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

Maybe on the operational side, I mean, where do you stand today as it relates to the leasing pipeline? Talk about kind of demand that you're seeing out there in the market. Let's compare that to 2Q, for example.

Okay. Yes. So starting with Q2, that was a record quarter for us on leasing overall. We leased 3.9 million square feet. That's about 1.5 million of development leasing through the Q2 period, which, to put in perspective, that was more than what we leased in development all last year. And so if you heard us talk about the business in 2025, we talked a lot about inconsistencies where we'd see a really good quarter followed by a weaker quarter. What we've now seen really starting in Q4 of last year is some consistent demand. And that consistent demand has really been a big driver for us, both on the development side, where we've -- through Q3 and our update we provided the other day, we've leased 280,000 square feet of additional development leasing. That's allowed us to increase our development starts throughout the year. We're now at $325 million. And it feels like there's probably more upward pressure on that number as we sit today. Our occupancy numbers have also outpaced in July and August. We're sitting right at 96.1%, which is ahead of our plan that we had in Q1. So the demand trends seem to be there. We're seeing that in a lot of different areas. We've talked a lot today about data center-related uses. If you haven't heard about it, but data centers are hot. The nice thing is that we're a benefit of that because a lot of the users that need to service data centers, be it HVAC, electrical or whatnot have to have warehouse space to provide those services. So we're enjoying the increased demand in data center-related uses. But then all the other trends that we've been seeing over the years, be it advanced manufacturing, be it the e-commerce, all those tailwinds are still feeding us beyond just the general GDP growth of the metropolitan areas that we service. So I feel like we're in a really good position in all the markets that we serve to continue to provide good growth in our assets, good same-store growth as well as what feels like an improving and more sustainable development business going into the rest of the year and into next year.

How sustainable is that data center demand do you think? And then maybe a second part to that would be how big can that become within sort of your portfolio?

That's a great question, and we've been studying it a lot and trying to understand it, but it does definitely feel very durable. As I mentioned, the users that we're seeing are supporting the data center. So it feels like as long as the data centers are there, they're going to have a need for our space. And then how big can it get?

It's not just like initial setup and they move the chips in, but is it like maintenance.

Maintenance, HVAC equipment, the power generators, they need backup and support and maintenance. The racking systems, we have one group that took some space from us in Houston that supports the racks. And so if you have an issue with a particular rack, they may send it to this facility, have it serviced or spot checked and sent back electrical components. So there's all different elements of the data center that I didn't initially appreciate even a year ago that we're now seeing that's fueling the need for all this space.

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Not in the data center. No. And so what we're seeing is HVAC is kind of the easiest example. So there's -- we have HVAC companies that have a commercial business. And so with the data centers that are now growing, that's become a bigger part of their business. So they have a core business they've always had, and it's just now expanding more because of the data center. And we're a benefit of that because we're their existing landlord and then they come to us say, "Hey, we need some additional space. What can you do?" And that's where our development pipeline and platform helps provide that growth for them.

So I think the other thing I agree with Reid, I'll add, just as we've studied it, and it's not throughout our portfolio, like we're not seeing this demand in Florida or California. But when we look from, say, the Carolinas, Atlanta, Dallas, Phoenix, it feels like that's where the data centers have been delivered, and we have those suppliers. And then when we looked at what's been delivered versus projected what's coming in the next 5 years, it was a multiple, which surprised me and given as much as we've spent on data centers, it's, call it, 4 or 5x more capacity coming that Dallas is projected to be the same or greater than Northern Virginia. And so as Phoenix, Atlanta, Charlotte, all these get built out, that's maybe Samir, where you touched on of like, there's a lot of runway left on this because maybe the supply chain has been built out in Northern Virginia, but it really hasn't. I know recent lease we signed in Arizona in the last 2 or 3 weeks, part of their thinking was we have adjacent land. We helped and that they wanted to be in our project and that we've got other buildings and land in the area. Their goal is to outgrow their space as soon as they can. So I hope they're right too on that.

And we've been looking at a lot of different studies from different groups, but one of the most recent ones I read was from Green Street, and they quoted that for every gigawatt, they anticipate there's a need for 2 million to 3 million square feet of supporting warehouse space. So if you feel like we're in the early innings of all this, which it feels that way, there should be a long growth rate and trend for the need for this type of warehouse space and the type of users we've been supporting here the last few quarters.

And I don't -- it didn't seem like there's any changes as it relates to the requirements or the lease terms that this category sort of has, right?

Yes, that's a great point. So we have -- we've been attracting all this data center-related demand, but we haven't changed anything about our strategy. So we haven't changed the location of our buildings, our investments or the building configurations. And even when these users come in, the requirements are pretty much the exact same from what our general users are using. So if I gave you the term sheets of a deal between the data center-related use and maybe one of our standard tenants, you wouldn't be able to tell the difference between term or our TI amounts or any other special requirements. So what we like about that, too, is long-term investor, long-term developer owner over the years, we never know what trends in the economy are going to be happening in another 5 or 10 years, but we have generic and optionality on our buildings that we'll still be able to track these future uses if the data center users decide to move on or whatnot.

What about -- given all this positivity and momentum in demand, what are you seeing in market rents? Like talk about -- I don't know, talk about nationally in some of your best markets, what you're seeing and maybe some of your relatively kind of weaker markets.

Yes. So for our product type, I think it's important to understand the small bay multi-tenant. That overall has been a tighter market over the years. So I think we've probably sounded more bullish on rent growth and be able to hold rents in the weaker markets than some of our peers. And so throughout this year, it feels like we've been from a rent growth perspective on just a market standpoint, probably a couple of bps above inflation. I think as you look forward, I think the trend is going to be positive on that. One of the things that we're anticipating is higher construction costs as we go into 2027 and beyond. And that's being driven by several factors. Obviously, you have higher fuel costs, be it diesel or gasoline. We're also hearing from our GCs that steel is increasing both the lead time and the cost of steel as some of these large manufacturing facilities are gobbling up a lot of the steel capacity in the country. So -- and then also, I think there's going to be a higher amount of supply, mostly on the big box side. And so all that equates to higher construction costs and then you layer on that there's going to be higher interest rate carry that's going to make the cost of projects go up, which then should have the effects of having to push rental rate to justify new development. So I think the trends for rent growth are positive for our sector as we finish out '26 and really looking into the future.

I'll open it to the audience for...

Maybe Marshall, going back to some of your opening comments about having parks where you build one building and then the next. Do you have a sense of across the EGP portfolio, how much runway there is for development based on existing parks where you still have capacity for more buildings on those parks?

Yes. I'm trying to get -- it's in our supplement right. I won't grab it, but I want to say -- and I'm getting away from parks, but we have capacity at the end of 2Q for about 1 million square feet more to build. That wouldn't all be parks, but a majority of that is. And then in our update would be a new park, but we bought really something Reid worked on for a long time. I think people underestimate how long it takes to get these land sites ready and approved, but 100 acres in Dallas. And then what was it in Florida, we bought 30 acres, and it was maybe 12 parcels and 10 family members where the guy that bought it said and they didn't all speak to each other, get along. Sometimes I regret making that first call to a family member, but that will allow us to grow that from a 3-building park to a 5 building, and it's right where Tampa very well to East Tampa, where I-4 and I-75 connect. So we're on both sides of that. So great visibility access, but it's just -- it's all difficult. But yes, so we've got a lot of runway, and it's something -- that's what we've got on the balance sheet. And we're also working, especially where we're seeing this demand, other land, and we're in due diligence in Atlanta and Phoenix and a number of markets. I always think of what you see in our supplements, mainly to me, it's almost like the iceberg. What you're seeing is what we already own. And then there's a bunch of other sites that depending how zoning and permitting and demand, whether we close that or not. But we try to look at that on really a market by market or submarket by submarket so that you've got that capacity because I always go back, I can think of one case in Jacksonville, where we had a tenant we didn't have the land and they needed more space if we can't I'd rather cannibalize our own rents than have someone else. And that's one where we lost a good tenant. They had just outgrown our space. We didn't have the building or the land, but we'd rather -- I may have mentioned about 1/3 of our development leasing is existing tenants moving around from within our park or around the corner. And so that's why we'd like to cluster our assets. And again, if somebody is shrinking, you can try to move them around and just keep moving the Rubik's cube to find a home for them. And everybody thinks they're going to expand on the way in, not everybody does, but it's nice to say, hey, we've got room for you and the -- we've been fortunate in industrial that by the time you've outgrown your space in Building 3 and we build Building 8 for you, we're coming in mid-lease term. So we -- you're kind of captive. It's hard for you to go to another landowner or another landlord and the rents you signed up for 2 or 3 years ago, so we can backfill you at a higher rate. So we see -- we know when that new building is going to be delivered. And hopefully, the team can get the new tenant at a higher rate in place to kind of backfill and keep turning that way.

How should we think about cash leasing spreads, right? I mean it feels like that continues to normalize, and we're kind of in this 19%, 20% level. So where does that sort of settle in, you think, in a normalized sort of environment?

Yes. I mean it's been somewhat of a slow deflating balloon on the cash spreads. But it does feel like I mentioned earlier, that rent growth should start reaccelerating. So as we kind of look into the future, that may -- that balloon may deflate a little bit slower than it has been. But this year, it feels fairly sustainable at that kind of 20% level. And if you look at the Q3 update we provided, we were a little north of that on a cash basis and almost 40% on a straight-line basis on the re-leasing spreads. And the geographic diversity that we have that we talked about a little bit, that -- it's been interesting because some of the markets like in California, those re-leasing spreads have been slower to date, where historically, that's really fueled the growth, whereas a market like Houston kind of reversed and flipped. So Houston now is really above the company average on re-leasing spreads. So we like the diversity geographically because we're never going to guess or one market is never going to be the hottest forever. But if we're enough of the fast-growing markets, we're going to pick right more times than we'll pick wrong.

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I was just going to correct myself. Andrew, when you ask me, this is why I don't rely on my memory. It's 1,000 acres, I said to 1,000 acres and 11 million square feet. So I think we're about 66 million square feet all in. And so that's -- we won't -- I promise we won't build all that at once, but we'll build it as fast as the market can absorb it. So I was wildly all...

I mean I know you don't have a lot of exposure to SoCal, maybe it's 10% to 12%, something like that. Like what are you seeing there? I mean, are you seeing the market improve at this point? I'm just curious.

Yes, it definitely feels like there are some green shoots in California. There are some submarkets that are feeling it sooner than others. It's been a market where there was -- in the L.A. area, there was 12 quarters of negative absorption, and that now has trended positive the last couple of quarters. So is that a new trend? It kind of feels like it. The aerospace, advanced manufacturing users feel like that's powering some of that market as well as the big box space and kind of everything in between seems like it's going to start filling in. I think the supply picture is going to be even more constrained in California because some of the regulations that they've imparted. So as long as the growth can pick back up and be positive, I think California could look better in the next couple of years than it has the last several.

You guys talk about where you're seeing the data center demand in your portfolio? And can you quantify how much leasing is coming from that? Just any sort of color you can give us on what you're seeing?