EASTGROUP PROPERTIES INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of results of operations and financial condition should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes “forward-looking statements” (within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”)) that reflect EastGroup’s expectations and projections about the Company’s future results, performance, prospects, plans and opportunities. The Company has attempted to identify these forward-looking statements by the use of words such as “may,” “will,” “seek,” “expects,” “anticipates,” “believes,” “targets,” “intends,” “should,” “estimates,” “could,” “continue,” “assume,” “projects,” “goals,” “plans” or variations of such words and similar expressions. These forward-looking statements are based on information currently available to the Company and are subject to a number of known and unknown assumptions, risks, uncertainties and other factors that may cause the Company’s actual results, performance, plans or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, those discussed below. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. The Company does not undertake publicly to update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or new information, future events or otherwise, except as may be required to satisfy the Company’s obligations under federal securities laws. The following are some, but not all, of the risks, uncertainties and other factors that could cause the Company’s actual results to differ materially from those presented in the Company’s forward-looking statements (the Company refers to itself as “we,” “us” or “our” in the following): • international, national, regional and local economic conditions; • disruption in supply and delivery chains; • construction costs could increase as a result of inflation impacting the costs to develop properties; • increase in interest rates and ability to raise equity capital on attractive terms; • financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest, and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all; • our ability to retain our credit agency ratings; • our ability to comply with applicable financial covenants; • the competitive environment in which the Company operates; • fluctuations of occupancy or rental rates; • potential defaults (including bankruptcies or insolvency) on or non-renewal of leases by tenants, or our ability to lease space at current or anticipated rents, particularly in light of the significant uncertainty as to the conditions under which current or potential tenants will be able to operate physical locations in the future; • potential changes in the law or governmental regulations and interpretations of those laws and regulations, including changes in real estate laws or real estate investment trust (“REIT”) or corporate income tax laws, and potential increases in real property tax rates; • our ability to maintain our qualification as a REIT; • acquisition and development risks, including failure of such acquisitions and development projects to perform in accordance with projections; • natural disasters such as fires, floods, tornadoes, hurricanes and earthquakes; • pandemics, epidemics or other public health emergencies, such as the coronavirus (“COVID-19”) pandemic; • the terms of governmental regulations that affect us and interpretations of those regulations, including the costs of compliance with those regulations, changes in real estate and zoning laws and increases in real property tax rates; • credit risk in the event of non-performance by the counterparties to our interest rate swaps; • the discontinuation of London Interbank Offered Rate (“LIBOR”); • lack of or insufficient amounts of insurance; • litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; • our ability to attract and retain key personnel; • risks related to the failure, inadequacy or interruption of our data security systems and processes; -26- • potentially catastrophic events such as acts of war, civil unrest and terrorism; and • environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A. Risk Factors within the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In addition, the Company’s current and continuing qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and depends on the Company’s ability to meet the various requirements imposed by the Code through actual operating results, distribution levels and diversity of stock ownership. OVERVIEW EastGroup’s goal is to maximize shareholder value by being a leading provider in its markets of functional, flexible and quality business distribution space for location-sensitive customers (primarily in the 15,000 to 70,000 square foot range). The Company develops, acquires and operates distribution facilities, the majority of which are clustered around major transportation features in supply constrained submarkets in major Sunbelt regions. The Company’s core markets are in the states of Florida, Texas, Arizona, California and North Carolina. During the three and nine month periods ended September 30, 2022, economic uncertainty and stock market volatility have increased due to a number of factors, including the continuing COVID-19 pandemic, lingering supply chain disruptions, rising inflation, and increasing interest rates. While these factors have not had a significant adverse impact on EastGroup to date, they may adversely impact the Company in the future. Most of the Company’s leases include scheduled rent increases. Additionally, most of the Company’s leases require the tenants to pay their pro rata share of operating expenses, including real estate taxes, insurance and common area maintenance, thereby reducing the Company’s exposure to increases in operating expenses resulting from inflation or other factors. In the event inflation causes increases in the Company’s general and administrative expenses, or higher interest rates increase the Company’s cost of doing business, such increased costs would not be passed through to tenants and could adversely affect the Company’s results of operations. The Company continues to monitor these supply chain, inflation and interest rate factors, as well as the uncertainty resulting from the overall economic environment. EastGroup believes its current operating cash flow and unsecured bank credit facilities provide the capacity to fund the operations of the Company, and the Company also believes it can issue common and/or preferred equity and obtain debt financing on currently acceptable terms. During the three months ended September 30, 2022, EastGroup issued 6,368 shares of common stock through its continuous common equity offering program, providing net proceeds to the Company of $1.0 million. During the nine months ended September 30, 2022, EastGroup issued 391,906 shares of common stock through its continuous common equity offering program, providing net proceeds to the Company of $75.2 million. Also during the nine months ended September 30, 2022, the Company closed a $100 million senior unsecured term loan with an effectively fixed interest rate of 3.06%, the private placement of $150 million of senior unsecured notes with a fixed interest rate of 3.03%, and a $125 million senior unsecured term loan with a $75 million tranche and a $50 million tranche. The $75 million tranche has an effectively fixed interest rate of 4.00%, and the $50 million tranche has an effectively fixed interest rate of 4.09%. Additionally, the Company and a group of lenders agreed to terms on the private placement of two senior unsecured notes totaling $150 million during the nine months ended September 30, 2022. One note for $75 million has a fixed interest rate of 4.90%, and the other $75 million note has a fixed interest rate of 4.95%. The notes, dated August 16, 2022, were issued and sold on October 12, 2022. EastGroup’s financing and equity issuances are further described in Liquidity and Capital Resources below. The Company’s primary revenue is rental income. During the nine months ended September 30, 2022, EastGroup executed new and renewal leases on 7,304,000 square feet (14.4% of the operating portfolio’s total square footage of 50,698,000). For new and renewal leases signed during the first nine months of 2022, average rental rates increased by 36.4% as compared to the former leases on the same spaces. Property Net Operating Income (“PNOI”) Excluding Income from Lease Terminations from same properties (defined as operating properties owned during the entire current and prior year reporting periods – January 1, 2021 through September 30, 2022), increased 7.2% for the nine months ended September 30, 2022 as compared to the same period in 2021. EastGroup’s operating portfolio was 99.0% leased and 98.5% occupied as of September 30, 2022, compared to 98.8% and 97.6%, respectively, at September 30, 2021. As of October 25, 2022, the operating portfolio was 99.3% leased and 98.7% occupied. Leases scheduled to expire for the remainder of 2022 were 2.6% of the operating portfolio on a square foot basis at September 30, 2022, and this percentage was reduced to 2.2% as of October 25, 2022. -27- The Company generates new sources of leasing revenue through its development and acquisition programs. The Company mitigates risks associated with development through a Board-approved maximum level of land held for development and by adjusting development start dates according to leasing activity. During the nine months ended September 30, 2022, EastGroup acquired four value-add projects located in Houston, Phoenix, San Francisco, and Greenville containing 1,044,000 square feet for $122.9 million. EastGroup also acquired 286.0 acres of development land in nine cities for $77.6 million. During the same period, the Company began construction of 13 development projects containing 2,317,000 square feet in 10 cities. EastGroup also transferred 11 development and value-add projects (2,334,000 square feet) in nine cities from its development and value-add program to real estate properties, with costs of $324.1 million at the date of transfer. As of September 30, 2022, EastGroup’s development and value-add program consisted of 27 projects (4,934,000 square feet) located in 14 cities. The projected total investment for the development and value-add projects, which were collectively 48% leased as of October 25, 2022, is $600.8 million, of which $191.8 million remained to be invested as of September 30, 2022. During the nine months ended September 30, 2022, EastGroup closed the acquisition of Tulloch Corporation, the owner of an industrial real estate portfolio that included 14 operating properties located in Sacramento and San Francisco containing 1,706,000 square feet. The portfolio also included two land parcels located in Sacramento and San Francisco totaling 10.5 acres. As consideration in connection with the acquisition, EastGroup assumed a loan with an outstanding principal balance of $60 million, which the Company immediately repaid with no penalty in June 2022, and issued 1,868,809 shares of the Company’s common stock. During the nine months ended September 30, 2022, EastGroup sold 287,000 square feet of operating properties, generating gross sales proceeds of $52.4 million. The Company recognized $41.0 million in Gain on sales of real estate investments during the nine months ended September 30, 2022. The Company typically initially funds its development and acquisition programs through its unsecured bank credit facilities, the total capacity of which was increased in June 2021 to $475 million (as discussed in Liquidity and Capital Resources ). As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, to replace short-term bank borrowings. Moody’s Investors Service has assigned the Company’s issuer rating of Baa2 with a stable outlook. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. For future debt issuances, the Company intends to issue primarily unsecured fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps. The Company may also access the public debt market in the future as a means to raise capital. 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’s chief decision makers use two primary measures of operating results in making decisions: (1) funds from operations (“FFO”) attributable to common stockholders, and (2) property net operating income (“PNOI”). FFO is computed in accordance with standards established by the National Association of Real Estate Investment Trusts, Inc. (“Nareit”). Nareit’s guidance allows preparers an option as it pertains to whether gains or losses on sale, or impairment charges, on real estate assets incidental to a REIT's business are excluded from the calculation of FFO. EastGroup has made the election to exclude activity related to such assets that are incidental to our business. FFO is calculated as net income (loss) attributable to common stockholders computed in accordance with U.S. generally accepted accounting principles (“GAAP”), excluding gains and losses from sales of real estate property (including other assets incidental to the Company’s business) and impairment losses, adjusted for real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO is not considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company’s financial performance, nor is it a measure of the Company’s liquidity or indicative of funds available to provide for the Company’s cash needs, including its ability to make distributions. The Company’s key drivers affecting FFO are changes in PNOI (as discussed below), interest rates, the amount of leverage the Company employs and general and administrative expenses. PNOI is defined as Income from real estate operations less Expenses from real estate operations (including market-based internal management fee expense) plus the Company’s share of income and property operating expenses from its less-than-wholly-owned real estate investments. -28- EastGroup sometimes refers to PNOI from Same Properties as “Same PNOI”; the Company also presents Same PNOI Excluding Income from Lease Terminations. Same Properties is defined as operating properties owned during the entire current period and prior year reporting period. Properties developed or acquired are excluded until held in the operating portfolio for both the current and prior year reporting periods. Properties sold during the current or prior year reporting periods are also excluded. For the three and nine months ended September 30, 2022, Same Properties includes properties which were included in the operating portfolio for the entire period from January 1, 2021 through September 30, 2022. The Company presents Same PNOI and Same PNOI Excluding Income from Lease Terminations as a property-level supplemental measure of performance used to evaluate the performance of the Company’s investments in real estate assets and its operating results on a same property basis. FFO and PNOI are supplemental industry reporting measurements used to evaluate the performance of the Company’s investments in real estate assets and its operating results. The Company believes that the exclusion of depreciation and amortization in the calculations of PNOI and FFO provides supplemental indicators of the properties’ performance since real estate values have historically risen or fallen with market conditions. PNOI and FFO as calculated by the Company may not be comparable to similarly titled but differently calculated measures for other REITs. Investors should be aware that items excluded from or added back to FFO are significant components in understanding and assessing the Company’s financial performance. These non-GAAP figures should not be considered a substitute for, and should only be considered together with and as a supplement to, the Company’s financial information presented in accordance with GAAP. The following table presents reconciliations of Net Income to PNOI, Same PNOI and Same PNOI Excluding Income from Lease Terminations 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) NET INCOME $ 37,817 30,792 147,586 85,727 Gain on sales of real estate investments — — (40,999) — Interest income (36) (2) (42) (6) Other revenue (88) (13) (165) (40) Indirect leasing costs 119 133 410 597 Depreciation and amortization 39,277 32,263 113,079 93,925 Company’s share of depreciation from unconsolidated investment 31 34 93 102 Interest expense 9,771 8,416 26,851 24,873 General and administrative expense 3,967 3,559 12,503 12,081 Noncontrolling interest in PNOI of consolidated joint ventures (31) (15) (84) (46) PROPERTY NET OPERATING INCOME (“PNOI”) 90,827 75,167 259,232 217,213 PNOI from 2021 and 2022 acquisitions (5,888) (702) (11,434) (738) PNOI from 2021 and 2022 development and value-add properties (9,906) (2,767) (25,023) (6,107) PNOI from 2021 and 2022 operating property dispositions — (867) (237) (2,585) Other PNOI 108 (39) 221 (166) SAME PNOI 75,141 70,792 222,759 207,617 Net lease termination fee income from same properties (24) (353) (1,115) (947) SAME PNOI EXCLUDING INCOME FROM LEASE TERMINATIONS $ 75,117 70,439 221,644 206,670 -29- PNOI was calculated as follows 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) Income from real estate operations $ 125,570 104,584 357,020 302,063 Expenses from real estate operations (35,033) (29,644) (98,643) (85,521) Noncontrolling interest in PNOI of consolidated joint ventures (31) (15) (84) (46) PNOI from 50% owned unconsolidated investment 321 242 939 717 PROPERTY NET OPERATING INCOME (“PNOI”) $ 90,827 75,167 259,232 217,213 Income from real estate operations is comprised of rental income, net of reserves for uncollectible rent, expense reimbursement pass-through income and other real estate income including lease termination fees. Expenses from real estate operations is comprised of property taxes, insurance, utilities, repair and maintenance expenses, management fees and other operating costs. Generally, the Company’s most significant operating expenses are property taxes and insurance. Tenant leases may be net leases in which the total operating expenses are recoverable, modified gross leases in which some of the operating expenses are recoverable, or gross leases in which no expenses are recoverable (gross leases represent only a small portion of the Company’s total leases). Increases in property operating expenses are fully recoverable under net leases and recoverable to a high degree under modified gross leases. Modified gross leases often include base year amounts, and expense increases over these amounts are recoverable. The Company’s exposure to property operating expenses is primarily due to vacancies and leases for occupied space that limit the amount of expenses that can be recovered. The following table presents reconciliations of Net Income Attributable to EastGroup Properties, Inc. Common Stockholders to FFO Attributable to Common Stockholders 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, except per share data) NET INCOME ATTRIBUTABLE TO EASTGROUP PROPERTIES, INC. COMMON STOCKHOLDERS $ 37,792 30,771 147,511 85,668 Depreciation and amortization 39,277 32,263 113,079 93,925 Company’s share of depreciation from unconsolidated investment 31 34 93 102 Depreciation and amortization from noncontrolling interest (5) — (14) — Gain on sales of real estate investments — — (40,999) — FUNDS FROM OPERATIONS (“FFO”) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 77,095 63,068 219,670 179,695 Net income attributable to common stockholders per diluted share $ 0.87 0.76 3.48 2.13 Funds from operations (“FFO”) attributable to common stockholders per diluted share $ 1.77 1.55 5.18 4.47 Diluted shares for earnings per share and funds from operations 43,581 40,567 42,419 40,165 The Company analyzes the following performance trends in evaluating the revenues and expenses of the Company: • The change in FFO per share represents the increase or decrease in FFO per share from the current period compared to the same period in the prior year. For the three months ended September 30, 2022, FFO was $1.77 per share compared with $1.55 per share for the same period of 2021, an increase of 14.2%. For the nine months ended September 30, 2022, FFO was $5.18 per share compared with $4.47 per share for the same period of 2021, an increase of 15.9%. • For the three months ended September 30, 2022, PNOI increased by $15,660,000, or 20.8%, as compared to the same period in 2021. PNOI increased $7,139,000 from newly developed and value-add properties, $5,186,000 from 2021 and 2022 acquisitions and $4,349,000 from same property operations; PNOI decreased $867,000 from operating properties sold in 2021 and 2022. -30- For the nine months ended September 30, 2022, PNOI increased by $42,019,000, or 19.3%, as compared to the same period in 2021. PNOI increased $18,916,000 from newly developed and value-add properties, $15,142,000 from same property operations and $10,696,000 from 2021 and 2022 acquisitions; PNOI decreased $2,348,000 from operating properties sold in 2021 and 2022. • The change in Same PNOI represents the PNOI increase or decrease for the same operating properties owned during the entire current and prior year reporting periods (January 1, 2021 through September 30, 2022). Same PNOI, excluding income from lease terminations, increased 6.6% and 7.2% for the three and nine months ended September 30, 2022, as compared to the same periods in 2021. • Same property average occupancy represents the average month-end percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage for the same operating properties owned during the entire current period and prior year reporting periods (January 1, 2021 through September 30, 2022). Same property average occupancy was 98.3% for the three months ended September 30, 2022, compared to 97.8% for the same period of 2021. Same property average occupancy was 98.1% for the nine months ended September 30, 2022, compared to 97.3% for the same period of 2021. • Occupancy is the percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage as of the close of the reporting period. Occupancy at September 30, 2022 was 98.5%. Quarter-end occupancy ranged from 97.4% to 98.5% over the previous four quarters ended September 30, 2021 to June 30, 2022. • Rental rate change represents the rental rate increase or decrease on new and renewal leases compared to the prior leases on the same space. Rental rate increases on new and renewal leases (4.6% of the operating portfolio’s total square footage) averaged 39.4% for the three months ended September 30, 2022. For the nine months ended September 30, 2022, rental rate increases on new and renewal leases (14.4% of the operating portfolio’s total square footage) averaged 36.4%. • Lease termination fee income is included in Income from real estate operations. Lease termination fee income for the three and nine months ended September 30, 2022 was $24,000 and $2,397,000, respectively, compared to $353,000 and $947,000 for the same periods of 2021. • The Company records reserves for uncollectible rent as reductions to Income from real estate operations ; recoveries for uncollectible rent are recorded as additions to Income from real estate operations . The Company recorded net reserves for uncollectible rent of $198,000 and $128,000 for the three and nine months ended September 30, 2022, respectively, compared to net recoveries of $256,000 and $346,000 for the same periods of 2021. We evaluate the collectability of rents and other receivables for individual leases at each reporting period based on factors including, among others, tenant payment history, the financial condition of the tenant, business conditions and trends in the industry in which the tenant operates and economic conditions in the geographic area where the property is located. If evaluation of these factors or others indicates it is not probable we will collect substantially all rent, we recognize an adjustment to rental revenue. If our judgment or estimation regarding probability of collection changes we may adjust or record additional rental revenue in the period such conclusion is reached. The Company followed its normal process for recording reserves for uncollectible rent during the three and nine months ended September 30, 2022. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company’s management considers the following accounting policies and estimates to be critical to the reported operations of the Company. Acquisition and Development of Real Estate Properties The Financial Accounting Standards Board (“FASB”) Codification 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. Factors considered by management in allocating the cost of the properties acquired include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. 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. -31- 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. 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. The significance of this accounting policy will fluctuate given the transaction activity during the period. 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 properties based on development activity. -32- FINANCIAL CONDITION EastGroup’s Total Assets were $3,962,323,000 at September 30, 2022, an increase of $746,987,000 from December 31, 2021. Total Liabilities increased $328,261,000 to $1,972,137,000, and Total Equity increased $418,726,000 to $1,990,186,000 during the same period. The following paragraphs explain these changes in additional detail. Assets Real Estate Properties Real estate properties increased $704,568,000 during the nine months ended September 30, 2022, primarily due to: (i) the acquisition of 14 operating properties; (ii) the transfer of 11 projects from Development and value-add properties to Real estate properties (as detailed under Development and Value-Add Properties below); (iii) capital improvements at the Company’s properties; and (iv) costs incurred on development and value-add projects subsequent to transfer to Real estate properties discussed below. These increases were partially offset by operating property dispositions discussed below. During the nine months ended September 30, 2022, EastGroup acquired the following operating properties: OPERATING PROPERTIES ACQUIRED IN 2022 Location Size Date Acquired Cost (1) (Square feet) (In thousands) Cebrian Distribution Center and Reed Distribution Center (2) 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 (2) San Francisco, CA 1,377,000 06/01/2022 309,404 Total operating property acquisitions 1,706,000 $ 359,130 (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. Refer to Note 7 in the Notes to Consolidated Financial Statements. (2) 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. During the nine months ended September 30, 2022, the Company made capital improvements of $29,297,000 on existing properties (included in the Real Estate Improvements table under Results of Operations ). Also, the Company incurred costs of $9,346,000 on development and value-add properties subsequent to transfer to Real estate properties ; the Company records these expenditures as development and value-add costs on the Consolidated Statements of Cash Flows. During the nine months ended September 30, 2022, EastGroup sold 287,000 square feet of operating properties, generating gross sales proceeds of $52,410,000. The Company recognized $40,999,000 in Gain on sales of real estate investments during the nine months ended September 30, 2022. Development and Value-Add Properties EastGroup’s investment in Development and value-add properties at September 30, 2022 consisted of projects in lease-up and under construction of $409,017,000 and prospective development (primarily land) of $169,558,000. The Company’s total investment in Development and value-add properties at September 30, 2022 was $578,575,000 compared to $504,614,000 at December 31, 2021. Total capital invested for development during the first nine months of 2022 was $395,313,000, which primarily consisted of costs of $368,136,000 and $29,911,000 as detailed in the Development and Value-Add Properties Activity table below and costs of $9,346,000 on properties subsequent to transfer to Real estate properties. These costs were partially offset by development spending prepaid in prior periods and the cost of development land acquired in the acquisition of Tulloch Corporation. The capitalized costs incurred on development and value-add properties subsequent to transfer to Real estate properties include capital improvements at the properties and do not include other capitalized costs associated with development (i.e., interest expense, property taxes and internal personnel costs). The Company capitalized internal development costs of $2,388,000 and $7,474,000 for the three and nine months ended September 30, 2022, respectively, compared to $2,031,000 and $5,311,000 for the same periods of 2021. -33- During the nine months ended September 30, 2022, EastGroup acquired the following value-add properties: VALUE-ADD PROPERTIES ACQUIRED IN 2022 Location Size Date Acquired Cost (1) (Square feet) (In thousands) 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 (1) Represents the sum of the purchase price, closing costs and capitalized acquisition costs. 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. Costs associated with these acquisitions are included in the Development and Value-Add Properties Activity table. The land acquisitions in San Francisco and Sacramento were acquired in connection with the Company’s acquisition of Tulloch Corporation in June 2022. These increases were offset by the transfer of 11 development and value-add projects to Real estate properties during the nine months ended September 30, 2022 with a total investment of $324,086,000 as of the date of transfer. -34- Costs Incurred Anticipated Building Conversion Date DEVELOPMENT AND VALUE-ADD PROPERTIES ACTIVITY Costs Transferred in 2022 (1) For the Nine Months Ended 9/30/2022 Cumulative as of 9/30/2022 Projected Total Costs (In thousands) LEASE-UP Building Size (Square feet) Mesa Gateway, Phoenix, AZ (2) 147,000 $ — 18,636 18,636 22,600 11/22 Tri-County Crossing 5, San Antonio, TX 106,000 — 4,477 10,077 11,600 11/22 45 Crossing, Austin, TX 177,000 — 8,165 25,225 26,900 12/22 Basswood 1 & 2, Fort Worth, TX 237,000 — 6,959 22,188 25,100 01/23 Cypress Preserve 1 & 2, Houston, TX (2) 516,000 — 54,021 54,021 57,800 03/23 Zephyr, San Francisco, CA (2) 82,000 — 28,863 28,863 29,800 04/23 Access Point 3, Greenville, SC (2) 299,000 — 22,472 22,472 24,400 07/23 Grand West Crossing 1, Houston, TX 121,000 — 4,143 13,012 15,700 07/23 Tri-County Crossing 6, San Antonio, TX 124,000 — 5,922 9,704 10,600 08/23 Grand Oaks 75 4, Tampa, FL 185,000 — 9,537 15,915 17,900 09/23 McKinney 3 & 4, Dallas, TX 212,000 — 10,803 21,241 26,800 09/23 Total Lease-Up 2,206,000 — 173,998 241,354 269,200 UNDER CONSTRUCTION World Houston 47, Houston, TX 139,000 4,506 11,566 16,072 19,100 12/22 Horizon West 4, Orlando, FL 295,000 6,176 16,323 22,499 28,700 01/23 SunCoast 11, Fort Myers, FL 79,000 1,524 5,630 7,154 9,900 01/23 SunCoast 12, Fort Myers, FL 79,000 — 3,762 7,940 9,300 01/23 LakePort 4 & 5, Dallas, TX 177,000 — 9,373 17,311 24,000 11/23 Arlington Tech 3, Fort Worth, TX 77,000 1,980 5,055 7,035 10,300 12/23 Hillside 1, Greenville, SC 122,000 632 5,930 6,562 11,600 12/23 I-20 West Business Center, Atlanta, GA 155,000 — 9,097 12,061 15,500 12/23 Gateway 2, Miami, FL 133,000 8,049 5,174 13,223 23,700 02/24 Horizon West 1, Orlando, FL 97,000 3,730 2,719 6,449 13,200 03/24 Steele Creek 11 & 12, Charlotte, NC 241,000 2,857 6,721 9,578 24,900 04/24 Springwood 1 & 2, Houston, TX 292,000 6,741 10,950 17,691 33,300 05/24 Stonefield 35 1-3, Austin, TX 274,000 10,279 2,487 12,766 35,300 06/24 SunCoast 10, Fort Myers, FL 100,000 1,624 460 2,084 13,600 06/24 McKinney 1 & 2, Dallas, TX 172,000 4,261 240 4,501 27,300 08/24 Cass White 1 & 2, Atlanta, GA 296,000 3,534 1,203 4,737 31,900 10/24 Total Under Construction 2,728,000 55,893 96,690 167,663 331,600 The Development and Value-Add Properties Activity table is continued on the following page. -35- Costs Incurred Costs Transferred in 2022 (1) For the Nine Months Ended 9/30/2022 Cumulative as of 9/30/2022 (In thousands) PROSPECTIVE DEVELOPMENT (PRIMARILY LAND) Estimated Building Size (Square feet) Phoenix, AZ 655,000 — 15,170 15,170 Sacramento, CA 93,000 — 3,098 3,098 San Francisco, CA 65,000 — 3,561 3,561 Fort Myers, FL 364,000 (3,148) 1,815 6,965 Miami, FL 510,000 (8,049) 17,651 23,933 Orlando, FL 886,000 (9,906) 878 17,210 Tampa, FL 32,000 — — 825 Atlanta, GA 751,000 (3,534) 6,785 8,309 Jackson, MS 28,000 — — 706 Charlotte, NC 1,146,000 (2,857) 1,319 13,566 Greenville, SC 476,000 (632) 3,994 5,098 Austin, TX 550,000 (10,279) 19,297 15,449 Dallas, TX — (4,261) 457 4,594 Fort Worth, TX 575,000 (1,980) 1,459 14,806 Houston, TX 1,536,000 (11,247) 16,667 30,253 San Antonio, TX 277,000 — 5,297 6,015 Total Prospective Development 7,944,000 (55,893) 97,448 169,558 12,878,000 $ — 368,136 578,575 DEVELOPMENT AND VALUE-ADD PROPERTIES TRANSFERRED TO REAL ESTATE PROPERTIES DURING 2022 Building Size (Square feet) Building Conversion Date Access Point 1, Greenville, SC (2) 156,000 $ — 7 12,529 01/22 Speed Distribution Center, San Diego, CA 519,000 — 2,884 70,702 03/22 Access Point 2, Greenville, SC (2) 159,000 — 601 12,232 05/22 Grand Oaks 75 3, Tampa, FL 136,000 — 1,205 11,397 06/22 Siempre Viva 3-6, San Diego, CA (2) 547,000 — 595 133,283 06/22 Steele Creek 8, Charlotte, NC 72,000 — 5,142 7,870 07/22 CreekView 9 & 10, Dallas, TX 145,000 — 4,210 15,546 08/22 Gateway 3, Miami, FL 133,000 — 4,903 18,069 08/22 Ridgeview 3, San Antonio, TX 88,000 — 3,513 9,317 08/22 Americas Ten 2, El Paso, TX 169,000 — 5,254 14,354 09/22 Horizon West 2 & 3, Orlando, FL 210,000 — 1,597 18,787 09/22 Total Transferred to Real Estate Properties 2,334,000 $ — 29,911 324,086 (3) (1) Represents costs transferred from Prospective Development (primarily land) to Under Construction during the period. Negative amounts represent land inventory costs transferred to Under Construction. (2) Represents value-add acquisitions. (3) Represents cumulative costs at the date of transfer. Accumulated Depreciation Accumulated depreciation on real estate, development and value-add properties increased $85,591,000 during the nine months ended September 30, 2022, primarily due to depreciation expense, partially offset by the sale of three operating properties totaling 287,000 square feet. Real Estate Assets Held for Sale Real estate assets held for sale decreased $5,695,000 during the nine months ended 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. The Company did not classify any properties as held for sale as of September 30, 2022. -36- Other Assets Other assets increased $58,943,000 during the nine months ended September 30, 2022. A summary of 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 Liabilities Unsecured bank credit facilities, net of debt issuance costs decreased $52,878,000 during the nine months ended September 30, 2022, mainly due to repayments of $749,053,000 and new debt issuance costs incurred during the period, partially offset by borrowings of $695,726,000 and the amortization of debt issuance costs during the period. The Company’s credit facilities are described in greater detail under Liquidity and Capital Resources . Unsecured debt, net of debt issuance costs increased $298,911,000 during the nine months ended September 30, 2022, primarily due to the closing of a $100 million senior unsecured term loan in March, closing the private placement of $150 million senior unsecured notes in April, the closing of a $125 million senior unsecured term loan in August, and the amortization of debt issuance costs, partially offset by the repayment of a $75 million term loan in February and new debt issuance costs incurred during the period. The borrowings and repayments on Unsecured debt, net of debt issuance costs are described in greater detail under Liquidity and Capital Resources . Secured debt, net of debt issuance costs decreased $83,000 during the nine months ended September 30, 2022. The decrease resulted from regularly scheduled principal payments of $70,000 and amortization of premiums, partially offset by the amortization of debt issuance costs during the period. Also during the nine months ended September 30, 2022, the Company assumed a $60 million loan in the acquisition of operating properties and development land, which was repaid with no penalty during the same period. -37- Accounts payable and accrued expenses increased $81,190,000 during the nine months ended September 30, 2022. 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. Other liabilities increased $1,121,000 during the nine months ended September 30, 2022. 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 Equity Additional paid-in capital increased $380,011,000 during the nine months ended September 30, 2022, primarily due to: (i) the issuance of 1,868,809 shares of common stock 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, in the net amount of $303,682,000; (ii) the issuance of common stock under the Company’s continuous common equity offering program (as discussed in Liquidity and Capital Resources) ; and (iii) activity related to stock-based compensation (as discussed in Note 16 in the Notes to Consolidated Financial Statements). During the nine months ended September 30, 2022, EastGroup issued 391,906 shares of common stock under its continuous common equity offering program with net proceeds to the Company of $75,189,000. For the nine months ended September 30, 2022, Distributions in excess of earnings increased $1,007,000 as a result of dividends on common stock of $148,518,000 exceeding Net Income Attributable to EastGroup Properties, Inc. Common Stockholders of $147,511,000. -38- Accumulated other comprehensive income increased $39,826,000 during the nine months ended September 30, 2022. The increase resulted from the change in fair value of the Company’s interest rate swaps (cash flow hedges) which are further discussed in Notes 13 and 14 in the Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS Net Income Attributable to EastGroup Properties, Inc. Common Stockholders for the three and nine months ended September 30, 2022 was $37,792,000 ($0.87 per basic and diluted share) and $147,511,000 ($3.49 per basic share and $3.48 per diluted share), respectively, compared to $30,771,000 ($0.76 per basic and diluted share) and $85,668,000 ($2.14 per basic share and $2.13 per diluted share) for the same periods in 2021. The following paragraphs provide further details with respect to these changes: • PNOI increased by $15,660,000 ($0.36 per diluted share), or 20.8%, for the three months ended September 30, 2022, as compared to the same period in 2021. PNOI increased $7,139,000 from newly developed and value-add properties, $5,186,000 from 2021 and 2022 acquisitions and $4,349,000 from same property operations; PNOI decreased $867,000 from operating properties sold in 2021 and 2022. Lease termination fee income was $24,000 and $353,000 for the three month periods ended September 30, 2022 and 2021, respectively. The Company recorded net reserves for uncollectible rent of $198,000 and net recoveries of uncollectible rent of $256,000 for the three months ended September 30, 2022 and 2021, respectively. Straight-lining of rent increased PNOI by $2,764,000 and $2,542,000 for the three months ended September 30, 2022 and 2021, respectively. PNOI increased by $42,019,000 ($0.99 per diluted share), or 19.3%, for the nine months ended September 30, 2022, as compared to the same period in 2021. PNOI increased $18,916,000 from newly developed and value-add properties, $15,142,000 from same property operations and $10,696,000 from 2021 and 2022 acquisitions; PNOI decreased $2,348,000 from operating properties sold in 2021 and 2022. Lease termination fee income was $2,397,000 and $947,000 for the nine month periods ended September 30, 2022 and 2021, respectively. The Company recorded net reserves for uncollectible rent of $128,000 and net recoveries of uncollectible rent of $346,000 for the nine months ended September 30, 2022 and 2021, respectively. Straight-lining of rent increased PNOI by $6,654,000 and $6,511,000 for the nine months ended September 30, 2022 and 2021, respectively. • EastGroup recognized gains on sales of real estate investments of $40,999,000 ($0.97 per diluted share) during the nine months ended September 30, 2022. There were no sales during the three months ended September 30, 2022. There were also no sales during the three and nine months ended September 30, 2021. • Depreciation and amortization expense increased by $7,014,000 ($0.16 per diluted share) and $19,154,000 ($0.45 per diluted share) during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. EastGroup entered into 24 leases with certain rent concessions on 1,178,000 square feet during the three months ended September 30, 2022, with total rent concessions of $2,293,000 over the lives of the leases. During the same period of 2021, the Company entered into 41 leases with certain rent concessions on 1,163,000 square feet with total rent concessions of $1,710,000 over the lives of the leases. EastGroup entered into 90 leases with certain rent concessions on 3,824,000 square feet during the nine months ended September 30, 2022, with total rent concessions of $6,126,000 over the lives of the leases. During the same period of 2021, the Company entered into 139 leases with certain rent concessions on 4,452,000 square feet with total rent concessions of $8,422,000 over the lives of the leases. The Company’s percentage of leased square footage for the operating portfolio was 99.0% at September 30, 2022, compared to 98.8% at September 30, 2021. Occupancy for the Company’s operating portfolio at September 30, 2022 was 98.5% compared to 97.6% at September 30, 2021. Same property average occupancy represents the average month-end percentage of leased square footage for which the lease term has commenced as compared to the total leasable square footage for the same operating properties owned during the entire current period and prior year reporting periods (January 1, 2021 through September 30, 2022). Same property average occupancy for the three and nine months ended September 30, 2022, was 98.3% and 98.1%, compared to 97.8% and 97.3% for the same periods of 2021. -39- The same property average rental rate calculated in accordance with GAAP represents the average annual rental rates of leases in place for the same operating properties owned during the entire current period and prior year reporting periods (January 1, 2021 through September 30, 2022). The same property average rental rate was $7.12 and $7.00 per square foot for the three and nine months ended September 30, 2022, respectively, compared to $6.72 and $6.58 per square foot for the same periods of 2021. Interest expense increased $1,355,000 and $1,978,000 for the three and nine months ended September 30, 2022, compared to the same periods in 2021. The following table presents the components of Interest expense for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Increase (Decrease) 2022 2021 Increase (Decrease) (In thousands) VARIABLE RATE INTEREST EXPENSE Unsecured bank credit facilities interest - variable rate (excluding amortization of facility fees and debt issuance costs) $ 1,653 67 1,586 2,904 659 2,245 Amortization of facility fees - unsecured bank credit facilities 180 180 — 533 571 (38) Amortization of debt issuance costs - unsecured bank credit facilities 163 163 — 488 443 45 Total variable rate interest expense 1,996 410 1,586 3,925 1,673 2,252 FIXED RATE INTEREST EXPENSE Unsecured debt interest (1) (excluding amortization of debt issuance costs) 11,147 9,776 1,371 30,881 27,889 2,992 Secured debt interest (excluding amortization of debt issuance costs) 20 365 (345) 69 1,478 (1,409) Amortization of debt issuance costs - unsecured debt 179 147 32 488 435 53 Amortization of debt issuance costs - secured debt 1 10 (9) 3 84 (81) Total fixed rate interest expense 11,347 10,298 1,049 31,441 29,886 1,555 Total interest 13,343 10,708 2,635 35,366 31,559 3,807 Less capitalized interest (3,572) (2,292) (1,280) (8,515) (6,686) (1,829) TOTAL INTEREST EXPENSE $ 9,771 8,416 1,355 26,851 24,873 1,978 (1) Includes interest on the Company’s unsecured debt with fixed interest rates per the debt agreements or effectively fixed interest rates due to interest rate swaps, as discussed in Note 14 in the Notes to Consolidated Financial Statements. The Company’s variable rate interest expense increased by $1,586,000 and $2,252,000 for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 primarily due to increases in the Company’s average borrowings and weighted average variable interest rates on its unsecured bank credit facilities as shown in the following table: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Increase (Decrease) 2022 2021 Increase (Decrease) (In thousands, except rates of interest) Average borrowings on unsecured bank credit facilities - variable rate $ 195,276 31,380 163,896 210,841 81,136 129,705 Weighted average variable interest rates (excluding amortization of facility fees and debt issuance costs) 3.36 % 0.86 % 1.84 % 1.08 % The Company’s fixed rate interest expense increased by $1,049,000 and $1,555,000 for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 as a result of the unsecured debt and secured debt activity described below. -40- Interest expense from fixed rate unsecured debt increased by $1,371,000 and $2,992,000 during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. The increases resulted from the Company’s unsecured debt activity described below. The details of the unsecured debt obtained in 2021 and 2022 as of September 30, 2022 are shown in the following table: NEW UNSECURED DEBT IN 2021 AND 2022 Effective Interest Rate Date Obtained Maturity Date Amount (In thousands) $50 Million Senior Unsecured Term Loan (1) 1.55% 03/18/2021 03/18/2025 $ 50,000 $125 Million Senior Unsecured Notes 2.74% 06/10/2021 06/10/2031 125,000 $100 Million Senior Unsecured Term Loan (2) 3.06% 03/31/2022 09/29/2028 100,000 $150 Million Senior Unsecured Notes 3.03% 04/20/2022 04/20/2032 150,000 $50 Million Senior Unsecured Term Loan (3) 4.09% 08/31/2022 08/30/2024 50,000 $75 Million Senior Unsecured Term Loan (4) 4.00% 08/31/2022 08/31/2027 75,000 Weighted Average/Total Amount for 2021 and 2022 3.06% $ 550,000 (1) The interest rate on this unsecured term loan is comprised of LIBOR plus 100 basis points subject to a pricing grid for changes in the Company’s coverage ratings. The Company entered into an interest rate swap to convert the loan’s LIBOR rate to a fixed interest rate, providing the Company an effectively fixed interest rate on the term loan of 1.55% as of September 30, 2022. See Note 14 in the Notes to Consolidated Financial Statements for additional information on the interest rate swaps. (2) The interest rate on this unsecured term loan is comprised of the Secured Overnight Financing Rate (“SOFR”) plus 130 basis points subject to a pricing grid for changes in the Company’s coverage ratings. The Company entered into an interest rate swap to convert the loan’s SOFR rate to a fixed interest rate, providing the Company an effectively fixed interest rate on the term loan of 3.06% as of September 30, 2022. See Note 14 in the Notes to Consolidated Financial Statements for additional information on the interest rate swaps. (3) The interest rate on this unsecured term loan is comprised of SOFR plus 85 basis points subject to a pricing grid for changes in the Company’s coverage ratings. The Company entered into an interest rate swap to convert the loan’s SOFR rate to a fixed interest rate, providing the Company an effectively fixed interest rate on the term loan of 4.09% as of September 30, 2022. See Note 14 in the Notes to Consolidated Financial Statements for additional information on the interest rate swaps. (4) The interest rate on this unsecured term loan is comprised of SOFR plus 85 basis points subject to a pricing grid for changes in the Company’s coverage ratings. The Company entered into an interest rate swap to convert the loan’s SOFR rate to a fixed interest rate, providing the Company an effectively fixed interest rate on the term loan of 4.00% as of September 30, 2022. See Note 14 in the Notes to Consolidated Financial Statements for additional information on the interest rate swaps. The increase in interest expense from the new unsecured debt was partially offset by the refinance of a $100,000,000 senior unsecured term loan on March 25, 2022, which resulted in a 60 basis point reduction in the effectively fixed interest rate; and also by the repayment of the following unsecured debt during 2021 and 2022: UNSECURED DEBT REPAID IN 2021 AND 2022 Interest Rate Date Repaid Payoff Amount (In thousands) $40 Million Senior Unsecured Term Loan 2.34% 07/30/2021 $ 40,000 $75 Million Senior Unsecured Term Loan 3.03% 02/28/2022 75,000 Weighted Average/Total Amount for 2021 and 2022 2.79% $ 115,000 -41- The increase in interest expense from unsecured debt was offset by a decrease in secured debt interest expense. Interest expense from secured debt decreased by $345,000 and $1,409,000 during the three and nine month periods ended September 30, 2022, respectively, as compared to the same periods in 2021 as a result of regularly scheduled principal payments and the payoffs described in the table below. Regularly scheduled principal payments on secured debt were $70,000 during the nine months ended September 30, 2022. During the year ended December 31, 2021, regularly scheduled principal payments on secured debt were $2,989,000. During the nine months ended September 30, 2022, the Company assumed a $60 million loan in the acquisition of operating properties and development land, which was repaid with no penalty during the same period. EastGroup did not obtain any new secured debt during 2021. The details of the secured debt repaid in 2021 are shown in the following table: SECURED DEBT REPAID IN 2021 Interest Rate Date Repaid Payoff Amount (In thousands) Colorado Crossing Distribution Center, Interstate Warehouse 1-3, Rojas Commerce Park, Steele Creek Commerce Park 1 & 2, Venture Warehouses and World Houston Int’l Business Ctr 3, 4 & 6-9 4.75% 03/08/2021 $ 40,841 Arion Business Park 18, Beltway Crossing Business Park 6 & 7, Commerce Park Center 2 & 3, Concord Distribution Center, Interstate Warehouse 5-7, Lakeview Business Center, Ridge Creek Distribution Center 2, Southridge Commerce Park 4 & 5 and World Houston Int’l Business Ctr 32 4.09% 10/07/2021 33,090 Weighted Average/Total Amount for 2021 4.45% $ 73,931 Interest costs during the period of construction of real estate properties are capitalized and offset against interest expense. Capitalized interest increased $1,280,000 and $1,829,000 for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021, due to changes in development spending and borrowing rates. Depreciation and amortization expense increased $7,014,000 and $19,154,000 for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021, primarily due to the operating properties acquired by the Company in 2021 and 2022 and the properties transferred from Development and value-add properties in 2021 and 2022, partially offset by operating properties sold in 2021 and 2022. Gain on sales of real estate investments , which includes gains on the sales of operating properties, increased $40,999,000 during the nine months ended September 30, 2022, as compared to the same period in 2021. There were no sales during the three months ended September 30, 2022. Also, there were no sales during the three and nine months ended September 30, 2021. The Company’s 2021 and 2022 sales transactions are described below in Real Estate Sold and Held for Sale . -42- Real Estate Improvements Real estate improvements for EastGroup’s operating properties for the three and nine months ended September 30, 2022 and 2021 were as follows: Three Months Ended September 30, Nine Months Ended September 30, Estimated Useful Life 2022 2021 2022 2021 (In thousands) Upgrade on acquisitions 40 yrs $ 126 214 458 368 Tenant improvements: New tenants Lease life 3,437 3,349 9,775 8,516 Renewal tenants Lease life 606 609 2,477 2,793 Other: Building improvements 5-40 yrs 2,509 1,521 7,926 4,925 Roofs 5-15 yrs 2,733 1,682 5,665 7,744 Parking lots 3-5 yrs 373 439 1,598 870 Other 5 yrs 658 160 1,398 853 Total real estate improvements (1) $ 10,442 7,974 29,297 26,069 (1) Reconciliation of Total real estate improvements to Real estate improvements on the Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2022 2021 (In thousands) Total real estate improvements $ 29,297 26,069 Change in real estate property payables (1) 535 Change in construction in progress 1,747 145 Real estate improvements on the Consolidated Statements of Cash Flows $ 31,043 26,749 Capitalized Leasing Costs The Company’s leasing costs (principally commissions) are capitalized and included in Other assets . The costs are amortized over the terms of the associated leases, and the amortization is included in Depreciation and amortization expense. Capitalized leasing costs for the three and nine months ended September 30, 2022 and 2021 were as follows: Three Months Ended September 30, Nine Months Ended September 30, Estimated Useful Life 2022 2021 2022 2021 (In thousands) Development and value-add Lease life $ 3,654 1,369 10,422 8,928 New tenants Lease life 2,414 2,073 8,554 9,228 Renewal tenants Lease life 2,881 2,956 9,779 6,496 Total capitalized leasing costs (1) $ 8,949 6,398 28,755 24,652 Amortization of leasing costs $ 4,684 4,017 13,716 11,936 (1) Reconciliation of Total capitalized leasing costs to Leasing commissions on the Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2022 2021 (In thousands) Total capitalized leasing costs $ 28,755 24,652 Change in leasing commissions payables (1,787) (1,861) Leasing commissions on the Consolidated Statements of Cash Flows $ 26,968 22,791 -43- 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 Accounting Standards Codification (“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 in the first quarter of 2022, and the Company recorded a gain on the sale 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. 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. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $276,551,000 for the nine months ended September 30, 2022. The primary other sources of cash were borrowings on unsecured bank credit facilities and unsecured debt; proceeds from common stock offerings; and net proceeds from sales of real estate investments. The Company distributed $139,597,000 in common stock dividends during the nine months ended September 30, 2022. Other primary uses of cash were for repayments on unsecured -44- bank credit facilities, unsecured debt and secured debt; the construction and development of properties; capital improvements at various properties; leasing commissions; and purchases of real estate. The Company anticipates that its current cash balance, operating cash flows, borrowings under its unsecured bank credit facilities, proceeds from new debt and/or proceeds from the issuance of equity instruments will be adequate for (i) operating and administrative expenses, (ii) normal repair and maintenance expenses at its properties, (iii) debt service obligations, (iv) maintaining compliance with its debt covenants, (v) distributions to stockholders, (vi) capital improvements, (vii) purchases of properties, (viii) development, and (ix) any other normal business activities of the Company, both in the short-term and long-term. The Company expects liquidity sources and needs in the coming year to be consistent in nature with those for the nine months ended September 30, 2022. As of September 30, 2022, the Company was contractually obligated to pay the dividend declared in August 2022, which was paid in October 2022. An amount for dividends payable of $55,785,000 was included in Accounts payable and accrued expenses at September 30, 2022, which includes dividends payable on unvested restricted stock of $1,446,000, which are subject to continued service and will be paid upon vesting in future periods. Total debt at September 30, 2022 and December 31, 2021 is detailed below. The Company’s unsecured bank credit facilities and unsecured debt instruments have certain restrictive covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage, and the Company was in compliance with all of its debt covenants at September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 (In thousands) Unsecured bank credit facilities - variable rate, carrying amount (1) $ 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 (2) 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 (2) 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) The Company’s balances under its unsecured bank credit facilities change depending on the Company’s cash needs and, as such, both the principal amounts and the interest rates are subject to variability. (2) These loans have a fixed interest rate or an effectively fixed interest rate due to interest rate swaps. Until June 29, 2021, EastGroup had $350 million and $45 million unsecured bank credit facilities with margins over 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 Company’s $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. -45- 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. As market conditions permit, EastGroup issues equity and/or employs fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps, to replace the short-term bank borrowings. The Company believes its current operating cash flow and unsecured bank credit facilities provide the capacity to fund the operations of the Company. The Company also believes it can obtain debt financing and issue common and/or preferred equity. For future debt issuances, the Company intends to issue primarily unsecured fixed-rate debt, including variable-rate debt that has been swapped to an effectively fixed rate through the use of interest rate swaps. The Company may also access the public debt market in the future as a means to raise capital. 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, 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 the annual rate of 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 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. 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 -46- 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. On December 20, 2019, EastGroup entered into sales agreements (the “December 2019 Sales Agreements”) with each of BNY Mellon Capital Markets, LLC; BofA Securities, Inc.; BTIG, LLC; Jefferies LLC; Raymond James & Associates, Inc.; Regions Securities LLC; and Wells Fargo Securities, LLC in connection with the establishment of a new continuous common equity offering program pursuant to which the Company may sell shares of its common stock with an aggregate gross sales price of up to $750,000,000 from time to time. On July 28, 2021, the Company entered into a sales agreement (together with the December 2019 Sales Agreements, the “Sales Agreements”) with TD Securities (USA) LLC, which is substantially similar to the December 2019 Sales Agreements, and entered into corresponding amendments to the December 2019 Sales Agreements to include TD Securities (USA) LLC as a participating sales agent. Pursuant to the Sales Agreements, the shares may be offered and sold in transactions that are deemed to be “at the market” offerings as defined in Rule 415 of the Securities Act. As of October 26, 2022, the Company has sold an aggregate of 2,653,011 shares of common stock with gross proceeds of $444,288,000 under the Sales Agreements, and EastGroup may offer and sell additional shares of its common stock with an aggregate gross sales price of up to $305,712,000 through the sales agents. During the nine months ended September 30, 2022, EastGroup issued and sold 391,906 shares of common stock under its continuous common equity offering program at an average price of $194.28 per share with gross proceeds to the Company of $76,141,000. The Company incurred offering-related costs of $952,000 during the nine months, resulting in net proceeds to the Company of $75,189,000. During the nine months ended September 30, 2022, the Company issued 1,868,809 shares of common stock in the acquisition of operating properties and development land in the gross amount of $303,756,000. The Company incurred issuance-related costs of $74,000. EastGroup’s other material cash requirements from known contractual and other obligations, including real estate property obligations, development and value-add obligations and tenant improvements as of December 31, 2021, did not materially change during the nine months ended September 30, 2022. The Company has no material off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. -47-