EastGroup Properties Inc. (EGP) is an industrial REIT with its portfolio mainly concentrated in the Sunbelt region of the United States. A large chunk of its properties are spread across Texas, Florida, California and Arizona. The REIT has created a niche for itself in the market by specializing in providing high quality and functional business distribution real estate for location sensitive clientele. Its major properties are centrally located with access to major transportation hubs. Another major feature of its target markets is the supply constraints which keep entry barriers high for competitors.
In order to fully understand the investment potential of a REIT, it is highly important to make an objective analysis of its portfolio. The holding of a REIT is relevant not only in quantitative terms but also on qualitative arena. EastGroup Properties has nearly 45 million square feet of real estate under its management. This real estate is mainly sprinkled across some of the most lucrative markets in the country. These Sunbelt markets have various features which set them apart.
EastGroup Properties has a highly diversified portfolio in terms of geographic reach. Its properties are located in 13 markets across the United States. While all of these states have common feature of high economic growth rate, they also display varied economic cycles. This feature ensures that the overall impact of economic cycles is minimal on the performance of the REIT. These markets also have average growth rate higher than the national growth rate, providing an extra edge to EastGroup Properties.
Texas has the highest stake in the REIT’s portfolio with 34 percent of its properties domiciled in the state. Florida is a close second with a 28 percent share while California, Arizona and North Carolina are other major markets for EastGroup Properties. These markets offer safe environment for the REIT through their high entry barriers. Due to low supply relative to demand, EastGroup Properties is not threatened with a high level of competition.
EastGroup Properties’ portfolio is not only impressive in terms of quantity but in terms of quality as well. Apart from geographic diversification, the REIT has created a specialized market for itself by concentrating on providing e-commerce storage solutions in the form of last mile warehouses. The REIT has a healthy pipeline consisting of small and large warehouses, ensuring that it is able to capture different strata of the market.
Further, the REIT is also in position to charge premium pricing, owing to its properties being located in key areas. It is also able to serve a wide range of clientele with its 15,000 to 70,000 square feet properties. Its tenant base is also highly diversified as its top 10 customers only account of 8 percent of its annualized base rent as on September 30, 2019.
Another diversification criteria for the REIT is in the form of properties it offers. EastGroup Properties mainly specializes in providing business distribution real estate, forming 88 percent of its portfolio. The average building size for this type of offering is 83,000 square feet, helping attract larger customers. The REIT also has interests in Bulk Distribution and Business Services segment, each accounting for 9 percent and 3 percent of the portfolio, respectively.
The analysis of the REIT’s portfolio shows that it offers unique combination of diversification and specialization. While diversifying geographically, it still maintains the theme of locating its properties in high growth markets. Further, it also complements its geographical diversification by focusing on specific segments such as Business Distribution real estate. Overall, the REIT strategy is future oriented and is expected to maintain its future outlook.
The Business Model
Apart from looking at the REIT’s holding, it is equally imperative to critically scrutinize the future strategy of the REIT. EastGroup Properties works on a multipronged strategy to remain competitive in this cutthroat market. The critical elements of its growth strategy are focus on targeted development, recycling of capital and organic growth. With its targeted development approach, EastGroup Properties is able to derive synergies and scale. The strategy also allows it to develop its own distinct style of properties layout. The REIT’s capital recycling approach ensures that the REIT is invested in the most lucrative available projects. It constantly monitors the progress of its various projects and divests from lagging opportunities. The capital is then redeployed to more attractive venues. As of September 30, 2019, the REIT has 26 projects in various stages of development spread across 11 cities. These projects encompass over 3.8 million square feet and have an estimated cost of $359 million.
The Investment Thesis
REIT investments have a USP attached to them in the form of dividend payments. Since it is one of the defining criteria for determining the investment potential of a REIT, let’s have a look at the dividend history of EastGroup Properties. The REIT has a consistent track record when it comes to making dividend payments. Its latest dividend payment stood at $0.75 per share, taking its annualized dividend to $2.94 per share. While its dividend yield of 2.11 percent is slightly on the lower side, the consistency and growth rate of the dividend makes up for it. The company has also managed to control its Dividend FFO Payout ratio, which currently hovers around relatively healthy 59 percent. This ratio implies that the REIT has high potential of keeping up the dividend growth rate.
Source: Company Website
Additionally, coming to the performance of the REIT stock in the market, it is evident that the strategic initiatives of the REIT are reaping rewards. In the past 12 months, the stock has shown consistent growth and has gained over 30 percent. Combined with an excellent dividend track record, the REIT seems to be a good option for an income-driven long-term portfolio. The company’s strategy to focus on key markets and segments is expected to provide positive fillip to the stock by offering a unique market proposition.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.