Good. All right. Good afternoon, everyone. I'm Jonathan Hughes, one of the real estate analysts at Raymond James. Thank you for joining this discussion to hear more about the EastGroup story. Joining me on stage is President and CEO Marshall Loeb and CFO Brent Wood. First, Marshall's going to give an overview of the company. Then I will ask some questions addressing key topics and issues, and then we can open it up to questions from the audience. With that, Marshall.
Okay. Thank you, Jonathan. Thank you for moderating our panel. Thank you for everybody in the audience that's here. We'll run through our presentation, but please stop Brent and I along the way if you have any questions and things like that. Happy to help. As Jonathan mentioned, we're one of the industrial REITs here at NAREIT. Kind of how differentiate us from our peers, where we fit are Shallow Bay. Our average building size is 95,000 sq ft. Our average tenant size is 35,000 sq ft. When you think of last-mile deliveries, that's really the niche where we're targeting. It's not so much getting goods from one port, the West Coast to Chicago or New York. It's moving goods around a zip code within Atlanta or across Dallas and markets like that.
Our markets are primarily the Sunbelt markets: California, Las Vegas, Arizona, Texas, Florida, up through the Carolinas, Georgia. It is really where the population, where we are going, is mostly Sunbelt, but where we are going is where the population growth is. Where we want to catch those trends for you is last-mile delivery, which is where the world is going to, whether it is goods or services or population growth, because finding industrial land gets increasingly harder and harder every year, especially in a city that is growing rapidly. We are a long-standing REIT. We have been around probably 20 years, plus years. Our returns have been very attractive. I would say we have evolved our strategy, but not really changed it. Thank you. That is really where we kind of fit in within our peers. We are primarily a developer. Although, depending where the market is, we will end up owning the same type product.
We try to be indifferent whether we buy it, build it, or buy it vacant, really depending on where that risk-reward is at any point in the cycle. At the end of the day, we'll get to the same place. We just finished a series of buying properties. We feel like the market's going to shift back, or it was shifting back earlier this year to the development side. Happy to kind of talk more. I won't take all of Jonathan's questions quite yet, but that's a little bit of a summary fon EastGroup.
Yep. Maybe we can talk about the macro environment. Obviously, there's a lot of uncertainty out there, and tariffs have a lot of impact to some industrial properties, more so than others. Maybe talk about what you're seeing in terms of that impact on your business.
Sure. I'll talk maybe if I thank you. If I go back maybe to last fall, and really last year, you heard us and our peers say companies or corporations were being deliberate or methodical in their decision-making. It was not we were full. We were 96-97% leased, which is we put out a press release ahead of NAREIT. We're still roughly rounding a 97% leased. I kept hearing that tenants are waiting on the election. I've kidded. Brokers always have a reason why things aren't happening. I've heard about three times, and it was explained, you have two candidates with widely differing policies. For better or worse, after the election, in fourth quarter, we signed as, and again, we've been around probably 40 years, 30 years as an industrial REIT, a record number of square footage for our company.
We put out our earnings. We had a record quarter and fourth quarter in terms of just square footage lease. Prologis said the same thing. That was a little bit eye-raising. We finished up first quarter, and it was our third most square footage lease. It felt like we kind of came out of a cloudy environment to a blue sky, sunny day. We had two of our three best quarters in our history in a row. Our developments were leasing, and you felt like, okay, here is this inflection point that Marshall keeps predicting every year is coming in industrial. We had Liberation Day. We signed a fair amount of leases.
What I would say, it's not like things have stopped, but it feels like we've gone from a little bit yellow light to green light, back to maybe yellow light again. I'd say in the last 30 days, it feels like tenants are a little more hesitant. The smaller the space, again, our average suite is 35,000 sq ft. I'd say tenants, 50,000 sq ft and below, that activity is still really good. The larger the space, and maybe my logic is it's the larger rent commitment by the tenant. Those deals are still happening. We've signed leases as recently as last week. We closed on a small property on a disposition Monday. There is still transaction activity, but we went from what felt like record pace to a little bit of a slowdown. We will see.
I think, you know, this is unlike the GFC or COVID or other things we've been through. This one feels more artificial to me or man-made. Everything was fine April 1, April 2. The world changed a little bit. I think in time, and I'm telling myself things will even out, and we'll, you know, again, I'm thankful we're 97% leased. If you look at our product type, our market's about 4% vacant. Shallow bay, when you hear about industrial overbuilding, or if you all hear that, it's usually large buildings on the edge of town. That's not what we are. We're infill sites, smaller buildings. We're, call it, 3% vacant. Our product type is maybe 4-5% vacant nationally. What I get excited about is supply is at a record low.
I was just reading, for example, Atlanta construction's at its lowest point since 2014. If you look at markets like Dallas and Houston, absorption last year was $20 million. The construction pipeline's around $10 million. Those markets I keep waiting for will snap back fairly quickly. What we've seen, I'll blame it on, pick on Amazon, for us to go through zoning and approvals and entitlement. Everybody wants the good or service quickly, you know, as soon as you hit click or hang up the phone, but no one wants it to originate from their neighborhood or around the corner, you don't want all the trucks on the street. It's always been a little bit harder. That's why most of the buildings are bigger and on the edge of town.
For us to get zoning approval, I'd say it's gone up fairly significantly in the last two to four years post-COVID. That is going to, and we've got the land sites. That is going to slow down so many developers as they get back in the market when things do turn. We feel pretty good about our runway, given our balance sheet and our land holdings that are all zoned and permitted, that we'll be able to move much more quickly than our private peers will.
Okay. That's maybe a good, we can continue talking about the Shallow Bay product type. Historically, it's a less supply impacted segment of the industrial warehouse market. Talk about the cost to build, why you don't see more people doing it, just the economics of it.
You know, typically what's interesting, and we'll get the question if what you're doing, if you're building buildings to 7%, low 7%s today, and they're worth, you know, as we complete probably in the mid-4%s to maybe up to 5%, that profit margin's attractive. As I mentioned, it's maybe two or three things. Land's harder to come by. When you think of industrial, every other property type can go vertical. We're the first guys to get outbid for land. We need a lot of land and a lot of flat land, or at least land you can make flat, which is expensive. It's just harder to find those infill sites. That's why it takes time to get through zoning. It takes time. So many of our peers, not that we're a small company, but are so much larger.
The pension funds, you know, a typical building for us is maybe 120,000 sq ft. So you may spend $12 million, $15 million, and we may build them. We'll typically build them one or two at a time. You're not putting enough capital to work. They can stay very busy, but not put the capital to work. We'll try to do that and do it in multiple cities, multiple sub-markets, and it adds up. People typically shy away from Shallow Bay just because of the hurdles. One of the analysts, Jonathan's peers, was we have the highest development returns in the industrial space. It's just, you know, it would be minimum wage for a number of them for the amount of dollars they could put to work. Even the private guys kind of shy away.
There's land that's more readily able to find on the edge of town. It's cheaper, and it's easier to get through zoning. Thankfully, I've always said I like where we fit on the playground. We're kind of not much competition. Our competition's usually local, regional players. Not that none of the other REITs do it, but it's hard to put the capital to work on our size product that you can on big box development.
Yep. And in addition to the, you know, smaller size, the shallow bays, you have a park strategy, so to speak, so clustering of assets. But talk about what that means in terms of margins, efficiencies for operating these buildings.
Sure. Ideally, good, thank you for the question. We'll build a campus setting. What we like about that, maybe a couple of examples, is I think our peers, I'll keep picking on the big box or maybe just a difference. If we went and built a big box, usually we might go build 700,000 ft on the edge of town. Your tenant's pretty indifferent if you're on the east side of town or the west side. They may be moving goods through Phoenix or Las Vegas. There's no, the distribution range is much, much larger. It is more of a commodity business, and it is all about access and employment availability and low rents, where you're trying to service where we are like the Golden Triangle, as they call it, in North Atlanta or the East Valley within Phoenix or markets like that.
When we build a campus, we'll build it, rather than build it all at once, we'll build one or two buildings at a time. It gives us kind of a test case rather than building 800,000 sq ft on the edge of town. What happens within those two buildings is it makes my job much easier, I'll admit. I hope our comp committee's not listening. What I would say is that as they lease up, I'll get an inbound call from the field saying, "I'm 50% leased. I've got three proposals out, and I've got a couple of tenants that are saying they need to expand elsewhere within that market." We will start the next two buildings. It's really maybe my two analogies, almost like a home builder building out a subdivision. As one home sells, you build the next one.
The size of our investment that are at risk is smaller than our peers. We do it very incrementally. The flip side, we know if phase three in our park is not working, that phase four is not, you know, it is not leasing as quickly as we would like. Phase four is not a way to solve the challenges for phase three. We can tap the brakes and really it will go, development starts as fast or as slow as really the market dictates. I have said, you know, our peers, it is more of a maybe a push strategy. You are pushing product out in the market, and you hope the market is there when your product gets delivered.
We're pull, and we know, I guess the other fear is in cases if we don't have those buildings going and we've got tenants that need to expand, someone's going to get that space. We'd rather cannibalize our own current inventory. The way it's worked, about a third of our development leasing has been existing tenant expansions over the last several years. We're accommodating their growth. Where industrial rents have gone and are still moving is then we can go back and refill your space in building three at a higher rent midterm. Your midterm, we can kick off building seven, backfill your space at a higher rent, and just kind of keep working our way through a park.
If we like the park, we'll try to find as much contiguous land or land around the corner to keep going as we can. That also helps us market the suites because every tenant thinks, you know, their goals are they want to outgrow their space. We can say, "Look, we've got, you know, room for eight or nine buildings. We have the parks built. We can get you space ideally under the same roof. We'll move tenants around for you if you give us enough notice. Or we can put you in buildings three and four, and you'll be across the truck court from each other for efficiency." Rather than have, we do have one-off buildings, but ideally we like that campus setting.
It also allows us to control the tenants that are in there, the landscaping, all the things like that, the amenities package. You can really create a nice sense. I'm biased. I know you're all thinking I'm talking about a different product type than industrial, but you can create a great sense of place with the right tenancy and the right landscaping. I think that as a long-term owner versus a merchant developer who's going to flip, those investments for us really start to pay off when you're a 10, 20-year holder of those type parks.
Yep. There are a lot of great charts and slides on this in your presentation. That would be lovely to show. Maybe we could try that next year. Maybe let's go to an ideal year in terms of acquisitions and development starts. What does that look like?
Ideal, you know, we, again, I was trying to say, we try to end up in the same spot and how we get there. We would say, you know, if we went back maybe eight years, our development starts were $100 million a year. And again, at the peak, we probably hit $400 million a year in development starts. Some of that is construction costs going up, land costs maybe, but it was really just the market pulling those next wave of buildings. Acquisitions, it will really go as, you know, as we think about it, how many tenants and where across the country. We've bought as much as I think $500 million in a year was probably our peak year. We don't want to, look, we've got, we've built our company for scale.
We've grown from a sub $3 billion market cap to a, call it $10-$11 billion market cap, depending where the stock market is in any given time. We also want to be mindful of, you know, that our property managers and our accounting team and things like that. Where are the properties? How many tenancies are there? I think we could certainly grow. We've done it. $500 million a year in starts, $300 million in starts. Or when our leasing starts are going well, that was because we, the benefit we have of an operator, we felt like we were able to see the leasing velocity we had. In cases where we had those local regional developers around the corner, bought their vacant buildings because they're working off an IRR promote.
That risk return, we would say acquisitions at the point were maybe at a five. Development was at a seven. We could buy buildings that had been built, but not leased at a six. It was really a shadow development pipeline if we could find those opportunities. That window closed. What we kind of see is for a minute, the acquisition window will be attractive, and then the development window will be open. We remind ourselves it's okay to just simply be patient. We've got organic growth. We've been growing our rents at net effective 50%, north of 50% the last two years. The last few quarters, it's been north of 40%. We like that organic growth that we've got internally.
Look, if the external opportunities are there, we're not going to do, we're not going to buy a hotel with, you know, your investment. If we can find the right risk-reward, and sometimes it finds us in the downturn. We had developers who tied up land sites but couldn't close. We bought about half a dozen of those where they had done all the kind of, not all the legal work on the land to have it ready. Then they lost their funding. We were able to step in, and that accelerated our ability to start those sites. It went from that to the inbound calls became the brokers saying, "We took this to market. It didn't close.
Our buyer backed out. We were able to say, thankfully, Brent and the team had our balance sheet in good enough shape to say, "Look, if you're awarded, I know you're awarded at this price. We're here, but we can close in about 30 days." That worked for a while. I think the investment markets come back. That acquisition window, if you follow, as you saw us close a few opportunities in fourth quarter last year, we'll find some strategic opportunities this year, but we were able to buy new buildings that were leased at 6% returns. That was something we hadn't, that acquisition window was open for about maybe 24 months. The hope is we're nimble enough and you know when that, which window is open to kind of work through.
Yep. Maybe that's a good lead into just the balance sheet and the flexibility that that affords you. Maybe for Brent, take that one. That's one thing that certainly is also, I think, differentiating relative to your peers is your balance sheet.
Yeah. No, it's interesting. And as we've grown, we're very pleased. We've grown earnings for an extended period of time, as Marshall said. At the same time, we've done it by deleveraging or getting a more conservative balance sheet. Our debt to EBITDA now is trending into three and probably going below three. Fixed charge coverage ratios north of 15. Just a historically strong balance sheet for us. We've been the benefactor since interest rates began their quick rise two and a half years or so ago. Our shareholders, I'm going to say, you know, rewarded us with a good share price so that we've had good equity access over that period of time. We predominantly have been sourcing capital via new equity raises. It's been good to have that access. By doing that, we've delivered the balance sheet.
We have a lot of capacity to add more debt down the road. We would like to see rates come down a little bit more. They're headed slowly in the right direction, but we've been patient. I think the important thing to note and the exciting thing as we have that capital available is we've been raising capital. Our team has continued to find opportunities to invest capital. We haven't been raising capital as a means to, you know, put out a fire here, do something there. It's been continually growing the company via the acquisitions, development, and the other things Marshall talked about. A very conservative balance sheet.
I think the people that maybe have not paid close attention, especially to the top tier REITs over the last handful of years, it is a much different sector, a much more deleveraged sector, a much more safe haven to like a rising interest rate environment. You know, again, we are in a good spot. We are looking forward to having a little more sunnier skies here in the future. We can put all that capital to work. As Marshall said, we will be patient and the team in the field will do it at the pace that the market allows us. Yeah, we look forward to unleashing some of that dry powder we have stored up there.
We're about 20 minutes in. I'll give an opportunity to the audience. If there's any questions, please raise your hand. Go ahead.
Can you talk about Southern California and what you own? I am sure you are not interested in any of the stress that might be happening in the East, but to what extent do you see opportunities there?
Yeah. The question, I can hear you. Thank you. I'm not sure if everybody could. It was really about Southern California, how do we view that market and maybe Inland Empire East a little bit or IE East, as they call it, that maybe perspective. We're about 5% of our NOI comes from LA, about 5%. We're about 17% California. And that's really spread predominantly the Bay Area, LA, San Diego. Maybe I know your question. San Diego and LA feel, or San Diego and San Francisco feel pretty stable. They've had, we get spoiled that we've had positive net demand in our markets. Dallas is on, I'm looking at Reed, who runs Texas for us, something like 60 consecutive quarters of positive demand. It is just where is supply at any given point relative to that demand? Atlanta's something like 40 quarters, 50 quarters in a row.
Most of our markets where California has thrown us a little bit was San Diego and the Bay Area would have one positive quarter, one negative quarter, that type thing. LA, unfortunately, has had nine consecutive quarters of negative absorption. First quarter was negative 2 million sq ft. It has been a harder market for us. We thankfully only have, I am aware of one vacancy there. We had a, it is in Carson, so we are down by, if you all know LA, Port of LA, Port of Long Beach. We have good activity. We have been leased out a couple of times. I think at least once post April 2nd. Those tenants have put things on hold. The tenancy there is very port driven. What has thrown us a little bit, I would argue that was traditionally probably our best market in the country of our markets.
It has probably been arguably the worst for the last 18 months. Unfortunately, we just have not, I would love to tell you, I think it is turning around or stabilized. Until they can have at least a positive quarter or a flat quarter of absorption, it still feels like, and what is interesting to me, usually if you said historically, maximum what ruins a real estate market is it is all supply and demand. In Los Angeles, they never had the supply because there was already no land. It was really, as best I can tell, coming out of 2020, out of COVID, all the logistics companies raced to take space. They have more space than they wanted. Inland Empire East, so our portfolio is predominantly mid-counties, City of Industry, and west. We feel good long-term about consumption.
It's what, 17 million people, maybe off slightly on how many people are in the metro area. That's a lot of consumption. Even if you're near the port, that also happens to be south of downtown. You're not that far from Santa Monica and the beach communities. Inland Empire East, if you get more towards San Bernardino, Redlands, those areas of LA, it's really very port driven where goods come in from the port, get unloaded there, and then they make their way to New York, Boston, Chicago, Philadelphia. That's a trickier, maybe I'll use it, question not asked, but if you say, why do we like being near the consumer? We think it's a lot more predictable, stickier demand. We do have three buildings kind of in that South Bay area of LA. Again, the overall market's 5%. I've used examples in an earlier meeting.
We've been in markets like Houston, which Brent ran for us for years. And we've been since the 1990s, we've been in Jacksonville, Florida since the 1990s, but we're nowhere near the ports in those markets because ports are, to me, harder to predict. You know, if you can invest and own our stock, I hope you will, I would say, to me, it's a lot easier prediction to say more people are going to be living in Nashville, Tennessee, or Austin, Texas, or Tampa, Florida in five to ten years than the port of Houston's going to gain market share from Savannah versus Miami versus Jacksonville, LA, Long Beach. So we are not really port driven. At times, we've probably maybe missed some opportunities, certainly as Houston's port has done well the last decade, it feels like.
We like being as, we want to be in a low visibility, great access, low visible retail location. We want to be as near your homes as we can. That is why we see tenancies like, you know, Amazon is our largest tenant, but we also have Best Buy, Home Depot, Lowe's, the goods that you probably cannot fit in your, that you cannot fit in your car, they are white goods. If you buy a refrigerator, you are not leaving the store, but it can come from one of our properties and be at your house later that day. Again, that is how they have used us as they talk about going from store level inventory to market level inventory. We get the big bulky items from Amazon and some of them. LA has us a little bit concerned. It is still not, I am glad it is 5%.
At times, we've wished we were a lot larger than 5%, but it's also a reminder for us, we like tenant diversification. Our top 10 tenants are about 7% of our revenue stream, and that's about half the industry average. We like geographi0.c diversification because every market that seems red hot suddenly can turn. Rents doubled in LA really rapidly, and then they've come down like a rocket as well, unfortunately.
Maybe talk about five, six weeks ago, you were the only industrial player to adjust guidance upward, raising occupancy and NOI growth guidance. What gave you the confidence to do that in this, you know, macro uncertainty that we've heard about for the past 25 minutes or so?
Yeah, I'll jump in there. Part of it is the team, you know, we had a strong first quarter. I think we were about $0.03 above our midpoint in the guide. It gave us some flexibility in the latter part of the year. Just strong performance. We continue, even though things, as Marshall said, coming into April 2nd, at the time we did the call, you were not exactly sure how that was going to play out. We have seen continued strength in rental rates. We have maintained a very strong occupancy and lease percentage. You know, probably where that little bit of slower activity has shown itself more is maybe in our development leasing, just trying to get those deals over the hump has been a little bit slower.
You know, really, we build our budget and our guidance from the ground up, meaning all our asset team, it's not at the corporate level, us making global assumptions. We build it from the bottom up, individual leases that are either vacant or rolling for that year. We roll that up. We add our corporate, you know, expense and that type thing to it and then measure. Thankfully, as we rolled it, we were just in a good, you know, good position, you know, early into the year. We put out a release a couple of days ago, which is sort of a market update. We're trending at or maybe slightly ahead on an occupancy level of where we've projected. It was just a good strong quarter, as Marshall talked about.
We are just trying to sustain that momentum into the year and trying to be patient and wait this out to where if there is some clarity, you feel like there is the opportunity for some uptick given supply being tight and some of those other factors. It was really just a strong, you know, it always helps to have a strong quarter, and the quarterly reporting gives you a little more runway to kind of push the rest of the year. We are glad the team afforded us that opportunity.
All right. If there's no other questions from the audience, maybe Marshall, you want to leave us with kind of a summary of what the investors in the room should know about the EastGroup story over the next few years?
Sure. Maybe with the, thank you, with the preface that take this, I'm an optimist. But here's with that in mind. I really like our positioning better than I have. And I would have told you I'm an optimist the last four or five years, but I like it better today than I would have at any given point before, even with the tariff news and things. But my reasoning is, you know, we're, if I round, we're 3% vacant. Our property types, 4% vacant. Our balance sheet's literally as strong as it's ever been. So we have that dry powder to take advantage. And supply is at its, you know, it was low a year ago, I say a year or two ago. But with the downturn and the run-up in interest rates, or really capital markets downturn, it wasn't an occupancy downturn or anything like that.
So many of our private peers have been pushed out of the market. They did not have the balance sheet because they were entrepreneur to carry land, carry a construction team. So many of our peers have been sidelined that it is going to take them a while to catch up when things do turn. I feel like with a little bit of business confidence, which we saw in, I would not call the economy great in fourth quarter or first quarter of this year, but just better or consistent, that I feel like there could be a pretty sharp turn. It is going to be a while before our peers can catch up on development. The other thing I like, if you look back for what it is worth, our average FFO multiple, probably our five-year average is around 25 times.
We've gotten as high as in the 30, call it mid-30s FFO multiple. Today, we're a little below 19. I think the fundamental setup is better than it's been the last handful of years. Yet our FFO multiple is five or six turns below where it's been over that time period. I don't know that 25 is the right number or not, but for what it's worth, that's roughly the average. It feels like our stock price doesn't really reflect what we feel like is this inflection point coming. I'm convinced it's coming. I just keep getting wrong when that is. It's like I keep saying June. I just thought it was going to be June of 2024. Now I'll say June of 2025. At some point, when business confidence comes back, we feel like there's pent-up demand and that will affect us.
I'm seeing zeros. Thank you all.
Yep. Thank you, Marshall. Thank you, Brent. Thanks everyone for joining.