All right, we're on the clock. This is the EastGroup Properties 1x1 meeting. I'm Blaine Heck. I cover office, industrial, and cold storage for Wells Fargo, and I'm very happy to have Marshall Loeb, Reid Dunbar, Staci Tyler, and Brent Wood with me from EastGroup. I'll turn it over to you, Marshall, to give a layout of the land of your company and how we should think about the industrial marketplace.
Sure. Thanks everyone for your time. Blaine, thanks for agreeing to moderate our panel. Just as we get into Q&A, to help you all, Reid, to my immediate right, is our President, Staci Tyler, our Chief Financial Officer, and Brent is our Chief Operating Officer. I'll try to traffic cop your questions to the right person. We're a longstanding industrial REIT. Kind of where we fit, we're shallow bay. Our typical, when I say that, it's also another, maybe I'm using it as a euphemism for last mile as well. Our average tenant size is a little over 35,000 ft. Our average building is around 100,000 sq ft. We're not the big boxes on the edge of town. Our ideal would be to build a business park literally around the corner from you.
We'll say we want to be kind of residential, that last mile area, which we think is really where the world is heading to. The other way, when you look at our geographic footprint, going east to west, we run from the Carolinas, Georgia, Florida, Texas, Arizona, Nevada, out to California, then Nashville as well within that footprint. The reason we pick those areas is that's where the population's moving. When the population shifts, we'll shift with it, but over a long period of time, those infill locations that we seek out just get to be more and more valuable as a REIT and having that long-term ownership. That's really where we fit in. We've been in industrial, we've been a REIT for probably 40 years, an industrial REIT for about 30 years.
Brent, Staci, and I all have been with the company probably longer than we want to calculate on average. For as young as we are, I know you wouldn't believe the number and things like that. I've been with the company for a while.
What do you think differentiates your story versus the other REITs within industrial?
Good question. I would say, look, we admire and think a lot of our peers. What we spend time talking about, if you went back over that 30-year period or probably more likely five, 10, 20 years, we're one of the top performing, if not the top performing industrial REIT over that time period. Within that, we try to think about what can we do to reduce your risk without impacting your return. As we go through that, I think there's different ways we can structure our company differently from our peers, in that, I mentioned last mile, and land's harder to come by. It's harder to get zoned than you think of, say, big land parcels on the edge of Phoenix, on the edge of Atlanta, Dallas. We do that as one way we address it. We also go to fast-growing markets.
If it's a flat market, nothing against, I lived in Ohio, I'll pick on Cleveland. It's more of a zero-sum game. One tenant, hey, Joe, one tenant moves from one part of the market to the other, where Dallas, you've got population. Houston, you've got population growth. You've got e-commerce penetration. We'd rather catch as many of those tailwinds as we can, and then we are a developer, but rather than build a big box building on the edge of town and hope four other people aren't doing it at the same time, we get sector-leading development yields, but we'll build a park out in phases. We'll build one or two buildings at a time, and then I'll get a call from the field saying, "I'm 50% leased on phase II. I've got some prospects.
I have some tenants that may want to expand elsewhere within the portfolio. Most of our peers, it's a push of demand. We think the market's ready. We'll build a 750, a million-square-foot building on the edge of town. Ours is built two 200,000 ft buildings typically, but have that demand pull it. We think that we can get really attractive yields. We've developed around a seven yields if we sold it upon completion. I'm using round numbers or probably around a five. Having that demand pulled, and then the other benefit we get from building phase II, we know where rents and tenant improvements are in phase III. Usually, thankfully, the industrial market's had a tailwind, phase III, we're not estimating rents quite as wildly as we would as if we did it one-off, like that.
Again, that's where we try to operationally reduce your risk by where we go into Atlanta, for example, where we go in Atlanta, and how we build out those markets. From the other side, we believe in geographic diversity. We're in a little over 20 different markets, the major cities in those states that we talk about. Our top 10 tenants are in a little over 30 locations. Those account for a little less than 7%, which is about half our sector average, because you never know what day you're going to come in and read about a surprise bankruptcy or something like that happening. We try to have geographic diversity, tenant diversity, and then I'll complement.
The other side's Staci and her team, and that our debt to EBITDA is 3x , which is the lowest in our sector, one of the lowest of the REITs you'll see here. Within that 3x, it's all long-term fixed rate laddered debt. Again, all the different things I could go through, we don't think we've sacrificed any returns for you, but it's ways we try to structure. Look, you can either invest in an equity or in a bond, but we'd like to think, okay, how do we get you bond-like safety but equity-like returns? Whether it's through our balance sheet or what we do, that's what we spend time. Without being so conservative, we miss opportunities along the way. Again, our peers are good, but if you like a safe structure, last mile industrial, hard to replicate portfolios because the land's not there.
That's really my 20-minute elevator pitch on what we do.
We certainly like that elevator pitch. Staci, to that point, how do you think about the right leverage for your company and where you can grow into that?
Sure. As Marshall mentioned, we're currently at about 3x debt to EBITDA, which is obviously a very strong balance sheet condition. We would feel comfortable increasing leverage from there, but we really like the opportunity that we have with leverage as low as it is, because we know that if we find more acquisition opportunities, other avenues for growth, we know that we have capacity on the balance sheet to allow for that. We try to remain flexible and consider equity and debt issuance as options for our capital needs. Coming into the year, we budgeted the need for $300 million in capital, and we had initially contemplated that that would be in the form of unsecured debt in the second half of the year. We said all along that we would remain flexible, and we've done that.
As we've monitored the equity markets, we've issued about $70 million in regular way ATM issuance, and we have about $200 million in forward ATM contracts that we can issue and draw down between now and second quarter of 2027. It gives us a lot of flexibility in terms of timing. We've pretty much shored up the capital that we need for this year, but we've also maintained some flexibility so that if we do see interest rates come down, we could take advantage of a window to issue debt. If not, then we have issued that equity and have the capital to support the growth that we have assumed in guidance and also have plenty of capacity for opportunistic acquisitions or additional development starts if the market allows.
What is the pricing on that forward? Just to be clear.
Just over $201 per share.
Yeah. Very nice.
Yeah.
Reid or Brent, what are you seeing on the acquisition market? Is it opening up?
Blaine, we've actually been a little surprised this year. We anticipated, or maybe hoped that cap rates would increase some to give us additional buying opportunities as the year progressed. With where we are with the interest rates, that seemed like a reasonable assumption. Given the amount of capital flows that still want to be in industrial, we're seeing cap rates actually have compressed some.
Yeah.
We're finding some deals, but not as many as we have in the last couple of years. That's not necessarily a bad thing, we'll continue to search and hunt. Cap rates remain fairly tight. As deals present themselves, as Staci mentioned, we do have the capital to move quickly and take advantage of different situations.
Is development the best use of capital at this point?
Yeah. For us, that's where we historically have made the best investments, where we see the best yield on those returns. As the years progress, we've been happy to see where our development leasing has gone. Q4 was a kind of a rebound quarter for us. Q1 is in line with that Q4 number, and then quarter- to- date, it seems like our leasing remains fairly strong. With that, as Marshall mentioned in his opening remarks, that allows us to pull new developments out of the market. As development leasing continues, that'll allow us to invest more in new developments and continue to grow the portfolio.
Which markets do you think are most frothy for development, and really seeing the rents that justify yields that you guys want to create?
Sure. I like your optimism, the word frothy. It's getting better. I don't know if we're frothy yet. We hope we get there. The fun thing's been the leasing we've done so far this year, which really 3/4 in a row where development leasing's really picked up. It's been broad-based. It's been really well dispersed amongst our development platform. I think we're active in something like 13 to 15 different markets or sub-markets with our development activity. We're seeing the East Coast, and when I say East Coast, for us, that's kind of Raleigh, Greenville, Charlotte, through Atlanta, down through Florida. Good winds throughout those areas, high- growth areas. Even a market like Atlanta, which is notorious for being a little bit overbuilt big box, but on the multi-tenant side, we've signed three nice deals, our team there, in the last three weeks or so.
Moving toward Texas.
Dallas, if you spend any time in DFW at all and right around the city, you see the cranes. A lot of times you can go to markets and you just get the vibe that things are happening, and Dallas is one of those markets. It doesn't take you long sitting in traffic checking your phone to realize there's a lot of things happening there. We've had a lot of luck in many sub-markets within Dallas. Houston's been maybe a little bit of a sleeper over the last couple of years. I think in some of the CBRE and national numbers, Houston is rated as one of the top net- absorption markets in all the U.S., and so we continue to have wins there, a good team, a very good track record there. Austin is one of the markets where people like to be a lot.
UT grads don't like to go far from Austin, and it appears some of them like to build industrial buildings. That market's been a little overbuilt. We like it long term, but it's been a little slower there. Moving out west, Phoenix and Vegas have been good for us. Maybe a little bit of benefactor from some of the California exodus, if you will, of some companies and of some people. As you move to California, which for us is only, I think, something 11%-15% of our NOI, we continue to see Los Angeles be slow and sluggish. Maybe, I think heard the term saying the bottom is forming, which maybe is a way of saying we haven't gotten to the bottom all the way yet. That feels better, having visited that. The Bay Area is a bit slow.
The markets are steady. When you look at numbers on paper, the vacancy or nothing like that jumps out at you. Where you feel it more as a company is when you have vacancies in those markets. The foot traffic just isn't what you'd like to see. A long-winded way of saying, really most of all our markets are performing well. We're seeing activity in those markets, and we're pretty much green light and feeling optimistic across the board, maybe save and except being cautious in some of the California markets.
Okay. Where would you see supply coming back quickest, and does it actually even impact your competitive set?
One of the things we'll typically say is we like where we fit on the playground.
Yeah.
We go through it daily. We know how hard it is to get infill sites. It's a dichotomy. Everybody wants the package. As one broker described it to me, any time you hit click or hang up the phone, you want the repair person, the service, or the package delivered, but nobody wants trucks in their neighborhood. Zoning post-COVID has gotten much harder. Not that it's ever been easier, it's just gotten measurably harder post-COVID to build. With that, and sites are available on the edges of the cities where we are, that's where we think. Our shallow- bay vacancy rate is roughly, and there's a page in our investor presentation, we'll break it down by square footage. Our vacancy rate, without painting wide margins, about half the industrial national average, and it's stayed below it over a long period of time.
That we don't put capital out in large increments like large institutions want. It pushes them, the development fees are smaller, so those local regional players. The first developments will come out, we expect them to be on the edge of town where land's more available, the zoning battle won't be as hard. As we think about the vacancy rate, ours, I'm speaking nationally, we're around, call it 4.5%. National big box vacancy is probably 8%-9%, so roughly around half that range. We have more functional obsolescence in that 20 years ago, no one was building 800,000 ft buildings, where we've got, there's a lot of older, 40,000 ft-50,000 ft buildings.
What we'd like is just given where the trends are going for that last mile distribution, it's hard to call it good news, but when you think of a Phoenix, a Nashville, a Houston, a Greenville, Raleigh, the traffic's terrible in every one of our cities. Again, it's hard to say traffic's terrible, but what we like about that, those cities have grown faster than the cities or the states have been able to keep up with the transportation systems there. That last mile, and especially now with gas prices higher, it'll take a little while to flow through. That last mile, not only do we help our customers with quicker delivery and better service, if you're in a hotel and your air's out, you want that Trane air conditioning, Goodman repair person there quickly, and that's where we try to get to.
You could save rents on the edge of town, but what you save in rent, you're going to lose in service, and you're going to lose in fuel costs because your repair people or your delivery people are going to be stuck on the freeway in Nashville or Atlanta or wherever. That's our strategy, and that's where we fit in, and I like that we're more insulated from new supply than our peers are. We've built north of 50% of our portfolio over the years, and then what we've bought, if you've watched us the last decade, has been either vacant or leased new buildings. We've usually tried to keep that flight to quality within our size range. We think our portfolio is one of the best out there in terms of shallow bay, but yet a very modern portfolio.
Some of our markets, when you read the stats, you'll see it's negative absorption in the grade C. It's all improving now, but it was a flight to quality, which we think helps us as well.
Have you seen oil prices and that transfer into leasing discussions yet?
Not yet.
No.
It might in time. I think, look, we'll roll about 14% of our portfolio on an annual basis. Again, new leasing, we've not seen that trend. I guess we'd say with oil prices, what worries us, probably like everyone, is the impact eventually on the consumer.
Yeah.
We're really maybe another way to think about EastGroup, our buildings are built for local consumption. The GDP, if you did a market, and we've done this, it's in our slide deck. The GDP in our markets is about 35% higher than the national average over either the last five or 10 years. We need consumption in Atlanta, in Nashville, and Phoenix. It will eventually get to us, but it'll make it more impactful. The trend that we have seen of late, really starting in fourth quarter and in first quarter, and what we like is how flexible and well-located our buildings are. Suppliers to the data centers, with the amount of capital going into the data center sector, we've picked up about half of our development leasing.
It won't stay at that high of a run rate, it was someone supplying racking, cooling equipment, one related to the construction. We're an ancillary beneficiary of, in our markets, e-commerce was a new tenant. Green energy was a new demand a few years ago. Pharmaceutical fulfillment, where people push you to manage your prescription prices, we have several tenants that do that. Advanced manufacturing a few years ago, that onshoring people are typically going to the Carolinas and Texas and Arizona are getting more than their market share. Of late, it's been data center development, which we think has a tailwind to it, and it's been a nice ancillary use.
Yeah. How sustainable do you think that data center demand is?
I guess.
Is it more driving the development of data centers or maintenance and longstanding?
Ours, all but one lease has been maintenance.
Yeah.
We think it's more sustainable. One, I think the construction will continue, at least as we're not data, or I'm not a data center expert, just what you read and the amount of just sheer capital that's being put in that space. When we look at the type leases we've got, the users where it's cooling, racking, delivering things to an ongoing data center rather than, as I mentioned, one was related to construction, and we have construction contracts that are still ongoing, like with the Texas Instruments plant outside Dallas and the Intel chip plant in Phoenix and things like that. We just need a new use. Come tour anytime if someone wants to. There's a million ways to use our buildings.
Yeah
We continue to find new uses. I think the data center one, I don't think it'll run rate anywhere near 50%, but maybe 10%-20% feels like it could be on an ongoing basis. Kind of like we had similar. We had no e-commerce tenants really 10 years ago, and now Amazon is our largest tenant, that type thing.
Yeah. We're going to open it up to the audience. Any questions? Don't be shy.
We usually try to catch people right after lunch is the best time for this presentation.
Acquisitions, it's been a historical growth engine for your company, but it does seem like cap rates are.
Yeah
pretty tight at this point. What are you messaging to investors at this point?
I think probably, I'd say three things with that.
I agree.
Yeah.
One, we'll be patient on acquisitions. It's fine. If we miss our acquisition budget this year, we missed our development starts last year. I'm actually proud of the team.
It's fine, yeah.
Leasing was slower, and it's okay. It's all right if we miss it. We'll be patient and buy what makes sense. The other thing it tells us is if development leasing is going well and people want to own, as one broker said, there's a global wall of capital that wants to own U.S. industrial, and I think people appreciate shallow bay more and more. Rather than outbid the world, we'd rather be the supplier. We'd rather build it as fast as we can. I think we're always pruning from the bottom of our portfolio, but it pushes us. If people are willing to pay prices that are closer to the 10-year than we would've anticipated, we exited Fresno earlier this year.
We sold a building in Jacksonville, although we like that market, and we'll continue to maybe step on the gas on some dispositions while it's a good market to sell things. Look, we can't control the market, but we can kind of get a read on it and try to. If the market, if acquisition window is open, we'll go as fast as we can until that window closes. Same with development. We're going to get to the same place, it's just which road do you take to get to a well-located quality infill,
Yeah
industrial building. We've bought them vacant, we've built them, and we've bought them leased. We'll just try to go where that risk-return sits in the market, given at that point in time.
Yeah. Maybe for Staci or Brent, where do you think the biggest levers of outperformance relative to guidance could be?
I think just really in terms of our core operations, our occupancy has been trending ahead of,
Yeah
projections, when we think about largest dollars, our operating portfolio, the same store portfolio is about 60 million square feet. We can really drive growth there. Obviously with our development leasing, we have a lot of opportunity there. We have about $0.04 of speculative NOI included in our guidance for the year. We've made some progress leasing that. If we continue at the pace that we have been, then we could certainly see some outperformance there. That's an opportunity. As Marshall mentioned, acquisitions, we hope we can get there. We hope we find more acquisitions. Those tend to be quiet and then appear suddenly and sometimes in clusters. That would be a place that we would look for that. I think our core operations outperforming on occupancy and development starts, those would be main drivers.
Okay
outperformance.
How about bad debt?
Bad debt is trending around historical averages.
Okay.
We're not seeing any issues there. We had budgeted at about historical averages, so I don't know how much upside there would really be there, but we're feeling good about tenant credit health. We're not seeing deterioration through conversations, timing of payments. We're not seeing any issues brewing there. I think Marshall mentioned this, really, most of our tenants are providing goods and services to the local economy,
Yeah
where they're located. They're more in tune with what their customers need, and if their customers are still selling and they need more inventory, and if they still need services, then they're less sensitive to the headlines and the macro uncertainty, and they're more focused on the local economy and the vibrance of that local economy. We've not seen any issues brewing, and certainly if bad debt comes in lower,
Right
that's an area of potential outperformance as well.
Brent, anything?
Yeah, no, I would agree with everything Staci said, For us, in terms of upside or thinking, when we really shine and can add value the most for you, the shareholders, when our development pipeline is really churning. We've talked about acquisitions, and cap rates have been sticky, and those opportunities haven't been quite as to the extent we thought. Where we really add value as a team is our platform, our team in the field. Sourcing land inventory in these high-growth metro areas that we're talking about is not easy. It's very time-consuming, but the reward is there as you do it. You build the buildings. We're building to a 7%- 7.5% return in a 4.5% or 5% cap environment. That's good, we want to do that as much as we can.
Last year, and probably for four or five quarters running, we were slowly pulling our development starts down. As Marshall said, that's just what the market was dictating. Even though it was minimal, we did take up our development starts at the end of first quarter. If anything else, we just really wanted to show a sign of feeling more optimistic about development starts. To do that, if that's something that we could start moving in the upside rather than last year, we're the downside. It sets the table for future years. We also have in the same year, you can have more capitalization offset and those type things. To the extent we can up that development platform is really where we can add the value the fastest.
Are you seeing supply tick up in any of your markets? Probably more specifically, the segment of your markets that you guys play in?
Yeah, supply has started to tick up slightly.
Yeah.
Nothing dramatic that would overly concern us. As Marshall kind of mentioned on where do we see supply hitting first, that's going to be in the big box-
Big one.
kind of the 1- million- square- foot range, that's going to be on the outside of town, which again, is a completely different sandbox than where we play. Just adding on a little bit to what Brent said about the development business and potential upside, our strategy of having multiple phase developments in the same part gives us the ability to get a great judge on current demand. What we also do is every phase that we're under construction, we're permitting and designing the next phase. As soon as we lease a space or get to a certain point, we can react quicker than most, and deliver new space.
With 1,000 acres currently under ownership within our portfolio, and with all the current projects that are under construction having additional phases that have permits ready, we can respond to that demand quicker than our peers at this stage.
What do you think rent growth is in 2027 in your segment of the markets?
It's
I'm not very good-
Sorry
at forecasting things. If I was good, I remember somebody, "You're welcome to-
I know everyone.
come on my yacht to my island," and things like that. I think we're closer to an inflection point. I think our vacancy's half the sector average. In other slowdowns in the GFC, our occupancy dropped down into the upper 80s%. This time we've stayed 96%- leased, that catch-up factor, what I like, and I usually with kids say I don't, I'm running out of time, just, it's going to take a while for supply to catch up, and I think we'll have better rent growth, 5%, 6%.
Okay
I think. I say easy, but yeah.
Any last-minute questions from the audience? Go ahead.
Thoughts on Southern California? Any opportunities for you? Is this kind of a bid-ask ?
No, we've looked. What's surprised me, just using L.A., and I thought of that, it's had 12 quarters in a row of negative demand, and I'll contrast that with a Dallas with about 60 quarters in a row of positive demand. I'm spoiled, and we're used to positive demand. First quarter was slightly positive. Inland Empire was negative. It was a few hundred thousand feet, so it wasn't a big bounce back. In terms of opportunity set, pricing hasn't moved to reflect that negative demand, and so it makes it hard to get excited about placing capital. To me, and I'm out of step with the market, I'd say, but the pricing has held firm even while demand's gone backwards, and I guess, I'm not sure, we don't know the answer. At what point does cyclical become secular?
How many quarters in a row of negative demand do you need? I'm used to markets getting bad because of oversupply, not just the bottom fell out, which is kind of where L.A.'s been. Thanks, everyone, for your time.
All right. Thank you all.
Thank you.
Appreciate it.