| EASTGROUP PROPERTIES INC ITEM 1A RISK FACTORS In addition to the other information contained or incorporated by reference in this document, readers should carefully consider the following risk factors |
| Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on the Companyapstas financial condition and the performance of its business |
| The Company refers to itself as "e we "e or "e our "e in the following risk factors |
| Real Estate Industry Risks We face risks associated with local real estate conditions in areas where we own properties |
| We may be affected adversely by general economic conditions and local real estate conditions |
| For example, an oversupply of industrial properties in a local area or a decline in the attractiveness of our properties to tenants would have a negative effect on us |
| Other factors that may affect general economic conditions or local real estate conditions include: o population and demographic trends; o employment and personal income trends; o income tax laws; o changes in interest rates and availability and costs of financing; o increased operating costs, including insurance premiums, utilities and real estate taxes, due to inflation and other factors which may not necessarily be offset by increased rents; and o construction costs |
| We may be unable to compete with our larger competitors and other alternatives available to tenants or potential tenants of our properties |
| The real estate business is highly competitive |
| We compete for interests in properties with other real estate investors and purchasers, many of whom have greater financial resources, revenues, and geographical diversity than we have |
| Furthermore, we compete for tenants with other property owners |
| All of our industrial properties are subject to significant local competition |
| We also compete with a wide variety of institutions and other investors for capital funds necessary to support our investment activities and asset growth |
| In addition, our portfolio of industrial properties faces competition from other properties within each submarket where they are located |
| We are subject to significant regulation that inhibits our activities |
| Local zoning and use laws, environmental statutes and other governmental requirements restrict our expansion, rehabilitation and reconstruction activities |
| These regulations may prevent us from taking advantage of economic opportunities |
| Legislation such as the Americans with Disabilities Act may require us to modify our properties and noncompliance could result in the imposition of fines or an award of damages to private litigants |
| Future legislation may impose additional requirements |
| We cannot predict what requirements may be enacted or what changes may be implemented to existing legislation |
| Risks Associated with Our Properties We may be unable to renew leases or relet space as leases expire |
| We may not be able to relet the property on similar terms, if we are able to relet the property at all |
| The terms of renewal or re-lease (including the cost of required renovations and/or concessions to tenants) may be less favorable to us than the prior lease |
| If we are unable to relet all or a substantial portion of our properties, or if the rental rates upon such reletting are significantly lower than expected rates, our cash generated before debt repayments and capital expenditures, and our ability to make expected distributions to stockholders, may be adversely affected |
| We have been and may continue to be affected negatively by tenant bankruptcies and leasing delays |
| Similarly, a general decline in the economy may result in a decline in the demand for space at our industrial properties |
| As a result, our tenants may delay lease commencement, fail to make rental payments when due, or declare bankruptcy |
| Any such event could result in the termination of that tenantapstas lease and losses to us, and distributions to investors may decrease |
| We receive a substantial portion of our income as rents under long-term leases |
| If tenants are unable to comply with the terms of their leases because of rising costs or falling sales, we may deem it advisable to modify lease terms to allow tenants to pay a lower rent or a smaller share of taxes, insurance and other operating costs |
| If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to the tenant |
| We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises |
| If a tenant becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the tenant |
| A tenantapstas default on its obligations to us could adversely affect our financial condition and the cash we have available for distribution |
| Our investment in property development may be more costly than we anticipate |
| We intend to continue to develop properties where market conditions warrant such investment |
| Once made, our investments may not produce results in accordance with our expectations |
| Risks associated with our current and future development and construction activities include: o the unavailabity of favorable financing alternatives; o construction costs exceeding original estimates due to rising interest rates and increases in the costs of materials and labor; o construction and lease-up delays resulting in increased debt service, fixed expenses and construction costs; o expenditure of funds and devotion of managementapstas time to projects that we do not complete; o occupancy rates and rents at newly completed properties may fluctuate depending on a number of factors, including market and economic conditions, resulting in lower than projected rental rates and a corresponding lower return on our investment; and o complications (including building moratoriums and anti-growth legislation) in obtaining necessary zoning, occupancy and other governmental permits |
| We face risks associated with property acquisitions |
| Our acquisition activities and their success are subject to the following risks: o when we are able to locate a desired property, competition from other real estate investors may significantly increase the purchase price; o acquired properties may fail to perform as expected; o the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates; o acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures; o we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and as a result, our results of operations and financial condition could be adversely affected; and o we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities |
| As a result, if a claim were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow |
| Coverage under our existing insurance policies may be inadequate to cover losses |
| We generally maintain insurance policies related to our business, including casualty, general liability and other policies, covering our business operations, employees and assets |
| However, we would be required to bear all losses that are not adequately covered by insurance |
| In addition, there are certain losses that are not generally insured because it is not economically feasible to insure against them, including losses due to riots or acts of war |
| If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, then we could lose the capital we invested in the properties, as well as the anticipated future revenue from the properties and, in the case of debt, which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties |
| Moreover, as a number of our properties are located in California, an area known for seismic activity, we may incur material losses in the future in excess of insurance proceeds from our earthquake insurance |
| Although we believe that our insurance programs are adequate, we cannot assure you that we will not incur losses in excess of our insurance coverage, or that we will be able to obtain insurance in the future at acceptable levels and reasonable costs |
| We face risks due to lack of geographic diversity |
| Substantially all of our properties are located in the Sunbelt region of the United States with an emphasis in the states of California, Florida, Texas and Arizona |
| A downturn in general economic conditions and local real estate conditions in these geographic regions, as a result of oversupply of or reduced demand for industrial properties, local business climate, business layoffs and changing demographics, would have a particularly strong adverse effect on us |
| We face risks due to the illiquidity of real estate which may limit our ability to vary our portfolio |
| Real estate investments are relatively illiquid |
| Our ability to vary our portfolio in response to changes in economic and other conditions will therefore be limited |
| If we must sell an investment, we cannot ensure that we will be able to dispose of the investment at terms favorable to the Company |
| We face possible environmental liabilities |
| Current and former real estate owners and operators may be required by law to investigate and clean up hazardous substances released at the properties they own or operate |
| They may also be liable to the government or to third parties for substantial property or natural resource damage, investigation costs and cleanup costs |
| In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs the government incurs in connection with the contamination |
| Contamination may affect adversely the ownerapstas ability to use, sell or lease real estate or to borrow using the real estate as collateral |
| We have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of environmental conditions or violations with respect to the properties we currently or formerly owned |
| Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed of, released from, or present at, the property |
| A conveyance of the property, therefore, does not relieve the owner or operator from liability |
| Although Phase I environmental site assessments ( "e ESAs "e ) have been conducted at our properties to identify potential sources of contamination at the properties, such ESAs do not reveal all environmental liabilities or compliance concerns that could arise from the properties |
| Moreover, material environmental liabilities or compliance concerns may exist, of which we are currently unaware, that in the future may have a material adverse effect on our business, assets or results of operations |
| Financing Risks We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk |
| We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest |
| Therefore, we will likely need to refinance at least a portion of our outstanding debt as it matures |
| There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt |
| We face risks related to "e balloon payments "e |
| Certain of our mortgages will have significant outstanding principal balances on their maturity dates, commonly known as "e balloon payments "e |
| There can be no assurance whether we will be able to refinance such balloon payments on the maturity of the loans, which may force disposition of properties on disadvantageous terms or require replacement with debt with higher interest rates, either of which would have an adverse impact on our financial performance and ability to pay dividends to investors |
| In order to qualify as a REIT, we are required each year to distribute to our stockholders at least 90prca of our REIT taxable income, and we are subject to tax on our income to the extent it is not distributed |
| Because of this distribution requirement, we may not be able to fund all future capital needs from cash retained from operations |
| As a result, to fund capital needs, we rely on third-party sources of capital, which we may not be able to obtain on favorable terms, if at all |
| Our access to third-party sources of capital depends upon a number of factors, including (i) general market conditions; (ii) the marketapstas perception of our growth potential; (iii) our current and potential future earnings and cash distributions; and (iv) the market price of our capital stock |
| Additional debt financing may substantially increase our debt-to-total capitalization ratio |
| Additional equity financing may dilute the holdings of our current stockholders |
| Fluctuations in interest rates may adversely affect our operations and value of our stock |
| As of December 31, 2005, we had approximately dlra117 million of variable interest rate debt |
| As of December 31, 2005, the weighted average interest rate on our variable rate debt was 5dtta16prca |
| We may also incur indebtedness in the future that bears interest at a variable rate or we may be required to refinance our existing debt at higher rates |
| Accordingly, increases in interest rates could adversely affect our financial condition, our ability to pay expected distributions to stockholders and the value of our stock |
| A lack of any limitation on our debt could result in our becoming more highly leveraged |
| Our governing documents do not limit the amount of indebtedness we may incur |
| Accordingly, our board of directors may incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT We might become more highly leveraged as a result, and our financial condition and cash available for distribution to stockholders might be negatively affected and the risk of default on our indebtedness could increase |
| Other Risks The market value of our common stock could decrease based on our performance and market perception and conditions |
| The market value of our common stock may be based primarily upon the marketapstas perception of our growth potential and current and future cash dividends, and may be secondarily based upon the real estate market value of our underlying assets |
| The market price of our common stock is influenced by the dividend on our common stock relative to market interest rates |
| Rising interest rates may lead potential buyers of our common stock to expect a higher dividend rate, which would adversely affect the market price of our common stock |
| In addition, rising interest rates would result in increased expense, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends |
| We may fail to qualify as a REIT If we fail to qualify as a REIT, we will not be allowed to deduct distributions to stockholders in computing our taxable income and will be subject to federal income tax, including any applicable alternative minimum tax, at regular corporate rates |
| In addition, we may be barred from qualification as a REIT for the four years following disqualification |
| The additional tax incurred at regular corporate rates would significantly reduce the cash flow available for distribution to stockholders and for debt service |
| Furthermore, we would no longer be required by the Internal Revenue Code to make any distributions to our stockholders as a condition of REIT qualification |
| Any distributions to stockholders would be taxable as ordinary income to the extent of our current and accumulated earnings and profits, although such dividend distributions would be subject to a top federal tax rate of 15prca through 2008 |
| Corporate distributees, however, may be eligible for the dividends received deduction on the distributions, subject to limitations under the Internal Revenue Code |
| To qualify as a REIT, we must comply with certain highly technical and complex requirements |
| We cannot be certain we have complied with these requirements because there are few judicial and administrative interpretations of these provisions |
| In addition, facts and circumstances that may be beyond our control may affect our ability to qualify as a REIT We cannot assure you that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to our qualification as a REIT or with respect to the federal income tax consequences of qualification |
| We cannot assure you that we will remain qualified as a REIT There is a risk of changes in the tax law applicable to real estate investment trusts |
| Since the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted |
| Any of such legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors |
| Our Charter contains provisions that may adversely affect the value of shareholders &apos stock |
| Our charter generally limits any holder from acquiring more than 9dtta8prca (in value or in number, whichever is more restrictive) of our outstanding equity stock (defined as all of our classes of capital stock, except our excess stock) |
| The ownership limit may limit the opportunity for stockholders to receive a premium for their shares of common stock that might otherwise exist if an investor were attempting to assemble a block of shares in excess of 9dtta8prca of the outstanding shares of equity stock or otherwise effect a change in control |
| Also, the request of the holders of a majority or more of our common stock is necessary for stockholders to call a special meeting |
| We also require advance notice by stockholders for the nomination of directors or proposal of business to be considered at a meeting of stockholders |
| We have adopted a stockholder rights plan that may make a change in control difficult |
| Under the terms of the plan, we declared a dividend of rights on our common stock and Series B preferred stock |
| The rights issued under the plan will be triggered, with certain exceptions, if and when any person or group acquires, or commences a tender offer to acquire, 15prca or more of our shares, our Board of Directors determines that a substantial stockholderapstas ownership may be adverse to the interests of our other stockholders or our qualification as a REIT, or other similar events |
| The plan could have the effect of deterring or preventing our acquisition, even if a majority of our stockholders were in favor of such acquisition, and could have the effect of making it more difficult for a person or group to gain control of us or to change existing management |
| We have change of control agreements with certain of our officers that may deter changes of control of the Company |
| We have entered into change of control agreements with certain of our officers providing for the payment of money to these officers upon the occurrence of our change of control as defined in these agreements |
| If, within a certain time period (as set in the officerapstas agreement) following a change of control, we terminate the officerapstas employment other than for cause, or if the officer elects to terminate his or her employment with us for reasons specified in the agreement, we will make a severance payment equal to the officerapstas average annual compensation times an amount specified in the officerapstas agreement, together with the officerapstas base salary and vacation pay that have accrued but are unpaid through the date of termination |
| These agreements may deter our change of control because of the increased cost for a third party to acquire control of us |
| Our Board of Directors may authorize and issue securities without stockholder approval |
| Under our Charter, the board has the power to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as the board of directors may determine |
| The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders &apos best interests |
| Maryland business statutes may limit the ability of a third party to acquire control of us |
| Maryland law provides protection for Maryland corporations against unsolicited takeovers by limiting, among other things, the duties of the directors in unsolicited takeover situations |
| The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders rights plan, (c) make a determination under the Maryland Business Combination Act or the Maryland Control Share Acquisition Act, or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition |
| Moreover, under Maryland law the act of a director of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director |
| Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law |
| The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including mergers, dispositions of 10 percent or more of its assets, certain issuances of shares of stock and other specified transactions, with an "e interested stockholder "e or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met |
| An interested stockholder is generally a person owning or controlling, directly or indirectly, 10 percent or more of the voting power of the outstanding stock of the Maryland corporation |
| The Maryland Control Share Acquisition Act provides that "e control shares "e of a corporation acquired in a "e control share acquisition "e shall have no voting rights except to the extent approved by a vote of two-thirds of the votes eligible to cast on the matter |
| "e Control Shares "e means shares of stock that, if aggregated with all other shares of stock previously acquired by the acquirer, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of the voting power: one-tenth or more but less than one- third, one-third or more but less than a majority or a majority or more of all voting power |
| A "e control share acquisition "e means the acquisition of control shares, subject to certain exceptions |
| If voting rights of control shares acquired in a control share acquisition are not approved at a stockholders &apos meeting, then subject to certain conditions and limitations, the issuer may redeem any or all of the control shares for fair value |
| If voting rights of such control shares are approved at a stockholders &apos meeting and the acquirer becomes entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights |