Q3 2025: Contradictions in Leasing Activity and Market Demand

Guidance:

• Q4 FFO expected $2.30–$2.34 per share; FY2025 FFO expected $8.94–$8.98 (increases of ~7.9% and ~7.3% vs prior year).
• Q4 same-store occupancy projected at 97%.
• Revised midpoint cash same-store growth to 6.7%.
• Reforecasted 2025 development starts to ~$200M (reduced vs prior plan).
• Uncollectible rents estimated at 35–40 basis points of revenues.
• Plan to utilize credit facilities and issue roughly $200M of debt in late Q4.

Business Commentary:

• Revenue and Financial Performance:
• EastGroup Properties reported same-store cash same-store sales growth of 6.9% for the quarter and 6.2% year-to-date.
• The company's FFO per share was $2.27, up 6.6% from the same quarter prior year.

• The financial performance was driven by strong fundamentals in their 61 million square foot operating portfolio, which ended the quarter at 96.7% leased.

• Leasing Activity and Market Conditions:

• Leasing activity improved compared to the second quarter, with quarter end leasing at 96.7% and occupancy at 95.9%.
• The company experienced average quarterly occupancy of 95.7%, which was down 100 basis points from the previous year.

• The market was characterized by bifurcation, with more activity in smaller spaces under 50,000 square feet and slower activity in larger spaces, impacting development leasing.

• Development Pipeline and Strategy:

• EastGroup revised their development starts to $200 million for 2025 due to slower leasing in development projects.
• The company's strategy focuses on aligning development starts with market demand and leveraging existing tenant expansion needs.

• They are capitalizing on limited supply availability and near-shoring trends to position for future growth.

• Tenant Credit and Collections:

• Tenant collections remain healthy, with anticipated uncollectible rents at 35 to 40 basis points of revenues, in line with historical levels.
• The diversified tenant base and strategic location of properties in high-growth markets contribute to EastGroup's financial stability.

Sentiment Analysis:

Overall Tone: Positive

• Management stated they are "pleased with our results," highlighted FFO per share up 6.6% year‑over‑year, emphasized "portfolio quality and resiliency," reported improving prospect activity and expressed being "hopefully optimistic" about macro sentiment and next‑year prospects.

Q&A:

• Question from Samir Khanal (Bank of America): Can you expand on leasing and the development pipeline and what prospects need to see to close larger deals?
  Response: Prospect conversations have steadily improved since May, but large-box conversions remain deliberate and slow; management is not assuming spec leasing for the rest of the year and will only start projects as leases are executed.

• Question from Blaine Heck (Wells Fargo): How have construction costs trended and where are market rents relative to yields required for development?
  Response: Construction pricing has eased ~10–12%; underwriting uses today’s rents and still pencils in the mid‑7% return range — demand (not cost) is the main constraint on new starts.

• Question from Craig Mailman (Citi): How much of available development inventory has active prospects vs. quiet, and is it a rent/concession issue or decision timing?
  Response: Most projects have some activity, but many sent leases haven’t returned or signings have reversed; interest exists across developments, but signing lag and decision‑timing—not price—are the primary issues.

• Question from Nicholas Thillman (Baird): Can you sustain re‑leasing spreads in the mid‑30s next year given the expiration mix?
  Response: Yes — given tight shallow‑bay supply and low deliveries, recent mid‑30% GAAP re‑leasing spreads are sustainable and could improve if demand strengthens.

• Question from Connor Mitchell (Piper Sandler): Can you rank regional performance and where you see strength or weakness?
  Response: Strongest: Eastern region (Florida, Raleigh, Nashville); Texas/Dallas healthy but needs expansion land; Arizona performing well; California (especially L.A.) and Denver are slower.

• Question from Jonathan Petersen (Jefferies): Any change in bad debt/tenant watch list, and at what interest rate would leverage increase toward targets?
  Response: Bad debt remains low (~30–35 bps) and the watchlist is stable; the company will increase leverage when debt/equity tradeoffs are attractive and expects potential unsecured term debt (~$200–$250M) could price in the low‑4% area.

• Question from John Kim (BMO Capital Markets): What is the average rent per sq ft signed YTD and how should we view GAAP same‑store NOI run‑rate?
  Response: They will provide average $/ft offline; management said rents remain sticky and operating momentum supports a strong same‑store run rate (implied Q4 cash same‑store ~8.2% to hit guidance).

• Question from Brendan Lynch (Barclays): With development pulled back, does your view on acquiring vacancy change?
  Response: Remain opportunistic — favor well‑located, immediately accretive stabilized assets, but will pivot to development or partnership opportunities when market signals and inbound deals justify it.

• Question from Todd Thomas (KeyBanc Capital Markets): Do development delays push starts into 2026 or could slower pace persist?
  Response: If demand recovers, starts could exceed $200M in 2026; if not, starts will stay lower — management will time breaks based on signed leases and has permits ready to accelerate.

• Question from Omotayo Okusanya (Deutsche Bank): Was this quarter’s deceleration in mark‑to‑market mix‑related or pricing pressure?
  Response: Primarily mix‑related; quarter‑to‑quarter GAAP spreads can move with mix (leases commenced vs signed), but the mid‑30% GAAP range remains generally sticky.

• Question from Michael Mueller (JPMorgan): Does the ~9% pre‑leasing for under‑construction projects affect start decisions or do you cap spec exposure?
  Response: Both factors matter — they monitor portfolio‑level development exposure and make park‑by‑park decisions, preferring to be pulled by tenant demand rather than push spec supply.

• Question from Jessica Zheng (Green Street): Any change in tenant credit quality or lease‑term preferences?
  Response: No material change — tenant credit quality and lease characteristics remain consistent, supported by low bad‑debt run rates and stable underwriting/TI practices.

Contradiction Point 1

Leasing Activity and Market Demand

It involves changes in the company's outlook on leasing activity and market demand, which are crucial for understanding their financial performance and growth prospects.

What factors drive leasing trends in development projects and how do prospects convert to signed leases? - Samir Khanal(Bank of America)

2025Q3: We're encouraged by the tenor of conversations; they've improved since May. About 1/3 of development leasing involves existing tenant expansion. Retention rates are high, indicating tenant caution. Development pipeline is leasing and maintaining projected yields, but at a slower pace. Market demand indicates we'll reforecast 2025 starts to $200 million. - Marshall Loeb(CEO)

Can you describe the pace of leasing in Q2? How is the leasing pipeline progressing across stages? - Samir Upadhyay Khanal(BofA Securities)

2025Q2: The market pickup from last year was strong in the first quarter. The activity slowed due to the tariff news, but people are becoming more numb to it. The portfolio remains full, with activity in development leasing being slower. Smaller leases are closing quickly, while larger spaces have a slower decision-making time. The pipeline is well-spaced, and some deals have been delayed, but there's no new decision-making like last year. There's potential for a quick rebound. - Marshall Loeb(CEO)