EastGroup Properties, Inc. (EGP) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Citi's 2026 Global Property CEO Conference. I'm Craig Mailman with Citi Research. We're 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 over the liveqa.com and enter code GPC26 to submit questions. So Marshall, I'm going to turn it over to you to introduce your company and team, provide any opening remarks and tell the audience the top reasons that investors should buy your stock today, and then we can jump into Q&A.

Good morning, everyone, and thank you, Craig. [indiscernible]

Hit the red button. It's a new...

Okay. I was trying to kill time. But -- thank you, Craig. Good morning, and thanks, everyone, for your time and interest in EastGroup this morning. I'll start kind of right to left introducing our team. John Coleman, EVP, runs our Eastern region, come 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. And then Casey Edgecombe, who handles many of you know, our Investor Relations. EastGroup, if you're not familiar, we're -- we call shallow bay industrial REIT, which is really shallow bay euphemism for kind of smaller infill buildings. One of our peers described this years ago and made the comment, EastGroup is always been last mile. You all just didn't -- weren't smart enough to coin the phrase to come up with that. But we try to build a campus setting, near businesses, near higher-end residential, ideally, that's where the disposable income is and 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, two or three facts that come to my mind. And we talk internally a good bit of how do we lower our risk without reducing our return but we've now had 51 consecutive quarters of FFO growth versus the same quarter prior year. Same thing for our same-store NOI. So if we -- if we can hang in there one more month, we'll make it for 13 years of positive FFO and positive same-store NOI just as 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. So a proven management team, and I was looking at the screen just a little bit earlier of all the red on it and things like that. So we've been through every -- COVID, GFC. We've been a public company. We've been an industrial REIT and a public company. So thankfully, our team has been through all those cycles. Our strategy evolves, but we don't -- we weren't housing or we weren't office, things like that. We've always been a shallow bay industrial REIT during that time frame. And maybe going through all those economic cycles, one of the other things we've learned is the, you never know what the next black swan event is, so have a safe balance sheet. So 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 3%. Our debt within our total market cap is around 14%. And that's all laddered fixed rate debt, in terms of laddered, in terms of maturity. So 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 going to come in and pick up the news of an accounting scandal or some issue at one of our tenants. So -- and 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. So hopefully, we're going to have run our company and have low overhead for you. And then on top of all that, we're actually trading below -- still trading below our long-term multiple of FFO. So again, a lot of that is 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, and when we're below our historic multiple. So those are our main reasons why we think it's a compelling opportunity.

Perfect. Well thanks for the initial comments. And you guys were nice enough to put an operating update out ahead of the conference. And the development leasing, which started to pick up in the fourth quarter, looks like it's continuing. So maybe just talk a little bit about maybe some of the gestation periods on the 166,000 that you signed and how the leasing pipeline for development and operating assets kind of looks today and 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. And look, I'll confess, I was in -- I love our setup and that supply is at its lowest level since 2018 and 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 tenant fee is about 35,000 feet. Our average building size is just under 100. So again, we'll have a small campus for that last mile service or delivery. Thankfully, our development leasing and 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 the fourth quarter. So we really -- and it has been an interesting year in the last, call it, 18 months where we've had solid activity, but when you mentioned gestation period, just getting people to the cash register. We had people in the store. It's getting under the cash register and that seemed to happen more in fourth quarter, the 166,000 feet 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. So we're going to expand their building by about 100,000 feet, kind of renew their existing lease and add 100,000 feet. And on top of that, we -- I'm pleased, again, still with the activity we have. You just -- you always read the 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 we -- you hear us report will be first quarter, but I'm hopeful we'll have a decent chance to build on those 166,000 feet.

Yes. So I think as everybody is aware, with Liberation Day last year, 1st of April, caused a lot of users to pause and wait to see what would happen. So we did see the biggest impact on that through our development leasing. The operating portfolio performed quite well last year is as users decided to stay in place and renew. But the development was a little bit slower. We saw some of that, as Marshall mentioned, fall out in Q4, which is a nice thing to see. And 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 of quarters ago. So some good leasing to start the year. We want to see some more, but the most important thing is just some consistency throughout the year. So -- we'll see how it turns out here in the next few months.

And as you guys look at sort of the tenant pool for your size range, you guys are a little bit differentiated with having, I think, your average tenant size is around 35,000 square feet, which seems to be a stronger part of the market. But how deep is the tenant pool for that segment of the market? And I know that you guys do sort of out-punch the market in some of the areas in terms of occupancy versus market occupancy. And so just talk a little bit about the resurgence there, markets that maybe are thinner than if you don't make a deal, it may be a couple of months until 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. Yes. Again, what we like, and I remember brokers saying to me, every 10,000 feet, the number of prospects you have goes up -- I guess it drops exponentially, it should come down. So smaller to the tenant, it's more and the TIs are lower. It's -- we focus on tenants that distribute within the metropolitan area. So we want growth in Orlando, growth in Dallas, Austin, Phoenix, Las Vegas. That's where we pick the markets. And then 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 is your traffic is terrible. You've outgrown the freeway system, they don't keep up, things like that. So 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 is out, you want the repair person quickly. And if they're coming from cheaper space on the edge of town, they're going to get stuck in traffic. So that's really where we've said, we're not the lowest cost competitor, but we want to compete on traffic, our own service level and then you really need that location. It's usually the smaller markets, and they're good. There's -- we're in -- it's a smaller portion of our portfolio, whether it's a Tucson. There's a lot less competition or Greenville, South Carolina, maybe it's one of John's markets where look, we're one of the fewer games in town versus a Dallas/Atlanta things like that, but there's also fewer tenancy, but that really hasn't held us back on rents or things like that. But in some areas, there's always activity in Houston. There's always activity in Phoenix. And 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 foot building. So the vacancy rates, and I'm probably off here a little bit, but call it 8% or 9%. But years ago, no one was building. So all those buildings are much newer than you think, 100,000-foot building. The obsolescence factor or the local owner that may not have the CapEx that may be partnership that they just aren't real estate people. So we should, in my mind, always be able to outpunch the market, at least over the long term. And look, there's a couple of markets where we do watch, for example, like I guess, Reid has got Austin, Texas, the vacancy rate because of oversupply in Austin and that market has gotten really long north to south, but it's 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. So again, it's a lot of big box on the edge 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 and what we try to own or build, which are the newer buildings.

We have a couple of questions coming in. First one, just on tariffs. What are you hearing from tenants following the Scottish EPA ruling? Does the ruling reduce uncertainty for tenants? Or does it pivot to alternative tariff statutes to keep uncertainty elevated?

Yes. It's 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. So 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. So we're still full. It's just -- about 1/3 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. So we'll build building 8 for them in the park. And it will hurt our same-store numbers, but what we can tailor we usually tell the tenants we can accommodate your growth needs. And the way the markets work the last several years, rents have been rising and still are that we can backfill your space in Building 3 at a higher rate, and we have -- it will take us probably 9 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. So we've said it's going to be a noisy year with a lot of headlines. And I'm hopeful -- 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 going to 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 is saying, we need more space. Corporates saying whether headlines are messy, sit tight, make do. And at some point, people get to a point where they just need to run their business and need more space. And that's what we saw later in the year. So this, to me, is just another kind of dot on the Richter scale of, okay, there's -- now it's Iran and there's tariffs and this and that, and I feel for our tenants. But at some point, your customers -- if your sales are going up and your customers are hanging in there, which seems to be the way the economy you've got to run your business. And I think that's what we saw in fourth quarter and are seeing to a degree in first quarter still. So I'm hopeful people are getting a little more used to the shocks to the system.

And then 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. Yes. It obviously varies from market to market. Some of the lower cap rate markets, we're seeing kind of that low 5s, sometimes upper 4s. Some of the stronger markets are like 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 in strong demand is kind of that low 5 range. And then kind of depending, you may see a little bit higher than at mid-5. It's kind of depending on the -- like in Austin, maybe a little bit weaker just because of 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, but that's probably anywhere from -- still seems to be fairly healthy, but kind of mid-5s to upper 5s, what we're hearing and seeing.

And you guys talk a little about development yields. It feels like you guys have been sticky in sort of that plus or minus 7% range despite cap rates moving around, and it feels like maybe being lower than people still would have thought on a market basis. But the comfort level that you guys have, I know your start guidance was pretty healthy this year. So the view there on incremental starts, build-to-suit versus spec. And then I know in the operating update as well, you guys issued some equity. The view of equity versus incremental debt.

Okay.

I doubt those are the question that you want.

On this one, it's not that...

I'll remind you.

It's only because of memory, not avoiding a topic. Thankfully, our development yields have hung in there, like you say 7 -- low 7s. So we'll typically try to say in our rule of thumb is 150 basis points above the market cap rate. And again, kind of depending on the size of the portfolio and things like that. So we have healthy profit margins on our development. And I'll brag on our team a little last year. At this time last year, we had come out with $300 million in starts. And with Liberation Day and things like that, we'll build a part, but as I should have mentioned more, we'll build it in phases. We'll build 1 or 2 buildings at a time, and it's easy. We'll taper. It's a pull system. Most of our peers are we're going to go build a building, and I hope 3 people aren't doing that. But I'll get a call from one of these guys saying, hey, Phase 2 is 50% leased. I've got an LOI out or a lease out or more activity, I need to build the next phase. So we only started $175 million a year ago, where we thought. We had told The Street, we bought $300 million. So it's hard to predict, but we'll say, look, we'll go as fast or as slow as the markets telling us and 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've penciled out. It will come from the teams in the field. And 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 will kind of pull the ticket to put more blue shirts on the shelf. I mean it's like a retail store are like you would build out a subdivision for residential is, one or two home sale will start the next one. And we think that's a lower risk, and we like the returns we're getting. I would say one thing that it's maybe -- it has 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 '23 COVID levels of supply. And so many of the people that build shallow bay are local regional developers with an institutional partner. So in this slowdown, their balance sheets really weren't structured to carry -- 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've done all the work, but I don't want to carry it for 2 years until the market kind of normalizes and goes back. So we think we're going to have a really good runway in terms of fewer people. It's going to take them a little while to get back in business and up and running, and they will and will oversupply again, that's nature of our business, but there will be a pretty long runway measured in a couple of years. And 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 or like the one in Arizona, we announced, would you expand the building? And again, the -- we have a good relationship with them, but I think that 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 2 buildings, but where tenants would take an entire building or maybe in a couple of buildings in a park if we would build it and things like that, going on now than I'd probably say we have in the last 3, 4 years that I can think of.

And just to add a little bit to Marshall's comments on some of the pre-lease or build-to-suit activity, we really saw into 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. And so that's one example of the expansion we signed in Arizona, which was a good sign, but we continue to have other conversations. And that's also, I think, a point out that the power of our platform and portfolio, and we have over 70 million square feet of existing product and over 1,400 customers when they need to expand. We're usually always the first call, and 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. So 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.

So that -- I agree with Reid. Hopefully, it would give us some upside to the $250 million in starts because it's hard. These are so [ 0 - 100 ]. But if we could land a few of those, and if the economy can hang in there, then I'm an optimist, but I hope we can hang in there and maybe have some upside to the number of starts. But there, again, I think I always say I don't worry about the buildings starting as much as I think about them finishing. We can start whatever we want to start. We just want to make sure we get it leased, and we usually underwrite a year after completion to get the building stabilized and lease. And either way, that's when it rolls in the portfolio. And last year, we saw where a vacancy dropped, it was more buildings that are we're achieving our yields, but it was taking 16, 17 months past completion to lease up rather than at the peak, it was 6 or 7 months. And that was when we kind of peaked on development as a company, probably just under $400 million. But again, I'm glad we have the team and the balance sheet and the land. And these guys will say we always want -- usual 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. So getting industrial permitted has gotten materially harder than it was 5 or 6 years ago, which is great for the 65 million square feet we own, it's challenged for the next -- that incremental 5 million we'll build.

I was going to add, just if you take a snapshot of where we are in the Eastern region, with new development starts. We're at about a 60% reduction from the peak. So that dynamic has really worked in our favor. A couple of 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 new demand for construction. Also, as we look forward into this year 2026, supply will be greatly down to Marshall's point, so we think there could actually be some upward pressure on rental rates when that happens. And then his point on land, just having the land entitlements in place, ready to be permit ready to start. That's key that we have a very deep land inventory that is fully entitled and really when that site is ready for the next phase, we're ready to start construction.

And on development, we had a question come in. On whether you've seen water rights extend entitlement time lines or change density site coverage for new development?

Yes. Nothing, at least in our markets yet on water that I've seen or heard of. As we mentioned, the entitlement period is taking longer. Power is more of a constraint than typical. But for our users, most of them aren't really heavy power requirements. So we haven't seen a hindrance on any of our activity regarding power, but it is something we're monitoring.

And that's all really being driven by the data center demand, so power and water, shocking how much of that is consumed. And in Atlanta, at least I use as an example, public hearings now where residents are showing up in opposition of future data center zoning and permitting. So it's on the table. I'm not sure where it's going to go from here. We put our toe in the water and looked at some data center opportunities, probably not a great fit for us. But I think that is going to continue to see some pushback on those two utilities moving forward.

In the markets you guys operate on or in rather, how much -- 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?

Certainly, they can pay a lot more, and usually with industrial, we can only go one story historically. So we've said, we're about the first guys to get priced out of land when we chase it. And so it's one more source of competition. They're so tied into power, where John said, it's not something we're actively looking, but we said, let's understand it. If we do have land that's has the power and the water for data centers, we kind of kid, we want to know if there's oil under our land. If we happen to buy it, we weren't looking for it. But if it's there, we should capitalize on it. And so it's another set of competition, but theirs -- they seem so much more limited than what we can do for industrial. Ours is hard to come by, but 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 but 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 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 -- I wouldn't buy EastGroup stock because of the data center opportunities, there's better opportunities in other rooms here than this one.

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?

Look -- and 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 lump together. But 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 has risen to it's a CFO decision to sign the leases. So that's part of what takes that gestation period out a little bit. And I would say look, we've got local regional tenants, and we've got Fortune 100 tenants. And usually, the bigger the company, the bigger the legal department, the longer the gestation period, even if we have 3 releases with them in other markets and things like that. It just takes longer. So it's hard to predict the cadence and the square footages could throw. And literally, as those leases get signed, we'll move pretty quickly to build that next building these because with the permits in hand and the reason if this helps, is our prospects all have tenant rep brokers, and if I'm Citi's tenant rep broker, I want to see that construction underway because if I promise you, your space is going to be ready in June. I want that developer, we -- maybe if it's a free lease, you could have not broken ground. But if you're moving in because I know come July, you're going to be calling me every day asking where your space is. So that's why it's important for us to have a little bit of inventory out there in the market because you hate to lose, and it's happened to us before you hate to lose a good tenant because you can't accommodate their growth. But if we don't, somebody is. So we're trying to have that ability. So that's where, again, if we land some of these pre-lease opportunities, I could see upside to the 250. Or just if the market hangs in there, look, I hope there's upside to it, but -- that said, using just as recent as last year as an example, I think we're -- 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 and that we didn't see the development opportunities and cap rates were sticky last year. So what we bought was strategic, more than opportunistic, where a couple of years ago, we saw things not close because of the capital markets, and we were getting a second look. And so we had a very active year in buying existing lease but new product and then that window closed, and so we'll try to find where that market opportunity. We've said we're going to end up with well-located, state-of-the-art shallow bay industrial buildings and fast growing markets. And sometimes, most of the time, we're better off building it. If everybody wants it, we'd rather create it than outbid people for. But sometimes the market gives you that window to buy it vacant or buy it when it's leased, and it's just kind of -- usually, it's the inbound calls to tell you where the window is.

And then 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 kind of spent on identifying opportunities for productivity enhancement or, I guess, revenue enhancement? However you kind of looked at it internally?

Yes. Good question, and we spend or I'll complement our IT team of where it can we use it and training and trying to stay safe too within a cybersecurity world. So we think about all of those things, about one, making sure we don't get hacked and everybody, including the clicked on something or link you shouldn't and things like that. But 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 a design, it's not a creative team. It's not legal or think of different people like that. But -- it's been our accounting. So our quarter end closing has gotten -- that team has done a really nice job of property accounting of automating more and more of that, and they're able to what we've talked about is we'd rather reduce the kind of the closing time but offset that with analysis time. So if we can use technology to do that. And they've -- 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. So -- and I think our -- probably within our tenant base, it's still -- you're still delivering goods and services to local tenants. So they can probably -- the bigger the space, probably the more we see the tenants' ability to put into their CapEx and equipment. But a 35,000 foot, it's usually not state-of-the-art where 1 million square foot building would be. But we'll watch and see how they can use it to maybe be more efficient with their space and if they can. But again, we keep seeing more and more opportunities, again, using like the on-shoring, near-shoring is probably the latest tailwind where we see benefits from kind of like e-commerce, we said our old tenants didn't go away, then e-commerce kind of started diving into the pie. And now it's been -- and we're not manufacturer. I'm watching 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 -- can supply either food or paper products or boxes or anywhere in there of any kind of range of things to people that need to be near that new source of demand in the market.

Then just rapid fires here. Same-store NOI growth for the Industrial Group in '27.

The group 5.5.

And then 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. So I'll...

Well, thank you guys so much. Everyone, enjoy the conference.

Thanks, Craig. Thanks, team.