal and interest due $9,367 monthly, maturing October 1, 1997, secured by real estate with a carrying amount of $1,656,000 at December 31, 1996 959 - Huntwood mortgage, interest at 7.99%, principal and interest due $100,250 monthly, maturing August 22, 2006, secured by real estate with a carrying amount of $18,868,000 at December 31, 1996 12,959 - Wiegman mortgage, interest at 7.99%, principal and interest due $46,269 monthly, maturing August 22, 2006, secured by real estate with a carrying amount of $9,191,000 at December 31, 1996 5,981 - -------- ------ $115,116 67,203 ======== ====== </TABLE> Approximate principal payments due during the next five years are as follows: 1997, $26,337,000; 1998, $3,719,000; 1999, $2,223,000; 2000, $10,624,000; and 2001, $6,071,000. (8) Trust Administration On March 1, 1983, the Trust approved an agreement, which was amended on March 1, 1984, and again on September 1, 1990, whereby the day-to-day management was transferred from its former adviser to officers of the Trust, who were also officers of Eastover Corporation and certain other affiliates. Certain administrative expenses were allocated monthly among Eastover Corporation, Congress Street Properties, Inc., The Parkway Company and the Trust based on the shared expense agreement. Effective December 31, 1994, the Trust terminated the expense sharing agreement and now maintains its own officers and employees. (9) Reverse Repurchase Agreements The Trust does not in the ordinary course of business take possession of the securities which collateralize its reverse repurchase agreements (assets purchased under agreements to resell). The Trust has the right to demand additional collateral or return of the invested funds at any time the collateral value is less than the invested funds plus any accrued earnings thereon. The Trust does, however, conduct these transactions on a short term basis with financial institutions with which it has normal business relationships. At December 31, 1996 and 1995, the Trust did not hold reverse repurchase 41
42 agreements with any individual counterparty or group of counterparties in excess of 10% of shareholders' equity. (10) Shareholders' Equity In 1994, the Trust adopted the 1994 Management Incentive Plan. The previous plan included stock options, stock appreciation rights, incentive compensation units and a bonus plan. The 1994 Management Incentive Plan includes stock options (50% vested after one year and the other 50% after two years) and an annual incentive award. Stock option activity for the 1994 plan is as follows: <TABLE> <CAPTION> Years Ended December 31, -------------------------------------------- (Number of shares) 1996 1995 1994 - ------------------ ------- ------- ------- <S> <C> <C> <C> Outstanding at beginning of year 261,375 262,875 - Granted 202,125 15,000 262,875 Exercised (31,500) - - Expired (9,750) (16,500) - ------- ------- ------- Outstanding at end of year 422,250 261,375 262,875 ======= ======= ======= Exercisable at end of year 220,125 126,938 - Available for grant at end of year 44,828 38,625 37,125 Price range of options: Outstanding $12.00 - $17.92 $12.00 - $13.42 $12.00 - $12.67 Exercised $12.00 - $12.67 - - </TABLE> The annual incentive award program began in 1995 and the Compensation Committee determined awards based on actual funds from operations per share ("FFO") compared to goals set for the year. The 1996 and 1995 awards approximated $311,000 and $382,000, respectively, and were payable two-thirds in cash and one-third in Shares of the Trust. The Trust has a Trustees Stock Option Plan, as amended in 1994, under which an aggregate of 150,000 shares of beneficial interest are reserved for issuance upon exercise of any options granted. Under the Trustees plan, each Non-Employee Trustee is granted an initial 7,500 options and 2,250 additional options on the date of any Annual Meeting at which the Trustee is reelected to the Board. Stock option activity for the Trustee plan is as follows: <TABLE> <CAPTION> Years Ended December 31, --------------------------------------------- Number of shares) 1996 1995 1994 - ------------------ ------- ----- ------ <S> <C> <C> <C> Outstanding at beginning of year 65,250 76,500 52,500 Granted 11,250 11,250 24,000 Exercised - (22,500) - ------ ------- ------ 76,500 65,250 76,500 ====== ======= ====== Exercisable at end of year 76,500 65,250 76,500 Available for grant at end of year 51,000 62,250 73,500 Price range of options: Outstanding $10.67 - $14.58 $10.67 - $12.67 $10.67 - $11.33 Exercised - $10.67 - </TABLE> In calculating net income per share of beneficial interest, the dilutive effect of the various benefit plans, if any, was not significant. In January 1994, the Trust completed the public offering of 2,625,000 shares of beneficial interest at $13.33 per share and received net proceeds of $32,164,000. 42
43 Under the plan existing prior to the 1994 Management Incentive Plan, officers exercised 117,000 stock options and stock appreciation rights ("SARs"). The stock option exercise price was $8.25 per share for a total option price of $965,250. Compensation was accrued by the Trust for SARs expense based on the excess of the market price over the exercise price, $8.25 per share, of the SARs. Compensation recovery for the SARs was $251,000 in 1994. Compensation expense for the incentive compensation units was accrued by the Trust based on the dividends paid by the Trust and in accordance with a vesting schedule. Compensation expense for the units was $89,000 in 1994. Amounts due in 1995 and 1996 were estimated and paid in Trust shares in 1994. The Trust issued 17,096 shares and recorded an expense of $122,000 which is included with stock appreciation rights and incentive compensation expense on the 1994 statement of operations. Compensation for the bonus plan amounted to $122,000 in 1994. During 1995, the Trust adopted a dividend reinvestment plan, which allows shareholders to reinvest cash distributions in new shares of the Trust. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 provides accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument. The Trust elected to remain with the accounting treatment outlined in APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Trust accounts for its stock based compensation plans under APB Opinion No. 25, under which no compensation cost has been recognized. The pro forma effect of SFAS No. 123 did not have a material impact on net income or net income per share for 1996 and 1995. (11) Future Accounting Changes In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share". SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. This statement replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the statement of operations for all entities with complex capital structures and requires a reconciliation between basic and diluted earnings per share. SFAS No. 128 is effective for fiscal years ending after December 15, 1997, the adoption of this statement is not expected to have a material impact on the 1997 consolidated financial statements. Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure". This statement establishes standards for disclosing information about an entity's capital structure. This statement is effective for fiscal years ending after December 15, 1997. The adoption of this statement is not expected to have a material impact on the 1997 consolidated financial statements. (12) Mergers During 1996, the Trust acquired the entities described below, which were accounted for by the purchase method of accounting. For financial reporting purposes, the assets of the company acquired are assigned new cost basis amounts based on the allocation of the purchase price of the assets to the Trust. In general, the purchase price to the Trust consists of the new shares issued at the market price of the Trust's shares on the date of the merger and the previous investment the Trust had in LNH and Copley. The shares of LNH and Copley owned by the Trust were retired at the merger date. The operating results of LNH and Copley have been included in the consolidated statements of operations subsequent to the dates of acquisition. On May 14, 1996, the merger of LNH with EGP-LNH Corporation, a wholly-owned subsidiary of the Trust, was completed. Under the terms of the merger, each 43
44 LNH share was converted into the right to receive .55065 EastGroup shares (.3671 pre-split). The Trust issued 927,366 shares as a result of the merger. On June 19, 1996, Copley was merged into the Trust. Under the terms of the merger, each Copley share was converted into the right to receive 1.06002 EastGroup shares (.70668 pre-split). EastGroup issued 3,238,343 of its shares as a result of the merger. The increase in net assets at the acquisition dates, based on relative fair values, resulting from the mergers was as follows (in thousands): <TABLE> <CAPTION> LNH Copley -------- -------- <S> <C> <C> Real estate properties $ 6,243 113,192 Investment in joint venture 4,298 -- Mortgage loans 5,614 880 Land 521 3,280 Investment in real estate investment trust 1,050 -- Cash 1,200 1,550 Accounts receivable and other assets 425 305 Mortgage notes payable -- (59,681) Minority interests (783) (1,740) Accounts payable and other liabilities (713) (1,063) -------- -------- $ 17,855 56,723 ======== ======== </TABLE> The Trust's purchase price of the net assets acquired consisted of the following (in thousands): <TABLE> <CAPTION> LNH Copley -------- ------ <S> <C> <C> Shares of beneficial interest (927,366 and 3,238,343 shares) $ 13,640 47,658 Cash in lieu of fractional shares (369 and 390 shares) 5 6 Merger expenses 292 2,866 Prior investment in LNH and Copley 3,918 6,193 -------- ------ $ 17,855 56,723 ======== ====== </TABLE> The following unaudited pro forma combined results of operations gives effect to the LNH and Copley mergers as if they had occurred at the beginning of the fiscal year for each of the periods presented: (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> 1996 1995 ----------- --------- <S> <C> <C> Revenues $ 47,191 45,606 Net income 12,796 10,363 Net income per share 1.21 .99 =========== ========= Shares used in computation 10,532 10,504 =========== ========= </TABLE> In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the transaction been consummated at the beginning of 1996 and the beginning of 1995 or of future operations of the combined companies under the ownership and management of the Trust. Effective December 22, 1994, the merger of Eastover Corporation ("Eastover") with Eastover Acquisition Corporation ("EAC"), a wholly-owned subsidiary of the Trust, was completed. EAC was immediately liquidated and distributed its assets and liabilities to EastGroup. The shareholders of Eastover received nine-tenths of one (.9) share (.6 pre-split) of beneficial interest of EastGroup for each share of beneficial interest of Eastover held by them. The merger was accounted for using the purchase method of accounting. The operations of Eastover subsequent to December 22, 1994, have been included 44
45 in the accompanying consolidated statements of operations. The unaudited pro-forma effects of the Trust's acquisition of Eastover as if it had occurred on January 1, 1994, would be to increase revenues by approximately $18,000 in 1994, decrease net income by $412,000 in 1994 and net income per share by $.06 in 1994. (13) QUARTERLY RESULTS OF OPERATIONS - UNAUDITED <TABLE> <CAPTION> CALENDAR 1996 CALENDAR 1995 QUARTER ENDED QUARTER ENDED ------------- ------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- ------- ------- -------- ------- (In thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues $ 7,412 8,111 12,104 12,138 $ 7,283 7,780 7,732 7,469 Expenses (6,236) (6,733) (9,569) (10,058) (6,193) (6,569) (6,668) (6,445) ------ ------ ------ ------- ------- ------- ------- ------- Income before gains on investments 1,176 1,378 2,535 2,080 1,090 1,211 1,064 1,024 Gains on investments 1,353 656 152 3,179 412 1,039 - 1,871 ------- ------ ------ ------ ------- ------- ------- ------- Net income $ 2,529 2,034 2,687 5,259 $ 1,502 2,250 1,064 2,895 ======= ====== ====== ====== ======= ======= ======= ======= Net income per share of beneficial interest $ .40 .28 .26 .50 $ .24 .36 .17 .46 ======= ====== ======= ======= ======= ======= ======= ======= Weighted average shares outstanding 6,353 7,238 10,535 10,542 6,332 6,337 6,340 6,344 ======= ====== ======= ======= ======= ======= ======= ======= </TABLE> (14) Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Trust's financial instruments at December 31, 1996 and 1995. FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments", defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. <TABLE> <CAPTION> 1996 1995 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (In thousands) <S> <C> <C> <C> <C> Financial Assets Cash and cash equivalents $ 438 438 26 26 Investment in real estate investment trusts 934 1,001 10,787 10,739 Mortgage loans 12,503 13,824 6,008 7,623 Financial Liabilities Mortgage notes payable 115,116 118,440 67,203 67,109 Notes payable to banks 13,962 13,962 4,359 4,359 </TABLE> The carrying amounts shown in the table are included in the balance sheet under the indicated captions. The following methods and assumptions were used to estimate fair value of each class of financial instruments. Cash and Cash Equivalents: The carrying amounts approximate fair value because of the short maturity of those instruments. Mortgage Loans: The fair value of performing mortgage loans is estimated using discounted cash flows at current interest rates for loans with similar terms and maturities or based on the estimated value of the underlying collateral adjusted for the borrower's payment history and financial wherewithal. The fair value for nonperforming loans is based on the underlying collateral value. Investment in Real Estate Investment Trusts: The fair value of the equity investment is based on quoted market prices at the reporting date for the investment. 45
46 Mortgage Notes Payable: The fair value of the Trust's mortgage notes payable is estimated based on the quoted market prices for similar issues or by discounting expected cash flows at the rates currently offered to the Trust for debt of the same remaining maturities, as advised by the Trust's bankers. Notes Payable to Banks: The carrying amounts approximate fair value because of the variable rate of interest on the debt. (15) Subsequent Events The Trust has entered into contracts to purchase two industrial properties in Houston, Texas. The total investment in these properties is estimated to be $9,200,000 and are scheduled to close in the second quarter of 1997. On March 20, 1997, the Trust purchased Interchange A (33,000 square feet) in Jackson, Mississippi for a total investment of approximately $1,090,000. On February 4, 1997, the Trust announced the offering of 1,875,000 shares of beneficial interest under its existing shelf registration statement. The shares were sold to institutional investors. The net proceeds of the offering (approximately $32,775,000, net of underwriting commissions and expenses) were used for the repayment of approximately $30,000,000 of outstanding indebtedness and to fund working capital requirements, including the acquisition of industrial properties. On February 28, 1997, in connection with this public offering, the underwriter exercised in full its over-allotment option for an additional 225,000 shares. The net proceeds to the Trust from the exercise of the over-allotment option were approximately $3,950,000. This amount will also fund working capital requirements. The Trust entered into a sales contract to sell the Santa Fe Energy Building in Houston, Texas at a price of $13,000,000. The buyer has placed $100,000 at risk with closing scheduled for June 3, 1997. The buyer has agreed to cooperate in a tax-deferred exchange transaction if requested by the Trust. The sale, if consummated, will result in a gain of approximately $2,527,000. (16) Related Party Transactions EastGroup and Parkway Properties, Inc. continue to share the same office space at One Jackson Place in Jackson, Mississippi, but Parkway is scheduled to move to its own space in April 1997. EastGroup and Parkway share the rent with respect to such space based upon the number of employees each has in the space divided by the total number of employees of both companies using the space. In addition, EastGroup and Parkway share the services of the Trust's Chief Executive Officer and a limited number of clerical and support staff employees and expenses related thereto are shared equally between EastGroup and Parkway. Parkway and EastGroup also share the expenses of certain office supplies and equipment, and EastGroup reimburses Parkway for the services of certain employees of Parkway who perform services for EastGroup on an as requested basis. 46
47 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES THE TRUSTEES AND SHAREHOLDERS EASTGROUP PROPERTIES: Under date of March 21, 1997, we reported on the consolidated balance sheets of EastGroup Properties and subsidiaries, a Maryland real estate investment trust, as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which are included in the 1996 Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedules as listed in Item 14 (a)(2) of Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Jackson, Mississippi March 21, 1997 KPMG Peat Marwick LLP 47
48 SCHEDULE III REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (IN THOUSANDS) <TABLE> <CAPTION> Costs Capitalized Initial Cost to the Trust Subsequent to Acquisition ------------------------- ------------------------- Buildings and Advances Capitalized Description Encumbrances Land Improvements Other Under Lease Costs Other ----------- ------------ ---- ------------ ----- ----------- ----- ----- <S> <C> <C> <C> <C> <C> <C> <C> Acquired Land subject to long-term net leases: Apartments: Country Club - Alabama (c)(h) 4,245 500 - - - - - Shopping Centers: Ponderosa - Kentucky - 27 - - - - - -------- -------- -------- ------- -------- ------- -------- Total land subject to long-term leases 4,245 527 - - - - - ------- -------- -------- ------- -------- ------- -------- <CAPTION> Gross Amount at Which Carried at Close of Period ------------------------------------- Buildings Accumulated and Depreciation Land Improvements Other Total 12/31/96 Acquired ---- ------------ ----- ----- -------- -------- <S> <C> <C> <C> <C> <C> <C> Acquired Land subject to long-term net leases: Apartments: Country Club - Alabama (c)(h) 500 - - 500 - 1973 Shopping Centers: Ponderosa - Kentucky 27 - - 27 - 1994 ---- ------ ------ ---- ----- Total land subject to long-term leases 527 - - 527 - ---- ------ ------ ---- ----- </TABLE> 48
49 <TABLE> <CAPTION> REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (IN THOUSANDS) Initial Cost to the Trust -------------------------------- Buildings Description Encumbrances Land and Improvements - ----------- ------------ ---- ---------------- <S> <C> <C> <C> Real estate properties (d) and (e): Industrial: Nobel Center - California 2,968 542 - Exchange Warehouses (2)-Texas - 536 1,178 Interstate Warehouses (2)-Texas 1,954 1,757 4,941 Venture Warehouses (2)-Texas - 1,452 3,762 Rampart-Colorado - 1,023 3,861 Sunbelt-Florida 4,148 1,034 5,056 La Quinta-Florida - 421 575 Deerwood-Florida 1,754 1,147 1,799 56th Street - Florida 2,274 551 2,126 JetPort Commerce Park (3) - Florida 3,902 857 3,635 Lake Pointe - Florida 10,887 3,442 6,450 Exchange Dist. - Florida 2,432 603 2,414 Phillips - Florida - 1,375 2,961 Northwest Point - Texas (j) 5,275 1,243 5,640 Westport - Florida 3,254 980 3,800 Lakeside Distribution - Oklahoma - 120 1,154 Linpro Distribution - Florida - 613 2,243 Broadway Industrial Center - Arizona - 837 3,349 Dominguez Distribution - California 5,138 2,006 8,025 Huntwood Associates - California 12,959 3,842 15,368 Kingsview Industrial - California - 643 2,573 Metro Business Park - Arizona 5,114 1,927 7,708 Sample I-95 - Florida - 1,565 6,262 University Business Center - California 17,413 5,517 22,067 Wiegman Associates - California 6,940 2,197 8,788 Braniff Park West - Oklahoma (i) 1,977 1,066 4,641 Walnut Business Park - California (i) 2,817 2,885 5,274 ------------------------------------------------ 91,206 40,181 135,650 ------------------------------------------------ Industrial Development: Chancellor Distribution - Florida - 291 730 Rampart II - Colorado - 196 674 ------------------------------------------------ - 487 1,404 ------------------------------------------------ Office Buildings: 8150 Leesburg Pike - Virginia (j) 5,941 2,208 14,068 Columbia Place - Maryland 10,046 2,402 9,610 Los Angeles Corporate Center - California - 1,363 5,453 ------------------------------------------------ 15,987 5,973 29,131 ------------------------------------------------ Apartments: LaVista-Georgia 5,862 1,526 2,886 Doral Club-Texas 4,300 670 5,976 Sutton House - Texas 5,826 471 8,098 Hampton House - Mississippi (i) 2,121 575 5,706 Grande Pointe - Alabama (i) 2,113 615 5,499 ------------------------------------------------ 20,222 3,857 28,165 ------------------------------------------------ Operating Properties Held For Sale: Santa Fe Energy - Texas (j) 1,663 623 9,793 Liberty Corners - Missouri - 804 2,583 ------------------------------------------------ 1,663 1,427 12,376 ------------------------------------------------ Land Held for Sale (f): Jefferson Parish-Louisiana - 3,050 - Silvermill - Texas - 27 - ------------------------------------------------ - 3,077 - ------------------------------------------------ Total real estate owned 129,078 55,002 206,726 --------------------------------------------------- Total $ 133,323 55,529 206,726 ==================================================== </TABLE> Notes: 49
50 <TABLE> <CAPTION> SCHEDULE III (CONTINUED) Gross Amount at Which Carried at Close Costs Capitalized of Period Subsequent to Acquisition -------------------------------------- Accumulated - ------------------------- Buildings Depreciation Capitalized and Dec. 31, Year Year Costs Other Land Improvements Total 1996 Acquired Constructed ----- ----- ---- ------------ ----- ---- -------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> 3,696 - 542 3,696 4,238 1,343 1987 1986 232 - 536 1,410 1,946 341 1988 1979 604 - 1,757 5,545 7,302 1,441 1988 1978 718 - 1,452 4,480 5,932 1,089 1988 1979 282 - 1,023 4,143 5,166 925 1988 1987 598 - 1,034 5,654 6,688 1,108 1989 1987 79 - 440 635 1,075 150 1989 1974 260 - 1,147 2,059 3,206 398 1989 1978 266 - 551 2,392 2,943 300 1993 1981/86 780 - 857 4,415 5,272 480 1993/94/95 1974/79/85 1,090 - 3,442 7,540 10,982 963 1993 1986/87 412 - 603 2,826 3,429 256 1994 1975 1,540 - 1,375 4,501 5,876 303 1994 1984/95 160 - 1,243 5,800 7,043 352 1994 1984/85 104 - 980 3,904 4,884 232 1994 1983/87 108 - 120 1,262 1,382 64 1994 1986 - - 613 2,243 2,856 47 1996 1986 - - 837 3,349 4,186 82 1996 1971 - - 2,006 8,025 10,031 120 1996 1977 - - 3,842 15,368 19,210 342 1996 1988 - - 643 2,573 3,216 46 1996 1980 11 - 1,927 7,719 9,646 117 1996 1977/79 - - 1,565 6,262 7,827 159 1996 1990 137 - 5,517 22,204 27,721 333 1996 1987/88 - - 2,197 8,788 10,985 138 1996 1986/87 - - 1,066 4,641 5,707 44 1996 1974 - - 2,885 5,274 8,159 69 1996 1966/90 - --------------------------------------------------------------------------------------------- 11,077 - 40,200 146,708 186,908 11,242 - --------------------------------------------------------------------------------------------- - - 291 730 1,021 - 1996/97 1996/97 34 - 230 674 904 - 1996/97 1996/97 - --------------------------------------------------------------------------------------------- 34 - 521 1,404 1,925 - - --------------------------------------------------------------------------------------------- 3,731 - 2,208 17,799 20,007 6,869 1975/89 1974/94 - - 2,402 9,610 12,012 128 1996 1988 77 - 1,363 5,530 6,893 81 1996 1986 - --------------------------------------------------------------------------------------------- 3,808 - 5,973 32,939 38,912 7,078 - --------------------------------------------------------------------------------------------- 4,053 - 1,526 6,939 8,465 1,284 1991 1968/96 475 - 670 6,451 7,121 1,168 1992 1985 172 - 471 8,270 8,741 912 1993 1985 311 - 575 6,017 6,592 503 1994 1990 461 - 764 5,811 6,575 516 1994 1983 - --------------------------------------------------------------------------------------------- 5,472 - 4,006 33,488 37,494 4,383 - --------------------------------------------------------------------------------------------- 470 - 623 10,263 10,886 803 1994 1981 20 - 804 2,603 3,407 56 1996 1987/88 - --------------------------------------------------------------------------------------------- 490 - 1,427 12,866 14,293 859 - --------------------------------------------------------------------------------------------- 49 (2,541)(g) 558 - 558 - 1978 n/a - - 27 - 27 - 1996 n/a - --------------------------------------------------------------------------------------------- 49 (2,541) 585 - 585 - - --------------------------------------------------------------------------------------------- 20,930 (2,541) 52,712 227,405 280,117 23,562 ------------------------------------------------------------------------------------ 20,930 (2,541) 53,239 227,405 280,644 23,562 ==================================================================================== (a)(b) (a) (continued) </TABLE> 50
51 (a) Changes in Real Estate Properties Follow: <TABLE> <CAPTION> Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- (In thousands) <S> <C> <C> <C> Balance at beginning of year $ 156,931 158,110 107,719 Real estate properties acquired - LNH merger 6,243 - - Land acquired in LNH merger 521 - - Real estate properties acquired - Copley merger 113,192 - - Land acquired in Copley merger 3,280 - - Improvements 7,469 4,386 4,402 Deed in lieu of foreclosure - 1,002 - Purchase of real estate properties 13,865 806 51,680 Writedown of real estate properties - (136) (429) Carrying amount of investments sold (20,857) (7,237) (3,050) Write-off of fully depreciated assets - - (2,212) --------- ------- ------- Balance at end of year (1) $ 280,644 156,931 158,110 ========= ======= ======= <FN> (1) Includes 25% minority interest in JetPort Commerce Park, 56th Street Commerce Park, and Westport Commerce Center and 20% minority interest in University Business Center and 22.22% minority interest in Liberty Corners Shopping Center totaling $11,469,000 at December 31, 1996. Includes minority interest in JetPort Commerce Park, 56th Street Commerce Park, Exchange Distribution Center, JetPort 516 Commerce Park, JetPort 515 Commerce Park and Westport Commerce Center of $4,054,000 in 1995 and $3,701,000 in 1994. </TABLE> Changes in the accumulated depreciation on real estate properties follow: <TABLE> <CAPTION> Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- (In thousands) <S> <C> <C> <C> Balance at beginning of year $ 19,206 15,888 13,981 Depreciation expense 7,266 5,235 4,119 Accumulated depreciation on assets sold (2,910) (1,917) - Write-off of fully depreciated assets - - (2,212) -------- ------ ------- Balance at end of year $ 23,562 19,206 15,888 ======== ====== ======= <FN> (b) The aggregate cost for federal income tax purposes is approximately $246,548,000. The federal income tax return for the year ended December 31, 1996 has not been filed and, accordingly, the income tax basis of real estate properties as of December 31, 1996 is based on preliminary data. (c) The land tenant has the option, subject to certain conditions, to repurchase the land at a price which would not be less than the cost of the land interest to the Trust. (d) Reference is made to allowance for possible losses on real estate investments in the notes to consolidated financial statements. (e) The Trust computes depreciation using the straight-line method over the estimated useful lives of the buildings (25 to 40 years) and other improvements (3 to 10 years). (f) The investment is not producing income to the Trust as of December 31, 1996. (g) Represents a writedown of $2,496,000 and income received but deferred of $45,000. (h) Real estate land converted to land purchase-leasebacks. </TABLE> 51
52 (i) The acquisition line of credit is secured by Hampton House Apartments, Grande Pointe Apartments, Walnut Business Park and Braniff Park West. The outstanding acquisition line of credit of $9,028,000 at December 31, 1996 was allocated to encumbrances for these respective properties based on carrying value at December 31, 1996. (j) The line of credit is secured by the outstanding stock of the Trust's wholly-owned subsidiary EastGroup Virginia, Inc. which owns 8150 Leesburg Pike Office Building and 99% owned partnership EastGroup Houston Partners, Ltd. which owns the Santa Fe Energy Office Building and Northwest Point Distribution Center. The outstanding line of credit of $4,934,000 at December 31, 1996 was allocated to encumbrances for these respective properties based on carrying value at December 31, 1996. 52
53 <TABLE> <CAPTION> SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1996 (IN THOUSANDS) Interest Final Periodic Number of Loans Rate Maturity Date Payment Terms Prior Liens --------------- ---- ------------- ------------- ----------- <S> <C> <C> <C> <C> <C> First mortgage loans (c): MOTELS: Jacksonville, Florida 1 8.5% 4/00 P&I monthly - Nashville, Tennessee 1 9% 5/98 P&I monthly - Nashville, Tennessee 1 10% 7/97 P&I monthly - Gainesville, Florida 1 10% 1/02 P&I monthly - (effective 2-27-97) INDUSTRIAL: Tampa, Florida 1 prime + .125% 10/01 Interest monthly - Hayward, California 1 9% 1/97 Interest monthly - APARTMENTS: Country Club - Alabama 1 8.5%-9%(d) 12/99 (d) - SHOPPING CENTERS: Inverness, Florida 1 8.0% 11/98 Interest monthly - OFFICE BUILDINGS: Dublin, Ohio 1 10.0% 9/99 P&I monthly - Columbia, Maryland 1 9.56% 2/00 P&I annually - UNDEVELOPED LAND: Hickory Creek, Houston, Texas 1 Prime 9/99 (f) - Meadowbend, Houston, Texas 1 8% 4/99 P&I monthly - Baypointe, Houston, Texas 1 9.5% 4/99 P&I semi-annually - OTHER LOANS 2 8.5% 3/07-1/08 P&I monthly - ------ ------ Total first mortgage loans 15 - ====== ====== <CAPTION> Principal Amount of Loans Subject to Face Amount Carrying to Delinquent of Mortgages Amount of Principal Dec. 31, 1996 Mortgages or Interest(e) ------------- --------- -------------- <S> <C> <C> <C> First mortgage loans (c): MOTELS: Jacksonville, Florida $ 795 412 - Nashville, Tennessee 942 845 - Nashville, Tennessee 917 517 917 Gainesville, Florida 1,571 1,183 1,571 INDUSTRIAL: Tampa, Florida 141 141 - Hayward, California 700 700 - APARTMENTS: Country Club - Alabama 4,245 2,685(d) - SHOPPING CENTERS: Inverness, Florida 1,873 1,636 - OFFICE BUILDINGS: Dublin, Ohio 92 92 - Columbia, Maryland 180 180 - UNDEVELOPED LAND: Hickory Creek, Houston, Texas 3,165 2,529 - Meadowbend, Houston, Texas 17 1 - Baypointe, Houston, Texas 2,005 1,523 - OTHER LOANS 59 59 - ------- ------- ------- Total first mortgage loans $16,702 12,503(a)(b) 2,488 ======= ======= ======= </TABLE> 53
54 MORTGAGE LOANS ON REAL ESTATE (CONTINUED) Notes: (a) Changes in mortgage loans were as follows: <TABLE> <CAPTION> Years Ended December 31, ------------------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) <S> <C> <C> <C> Balance at beginning of year $ 6,008 8,817 8,383 Loans to facilitate the sale of property, net of deferred gains - 150 - Loan to facilitate the purchase of property - - 1,862 Advances on mortgage notes receivable 121 - - Deed in lieu of foreclosure - (1,009) - Payments (338) (2,088) (734) Amortization of discount on loans, net 418 138 154 Allocation of allowance - - (500) Writedown of mortgage notes receivable (200) - (457) Mortgage note receivable from Eastover merger - - 39 Mortgage notes receivable from LNH merger 5,614 - - Mortgage notes receivable from Copley merger 880 - - Restructure of mortgage note receivable - - 70 -------- ------ ------ Balance at end of year $ 12,503 6,008 8,817 ======== ====== ====== <FN> (b) The aggregate cost for federal income tax purposes is approximately $15,274,000. The federal income tax return for the year ended December 31, 1996 has not been filed and, accordingly, the income tax basis of mortgage loans as of December 31, 1996 is based on preliminary data. (c) Reference is made to allowance for possible losses on real estate investments in the notes to consolidated financial statements. (d) Effective January 1, 1994, this note was modified. The interest rate decreased from 9% to 8.50% beginning January 1, 1994, increased to 8.75% as of January 1, 1995 and increased to 9% as of January 1, 1996. The past due interest and land rent of $70,000 was added to the outstanding face value of the mortgage balance increasing it to $4,245,000. The maturity of the loan was extended from August 28, 1996 to December 31, 1999. Prior to this modification, the stated rate on the note was 9%. The carrying amount of this note is net of the deferred gain of $1,127,000 and interest valuation of $433,000. The deferred gain is recognized on the installment method. (e) Interest or principal in arrears for three months or less is disregarded in computing principal amount of loans subject to delinquent principal or interest. (f) Payments on this note are received quarterly. They include a fixed principal amount as scheduled in the note document and interest that has accrued since the last payment. </TABLE> 54
55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EASTGROUP PROPERTIES By: /s/ David H. Hoster David H. Hoster II, President & Trustee March 31, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. * /s/ H. C. Bailey /s/ Leland R. Speed H. C. Bailey, Jr., Trustee Leland R. Speed, Chairman of the Board March 19, 1997 (Principal Executive Officer) March 31, 1997 * /s/ David Osnos * /s/ Alexander G. Anagnos David Osnos, Trustee Alexander G. Anagnos, Trustee March 19, 1997 March 19, 1997 * /s/ John Palmer /s/ Diane W. Hayman John N. Palmer, Trustee Diane W. Hayman, Controller March 19, 1997 (Principal Accounting Officer) March 31, 1997 * /s/ Harold B. Judell /s/ N. Keith McKey Harold B. Judell, Trustee N. Keith McKey, Executive Vice-President, March 19, 1997 Chief Financial Officer and Secretary (Principal Financial Officer) March 31, 1997 /s/ N. Keith McKey * By N. Keith McKey, Attorney in fact 55
56 EXHIBIT INDEX ------------- The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table: <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------ ----------- <S> <C> (3) Form 10-K exhibits: (3) (a) Restated Declaration of Trust (incorporated by reference to Exhibit 1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (No. 33-65337) filed February 27, 1996) (b) Amendment to Restated Declaration of Trust (incorporated by reference to Appendix E of the Registration Statement on Form S-4 (No. 333-01815). (c) Trustees Regulations of the Registrant (incorporated by reference to Exhibit 3 of the Registrant's 1980 Annual Report on Form 10-K). (d) Amendment to the Registrant's Trustees Regulations (incorporated by reference to Exhibit 3 of the Registrant's 1980 Annual Report on Form 10-K) (e) Amendment to Registrant's Trustees Regulations (incorporated by reference to Exhibit 3(d) of the Registrant's 1983 Annual Report on Form 10-K). (10) (a) EastGroup Properties 1994 Management Incentive Plan (incorporated by reference to Appendix D of the Registrant's Registration Statement on Form S-4 (No. 333-01815).* (b) EastGroup Properties 1991 Trustees Stock Option Plan, As Amended (incorporated by reference to Exhibit B of the Registrant's proxy statement dated April 26, 1994).* (c) Agreement and Plan of Merger among EastGroup Properties, EastGroup-LNH Corporation and LNH REIT, Inc. (incorporated by reference to Appendix A of the Registrant's Registration Statement on Form S-4 (No. 33-65337) filed December 22, 1995). (d) Agreement and Plan of Merger between Copley Properties, Inc. and EastGroup Properties (incorporated by reference to Exhibit IX to Amendment No. 9 to the Registrant's Statement on Schedule 13D dated February 12, 1996). (e) Form of Change in Control Agreement that Registrant has entered into with each executive officer (filed herewith)* (11) Statement re: Computation of per share earnings (filed herewith) (21) Subsidiaries of Registrant (filed herewith) (23) Consent of KPMG Peat Marwick LLP (filed herewith) (24) Powers of attorney (filed herein) (27) Financial Data Schedule (filed herewith) (28) Agreement of Registrant to furnish the Commission with copies of instruments defining the rights of holders of long-term debt (incorporated by reference to Exhibit 28(e) of the Registrant's 1986 Annual Report on Form 10-K) * Indicates management or compensatory agreement. </TABLE>