All right, we'll go ahead and get started. Introduce myself, I'm Bill Crow. I'm part of the real estate research team at Raymond James. I cover industrial, office, and lodging sectors. Fortunate enough to have covered EastGroup for 27 years or something like that. It's been a long time. And with us today, we obviously have the whole team. I'll introduce Marshall Loeb. I'll let him introduce the rest of the team members for you. And Marshall, then, if you could maybe go into an overview. I want to drill down into some of the supply/demand trends that we're seeing, but maybe an overview on what makes EastGroup, EastGroup.
Okay. Thank you. Good afternoon, and thank you, Bill. Thanks for agreeing to host. I knew you... I was curious. I knew you had covered EastGroup for a long time. I didn't realize we, you know, your career is on 27 years covering us, and you survived, so thank you. With me are Brent Wood, our CFO; Staci Tyler, our Chief Administrative and Chief Accounting Officer; Reid Dunbar, who runs our Central Region, which is mostly Texas, the major Texas markets, along with Tennessee, and we threw New Orleans in as well into that. So it's great to be here. I feel like I'm at the First Baptist Church of Manhattan, with everybody sitting in back. I feel like in the back rows, sitting more crowded than the front rows, but glad you're here, wherever you're sitting.
In terms of EastGroup, overall, maybe there's a two-part answer, if I may. I don't want to eat up all of Bill's time. Kind of longer term answer, I would say, and, and go to our website. If you click on our roadshow, our investor presentation, if you look, pending what your hold period is, if you go one year, three year, five year, 10, 15, 20 years, I think it's as far back, the lowest return we have in that is about 11%. So we feel like our strategy, or it has been, we've been through about every economic up leg, down leg, GFC over that time period. And if you said what we're doing isn't that much different than we did 20 years. It's evolved, but we are shallow bay, multi-tenant, industrial buildings in fast-growing markets.
Our footprint really runs, as people say, the Smile States, California, Las Vegas, Arizona, Texas, up through Atlanta, and up through Florida, and the Carolinas. So, as you look at that, what we like about our product, we are shallow bay, which is maybe another way of saying last mile. We're not the goods that come through the ports of L.A. and Long Beach and get to New York or Chicago. It is more delivery and parts and repair around North Atlanta, around South Jacksonville, Northeast Dallas, Austin. So we're really where people need, as the way they compete more and more with that last mile delivery. That's where we fit in, and we'll touch on that later. That's why there's so much less supply.
So overall, what we like about being in those growth market, our GDP, if you market weight it over five or 10 years, is roughly 70% faster than the U.S. average. So I think that makes our job easier. It's not a zero-sum game. There's tenants moving there. Our balance sheet, our leverage level is low. We're below, a little below 4x debt to EBITDA. Fixed charges, debt to market cap is probably around 18% today, pending stock price. We have no floating rate debt, and our debt that we do have is all fixed rate, thanks to this team here.
We'll build a product that if you go back, what we do with shallow bay, if you look back going all the way to 2006, and you'll see this in our roadshow, the availability has never been as great as the big box in any point in time, going back over that 18-year period. You can probably continue to go back, but that's where we kind of started our measure. So we like building. What we build is different than our peers'. Land's harder to come by, and then the way we develop it. So we try to take that risk out, whether it's being in fast-growing markets. We're geographically diversified across a number of markets. Our top 10 tenants account for a little bit less than 8% of our NOI, and that's about half our sector average.
Some of our peers have had, and Amazon's a great company, more Amazon exposure than our entire top 10 tenants that are in multiple locations. So along the way, what we try to do is take that risk away without reducing your return. When we build a park, the majority of our properties, ideally, are in a park setting, and we'll build as many buildings there as we can kind of squeeze in the park, and then buy the contiguous land, if we can. But we'll build it 1, 2, 3 buildings at a time, and as those lease up, we'll build the next building, where some of our peers will either build the entire park or build an 800,000 ft, 900,000- ft or greater building on the edge of town. We're a couple buildings, and we've used the retail analogy as blue sweaters.
As we sell blue sweaters, we'll add 1 or 2 more, and so we'll go as fast, and an awful lot of our leasing is existing tenants outgrowing their space, and we can move you from building 2 to building 6. And in the meantime, industrial rates, thankfully, have been rising the last several years. A little bit of an update, the last six quarters on a GAAP, so kind of net effective rents, our average rent increase over that period, we're in the 7th quarter of that, knock on wood, should be north of 50%. The last six have all been over 50%. Rental rate growth, this... two months into the quarter, we were at 70%, the release we put out last week.
I think that'll moderate somewhat by the time we get to the end of the quarter, but we've had this, thankfully, this great tailwind, whether it's population growth, e-commerce. You all have read about nearshoring, onshoring, and we run from San Diego through Tucson, Phoenix, El Paso, and benefiting from that into San Antonio and Austin and Dallas, kind of the green belt for energy, as they call it. It runs through the Carolinas to Georgia.
So I'm grateful for all the tailwinds we have, and if we can just be prudent about finding those opportunities and not go kind of that happy medium, too fast or too slow, and maintain a safe balance sheet, it's a pretty safe, stable model that over 20 years has produced at least an average of 11% return, and depending what your time frame is, a lot of cases, much better than that. So I've probably rambled enough, and I'll let you go.
You're not using my time. The objective here is to let you speak. I think that's a great answer, and I like the comparison and to others in the sector. So if we can think about that mindset going forward, I know there's a lot of concern right now about both supply and demand, and, you know, we've got a little bit skewed, or we're in some unusual circumstances the last few years. What are you seeing out there? You know, compare what we saw the last few years to what you're seeing today from a demand perspective. Let's start there.
Okay, I'll start, and then I may, Reid, if you're okay, I may pull you in. What we've seen is kind of coming out of COVID, we had, you know, unlike any time we've seen, just this frenzy for industrial space, which was great, and that's some of those embedded rent growth that we're still working through, the 50%-70% rent increases. It moderated a little, as you would imagine, when interest rates started going up, and now we're, you know, in our second year of that. Moderated, it went from great to good, but... And you'll see it in our release last week, we ended May, we're 97.7% leased, 97% occupied. So I'm an optimist, but what I like about that, if you kind of think, and in my mind, it's almost a three-legged stool, and that, we're full.
As interest rates went up, the other benefit of that is industrial starts went down. So starting in fourth quarter of 2022, starts went down nationally. Starts are about down probably 30% from where they were at the peak. So and it'll take a while for what we build, and so much of our competition is local, regional developers, and they don't have the balance sheet to carry the land. We bought a good about 6 of those type sites last year or so, where they had everything done and due diligence, it was time to close, and they couldn't close, so we were able to step in. Reid, was a couple of sites in Austin, Atlanta, Tampa, Denver, a number of sites like that. So with starts down and we're full, what if you'd say what we need, we don't need a...
With the tailwinds, I've always said, "We don't need a good economy. We just don't need a bad one." I'd love to have a little bit of an oomph of business confidence. Renewals have been running higher than historically average the last year, and my amateur read in that is that there's hopefully pent-up demand. When renewals have run higher as a percent, it was during COVID. And it usually works the way that, Brent and I say we need more space, we call you at corporate, you'll say, "Make do for a little bit," and then at some point, they finally relent. So I think we're hopefully in that make do period.
Before, I thought it's when interest rates come down, or maybe now it's post-election, or every headline seems to be bad, and every time a Fed governor speaks somewhere, our stock price drops $3, it feels like, over nothing internally related to us. So we just need a little bit of business confidence because there's no supply, and when it does come back, we've got the team, we've picked up the land sites, we've got the permits in hand, and we have the balance sheet. So I think we'll have a couple of year head start on our peers, which everyone will be able to push rents, but we'll be able to accommodate that pent-up demand. We just need... And it, it is leasing, and maybe that's where I'll turn it over to Reid. We feel a little better each month this year about the leasing environment.
Yeah. So from a demand perspective, I would say that Q4 was a slower period for us, especially as we came down off the highs of 2022. But incrementally, every quarter, we've seen an improvement. So Q1 was a little bit better than Q4, and Q2's been better than Q1. And I would say in the last 30-45 days, the team overall in the field seen definitely an uptick in prospects and demand, as well as if you heard us speak earlier in the year about tenant and their decision processes, that was getting lengthened out. Now it feels like tenants are stepping up and making decisions a little bit quicker, and see a little bit more need to take down space.
So we're, we're pleased where we sit now, and we, we have probably more prospects for space, where before maybe we had one prospect for a space, we're now seeing multiple prospects for one space. So that gives us the ability to either maintain or even push rents in what some people believe is a slower environment. But for our multi-tenant, smaller bay product, we feel pretty good, good about where demand stands today.
It's interesting because we've heard from others that maybe March was a little bit of a slower period. And of course, that was used in many cases to provide the commentary on the first quarter earnings calls, and things have actually improved since then. Is that fair?
Yeah. Again, we heard that here, too, which is saying it's like: Yeah, we didn't—March wasn't especially good or bad. It was... The problem with Reid, it was kind of late last year, where prospect activity felt lower, and then it's been a little better and a little better. And maybe if this is helpful, I mean, one analogy we've said, like, during the GFC, one of our guys said, you know, we were talking about getting lease space leased. Just like, "Look, I would offer more free rent if I just had someone to offer it to."... that no one was out looking for space at that point. The emails I get, or if we run through our development pipeline, as Reid said, we've got names and full building users, and activity and leases out, and letters of intent.
It's just getting them, I'll stick with retail, getting them to the cash register, getting people to have a little bit of a sense of urgency about it. And it feels like it's getting slowly better, and maybe if a couple of people, where we've got a lot hearing that we've got multiple prospects, 'cause when someone misses out on a space, all of our customers come to us through tenant rep brokers, then that word will spread pretty quickly, and that may also help. Where before people were in the run-up, people were afraid of missing out on space. Now it feels like, look, we'll evaluate it.
And the other comment, which makes sense, is we've raised rents over time, and we still see that upward pressure, is that it went from being a real estate director decision to a CFO decision, because the dollar commitment's gotten greater, so it takes longer for our tenants to commit to that space. So that part I get, and it makes sense. And, you know, the other side, where you hear about the industrial markets, that this is helpful, I would say, kind of 2020 to maybe mid-early part of 2023, you could buy any industrial REIT, and we were all doing well, thankfully. The supply that came out, and again, this I'll keep referencing our website.
We, we worked with one of the research firms, and the square footage that was delivered in buildings that were 140,000 ft, so not that great, and above, over the last five years grew by 32%. Our average building's 95,000 ft. Our average tenant's 35,000 ft, and buildings 140,000 ft and below, the square footage growth was under 6%. So it's... And it makes sense if you think it's easier to go south of Dallas, Inland Empire, east, south of Atlanta, and find a big site of land that you can get more zoned. There's less neighbors to protest your permitting change, get it zoned and titled, and so many of our peers are so much larger on the institutional scale.
They can put so much more capital to work on an 800,000 ft building than our 120,000 or maybe 220,000 , you know, $114 million building. We just need to do it in scale to kind of keep moving it. And we've. That said, we've always had earnings growth and NAV creation as goals, but not. We've never said, "Look, we can grow. That's easy. You just outbid everybody else." But we'd rather create. We need to create that value over time. So we've never had growth for growth's sake as a goal, or we've never had capital that we needed to place, maybe as some of the funds that have raised, and they have to go put it to work now.
Marshall, REIT investors are selfish, and they want not only that 50% or 70%, I should say, greedy, 50% or 70% mark-to-market on lease rollover, but they want to know that market rents continue to grind higher. And I, I'd like your perspective on what you're seeing with market rents broadly in the U.S., in your markets, I should say, and then maybe Southern California, dive in there a little bit.
Yeah. Okay. We would say, as, as I mentioned, we had that great spike in rents, and then there's probably better. This is not to scale, as I draw in the air with my finger, especially for those of you all listening on the webcast. But we had pretty, you know, vertical rent growth there coming out of COVID. It's still growing, absent, and it's, it's interesting and inputs welcome. I'd say our, two of our best historic market- historic markets have been L.A. and San Francisco, where they've really been two of our tougher markets the last year or two, and if you read any brokerage group's report, it would... Absent those two markets, it would say absorption was here, deliveries were here, you know, a kind of big box included, and the good news is construction stopped, so it's going to normalize.
If you read those two markets, there's no, it's not the new deliveries, it's absorption's been negative. So that has us being... We like the California markets, we like diversity, but those have behaved differently than they have historically the last couple of years, and I'm not quite sure I can explain why, but we've watched those. And as I was drawing, our rent growth had this great run up. It's still growing, absent those two markets, but we've still got embedded growth because it had such a great run. And then I think when you take our markets are maybe 4% vacant, we're 98% leased, and you take new supply out, because it takes 10 months, and that's once you break ground. But if you go through the permitting and the zoning, a lot of cases, that's mostly, that's probably two years, depending which area.
It will take a while for new inventory to catch up. So I'm expecting or hoping there'll be this next squeeze on rents because of when people are ready to move again, and I don't see e-commerce going away or all the different drivers, nearshoring in our markets, or just population growth, people moving to Texas and Florida. So I think we had a rent kind of squeeze. It's still going forward, absent two markets, albeit at a slower rate, and then I think it's going to get another squeeze for a few years. And that's really what will pull our development starts forward, too, because there's just that lack of available space.
So we've gone up, and just to draw that same chart, you've gone up, and then now we're at a much slower-
Still going, yeah.
almost, almost horizontal line.
Kind of single digit, double digit to single digit.
Okay.
Yeah.
You anticipate potential acceleration next year, you think, or later this year?
Yeah, I think it's. Look, I've been waiting for an interest rate, like all of us. You know, it's gonna come in March. It's going to be, you know, it's 90 days. I just don't know 90 days from when. No one's told us, but I don't know if it's after the election. I, I think I'd like it to, you know, late this year to end of 2025, is when we'll feel it. Whenever people feel a little better about things or when corporate, you know, finally relents and says, "We'll let you have more space." And we're seeing that on the margins, I think, today, it's, and maybe when people miss out on some space, when does it, you know, when does it get better? When does everybody, you know, the pendulum always swings too far one way or the other. When does it start moving back?
That's where, again, look, I would say, from a high and a low, our earnings have gone up. Maybe one other reason to own us, our fundamentals are really solid. 98% leased, raising rents 50%, lack of new supply. We're in our 7th quarter of shrinking supply, and I don't see that turning, given capital markets, anytime soon. And then I'll layer in on that, and we're at our lowest stock multiple that we've been in about the last five years. So I think that's what it felt like. Sentiment swung when some of our peers cut guidance. We, you know, felt like we got, we maintained our guidance, but we got caught up in the wake of just... It felt like the world was saying industrial's been so great.
We would go to these conferences the last few years, and it's, "When does it finally drop?" And it's hard, just as hard for us to predict it. We would just say, "You know, watch our occupancy and watch our rent spreads and our development pipeline, how that's leasing," and it's still moving forward. It's just a matter of how fast is it going. Our bad debt, how about Staci and Brent, still feels manageable. Our term fees are low, which is kind of another red flag or maybe yellow flag. Go on.
Sure. So I'll just speak to our tenant credit, and that is really looking good. In the first quarter, we had a couple tenants that surfaced that we recorded bad debt on. And, you know, we were wondering with all, you know, the news, and we all just keep waiting for the ball to drop. You know, is this the beginning of a larger problem? And thus far, this quarter, we have not seen any indication of that thus far. So, we have about 1,400 tenants in 1,600 spaces, and we keep a very close eye on timing of rent collections and our AR aging, and really keep a good pulse on that. And, things are looking good thus far, and we are hopeful that that will continue.
It's just as Marshall alluded to, when will interest rates be cut, and what type of impact will that have on our tenants over time? Time will tell, but thus far, we are continuing to see strength in our tenants and their ability to pay rent.
Maybe you could talk about the... If you could dissect the tenant base a little bit, where's the strongest demand coming from? You know, how is the housing renovation? Or just-
Yeah.
Where are you seeing strength and weakness?
It's pretty broad-based, thankfully, and Reid, maybe Chad and Brent that, you know, food and beverage, you know, we get questions about 3PLs, and we haven't seen them pull back maybe the way the big box has. That's been still pretty solid for us in terms of no lease buyouts, sublease, anything like that. We've picked up more green energy users, so that, it's kind of as that's bubbled up. And then I think the other thing about our markets, we'll have with the manufacturing, we've done very well in those. So last year, our average rent growth was 50% as a company, rounding. And if you look at San Diego, Arizona as a state, and then El Paso, those averaged 100%. So really strong in those markets, and friendshoring is the phrase I've heard this week.
We think China plus one manufacturing is a positive trend. I know that they just had the election in Mexico, and there's some questions, but I do think there's that is a long-term tailwind we can hopefully benefit on part of our portfolio. Not all. It won't affect Charlotte or Florida. And then, you know, of late, it's just in China, as an aside, tire guys. I'm not sure I can explain that, but when we looked down our prospect list, we had several tire distributors. So it's a broad mix of, you know, if you're out and you want to take a tour of an EastGroup building, let us know. If there's a million ways to make a living out there, and we like infill, functional, inexpensive, compared to other alternatives, there's a million ways to use our buildings. Medical, pharmaceutical, fulfillment.
If you're on a recurring prescription, we've got several in Florida and Arizona seem to be where they locate, where Blue Cross or UnitedHealthcare will push you to order online. It's cheaper than go to Duane Reade, CVS, Walgreens. And so we've got some of that use in the back of our warehouse, where it is pharmaceutical fulfillment. One, you know, in Vegas, where they'll deliver to your dialysis center. One delivers to nursing homes. So it's a little bit of everything, which I think is good. And I—when I think of our tenant base, I'll, and as Brent has said, you know, some of our old line tenants, when you first started the pool supply, HVAC, home building, we have the Budweiser distributor in Jacksonville.
All those tenants are still there, and every few years, it seems like I'll get a call from the field, and it's e-commerce, and then it's green energy, and then it's this or that. There's some new use. Those old tenants aren't going away, but there's a new use. It's Home Depot, Best Buy, Lowe's, carrying their white goods on a market level rather than a store-level inventory. And with kind of their thinking, as Andre said, you're not leaving a Lowe's with a refrigerator, washer, dryer, but if you have an EastGroup building that's an infill location, we can get it to your home this afternoon. So come to the store, pick it out, and rather than have that housed in the back of the store, they started carrying more and more of those white goods with us.
That was a different use in the last 2-4 years.
Let's look at the balance sheet for a second. I'd argue that you're underlevered, but I would also recognize that the times that companies need capital, it's the most expensive, so you get them when you can get it more often than not. But, kind of give us your philosophy on raising capital, using equity to drive your growth.
Sure.
Sure, yeah. I'll jump in, Bill. Thanks. You know, I've heard the phrase underlevered. Even our board said, "Hey, you know, how low do we want to go with our leverage in it?" We haven't had specific goals about trying to get low. It's just for us, for the last pretty much 24 months running now, our most attractively priced source of capital has been our equity. So we've been in a position, thankfully, to very accretively issue that equity and put it to work. And so by doing that, we have significantly delevered the balance sheet, where we've gone under 4 on our debt EBITDA, our fixed charge interest ratio, we've gone north of 11 times, which is really high. And so, it's really been by default that we've delevered as much as we have.
We've been able to issue equity previously, say, in the mid-4, that with some price give back, as Marsh alluded to, we were now probably at a 5%, 5.1% or so cost of equity. But when you compare that to long-term debt, be it private placement or 10-year type term, you're still looking for us at our rating at somewhere around a 6%. So it still is an attractive source. We certainly have cleared the path for a lot of runway to where, when rates, at whatever point they do come down, we're gonna have a lot of capacity, which will be exciting if opportunities are there to lean into that. The other thing I would point out is, we've been issuing capital because Reid and his counterparts in the field have been finding very attractive, opportunistic places to put this cap.
We haven't been raising capital for just the sake of doing it. We've been putting it to work via opportunistic acquisitions. Our development pipeline is averaging about a 7% return. So even still issuing equity at a 5% and and bringing back 6.5%-7% yields, it's still been attractive. But look, the pendulum will swing, and when it does, we've got plenty of runway for debt. So we're in a very good balance sheet position to be able to just continue to navigate whatever direction we want to go.
I should have asked this question earlier. I apologize. We only have about two minutes left, but are there any questions out in the audience?
Yeah.
It's obviously been a muted transaction environment, but would be curious to hear what you are seeing in terms of trades in your market, where your guys' cost of capital is for acquisitions, and then technology development is challenged as well. What are we need to solve for on development today?
Yeah, good, good question, and I'll repeat it real quickly in case someone couldn't hear. It was, what are we seeing in the acquisitions environment in terms of cap rates and then our development yields? Our development yields, and what's in place is we're trending at a 7-type development yield. Cap rates had gotten this low. At kind of the peak, we were developing to a 7, and they were maybe 3.5, 3.75. They've come up some, but and then, and then on the acquisitions, it's, it's almost... I feel like there's two buckets. If it's a portfolio of any size, 3 or 4 buildings, it's still trading sub-5, and we've, we've gotten clobbered.
We've usually—we'll make offers, and we usually have, you know, during the peak when there's a, some of the brokers will say, global wall of capital that wants U.S. industrial. So we've said we're better off making it than bidding against the world. Where we found opportunities, and it's been 7 buildings, we've sold some of our weaker portfolios. You all sold us. They've been leased. A couple projects in Jackson, Mississippi, they were leased, but that's the rents are going to grow faster in Nashville, where Reid found an opportunity. We entered Raleigh. We sold our only office building. It was a two-year process with probably 3 different buyers in suburban L.A. We sold some R&D land we picked up in a portfolio.
We can move your capital where it's going to grow faster, and on the acquisitions, we still get clobbered on the portfolios, but where we've, the 7 projects we've bought, our ability to say we have capital in this last environment, and we can close in 30-40 days, has been a point of differentiation where it wasn't. And if you went through the 7, a couple of those were, they had been to market, someone had tied it up, they didn't close. We probably, most, we had bid on it, but we weren't the high bid. It comes back, it's got a little bit of a stigma, so what do I not know? Why didn't it close? And they've averaged... So of those 7, the average age has been just over a year old.
We're a little north of a 6% yield on those, but in one case, it was, so it's been to market, didn't close, pension fund, needed liquidity, and this is what we were told by the brokers. They couldn't sell their office building, and they needed liquidity and a quicker close by quarter end, and we were able to step into that. One, a group that tied up a vacant building, had gotten it leased, so they created the value, but then they weren't able to close, so we assumed that contract. So we've kidded it at the conference. It's kind of been the Statue of Liberty acquisition. Give us your tired, your poor, your huddled masses. Give us something that's got something's gone wrong, capital markets, and we can step in.
So we've managed, you know, 6.1%, 6.2% cash, maybe 6.5% GAAP, call it 6.6%-6.7%. As people would say, stabilized or mark-to-market, rents have been a little below. And then our flip, as we think of these, they've added a dime, so we've spent $280 million. It adds a dime to our FFO if you match it up to the equity we raised that quarter. But I would put all seven of those in the top third of our portfolio or more. They're Southwest Las Vegas, you know, servicing the Strip, where there's land constraints and airport. Northeast Dallas, a tenant servicing the new TI project, or not TI, but semiconductor plant in Sherman, Texas.
Nashville, we're right at the entrance or near the Research Triangle Park in Raleigh, where they've got several billion-dollar, multi-million-dollar projects going on, and there's no industrial allowed in the RTP or the Research Triangle, as they call it. So I like that we're creating long-term value, but we're buying state-of-the-art buildings, that something happened in the transaction market, and we're able to step in, and I'm out of time, and I don't think that'll last very... I think that window is gonna slam shut, and we'll be back to being a developer again as soon as interest rates move. But while it's there, we'll take advantage of it.
All right. Thank you all. Join me for,