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‘Final mile’ leads to profits for EastGroup


Jackson’s EastGroup Properties has discovered just how lucrative the “last mile” can be in the warehouse logistics business after deciding two decades ago to concentrate fully on building, buying and leasing business warehouse space across America’s Sunbelt.

“Be quick or be broke” is the mantra of most tenants of EastGroup Properties as the tenants compete in a retail market in which customers see next-day or day-after delivery as a right and not a privilege.

The “last mile” has been good to the publicly traded EastGroup, an industrial real estate investment trust that has 377 warehouse distribution properties in 10 states, as well as a single office building. With it, the REIT has reached a market capitalization of $4.15 billion, growing by $2 billion since 2015. It’s also become a top earner for investors, recently moving into 7th place among the nation’s 170-plus REITs for money made for investors the last three years.

Today, President and CEO Marshall Loeb says, EastGroup has a mix of tenants who sell off the Internet and others who deliver for Internet sales for Amazon, Best Buy, Lowes and the like. “And then most all of our tenants also have a website in addition to their traditional sales model. So, it’s continuing to evolve the way towards ‘last mile or last touch’ distribution,” he said.

Loeb said EastGroup’s tenants, whether national or local, primarily distribute to the metro area in which their space is located rather than to a much larger region or to the entire country as part of a supply chain. “This means the economic vibrancy and growth of these metro areas is a major determinant” of whether EastGroup goes there, Loeb said.

New market, new pursuits

As the 21stt century arrived, the 40-year-old REIT dropped its retail and office property holdings. It would instead devote itself to making a living from the business distribution markets designed to serve local populations across the Sunbelt from California to North Carolina and down to Florida. Now those markets are sizzling as tenants obsess over closing the distance between themselves and their customers.

EastGroup Properties, EGP on the NYSE, is sitting pretty with 42 million square feet 98 percent leased. Its frustration is the disappearance of strategically located land on which to build and existing buildings to acquire.

“It never is easy in a bidding war for things you want to buy,” said Loeb, who has headed the  Jackson real estate company since summer 2015.

But as an industrial REIT occupying the 75,000- square-feet-and-below niche, EGP can make patience a virtue, he added.

EastGroup, like other REITs, is designed to provide sustained incomes for investors over long periods rather than quick investment growth. For instance, EGP sets a 19-year target for its newest properties.

“That is maybe one of the big differences in our sector,” Loeb said. “As a REIT, you don’t need to buy and sell quickly.”

But you must be near where rooftops are going to grow enough to accommodate 500,000 new residents over the next two decades, Loeb noted.

Examples are EGP’s Texas markets of Dallas and Houston, where the company has a combined 36 percent of its properties. Loeb has heard the predictions Houston will grow by around 2.2 million people by 2030 and Dallas by 1.5 million. But those projections are hardly sufficient for EGP to make it a target

“They are often wrong,” Loeb said of the prognosticators.

“It’s easier to see/pick cities that have had long term job and population growth – Orlando, Atlanta, Dallas, San Francisco, Charlotte, Austin, Phoenix, Tampa, Miami, Houston… and we believe well located properties in the middle of a growing market will only become more valuable over time,” he noted in an email after an interview.

EastGroup has opened new offices in the past two years in Los Angeles, Miami and Atlanta with new team members, Loeb said.

’Supply constrained’ is target

On one hand, Loeb would like to find and buy more metro submarket land for development at a price EGP can justify paying. But on the other, EGP executives are happy to see the tight land market. A “supply constrained” submarket gives leverage to landlords, especially landlords like EGP with over 40 million square feet of warehouse distribution space.

The key for EGP’s marketing in the 5,000-to-50,000 square-foot range and later 15,000-to-75,000 square-foot warehouse spaces has been situating the properties in the right places. That means near metro freeway interchanges and as close to airports as affordable.

EGP went after vacant “greenfields” until supply of that land dried up. Nowadays, it hardly matters what is standing on an unused property, according to Loeb. “We’ve looked at water parks, drive-in theaters, churches, even malls,” he said.

Nearly half of EastGroup’s buildings are company-built. It ended 2018 with 377 industrial properties and one office building in 10 states.

The REIT bought 627,000 square feet of space for leasing and 83 acres for a total of $87 million. Also, in 2018, the company began construction of 12 development projects of 1.7 million square feet, at an estimated cost of $140 million.

At year-end, EGP had about 1,500 customers with an average size of 26,000 square feet and a weighted average lease term of 5.8 years, the company said in a letter ahead of its May annual shareholders’ meeting.

A typical tenant, Loeb said, “is a guy who sells carpet” locally. If the carpet seller grows and needs more square-footage, EastGroup will move the tenant into larger quarters with a new lease.

Tenant move-outs are generally good news, at least in the current market. Their departures give EGP an opportunity to push up rents in the newly vacant space, Loeb said.

Tenants whose EGP leases expire this year can expect a 17 percent rent hike on average, according to Loeb.

When do rates stop rising?

“Knock on wood,” Loeb said. “With continued prices going up, we think there is a little more pressure on rents.”

Loeb estimates his company’s 2 percent vacancy rate across its 343 buildings is “slightly better” than competitors’ occupancy rates. “Markets are maybe 5 to 6 percent vacant.”

Overall, warehouse properties of all sizes are “pretty full right now,” he added.

“We’ve got about two good years of inventory left,” Loeb noted, referring to the time it would take to lease out its properties at today’s pace of leasing and lease renewals.

Whether today’s leasing pace and high rents continue could hinge on duration of an economic cycle that Loeb says typically lasts 6 years to 7 years. “And while fairly far along into this one, we aren’t seeing any signs of a slowdown, thankfully, just yet.”

EastGroup, he said, has “taken the attitude that when a storm does hit, we want to be stronger.”

That translates to better properties, Loeb said. “We continue to develop and have sold a number of older properties,” he added.

Growing and keeping a strong team is a must as well, Loeb said.

Finally, paying down debt to keep the balance sheet strong is a hedge against an economic storm, he added.

“Our debt as a percentage of our market capitalization,” he said, “is down from roughly 36 percent in early 2016 to 22 percent as of March 3.”


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