EastGroup Properties, Inc.

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EastGroup Properties, Inc.

300 One Jackson Place, 188 East Capitol Street
Jackson, Mississippi 39201
U.S.A.
Telephone: (601) 354-3555
Fax: (601) 352-1441
Web site: http://www.eastgroup.net

Public Company
Incorporated: 1969 as Third ICM Realty
Employees: 57
Sales: $108.44 million (2003)
Stock Exchanges: New York
Ticker Symbol: EGP
NAIC: 525930 Real Estate Investment Trusts

EastGroup Properties, Inc. acquires, operates, and develops industrial real estate properties in the southern and southwestern United States, focusing primarily on markets in Florida, Texas, Arizona, and California. EastGroup concentrates on acquiring distribution centers near transportation centers. The company's properties range in size from 20,000 square feet to more than one million square feet. EastGroup's portfolio of properties contains nearly 20 million square feet.

Origins

Mississippi-based EastGroup began its business life under a different name in a different part of the country. The one thread connecting the company from its past to its existence in the 21st century was its classification as a real estate investment trust, or REIT. The birth of EastGroup followed not long after REITs were encouraged to be formed by the Real Estate Investment Trust Act of 1960. The law sought to stimulate investment in real estate by granting special tax concessions to companies, trusts, or associations that qualified as REITs. The qualification standards were numerous, but as a general rule REITs were exempt from federal income taxation provided they distributed nearly all of their taxable income as dividends to shareholders and held at least 75 percent of their assets in real property. The special tax status provided by the law was intended to be limited to passive investors in real estate, not to entities that actively operated a real estate business.

The exemption from taxation opened the doors to investors who otherwise would have been barred from engaging in real estate ownership and professional real estate management. For the first time, small investors, encouraged by the provisions of the Real Estate Investment Trust Act, could pool their investments and participate in business activities that historically had been restricted to institutions or to the wealthy. With a pooling of investments, the risk of loss was spread out, lessened by the greater number of investors involved in a purchase. A greater number of investors also allowed involvement in projects that the individual investor did not have the resources to undertake. The benefits were substantial, spawning a wave of REIT formations during the 1960s, particularly later in the decade when technical changes in the tax code invigorated interest in REITs. It was at this point that EastGroup's predecessor was formed. In July 1969, Third ICM Realty was incorporated, commencing operations several months later in December 1969.

Initially, ICM Realty invested in real estate projects in the northeastern United States, developing its portfolio in markets far removed from the company's geographic focus in later years. Many of the REITs in existence during the late 1960s and early 1970s grew rapidly, funding their expansion through offerings of stock to the public, which provided substantially more capital than traditional sources of real estate financing. ICM Realty followed suit, completing its initial public offering (IPO) of stock in 1971, the same year the company dropped "Third" from its corporate title.

After an initial burst of growth, the REIT industry experienced one of the more difficult periods in its history. Capital, obtained through public offerings, was relatively easy to come by, creating a glut of cash in the industry. Few industries could complain of having access to too much money, but for REITs the supply of funds exceeded the number of quality real estate investments available, which, in turn, drove property prices skyward. The industry, particularly those REITs involved in development projects, suffered as it entered the mid-1970s, experiencing a general downturn that was exacerbated by recessive economic conditions between 1974 and 1975. Numerous real estate projects failed during the period, prompting a series of amendments to the provisions governing REITs. ICM Realty withstood the downturn, enduring the grim conditions that beset the industry early in the company's development. ICM Realty survived, giving it a chance to some day make its mark on the national scene—a day, as it happened, that was years away.

New Management in 1983

For more than two decades, ICM Realty operated in near obscurity. The company's path towards prominence did not begin until it gained the management team that would lead it into the 21st century. In 1983, the year the company adopted the name EastGroup Properties, the two most influential individuals in the company's history arrived. Leland R. Speed, who earned a B.S. in industrial management from Georgia Institute of Technology and an M.B.A. from Harvard Business School, became EastGroup's chief strategist. Before joining the company, Speed was involved in the general securities and real estate development business. In 1983, Speed was joined by David H. Hoster II, who received a B.A. in history from Princeton University and an M.B.A. from Stanford University. Before joining EastGroup, Hoster spent eight years in Washington, D.C., serving as president of Riviere Realty Trust, a position he was given after spending three years as a project manager with K.S. Sweet Associates.

With Speed in the lead and Hoster at his side, EastGroup Properties gradually developed into a REIT of note. It took more than a decade after the pair's arrival before the company began its rise, however. EastGroup, despite the implication in its name and its region of origin, created its identity in the southern and southwestern United States, in the region commonly referred to as the Sunbelt. The company made its mark not as a Maryland-based company but as a Jackson, Mississippi-based company, one that started to exhibit impressive growth during the 1990s. EastGroup entered the decade having never generated more than $10 million in annual revenue. The company exited the decade flirting with the $100 million-in-sales mark.

EastGroup, as led by Speed and Hoster, focused on acquiring and developing industrial properties, particularly distribution centers located near transportation hubs. REITs commonly pursued specific segments of the real estate market, describing themselves as healthcare REITs, residential REITs, retail REITs, hotel and motel REITS, and numerous other classifications. EastGroup positioned itself as an industrial REIT with a particular focus on distribution centers near transportation hubs, although the company occasionally acquired office space that did not meet its principal strategic criteria.

Speed applied EastGroup's strategy to the Sunbelt, concentrating much of his efforts in Florida, Texas, Arizona, and California. The company's revenue volume edged passed $13 million in 1992, beginning a measured march upwards. Growth came as Speed expanded the company's portfolio of property holdings, with sharp increases realized by acquiring other industrial REITs. Speed assumed an acquisitive posture as his company exited the mid-1990s, when EastGroup was generating roughly $30 million in revenue. Between 1996 and 1998, the company acquired three publicly held REITs, beginning with the May 1996 purchase of LNH REIT, Inc. LNH, with approximately $2.5 million in 1995 revenues, had $6.2 million worth of real estate properties in its portfolio, including a 122,000-square-foot commercial facility in Kansas City, Missouri, a 135,000-square-foot shopping center in Warwick, Rhode Island, and a 100,000-square-foot industrial building in Fort Lauderdale, Florida. A much larger acquisition followed the next month, when EastGroup purchased Copley Properties, Inc. in a $166 million transaction. Formed in 1985, Copley owned and operated 15 properties with more than 2.5 million square feet of leasable space, possessing more than $80 million in assets. Copley's properties, primarily located in Arizona and California, bolstered EastGroup's presence in the Sunbelt. In June 1998, the company completed another acquisition on the scale of the Copley purchase, acquiring Meridian Trust VIII Co. in a $103 million deal. Meridian owned 18 industrial properties in major Sunbelt markets, giving EastGroup more than 2.6 million square feet of leasable space.

The acquisition of REITs and the expansion of the company's own portfolio through internal means greatly accelerated EastGroup's growth during the late 1990s. By the end of 1999, the company was a $74-million-in-revenues REIT, having increased its revenue volume nearly fivefold in five years. The company maintained the intensified pace in 1999, completing 13 acquisitions in five states that added more than 1.6 million square feet of leasable space. By this point, Hoster had assumed day-to-day control over the company, becoming EastGroup's chief executive officer in September 1997. Speed presided as chairman. Under Hoster's leadership, EastGroup entered the 21st century with roughly 16 million square feet of leasable space. He focused his efforts on expanding the company's base, guiding EastGroup past the $100 million-in-revenue mark.

Company Perspectives:

EastGroup's strategy is to create shareholder value through our three pronged growth strategy: targeting development in submarkets where EastGroup already has a presence; recycling of capital through the sale of assets and reinvestment of the proceeds; internal growth of the company's core portfolio. Our investment approach reflects these recurring specific themes: being where location sensitive tenants want to be; competing on location rather than rent; clustering of multi-tenant properties; distribution—not storage; focus on transportation features; submarket driven.

EastGroup in the New Millennium

EastGroup's pattern of robust financial growth, which described the company for much of the 1990s, continued at the start of the new century. Revenues reached nearly $98 million in 2000 before eclipsing a financial milestone the following year, when the company's sales volume totaled $105 million. From there, EastGroup's financial growth stagnated, as a national recession delivered a discernible blow to the real estate market. Vacancy rates increased during the economic downturn, causing the company's financial progress to stall. In 2002, EastGroup's revenues only increased by roughly $650,000. Further, market conditions did not justify aggressive expansion, making the early years of the decade a period of little significant progress. When the economic climate improved, however, Hoster quickly seized the opportunities available to him, ushering EastGroup into a period of expansion first demonstrated in 2003.

As EastGroup neared its 35th anniversary, Hoster directed the company's growth in California, Arizona, Texas, and Florida, where more than 80 percent of its properties were located. Hoster purchased five properties in 2003, adding 442,000 square feet of leasable space and 82 acres of land for future development. The properties acquired included the 62,000-square-foot Altamonte Commerce Center II in Orlando, Florida, and the 63,000-square-foot Airport Commons Distribution Center in Phoenix, Arizona, both acquired in May for a total of just under $6 million. In September, the company paid $4.2 million for the Shady Trail Distribution Center in Dallas, Texas. In October, the 72,000-square-foot Expressway Commerce Center II in Tampa, Florida, was acquired, followed by the purchase of another Tampa-based property the following month, the 127,000-square-foot Oak Creek Distribution Center. Each Tampa property was acquired for $4.2 million. The company ended the year with a modest gain in revenues to $108 million, a total generated from the 19.4 million square feet of leasable space that constituted its portfolio.

EastGroup remained in the acquisitive mode as it celebrated its 35th year in business. Among the purchases made during 2004 was the acquisition in April of the Kirby Business Center in Houston. Located near the city's sports complex, Reliant Stadium, the Kirby property was a 125,000-square-foot distribution center. "This acquisition," Hoster said in an April 5, 2004 interview with Mississippi Business Journal, "increases EastGroup's ownership in Houston to three million square feet including our properties under development." A significant acquisition followed in August, when EastGroup entered the San Antonio market for the first time. The company purchased the Alamo Downs Distribution Center for $8.4 million, gaining a two-building, distribution complex with more than 250,000 square feet of leasable space. In an August 23, 2004 interview with the Mississippi Business Journal, Hoster marked the occasion by explaining, "San Antonio is a new market for EastGroup, and we see the potential for growing ownership there to over one million square feet. We believe that a portfolio of quality properties in San Antonio will complement our operations in Houston, Dallas, and El Paso." As Hoster guided the company forward, he sought to increase the 20.2 million square feet owned by the company in late 2004 and create a bigger presence for EastGroup in the Sunbelt.

Principal Subsidiaries

EastGroup Properties General Partners, Inc.; EastGroup Properties Holdings, Inc.; Nash IND Corporation; EastGroup TRS, Inc.

Principal Competitors

Duke Realty Corp.; Kilroy Realty Corporation; Prentiss Properties Trust.

Key Dates:

1969:: Incorporated as Third ICM Realty, EastGroup Properties is formed.
1971:: The company completes its initial public offering of stock.
1983:: Concurrent with a name change to EastGroup Properties, the company hires the two senior executives who will lead it into the 21st century.
1996:: EastGroup Properties acquires LNH REIT, Inc. and Copley Properties, Inc.
1998:: Meridian Trust VIII Co. is acquired.
2003:: Nearly $20 million is spent on acquiring real estate properties.