Good morning, everyone, and welcome to Citi's 2026 Global Property CEO Conference. I'm Craig Mailman with Citi Research. We are pleased to have with us today EastGroup 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 GPC26 to submit questions. Marshall, I'm gonna turn it over to you to introduce your company and team, provide any opening remarks, and tell the audience the top reasons an investor should buy your stock today, and then we can jump into Q&A.
Good morning, everyone. Thank you, Craig.
Hit the red button. It's new. There you go. Okay.
I was trying to kill time, but thanks. Thank you, Craig. Good morning, and thanks everyone for your time and interest in EastGroup this morning. I'll start kinda right to left introducing our team. John Coleman, our EVP, runs our eastern region, coming from the Carolinas down to here, down to Miami. Reid Dunbar, who is our President as of January of this year and runs our central region, which is really Texas and Nashville. Casey Edgecombe, who handles, many of you know, our investor relations. EastGroup, if you're not familiar, we're a, we're called shallow-bay, industrial REIT, which is really shallow-bay, a euphemism for kinda smaller infill buildings.
One of our peers described us years ago and made the comment, "EastGroup's always been last mile. You all just weren't smart enough to coin the phrase to come up with that." We try to build a campus setting, you know, near businesses, near higher end residential. Ideally, that's where the disposable income is. We're typically Smile States, which is where people are moving, where there's population growth, things like that. In terms of, as I was thinking about kind of Craig's question of reasons why to invest in EastGroup, the two or three facts that come to my mind, we talk, you know, internally a good bit of how do we lower our risk without reducing our return? We've now had 51 consecutive quarters of FFO growth versus the same quarter prior year. Same thing for our same-store NOI.
If we can hang in there one more month, we'll make it to 13 years of positive FFO and positive same-store NOI. Just this push for industrial REIT and the growth we've been able to enjoy. We're one of the older REITs here in terms of we were started. We've been industrial since the mid-90s, a proven management team. I was looking at the screen just a little bit earlier of all the red on it and things like that. We've been through every COVID, GFC. We've been a public company. We've been an industrial REIT and a public company. Thankfully, our team's been through all those cycles. Our strategy evolves. We weren't housing or we weren't office, things like that. We've always been a shallow-bay industrial REIT during that timeframe.
Maybe going through all those economic cycles, one of the other things we've learned is, you never know what the next black swan event is. Have a safe balance sheet. We have the lowest debt to EBITDA in our sector, right around 3x . Our debt to total market cap, at least as of the close of Friday, was around 14%. Our debt to EBITDA is around 3x. Our debt within our total market cap's around 14%. That's all laddered fixed rate debt in terms of laddered, in terms of maturity. We try to have a very safe balance sheet within that, as we work through. We also have the lowest top 10. Our top 10 tenants are a little below 7% of our revenue, so we like the geographic as well as the tenant diversity.
You never know when you're gonna come in and pick up the news of an accounting scandal or some issue at one of our tenants. Thankfully, there's not that many, but we try to be geographically diversified, tenant diversified, have the lowest G&A as a percentage of revenue in our sector. Hopefully, we can run our company and have low overhead for you. On top of all that, we're actually trading below, still trading below our long-term multiple of FFO. Again, a lot of that's interest rate. I'm trying to not blame it on the spokesperson for the company, but you can get all those things, 13 years of better FFO growth, safer balance sheet.
We've cut our debt by about half of where it was a handful of years ago, things like that. We're below our historic multiple. Those are our main reasons why we think it's a compelling opportunity.
Perfect. Well, thanks for the initial comments. You guys were nice enough to put an operating update out ahead of the conference. The development leasing, which started to pick up in the fourth quarter, looks like it's continuing. Maybe just talk a little bit about maybe some of the gestation periods on the 166,000 sq ft that you signed and how the leasing pipeline for development and operating assets kinda looks today and, you know, as we focus mainly on that inflection of leasing that investors have been waiting for for industrial that looks like it's here. Maybe just talk about that trend.
Sure. No, good question. I'll confess I was in. I love our setup. Its supply is at its lowest level since 2018. In the smaller or shallow-bay buildings, the vacancy is about half the vacancy rate of the industrial market because so many big box buildings on the edge of town got built, which we don't compete with those either by location and mainly just building design. Our average tenancies about 35,000 ft. Our average building size is just under 100. Again, we'll have a small campus for that last mile service or delivery. Thankfully, our development leasing, Reid, I'll let you maybe add some color. We signed a little more than half of our development leasing that we signed in 2024 or 2025 in fourth quarter.
We really—i t has been an interesting year, the last, call it 18 months, where we've had solid activity. You mentioned gestation period, just getting people to the cash register. We had people in the store. It's getting them to the cash register, and that seemed to happen more in fourth quarter. The 166,000 sq ft you mentioned were really since our earnings report, so early February, so a little under a month. We got a lease, a development lease signed, and then one that took a little bit. It's a long-term tenant, and they're expanding their building. It's manufacturing related, kind of cross-border, which we think is another tailwind where their business is good, and they want to expand the building.
We're gonna expand their building by about 100,000 sq ft, kind of renew their existing lease, and add 100,000 sq ft. On top of that, I'm pleased again still with the activity we have. You just, you know, you always breathe a sigh of relief when the lease gets signed, but there's still a fair amount of activity throughout our portfolio that hopefully, probably the next time you hear us report, it'll be first quarter. I'm hopeful we'll have a decent chance to build on those 166,000 sq ft.
Yeah. Yeah. I think as everybody is aware, with Liberation Day, last year, first of April, it caused a lot of users to pause and wait to see what would happen. We did see the biggest impact on that through our development leasing. The operating portfolio performed quite well last year as users decided to stay in place and renew. The development was a little bit slower. We saw some of that, as Marshall mentioned, thaw out in Q4, which is a nice thing to see. It feels like, from the comments we're receiving from the team in the field, is that they're seeing more activity, steadier amount of activity. Again, it's a little hard to get people to actually sign and get it over the goal line, but we're optimistic.
We're optimistic today than we were, call it, a couple quarters ago. Some good leasing to start the year. We wanna see some more, but, the most important thing is just some consistency throughout the year. We'll see how it turns out here in the next few months.
Did you guys look at sort of the tenant pool for your size range? You guys are a little bit differentiated with, you know, having, I think, your average tenant size around 35,000 sq ft .
Right. Correct.
which seems to be a stronger part of the market. How deep is the tenant pool for that segment of the market? I know that you guys do sort of outpunch the market in some of the areas in terms of occupancy versus market occupancy. Just talk a little about the resurgence there, markets that maybe are thinner, that if you don't make a deal, it may be a couple of months till the next tenant comes, versus others where you could hold the line a little bit more on pricing and maybe even push on the margin.
Sure. Good question. Yeah. Again, what we'd like, and I remember a broker saying to me, every 10,000 sq ft, you know, the number of prospects you have goes up. You know, I guess it drops exponentially as you come down. Smaller the tenant, it's more, and the TIs are lower. It's we focus on tenants that distribute within the metropolitan area. We want growth in Orlando, growth in Dallas, Austin, Phoenix, Las Vegas. That's where we pick the markets. In some cases, when we see these fast-growing markets, we'll have the same tenancy in different parts of the market because when it's a fast-growing city, it's also a euphemism as your traffic is terrible. You know, you've outgrown the freeway system. They don't keep up, things like that. That helps us.
Like in Dallas, we've got, for example, because you can compete on your service level. If you're a hotel, and your AC's out, you want the repair person quickly. If they're coming from cheaper space on the edge of town, they're gonna get stuck in traffic. That's really where we've said, we're not the lowest cost competitor, but we wanna compete on traffic, or on service level, and then you really need that location. It's usually the smaller markets, you know, and they're good. It's a smaller portion of our portfolio, whether it's at Tucson, there's a lot less competition or Greenville, South Carolina, maybe it's one of John's markets where, you know, look, we're one of the fewer games in town versus a Dallas, Atlanta, things like that.
There's also fewer tenancy, but that really hasn't held us back on rents or things like that. In some areas, you know, there's always activity in Houston. There's always activity in Phoenix. Look, and I think we should. We're in real estate. We do this every day. As we think about vacancy, when you think big buildings, no one was building 800,000 sq ft buildings. The vacancy rates, I'm probably off here a little bit, but call it 8% or 9%. Years ago, no one was building. All those buildings are much newer than you think 100,000 sq ft buildings. The obsolescence factor or the local owner that may not have the CapEx, that may be you know, a partnership, that they just aren't real estate people.
We should, in my mind, always be able to outpunch the market, at least over the long term. Look, there's a couple of markets where we do. Watch, for example, like, I guess Reid's got Austin, Texas. The vacancy rate because of oversupply in Austin and that market's gotten really long north to south, but is around 20%, but we're 99% leased in Austin. Phoenix has a pretty high vacancy rate, maybe 14%, 15%, but we're thankfully 99% leased in Phoenix.
Again, it's a lot of big box on the edge of town, and there's been a flight to quality in this slowdown too, which we see markets like Atlanta that have negative absorption in the Class B and C product in the older buildings and pretty strong positive absorption in what we try to own or build, which are the newer buildings.
We have a couple questions coming in. First one on tariffs. What are you hearing from tenants following the SCOTUS IEEPA ruling? Does the ruling reduce uncertainty for tenants, or does it pivot to alternative tariff statutes keep uncertainty elevated?
Yeah. It's as one, and John or Reid chime in. I would say it's early to get that tenant feedback. I guess my take is starting last, and I agree with Reid. When we had first quarter last year was one of our strongest quarters, and then when we had Liberation Day, it just put capital decision-making and paralysis a little bit. Our portfolio stayed full. It was development leasing. We ended the year 97% leased. We're 96.6%, I believe, is our update as of Friday. We're still full. It's just about a third of our development leasing is, as you think about one of the things we like about a park setting is a tenant in building 3 has outgrown their space.
We'll build building 8 for them in the park, and it'll hurt our same-store numbers, but we can tailor. We usually tell the tenants, we can accommodate your growth needs. The way the market's worked the last several years, rents have been rising and still are, that we can backfill your space in building 3 at a higher rate. It'll take us probably nine or 10 months to deliver the new building, but move people around. I think tenants are maybe a little more immune, maybe all of us are. We've said it's gonna be a noisy year with a lot of headlines. I'm hopeful, you know, I don't think we're I don't know if anybody here. I don't think we're done with tariffs.
One, I don't know. Don't listen to my political advice, but I don't think the Supreme Court ruling is gonna mean this isn't a topic anymore. I think at some point, you have to run your business, and people, it's usually the local team saying, "We need more space." Corporate saying, "Well, the headlines are messy. Sit tight. Make do." At some point, people get to a point where they just need to run their business and need more space. That's what we saw later in the year. This, to me, is just another kind of dot on the Richter scale of, okay, now it's Iran, and there's tariffs and this and that.
I feel for our tenants, but at some point, you know, do your customers if your sales are going up and your customers are hanging in there, which seems to be the way of the economy, you've got to run your business. I think that's what we saw in fourth quarter and are seeing to a degree in first quarter still. I'm hopeful people are getting a little more used to the shocks to the system.
The other question that came in, could you just talk about where cap rates are kind of on a stabilized basis or market rent basis, for assets in your markets today?
Sure. Yeah. It obviously varies from market to market. Some of the the lower cap rate markets we're seeing kind of that low 5s, sometimes upper 4s. Some of the stronger markets are like a Nashville, where supply and demand has probably stayed more in check than anywhere else in the country. Dallas cap rates with the growth rates there that we're seeing and strong demand is, you know, kind of that low 5s range. And then kind of depending, you may see a little bit higher than, at mid-5s. It's kind of depending like in Austin, maybe a little bit weaker just 'cause the amount of supply. California, Southern California is a little bit more challenged because market rates are more in flux, harder to really ascertain today.
That's probably anywhere from still seems to be fairly healthy but kinda mid-5s to upper 5s, what we're hearing and seeing.
You guys talk a little about development yields. It feels like you guys have been sticky in sort of that ± 7% range despite, you know, cap rates moving around, and it feels like maybe being lower than people still would have thought on a market basis. The comfort level that you guys have, I know your start guidance was pretty healthy this year. The view there on incremental starts, build-to-suit versus spec, and then, you know, I know in the operating update as well, you guys issued some equity.
The view of equity versus incremental debt.
Okay.
I know that's a few questions in one.
If I miss one, it's not that I'm—
I'll remind you.
It's only because of memory, not avoiding the topic. You know, thankfully, our development yields have hung in there, like you say, 7%, low 7s. We'll typically try to upstate. You know, our rule of thumb is 150 basis points above a market cap rate. Again, kind of depending the size of the portfolio and things like that. We have healthy profit margins on our development, and I'll brag on our team a little. This time last year, we had come out with $300 million in starts. With Liberation Day and things like that, we'll build a park, but as I should have mentioned more, we'll build it in phases. We'll build one or two buildings at a time, and it's easy. We'll taper. It's a pull system.
Most of our peers are, we're gonna go build a building, and I hope three people aren't doing that. I'll get a call from one of these guys saying, "Hey, phase II's 50% leased. I've got an LOI out or a lease out or more activity. I need to build the next phase." We only started $175 million a year ago, where we had told The Street we thought $300 million. It's, it's hard to predict, but, you know, we'll say, "Look, we'll go as fast or as slow as the market's telling us." I like that we were disciplined about it, even though, look, we'd rather have done $300 million. This year, we're at $250 million, which is kind of what we penciled out. It'll come from the teams in the field.
Usually, again, we'll pull that ticket. We were talking earlier today about a few of the development leases we're working on of, okay, if we can get this lease in, that'll kind of pull the ticket to put more blue shirts on the shelf. I mean, it's like a retail store or like you would build out a subdivision for residential. As one or two homes sell, we'll start the next one. We think that's a lower risk, and we like the returns we're getting. I would say one thing that's, it's just been interesting and maybe not surprising, and you saw it a little bit with the expansion we announced, that because of the lack of supply, that we're back to pre-COVID levels of supply. So many of the people that build shallow-bay are local, regional developers with an institutional partner.
In this slowdown, their balance sheets really weren't structured to carry land, carry a construction team, do all the things like that. We bought land from people that weren't able to close sites where they'd done all the work, but I don't want to carry it for two years until the market kind of normalizes and goes back. We think we're gonna have a really good runway in terms of fewer people. It's gonna take them a little while to get back in business and up and running, and they will, and we'll oversupply again. That's the nature of our business. There'll be a pretty long runway measured in a couple of years. With that, we've had more pre-lease opportunities where people haven't been able to find the space that, would you build us a building?
Like the one in Arizona we announced, would you expand the building? Again, we have a good relationship with them, but I think the availability just isn't there, and we're probably working on more. We typically build spec. Maybe we have an existing tenant in hand to take part of that building or part of those two buildings. Where tenants would take an entire building or maybe a couple of buildings in a park if we would build it and things like that going on now, I'd probably say we have in the last three, four years that I can think of.
Just to add a little bit to Marshall's comments on some of the pre-lease or build-to-suit activity. We really saw end of last year an uptick in the number of conversations we're having with some of our existing tenant base and customers that needed to either expand or consolidate operations, and I'd say that has accelerated into this year. That's one example of the expansion we signed in Arizona, which was a good sign, but we continue to have other conversations. That's also, I think, a point out that, you know, the power of our platform and portfolio, when we have over 70 million sq ft of existing product and over 1,400 customers. You know, when they need to expand, we're usually always the first call. That's why we like to do things in phases.
That's why we always like to have some land inventory. With over 1,000 acres of land, we're in a prime position to service, these tenants that are now needing to expand or reconfigure some of their distribution networks. I feel like we're in a good spot. We won't land all the conversations we're having, but we've shown we've landed one earlier this year, and hopefully we'll pull another one or two in the boat, as we continue, throughout 2026.
That, I agree with Reid, hopefully would give us some upside to the $250 million in starts because it's hard. You know, these are so 0, 100. If we could land a few of those, and if the economy can hang in there, then I'm an optimist. I hope we can hang in there and maybe have some upside to the number of starts. There again, I think I always say, I don't worry about the buildings starting as much as I worry about them finishing. You know, we can start whatever we want to start. We just want to make sure we get it leased. We'll usually underwrite a year after completion to get the building stabilized and leased. Either way, that's when it rolls in the portfolio.
Last year, we saw where our vacancy dropped, it was more buildings we're achieving our yields, but it was taking 16, 17 months past completion to lease up, rather than at the peak, it was six or seven months. That was when we kind of peaked on development at, as a company, probably just under $400 million. Again, I'm glad we have the team and the balance sheet and the land and these guys will say, we always usually we'll have permit in hand for that next space, which that's gotten much harder within the cities too, of just pulling those permits in fast-growing cities that people want the delivery quickly. They want the service person, but no one wants all the trucks on their road.
Getting industrial permitted has gotten materially harder than it was five or six years ago, which is great for the 65 million sq ft we own. It's a challenge for that incremental 5 million we'll build. John, you.
I was gonna add just, if you take a snapshot of where we are on the eastern region with new development starts, we're at about a 60% reduction from the peak. That dynamic has really worked in our favor. A couple things, construction costs, although there have been some tariff impacts to construction, we're actually seeing lower construction costs for new development because of the lack of n ew demand for construction.
As we look forward into this year, 2026, supply will be greatly down to Marshall's point. We think there could actually be some upward pressure on rental rates when that happens. His point on land, just having the land entitlements in place, ready to be permit-ready to start, that's a key that we have a very deep land inventory that is fully entitled. Really, when that site is ready for the next phase, we're ready to start construction.
On development, we had a question come in, on whether you've seen water rights extend entitlement timelines or change density site coverage for new development.
Yeah. Nothing, at least in our market yet on water that I've seen or heard of. As we mentioned, the entitlement period is taking longer. Power is kind of more of a constraint than typical. For our users, most of them aren't really heavy power requirements, so we haven't seen a hindrance on any of our, you know, activity regarding power. It is something we're monitoring.
That's all really being driven by the data center demand. Power and water, shocking how much that is consumed. In Atlanta, at least I use as an example, public hearings now where residents are showing up in opposition of future data center zonings and permitting. It's on the table. I'm not sure where it's gonna go from here. You know, we put our toe in the water and looked at some data center opportunities. Probably not a great fit for us. I think that is gonna continue to see some pushback on those two utilities moving forward.
In the markets you guys operate on, or in rather, I've gotten this question a few times, like, data center development, how much does that crimp industrial development, right? Because you guys are sharing or not sharing land sites, but targeting similar land sites. Like, in your markets, where do you see that impact, be sort of the greatest on future new supply of industrial?
You know, certainly they can pay a lot more. Usually with industrial, we can only go one story, you know, historically. We've said we're about the first guys to get priced out of land when we chase it's, you know, one more source of competition. They're so tied into power, where John said, well, you know, it's not something we're actively looking, we said, let's understand it. If we do have land that has the power and the water for data centers, we've kind of kidded, we wanna know if there's oil under our land. If we happen to buy it, we weren't looking for it, if it's there, we should capitalize on it. It's another set of competition, they seem so much more limited than what we can do for industrial.
Ours is hard to come by. Theirs is even harder to have the zoning, the permitting, and have the power especially is where we're. They've approached us on some sites at different times, some of the data center guys. The power requirements they need, and it takes the lead time, as I understand it, for them to get that power is so long that we've just. I've said when we get a data center question, it's like, look, if we can capitalize and there's an opportunity to do it without us pretending to be a data center developer, which isn't. You know, I wouldn't buy EastGroup's stock because of the data center opportunities. There's better opportunities in other rooms here than this one.
You know, shifting to AI. actually, before I do that, we got one question come in. How should we think about development leasing cadence throughout the year and subsequently development starts?
A number of these are. I guess it's hard to predict the cadence. Again, it was odd last year. I don't know that we normally have 52% in one quarter. It's usually not that lumped together. You never know when that tenant finally decides, and his rents have risen. One broker described it, this used to be a director of real estate decision. Now the dollar commitment's risen to it's a CFO decision to sign the leases. That's part of what takes that gestation period out a little bit. I would say, look, we've got local regional tenants, and we've got, you know, Fortune 100 tenants. Usually the bigger the company, the bigger the legal department, the longer the gestation period, even if we have three leases with them in other markets and things like that.
It just takes longer. It's hard to predict the cadence. The square footages could throw. Literally, as those leases get signed, we'll move pretty quickly to build that next building. These guys, with the permits in hand. The reason, if this helps, is our prospects all have tenant rep brokers. If I'm Citi's tenant rep broker, I wanna see that construction underway, because if I promise you, your space is gonna be ready in June, I want that developer—y ou know, maybe if it's a pre-lease, you could have not broken ground. If you're moving in, because I know come July, you're gonna be calling me every day asking where your space is. That's why it's important for us to have a little bit of inventory out there in the market, 'cause you hate to lose.
It's happened to us before. You hate to lose a good tenant because you can't accommodate their growth. If we don't, somebody is. We try to have that ability. You know, that's where, again, if we land some of these pre-lease opportunities, I could see upside to the $250 million, or just if the market hangs in there. Look, I hope there's upside to it. That said, using just as recent as last year as an example, I think you're better served if we're a disciplined allocator of capital. Last year was our lowest new investment year we've had in a while, in that we didn't see the development opportunities. Cap rates were sticky last year, so what we bought was strategic more than opportunistic.
Where a couple years ago, we saw things not close because of the capital markets, and we were getting a second look. We had a very active year in buying existing lease but new product, and then that window closed. We'll, you know, we'll try to find where that market opportunity. We've said we're gonna end up with well-located, state-of-the-art shallow-bay industrial buildings in fast-growing markets. Sometimes, most of the time, we're better off building it. If everybody wants it, we'd rather create it than outbid people for it. Sometimes the market gives you that window to buy it vacant or buy it when it's leased, and it's just kind of—u sually, it's the inbound calls that tell you where the window is.
Pivoting a bit to AI, I guess, just as it relates to EastGroup to start off, what initiatives are you guys looking at? How much time or money have you kinda spent on identifying opportunities for productivity enhancement or, I guess, revenue enhancement? However you kinda looked at it internally.
Yeah, good question. We spend or I'll complement our IT team of where can we use it and training and trying to stay safe too within a cybersecurity world. We think about all of those things. About one, making sure we don't get hacked, and everybody, including me, has clicked on something or a link you shouldn't and things like that. On AI, we've spent time training all of our team. It's mainly if you said to date, where have we seen the reduction because we're not, you know, we're not a design— it's not a creative team. It's not, you know, legal or I think of different people like that. It's been our accounting. Our quarter-end closing has gotten—
That team's done a really nice job, property accounting, of automating more and more of that. What we've talked about is we'd rather reduce the, kind of the closing time, but offset that with analysis time. If we can use technology to do that, and They may argue with me on the percentages. It's mostly been what's available out there with us tweaking it a little bit to use it and things like that. I think our, you know, probably within our tenant base, you're still delivering goods and services to local tenants. They can probably The bigger the space, probably the more we see the tenants are ability to put into their CapEx and equipment. A 35,000 sq ft, it's usually not state-of-the-art where a 1 million sq ft building would be.
We'll watch and see how they can use it to maybe be more efficient with their space. If they can. Again, we keep seeing more and more opportunities. Again, using like the onshoring, nearshoring is probably the latest tailwind where we see benefits from. Kind of like e-commerce. We've said our old tenants didn't go away, then e-commerce kind of started diving into the pie, and now it's been—and w e're not the manufacturer much of the time, but it's more suppliers to the Intel plant in Phoenix, to the TI plant outside of Dallas, to Tesla when they come to Austin. We've got tenants that are, you know, can supply either food or paper products or boxes or anywhere in there of any kind of range of things that people that need to be near that new source of demand in the market.
Just rapid fires here. Same-store NOI growth for the industrial group in 2027?
The group, 5.5% .
From an M&A perspective, in your property type, more, same or fewer companies this time next year?
Sure. It seems in the REIT industry to be fewer. Go with the flow.
Well, thank you guys so much. Everyone enjoy the conference.
Thanks, Craig.
Thanks, team. All right. Thank you.