Welcome to the 11:35 A.M. session here at day two of Citi 2019 Global Property CEO Conference. I'm Manny Korchman, and we're pleased to have with us EastGroup Properties CEO Marshall Loeb. This session's for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available here and on the webcast on the Disclosures tab. For those in the room or the webcast, you can sign on to liveqa.com, enter code CITI2019 to submit questions. With that, Marshall, I'll turn it over to you to introduce your company and management team and provide the audience three reasons why investors should buy your stock today.
Okay. Thank you, Manny. Good morning, everybody. Thank you for your time this morning. I know it's a busy conference, so we appreciate you taking your time out to hear the EastGroup story. To my left here is Brent Wood, who is our Chief Financial Officer, and on the other side to my right is John Coleman, who runs our eastern region, which runs from Charlotte down to Miami. Three reasons to own EastGroup. There's many reasons, but if I had to only pick three, I would say, one, our track record. We've been a REIT for a little over 40 years. Last year, we were the top-performing industrial REIT. If you look back over a three-year, five-year, 10, 15, 20-year period, our average shareholder returns have been in those anywhere from 10%-15% returns. A long track record of steady performer, good shareholder returns.
We like that. In this environment over the last couple of three years, if you look at the end of the year, our average return in our development pipeline, for example, was 7.4%. The buildings we pulled out of our pipeline last year averaged just over an 8% return. We're a long-term owner, but if you took those to market, it's really the value accretion of our development pipeline. Took those to market, probably anywhere from a four and three quarters to 5 type cap rate on balance for those. We're getting large spreads on our development pipeline. That's been able to help us create NAV over the last several years as we can pull more and more buildings through our pipeline as rapidly as we can. Then the third reason, and this ties into the second reason why our developments have worked so well.
You all have seen all the industrial REITs have benefited from the shift to e-commerce. Where EastGroup kind of fits in within the food chain of the industrial REITs is we'll typically build, our average building's maybe 90,000-140,000 feet. We'll build a business park. An infill site business park, multiple buildings is really our bread and butter. A lot of our peers, public and private, will build much larger buildings on the edge of town, half a million, 1 million square foot type logistics chain distribution centers. As e-commerce or really retail evolves to rapid delivery, we're seeing each quarter more and more of a shift to retailers figuring out how do we accommodate people that order online and want it delivered this afternoon or tomorrow.
Where it used to be two-day delivery or three-day delivery worked for Amazon, that delivery period continues to get compressed, and that works well for us in that last mile where our buildings are close to consumer, and we've built about half of our portfolio to date, so very new state-of-the-art buildings. Work functionally and are also very close to populations.
Great, thanks for that. What's the biggest potential disruption to your business, and what are you doing to take advantage of it or mitigate the risk of it?
I think in looking at that, we still think e-commerce or as it evolves, could definitely, technology of disrupt industrial. I'd say near term and maybe all the REITs, I'd say, some black swan economic event. A little bit like how earlier in the year felt. That would disrupt us. This shift to e-commerce and last mile, we're seeing tenants that we wouldn't have had in our portfolio two, three years ago, where all of a sudden we're having multiple locations with them. Maybe a few years ago, and they still work, you would have heard us describe our portfolio, a lot of it by ports. We like being near the airport, near the freeway. We still like to be near the freeway access.
It's a little bit, it reminds me of having had some background in retail, where if we can go on the side of town where the population growth and usually the higher household income growth and, typically comes with that, the education, some more shopping online. What works is a distribution center. Some of our locations almost have a little bit of a retail overlap now, where in Atlanta where John covers, we're up Georgia 400. It's in that golden triangle, as they refer to it, where there's a lot of household growth, a lot of high net worth individuals. That works well for that last mile delivery. It's a little bit of a disruption or shift of how we think about locations maybe than we would have five years ago.
Are you seeing those shifts within your current tenant base, or are you seeing other new tenants coming to you looking for space at which point you're trying to sort of churn more of your current?
Yeah. The good news is our old line tenants, in this economy, have continued to do well. Even shift more. Good question. I'm thinking of some leases we've done of late are like Emser Tile, tile companies where they'll build, really looks like a retail showroom in the front of their space or Ferguson. Ferguson Plumbing, I guess is how I think of them, where the front 10% of their space is a showroom, and they'll put significant dollars into that build-out. Where it's a little bit of a showroom with a distribution in back. Our traditional tenants haven't gone away. It is new users like a Wayfair or is that Lowe's?
John just signed a couple leases with Lowe's in the last 90 days, and we may have had them, rather than have that stored in the back of their retail store, now you're able to deliver from an EastGroup warehouse to your home this afternoon. The good news is our traditional tenants are still hanging in there and doing well. It's names that we hadn't seen in the past. Tesla is another name that we've had show up on our radar, where they're rolling out more cars and they need a place to store parts and do service and things like that.
It's tenant names that we haven't seen, and what's interesting is they'll pop up in one or two or three locations, it feels like, in a few months.
Are you tempted to play in the bigger box, sort of more regional distribution space, or do you like being in that more local-
I like sticking to what we know. I think there's a lot of guys that are here at the conference that do the big box distribution space well. We're in the second day of the conference. Earlier in the conference, I was saying one of the things that's underappreciated about our company, and I'll switch that to maybe under-articulated about our company. When we build a business park, we'll typically think of us almost like a residential subdivision builder in that we'll start with a building or two, and as those buildings get leased and we have activity and are getting the rents we underwrote, we'll start the next building. Our supply really gets pulled by the market. There's a couple of markets, and we were talking with John earlier, where we're out of space in Charlotte. We're running out of space in Orlando.
Where most of our peers on that big box, you're typically on the edge of town, and it's more of a For us, looking at a bet, if we build 800,000 feet in Northern New Jersey, I think the market will support it, or 750,000 feet south of Dallas. Where to us it's let's build 200,000-foot buildings. Oftentimes they'll share a truck court, and as those lease up, we'll build the next one and the next one. I like where we kind of fit within the industrial food chain, and it's what we have the most experience at too.
Yeah. I would even add to that, Manny, I just think that's what makes us different or separate is we've stuck to that multi-tenant approach. Most of our core peer group, as Marshall said, they can build bulk distribution and they do a good job of it. It's one of the things that's really differentiated us from the group. There's actually more supply, more competition, less barrier to entry, a more commodity feel as you get into the bigger, bulkier boxes than, again, more of our multi-tenant focusing on the 20,000 to 50,000 square foot users. As Marshall said, we've executed on that strategy and we'll keep pushing that forward.
A question off that. What keeps the competition out? Is it just too much work? Is it too little capital outlay per deal?
Two reasons, and I'm putting them almost in reverse order. If you went through the math, our average new project's $12 million. With the spreads we're getting, when we're able to pull it out of the pipeline, it's worth about $18 million. The returns are good. They've been there. At $12 million, most of our peers, and so many of those are still private, the Clarion's, the AEW's, they don't really do tons of development, Blackstone. For them to put up $12 million at a time, they'll stay busy but not move the needle. It's garage sale items to them. The other thing, if you said what disruptor worries us a little bit, it's not exactly a disruptor, finding land is incredibly hard.
We like infill locations and fast-growing Sun Belt markets and finding land, since we only build one story is industrial. With our rents, land quickly gets priced beyond industrial. In Houston, where there's no zoning, for example, they're saying so much of the land has been gobbled up by the multifamily developers over the last several years. Finding land is what we think is really holding people back as well. That supply for There's a CBRE study where it's showing that shallow bay deliveries are still below the peak before the last recession. I guess that's the other reason not to build big-box. There's so many other people that do that, and at the $12 million per building, we'll have a lot of starts to get to our $140 million projection of starts this year, and that wouldn't move the needle for some of our peers.
How much does your land bank allow you to build at this point? Maybe to your point on how hard it is to buy land, how do you find the next land site?
We probably have a good couple years of runway, and that's broadly speaking. Some markets were tighter than others. The way we're structured, which I like, I guess another nice point of EastGroup Properties, I'd say we have the lowest G&A in our sector. No chief investment officer, no chief operating officer. I'll let John kind of talk about finding land. If you're one of our three regionals, you're really responsible for everything that happens from Charlotte to Miami within our portfolio. They spend a lot of their time looking for that next land site so that we can keep the development cycle rolling to kind of keep what's the next subdivision basically that we're going to build. I've kidded them and been a little bit apologetic to our board. Every land parcel we buy now seems to have a story to it.
In South Florida, we're redeveloping what were horse stables that Churchill Downs had. We've looked at brownfield sites that a bank has cleaned up. We recently acquired in Texas. The greenfield sites that we would go acquire and we could build rapidly on are pretty much gone. Brent acquired some sites. Brent ran Texas for us that were one in Dallas, one in San Antonio, where the vision was for retail, and those owners, we bought the back half of it, and then the owners finally gave up on the retail vision, and we were able to buy the front. Maybe, John, since you do it daily, any comments?
Sure. A big part of my job is to make sure in a very active market that I always have that next phase of development ready to go. We don't like a gap because we want to continue the momentum that we were successful in the prior phases. It's an ongoing process for my markets in the eastern region. I'm always keeping an eye out for that next land site. What's nice about our product type, as you mentioned, is the smaller building. We can actually target some sites that are in the 20, 30, 50 acre range. We don't necessarily have to have the large site. We don't need the big-box site. Some of those sites have been passed over just because of the size of our overall development. Also, we're willing to roll our sleeves up.
It doesn't necessarily, as Marshall said, have to be a greenfield. In Charlotte, for example, I did an assembly of eight different residential owners that required a rezoning. We started that process early enough so that when our third phase of that park was ready to go, that land had been fully entitled, rezoned, and permitted. Right now, you have to be very creative, and I think that's the one word we look at. Creative on land use, location, and how we work through that land development process, so we have that next phase ready to go.
Marshall, if you think about the customers you talked about at the beginning, more typically last mile than anything else to however you want to define that. How far is that from the population center? John mentioned a piece of residential land. To most of us in the room, it sounds odd that residential land would be turned to industrial. It doesn't sound like it's the right direction. How far is that from sort of where people wanted to live, that it makes for good industrial space?
We'd love to get as close to the residential as zoning would let us, I guess, really. Long as you're near a freeway entrance, too. If you could have both of these. In Charlotte, this is our Steel Creek site. We're near the airport, we're near the freeway, and it was residential nearby as well. If you can get, I think, for that quick delivery, the better. We went to Fort Worth. We've been in Dallas for a couple of decades, but went to Fort Worth, really. As we met with brokers or looked around Dallas, that it crossed 1 million people. There's a lot of net worth or economic growth within that market. In talking to some of our tenants, it played out like Goodman HVAC.
Again, I'll use them maybe as a national company, but an old line economy where their comment was, "We're spending so much time. As Dallas grows, the traffic gets worse." If it's July and your air conditioner's out, you want the guy there quickly. We have them in Dallas, but then they also took space in Fort Worth, and we've had a couple of tenants that have done that. We hear that in Phoenix as well. We like the East Valley, which is typically the preferred side of Phoenix, but where people need an east and a West Valley location, that if you're driving around Atlanta, and John, pointing to John, since he lives there, as you all know, the traffic's horrible. It's nice to get one location on the outskirts of town.
Probably, if you have two hour delivery or delivery this afternoon just won't work. That's what we're seeing at a CBRE conference last week. This was their kind of national partners conference, and they talked about e-commerce and logistics. Not that it's run its course, but the logistics chain has certainly played out much more. They gave an example of an Amazon warehouse in Kansas that Amazon had vacated because their strategy had changed so much. Really, this last mile quicker delivery is a much earlier inning, feels like in the game than how do we get goods from China to New York or China to Chicago. That's not ninth inning, but it's a later inning than if Amazon's still figuring it out and Lowe's and people like that. It's still coming, or we've seen it.
If we can keep edging near the consumer and ideally a growing consumer base, which is what we like about our Sun Belt markets, and have that ingress, egress, where you can go in different directions quickly. The benefit of being a REIT versus private equity. If you think of capital allocation, we can sit back and hold the properties for 10 to 20 years versus an IRR type model. I like kind of where we fit on that from a capital structure as well.
If we come to your neighborhood, we fully expect your support on the zoning change. Outside the Sun Belt, you're not coming.
I guess when you think about that, it's a good question on markets. What other markets could we see you either growing in or entering? Atlanta was a somewhat newer one for you recently.
Yeah.
What other sort of opportunities like that are out there?
I guess broadly based, we like our footprint. It's hard to do in this market, so we'll be patient. We're under-allocated, if you looked at us like a portfolio, under-allocated in Atlanta. We're looking to hire someone here in South Florida. We've got product here. We've been here, but we'd like to grow here. We hired someone or just placed someone in Los Angeles to cover California. We're under-allocated. First preference would be to grow in some of the markets we're in, where we're already in Denver, we're already in Las Vegas, for example. Austin, Texas, we're developing there and growing there. If we didn't get to any new markets for another five years, I want to have opportunities, but we'd probably be okay with that. That said, we do look around within our footprint. We've spent some time in Greenville, Spartanburg, South Carolina.
John's been to Nashville. Hot market. We're probably a little bit late to Nashville. A lot of our peers are there. We've looked at Raleigh, North Carolina. Again, Brent said, we're not in your neighborhood, I promise, but at least kind of within our geographic footprint, we would stick, and that would be our second preference. Really, at some point, in case something came up in Raleigh or Nashville or Greenville, we said, all right, we can take a day. The good news is the brokers will meet with you for free. If you go from the Cushman office to the CBRE to the Stream office, you can get a pretty quick education on the market in a day or two trip there.
What's your edge in a market like Southern California?
I don't know that we have an edge so much there. Probably our product type, again, there's a lot of people in Southern California, would be that we're not Inland Empire East looking to build the big-box, as Brent referred to. It's really time. What we've bought there has been more opportunistic. We've done 2 deals on the cusp of a 3rd deal there, knock on wood, that we're close to. One was really just riding around with a broker. One was off-market. He pointed out a building where the owner had some family disruption. They thought they would sell the building and then the business. We bought the building, did a short-term lease back there. We think it's What we've looked at is all value add.
We bought a vacant building in San Diego. We had a couple of tenants within our portfolio that both wanted to expand. We expanded one in our Ocean View project, took one down to Siempre Viva, which was our other project, got the balance of that lease. Again, there we found an owner user who was willing to sell. The third deal is also a creative. It's a covered land play where we would buy the land, get some income if we can get there with it, develop it when that lease burns off, ideally. We're trying to turn over a lot of stones. We bid on assets that get listed. We lost one last week. We typically bid and lose, so I don't expect to win too many of those.
We lost on a project in Atlanta last week. We lost in Southern California. The good news is we can afford to be patient, we'll grow there over time. It'll probably be value add or something that's a little bit has a story to it. Almost like our land acquisitions of late have all had some kind of story to it of why it's left over or why it's available.
Someone asked the question here, what is the risk of oversupply?
Right now, we're much more worried about demand disruption than oversupply. We've just not seen it. I guess there's always a risk of oversupply. We're not seeing it at all. That's one of the things when we entered Atlanta that we liked, was we drove around the market. You can look at development numbers in Atlanta, they're pretty large. For the most part, it's big box south of town, even in our sub-markets, it's not there. I was just looking. Atlanta's 15 million in construction at year-end, in 2018, 18 million sq ft of absorption, 20 million sq ft of absorption. You're seeing large numbers in places like Dallas and Inland Empire. So far, demand has kept pace with inflation.
In Dallas, as we dug through it and we got to shallow bay, only about 10% of the deliveries really were applicable buildings in terms of depth. Because a big building, if you lease 40,000 feet, you're going to end up with one dock door and a bowling alley. It's not economic for that owner to build that demising wall and the tenant improvement. It may as well be hotels being delivered as a million square foot building. That we'd like, again, knock on wood, if we're struggling with land, it's frustrating to us. The good news is our peers are just as much as we are.
Is there anyone out there solving that smaller space dilemma, if you will, by taking those big boxes and dividing them? In my mind, I'm thinking something like what WeWork is doing on the office side. Is there someone that's at scale doing that on the industrial side where they're saying, "I'm happy to put up the demising wall because I'm just going to churn through tenants, and that demising wall is my competitive advantage?
Yeah. Good question. There's two companies that we've run across that kind of fit that. They're a little bit different, but there's a company, Flexe, that's out of Seattle, we haven't dealt with them. There's a Cubeworks that's out of Southern California, and they are in one of our projects. Took about 90,000 feet. We've met I haven't, but our guys that run California have met with their owner. It's a young guy, kind of their pitch, it's metal walls between, at least for now, and they could change it, between the spaces, shared office space. It's a little bit that Airbnb, like you described WeWork, they describe it as someone I think it's a good maybe feeder for us. I'm an optimist.
Where you have a home business, maybe you're selling on Amazon, you've outgrown your garage or your spare bedroom, and you go take space month to month in one of these locations. I hope they outgrow that and move into our space. We just signed a lease in Phoenix, a little bit different, but it was someone that came out of, it's in Mesa, out of the business incubator. They outgrew that. Their financials are a little more solid. They take the space as is. We signed a lease. I'm viewing Flexe and Cubeworks as, okay, hopefully they help people move from garage to almost like a Regus or WeWork. Maybe if their business keeps doing well, they'll move to a direct lease with us, hopefully.
I think they even lease space to overflow holidays, wouldn't it, to Amazon or Walmart.
Walmart took space over the holiday, seasonal space from them too. Again, we're trying to watch it and see what's out there, but so far it feels more of a help than a disruptor or a threat, and that they took 90,000 feet on a sublease and then a direct lease after that from one of our tenants.
Sort of like an oversized self-storage.
Yeah. Self-storage with an shared office component.
An ability to receive goods in a dock-high truck, which you can't do in self-storage.
Yeah.
A lot of these guys have some form of inventory that they need to bring in on an open road truck, and then you can't pull that into a self-storage unit. They don't need 20,000 feet or something like that. It's 90,000 feet that we otherwise probably wouldn't have leased because none of the individual people in there with them could have taken down anything of size.
I was thinking about getting into details. The other thing, the demising walls run and don't go to the ceiling, you don't have a firewall like we typically have between our tenants. If your racking gets really intense, again, they could change their model, but those models don't work. It's maybe a 12 foot, 15 high foot metal wall between the spaces. They're growing fairly rapidly, and again, we met with the ownership, and we'll see where that goes. Again, my hope is, hey, it's kind of like Tesla and Wayfair and all the other names of, okay, there's a million ways to use our buildings, which I love. Of here's one other user that's out there on the horizon that we hadn't seen a couple of years ago or a year ago.
A question here from the room. What's the short to medium rental growth outlook given the strong demand?
Last two years, we'll report our cash and GAAP re-leasing spreads. We like the GAAP numbers because you capture the free rent and the rent bumps. Last year, we were 16% portfolio wide for eight, then for 2017, we were 17%. If I were building a model, I would probably put that same high teens number in. Near term, and I've been wrong to date, I thought with construct, as the markets are this tight, most of our market's 94%, 95%, 96% occupied and construction prices coming up, that there'd be more of a rent spike. I'll keep predicting it. I can't really point to anything within our numbers just yet to say aha, but it feels like just anecdotally or intellectually, that there's going to be continued upward pressure on rents.
That's what we're hearing as we bid on properties too, that cap rates, they've come down in secondary markets like a Denver, a Phoenix, Orlando, Charlotte. They've flattened out in the major markets, but that buyers are underwriting higher rent growth. That's how pricing continues to go up, even though cap rates really haven't fallen that much, as institutions are expecting more and more rent growth over the next decade.
Questions in the room?
Have you heard about this initiative at least a couple of the public storage REITs have called Warehouse Anywhere?
A little bit. Go ahead. Yeah. I won't sound knowledgeable, too.
Well, it's a national network. I don't know how many thousands of units that they have that they market to potential users for short-term or long-term warehouse opportunities. They actually It's right here.
Okay.
Where they actually fit out the-
Okay
space with what they call a chandelier. It's basically for package shipping and things like that, so they can locate it, as you said, close to where they are.
I see.
I just wondered.
I wonder how the truck ingress is.
I think it's this, yes.
Yeah, the size of the bays, too, I wonder about. I think it's interesting, and they'll probably do some. We're smaller. Our typical tenant size is around 30,000 feet.
And those are probably-
This is much smaller.
Those are hundreds of feet.
Yeah.
That would be Etsy store owners and that type thing where that would work very well.
It is for the last mile.
Okay.
I was just curious. The other question I have, which actually was Manny's question earlier, there's been so much conversation about the last mile, and EastGroup obviously has been doing this for a long time. Just recently, it seems to be a lot of talk about it. It's hard for me to envision that there's more encroachment on your strategy and what you're trying to do.
We're not the only guys out there. I like the xylophone. It's usually a local regional developer with an institutional partner. John will run into competition, but it's not the majority of the supply you would read about in an Atlanta or a Dallas or a Phoenix. I won't say we have the market. We certainly don't have the market to ourselves. But of the industrial REITs, we're the only guys that DCT did some of this. A year ago, if you had asked me what REIT's the closest to you, we would have said DCT, and they did a little of both. They would build some of that. Prologis will do some of it, but they're so big, from an outside look, they can't only do that.
It's usually a local regional player with Clarion, AEW, Heitman, someone like that as their partner that we'll run into, and it's just not that much. You do hear more about it of late, and maybe that's, we've thought, it's just a shifting retail chain. It's our same strategy that we've had for Remember, I started, I like our 20-25-year track record. It's just there's been new tenant demand that continues to grow over the last handful of years.
We've even bought some of those properties from some of those local regional developers. We had a project in Fort Worth that was newly built. We liked. It was partially leased, so we worked a deal where we got a better yield than if it was 100% leased, but maybe not quite as good had you done it totally spec yourself. We did that in Las Vegas, looking at another project there. Sometimes if you can't beat them, join them. Sometimes you look at that maybe even as an opportunity to pick up a value add situation.
I'm curious about your land position. Obviously, it's played a critical role in the growth of your enterprise over the years. You indicated before that your land bank is now a couple of years. I'm wondering, historically speaking, was it always a couple of years, or was it more? Do your remarks really camouflage what is a crunch in terms of obtaining land?
I wouldn't say crunch. I hope, again, a couple of years, part of my little bit hesitancy was, what's the economy like over the next It could be five years if the economy gets bad, or a couple of years could get drug out. A couple of years at this economy. Our development starts, which I view as a good thing, we're up. We had a record number of starts last year. We look to match that this year. As fast as a shareholder, as fast as we can move the land through the bank and into developed, stabilized buildings, then that becomes NOI. That's our goal. I hope I am. I hope we run through it faster than two years, really. We're always out looking for those next land parcels.
I've said I have an odd love-hate relationship with land, you want to have enough to continue the development pipeline, if you have too much land, what we remember in the last downturn, that nearly killed some of our competitors because then it becomes carry rather than opportunity. We try to look at it by market, do we have enough land to kind of carry us in each market.
In terms of constraining and disciplining your behavior, what percentage of your balance sheet are you willing to apply to land? How much of your balance sheet are you willing to put in terms of properties under development at any one point in time?
Good question. Informally, we kind of said land, we'd like to have no more than 6% of the balance sheet, we're at about half that number now, 3%. We've also kind of said it gets a little tricky in Miami and Southern California. You can buy a parcel that's not that big, but it's very expensive compared to some of our other markets. It could ebb and flow within that. Then we look at what we call our low earning assets, which is land, what's under construction, then Brent mentioned some of our value add, kind of lower yielding opportunities until they stabilize. That's in the higher single digits. We probably would start, if that started creeping into double digits, we'd probably start to think about that, or the other side, at least look at where it is.
I mean, is it a building that's complete that we're in lease up or a value add where the gestation period could be pretty short versus land, where you may be a year or two away, or entitled or un-entitled land. We also, when we look at our low earning assets, it's a United Way thermometer. It's a thermometer looking that's color-coded because if it's really we just need to get a lease or two signed, it could come out of that pipeline fairly quickly. If that helps, that's how we think about it.
Thank you.
We're into the next-
Session is now over. Please proceed to Great Hall 15 on the third floor for lunch. Our keynote speaker is starting in five minutes.
I'm going to fire through rapid fire here.
Okay.
Will there be more or fewer industrial REITs a year from now?
Fewer.
What will same store NOI growth be for the industrial sector overall in 2020?
Three to three and a half.
What will the 10-year Treasury yield be one year from today?
2.6.
In what year will the U.S. enter a recession?
2021.
Thank you.