EastGroup Properties' Q3 2025: Contradictions Emerge on Development Leasing, Portfolio Spreads, and Tariff-Driven Acquisition Shifts

Guidance:

• Q4 FFO guidance: $2.30 to $2.34 per share.
• FY2025 FFO guidance: $8.94 to $8.98 per share (up 7.9% Q4 guidance comparison and ~7.3% vs prior year for full year).
• Projected same-store occupancy for Q4: 97%.
• Cash same-store NOI growth midpoint raised to 6.7% (up 20 bps).
• 2025 development starts reforecasted to $200M; construction starts reduced by $15M.
• Plan to utilize credit facility and issue ~$200M debt late in Q4; uncollectible rents estimated 35–40 bps of revenue.

Business Commentary:

• Revenue Growth and Leasing Activity:
• EastGroup Properties reported funds from operations at $2.27 per share for Q3 2025, which represents a 6.6% increase over the prior year.

• The growth was driven by good fundamentals in their 61 million square foot operating portfolio, which ended the quarter 96.7% leased, with quarter-end leasing at 96.7%, and occupancy at 95.9%.

• Development Pipeline and Market Demand:

• The average quarterly occupancy was 95.7%, down 100 basis points from the previous year, with development starts reforecasted to $200 million for 2025.

• The slower pace of development leasing is attributed to the market demand stabilizing after initial strong demand, and a cautious approach to expansion as tenants prefer to retain existing spaces.

• Tenancy and Portfolio Diversity:

• The top 10 tenants now account for 6.9% of rents, down 60 basis points from the previous year, indicating a diversified rent roll.

• EastGroup.Properties has maintained stable earnings, despite economic uncertainties, by targeting geographic and tenant diversity to stabilize earnings regardless of the economic environment.

• Guidance and Financial Performance:

• EastGroup Properties estimates FFO guidance for Q4 2025 to be in the range of $2.30 to $2.34 per share and for the year in the range of $8.94 to $8.98, representing increases of 7.9% and 7.3% compared to the prior year.
• The growth in guidance reflects the strong overall performance of their operating portfolio and the ability to utilize their flexible balance sheet to manage potential capital sources.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described results as strong and execution as excellent: "We’re pleased with our results"; FFO per share $2.27, up 6.6% YOY; quarter-end leasing 96.7% and average occupancy 95.7%. Management said prospect activity is increasing and they are "cautiously optimistic" about larger-space activity while preserving balance-sheet flexibility.

Q&A:

• Question from Samir Canal (Bank of America): Can you expand on leasing, especially the development pipeline and why larger boxes are taking longer to convert?
  Response: Activity has steadily improved since May, but larger deals remain deliberate—resulting in slower development leasing; management reforecasted 2025 starts to $200M and is prioritizing converting current prospects rather than spec starts.

• Question from Blaine Heck (Wells Fargo): How have construction costs trended and do market rents support acceptable development yields?
  Response: Construction pricing has come down roughly 10–12%, projects still pencil in the low-to-mid 7% yield range, and the primary constraint is demand rather than construction costs.

• Question from Craig Mailman (Citi): How much of the development availability has active prospects versus quiet; is it rent/concessions or decision timing?
  Response: Most developments show some activity but conversions are inconsistent—management noted examples of signed deals reversing; several large pre-lease prospects exist that could materially reduce availability if they convert.

• Question from Nick Sillman (Baird): Can you sustain mid-30s GAAP releasing spreads and see similar spreads next year?
  Response: Yes—management believes mid-30s GAAP releasing spreads are sustainable and that tight supply should provide upside when demand recovers.

• Question from Connor Mitchell (Piper Sandler): Regional color—where are markets strongest or weakest?
  Response: Eastern markets (Florida, Raleigh) strongest; Texas (Dallas) and Arizona strong with low vacancy in their assets; California (LA) and Denver are slower.

• Question from Rich Anderson (Cantor Fitzgerald): If the 22% cash spread environment persists, how long until it compresses to single digits?
  Response: If demand stayed flat it would take multiple years given typical lease terms, but current tight supply means even modest demand improvement could quickly restore higher spreads.

• Question from John Peterson (Jefferies): Level of bad debt this quarter and when would you increase leverage to long-term targets as rates fall?
  Response: Bad debt remains low (~30–35 bps of revenue) and the balance sheet is strong; management plans to tap debt (targeting a ~$200–250M unsecured term loan at ~4.3–4.4%) rather than rush to lever up until attractive opportunities arise.

• Question from John Kim (BMO Capital Markets): What is average rent per sq ft signed YTD and how does it compare to 2026 expirations?
  Response: No per‑sq‑ft figure provided; management says rents remain sticky (off highs but durable) and operating-portfolio momentum—projected 97% same-store occupancy—supports favorable same-store NOI into next year.

• Question from Brandon Lynch (Barclays): With fewer development starts, does that change your appetite for acquiring vacant/stabilized assets?
  Response: Remain opportunistic—continue to acquire well-located shallow-bay stabilized assets while staying ready to increase development or partner when market conditions and returns justify it.

• Question from Todd Thomas (KeyBank Capital Markets): Do delayed starts push activity into 2026 or could slower pace persist and pressure 2026 starts?
  Response: Starts could rebound above $200M in 2026 if demand improves; company will be patient and can ramp quickly due to permits and park positions, but will pull back if market warrant caution.

• Question from Amateo Okusanya (Deutsche Bank): Was the deceleration in mark‑to‑market this quarter mix- or price-driven?
  Response: Primarily mix/timing—management reports leases signed (real-time) versus peers that report commenced leases; GAAP releasing spreads in the mid-30s remain broadly sticky, so it’s not broad pricing pressure.

• Question from Mike Miller (JP Morgan): Do you cap spec development exposure or let opportunity dictate starts?
  Response: They monitor entity-level exposure and maintain internal limits on unleased/development inventory; starts are driven park-by-park by demonstrated demand rather than aggressive specing.

• Question from Ronald Camden (Morgan Stanley): Which markets did you pull back development from and will spreads drive same-store next year?
  Response: Some starts (notably in Texas) were deferred—one reversal represented a ~$20–25M swing; same-store strength next year will be driven by rent stickiness and rising occupancy.

• Question from Michael Griffin (Evercore ISI): How are leasing costs and TIs trending; will you get more aggressive to close deals?
  Response: Leasing costs/TIs remain moderate (roughly $1.10–$1.20 p.s.f. contextually) and commissions have risen; firm can offer competitive TIs but slower leasing is driven by tenant decision timing, not lack of incentives.

• Question from Jessica Zhang (Green Street): Any change in tenant credit quality or lease-term preferences with smaller tenants more active?
  Response: No material change—tenant credit and lease-term profiles are consistent, watchlist stable, and bad-debt metrics remain low.

• Question from Michael Carroll (RBC Capital Markets): You seem encouraged by prospects but lowered development assumptions—are you right-sizing expectations?
  Response: Yes—development assumptions were trimmed because inventory and slower development leasing warranted it, but operating-portfolio momentum and improving prospect activity underpin cautious optimism for recovery.

Contradiction Point 1

Development Leasing Activity

It reflects changing dynamics in the development leasing process, which can impact revenue projections and investor expectations.

Can you provide more details on leasing, particularly regarding development projects and tenant expansions? - Samir Canal(Bank of America)

2025Q3: Development leasing is slower, with a few signed leases not being finalized. Our development pipeline is still positive with continued interest from tenants and prospects, though the process is more cautious this year. - Marshall Loeb(CEO)

Can you discuss the pace of leasing in the second quarter to date? Is there a notable pullback in activity, and is it more pronounced in specific markets? - Blaine Heck(Wells Fargo)

2025Q1: We've been really pleased with our leasing volume. Our fourth quarter was our best quarter ever in terms of square footage leased, and our first quarter was our third best quarter ever. - Marshall Loeb(CEO)

Contradiction Point 2

Portfolio Leasing Spreads

It reflects differing expectations about the sustainability and future trends of leasing spreads, which are critical for revenue forecasting.

Can you provide an update on the operating portfolio and leasing volume, and their relation to GAAP leasing spreads? - Nick Sillman(Baird)

2025Q3: We believe we can maintain GAAP leasing spreads at the third-quarter levels. Supply is low, and if demand stabilizes, rents could increase further...Long-term trends suggest a possible 'rent squeeze' if demand improves, although forecasting is challenging. - Marshall Loeb(CEO)

What's the outlook for re-leasing spreads over the next 12-24 months? - Alexander Goldfarb(Piper Sandler)

2025Q2: We have embedded growth from COVID rent increases that will play out over 12 to 24 months. Market demand should rise, pushing rents up. Construction is slow, and we expect another period of rent growth as demand stabilizes. - Marshall A. Loeb(President, CEO & Director)

Contradiction Point 3

Development Leasing and Tenant Activity

It highlights a shift in EastGroup's expectations for development leasing and tenant activity, which directly impacts the company's development pipeline and revenue growth.

Why has incremental leasing in the development pipeline been muted, and is it due to rent, concessions, or other factors? - Craig Mailman (Citi)

2025Q3: Development leasing has had about six leases totaling 215,000 square feet since the last call. Some prospects have changed their minds, like one at Dominguez. - Marshall Loeb(CEO)

Given record leasing but slower development leasing, do you anticipate a return of development demand as you plan to accelerate development? - Alexander Goldfarb (Piper Sandler)

2024Q4: Development leasing is slower, but it's still 37% faster than last year with 11 leases. - Marshall Loeb(CEO)

Contradiction Point 4

Development Starts and Market Conditions

It reflects differing perspectives on development starts and market conditions, which are crucial for EastGroup's growth strategy and investor expectations.

Will the slow development leasing pace persist, or will project starts increase in 2026? - Todd Thomas (KeyBank Capital Markets)

2025Q3: We hope to exceed $200 million in starts next year. The market will dictate our pace, as we pull demand-based development starts. - Marshall Loeb(CEO)

Are you anticipating a resurgence in development demand given slower leasing for the operating portfolio and plans to accelerate development? - Alexander Goldfarb (Piper Sandler)

2024Q4: Our development starts are projected to pick up kind of from the field this year. Most of those are the back half of the year. - Marshall Loeb(CEO)

Contradiction Point 5

Impact of Tariffs on Acquisition Strategy

It highlights a shift in the company's acquisition strategy, influenced by external factors like tariffs, which can affect investment decisions and capital allocation.

Does the current situation change your perspective on acquiring vacancies? - Brandon Lynch(Barclays)

2025Q3: We thought, all right, let's be more conservative, and we backed away from a couple of acquisitions. - Marshall Loeb(CEO)

Brent, have you observed any changes in sellers' willingness to transact or deals withdrawn from the market due to recent uncertainty? - Todd Thomas(KeyBanc Capital Markets)

2025Q1: We have not moved our acquisition guidance for the year, but we have moved what we were planning to do in the first half of the year. - Brent Wood(CFO)