Welcome to Citi's 2024 Global Property CEO Conference. I'm Craig Mailman with Citi Research, and we're pleased to have with us EastGroup Properties and CEO Marshall Loeb. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to LiveQA and enter code GPC24 to submit any questions if you do not want to raise your hand. Marshall, I'm going to turn it over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons why an investor should buy your stock, and then we can head into Q&A.
Thank you, Craig. Good afternoon, everyone. With me is John Coleman, a number of you have met. John runs—we're divided into three regions, kind of geographically—but John runs our Eastern region, which really runs from here in South Florida up through the Carolinas to Charlotte, based in Atlanta. And I'll look to John for any hard questions that may come. But with that, and a little bit about EastGroup, we're a longstanding REIT. We're probably, you know, of the REITs here, probably been a REIT for 40 years, been an industrial REIT since the mid-1990s, really shifted into that. We're Shallow Bay in that our average building size is 95,000 sq ft, our average tenant size is about 35,000 sq ft, and we try to go to fast-growing markets. We say Sunbelt markets. We're California, Arizona, Nevada, Texas, Florida, and then up through the Carolinas.
So we try to be infill sites and in fast-growing cities. We think that's what—and we have, with our—as a REIT, we have the ability to buy or build and hold, and that's what leads to higher and higher rents. I'll tie into that of the—and why it's more different today than it's been the last several years—why to own our stock. The way we view it, we can get you this—if you're interested in industrial, which I would encourage you to come into—and then as you sort through the industrial, we can get you the same or better returns at less risk than a number of the other alternatives out there. And by that, I think our approach, Shallow Bay, today, if you look back, you know, different ways you can look at it. So many of our peers build big box. It's more on the edge of town.
A couple of stats. Since 2019, bigger box development, the increase in inventory has been in the low 30s, 32%. The increase in our type product has been a little bit under 6%. So we view our geography, we're more geographically diversified. Our top markets, about 10%. We're in a number of markets, so we have the geographic diversity. Our top 10 tenants are a little below at the end of fourth quarter, a little under 8% of our rents, which is the lowest in our sector. So we like the geographic diversity and in fast-growing markets, more tenant diversity. Our balance sheet is as strong or stronger than any, you know, we're right there with anyone in our, in the industrial sector, all has pretty good balance sheets, but our debt to EBITDA is below 4. We have a strong balance sheet.
As I mentioned, we've been a REIT for a long time. We have a proven public management team. So we're - it's not - I always think there's a little bit of just transition going from private to public. We're a longstanding up-and-down cycles public management team. So I think a lot of different ways we've tried to take risk out of it, out of the spectrum, but still get you the same amount of return. You know, what we build, where we build it, our balance sheet, our tenant diversity, all those things, I think we can get you the same returns but take less risk along the way.
Perfect. You guys have a little bit of a differentiated product type, right, with Shallow Bay, and it's helped you as new supplies come onto the market on the margin, right? You play in different markets where maybe not all supply is coming in, but even in Dallas, you guys are in different submarkets than where the supply is, different product type. Maybe talk a little bit about how that has allowed you to continue to have a similar level of starts the past couple of years despite, you know, growing consternation about oversupply that really picked up during COVID is now delivering.
Sure. And again, a good point, and I'll tie it back to my earlier answer. Just our product type, and again, it's smaller buildings, infill. We want to be near the consumer because we think we're not—not that anything's wrong with being near the port, it's just not kind of where we fit. We think that consumer is sticky and long-term. And because it's infill and there's been demand for big box, usually the bigger boxes will go, as Craig mentioned, to the—you know, we'll stick with Dallas, to the edge of town in Dallas. The land's more readily available, it's cheaper. Where we build, it's harder to get the zoning because usually you're nearer the neighborhoods, there's more zoning and regulations. You can put it into production quickly, and you can put capital out. So many of our peers, public and private, are just much larger.
So you can put the capital out. If you're that regional development partner and you're working for a promote, their promotes are greater on an 800,000 sq ft building than they are on a 130,000 sq ft multi-tenant building. So it's pushed so much of the supply. I've said before, I like where we fit on the playground. It's been less volatile, which I think as an investor helps you, and that's where our development starts. The other thing we do differently than a number of our peers, say an 800,000-sq-ft building, sticking with that, you may go build that on the edge of Dallas. And kind of the hope is you hope you're jumping in the food chain. It's really a market sample of one with your peers, and you hope your timing's generally fairly good. Maybe you're building more than one.
What we'll build, we'll build business parks, so it will be anywhere from, call it, 2-3 buildings up to our, you know, a large part for us is maybe 15-20 buildings. We've got a couple that are larger than that where we can, but we'll build them 1 or 2 buildings at a time. About 1/3 of our development leasing typically has been two existing customers outgrowing their space. So we're really feeding our development starts, what I like better about my job than some of my peers, I don't have to try to decide if an 800,000 sq ft building on Dallas, if the timing's good or bad.
It's really an inbound call from John or his counterparts saying, "In phase II or phase III, I'm running out of space, and I've got some of my existing tenants talking about expansion needs."
So we'll go think of it, I've used the analogy of a retail store where blue shirts are selling, and you just go put more blue shirts on the shelf. And the flip side of that, if they're not, if phase three's going slowly, we know the fix to that isn't to develop phase four. So we really feed our supply. Again, it's a little bit more risk-averse, but we're getting the same returns as our peers. But it's really, maybe if I said it in a much long-winded way, their model is a pushing demand out, and the market's going to absorb it. Ours is a pull. We're out of inventory right now in Tampa and some other markets.
We have tenants ready to expand, so we're going to meet that demand rather than assuming it's there. You're trying to, in ours too, you're estimating, "Where's it going to be in 10, 11 months when we deliver these buildings?" But I like that to me, it's really responding to inbound calls, and that's what's helped us. We've been low on our development starts the last few years versus our original guidance, and it's not, I'll take, you know, it's not that anything great that corporate's done other than the teams in the field keep calling saying, "Hey, I'm running low on inventory. We're 50% leased. I've got a lease out. I've got three proposals and maybe an LOI," and everything comes to us through a tenant rep broker. So they want to see that inventory coming because they're promising to their customer when it's going to be delivered.
It's a reactionary process. I'm hopeful we're targeting 300 million in starts, and I've tried to be pretty agnostic. If that drops to 200 million in starts or 100, that's really telling us or you as our investors, that's where the market is. If it goes to 400 million, then it's really hoping we have the land and the permits, which is part of, John would say his goal is to have that permit in hand to go as fast as the tenant demand really dictates.
Craig, the wave of new deliveries you mentioned, it's really been geared more towards the bulk space. As those deliveries have hit the market, and my office in Atlanta, so I'll use that as a benchmark. The vacancy in Atlanta for buildings over 500,000 sq ft is 10%. The vacancy for buildings 100,000 sq ft and smaller is 3.5%. I think that speaks to the product that was brought to market and maybe where the softness is now versus with our still having that lower vacancy is going to fuel the demand.
Marsh, you bring up a point about kind of what's embedded in guidance. You guys have a start guidance in there, but you also have kind of capital raises to support that to some extent, right? If you end up not hitting your start guidance, you probably throttle back the equity a bit too. It's not from an earnings impact perspective, it's not like, "Oh, we disappoint on starts. Numbers have to come down." It typically sort of nets out.
Yeah. We'll certainly back off equity and, you know, unless—I agree—unless, you know, acquisitions come our way, which we found more in the last year on those. But we'll—and what I like about industrial compared to maybe some other product types, the lead time isn't as long as, say, not that people are building CBD office buildings and things like that, but bigger other scale, we can deliver in 10-11 months. And we've typically used our ATM or our forward ATM now to fund it, which is a low-cost way, and it's easy to really match fund. A typical building for us may be $15 million compared to what some of our peers or other sectors have to raise. So we'll—if starts go away, and we'll try to be disciplined on our acquisitions. If we come away unhappy with those, we've got internal growth still.
Our average rent increase on a GAAP basis has been north of 50% for 6 quarters now running, counting this quarter. So we've got internal growth, and we hope occupancy can hang in there to keep that. And we'll try to go where the market takes us, whether it starts for acquisitions or for a while in kind of the 2016- 2020, we were buying vacant buildings because we saw our own development leasing. It would be a brand new building and taking that developer out and getting good returns there. And then that window kind of closed with the industrial frenzy when we backed away from it. But it'll come back.
Maybe touching on your success on the acquisition front, talk a little about maybe some of the development land sites you've been able to secure and what those basis are relative to maybe where you would have been able to buy those 12 months ago and what that means for development yields. Then also how you guys are thinking about risk-adjusted return on buying stabilized assets at the levels that you've been able to find some opportunities recently.
Sure. I'll answer, and then John, you can talk. John, because John's picked up a couple of, I won't call it maybe stress, not distress, but stress land acquisitions that we picked up in the last handful of months. But on the acquisitions, it's really more. Look, we've always bid on acquisitions, and some of the brokers will say there's a, which we like, there's a global wall of capital that wants to own U.S. industrial. So given that, we said we're better off making it than outbidding that. But then with the capital markets, all of a sudden last year, we were noticing more inbound calls. We've always had relationships with the capital markets brokers and the ability to just say our equity, you know, implied caps in the mid-fours.
So if you use just the, we've bought about 6 buildings, call it in the last 9 months, $225 million, and painting with a broad brush, the average age of those is a year and a half old. So we've bought new buildings that they're in Las Vegas, Dallas, Nashville, some of those markets, I think have a higher growth profile than our portfolio average long-term. Not that ours is weak, I just think those are really strong markets. So a year and a half old, slightly below market rents, and on a GAAP basis, the cash won't be much lower, but we've averaged about a 6.5 yield on those.
So if you're issuing equity, and if our equity went away, we've been issuing equity, you know, at or above NAV, mid-fours, buying buildings, investing in new buildings in the mid-sixes, and they've all had. It's not portfolios because we'll get outbid on those. It's been a one-off story that someone needed a quick close. Our pitch is we're not, we may not be your best offer, but we can do typically 30 days due diligence, 5 days to close, 30 days from when you tell us we're at. We don't, you know, we'll start when the person, we don't wait till the purchase and sale agreement's signed. So we're a short, quick close, or as quick as anyone can be. And that wasn't a differentiating factor, you know, 2 years ago and forever back.
I don't think this window will stay open that long when interest rates come down. I think that window will close. But what we bought adds about $0.08. I like that given our size and what we're able to invest in, we've raised our growth profile, we've issued equity at or above NAV, and we've added about $0.08 on a run rate to our FFO rate. So it's accretive immediately, and then we have better growth down the road. And as long as we can issue equity at a disciplined pace, we'll do that. The other feature you may have seen in third quarter and could have done this, I put it on myself a little bit earlier, but added a forward feature to our ATM.
And really what drove that, of the 6 buildings we bought, we probably passed on another 4-6 buildings, I'd call it, where what I didn't want to do was if we got a yes on those or we were in the middle of bidding, all of a sudden our line of credit goes up. You know, we weren't there with our ATM at the time, and you don't want to, I didn't want to run up the line of credit, and then you have to issue equity. So we've added a forward feature so we can really kind of have on the shelf, if you can issue the equity at a price you're comfortable with, and we're seeing more visibility on acquisitions than we have in the last few years. And again, I think when interest rates move, we'll see a, I think, two things.
I think first we'll see the acquisition window close, and then in time, I think what we'll see is more business confidence pick up within our own tenant base and expansions pick up. Maybe not the pace they were in 2021 and early 2022, which is as strong as I think we've ever seen it, but I think it'll pick up from where it is today.
Related to the development sites, we've been successful on closing two sites, one in Tampa for three buildings, one in Atlanta for two buildings. That Tampa is really well located. It's very close to the intersection of I-4 and I-75 with direct interstate visibility and frontage. What was unique on both of these is the local developer was not able to get debt or equity positioned to put the sites into production. So they range from 24-36 months where these were under control, and those developers went through rezonings, annexation, entitlement process. One was an assembly of 12 different parcels and really took it to a point where we could step in, and these sites were basically development ready.
As far as pricing on your question, they were below market mainly because of the timing that they had put those under control or under contract 24-36 months ago. Then also we didn't have to close and carry those sites while we went through that due diligence process. So very nice to have them permit ready, basically put them into production, and that really also mitigates our risk related to coverage or other factors that could come up during that permitting process. So unique opportunity on both of those. We're very happy with the presence and look forward to putting them into production.
We have a question coming in. Just what are acquisition cap rates in Dallas and Las Vegas versus SoCal?
I think similar. I mean, I would think, you know, in Dallas and Las Vegas, we've been, again, I don't want to violate a confidentiality. We haven't bought a lot. We've bought 2 or 3, and we've bought 6 in total. But we've been in Las Vegas, we've bought a couple there, and I'm doing it from memory. I think we were mid-fives, maybe cash six, kind of on a GAAP on new buildings there, a broad brush. Dallas was, it had really been marketed by the brokerage group. And again, when I say we're capital, we've seen usually there's an initial bidding round, a second bidding round, and then a buyer interview. In all that process, you're bidding against yourself. What's been unusual is sometimes buyers will drop out. The sellers start, the brokers will narrow the pool, and because of capital, we've seen people drop out of that.
Southern California, we've, I think it's pretty similar to that. They've certainly come up. I think what gets tricky about Southern California right now, we were looking at something fairly recently. We probably would have been outbid, but when we, because we'll look at going in cash cap rate, what's the mark to, what's the gap cap rate, because that's what we'll end up, you know, the public company reporting, and then what's the mark to market. And it was trickier getting a handle on mark to market in LA, and because as we looked at it, it was just a wide range from the brokers.
It feels like a very fluid market right now of maybe such a run-up in rents and now with things pulling back a little bit because we'll, yeah, I won't walk you through the entire process, but it was then we'd go to our auditors and say, "Here's where we feel comfortable, where mark to market is." And that was, we started going through, it was a wide range, which is Class A, what's Class B, what was TI and things like that. So it, but it was higher cap rates for sure. L.A. was our lowest cap rate market within our portfolio at the peak, and it feels like it's for the moment trading more similar, at least on cap rates, to Dallas or Atlanta, I think. But there's probably more variation. It's harder to peg market rents in L.A. than it's been in a couple of years too.
Any questions from the audience?
No? Okay.
Thanks for coming to the last meeting of the day. For sure, y'all, you know, we talked about bringing cocktails in here just to start everybody early, but I appreciate your time, so.
Oh, Chris, go ahead.
You talk about costs of doing the forward versus the compensation that's kind of pretty much like if there's a cost.
Yeah. Yeah, and I'll get the equity cost, and this is where I've had it explained to me, but I'll throw it a little bit, is the issuance price for both on our ATM is a 1% fee. And then there's the longer you don't take it down, it does cover the dividend, which kind of chips away at what that issuance price is. So I think when you do issue it, you know, you're better off taking it down fairly quickly, and then there's a carry on it and some things like that. But it's still less, you know, when we've talked to our Citi bankers and things like that, you know, you can kind of move from an ATM at 1% and maybe a plus or minus dividend when you, how fast you pull it down to a bulk transaction, which will be a little bit higher fees.
And again, to an overnight, you know, the more capital you raise, if it makes sense, the bigger the cost to us is. So that's why we like the ATM. And again, we didn't have the visibility on the acquisitions. When we're doing development, the traditional ATM really worked well, and when the acquisitions started to come our way, that's what really pushed us into the forward a little bit. But yeah, there's some nuances to it in terms of offset with the dividend and the carry, but generally both are for us. What we have with our group is a 1% fee on the ATM, whether it's traditional ATM, meaning you get the money in a couple of days, or forward ATM, which means we notify them a couple of days in advance of when we want the funds.
Kind of a follow-up question on that though, Marshall, and maybe this is a unique time and having the forward in place, just another, you know, arrow in the quiver. But where you guys are issuing capital, at least on a going-in basis, maybe not a stabilized cost of capital, but is in the fours. You could arguably put it in an interest-bearing account these days north of a five. And so there's really, if anything, a positive spread of sitting on cash that you may need for an acquisition that may or may not happen, and the cash is fungible, you can put it to development. So rather than pay maybe a marginally more expensive fee, why not just pre-fund some stuff you think you're going to have and park it at an accretive cost or accretive income to where your cost is?
You know, you're a good point and you're right. I guess the two answers to that would be, you know, it's, it would, since we don't know exactly when we're going to take it down, it's probably a money market 5, not a CD 5. So that 5 isn't, the equity's out, and that 5, if interest rates come down, I don't think they're going to, nobody's saying they're going to come down rapidly, but you could lose that. And then maybe where we started, I think, and I'm not picking on any of our peers so much, but you know, if you, we don't have, where we've done joint ventures, it's usually short-term. It's a landowner that we're going to take out on stabilization. We've tried to have a very simple balance sheet.
Look, I think if you want to invest in EastGroup, it's not a fund, you know, we're not looking for a promote. We're nothing against those things, but it's a pretty simple, straightforward model. Usually when analysts come into our sector, we'll say you really should start with EastGroup and work your way to the others because we're the easiest model to build and things like that. So I think keeping our balance sheet, you know, we've looked at converts have been, and I think to us, if I can say on the arrow in your quiver, learn about the forwards, learn about the converts, do all those things.
And there may be a time and place we execute on those, but if we can shy away and keep our model simple because there's always, my fear is there's always the one intended consequence that we are thinking about when it goes into it. Kind of like when we change comp plans, it seems like we get the intended consequence and then 10, I hadn't anticipated. So there's maybe that, and then it's just I like keep, you know, look, I think you buy EastGroup stock to be an industrial Sunbelt and Shallow Bay industrial investor. Not so much, look, if you want to earn more money on cash, you don't need to pay John Coleman and I to do that, so go invest it on your own.
Maybe there's a little bit of just keeping it that way, but we like the arrow in our quiver because acquisition funding is so, you know, lumpy, I guess. There's probably a better word out there than that, that the forward seemed to fit it. We'll go back to the ATM, and we can do both at the same time. We'll go back to the ATM probably more traditionally when, you know, when the interest rates come back down and acquisition window closes.
Just looking at your kind of the internal growth piece of it that is a very nice complement to the development program, you know, you guys joked about it last night with the err on the side of conservatism, right, which is good, especially in more volatile times. But the initial guidance of 6% is kind of the same as last year's guidance, and I think close to 2022's guidance. In both of those years, you ended up north of 8%, closer to 9% in 2022. Now we're in a different environment, but you have a fair amount of bad debt layered in, and you know, you look at the initial range, nothing was really identified. So maybe tell us one, are you still trending there with bad debt not really being an issue kind of most of the way through the first quarter?
And two, what can get you to the high end of that range or closer to 2023 growth? Is it a stretch given kind of the macro or again, just a level of conservatism?
Yeah, no, a good, fair question. I look on the bad debt, we budgeted for a little bit higher last year. We were about $1.5 million. This year we're $2 million. Just thinking at some point, and I can't say, you know, it was no specific tenants, anything like that, so much as you raise interest rates, what, 5, 6 times, eventually somebody in our portfolio with 1,400+ tenants is going to feel the sting of that. And it doesn't take many, it's usually not so much that they're behind on cash rents, but the straight-line rent write-off that can bite us fairly quickly. But to, you know, 2 months into the year, bad debt has trended like last year.
We do the budget in January, so we're a little ahead of where we thought. January was about in line and it should be because we did the budget then, or where it's not so much a market as we missed the budget type thing. If you beat in January, and February's a little bit ahead. The other factor, 2022 and 2023, we're happy where they turned out, but we had record kind of, as I started, we've been in business 40 years, and you said, what are your two best years for occupancy? They were 2022 and 2023 at 98%. So, and we've been, and thankfully wrong, but projecting a little bit, not that things would get bad, but reversion towards the mean. So our occupancy is guided to 97%. We're trending above that today. If you said, how do we beat the six?
It's maybe occupancy. We may not have to get to 98%, but we're somewhere between 97% and 98%, and maybe it's some bad debt that we were, you know, again, this is our guidance, and I hope we're conservative, and we have been in the past, but it's just been the market strength. Having done this maybe for John and I more years than we probably, as young as we are, want to add up, you know, the market's been better the last few years than we, than it's been at any point in our career. So you hate to budget to that. Look, and I hope we're, I hope again, I hope we're low, and we feel good about where re-leasing spreads are trending and things like that. So that all feels good, and we'll try to hang on to occupancy.
The other thing, we do see our development leasing slowing. I think if you said, what do you see your tenants doing? I think our retention rate was 79% last year. Typically, if you're building a model, I'd tell you 70%-75%. When it goes up like that, it was during COVID and the Great Financial Crisis. I think a lot of our tenants, if I'm an optimist or maybe what I'd call it today, I think people are taking a wait-and-see approach on expansions, and that fills up our developments. So where we do have vacancy, I think for us, we've added; before it was backfilling pretty quickly, it could take a little bit longer to backfill, but with our product type, there's not much, there's not much slack in the system, whereas John mentioned Atlanta, 10%-3.5% vacancy.
When business confidence improves, I think the slack will come out of the system on our product type much faster. And so we'll be able to push rents and start developments fairly quickly and hopefully get some pre-leases. I think there's not much, when people do come back to the store, there's not much inventory on the shelves for our product type.
Can you maybe put a little more context around your comment that development leasing is slowing? Is that recently or is that the last 12 months that that comment kind of refers to?
I'd say, well, not recent, but the last 6-8. It's picked up, activity's picked up this year. John, you want to, you're in it day to day, but.
Sure, I'd say the last 6-8 months, and it was really the prospects and tenants were in a wait-and-see type of attitude. If they could delay making a decision, they would delay making a decision because there was just so much uncertainty what the Fed was going to do with interest rates, how it was going to look by the end of the year. So delays were the preferred approach, but, and then through the end of the year that continued. But after the announcements in the fourth quarter and the projected drops in interest rates, we did see a renewed interest level of activity in the first quarter after the first of the year.
Okay, so incrementally things, I just wanted to clarify that wasn't since the call that things have slowed.
Yeah, no, I don't want to panic anyone. It's just it went from a frenzy pace to, you know, to a slower. And look, I'm glad our people are being, you know, the other couple of things. I think we, and John's gotten some big nice leasing done this year to take some slack. Our development leasing, what we'll deliver this year, it's more back half of the year, and we're at about 60% or 60% leased on it. So it's moving along. We just have work to do. It's just not at the pace it was. And I think people, whether it's, as John mentioned, interest rates, the Middle East, Ukraine, are being patient. And I think when they do, I'm hopeful there's pent-up demand for expansions and that that's when confidence picks up. That's when I've thought we'll have more development leasing.
Then the flip of that, I think we'll get outbid again on acquisitions. I think it's really just trying to figure out what window the market's letting us play in at any different time.
You had mentioned on the call nearshoring, onshoring, you're seeing some actual EV-related leases and things. I mean, is it, it feel like that tail is happening quicker than you expected or is it kind of episodic in terms of some one-off anecdotes here and there?
I think for us, it's really what I liked, and earlier means we compared it to when e-commerce came along. So what we like is our traditional tenants, the construction, train, air conditioning, the carpet supply, the pool supply person who's, you know, servicing that part of Atlanta, they're all still there. And then all of a sudden we had more e-commerce tenants. So it was kind of a new, and the same with kind of green energy, onshoring, nearshoring. We have, we don't get the manufacturer, but we have Tesla suppliers in San Antonio and Austin. There's an article, I think it was, it was Cushman & Wakefield calling the Battery Belt, and it talked about all the green energy battery plants really in the Carolinas and into Georgia and kind of the billions of dollars.
I think, you know, at least what you, what we, and this is more what I've read than what we've seen, it feels like, you know, what is that demand for electric vehicles that sales are stalling out, people are pulling back. I think it was one of the chip plants in Texas. Maybe they built, maybe it was Samsung built phase I, put phase II on hold. So I think it will ebb and flow, but I don't think it's going away. And we've seen, you know, we've been in El Paso 20+ years. The best three years in that market have been the last three. We're in the southern edge of San Diego where the city's pushed industrial, but you're also next to Tijuana. And so that's been a very strong market.
Phoenix, we had, you know, thanks to our team there, had about 100% releasing spreads there last year on that portfolio altogether. So those markets, I think it'll be a kind of like e-commerce in terms of retail capture, just a slow, steady build with China plus one manufacturing. It's a long-term decision, and I think over time we'll just pick up one plant and another, and that'll be at the margins, help our portfolio. We'll see more and more demand in those markets.
Perfect. Thank you guys so much.
Thank you.
Everyone go enjoy some cocktails and get some dinner. We'll see you tomorrow.
Thank y'all.
Thank you.
Thank you.