Amidst a whirlwind of economic uncertainty and volatile capital markets, EastGroup Properties unveiled a quietly audacious acquisition strategy during its recent earnings calls. While analysts focused on the usual metrics like occupancy rates, development pipelines, and the looming specter of bad debt, EastGroup subtly revealed a calculated pivot towards acquisitions that could significantly reshape its growth trajectory.

What's particularly striking about this strategy is its laser focus on acquiring near-new, fully leased properties at attractive yields. It's a strategy that seems counterintuitive in a market where many are predicting a slowdown and potential rent declines. But EastGroup is betting on the long game, leveraging its enviable balance sheet and a unique cost of capital advantage to acquire prime assets at a discount.

This "stealthy" acquisition spree, largely unnoticed by analysts caught up in the broader market narrative, has seen EastGroup acquire six buildings since mid-2023, totaling approximately $225 million. These aren't just any buildings though. They are strategically selected, averaging a mere 1.5 years old, boasting high functionality, prime locations, and a crucial detail: rents slightly below market rates.

EastGroup's President and CEO, Marshall Loeb, attributes this surprising opportunity to the current capital market environment. High interest rates have squeezed traditional developers, creating a window for EastGroup, armed with a more competitive cost of equity, to swoop in and secure these valuable assets.

The numbers tell a compelling story. EastGroup is securing these properties at an average GAAP cap rate of 6.5%, significantly higher than its estimated equity cost in the 4% range. This translates to an estimated $0.08 annual increase in FFO, a significant boost driven solely by these calculated acquisitions.

But what makes this strategy even more intriguing is the company's shrewd deployment of a forward equity program. Recognizing the need for certainty and swift execution in a volatile market, EastGroup implemented this program in Q4 2023, allowing them to secure $75 million in equity at an attractive initial price. This allows for match-funding of acquisitions, eliminating the risk of relying on debt and ensuring a smooth, efficient closing process.

Essentially, EastGroup is using this forward equity program as a strategic "war chest," prefunding future acquisitions and minimizing exposure to share count dilution until the capital is actually needed. This tactic, borrowed from the playbook of apartment REITs, adds another layer of financial finesse to EastGroup's acquisition strategy.

But this isn't just a short-term play. EastGroup is laying the foundation for long-term growth. By acquiring near-new properties with below-market rents, they are securing a built-in rent growth trajectory, further enhancing the long-term value of these acquisitions. It's a shrewd strategy that simultaneously boosts near-term earnings and sets the stage for future outperformance.

While many are predicting a slowdown, EastGroup is poised to capitalize on the coming market shift. As supply dwindles and confidence returns, the company's strategic acquisitions will deliver a double whammy: embedded rent growth and a head start on development opportunities. They are quietly assembling a portfolio primed to outperform in the coming years.

Analyzing EastGroup Properties' Acquisition Spree

Projected Impact of Acquisitions on FFO

The chart below illustrates the hypothetical growth in FFO per share driven by EastGroup Properties' recent acquisitions.

"Fun Fact: Despite its focus on the Sunbelt region, EastGroup Properties has roots dating back to 1985, with its first industrial park built in Jackson, Mississippi. It's a testament to the company's evolution, from a regional player to a national leader in industrial real estate, strategically navigating market cycles and delivering long-term value to its shareholders."