Q3 2020 Eastgroup Properties Inc Earnings Call

He's also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under Securities Act of 1933. The Securities Exchange Act of 1934 and the private Securities litigation Reform Act of 1995 forward-looking statement in the earnings. Press release along with our remarks are made as of today, and we undertake no duty to update them whether as a result of new information future or actual events or otherwise such statements involve known and unknown risks and uncertainties and other factors, including those directly and indirectly related to the outbreak of the ongoing coronavirus pandemic that may cause actual results to differ materially. We refer to certain of these risks in our SEC filings.

Thanks Kina. Good morning. And thank you for your time. We hope everyone and their families remain well and out of Harm's Way, and I'd like to start by thanking our team. They continue performing at a high level admits a challenging work environment or third quarter results were strong and demonstrated the resiliency of our portfolio and of the industrial Market the team produced another SOB statistics such as funds from operations came in above guidance up 6.3% compared to last quarter to a third quarter last year. This marks Thirty consecutive quarter as compared to the prior-year quarter, truly a long-term Trend year-to-date ffo per share is up 7.8%

Our quarterly occupancy while below prior year was high averaging 96.6% and a quarter in were ahead of projections at 97.8% leased and 96.4% occupied. Our occupancy is benefiting from a healthy Market with accelerating e-commerce and last-mile District delivery Trends also, but not as a high 83% year-to-date retention rate.

Releasing spread set a quarterly record at 28% Gap and 16.1% cash. Year-to-date leasing spreads were solid at 23.1% Gap and 13.3% cash and finally same store noi was up 3% for the quarter and 3.6% year-to-date in summary during a choppy environment. I'm proud of

Our strategy is evolving to not only include maintaining occupancy cash flow and liquidity as has been the case since March today. We're responding to the strength in the market development looking at each of our goals. I'm grateful we end of the quarter generally full at 97.8% least our second highest quarter on record Houston our largest market at thirteen and half percent of rents is 96.2% leased with an eight month average collection rate over 99% off company-wide rent collections remain resilient for October this far we've collected 97.6% of monthly rents.

There are still many unknowns about how fast and when the economy truly reopens and recovers. We all as a result simply have less Clarity than normal Brent will speak to our budget but I'm pleased that in spite of the uncertainty. We're tracking towards 535 per share and ffo this represents a $0.07 per share increase to our July 4th and five cents per share above our prepend emack expectations helping towards this end. Thankfully we have the most Diversified rent role in our sector with our town only accounting for 8.1% of rents.

Yes.

Stated before our development starts are pulled by market demand. So with the shutdown, we halted new starts given the strength. We're seeing and select select submarkets am planning a few fourth quarter starts and pending permitting timing. These will continue and the first quarter twenty Twenty-One and to position us following the pandemic. We've also been working on several new land sites and Park expansion more details to follow as we close on these Investments.

Other strategic transitions transactions, we've worked on include a hundred and sixty two thousand square foot value-add acquisition and Rancho Cucamonga near the Ontario Airport and dispositions, which hopefully continue towards closing and Houston and on our last property in Santa Barbara and now Brent will review a variety of financial topics, including our update the 2020 guidance.

Thanks Marshall. Good morning. Our third quarter results reflect the resiliency of our team and strong overall performance of our portfolio a missed a very challenging year ffo per share for the third quarter, exceeded our guidance range at a dollar thirty six per share and compared to third quarter 2019 of a dollar Twenty Eight represented an increase of 6.3% The outperformer continues to be driven by our operating portfolio performing better than anticipated name namely higher occupancy and strong Recollections from a capital perspective during the third quarter. We issued $32 million of equity at an average price of $133 per share and earlier this month we closed on to senior unsecured private placement notes totaling 175200000000 note was a tenure has a 10-year term with a fixed interest rate of 2.61% The second note is $75 million on a wage.

Of your term with a fixed interest rate of 2.71% that activity combined with our already strong and conservative balance sheet has kept us in a position of financial strength and flexibility, including the complete availability of our $395 revolver. As of today. Our debt to Total market capitalization is 19% debt to income ratio is 4.9 times and our interest and fixed charge coverage ratios are over seven point four times. Our rent collections have been equally strong. We have collected ninety-nine per-cent of our third-quarter revenue and entered into deferral agreements for an additional 5% bringing our total collected and deferred to 99.5% for the third quarter.

Last April we reported that 26% of our tenants had requested some form of rent deferment and the six subsequent months that only Rose to 28% and deferral request had basic Choice East the agreed-upon rate deferrals this far total one point seven billion dollars an increase of only two hundred thousand sent our report in July that represents just 5% of our estimated 2020 revenues.

We have consistently stated the depth and duration of the pandemic and its impact on the economy is on determinable. However, the immediacy and degree of potential tenant financial distress and loss but see we had budgeted for has not materialized as a result our actual performance and revised assumptions for the fourth quarter increased our ffo earnings guidance from a mid-point of $5.28 per share to 5:35 per share or a 7.4% increase over 2019 the revised midpoint, exceeds our original pre-coated guidance at the beginning of the year among the budget changes were an increase in average occupancy from 96% to 96.5% and a decrease in reserves for uncollectible rent from 3.6 million to 2.3 million dollars note that the reserve potential bad debt for fourth quarter of $600,000 is not attributable to specific tenants.

Our continued earnings growth directly contributed to increasing our quarterly quarterly dividend by 5.3% to $0.79 per share. Our third quarter dividend was the 163rd consecutive quarterly distribution to shareholders and represents an annualized dividend rate of $3.16 per share in summary. We were very pleased with our third quarter results. We will continue to rely on our financial strength the experience of our team and the quality and location of our portfolio to carry our momentum into next year now Marshall will make some final comments.

Thanks Brent and closing. I'm also proud of our third quarter results our company and our team has worked in numerous downturns and while different we'll work through this one too as the economy stabilizes. It's the future that makes me the most excited for each group. Our strategy has worked. Well the past few years and coming out of this pandemic. We foresee an acceleration a a number of positive trends for our properties and within our markets meanwhile our bread-and-butter traditional tenets remain and we'll continue needing Last Mile distribution space wage and fast-growing Sunbelt markets these along with the mix of our team our operating strategy and our markets has us optimistic about the future and will now open up the call for your questions.

At this time. If you would like to ask a question, please press the star and one on your touch-tone telephone. You may remove yourself from the Queue at any time by pressing the pound key to ask a question again, that is star and one as a reminder to give everyone an opportunity to ask questions today. We do ask that you limit yourself to one question plus one follow-up question.

And we will take our first question today from James Feldman with Bank of America Securities. Your line is open.

Morning, this is Elvis Rodriguez on for Jamie. Great quarter guys, just a couple of questions. So Houston occupancy and leaves percentage decline a hundred fifty basis points quarter-over-quarter off other with those was was that expected or any specific leases. You can discuss Elvis. Good morning. It's it's Marshall, you know with a little bit of an update. I would say, you know expected although Anna not not Houston specific. We really had thought our occupancy is kind as we thought the last couple of quarters with death more than a half. So expected move out its kind of some moving Parts. I think of our bad debt, they're oddly enough. There's really not been all and gas we did have one trouble. It's in the the airline industry. So it's really more specific than than Houston just with the slow down and Airlines, they they refurbish interiors and things like that. So that was one blip in, Georgia.

And and probably overall expected although not any specific tenant since I guess the end of the quarter we've regained fifty of those days this point so Houston's back to 96.7 which is essentially it's not at our portfolio average, but it you know kind of rounded just under 97% least. We're we're comfortable with Houston and then I'm also been pleasantly surprised kind of threw the pandemic to the 99% rent collected that Houston has been better than our company average at around ninety nine and half percent collected, going back to March really when this started so, you know, we we think Houston it's probably steady is our team they're described it and that's probably a good answer. It's not our best market supply has thankful slow down as you'd imagine most people have stopped. There's a lot of most of what is being built or newly-delivered is more big box and not directly applicable and we'll be fine in Houston. I think yep.

Yeah, I guess it's all expectations. The street has been much more worried about Houston than the reality has been today. And we think will be you know, kind of ninety-five to ninety-seven percent least pending how a couple things play out between now and and year-end.

Great. Thank you. And and then just one follow-up. So your development starts. I know you said you're going to you know, continue or increase developments going forward, but it went from 1 million square feet to 825 million square feet startup starts for the year. And I know you mentioned some delays from COVID-19.

Sure. Sure, good question. You know we really is this started like most of our peers kind of said let's finish what's in our pipeline but not start anything new just see how this plays out and I am Philippe today. It's been you know, you're kind of waiting for the bad news, but it's been much less than anticipated certainly in in March. And then again, maybe when we reported in July for example, and and and happy are 97.8% leased a quarter in and we're about there today. So really October I'd say looks a lot like third-quarter then it is it was our second highest on record. So with that and now I'll credit some of our Brokers think we've got some internal tenants that are looking for expansion space and people out in the market you really, you know, Thursday I have you really need to give me some inventory to to work from so we'll start and Charlotte Phoenix for a space with a couple of markets and in Northeast Dallas Fort Worth some of those authors

and that well

Elias but we feel pretty good about it at this pace about our 21 stocks and that they'll be more like a typical year of

Starts if we can, hang in there two, ninety-seven plus percent least and and starting to see, you know demand either from new tenants and I think our intents are getting comfortable enough. Everybody should be getting their see life through this to expansion plans that they put on hold to start talking about new space and things like that. So I think Twenty-One without getting too specific will be I'm expecting it to be a hopefully a good year starts with

Thanks, Marcia and congrats again on the quarter.

We will take our next question today from Daniel Santos with Piper Samuel. Your line is open some other couple of others are.

Bill and she'll costs have come down land prices have been fairly sticky. We've acquired some land you saw Fort Myers some other land that we have under contract and things kind of predominantly. I'm Jason to or around the corner from parts to kind of keep working on that next phase of a part land prices have been sticky but she'll costs have come down maybe not dramatically but a couple of maybe five to seven percent. Are you if thankfully hung in there on our product type. Most of our peers are are the bigger box, you know, I'm a little more on the edge of town. We're we're typically a business park infield Last Mile life is be at office or retail or hotel that there's been a lot of capital flowing towards industrial wage. So our development process

That's a really gone if we can maintain our deals and maybe our our rents are about the same our costs coming down slightly. So our deals have been able to hang in there, but we think the value when we finish the value creation is increased probably 25 basis points or so and are more and the last 90 days.

About it. That's helpful. And then the second I mean based on your men collections in your occupancy. It's safe to say your portfolio has been fairly well insulated from Provident tax, but in places the market, like could you walk us through maybe some changes in economic activity or behavior that you're seeing those markets, you know, nothing recent so much. I may be one market that probably get it done kind of comes to mind for me. If you look the Florida is a good Market the talking to our team there and what's interesting maybe using you know, I can see is is fine and South Florida, but looking at our Gateway project that right next to Hard Rock stadium. We we built two buildings. They leased up before we completed them off those Peloton Best Buy if there's really a cuz you're using those kind of as a last mile delivery part, but then we deliver the third building and it's been will be fine, but it's dead.

Slower to Lisa and talking to the team there, you know, Miami has been more shut down economically than say Tampa Jacksonville Fort Myers Orlando the other markets and in Florida, so I think that's where we seen it in Las Vegas is another Market where we acquired three new buildings two of them least up before we can finish and the third one. We've got activity page on the hospital strike and a little bit longer release and it's really more about the local economy being shut down the last few months, but because all you know, all of a sudden will be have done I would have guessed in my office building would have leased up usually easier than your first building and a brand new part, but it's been a little bit harder and I think that's that's really because of covet and and really the market and Thursday closed for the most part.

Got it. Thank you for me.

Thank you, and we will go next to Emmanuel corpsman with City or line is open.

Hi, this is Kristen Currie in for Manny quick question from us. What do you seeing in the transaction markets now that is giving you confidence and raising guidance for these volumes and how does pricing has changed since pre COVID-19?

And I'm trying to get across to make sure I understanding it, you know, the pricing in terms of finished product probably twenty-five to forty basis points lower certainly lower and the major markets and then what we've seen of late even you know, they're they're still top twenty markets, but maybe not the top handful wage being we we chased a portfolio and Atlanta that will be in the low 40s or talking to CBRE at one point. They have, you know, three projects under contract that we wash the clothes that were all below the lowest Camp right in Atlanta. For example, they were all kind of in that four and a quarter to four and half range. Uh, Austin we're seeing, you know for divorce rates which we have and and prices per square foot nearing two hundred foot in places like Austin, so we were just as we were kind of getting used to seeing it in LA and San Francisco.

And Miami we're now we're seeing that spread and Charlotte has a portfolio on the market.

I'm trying to not violate confidentiality agreements and things like that, but we'll go with a low, you know, a low cap rate for Charlotte probably a record day or send those kind of markets where you were raised in a number six through 25. We're seeing calculates down. And again, I think that's what we're told is, you know, people are comfortable with industrial rent growth going forward and just lack of appeal of maybe some other asset classes outside of multi-family and Industrial right now being the two that are the most in favor. Yeah, I think too damn that sux you might be referencing to our increase in our value of having property Acquisitions from from 9 to 30 million in Marshall might touch on those. Those are a couple of deals that we have planned to close last year in a little quicker. And so I mean those are both under contract to get in closed before the end of the year said those are, you know deals in hand. Yeah. It's a little more color wheel.

I'll probably won't get too far and had one of our Acquisitions. It really was a value-add and all credit John Coleman and his team in the Eastern region were able to get that ended in hand before the buildings finished off. So I was going to be a value-add and and basically as price like a value-add will now roll in as an acquisition and then the other one brand references which we have announced is the ranchers Club Ocean Center. The one in Rancho Cucamonga. We bought it. It's an owner user leasing the building back, you know for about half a year basically and and we think because of that leasing office. It's very close between two freeways and near the Ontario California Airport. If we think we're getting up a better pricing by taking that leasing risk on so again, it's it's wage and I guess that helps in terms of iron confidence talking with the Brokers and Southern California. They describe their Market almost like a goal post and that things were dead.

First quarter, they really stopped second quarter. And since it's been it's been a big pickup and business and a lot of activity in that Inland Empire especially Inland Empire West Palm or this property is

Got it. Yeah, that's helpful color. Just a quick follow-up. How do you think about using asset sales versus Equity issuance as a source of funds?

Yeah, I mean, we we're very pleased with you know, the attractiveness of our of our stock price and you see we issued some data this quarter and we were very pleased that the markets were not only open available to us but. Trying to have so we're not sure of capital. I mean those would be our primary sources of capital but I think as we've as we've been for several years now that you know recycle being good stewards of recycling through some of our you know lessor assets. I think it's more of that more so than doing it for Capital per se so I think you know, you'll see us continue to suck it Houston. We're very pleased to get that down into the 13% area and continued to decline. We've got a property there that we anticipate closing before before year-end but more it's more just navigating that aspect rather than Capital we have you know, thankfully we're in position where you know are are bottlenecks more opportunities and and opportunities.

that we like

versus Capital Access, which is a good problem to have

got it. Thank you.

And we will go next to Eric Frankel from Green Street. Your line is open. Thank you. I was hoping you can give us a little more color on how Market rents are generally trending. I'm looking for oil changes by market and looks like you know a few markets understandingly, California, but even parts of Texas can be doing really well while other markets at the accelerate a little bit maybe could provide them or color.

Sure here. Good morning. It's Marshall kind of either ride the California Market is or still strong and that helped release and spread this quarter which we were happy about, you know offset a record during the pandemic. It's it's kind of one of those where you it feels counterintuitive where the headlines aren't matching what we're seeing day today. So the California markets maybe Fresno's a little swerve certainly then the Bay Area San Diego, you know probably are bigger Markets Houston has kind of flattened out. You know, it it's steady is you'll see we're at least year-to-date also any money in a pending the batch of leases we have you can get some anomalies or in some of our smaller markets like Atlanta has a negative number but it's really more about which leases that role that I have a big enough space there yet. It's a really good a good statistical measure. So Houston's a little bit slower there vents it going backwards earlier in the year improving now a little bit as yep.

With activity picking up in Houston. The rest of them probably were staying and starting to pick back up again. I think with the stop in construction and especially at looking at the charts home construction is starting to think back up. But if you really dig through it kind of one more layer into the onion the construction that starting back off is predominantly big box and that's why we're like a lowest that we are excited about starting our development pipeline back off and where we don't have the activity by the time we deliver that'll be probably call it psychic order of twenty one and we took a year to lease it back up. So we think we're going to be ahead of the market with some of our deliveries and that not many people. I'm not keeping it very private but not many people are are looking at developing a very right now.

Right makes sense one of your peers kind of mentioned earlier this earnings season that that leasing volume might follow up a little bit next year just as the office opens up and maybe folks change their their consuming habits and settle bit less. I'm on amazon.com and more on vacations or concerts or whatever Services you do you have any views on Thursday, but the economic recovery would look like and how that might shape them in.

No, I guess I'll preface this by saying, you know, we're not Economist cuz you look as we meet in our guidance a couple of times and I clearly aren't good Economist fact that Francis. I I think you know, I'd like to think with the you know, we'll get questions. Do you think Amazon is creating a false sense of demand in the market and don't think that's certainly not true. We are having a number of conversations not true in the shallow of a space, you know can only speak with we're what we're dealing and one rotor described in more of a disrupter and then I think other companies will offer really have to adapt to Amazon's model and more and more to e-commerce and and delivery rather than in stores. So the other thing I do think e-commerce won't grow at the rate of you know, not 80% rates like it's it's growing currently, but but I also think with each quarter that goes by even in this kind of abnormal economy.

tennis or I just

We're kind of getting our sea legs first quarter was normal. Second order was a huge disruption. I think our own tenants are getting used to it or there's a couple cases where we've had a chance to speak to us saying they almost run out of inventory at different times. And what we read about first was Safety stock now, we're starting to see it a little more and more FAQ. I think the other industry that will benefit each group. We've typically and we've got the Ferguson Plumbing in The Dalles House color Home Building picking up. I think that's the other thing own nation and homebuilding we're seeing some activity without our portfolio, but I think we'll see more of that as the home builders really seem to be ramping up and doing well and and and population Chicago. I'm more optimistic about 21 than I was twenty. I'm grateful to our team and we've been able to hang in here better than we thought but I'm more optimistic about 21.

You know assuming there's not you know, I guess like dangerous. I'm assuming there's not another huge curve ball. We all get along.

Gotcha. Thanks. Thanks for taking my questions answer.

And we will go next to Craig with keybanc capital your line is open.

Hey guys, maybe I just wanted to Circle back to the balance sheet and maybe from a higher level clearly, you know, your cost of equity is made it very conducive to to use the ATM to help fund. But the cost of debt is also extremely low for you guys now, but just in the context of lower cap rates for industrial assets, you know by Nature raised debt-to-ebitda just the way the mass works and just kind of curious as you guys think about the optimal capital structure to maximize earnings kind of minimize risk. Now. What are what are talks internally kind of how do you guys balance those two things? And you know, does there need to be you know, some upward Trend in debt to ebitda just to to be able to kind of maximize everything?

Yeah, Craig if it's conversation, we have a frequently and and thankfully it's been from the views of two positives as I mentioned earlier. It's been an attractive cost of of equity and also as you mentioned in an equally attractive cost of debt, you know, we married on the side of this year being I guess you would call it a bit conservative as we put in the release we actually as of today and it'll change fairly quickly, but we're not even carrying a balance on our revolving or almost four hundred million dollar evolve or which is the first time I can recall not being drawn up in my years with the company. So it's an ongoing discussion, you know, there's times where it go like maybe we should be a little more louder than you have situation like we had earlier in the year and your price goes off. We went to eighty eight or nine dollars a share. Is it all of a sudden you feel better about being as conservative as you are so in essence flows with with where things are, but you know our would point out are dead.

But I had turned it down over time. Although if you mentioned Craig as a bit of a challenge when you're growing especially as we do via development where you're perennially

On on development costs that aren't yet producing noi that makes that a bit more of a challenge but we did go 7-5 this this past quarter debt-to-ebitda, which which package were all for us would be a goal but it's not a goal to the extent where we would you know would wouldn't preclude us from continuing to develop a ramp-up development if that means debt-to-ebitda goes up just a little bit that's just hear it with with the way that works. So, you know that we're in a good spot. So, you know the balance sheet, like I say, it's in good shape just really bored of our time and energy and focus is how do we find those opportunities is your guys with the boots on the ground do it terrific job looking under rocks and trying to find the things that work for us. So so really the focus continue to be there, you know, I I agree with Brent and I guess I wouldn't and you know, maybe if we went back a couple of three years ago when our Dental market cap was more in the mid-thirties and and are you know birth

That was a little bit higher ratios and things like that. Typically we have targeted a hundred fifty basis points spread over market cap rates and I'm really the last couple of years or today. We're probably more around three hundred basis points meaning if we can build to a 7-2. It's probably about afford to so is we as we talked about strategy and kind of how do we position ourselves? You're tempted. You don't want to you don't want to push too much product in the market. You want to see it getting absorbed as we keep kind of reloading the inventory for development of the value creation there. It's so attractive kind of offset of that kind of waiting for some disruption. We said, let's have a if we're going to be a little bit operationally aggressive to take advantage of the environment less be balance sheet safe. So that's when we really started and thankfully the market gave us the opportunity to to fill our balance sheet down to where it is today. I don't feel the need to really dead.

Continue to deliver we might if the opportunity presents itself, but we think we can be comfortable stepping on the gas where the market is really asking for those development opportunities Thursday. We and we love the spreads. We're sitting there. There's wine as they've ever been in our company history, but it also helps to have a safe balance sheet behind that in case something takes a little bit longer to lease off or several of them David.

Now that that that's helpful appreciate the thoughts there then just Brent relative to the same store guy that you guys are three six years a day mid point is 3 a.m. This just conservatism or you know, it's late in the year. So it's harder to move the numbers. But I mean does this imply sort of a diesel from three key levels and Fork you could get to that midpoint or should we think more you guys could be at the higher end of that 2 and 1/2 to 3 and 1/2 range, you know, as we traditionally do the the information put in that guide on the table is just transparency on what equates to that midpoint of ffo. So in that case, it does dial up to that 300 and as you basically backing into that does imply a bit slower fourth-quarter than than the earlier quarters and as of right now from a budget perspective, you know, that is what we've got dialed in now as to what happens Thursday.

You know each quarter here through the year.

We have been ahead of where we've anticipated. So my hope would be that that proves to are on a little bit on the conservative side and and improves yet again, but you know just remind her last year third and fourth quarter or some of our I think the highest percentage least marks we've had in the history of the company. So I don't know so much of the deceleration in markets as much as I you know, the measuring stick that you're going up against there is pretty darn strong and you compare that to just again budget assumptions aren't our goal or isn't objective every day. So you hope you you'd be that but um, so we'll see like I say, it's just a quarter to go there and you know, we're only two months to go there. So we'll like where we are at this point and fourth quarter and the arm phone off pretty quickly here turn to kind of see how that Stacks up for next year.

All right, and then if I could slip one more in Marshall the Rancho Cucamonga deal is at the $28. I deal that you guys did in the quarter. You're correct. Yes. Can you just talk about what kind of initial yield is versus what it could be stabilized when the the tenant and plays kind of moves out and you guys either Capital it or roll the rent up wage. Yeah the real sweet, you know, they ended up the owner lease the building back. So there was a rents are probably the market today and I would call that mid to hire fours. I think if we in and it's not we're not going to flip the asset, but if we put a call it a you know, not a fortune one thousand five to seven-year tenant in.

And it were a union Brantley could probably sell it in the higher 3 today in terms of Market or market cap rates are so I think will stabilize, you know, as we under wrote it will maintain a I'm a little bit optimistic by the time the tenant moves out given what's going on in Inland Empire West and Howland constrained that area is that are are rents that we underwrote being, you know, call it sixty days ago were going to be below Market six months from now so that but that's it. I think if we will will end up a little bit below five or below 500 when we get any of the tenant the term or something like that. So I think we're getting a good seventy-five or Plus basis-point premium to where Market calculate would be today.

Nice job. Appreciate it affects. None of them are off by thanking we we like strategically the to grow in Southern California, you know, trying to find an opportunity to be patient, which has been is awfully hard to do in LA and I like that we're life things up and and fingers crossed to exit Santa Barbara and sell our last R&D Building there and then close on another asset in Houston. So we're down to down 30 basis points in terms of Houston is when our portfolio this from second-quarter and then we'll sell something in fourth-quarter, hopefully and and just kind of keep turning the dials in the right direction. It's going to have descriptions of that helps leaves kind of how we're thinking of portfolio allocation. They're not they moved but they're all you know, maybe baby steps in the right direction on all three of them.

Absolutely. Thanks a lot. Yep.

We will go next to Bill Crow with Raymond James your line is open. Hey, good morning a couple of times today the in flow of capital into the sector from from other places and I guess that leads to to kind of a three-part question. Are you seeing new competitors on Acquisitions? Is there an erosion in development plan which might be evidenced in extended lease up. And new construction and three. How do you think this thing is?

I can remember all the good morning and I can remember all three of those. Yes. We are seeing which surprised me during a pandemic that we are seeing new entrance into industrial probably more and make sense more on the acquisition and development side. Although we see both Alice, you know some new entrants to development and Dallas things like that. We're not seeing an oversupply doesn't mean we won't but today we haven't seen that much development and typically like in the case and I'm trying to move the specific projects in Dallas. Thought they were more as your talent a boss, you know, you can put more dollars to work if you're coming into the market and I've gotten calls where I would call it, you know working acquaintances over the long time of your career that aren't an industrial really to talk about industrial and how do we think about it and view it and things like that? So it does make you nervous about where things are dead.

It is like your over driver giving you stock tips, you know, so we tell them that it's a horrible sex or stay out of it, except for supplies things like that. But you know, we're not seeing over so that's why we are seeing new entrants and I I'm an optimist and then we're I think in terms of where it ends what what surprised us back in 20 kind of like 15 2016 because everything is so institutionally held unlike the old days where it was, you know, the three of us have looking at Brent two and a bank loan divestment shut down rapidly in Houston in late 2015, when oil and gas turned down and this time although the endometrial fundamentals have held up and you wouldn't is one board member said I wouldn't know there was a pandemic if I did, you know, just reading through the numbers but I do think our industry is much more disciplined and much more institutionally on so I think Thursday

Still have the ability to shut down like they did and and Texas in 2016 and and like they did earlier this year. So I I think it ends. Well, I'm an optimist same thing we're saying is is kind of where Amazon is leading. So many retailers in New Uses of I think the growth rate for e-commerce and how the American shops whether it's curbside pickup or delivery or online is just beginning and and we'll see a lot of growth from that and that's where I am. Sometimes it's better to be lucky than good. But are are shallow bay and fill locations have always worked and I think we'll pick up over the it'll take years, but the next you know, 6 to 5 years a lot of new time customers and our buildings. We're starting to see that and seeing more and more repeat business from customers in our portfolio because of that.

Thank you for your time.

And we will move next to Michael Carroll from RBC Capital markets your line is open.

Yeah, thanks. I want to talk a little bit about your guys's occupancy Trend obviously is held up fairly well over the past three quarters better than I guess expectations. I guess what's driving that is it that off to the strong leasing volumes that you guys have been able to deliver over the past few quarters is it just less tenant issues that you thought possibly could have happened or was it a little bit of both?

I'm just going to go see him and Brent Jonathan. I think maybe certainly less I guess at the start of this. We you know looking back I feel comfortable about 6 to get on what our balance sheet was but was sixteen hundred tennis. I was worried that you know, we all won't make it to the other side of this March, you know that which tenants get kind of taken out by the downturn and the economic really shut down and that that attrition has been much less than we would have anticipated. So that's that filter occupancy. And then the other thing off with the uncertainty we typically, you know, historically average out of retention rates and low self, you know, seventy to seventy-five percent is probably high and over time and and year-to-date. I believe like eighty 3% So I think with uncertainty and it says put Road plans growth plans that they had in a late nineteen early 2020 has been put on hold so we've been able to log

Keep my number of our tenants that were tenants we had earlier in the year when we had our budgeted vacate where they said, you know, I'm just going to do our leasing terms has been consistent a little north of years where it always is but where they just on renewals rather than move out because they were uncertain what was going to happen. So I think those have been the the two big drivers to me and and then the team is Mark reopened and thankfully our son, you know, I won't not speaking medically, but just in terms of business economics, thankfully the majority of our markets opened up earlier than the rest of the country whether it's you know, Atlanta the Carolinas, Texas Florida, and that's what we really seen that activity and some of the guys say it's, you know, we're back to 3 covid levels in terms of leasing office these days.

Okay, if you're looking at your I guess your tenant roster have you done Exercise of how many tenants are in sectors that are overly exposed that are like in Leisure or event planning might have to get backspace. I could call some near-term disruptions or is it so modest for you that you don't really see too much risk on that front. We certainly look at those. I mean, maybe two things I'm glad and and irises moved around a little bit. Our top ten ten minutes are about just north of 8% of our revenues and that's you know, by far the lowest we've seen with the industrial sector. So the license, you know, we like Geographic diversity and we're working on that and I I like mental diversity. We certainly have those tenants on our watch list and am worried about Orlando and Las Vegas. Those markets have been you know, again internally surprisingly stinky where we hung on to our tenants and had fewer issues than we would have guessed a handful of birth.

months or so ago

You know, I think we watch those but they hung in there and thankfully, you know, I don't rent relief requests really came in and April and since then tenants move around and we do something else but I I rent for coming in earlier in each of the last three months. I've improved we were waiting when the PPP one's kind of ran out, you know, what happens next month and collect line for the last three months September was better than August October has been coming in earlier than September. So it feels like it's improving. So I rent relief requests not going away, but they've gone down materially and and surprisingly, you know, right at this point fifty basis points of our revenue and we've collected a fair amount of them off and they got deferred. I don't believe we have collected a fair amount of that already. So it makes us feel, you know, better about the portfolio and able to really raise guidance last month.

Again, this quarter of okay weird. Again, you're kind of waiting for that bad news is this things played out and and knock on wood. It's it hasn't been as harsh on on us or any of that already. Just probably all expected back when

Okay, great. Thanks. I guess plus last question. I'll jump off his you did talk a little bit about your watchlist. I mean, how how big is that watch list right now and how they compare guess with three six months ago.

It's less than three or six months ago and it is you know, it's more not by market or even you know, it's really tennis like the like I mentioned the one in Houston where you're where you're doing airplane refurbishments in your whole industry gets gets hit or we had someone that was in the dental supply business in Atlanta. And when this had, you know, like people stop going to the dead so bad. So those were the tenants that got pulled on her I think was sixteen hundred tennis even in a good economy. We have tenants on our watch list, but it's thankfully right now probably no longer than the North. Yeah, I would agree is, you know are bad continues to come in less than than we had originally anticipated and the watchlist and receivable ledgers has has maintained, you know maintain being pretty clear. So we continue to be impressed with Collections and extremely impressed.

With our used in collections in our team there Kevin and his team have done a terrific job as Marshall mentioned for third-quarter between Collections and rent deferral week. We collected 100% of our rents there in Houston for third quarter, which is just a testament to the team there in our tenant base. But so the watchlist you all things considered is a very manageable.

And you will go next to Kevin Kim with truth to security if your line is open.

Thanks for the morning. When you look into your controls for the next 12 months or so any pockets of concerned that we should be aware of and also I think about your Mattress Firm tenant today. There's there's always movement within our attendance. It's more honest faces of not going to think of what we know where the tenant has multiple locations and consolidating so we'll get that space back, but I think there's one in La there's outside on the rents that they're paying today and will refurbish the building and get badly. So nobody measured it jumps up. I got I would expect our retention rate is the economy stabilizes to drop back from the dead. He's more into the lower 70s where we traditionally are, but but hopefully there's more, you know more prospects out there and in some cases we're looking at upgrading tendency, you know a name.

On a waiting out. I got one. I'm happy. We've had a 99% collection through the pandemic so I can't it's not really fair for me to complain about some of our tenants that here there. You do get a chance to upgrade the use and off and Tennessee and Mattress Firm is you know, they've been through everything. I guess that their bankruptcy and through this their leases. We probably are winding through and off The Mattress Firm places in the next couple of years. I'm trying to do it from memory going through the bankruptcy, but the good news at the time there in multiple locations the average building age want to say when they had their bankruptcy maybe eighteen months ago was about six years on those buildings. So they're in some new developments and and places like Houston and Fort Myers and Tampa so some markets where there's enough velocity and moving tenant. So they're I think they're going to industry but their current today and you know, they're you know, they're certainly ones you you wage.

Just because the industry that and and and we're probably closer to the end on some of those leases than we are the beginning so we'll take a look at those places rolling and really learn what their plans are to I guess. I'm okay. And do you have any early estimates for 15 and what that can do to your tax base and California?

I mean, I think really on virtually all of our California leases are are triple-net. So they won't get passed through to our tenants at least what we've talked to start red, but people did not expect it to pass. But but you know, who knows who knows on that and it would take a couple of years for the tax assessors are you know, two two thousand years to really get through and reassess buildings there, you know thankfully for us it will you know, let's say a hundred percent but well in the mid-to-high 90s at least get them through to our tenants really we're within effect on say two to three years of US pass through the test. It would put a damper on our ability to push rents in California, which has been a strong market so I won't say and that's why we like a diversified portfolio that you know, we're trying to grow in California that said it's hard to watch all the dead.

Salons in California and not be concerned about the economy the economy in California long-term.

But but that makes me appreciate Texas and Florida and the Carolinas is as well. So we're watching it. It'll be delayed impact if it passes and it will be slow and our ability to push rents because it is a tennis it wants to me, you know, it's a bag of money. I don't care if you call it property tax reimbursements or rents or Insurance reimbursements. There's only so many that $10 I can pay so some of those dollars that would have gone to rents will get pulled into taxes if and when that happens and you know, and and we'll manage our size and California just like we're working on have only used in the last couple of years as well.

Maybe you can just I don't give you an estimate the impact might be difficult at this point, but maybe you can provide a couple ingredients. Like what is your average vintage here in California? And if you have the data like what the text Bill is currently in total for California in San Diego. I mean that's another advantage that we've acquired like the the one and in Rancho Cucamonga where you know, there'd be no impact cuz we just bought it and we were we've been active in San Diego that's it and in LA and San Francisco some of those are Legacy assets that we've all in the nineties, so and although we've gone up all the 2% a year every year we get a bigger hit on some of those assets will be out of life knock on wood. And so it's it's a mix of you know, there's a fair amount of the Bay Area that older there's some older and older and you know, there's one project in fridge.

Oh, that would be an older older van not the older like late nineties kind of vintage on those. And so those will be a little more exposed depending on where where they get assessed to Thursday. The other thing it's hard to estimate. You know, how aggressive the assessors are and how are appeals work. So don't don't have any number for you today on all of that and then an awful Arthur's you got were probably at Market already there just about Market.

Okay. Thank you. Sure.

And we will take our final question today as a follow-up from James Feldman with Bank of America Securities. Your line is open.

Thank you. Just one more quick one friend. You mentioned a 200k increases in the pearls from July to now anything from those tenants. Are they more torque related in Houston or you know any anything else that you can share from that?

No, it's you know, it's continued to be a pretty diverse many tenants thankfully not just single tenants that that drives the number of substantially but there's nothing alarming amongst that 200 again. We're very pleased at the total number is Marshall alluded to earlier that seems to have basically just topped out altogether off and the 1.7. We've already collected 200 of that through September everything that had been deferred that was do we have collected through the end of the third quarter. So, we've already reduced that figure at 9:30, I guess to 1.5 million outstanding and all but about a hundred thousand of that is due to be paid back by December of 2021. So our team did a good job of not prolonging the duration of which we were, you know deferring and allowing them some room to pay that at a later date so it would

Was it anything specific or?

Or alarming there on the on the 200 or for that matter really on the total. It was a pretty diverse mix of a little bit of help to a lot of different customers.

Great. Thank you. Yep.

And this does conclude our Q&A. I'll turn the call back to our presenters for any additional or closing remarks today.

Thanks for thanks everyone for your your time this morning and your interest in each group. We are certainly available. I know we let me get everyone on their questions on the Q&A Thursday available. If you have any follow-up, please give us a call. Shoot us an e-mail whatever is easiest and look forward to seeing you virtually and everything. I guess next. Thanks. Thanks.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

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