EASTGROUP PROPERTIES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS. EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) September 30, 2022 December 31, 2021 ASSETS Real estate properties $ 4,251,279 3,546,711 Development and value-add properties 578,575 504,614 4,829,854 4,051,325 Less accumulated depreciation ( 1,121,208 ) ( 1,035,617 ) 3,708,646 3,015,708 Real estate assets held for sale — 5,695 Unconsolidated investment 7,666 7,320 Cash 4,848 4,393 Other assets 241,163 182,220 TOTAL ASSETS $ 3,962,323 3,215,336 LIABILITIES AND EQUITY LIABILITIES Unsecured bank credit facilities, net of debt issuance costs $ 154,188 207,066 Unsecured debt, net of debt issuance costs 1,541,481 1,242,570 Secured debt, net of debt issuance costs 2,059 2,142 Accounts payable and accrued expenses 190,950 109,760 Other liabilities 83,459 82,338 Total Liabilities 1,972,137 1,643,876 EQUITY Stockholders’ Equity: Common shares; $ 0.0001 par value; 70,000,000 shares authorized; 43,573,951 shares issued and outstanding at September 30, 2022 and 41,268,846 at December 31, 2021 4 4 Excess shares; $ 0.0001 par value; 30,000,000 shares authorized; zero shares issued — — Additional paid-in capital 2,266,831 1,886,820 Distributions in excess of earnings ( 319,063 ) ( 318,056 ) Accumulated other comprehensive income 41,128 1,302 Total Stockholders’ Equity 1,988,900 1,570,070 Noncontrolling interest in joint ventures 1,286 1,390 Total Equity 1,990,186 1,571,460 TOTAL LIABILITIES AND EQUITY $ 3,962,323 3,215,336 See accompanying Notes to Consolidated Financial Statements (unaudited). -4- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 REVENUES Income from real estate operations $ 125,570 104,584 357,020 302,063 Other revenue 88 13 165 40 125,658 104,597 357,185 302,103 EXPENSES Expenses from real estate operations 35,033 29,644 98,643 85,521 Depreciation and amortization 39,277 32,263 113,079 93,925 General and administrative 3,967 3,559 12,503 12,081 Indirect leasing costs 119 133 410 597 78,396 65,599 224,635 192,124 OTHER INCOME (EXPENSE) Interest expense ( 9,771 ) ( 8,416 ) ( 26,851 ) ( 24,873 ) Gain on sales of real estate investments — — 40,999 — Other 326 210 888 621 NET INCOME 37,817 30,792 147,586 85,727 Net income attributable to noncontrolling interest in joint ventures ( 25 ) ( 21 ) ( 75 ) ( 59 ) NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS 37,792 30,771 147,511 85,668 Other comprehensive income - interest rate swaps 17,157 1,325 39,826 8,276 TOTAL COMPREHENSIVE INCOME $ 54,949 32,096 187,337 93,944 BASIC PER COMMON SHARE DATA FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS Net income attributable to common stockholders $ 0.87 0.76 3.49 2.14 Weighted average shares outstanding 43,467 40,434 42,308 40,058 DILUTED PER COMMON SHARE DATA FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS Net income attributable to common stockholders $ 0.87 0.76 3.48 2.13 Weighted average shares outstanding 43,581 40,567 42,419 40,165 See accompanying Notes to Consolidated Financial Statements (unaudited). -5- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) For the nine months ended September 30, 2022: Common Shares Additional Paid-In Capital Distributions in Excess of Earnings Accumulated Other Comprehensive Income Noncontrolling Interest in Joint Ventures Total BALANCE, DECEMBER 31, 2021 $ 4 1,886,820 ( 318,056 ) 1,302 1,390 1,571,460 Net income — — 63,580 — 24 63,604 Net unrealized change in fair value of interest rate swaps — — — 15,828 — 15,828 Common dividends declared – $ 1.10 per share — — ( 45,953 ) — — ( 45,953 ) Stock-based compensation, net of forfeitures — 2,594 — — — 2,594 Issuance of 385,538 shares of common stock, common stock offering, net of expenses — 74,179 — — — 74,179 Withheld 34,251 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock — ( 7,265 ) — — — ( 7,265 ) Net distributions to noncontrolling interest — — — — ( 58 ) ( 58 ) BALANCE, MARCH 31, 2022 4 1,956,328 ( 300,429 ) 17,130 1,356 1,674,389 Net income — — 46,139 — 26 46,165 Net unrealized change in fair value of interest rate swaps — — — 6,841 — 6,841 Common dividends declared – $ 1.10 per share — — ( 48,034 ) — — ( 48,034 ) Stock-based compensation, net of forfeitures — 3,062 — — — 3,062 Issuance of 1,868,809 shares of common stock, net of expenses, in the purchase of real estate — 303,682 — — — 303,682 Net distributions to noncontrolling interest — — — — ( 31 ) ( 31 ) BALANCE, JUNE 30, 2022 4 2,263,072 ( 302,324 ) 23,971 1,351 1,986,074 Net income — — 37,792 — 25 37,817 Net unrealized change in fair value of interest rate swaps — — — 17,157 — 17,157 Common dividends declared – $ 1.25 per share — — ( 54,531 ) — — ( 54,531 ) Stock-based compensation, net of forfeitures — 2,855 — — — 2,855 Issuance of 6,368 shares of common stock, common stock offering, net of expenses — 1,010 — — — 1,010 Withheld 733 shares of common stock to satisfy tax withholding obligations in connection with the issuance of common stock — ( 106 ) — — — ( 106 ) Net distributions to noncontrolling interest — — — — ( 90 ) ( 90 ) BALANCE, SEPTEMBER 30, 2022 $ 4 2,266,831 ( 319,063 ) 41,128 1,286 1,990,186 See accompanying Notes to Consolidated Financial Statements (unaudited). -6- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) For the nine months ended September 30, 2021: Common Shares Additional Paid-In Capital Distributions in Excess of Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest in Joint Ventures Total BALANCE, DECEMBER 31, 2020 $ 4 1,610,053 ( 329,667 ) ( 10,752 ) 880 1,270,518 Net income — — 27,339 — 18 27,357 Net unrealized change in fair value of interest rate swaps — — — 8,214 — 8,214 Common dividends declared – $ 0.79 per share — — ( 31,672 ) — — ( 31,672 ) Stock-based compensation, net of forfeitures — 2,147 — — — 2,147 Issuance of 317,538 shares of common stock, common stock offering, net of expenses — 44,485 — — — 44,485 Withheld 30,252 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock — ( 4,240 ) — — — ( 4,240 ) Net distributions to noncontrolling interest — — — — ( 11 ) ( 11 ) BALANCE, MARCH 31, 2021 4 1,652,445 ( 334,000 ) ( 2,538 ) 887 1,316,798 Net income — — 27,558 — 20 27,578 Net unrealized change in fair value of interest rate swaps — — — ( 1,263 ) — ( 1,263 ) Common dividends declared – $ 0.79 per share — — ( 31,981 ) — — ( 31,981 ) Stock-based compensation, net of forfeitures — 2,893 — — — 2,893 Issuance of 370,177 shares of common stock, common stock offering, net of expenses — 59,318 — — — 59,318 Net distributions to noncontrolling interest — 5 — — ( 17 ) ( 12 ) BALANCE, JUNE 30, 2021 4 1,714,661 ( 338,423 ) ( 3,801 ) 890 1,373,331 Net income — — 30,771 — 21 30,792 Net unrealized change in fair value of interest rate swaps — — — 1,325 — 1,325 Common dividends declared –$ 0.90 per share — — ( 36,726 ) — — ( 36,726 ) Stock-based compensation, net of forfeitures — 2,461 — — — 2,461 Issuance of 278,893 shares of common stock, common stock offering, net of expenses — 48,626 — — — 48,626 Net distributions to noncontrolling interest — — — — ( 69 ) ( 69 ) BALANCE, SEPTEMBER 30, 2021 $ 4 1,765,748 ( 344,378 ) ( 2,476 ) 842 1,419,740 See accompanying Notes to Consolidated Financial Statements (unaudited). -7- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Nine Months Ended September 30, 2022 2021 OPERATING ACTIVITIES Net income $ 147,586 85,727 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 113,079 93,925 Stock-based compensation expense 6,530 5,840 Gain on sales of real estate investments ( 40,999 ) — Changes in operating assets and liabilities: Accrued income and other assets ( 2,743 ) ( 2,688 ) Accounts payable, accrued expenses and prepaid rent 52,496 57,099 Other 602 1,263 NET CASH PROVIDED BY OPERATING ACTIVITIES 276,551 241,166 INVESTING ACTIVITIES Development and value-add properties ( 395,313 ) ( 189,955 ) Purchases of real estate ( 2,049 ) ( 104,006 ) Real estate improvements ( 31,043 ) ( 26,749 ) Net proceeds from sales of real estate investments 51,006 — Leasing commissions ( 26,968 ) ( 22,791 ) Changes in accrued development costs 22,141 22,130 Changes in other assets and other liabilities ( 3,328 ) 856 NET CASH USED IN INVESTING ACTIVITIES ( 385,554 ) ( 320,515 ) FINANCING ACTIVITIES Proceeds from unsecured bank credit facilities 695,726 316,893 Repayments on unsecured bank credit facilities ( 749,053 ) ( 380,877 ) Proceeds from unsecured debt 375,000 175,000 Repayments on unsecured debt ( 75,000 ) ( 40,000 ) Repayments on secured debt ( 60,070 ) ( 43,591 ) Debt issuance costs ( 1,617 ) ( 2,647 ) Distributions paid to stockholders (not including dividends accrued) ( 139,597 ) ( 95,240 ) Proceeds from common stock offerings 75,379 154,609 Common stock offering related costs ( 190 ) ( 238 ) Other ( 11,120 ) ( 4,334 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 109,458 79,575 INCREASE IN CASH AND CASH EQUIVALENTS 455 226 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,393 21 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,848 247 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized of $ 8,515 and $ 6,686 for 2022 and 2021, respectively $ 21,550 21,599 Cash paid for operating lease liabilities 1,445 1,133 Common stock issued in the purchase of real estate 303,682 — Debt assumed in the purchase of real estate 60,000 — NON-CASH OPERATING ACTIVITY Operating lease liabilities arising from obtaining right of use assets $ 398 13,056 See accompanying Notes to Consolidated Financial Statements (unaudited). -8- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying unaudited financial statements of EastGroup Properties, Inc. (“EastGroup” or “the Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the financial statements contained in the Company’s annual report on Form 10-K for the year ended December 31, 2021 and the notes thereto. Certain reclassifications have been made in the 2021 consolidated financial statements to conform to the 2022 presentation. (2) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of EastGroup, its wholly owned subsidiaries and its investment in any joint ventures in which the Company has a controlling interest. As of September 30, 2022 and December 31, 2021, EastGroup held a controlling interest in two joint venture arrangements. In 2019, the Company acquired 6.5 acres of land in San Diego, known by the Company as the Miramar land. Also in 2019, the Company acquired 41.6 acres of land in San Diego, known by the Company as the Otay Mesa land. During the year ended December 31, 2021, EastGroup began construction of Speed Distribution Center, a 519,000 square foot building on the Otay Mesa land, which was completed and transferred to the Company’s operating portfolio during the three months ended March 31, 2022. As of September 30, 2022 and December 31, 2021, EastGroup had a 95 % controlling interest in the Miramar land and a 99 % controlling interest in Speed Distribution Center. The Company records 100 % of the assets, liabilities, revenues and expenses of the buildings and land held in joint ventures with the noncontrolling interests provided for in accordance with the joint venture agreements. The equity method of accounting is used for the Company’s 50 % undivided tenant-in-common interest in Industry Distribution Center II. All significant intercompany transactions and accounts have been eliminated in consolidation. (3) USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period and to disclose material contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. (4) LEASE REVENUE The Company’s primary revenue is rental income from business distribution space. The table below presents the components of Income from real estate operations for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) Lease income — operating leases $ 93,548 78,040 267,423 225,780 Variable lease income (1) 32,022 26,544 89,597 76,283 Income from real estate operations $ 125,570 104,584 357,020 302,063 (1) Primarily includes tenant reimbursements for real estate taxes, insurance and common area maintenance. (5) REAL ESTATE PROPERTIES EastGroup has one reportable segment – industrial properties, consistent with the Company’s manner of internal reporting, measurement of operating results and allocation of the Company’s resources. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows (including estimated future expenditures necessary to substantially complete the asset) expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated -9- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the nine month periods ended September 30, 2022 and 2021, the Company did not identify any impairment charges which should be recorded. Depreciation of buildings and other improvements is computed using the straight-line method over estimated useful lives of generally 40 years for buildings and 3 to 15 years for improvements. Building improvements are capitalized, while maintenance and repair expenses are charged to expense as incurred. Significant renovations and improvements that improve or extend the useful life of the assets are capitalized. Depreciation expense was $ 32,052,000 and $ 92,159,000 for the three and nine months ended September 30, 2022, respectively, and $ 26,599,000 and $ 77,604,000 for the same periods in 2021. The Company’s Real estate properties and Development and value-add properties at September 30, 2022 and December 31, 2021 were as follows: September 30, 2022 December 31, 2021 (In thousands) Real estate properties: Land $ 703,282 544,505 Buildings and building improvements 2,911,492 2,408,944 Tenant and other improvements 616,751 570,627 Right of use assets — Ground leases (operating) (1) 19,754 22,635 Development and value-add properties (2) 578,575 504,614 4,829,854 4,051,325 Less accumulated depreciation ( 1,121,208 ) ( 1,035,617 ) $ 3,708,646 3,015,708 (1) EastGroup applies the principles of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, Leases, and its related Accounting Standards Updates (“ASUs”) to account for its ground leases, which are classified as operating leases. The related operating lease liabilities for ground leases are included in Other liabilities on the Consolidated Balance Sheets. (2) Value-add properties are defined as properties that are either acquired but not stabilized or can be converted to a higher and better use. Acquired properties meeting either of the following two conditions are considered value-add properties: (1) Less than 75 % occupied as of the acquisition date (or will be less than 75% occupied within one year of acquisition date based on near term lease roll), or (2) 20 % or greater of the acquisition cost will be spent to redevelop the property. (6) DEVELOPMENT AND VALUE-ADD PROPERTIES For properties under development and value-add properties acquired in the development stage, costs associated with development (i.e., land, construction costs, interest expense, property taxes and other costs associated with development) are aggregated into the total capitalized costs of the property. Included in these costs are management’s estimates for the portions of internal costs (primarily personnel costs) deemed related to such development activities. The internal costs are allocated to specific development projects based on development activity. As the property becomes occupied, depreciation commences on the occupied portion of the building, and costs are capitalized only for the portion of the building that remains vacant. The Company transfers properties from the development and value-add program to Real estate properties as follows: (i) for development properties, at the earlier of 90 % occupancy or one year after completion of the shell construction, and (ii) for value-add properties, at the earlier of 90 % occupancy or one year after acquisition. Upon the earlier of 90 % occupancy or one year after completion of the shell construction, capitalization of development costs, including interest expense, property taxes and internal personnel costs, ceases and depreciation commences on the entire property (excluding the land). (7) REAL ESTATE PROPERTY ACQUISITIONS AND ACQUIRED INTANGIBLES Upon acquisition of real estate properties, EastGroup applies the principles of FASB ASC 805, Business Combinations. The FASB Codification provides a framework for determining whether transactions should be accounted for as acquisitions of assets or businesses. Under the guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. Criteria considered in grouping similar assets include geographic location, market and operational risks and the physical characteristics of the assets. EastGroup determined that its real estate property acquisitions in 2021 and the first nine months of 2022 are considered to be acquisitions of groups of similar identifiable assets; -10- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) therefore, the acquisitions are not considered to be acquisitions of a business. As a result, the Company capitalized acquisition costs related to its 2021 and 2022 acquisitions. The FASB Codification also provides guidance on how to properly determine the allocation of the purchase price among the individual components of both the tangible and intangible assets based on their respective fair values. The allocation to tangible assets (land, building and improvements) is based upon management’s determination of the value of the property as if it were vacant using discounted cash flow models. Land is valued using comparable land sales specific to the applicable market, provided by a third party. The Company determines whether any financing assumed is above or below market based upon comparison to similar financing terms for similar properties. The cost of the properties acquired may be adjusted based on indebtedness assumed from the seller that is determined to be above or below market rates. The purchase price is also allocated among the following categories of intangible assets: the above or below market component of in-place leases, the value of in-place leases, and the value of customer relationships. The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a discount rate reflecting the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the amounts that would be paid using current market rents over the remaining term of the lease. The amounts allocated to above and below market lease intangibles are included in Other assets and Other liabilities , respectively, on the Consolidated Balance Sheets and are amortized to rental income over the remaining terms of the respective leases. The total amount of intangible assets is further allocated to in-place lease values and customer relationship values based upon management’s assessment of their respective values. Factors considered by management in the allocation include an estimate of foregone rents and avoided leasing costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. These intangible assets are included in Other assets on the Consolidated Balance Sheets and are amortized over the remaining term of the existing lease or the anticipated life of the customer relationship, as applicable. Amortization expense for in-place lease intangibles was $ 2,541,000 and $ 7,204,000 for the three and nine months ended September 30, 2022, respectively, and $ 1,647,000 and $ 4,385,000 for the same periods in 2021. Amortization of above and below market lease intangibles increased rental income by $ 605,000 and $ 1,957,000 for the three and nine months ended September 30, 2022, respectively, and $ 230,000 and $ 704,000 for the same periods in 2021. -11- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) During the nine months ended September 30, 2022, EastGroup acquired the following properties: REAL ESTATE PROPERTIES ACQUIRED IN 2022 Location Size Date Acquired Cost (1) (Square feet) (In thousands) Operating properties acquired (2) Cebrian Distribution Center and Reed Distribution Center (3) Sacramento, CA 329,000 06/01/2022 $ 49,726 6 th Street Business Center, Benicia Distribution Center 1-5, Ettie Business Center, Laura Alice Business Center, Preston Distribution Center, Sinclair Distribution Center, Transit Distribution Center and Whipple Business Center (3) San Francisco, CA 1,377,000 06/01/2022 309,404 Total operating property acquisitions 1,706,000 359,130 Value-add properties acquired (4) Cypress Preserve 1 & 2 Houston, TX 516,000 03/28/2022 54,462 Zephyr Distribution Center San Francisco, CA 82,000 04/08/2022 29,017 Mesa Gateway Commerce Center Phoenix, AZ 147,000 04/15/2022 18,315 Access Point 3 Greenville, SC 299,000 07/12/2022 21,127 Total value-add property acquisitions 1,044,000 122,921 Total acquired assets 2,750,000 $ 482,051 (1) Cost is calculated in accordance with FASB ASC 805, Business Combinations, and represents the sum of the purchase price, closing costs and capitalized acquisition costs. (2) Operating properties are defined as stabilized real estate properties (land including buildings and improvements) in the Company’s operating portfolio; included in Real estate properties on the Consolidated Balance Sheets. (3) The Company acquired these operating properties along with two land parcels, also in Sacramento, CA and San Francisco, CA, in connection with its acquisition of Tulloch Corporation in June 2022. Size and cost are presented on an aggregate basis for the properties located in Sacramento, CA and San Francisco, CA, respectively. In consideration for this acquisition, the Company assumed a $ 60,000,000 loan and issued 1,868,809 shares of the Company’s common stock. The acquisition date fair value of the loan assumed was $ 60,000,000 , and the acquisition date fair value of the common shares, which was based on the closing share price on the acquisition date, was $ 303,756,000 . (4) Value-add properties are defined as properties that are either acquired but not stabilized or can be converted to a higher and better use. Acquired properties meeting either of the following two conditions are considered value-add properties: (1) Less than 75 % occupied as of the acquisition date (or will be less than 75% occupied within one year of acquisition date based on near term lease roll), or (2) 20 % or greater of the acquisition cost will be spent to redevelop the property. -12- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table summarizes the allocation of the total consideration for the acquired assets and assumed liabilities in connection with the acquisitions identified in the table above which was acquired during the nine months ended September 30, 2022. ACQUIRED ASSETS AND ASSUMED LIABILITIES IN 2022 Cost (In thousands) Land $ 127,402 Buildings and building improvements 335,335 Tenant and other improvements 11,502 Total real estate properties acquired 474,239 In-place lease intangibles (1) 11,871 Below market lease intangibles (2) ( 4,059 ) Total assets acquired, net of liabilities assumed $ 482,051 (1) In-place lease intangibles and above market lease intangibles are each included in Other assets on the Consolidated Balance Sheets. These costs are amortized over the remaining lives of the associated leases in place at the time of acquisition. (2) Below market lease intangibles are included in Other liabilities on the Consolidated Balance Sheets. These costs are amortized over the remaining lives of the associated leases in place at the time of acquisition. The leases in the properties acquired during the nine months ended September 30, 2022 had a weighted average remaining lease term at acquisition of approximately 3.9 years. Also during the nine months ended September 30, 2022, the Company acquired 286.0 acres of development land in nine cities for $ 77,645,000 . The land acquisitions in San Francisco and Sacramento were acquired in connection with the Company’s acquisition of Tulloch Corporation in June 2022. -13- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) During 2021, EastGroup acquired the following properties: REAL ESTATE PROPERTIES ACQUIRED IN 2021 Location Size Date Acquired Cost (1) (Square feet) (In thousands) Operating properties acquired (2) Southpark Distribution Center 2 Phoenix, AZ 79,000 06/10/2021 $ 9,177 DFW Global Logistics Centre Dallas, TX 611,000 08/26/2021 89,829 Progress Center 3 Atlanta, GA 50,000 09/23/2021 5,000 Texas Avenue Austin, TX 20,000 10/15/2021 4,143 Total operating property acquisitions 760,000 108,149 Value-add properties acquired (3) Access Point 1 Greenville, SC 156,000 01/15/2021 10,501 Northpoint 200 Atlanta, GA 79,000 01/21/2021 6,516 Access Point 2 Greenville, SC 159,000 05/19/2021 10,743 Cherokee 75 Business Center 2 Atlanta, GA 105,000 06/17/2021 8,837 Siempre Viva Distribution Center 3-6 San Diego, CA 547,000 12/01/2021 134,479 Total value-add property acquisitions 1,046,000 171,076 Total acquired assets 1,806,000 $ 279,225 (1) Cost is calculated in accordance with FASB ASC 805, Business Combinations, and represents the sum of the purchase price, closing costs and capitalized acquisition costs. (2) Operating properties are defined as stabilized real estate properties (land including buildings and improvements) in the Company’s operating portfolio; included in Real estate properties on the Consolidated Balance Sheets. (3) Value-add properties are defined as properties that are either acquired but not stabilized or can be converted to a higher and better use. Acquired properties meeting either of the following two conditions are considered value-add properties: (1) Less than 75 % occupied as of the acquisition date (or will be less than 75% occupied within one year of acquisition date based on near term lease roll), or (2) 20 % or greater of the acquisition cost will be spent to redevelop the property. The following table summarizes the allocation of the total consideration for the acquired assets and assumed liabilities in connection with the acquisitions identified in the table above which were acquired during the year ended December 31, 2021. ACQUIRED ASSETS AND ASSUMED LIABILITIES IN 2021 Cost (In thousands) Land $ 42,554 Buildings and building improvements 225,645 Tenant and other improvements 4,907 Right of use assets — Ground leases (operating) 12,708 Total real estate properties acquired 285,814 In-place lease intangibles (1) 9,949 Above market lease intangibles (1) 6 Below market lease intangibles (2) ( 3,836 ) Operating lease liabilities — Ground leases (3) ( 12,708 ) Total assets acquired, net of liabilities assumed $ 279,225 (1) In-place lease intangibles and above market lease intangibles are each included in Other assets on the Consolidated Balance Sheets. These costs are amortized over the remaining lives of the associated leases in place at the time of acquisition. (2) Below market lease intangibles are included in Other liabilities on the Consolidated Balance Sheets. These costs are amortized over the remaining lives of the associated leases in place at the time of acquisition. (3) Operating lease liabilities - Ground leases are included in Other liabilities on the Consolidated Balance Sheets. -14- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The leases in the properties acquired during the year ended December 31, 2021 had a weighted average remaining lease term at acquisition of approximately 2.9 years. Also during 2021, the Company acquired 365.8 acres of development land in Austin, Houston, Charlotte, Greenville and Atlanta for $ 41,065,000 . The Company periodically reviews the recoverability of goodwill (at least annually) and the recoverability of other intangibles (on a quarterly basis) for possible impairment. No impairment of goodwill or other intangibles existed during the three and nine month periods ended September 30, 2022 and 2021. (8) REAL ESTATE SOLD AND HELD FOR SALE The Company considers a real estate property to be held for sale when it meets the criteria established under ASC 360, Property, Plant and Equipment, including when it is probable that the property will be sold within a year. Real estate properties held for sale are reported at the lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale. The Company did not classify any properties as held for sale as of September 30, 2022. As of December 31, 2021, the Company owned one operating property that was classified as held for sale on the December 31, 2021 Consolidated Balance Sheet. The property was sold, and a gain on the sale was recorded in the three months ended March 31, 2022. In accordance with ASC 360 and ASC 205, Presentation of Financial Statements , the Company would report a disposal of a component of an entity or a group of components of an entity in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, the Company would provide additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. EastGroup performs an analysis of properties sold to determine whether the sales qualify for discontinued operations presentation. The Company sold operating properties during the nine months ended September 30, 2022, as shown in the table below. The results of operations and gains and losses on sales for the properties sold are reported in continuing operations on the Consolidated Statements of Income and Comprehensive Income. The gains and losses on sales are included in Gain on sales of real estate investments. The Company did not consider its sales in 2022 to be disposals of a component of an entity or a group of components of an entity representing a strategic shift that has (or will have) a major effect on the entity’s operations and financial results. A summary of Gain on sales of real estate investments for the nine months ended September 30, 2022 and the year ended December 31, 2021 follows: REAL ESTATE PROPERTIES SOLD Location Size Date Sold Net Sales Price Basis Recognized Gain (In square feet) (In thousands) 2022 Metro Business Park Phoenix, AZ 189,000 01/06/2022 $ 32,851 5,880 26,971 Cypress Creek Business Park (1) Fort Lauderdale, FL 56,000 03/31/2022 5,282 1,901 3,381 World Houston 15 East Houston, TX 42,000 05/11/2022 12,873 2,226 10,647 Total for 2022 287,000 $ 51,006 10,007 40,999 2021 Jetport Commerce Park Tampa, FL 284,000 11/09/2021 $ 44,260 5,401 38,859 (1) Cypress Creek Business Park is located on a ground lease. In conjunction with the sale of the property, the Company fully amortized the associated right-of-use asset and liability of $ 1,745,000 . The Company had no sales during the nine months ended September 30, 2021. -15- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (9) OTHER ASSETS A summary of the Company’s Other assets follows: September 30, 2022 December 31, 2021 (In thousands) Leasing costs (principally commissions) $ 136,376 116,772 Accumulated amortization of leasing costs ( 47,217 ) ( 42,193 ) Leasing costs (principally commissions), net of accumulated amortization 89,159 74,579 Acquired in-place lease intangibles 39,282 31,561 Accumulated amortization of acquired in-place lease intangibles ( 16,092 ) ( 13,038 ) Acquired in-place lease intangibles, net of accumulated amortization 23,190 18,523 Acquired above market lease intangibles 840 885 Accumulated amortization of acquired above market lease intangibles ( 566 ) ( 508 ) Acquired above market lease intangibles, net of accumulated amortization 274 377 Straight-line rents receivable 58,178 51,970 Accounts receivable 6,449 7,133 Interest rate swap assets 41,128 2,237 Right of use assets — Office leases (operating) 2,015 1,984 Escrow deposits and prepaid costs for pending transactions 5,198 3,864 Prepaid insurance 3,826 7,793 Goodwill 990 990 Receivable for tenant improvement cost reimbursements 619 7,680 Prepaid expenses and other assets 10,137 5,090 Total Other assets $ 241,163 182,220 (10) DEBT The Company’s debt is detailed below: September 30, 2022 December 31, 2021 (In thousands) Unsecured bank credit facilities - variable rate, carrying amount $ 155,883 209,210 Unamortized debt issuance costs ( 1,695 ) ( 2,144 ) Unsecured bank credit facilities, net of debt issuance costs 154,188 207,066 Unsecured debt - fixed rate, carrying amount (1) 1,545,000 1,245,000 Unamortized debt issuance costs ( 3,519 ) ( 2,430 ) Unsecured debt, net of debt issuance costs 1,541,481 1,242,570 Secured debt - fixed rate, carrying amount (1) 2,071 2,156 Unamortized debt issuance costs ( 12 ) ( 14 ) Secured debt, net of debt issuance costs 2,059 2,142 Total debt, net of debt issuance costs $ 1,697,728 1,451,778 (1) These loans have a fixed interest rate or an effectively fixed interest rate due to interest rate swaps. -16- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Until June 29, 2021, EastGroup had $ 350 million and $ 45 million unsecured bank credit facilities with margins over London Interbank Offered Rate (“LIBOR”) of 100 basis points, facility fees of 20 basis points and maturity dates of July 30, 2022 . The Company amended and restated these credit facilities on June 29, 2021, expanding their capacities to $ 425 million and $ 50 million, respectively, as detailed below. The $ 425 million unsecured bank credit facility is with a group of nine banks and has a maturity date of July 30, 2025 . The credit facility contains options for two six-month extensions (at the Company's election) and a $ 325 million accordion (with agreement by all parties). The interest rate on each tranche is reset on a monthly basis and as of September 30, 2022, was LIBOR plus 77.5 basis points with an annual facility fee of 15 basis points. As of September 30, 2022, the Company had $ 120,000,000 of variable rate borrowings on this unsecured bank credit facility with a weighted average interest rate of 3.752 %. The Company's $ 50 million unsecured bank credit facility has a maturity date of July 30, 2025 , or such later date as designated by the bank; the Company also has two six-month extensions available if the extension options in the $ 425 million facility are exercised. The interest rate is reset on a daily basis and as of September 30, 2022, was LIBOR plus 77.5 basis points with an annual facility fee of 15 basis points. As of September 30, 2022, the interest rate was 3.918 % on a balance of $ 35,883,000 . For both facilities, the margin and facility fee are subject to changes in the Company's credit ratings. Although the Company’s current credit rating is Baa2 , given the strength of the Company’s key credit metrics, initial pricing for the credit facilities is based on the BBB+/Baa1 credit ratings level. This favorable pricing level will be retained provided that the Company’s consolidated leverage ratio, as defined in the applicable agreements, remains less than 32.5 %. The facilities also include a sustainability-linked pricing component pursuant to which the applicable interest margin will be reduced by one basis point if the Company meets certain sustainability performance targets. In January 2022, the Company and a group of lenders agreed to terms on the private placement of $ 150 million of senior unsecured notes with a fixed interest rate of 3.03 % and a 10 -year term. The notes were issued and sold on April 20, 2022 and require interest-only payments. The notes will not be and have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. In February 2022, EastGroup repaid a $ 75 million unsecured term loan at maturity with an effectively fixed interest rate of 3.03 %. In March 2022, the Company closed a $ 100 million senior unsecured term loan with a 6.5 -year term and interest only payments, which bears interest at an annual rate of the Secured Overnight Financing Rate (“SOFR”) plus an applicable margin ( 1.30 % as of September 30, 2022) based on the Company’s senior unsecured long-term debt rating. The Company also entered into an interest rate swap agreement to convert the loan’s SOFR rate component to a fixed interest rate for the entire term of the loan providing a total effectively fixed interest rate of 3.06 %. Also during March 2022, the Company closed on the refinance of a $ 100 million senior unsecured term loan with five years remaining. The amended term loan provides for interest only payments currently at an interest rate of SOFR plus 85 basis points, based on the Company’s current credit ratings and consolidated leverage ratio, which is a 60 basis point reduction in the credit spread compared to the original term loan. The Company has an interest rate swap agreement which converts the loan’s SOFR rate component to a fixed interest rate for the entire term of the loan, providing a total effectively fixed interest rate of 1.80 %. In June 2022, the Company assumed a $ 60 million loan in connection with the acquisition of Tulloch Corporation, the owner of an industrial real estate portfolio comprised of 14 operating properties and two parcels of land, which was immediately repaid with no penalty during June 2022. In August 2022, the Company closed a $ 125 million senior unsecured term loan with interest only payments, bearing interest at the annual rate of SOFR plus an applicable margin based on the Company’s senior unsecured long-term debt rating and consolidated leverage ratio. The loan has a $ 75 million tranche with a five -year term and a $ 50 million tranche with a two -year term. The Company also entered into interest rate swap agreements to convert the loans’ SOFR rate components to fixed interest rates for the entire term of the loans, providing total effectively fixed interest rates of 4.00 % and 4.09 % on the $ 75 million and $ 50 million tranches, respectively. In July 2022, the Company and a group of lenders agreed to terms on the private placement of two senior unsecured notes totaling $ 150 million. One note for $ 75 million has an 11 -year term and a fixed interest rate of 4.90 % with semi-annual -17- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) interest-only payments. The other $ 75 million note has a 12 -year term and a fixed interest rate of 4.95 % with semi-annual interest-only payments. The notes, dated August 16, 2022, were issued and sold on October 12, 2022. The notes will not be and have not been registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. Scheduled principal payments on long-term debt, including Unsecured debt, net of debt issuance costs and Secured debt, net of debt issuance costs (not including Unsecured bank credit facilities, net of debt issuance costs ), as of September 30, 2022, are as follows: Years Ending December 31, (In thousands) 2022 - Remainder of year $ 30 2023 115,119 2024 170,122 2025 145,128 2026 141,672 2027 and beyond 975,000 Total $ 1,547,071 (11) ACCOUNTS PAYABLE AND ACCRUED EXPENSES A summary of the Company’s Accounts payable and accrued expenses follows: September 30, 2022 December 31, 2021 (In thousands) Property taxes payable $ 55,977 4,494 Development costs payable 33,398 17,529 Retainage payable 16,849 10,576 Real estate improvements and capitalized leasing costs payable 7,587 5,798 Interest payable 10,885 6,547 Dividends payable 55,785 46,864 Book overdraft (1) 421 4,845 Other payables and accrued expenses 10,048 13,107 Total Accounts payable and accrued expenses $ 190,950 109,760 (1) Represents checks written before the end of the period which have not cleared the bank; therefore, the bank has not yet advanced cash to the Company. When the checks clear the bank, they will be funded through the Company’s working cash line of credit, which is included in the Company’s Unsecured bank credit facilities. -18- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (12) OTHER LIABILITIES A summary of the Company’s Other liabilities follows: September 30, 2022 December 31, 2021 (In thousands) Security deposits $ 33,629 28,343 Prepaid rent and other deferred income 18,290 16,401 Operating lease liabilities — Ground leases 20,206 22,898 Operating lease liabilities — Office leases 2,086 2,032 Acquired below market lease intangibles 10,810 8,124 Accumulated amortization of below market lease intangibles ( 3,394 ) ( 2,707 ) Acquired below market lease intangibles, net of accumulated amortization 7,416 5,417 Interest rate swap liabilities — 935 Tenant improvement cost liabilities 1,816 2,796 Other liabilities 16 3,516 Total Other liabilities $ 83,459 82,338 (13) COMPREHENSIVE INCOME Total Comprehensive Income is comprised of net income plus all other changes in equity from non-owner sources and is presented on the Consolidated Statements of Income and Comprehensive Income. The components of Accumulated other comprehensive income (loss) are presented in the Company’s Consolidated Statement of Changes in Equity and are summarized below. See Note 14 for information regarding the Company’s interest rate swaps. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Balance at beginning of period $ 23,971 ( 3,801 ) 1,302 ( 10,752 ) Other comprehensive income - interest rate swaps 17,157 1,325 39,826 8,276 Balance at end of period $ 41,128 ( 2,476 ) 41,128 ( 2,476 ) (14) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risk, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and, to a limited extent, the use of derivative instruments. Specifically, the Company has entered into derivative instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative instruments, described below, are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to certain of the Company’s borrowings. The Company’s objective in using interest rate derivatives is to change variable interest rates to fixed interest rates by using interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. -19- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of September 30, 2022, the Company had seven interest rate swaps outstanding, all of which are used to hedge the variable cash flows associated with unsecured loans. All of the Company’s interest rate swaps convert the related loans’ LIBOR or SOFR rate components to effectively fixed interest rates, and the Company has concluded that each of the hedging relationships is highly effective. The changes in the fair value of derivatives designated and qualifying as cash flow hedges are recorded in Other comprehensive income (loss) and are subsequently reclassified into earnings through Interest expense as interest payments are made or received on the Company’s variable-rate debt in the period that the hedged forecasted transaction affects earnings. The Company estimates that an additional $ 12,778,000 will be reclassified from Other comprehensive income (loss) as a decrease to Interest expense over the next twelve months. The Company’s valuation methodology for over-the-counter (“OTC”) derivatives is to discount cash flows based on Overnight Index Swap (“OIS”) rates. Uncollateralized or partially-collateralized trades are discounted at OIS rates but include appropriate economic adjustments for funding costs (i.e., a LIBOR-OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. The Company calculates its derivative valuations using mid-market prices. In July 2017, the Financial Conduct Authority announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In March 2021, the ICE Benchmark Administration, the administrator of LIBOR, announced its intention to cease publication of certain LIBOR settings after 2021, while continuing to publish overnight and one-, three-, six-, and twelve-month U.S. dollar LIBOR rates through June 30, 2023. While this announcement extended the transition period to June 2023, the United States Federal Reserve Board and other regulatory bodies concurrently issued guidance encouraging banks and other financial market participants to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate as soon as practicable and in any event no later than December 31, 2021. In the U.S., the Alternative Reference Rates Committee, which was convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended SOFR plus a recommended spread adjustment as its preferred alternative to USD-LIBOR. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities. We expect that all LIBOR settings relevant to us will cease to be published or will no longer be representative after June 30, 2023. As a result, any of our LIBOR-based borrowings that extend beyond such date will need to be converted to a replacement rate. Certain risks may arise in connection with transitioning contracts to SOFR or any other alternative variable rate, including any resulting value transfer that may occur. The value of loans, securities or derivative instruments tied to LIBOR could also be impacted. During the nine months ended September 30, 2022, the Company entered into two new term loans and three swap agreements which are indexed to SOFR. Also, during the nine months ended September 30, 2022, EastGroup refinanced two existing term loans modifying the index from LIBOR to SOFR and concurrently amended the related swaps to reference SOFR rather than LIBOR. The Company’s unsecured bank credit facilities and two of its senior unsecured term loans and interest rate swap contracts are indexed to LIBOR and include provisions for a replacement rate which we believe will be substantially equivalent to the all-in LIBOR-based interest rate in effect prior to its replacement. Therefore, management believes the transition will not have a material impact on the Company’s consolidated financial statements. The Company is continuously monitoring and evaluating the related risks, which include interest on loans and amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans or derivative instruments indexed to LIBOR could also be impacted if LIBOR is limited or discontinued as interest rates may be adversely affected. While we expect LIBOR to be available in substantially its current form until June 30, 2023, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. -20- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of September 30, 2022 and December 31, 2021, the Company had the following outstanding interest rate derivatives that are designated as cash flow hedges of interest rate risk: Interest Rate Derivative Notional Amount as of September 30, 2022 Notional Amount as of December 31, 2021 (In thousands) Interest Rate Swap — $ 75,000 Interest Rate Swap $ 65,000 $ 65,000 Interest Rate Swap $ 100,000 $ 100,000 Interest Rate Swap $ 100,000 $ 100,000 Interest Rate Swap $ 50,000 $ 50,000 Interest Rate Swap $ 100,000 — Interest Rate Swap $ 75,000 — Interest Rate Swap $ 50,000 — The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021. See Note 17 for additional information on the fair value of the Company’s interest rate swaps. Derivatives As of September 30, 2022 Derivatives As of December 31, 2021 Balance Sheet Location Fair Value Balance Sheet Location Fair Value (In thousands) Derivatives designated as cash flow hedges: Interest rate swap assets Other assets $ 41,128 Other assets $ 2,237 Interest rate swap liabilities Other liabilities — Other liabilities 935 The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS Interest Rate Swaps: Amount of income recognized in Other comprehensive income (loss) on derivatives $ 18,162 247 39,517 5,015 Amount of (income) loss reclassified from Accumulated other comprehensive income (loss) into Interest expense ( 1,005 ) 1,078 309 3,261 See Note 13 for additional information on the Company’s Accumulated other comprehensive income (loss) resulting from its interest rate swaps. Derivative financial agreements expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company believes it minimizes the credit risk by transacting with financial institutions the Company regards as credit-worthy. The Company has an agreement with its derivative counterparties containing a provision stating that the Company could be declared in default on its derivative obligations if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender. If the Company breached any of these provisions it would be required to settle its obligations under the agreements at their termination value of $ 41,823,000 as of September 30, 2022. (15) EARNINGS PER SHARE The Company applies ASC 260, Earnings Per Share , which requires companies to present basic and diluted earnings per share (“EPS”). Basic EPS represents the amount of earnings for the period attributable to each share of common stock outstanding -21- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) during the reporting period. The Company’s basic EPS is calculated by dividing Net Income Attributable to EastGroup Properties, Inc. Common Stockholders by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of common stock. These unvested restricted shares, although classified as issued and outstanding, are considered forfeitable until the restrictions lapse and will not be included in the basic EPS calculation until the shares are vested. Diluted EPS represents the amount of earnings for the period attributable to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The Company calculates diluted EPS by dividing Net Income Attributable to EastGroup Properties, Inc. Common Stockholders by the weighted average number of common shares outstanding plus the dilutive effect of unvested restricted stock. The dilutive effect of unvested restricted stock is determined using the treasury stock method. Reconciliation of the numerators and denominators in the basic and diluted EPS computations is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) BASIC EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS Numerator – net income attributable to common stockholders $ 37,792 30,771 147,511 85,668 Denominator – weighted average shares outstanding 43,467 40,434 42,308 40,058 DILUTED EPS COMPUTATION FOR NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS Numerator – net income attributable to common stockholders $ 37,792 30,771 147,511 85,668 Denominator: Weighted average shares outstanding 43,467 40,434 42,308 40,058 Unvested restricted stock 114 133 111 107 Weighted average diluted shares outstanding 43,581 40,567 42,419 40,165 (16) STOCK-BASED COMPENSATION EastGroup applies the provisions of ASC 718, Compensation - Stock Compensation, to account for its stock-based compensation plans. ASC 718 requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements and that the cost be measured on the fair value of the equity or liability instruments issued. The cost for market-based awards and awards that only require service are expensed on a straight-line basis over the requisite service periods. The cost for performance-based awards is determined using the graded vesting attribution method which recognizes each separate vesting portion of the award as a separate award on a straight-line basis over the requisite service period. This method accelerates the expensing of the award compared to the straight-line method. For awards with a performance condition, compensation expense is recognized when the performance condition is considered probable of achievement. The total compensation expense for service and performance based awards is based upon the fair market value of the shares on the grant date. The grant date fair value for awards that have been granted and are subject to a future market condition (total shareholder return) are determined using a Monte Carlo simulation pricing model developed to specifically accommodate the unique features of the awards. During the restricted period for awards no longer subject to contingencies, the Company accrues dividends and holds the certificates for the shares; however, the employee can vote the shares. Share certificates and dividends are delivered to the employee as they vest. Forfeitures of awards are recognized as they occur. The Compensation Committee of the Company’s Board of Directors (the “Committee”) approves long-term and annual equity compensation awards for the Company’s executive officers. The vesting periods of the Company’s restricted stock plans vary, as determined by the Committee. Restricted stock is granted to executive officers subject to both continued service and the satisfaction of certain annual performance goals and multi-year market conditions as determined by the Committee. -22- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The long-term compensation awards include components based on the Company’s total shareholder return over the upcoming three -year period and the employee’s continued service as of the vesting dates. The total shareholder return component is subject to bright-line tests that compare the Company’s total shareholder return to the Nareit Equity Index and to the member companies of the Nareit industrial index. The Company begins recognizing expense for these awards based on the grant date fair value of the awards which is determined using a simulation pricing model developed to specifically accommodate the unique features of the award. These market-based awards are expensed on a straight-line basis over the requisite service period ( 75 % vests at the end of the three-year performance period and 25 % vests the following year). The long-term awards subject only to continuing employment are expensed on a straight-line basis over the requisite service period ( 25 % vests in each of the following four years ). The annual equity compensation awards include components based on certain annual Company performance measures and individual annual performance goals over the upcoming year. The certain Company performance measures for 2022 are: (i) funds from operations (“FFO”) per share, (ii) cash same property net operating income change, (iii) debt-to-EBITDAre ratio, and (iv) fixed charge coverage. The Company begins recognizing expense for its estimate of the shares that could be earned pursuant to these awards on the grant date; the expense is adjusted to estimated performance levels during the performance period and to actual upon the determination of the awards. The shares are expensed using the graded vesting attribution method which recognizes each separate vesting portion of the award as a separate award on a straight-line basis over the requisite service period ( 34 % vests at the end of the one -year performance period and 33 % vests in each of the following two years ). Any shares issued pursuant to the individual annual performance goals are determined by the Committee in its discretion following the performance period. The Company begins recognizing the expense for the shares on the grant date and will expense on a straight-line basis over the remaining service period ( 34 % vests at the end of the one -year performance period and 33 % vests in each of the following two years ). Equity compensation is also awarded to the Company’s non-executive officers and directors, which are subject to service only conditions and expensed on a straight-line basis over the required service period. The total compensation expense is based upon the fair market value of the shares on the grant date. The Committee has adopted an Equity Award Retirement Policy (the “retirement policy”) which allows for accelerated vesting of unvested shares for retirement-eligible employees (defined as employees who meet certain age and years of service requirements). In order to qualify for accelerated vesting upon retirement, the eligible employees must provide required notification under the retirement policy and must retire from the Company. The Company has adjusted its stock-based compensation expense to accelerate the recognition of expense for retirement-eligible employees. Stock-based compensation cost for employees was $ 2,625,000 and $ 8,175,000 for the three and nine months ended September 30, 2022, of which $ 645,000 and $ 1,981,000 were capitalized as part of the Company’s development costs. For the three and nine months ended September 30, 2021, stock-based compensation cost for employees was $ 2,458,000 and $ 6,791,000 , of which $ 632,000 and $ 1,661,000 were capitalized as part of the Company’s development costs. Stock-based compensation expense for directors was $ 230,000 and $ 336,000 for the three and nine months ended September 30, 2022, respectively, and $ 3,000 and $ 710,000 for the same periods in 2021. -23- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Following is a summary of the total restricted shares granted, forfeited and delivered (vested) to participants with the related weighted average grant date fair value share prices. Of the shares that vested in the nine months ended September 30, 2022, the Company withheld 34,251 shares to satisfy the tax obligations for those participants who elected this option as permitted under the applicable equity plan. As of the grant dates, the fair value of shares that were granted during the nine months ended September 30, 2022 was $ 9,560,000 . As of the vesting dates, the aggregate fair value of shares that vested during the nine months ended September 30, 2022 was $ 17,132,000 . Award Activity: Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Unvested at beginning of period 102,560 $ 133.28 106,212 $ 116.38 Granted (1) (2) — — 76,913 124.30 Forfeited — — — — Vested ( 52 ) 120.39 ( 80,617 ) 102.43 Unvested at end of period 102,508 $ 133.29 102,508 $ 133.29 (1) Includes shares granted in prior years for which performance conditions have been satisfied and the number of shares have been determined. (2) Does not include the restricted shares that may be earned if the performance goals established in 2020 and 2021 for long-term performance and in 2022 for annual and long-term performance are achieved. Depending on the actual level of achievement of the goals at the end of the open performance periods, the number of shares earned could range from zero to 105,485 . (17) FAIR VALUE OF FINANCIAL INSTRUMENTS ASC 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also provides guidance for using fair value to measure financial assets and liabilities. The FASB Codification requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2) and significant valuation assumptions that are not readily observable in the market (Level 3). The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments in accordance with ASC 820 at September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Carrying Amount (1) Fair Value Carrying Amount (1) Fair Value (In thousands) Financial Assets: Cash and cash equivalents $ 4,848 4,848 4,393 4,393 Interest rate swap assets 41,128 41,128 2,237 2,237 Financial Liabilities: Unsecured bank credit facilities - variable rate (2) 155,883 155,354 209,210 209,202 Unsecured debt (2) 1,545,000 1,427,208 1,245,000 1,267,702 Secured debt (2) 2,071 1,996 2,156 2,269 Interest rate swap liabilities — — 935 935 (1) Carrying amounts shown in the table are included on the Consolidated Balance Sheets under the indicated captions, except as explained in the notes below. (2) Carrying amounts and fair values shown in the table exclude debt issuance costs (see Note 10 for additional information). The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents: The carrying amounts approximate fair value due to the short maturity of those instruments. Interest rate swap assets (included in Other assets on the Consolidated Balance Sheets): The instruments are recorded at fair value based on models using inputs, such as interest rate yield curves, LIBOR and SOFR swap curves and OIS curves, -24- EASTGROUP PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) observable for substantially the full term of the contract (Level 2 input). See Note 14 for additional information on the Company’s interest rate swaps. Unsecured bank credit facilities: The fair value of the Company’s unsecured bank credit facilities is estimated by discounting expected cash flows at current market rates (Level 2 input), excluding the effects of debt issuance costs. Unsecured debt: The fair value of the Company’s unsecured debt is estimated by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company’s bankers (Level 2 input), excluding the effects of debt issuance costs. Secured debt: The fair value of the Company’s secured debt is estimated by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company’s bankers (Level 2 input), excluding the effects of debt issuance costs. Interest rate swap liabilities (included in Other liabilities on the Consolidated Balance Sheets): The instruments are recorded at fair value based on models using inputs, such as interest rate yield curves, LIBOR and SOFR swap curves and OIS curves, observable for substantially the full term of the contract (Level 2 input). See Note 14 for additional information on the Company’s interest rate swaps. (18) RISKS AND UNCERTAINTIES The state of the overall economy can significantly impact the Company’s operational performance and thus impact its financial position. Should EastGroup experience a significant decline in operational performance, it may affect the Company’s ability to make distributions to its shareholders, service debt or meet other financial obligations. (19) LEGAL MATTERS The Company is not presently involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company or its properties, other than routine litigation arising in the ordinary course of business. (20) RECENT ACCOUNTING PRONOUNCEMENTS EastGroup has evaluated all ASUs recently released by the FASB through the date the financial statements were issued and determined that ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , applies to the Company. See Note 14 in the Notes to Consolidated Financial Statements for the Company’s evaluation of ASU 2020-04. (21) SUBSEQUENT EVENTS Subsequent to September 30, 2022, EastGroup acquired 60.9 acres of development land in Atlanta for approximately $ 5.6 million. The Company has future plans to construct five buildings totaling approximately 750,000 square feet. Also subsequent to September 30, 2022, the Company closed on the acquisition of 87.5 acres of development land in Austin for approximately $ 30.1 million. The Company has future plans to construct seven buildings totaling approximately 1,007,000 square feet. -25-