Nothing on Wall Street goes in a straight line, but there are long-term trends that are worth watching. Industrial real estate investment trust (REIT) EastGroup Properties (EGP 1.22%) is playing one very large and long-term shift. Here's why investors might want to keep an eye on this landlord, even though the stock has lost more than a quarter of its value since the start of 2022.
The business
From a big-picture perspective, EastGroup is an industrial REIT that owns 56.6 million square feet space, largely warehouses. There's nothing remotely unique about this at all. Where this landlord differentiates itself is in location, with Texas accounting for roughly 34% of its net operating income, Florida 24%, California 21%, Arizona 7%, and North Carolina 6%. Summed up, that's 92% of its net operating income in warmer states, most of which are seeing population increases. The odd name out on that list is California, which has seen a population loss, but remains a vital transportation hub just the same because of its coastal location and proximity to Asian markets.
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Being in growing states is a huge benefit for a REIT, because it means that it's likely to see rising demand. The Sun Belt focus is the big attraction with EastGroup. It has been a net positive for investors, as well, with the REIT accumulating 12 consecutive years of annual dividend growth. The trailing-10-year average dividend growth rate was roughly 8%, with some higher rates over shorter time periods.
The most recent quarter, meanwhile, ended with occupancy at 98.1%, which is a sign of robust demand. New and renewal leases in the first quarter of 2023 were signed with rent bumps of 48.5%, which is another sign of strong demand. Funds from operations (FFO), which is like earnings for a REIT, rose 9.5% year over year, which is a pretty impressive. EastGroup is clearly operating well right now.
Why the price drop?
What appears to be going on with the stock price here is broader, with the entire warehouse REIT market under pressure. A big run-up during the work-from-home and social-distancing phase in the early days of the coronavirus pandemic had a lot to do with this. Online shopping took off and warehouses were needed to house all the goods moving around. Wall Street bid up the shares of almost any company, like EastGroup, that might benefit. That period is over and investors have moved on.
And yet the story behind EastGroup has longer legs than that. Business is more of a sine curve than a straight line, so investors need to remember that every year won't be like 2022. But the migration toward warmer Southern regions of the U.S. is not new and is unlikely to change anytime soon.
Meanwhile, EastGroup is using the strong demand to build for the future. In the fourth quarter EastGroup completed eight projects that were each 100% leased, which will boost results in 2023 and beyond. And it started this year with 20 ground-up development projects in the works that were already 38% leased. In the first quarter of 2023 it completed three projects, all 100% leased, and ended with an active pipeline of 21 projects that were collectively 38% pre-leased. This REIT is ready for the continued population shift toward the Sun Belt.
Worth a deep dive
It is possible that the warehouse market could fall out of bed, leaving EastGroup with new buildings it can't fill. However, that would most likely be a temporary setback given the growth in the Sun Belt. For long-term investors looking to own an industrial REIT with an advantageous geographic footprint, this looks like an interesting stock to consider. Although the dividend yield is a modest 3%, the dividend growth here is what will make this REIT attractive to income investors.
