Eastgroup Properties Inc (EGP) March 2, 2026 Conference Transcript

Good morning, everyone, and welcome to Sydney's 2026 Global Property CEO Conference. I'm Craig Mailman with City Research. We are pleased to have with us today East Group and CEO Marshall Loeb. This session is for city clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit questions. 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 an investor should buy your stock today. And then we can jump into Q&A. Hit the red button. It's a new...

Ah, okay.

I was trying to kill time, but thank you, Craig. Good morning, and thanks, everyone, for your time and interest in East Group this morning. I'll start kind of right to left, introducing our team, John Coleman. EVP runs our eastern region, coming from the Carolinas down to here, down to Miami. Reed 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. East Group, if you're not familiar, we're a, we call it Shallow Bay, industrial, which is really shall obey a euphemism for kind of smaller infill buildings one of our peers described as years ago and made the comment East Group's 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 you know 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 East Group, the 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 can hang in there one more month, we'll make it to 13 years of positive FFO and positive same-store NOI, just this push for industrial REIT and the growth we've been able to enjoy. We're one of the older REITs here in terms of we'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's been through all those cycles. Our strategy evolves, but we weren't housing or we weren't office, things like that. We've always been a Chalamet industrial REIT during that time frame. And maybe going through all those economic cycles, one of the other things we've learned is you never know what the next Black Swan event is. so have a safe balance sheet. So we have the lowest debt to EBITDA in our sector right around three times. Our debt to total market cap, at least as of the close of Friday, was around 14. Our debt to EBITDA is around three. 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 ten. Our top ten tenets 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. 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 can run our company and have low overhead for you. And then on top of all that, we're actually still trading below our long-term multiple of FFO. So again, a lot of that's interest rate. I'm trying to not blame it on the spokesperson for the company, but you can get all those things. 13 years of better FFO growth, safer balance sheet. We've cut our debt by about half of where it was a handful of years ago, things like that. 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, you know, as we focus mainly on that inflection and leasing that investors have been waiting for for industrial that looks like it's here, maybe just talk about that trend.

Sure. Now, 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 tenancy 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 read 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 and fourth quarter so we really and it was been an interesting year the last call it 18 months where we've had solid activity but and 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 hundred and sixty six thousand 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 a hundred thousand feet kind of renew their renew their existing lease and add a hundred thousand feet and on top of that we I'm pleased again still with the activity we have you just you know you always breathe a sigh of relief when the lease gets signed but there's still a fair amount of activity throughout our portfolio that hopefully probably the next time you hear us report will be first quarter, but I'm hopeful we'll have a decent chance to build on those 166,000 feet.

Yeah, so I think as everybody is aware, with Liberation Day last year, first of April, it caused a lot of users to pause and wait to see what would happen. So we did see the biggest impact on that through our development leasing, the operating portfolio performed quite well last year as users decided to stay in place and renew. But the development was a little bit slower. We saw some of that, as Marshall mentioned, fallout 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 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 did you guys look at sort of the tenant pool for your size range? You guys are a little bit differentiated with, you know, having, I think your average tenant size around 35,000 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 about the resurgence there, markets that maybe are thinner, that if you don't make a deal in maybe a couple 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. Yeah. Again, what we'd like, and I remember a broker saying to me, every 10,000 feet, the number of prospects you have goes up, you know, I guess it drops exponentially as you come down. So smaller the tenant, it's more, and the TIs are lower. 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 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 know 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 if you're a hotel and your AC's 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 and traffic. So that's really where we've said, we're not the lowest cost competitor, but we want to compete on traffic or on service level. And then you really need that location. It's usually the smaller markets, you know, and they're good. There's a, 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, you know, look, we're one of the fewer, fewer games in town versus a Dallas, Atlanta, things like that, but it has also fewer tenancy, but that really hasn't held us back on rents or things like that, but in some areas, you know, 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 buildings. So the vacancy rates, and I'm probably off here a little bit, but call it eight or nine percent. But years ago, no one was building. So all those buildings are much newer than you think 100,000 foot buildings. The obsolescence factor or the local owner that may not have the CapEx that may be, you know, a partnership that they just aren't real estate people. 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 Reed's got Austin, Texas, the vacancy rate because of oversupply in Austin and that market's 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 of town, and there's been a flight to quality in this slowdown, too, which we see markets like Atlanta that have negative absorption in the Class B and C product in older buildings and pretty strong positive absorption in what we try to own or build, which are the newer buildings.

We have a couple questions coming in. First one, just on tariffs, what are you hearing from tenants following the SCOTUS? IEPA ruling, does the ruling reduce uncertainty for tenants, or does it pivot to alternative tariff statutes to keep uncertainty elevated?

Yeah, it's one, and John or Reed chime in, I would say it's early to get that tenant feedback. I guess my take is starting last, and I agree with Reed, 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 a third of our development leasing is, as you think about one of the things we like about a park setting, is a tenant in building three has outgrown their space. so we'll build building eight for them in the park and and it'll hurt our same store numbers but what we can tailor we will 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 and building three at a higher rate and we have it'll take us probably nine or ten 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, you know, I don't think we're done, I don't, I don't know if anybody here, I don't think we're done with tariffs. One, I don't know, don't listen to my political advice, but I don't think the Supreme Court ruling is 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 saying we need more space corporate saying well the 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 you know 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.

Yeah, it obviously varies from market to market. Some of the lower cap rate markets, we're seeing kind of that low five, sometimes upper fours. Some of the stronger markets are like a Nashville, where supply and demand has probably stayed more in check than anywhere else in the country. Dallas cap rates with the growth rates there that we're seeing in strong demand is kind of that low five range. And then kind of depending, you may see a little bit higher than a mid five. 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-fives to upper fives, 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-the-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 know there's a few questions in one. If I'm this one, it's not that I'm... I'll remind you. It's only because of memory, not avoiding a topic. You know, thankfully, our development yields have hung in there, like you say, seven, low sevens. So we'll typically try to say, again, our rule of thumb is 150 basis points above a 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 park but as I should have mentioned more we'll build it in phases we'll build one or two buildings at a time and it is 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 three people aren't doing that but I'll get a call from one of these guys saying hey phase two's 50% lease 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 thought 300 million so it's it's hard to predict but you know we'll say look we'll go as fast or as slow as the market's telling us and i like that we're that we were disciplined about it even though look we'd rather have done 300 million this year we're at 250 which is kind of what we've penciled out it'll it'll come from the teams in the field and usually again we'll pull that ticket We were talking earlier today of a few of the development leases we're working on, of, okay, if we can get this lease in, that'll kind of pull the ticket to put more blue shirts on the shelf. I mean, it's like a retail store or like you would build out a subdivision for residential as one or two homes sell, we'll start the next one. And we think that's a lower risk, and we like the returns we're getting. I would say one thing that's maybe it's been interesting and maybe not surprising, and you saw it a little bit with the expansion we announced, that because of the lack of supply, that we're back to pre-COVID levels of supply, 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 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 two 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 the nature of our business, but there'll 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 they 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 and to take part of that building or part of those two buildings but where tenants would take an entire building or maybe a couple of buildings in a park if we would build it and things like that going on now, then I'd probably say we have in the last three, four 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 the suit activity, we really saw in the 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 when we have over 70 million square feet of existing product and over 1,400 customers, you know, 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. They're 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 would give us some upside to the 250 million in starts because it's hard, you know, 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 worry about them finishing, you know, we can start whatever we want to start, we just want to make sure we get it leased. And we'll usually underwrite a year after completion to get the building stabilized and leased. 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 were achieving our yields, but it was taking 16, 17 months past completion to lease up. Rather than at the peak, it was six or seven months. 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, usually we'll have permit in hand for that next space, which that's gotten much harder within the cities, too, of just pulling those permits in fast-growing cities that people want the delivery quickly, they want the service person, but no one wants all the trucks on their road, so getting industrial permitted has gotten materially harder than it was five or six years ago, which is great for the 65 million square feet we own. It's a challenge for that incremental five million we'll build.

I was going to add, if you take a snapshot of where we are in the eastern region with new development starts, we're at about a 60 percent reduction from the peak, so that dynamic has really worked in our favor. A couple things, construction costs, although 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 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 a 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 timelines or change density site coverage for new development.

Yeah, nothing, at least in our market chat on water, that I've seen or heard of As we mentioned, the entitlement period is taking longer. Power is kind of more of a constraint than typical, 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 that is consumed. In Atlanta, at least I use that as an example, public hearings now where residents are showing up in opposition of future data center zonings and permitting. It's on the table. I'm not sure where it's 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?

You know, certainly they can pay a lot more. And usually with industrial, we can only go one story, you know, 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, you know, one more source of competition. They're so tied into power, where John said, well, you know, it's not something we're actively looking, but we said let's understand it. If we do have land that has the power and the water for data centers, we kind of kidded. 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 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 when we get a data center question, it's like, look, if we can capitalize and there's an opportunity to do it without us pretending to be a data center developer, which isn't – I wouldn't buy East Group stock because of the data center opportunities. There's better opportunities in other rooms here than this one.

You know, shifting to AI. Actually, before I do that, we've got one question come in. How should we think about development, at least in 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, it's 52% in one quarter. It's usually not that lumped together. But you never know when that tenant finally decides, and as rents have risen, one broker described it, this used to be a director of real estate decision. Now the dollar commitment's risen to it's a CFO decision to sign the leases. 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, you know, Fortune 100 tenants. And usually the bigger the company, the bigger the legal department, the longer the gestation period, even if we have three leases with them in other markets and things like that, it just takes longer. 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 guys with the permits in hand and and the reason if this helps is our prospects all have tenant rep brokers and if I'm city'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 you know 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 spaces. 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 try 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 But that said, using just as recent as last year as an example, I think you're better served if we're a disciplined allocator of capital. Last year was our lowest new investment year we've had in a while in that we didn't see the development opportunities. 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 it, 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 that tell you where the where the window is then pivoting a bit to ai i guess just as it relates to to east group to start off what initiatives are you guys looking at how much time or money have you kind of spent on um identifying opportunities for productivity enhancement or I guess revenue enhancement, however you kind of looked at it internally.

Yeah good question and we spend or I'll complement our IT team of where can we use it and training and trying to stay safe too within a cybersecurity world so we think about all of those things about one making sure we don't get hacked and everybody including me has clicked on something or link you shouldn't and things like that but on AI we've spent time training all of our all of our team it's mainly if you said to date where have we seen the reduction because we're not you know we're not a design where it's not a creative team it's not you know legal or I think of different people like that but that's been our accounting so our quarter in closing has gotten that team's done a really nice job property accounting of automating more and more of that, and they're able to – what we've talked about is we'd rather reduce kind of the closing time, but offset that with analysis time, so if we can use technology to do that, and they may argue with me on the percentages, it's mostly been what's available out there with us tweaking it a little bit to use it and things like that. So, and I think our, you know, 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 are available, our ability to put into their CapEx and equipment. But a 35,000 foot, it's usually not state of the art where a 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. It's 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 the manufacturer. sure, 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 can supply either food or paper products or boxes or anywhere in there of any kind of range of things that people that need to be near that new source of demand in the market.

And then just rapid fires here. Same story on a wide growth for the industrial group in 27.

The group, five and a half.

And then, from an M&A's perspective, in your property type, more, same, or fewer companies this time next year? Sure, it seems in the reed industry to be fewer, so go with the flow. Well, thank you guys so much. Everyone, enjoy the conference.

Thanks, Greg. Thanks, Sam.