Good morning, everyone. Welcome to Citi 2025 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, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC25 to submit questions. Marshall, we'll turn it over to you to introduce your company, your team, provide any opening remarks, tell the audience the top reasons investors should buy your stock today, and then we can get to Q&A.
Okay, great. Good morning, Craig. Thanks. Good morning, everyone. Thanks for your time. Happy to try to get to anyone's questions. If there's anything we don't cover today, feel free to reach out. With me today, kind of starting to my far right, Todd Johnson.
Morning.
Todd runs our Florida operations. John Coleman, some of you probably know, we're divided into three regions. We can maybe later talk about our structures a little different than our peers, but John is really responsible for everything that happens from the Carolinas down to here, down to Miami, and then Casey Edgecombe, who is over our investor relations, so in terms of EastGroup, if I paint with a broad brush, we're a shallow bay last mile industrial owner and developer. Our footprint are the fast-growing markets and that people will say the Smile states, so we're California, Nevada, Arizona, Texas, through Georgia, Florida, and the Carolinas, so really where the population in the U.S. has been moving for a number of decades, and we're in the major cities in each of those states is probably where our footprint falls, and as I say, we've been shallow bay last mile.
We've been in those markets for 20, 30 years, most of them. When my reasoning for why you should buy EastGroup, what I would say a couple of things would be, one, when you look at our track record over that pick a time period, five years, 10 years, 20 years, if we're not, and we have some very good peers and a lot have merged over the years, if we're not the highest industrial return, we're going to be in the top two or three. So we have a very, I'm proud of the track record the company has built over the years within the industrial space. We have a very good track record. Along with that, when you look at some of the industrial REITs, during that time, we've had a lot of tenure. So it's the same team.
Todd has 25 years in the, we've been a public company since the 1980s. Todd is 25 years. John is 30 years, the vast majority of that, 20+ years with EastGroup. I started as a summer intern at EastGroup, have over 30 years. I know, I know. It's hard to believe when you look at me, right? I can't be that old. So I've got over 30 years of public REIT experience. Casey's is measured in months, but our senior team has been with us. So we've been through, I know we've gotten questions this morning about tariffs and the election, and there's always, you know, Greek debt. We've been through the GFC. We've been through COVID.
So to me, the fact that we've been able to put up the track record we have, we have tenure within the team that has dealt with, there's always some black swan event, and we've been able to work our way through it with a time-tested strategy. I do think, you know, every year I've thought this is a unique time, but my pitch is to why you should like EastGroup today in that shallow bay space. I'll admit industrial supply got out ahead of demand because things were great for several years, got out ahead. But when you look at spaces our size, our average tenant size is 35,000 sq ft. Our average building size is 95,000 sq ft, and about 88% of our rents come from tenants under 150,000 sq ft.
So if you kind of take that spot, we just put out our operating update ahead of the conference. We're 3% vacant. We were 97.1% leased. 100,000 sq ft and below nationally is only 4% vacant and supplies at an eight-year low. So what I like, again, it's real estate. It's a cyclical business. The pendulum swings the other way. We would say demand has picked up, and a lot of our peers, the people that were building what we build, the big companies, it's hard. Our average development is maybe a, you know, call it a 120,000, 140,000 sq ft building, maybe $15 million. People, it's easier to go to the edge of town. They need to, to put the kind of capital out to go build big boxes. Not many people build shallow bay. A lot of the ones that were building what we built were local, regional developers.
They've been on the sidelines and really been restarting their business. So as things turn, there's we're 3% vacant. The market's 4% vacant. There's not much supply there. We're expecting there to be a push, upward push on occupancy, even though it's pretty good today, which will lead next to an upward push on rents. And then with all of our, so many of our peers being sidelined for a couple of years because of the capital markets, we'll be one of the first developers out there. The competition will catch up, but we think we'll have a couple of years given how long it takes to get through zoning, permitting, acquire the land, and really have our peers be up and running.
Perfect. Thanks, Marshall. I'm kind of curious, does the messaging change today versus what it was yesterday given what went into effect? Or is it, you know, the uncertainty just too hard to handicap? And as you pointed out, your tenant segment and space segment is trending well ahead of the overall national average. And so you're kind of not expecting to see as much potential impact.
I mean, I guess a good question and probably several-part answer to it. I mean, with all the uncertainty and the tariffs, we really, if you said, what do we look for in a site, and this hasn't changed, we want to be, what I mentioned, where the population's going and fast-growing markets, and we also want to be as close to the end consumer. That's what we've stuck. If I use a couple of markets like Jacksonville and Houston, which are two of our markets, we've been there for over 30 years, but we're nowhere near the Port of Jacksonville or the Port of Houston because we think that because of tariffs and East Coast port strikes, West Coast port strikes, the amount of the water level in the Panama Canal, that's really volatile and hard to predict.
I feel pretty good if you pick one of our markets, Atlanta, Austin, Texas, Phoenix, that there's going to be more people there in five or 10 years because there's more people than were there from five or 10 years ago, and so that demand, wherever the product comes from, is going to continually grow, so it does reinforce, maybe it doesn't change our thinking, but reinforces, look, we've probably missed opportunities at the ports of Jacksonville and Houston, but that's a different animal than what we do. I think our tenants serve the local metro area. We'll look at the GDP in our metro area, and if you market weight it, our portfolio versus the national average over the last five years and 10 years, it's about the same, but our, the GDP is about 60% faster than the national average.
Look, Austin's growing faster, Dallas, Tampa, you name it, those markets, they're servicing their local market. They still have to source that product, so there'll be some ripple effects, but that makes us want to be reinforced, that sticky end consumer demand to date. And I know it's just as of yesterday, but since the election, I can think of only a couple of instances where I've heard of our tenants missing tariffs. One was in LA, in South Bay, LA. So I get it. You're so close to, we're near the Port of Long Beach and LA. So I get that one. And then another one where a prospect moved away. But we really, it's the discussion level in our meetings on tariffs to date has been here, and the actual impact has been much lower than that.
Appreciate that.
Can I add, Craig, one other thought I should?
Oh, yeah. Keep going.
That, also given that headline risk, we've said if we have the right needs, because the market, look, I feel confident our earnings are going up this year. I'm less confident about where interest rates, stock market, things like that, that when we have the needs and we have to have those first, we should move quickly on the capital markets because that window could close pretty quickly based on headlines day to day. We're not going to do anything rash, but our confidence level. Don't get complacent on the availability of debt or the availability of equity.
Okay. That was definitely helpful, and you brought up, you know, the operating update you guys put out and you're 97.1% occupied, so talk about, you know, the volume of leases you've seen even post earnings, which I assume included the Conn's lease, right? Because you didn't talk about that on the call. So that was a great backfill. Maybe also talk about how Starship, the backfill of that kind of is going and the timing on that.
Why don't I talk Starship and then I'll let, since John did the Conn's lease, I'll let John speak on that and then maybe Todd just in terms of demand. Starship, as I mentioned, we've got, thankfully we've only got one vacancy in LA, but to us it's a big one. We had, as I mentioned, our tenant sizes, we had a perfect storm in a negative way. We've got 20 tenants that are over 200,000 sq ft, but two of those went bankrupt in fourth quarter. One Asian 3PL near the port of LA, Long Beach. It's an asset we've owned since the mid-1990s. It's always been full. That market, looking at the options that we have, there's a lot of options.
If you're, if I were your tenant rep broker and you said, let's go look at options in the South Bay between 200,000- 250,000 sq ft, there's probably 20 options out there, which is a record that I can remember. I was the original asset manager on this asset. So I can remember South Bay t here hasn't been land you're just south of downtown near the port of LA, Long Beach, we're Carson, t here hasn't been land there in decades. So for it to have that many options of vacancy, I would have argued historically it's maybe the best submarket we've had in our company or one of the best. We've had prospects. We've even been leased out on the space, but that is one of the ones where tariffs comes up in conversation. So it's, we'll see, we'll get it released. I'm comfortable on that.
It's not a long-term problem. The building's been leased 99% of the time we've owned it. It's been leased to the point that we'll actually, you'll see it in our redevelopment most likely and that we, it doesn't have ESFR sprinkling. We need to redo the office, some things like that. So it'll be, now that it's finally vacant, we'll have a chance to do some redevelopment and we'll get it leased. We've been close. We were going to do it a few years ago and it got leased before someone came along and said, I'll pay the rent without the redevelopment. That was Starship. So we did that deal and then they went out of business. So we'll try it again, and then the other large bankruptcy was 300,000 sq ft in Charlotte, and I'll let John maybe speak to the success on it.
Great. Thanks, Marshall. Yeah, taking a step back, we look at the demand and post-election, we saw a noticeable increase in demand in our markets, which was great, but we were cautious. Well, let's see if we can then convert that demand into signed leases. A prospect for the Conn's space was part of that increased demand. And then we were successful in February converting Conn's into a 300,000 sq ft lease of the entire building. That lease has minor tenant improvements. So we're also able to get that occupancy sooner. So we're looking at an occupancy in the space by the end of March. That helped our Charlotte occupancy or percent leased go from 92%- 98%. So good win with Conn's, quick backfill, approximately 20% gap rental rate growth. But we also saw some productive development leasing as part of this new activity in February.
There were three spaces in Atlanta that we leased, development spaces in Atlanta leased for a total of 150,000 sq ft. So again, another example where we saw that new activity getting converted into signed leases and still have some additional activity that we hope to get signed up in the first quarter in Atlanta and in Charlotte. Then Todd can maybe speak to some of the activity he's seen on the demand side in Florida.
Sure. So in Florida, second and third quarter was pretty slow last year, but we did notice for whatever reason when the elections came around after they're completed between Thanksgiving and Christmas, when you're usually slow, we were about as busy as we had been. And we're seeing those convert, you know, people that were tire kicking and window shopping during that time over the last December of last year are starting to materialize into leases. In Florida, we alone, we've signed 18 renewals or expansions in Florida. And we're very close on five new development leases in Florida.
So we're happy, Craig. I mean, when we mentioned on our call, you know, green shoots, that it felt like, I look and I thought it would come earlier. I'll admit, I thought it was coming earlier than it is. And 100 days isn't a long or whatever the time period, a long-term trend since mid-November to today. But, you know, at first we were like, okay, we had our most productive leasing quarter and fourth quarter that we've had in our company's history. And then it was interesting to hear Prologis say the same thing was a nice confirmation of kind of what's going on. They had the same statistic in theirs. And we've thought, is this a pull forward? And is the wave, you know, is it going to ebb and flow?
Is it going to? But knock on wood, to date, we've been able to convert a number of those leases. And there's been, as Todd mentioned, still another. I hope by the time we report first quarter, some of those will convert into development leases and we'll continue to fill the portfolio. And if it does, that would give us the opportunity. We're not there, but hopefully development leasing occurs a little bit earlier in the year. And then as we build out our parks or campus settings, what that does is pull forward that next start. So that's what I mentioned earlier. We get excited about starts. It's as soon as tenants start to expand or want space, we'll build out a park in as many phases as the land will allow rather than build it all at once.
And about a third of our development leasing has historically been expansions. So we feel like we're on the early end of that. And look, I hope 100 days from now I feel as good as we do. January was a little bit better. And again, the budget was brand new. So it's hard to be, hopefully you're not off too much. We felt a little bit better in January than budget. The gap got a little bit bigger in February. We still got 10 months of the year. So who knows what could happen? But year to date, I'd say we feel better than we did as a, about the leasing environment than we did to start the year.
Now, that's great. And I got to, I have a couple of follow-ups following those comments. I mean, as we think about the cons lease with a March, kind of end of March commencement date at a 20% gap, I don't know what it is on cash, but probably somewhere 10%-15%.
It's a seven-year lease, so yeah, probably in that 10%-15%.
I mean, what was dialed into guidance on the backfill of that? Like how much sooner is that than what you guys had thought?
So when we did our budget for 2025, we had budgeted for. We're actually going to split the space into two spaces. It's a front-load building. So we were going to do two 150,000 sq ft leases. One was in the third quarter and fourth quarter. So that really accelerated the schedule and then the full building lease.
Oh, wow. All right. And then Todd, you had kind of mentioned some Florida leasing in the development pipeline. I'm just looking at the schedule here. I know you got some space in Fort Myers. You got some space in Miami, Orlando. Like where are you seeing the pickup in activity around the vacancy that you have?
Hopefully I'll have half of the vacancy in Fort Myers leased by the end of March. Good activity there. Orlando, we have two buildings completed at Horizon West development. We have 40,000 sq ft in Horizon 6 and just delivered Horizon 5 in December and expect to have the remainder of Horizon 6 leased up also this month as well. We're seeing good activity throughout Orlando. There's been a lot of product delivered in the Fort Myers area. That's probably impacted our leasing efforts there, just the amount of product that's come on board.
It's good news. I guess I'd say, Todd, I'm putting words in your mouth. It's been throughout, you know, Central Florida really strong, South Florida strong. I look in Jacksonville; we need land in Jacksonville. We're pretty full in Jacksonville. Even to accommodate growth, we've lost a tenant trying to accommodate growth. That's partially why land, having ideally contiguous land, is so important. From my seat, I like that it's been pretty consistent. It's not just Tampa's really doing well. It's been all of Todd's markets and all of John's region a little bit pretty throughout the company, maybe absent California where it feels like activity has picked up.
You had also mentioned Atlanta. How much space were you talking about getting leased there?
We had three leases signed in February. So then they were all development leasing. So development leases, that was 150,000 sq ft. And then I have a pending lease similar to Todd in Atlanta and then also in Charlotte for another 120,000 sq ft. Not signed, but hopeful to have those done in March also.
All right. So I know when I looked last quarter, you know, the lease-up pipeline under construction, the pre-leasing was a little bit slower. It sounds like as we stand here today, the lease-up pipeline is going to go from 20 to something much higher.
Yeah, but hang on. I guess I'll say, I hope you're right. Maybe I'll have two or three part answer. I hope you're right. I will say I worry a whole lot less about leases going out than I do leases coming back. So, you know, look, we could get emails or calls this afternoon. Look, and I'm happy the team is where we are, but don't raise our guidance just yet. I mean, look, a lot of times people change their mind as you, you know, as you alluded to earlier, headline risk is pretty great right now. So look, we feel better and I'm glad we've gotten the leases signed that we were able, good timing to have our update come out Friday. I'm excited about the lease activity we have in the portfolio.
It feels like the needles, the nose of the plane's pointing up more than down, but we need to get them back in and signed. And we'll look, we'll be the first, you'll hear me yell when they come in and things like that. But until they're signed by the tenant, it's just paper for now. But we're optimistic. So, you know, people, and I always feel better when they start indemnifying us for tenant improvements or hiring a third-party attorney and things like that. People don't like wasting their money. Again, corporations can have a change in a meeting, but you feel better when someone starts spending money and they're doing space plans and things like that. So knock on wood, we feel good, but don't count it just yet.
Just tell Brent the risk of not coming to conferences is he's got to raise numbers to get back.
I'll tie it down. I'll confess, I'm a lifelong Saints, New Orleans Saints fan. I've seen enough fourth quarter losses in my life. So those things happen.
I'm a Jets fan. Trust me, I've even lowered more. But I mean, it's been a pretty consistent message, right? I think one company put it as cautious optimism around activity improving. I mean, as you sit here today, how much sleep do you lose at night that this is totally going to reverse because there's some tariffs versus it may be a speed bump, but where we sit today, new supply, we know that pipeline is largely emptied out. New starts, I mean, talk about maybe that in your market, especially for your comparable space, is pretty minimal. So as you just look at the math of if companies want to expand, they've been sitting on the sidelines for three years. You get back to a more normalized level of absorption and supply ebbs.
You kind of, you know, talk about the math as you see it for your property type of competitive set over the next, you know, 12-18 months.
No, I like it and certainly we watch tariffs. I mean, it's every day there's a new story and I do think it's, I think, being the key word, a negotiation strategy that, look, I don't think the administration's going to run up inflation and throw the economy in the tank and things like that, but I can see how it would put a freeze on tenant decision-making or corporate decision-making, especially around some of our border markets. We're in Southern California, we're in San Diego, we're in Arizona, we're in Texas. It could have that impact. Again, I think the end consumer, who is the vast majority of our tenant base, there's going to be more people in Atlanta or Dallas or any of our markets, and they're going to order more online or traffic is terrible in about every of our markets.
You're going to need a. We have the same tenant in a number of cities in different parts of the city because the traffic is so bad. You could go to South Dallas and have lower rent, but if you're a hotel and your ACs out in the summer, you don't want to wait for the air conditioning repair person to get there. So I think that plays in. I love where we sit in terms of our peer developers have been sidelined for a couple of years. They're private. So their corporate structure, not all, but a lot wasn't to carry the land, thankfully, like we've been able to and keep the permits and carry the construction team. So I like the lack of supply and high vacancy.
I don't remember much about Econ 101, but I like where the supply demand picture's going, even with kind of headlines that could scare you to death, and I'll maybe tie that into our long-term public track record and long-term tenure and that there's always a headline that scares us to death. This is just the new one that we work through and things like that, so I think our tenants will work their way through it. I think expansions have been on hold. It feels like that ice is starting to thaw and break up a little bit post-election. I just hope it continues because if it does, then look, it's a cyclical business. We're on the backside of the cycle again, and I'll credit the team. Look, when development slowed down, we were able to buy what we would have built because the capital markets were in flux.
So there's always a strategy. It's just you hope whatever the environment is, it lasts long enough for you to implement your strategy. And I think that acquisition window is closed as well. Look, we've bid on things and we closed a fair amount in fourth quarter, but we've gotten our head handed to us on any number where we were the second buyer. We're just not seeing that opportunity anymore where something didn't trade. Is your offer still good and can you close in 30 days? And we were able to buy about a dozen buildings in markets like Las Vegas, Phoenix, Atlanta, Nashville, Raleigh at around a six cap. And now we're seeing things back in the fours and low fours on some of those again. So look, that window's closed.
So, if people are willing to pay fours, we're happy to develop to a seven if that's where the demand comes.
You guys have been able to use equity to kind of finance your business plan. You have sold assets as well. If the acquisition market cap rates continue to tighten despite the 10-year moving higher, I mean, I know you guys selectively sell, but like could that be a bigger part of the financing plan versus equity, even though your cost of equity has also improved, right? You guys hit the ATM a bit. Just talk about, I guess, sources of capital versus the deployment yields that you're seeing. You guys are, you know, an active developer. What are you expecting on the construction side as it relates to labor costs, right, with the immigration outlook that this administration has on inputs with tariffs, right?
Like what kind of yield degradation could you see from just higher costs versus, you know, rents growth that you're seeing in your market? I know that's a lot of questions in one.
Yeah, and remind me which parts I forget. I'm handing my answer.
No, go ahead. I forgot half of what I said.
I'll work on the sources, uses, and then maybe let John talk on the development side. But look, we like, ideally, and I'll credit Brent and our finance team to have all, you know, perfect world, we have debt, equity, and dispositions available to us. It's been the first time in my career where I can remember even short-term debt was higher than our implied cap rate. So our balance sheet leverage is lower than our target today. We like the dry powder. When opportunities show up, we have that opportunity.
There'll be a point in time where debt, maybe, I don't know, interest rates are coming down anytime soon, but we would have the ability to lean into debt and we're not going to over-lever our balance sheet, but we could get our, if we raise debt to EBITDA back up to about a 4.5x and we've kind of modeled it this way, say you could reinvest at 150 basis points above your cost of debt, and again, that's anytime you have that many assumptions in any model, I start to question it, but there's probably $0.25-$0. 30 of FFO growth we could gain just from rebalancing the balance sheet. On dispositions, I think, or we think we should always be selling our weakest assets. We'll ask the team. As I mentioned, our structure's a little different.
We don't have a Chief Investment Officer or a Chief Operating Officer. Really, if you have your region like John, we've got three regions. You're responsible for acquisitions, development, renewals, property management, all of that, and Brent and I were each, our CFO, were regional asset managers, so I like that model because you're really a generalist. And we'll ask them if you got a call in the morning and a tenant's bankrupt, which building are you hoping that's not in. And that's really our disposition list. And then we'll work our way through that batting order as much as without blowing up our earnings or needing to. We've had upward dividend pressure, thankfully, the last, you know, couple of decades, but without destroying our dividend or earnings. So we have a batting order where last year we sold our Jackson assets where we're down to one building.
We needed to get a renewal done, which we have. We got one building with one tenant and we need one buyer in Jackson. We'd like to take your capital to our other markets. Rents are going to grow faster in Nashville than Jackson, Mississippi. We're there and there's other markets. We'll sell service centers. So we'll keep working our way through and pending where the markets are and kind of how this year plays out, there's other things we'd like to sell. So we can maybe get a little ahead on that dispositions target. So we feel like equity is reasonably priced today. Debt is hopefully the line of credit, at least coming back our way and dispositions. In terms of construction and tariffs, really with the supply pipeline at a low, construction costs have come down probably 10%-15%.
There's components like steel and aluminum, like HVAC contracting. I think the flip side of that where I get excited is just land prices have been sticky during this downturn. I mean, maybe there were some people that had tied up land on the way up that couldn't close that we took out, but it's going to put upward pressure on rents. The other nice thing of tariffs is we also own 61 million sq ft. So it's going to be hard for someone to come down the street if labor gets, we're not feeling it yet on labor. We're not feeling it yet. And John can, I'll let John comment on construction prices, but if we do, it's going to also have an upward impact. Look, real estate's the, you know, the long-term hedge against inflation anyway.
So that's where we'll be from that end and maybe on the ground today on construction.
You know, Marshall hit the nail on the head. I think we've seen the reduction 10%-15%. But what that dynamic has done is also because of the reduced new construction starts and the reduced supply, that market has gotten much more competitive. We've seen an improvement on construction schedules, one to two months quicker delivery. But because of the competition, I think that's, and that reduction in cost is a combination of material and labor. So subcontractors are also getting more competitive to find jobs and get jobs. So don't know what will happen on the labor if that becomes more of an issue. But right now we've been talking to general contractors that they're going to, they've committed to maintain their same shell pricing if they can keep our account with this competitive environment. So we'll see what happens.
We had a question come in on live Q&A. What do you think caused the leasing uptick after the election? Why has it continued? Seems like business consumer confidence is rolling over.
Yeah, it's hard to, you know, heading into the election. I'm kidding. Brokers always have a reason why the lease is. It's the holiday. It's summer break. You know, the attorney's on vacation. Someone's in Europe. You know, there's, and we were hearing people are waiting on the election and I discounted it till about the third time I heard it. And what someone said, you have two candidates with so divergent policies. So people are waiting to see what happened. So I don't, you know, it's hard to, you know, maybe it's a gift horse. I don't want to look in the mouth. I'm not sure. Todd and I, we were talking about this earlier. I'm not sure what made people feel more confident. Maybe the election's behind you. You feel shaky, but a Middle East, you know, cease-fire.
And I think interest rates, when you look at, I was looking at something. One of our bankers had showed us the interest rate projection and the downward curve projected a year ago versus now. So maybe feel at some point people just have to feel a little more comfortable in this environment as best you can. It's maybe a little more certain than it was last fall, even though it's not completely certain today with tariffs. And I don't know that we're.
Todd, I'd say you haven't heard it from tenants. You just started getting RFPs and requests.
Perfect. Maybe we'll, in the interest of time, just jump to the rapid fire questions. In 2026, what do you think same store in Hawaii for the industrial group will be?
For our group, I think there's going to be an upward push based on supply. I'd say five and a half.
And 12 months from now, will be more, same, or the less amount of public industrial companies?
I think there'll be less. Just the amount of dry powder on the sidelines and the rebound in industrial that we think we're seeing and experiencing, I think it's going to lead to more M&A.
Perfect. Well, thank you guys so much.
All right. Thanks.