EastGroup Properties, Inc. ($EGP)

All right. We're on the clock. So this is the EastGroup Properties 1:15 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 kind of 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 the content. Reid is our -- to my immediate [ Reid ] is our President, Staci Taylor, our Chief Financial Officer; and Brent, our Chief Operating Officer. So I'll try to police of your questions to the right person, we're a long-standing industrial REIT, kind of where we fit where shallow bay. So our typical -- when I say that, it's also another -- maybe I'm using it as a euphemism for last mile as well. So we're -- our average tenant size is a little over 35,000 feet. Our average building is around 100,000 square feet. So we're not -- the big boxes on the edge of town. We want to -- 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. And then the other way, when you look at our geographic footprint, kind of going east to west, where you run from the Carolinas, Georgia, Florida, Texas, Arizona, Nevada, out to California and in Nashville as well within that footprint. And the reason we pick those areas is that's where the population is the population ships will 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. So that's really where we find. We've been in industrial, we've been a REIT for probably 4 years in industrial REIT for 30 years. Staci and I all have been with the company probably longer than they want to calculate on average. For as young as we are, I know you wouldn't believe the number and things like that. So 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 thank a lot of our peers, what we spend time talking about and if you went back over that 30-year period or probably more likely 5, 10, 20 years, we're one of the top performing, if not the top performing industrial REIT over that time period. But within that, we we try to think about what can we do to reduce your risk without impacting your return. So kind of go through that. I think there's different ways we can structure our company differently from our peers. And in that, I mentioned land is harder to come by, it's harder to get zoned than you think, I'd say, big land parcels on the edge of Phoenix, on the edge of Atlanta, Dallas. So we do that is 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 tack 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 were Dallas. You've got population Houston, you've got population growth, you've got e-commerce penetration. So 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 4 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. And so we'll build 1 or 2 buildings at a time, and then I'll get a call from the field saying, "I'm 50% leased on Phase 2. I've got some prospects I have some tenants that may want to expand elsewhere within the portfolio. And so most of our peers, it's a push of demand. We think the market's ready will build 750 building on the edge of town. [indiscernible] has built 200,000-foot buildings, typically, but have that demand pulled. So we think that we can get really attractive yields. We developed around yields if we sold it upon completion. I'm using round numbers or probably around the mine. But having that demand pulled and then the other benefit we get from building Phase 2, we know where rents and tenant improvements are a Phase 3. Usually, thankfully, the markets had industrial markets had a tailwind, but Phase I, we're not estimating rents quite as wildly as we would as if we did one-off, one-off like that. So again, that's where we try to operationally reduce your risk by where we go to Atlanta, for example, where we go with in Atlanta and how we build out those markets. And then from the other side, we believe in geographic diversity. We're on a little over 20 different markets, the major cities in those states. -- that we talk about. So we -- and then our top 10 tenants are on a little over 30 locations, and that -- 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. So we try to have geographic diversity, tenant diversity, and then I'll complement. The other side, Staci and her team and that our debt-to-EBITDA is 3x, which is the lowest in our sector, 1 of the lowest of the Reach you'll see here. And within that that the, it's all long-term fixed rate, ladder debt. So again, I think there's -- And all the different things I could go through, we don't think we 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. So whether it's through our balance sheet, are what we do. That's what we spend time without being so conservative, we miss opportunities along the way. So again, our gears are good, but if you like, safe structure last-mile industrial, hard to replicate portfolios because the land is not there. That's really kind of where we -- that's our -- that's my 20-minute elevator pitch on what we do.

We certainly like that elevator, but -- so Staci, to that point, how do you think about the right leverage for your company? And where you can grow into that?

Sure. So as Marshall mentioned, we're currently at about 3x debt to EBITDA, which is obviously, 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. So we try to remain flexible and consider equity and debt issuance as options for 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. But we said all along that we would remain flexible. And we've done that. And 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 '27. So it gives us a lot of flexibility in terms of timing. So 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 and if not, 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 over $201 per share.

Very nice. And Reid and Brent, what are you seeing on the acquisition market? Is it opening up or...

Blaine, we've actually been a little surprised this year. We anticipated that or maybe hoped that cap rates would increase some to give us additional buying opportunities as the year progressed with where we are at the interest rates, that seems like a reasonable assumption. But given the amount of capital flows, it still want to be in industrial, we're seeing cap rates actually have compressed some. And so 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. But we'll continue to search and hunt, but cap rates remain fairly tight. But 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 [indiscernible]

Yes. For us, that's where we, historically, made the best investments where we see the best yield on those returns. So as the years progress, we've been happy to see where our development leasing has gone in Q4 was 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. So with that, as Marshall mentioned in his opening remarks, that allows us to pull new developments out of the market. And so as development leasing continues, that will allow us to invest more in new developments and continue to grow the portfolio.

Which markets do you think are most kind of 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. But the fun thing has been, the leasing we've done so far this year, which is really 3 quarters in a row where development leasing has 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 submarkets are 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 wins 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 really seen. We've signed 3 nice deals, our team there in the last 3 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 in it. A lot of times, you can go to market, you use to get the vibe that things are happening in 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. And so we've had a lot of luck and many submarkets within Dallas. Houston has 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 rate 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. So that market has been a little overbuilt. We like it long term, but we're -- 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. And then as you move to California, which for us is only, I think, something 11% to 15% of our NOI, we continue to see Los Angeles be slow and sluggish. Maybe I think I heard the term saying the bottom is forming, which maybe is the way of saying we haven't got them all the way yet. But that feels better, having visited that and then the Bay Area is a bit slow. The markets are steady. And when you look at numbers on paper, the vacancy or nothing like that jumps out at you but where you kind of 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. So the long-winded way of saying it's -- really, most of all our markets are performing well. We're seeing activity in these markets. And we're pretty much greenlight and feeling optimistic across the board, maybe saving 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?

Yes, I think -- well, 1 of the things we'll typically say is we like where we fit kind of on the playground. And by that, it's and we go through it daily. We know how hard it is to get infill sites. It's a dichotomy. Everybody wants the package as if 1 broker described it to me any time you hit click or hang up the phone, you want to repair person to service or the package delivered, but nobody wants trucks in their neighborhood. So zoning post-COVID has gotten much harder -- not that it's ever been easier. It's just gotten measurably harder post COVID to build. So with that, and sites are available on the edges of the cities where we are -- that's where we think. And our shallow bay vacancy rate is roughly and there's a page in our investor presentation. We'll kind of break it down by square footage. Our vacancy rate with panning wide margins, about half the industrial national average, and it stayed below it over a long period of time and that we don't put capital out in large increments like large institutions want. So it pushes them to development fees are smaller, so those local regional players. So the first developments will come out, we expect them to be on the edge of town where land is more available the zoning battle won't be as hard. And then when you -- as we think about the vacancy rate, ours, I guess I'm speaking nationally is about we're around, call it, 4.5% national big box vacancy is probably 8% to 9%, so roughly around half that range. But we have more functional obsolescence in that 20 years ago, no one was building 800,000-foot buildings where we've got there's a lot of older 40,000, 50,000 foot buildings. And 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 Phoenix, Nashville, Houston, Greenville Raleigh, the traffic is terrible in every one of our cities. So again, it's hard to say traffic is terrible, but what we like about that, those cities have grown faster in the cities or the states have been able to keep up with the transportation systems there. And so that last mile and especially now with gas prices higher, it will take a little while to flow through. But that last mile, not only do we help our customers with quicker delivery and better service. If you're in a hotel and your ears out, you want the train air conditioning, Goodman repair person there quickly. And that's where we try to get to and 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 delivery people are going to be stuck on the freeway in Nashville or Atlanta or wherever. So that's kind of our strategy -- or that is 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 built north of 50% of our portfolio over the years. And then what we bought, if you watch just the last decade has been either vacant or leased new buildings. So 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. And -- 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 kind of transfer into leasing discussions yet?

Not yet. I mean it might in time. And I think -- look, we will roll about 14% of our portfolio on an annual basis. And again, new leasing we've not seen that trend. I guess we'd say with oil prices, what worries us, probably like everyone has the impact eventually on the consumer because we're really -- maybe another way to think about EastGroup, where our buildings are built for local consumption. The GDP, if you did kind of a market when we've done this, it's in our slide deck. Our -- the GDP in our markets is about 35% higher than the national average over either the last 5 or 10 years. So we go to -- we need consumption in Atlanta, in Nashville and Phoenix. And so it will eventually get to us, but it will make it more impactful to kind of the trend that we have seen of late, really starting in fourth quarter and in first quarter, and it's what we like is how flexible and well located in our buildings are, but 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, which is it won't stay at that high of a run rate, but it was someone supplying racking, cooling equipment, one related to the construction but we're an ancillary beneficiary of -- in our markets that went was 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 that we have several tenants that do that and then 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. And then of late, it's been data center development, which we think has a tailwind to it and it's been a nice in SP-8 How sustainable do you think that data center demand is it more driving the development of data centers or maintenance lease has been maintenance. So 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, but just what you read in the amount of just sheer capital that's being put in that space. But then when we look at the tight leases we've got the users where it's cooling, racking, delivering things to an ongoing data center rather than, as I mentioned, 1 was related to construction, and we have construction contracts that are still ongoing, like with the Texas Instrument plant outside Dallas and the Intel chip plant and Phoenix and things like that. So we just need a new use. There's come to our anytime you invite someone wants to, there's a million ways to use our buildings, but we continue to find new uses. And I think the data center one I don't think it will run rate anywhere near 50%, but maybe 10% to 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.

We want to open it up to the audience. Any questions? Don't be shy.

We're usually trying to catch people right after launch [indiscernible]

So acquisitions, it's been a historical growth engine for your company, but it does seem why cap rates are pretty tight at this point. What are you messaging to investors at this point?

I think probably. I'd say 3 things with [indiscernible] 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, and I'm actually proud of the -- but demand is leasing was slower, and it's okay. So it's all right if we miss it, we'll be patient and buy and what makes sense. The other thing it tells us is if development leasing is going well and people want to own is 1 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 we rather other than outdid the world. We'd rather be the supplier, so we'd rather build it as fast as we can. And I think when we have -- 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 have anticipated, we -- 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. So 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. And 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 industrial building. So we've bought them vacant. We built them and we bought them leased. So we'll just trying to go where that risk return sits in the market given at that point in time.

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 projections. So that -- when we think about largest dollars, I mean our operating portfolio, the same-store portfolio is about 60 million square feet. So we can really drive growth there. And then obviously, with our development leasing, we have a lot of opportunity there. We have about 4 of spec NOI included in our guidance for the year. And we've made some progress leasing that. And 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've gone more acquisitions. Those tend to be quiet and then appear suddenly and sometimes in clusters. So that would be a place that we would look for that. But I think our core operations outperforming on occupancy and development starts, those would be main drivers of potential outperformance.

How about bad debt?

Bad debt is trending around historical averages. And we're not seeing any issues there. We had budgeted at about historical averages, so I don't know how much upside that would really be there, but we're feeling good about tenant credit health. We're not seeing deterioration in through conversations timing of payments. We're not seeing any issues brewing there. And I think Marshall mentioned this, really, most of our tenants are providing goods and services to the local economy where they're located. So 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. So we've not seen any issues brewing. And certainly, if bad debt comes in lower, that's an area of potential outperformance as well.

Brent, anything?

Yes. No, I would agree with everything Staci said. And for us in terms of upside or think when we really shine it can add value the most for you the shareholders, when our development pipeline is really churning and we've talked about acquisitions and it has been -- cap rates have been sticky and those opportunities have been quite to the extent we thought. But 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 rewards there as you do it, you build the buildings we're building to a 7% to 7.5% return and a 4.5 or 5 cap environment. That's good. We want to do that as much as we can last year and probably 4 or 5 quarters running, we were slowly pulling our development starts down. As Marshall said, that's just what the market was dictating. And even though it was minimal, we did up tick up our development starts at the end of first quarter. And if anything else, we just really want to show a sign of feeling more optimistic about development starts. And so to do that, if if that's something that we could start moving in the upside rather than last year where 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. But to the extent we can we can up that development platform would be -- is really where we can add the value, the fastest.

Are you seeing supply tick up in any of your markets? And I mean, probably more specifically the segment of your markets that you guys play in?

Yes. Supply has started to tick up slightly but nothing dramatic that would overly concern us. And as Marshall kind of mentioned on where do we see supply heading first. That's going to be in the big box kind of the 1 million square foot range, and that's going to be on the outside of town, which again is a completely different sandbox than where we play. And then 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. And so what we also do is every phase that we're under construction, we're permitting and designing the next phase. So as soon as we lease a space or get to a certain point, we can react quicker than most and deliver new space. So 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 market?

Not very good forecast. If that was good I remember someone at your welcome to the island in the [indiscernible] but look, I think we're closer to an inflection point. I think our vacancies have the sector average and other slowdowns in the GFC, our occupancy dropped down into the upper 80s. This time, we've stayed 96%. So that catch-up factor what I like, and I usually a kid and say, I don't -- I'm running out of time, but just -- it's going to take a while for supply to catch up, and I think we'll have better rent growth, 5%, 6%.

Any last-minute questions from the audience. Go ahead.

[indiscernible]

Surprised me that -- so just using to it said it had 12 quarters in a row of negative demand, and I'll contrast that with like a Dallas with about 60 quarters in a row of positive demand. So I'm spoiled, and we're used to positive demand. First quarter was slightly positive. Inland NR was negative. It was a few hundred thousand feet. So it wasn't a big bounce back. But 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 not a stepped with the market, I'd say, but the pricing has helped firm even while demand has 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, and I'm used to markets getting bad because of oversupply, not just the bottom tell out, which is kind of where [indiscernible] Thanks, everyone, for your time.

All right. Thank you all. Appreciate it.