Q4 2020 Eastgroup Properties Inc Earnings Call
Graham is about to begin.
[music].
Good day, everyone and welcome to todays Eastgroup properties fourth quarter earnings call.
At this time all participants are in a listen only mode. Later, you'll have the opportunity to ask questions. During the question and answer session. You may have registered ask a question at any time by pressing the star and one on your Touchtone phone. We do ask that you keep your questions to one question and one follow up question. Please.
Also note this call may be recorded and it is now my pleasure to turn the call over to Marshall Loeb President and CEO. Please go ahead.
Good morning, and thanks for calling in for our fourth quarter, 'twenty and 'twenty Conference call.
Always we appreciate your interest Brent Wood, our CFO and it's also participating on the call and since we'll make forward looking and what can statements. We ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as P. N O Y and S. F. O that are non-GAAP measures as defined and regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website and to our periodic report.
It's furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and reconciliation of them to our GAAP results.
Please also note that some statements. During this call are forward looking statements as defined and and within the safe harbors under the Securities Act of 1933, The Securities Exchange Act of 19, and 34 and the private Securities Litigation Reform Act of 1995.
Forward looking statements and 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, our actual events or otherwise.
Such statements involve known and unknown risks 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 risk factors and our SEC filings.
Yeah.
Thanks, Dana good morning, and thank you for your time, we hope everyone and their families are well on.
I'll start by thanking our team for a great year. They continue performing at a high level.
And that's the challenging unique work environment, our fourth quarter and full year results were strong and demonstrate the resiliency of our portfolio and of the industrial market.
Some of the results. The team produced include funds from operations came in above guidance up eight seven per cent compared to fourth quarter last year.
This March 31 consecutive quarters of higher F F O per share as compared to the prior year quarter truly a long term trend.
And for the year F F O rose, 8% to a record $5.38.
This represents an eight cent per share improvement over our original free Covid forecast.
Our quarterly occupancy averaged 96, 9% and at quarter and we were ahead of projections at 98% leased and 97, 3% occupied.
Our occupancy is benefiting from a healthy market with accelerating E commerce and last mile delivery trends also benefiting occupancy with a high retention rate of 80 per cent for the year quarterly re leasing spreads were strong at $15 four per cent gap.
And seven 9% cash.
Our 'twenty and 'twenty, releasing spreads and set an annual record at 21 seven per cent gap and $12 three per cent cash.
This further marks sixth consecutive years of double digit rent per GAAP rent growth finally same store NOI rose 2.2 per cent for the quarter and three two per cent for the year and summary, during a prolonged choppy environment and I'm proud of our team's results.
Today, we're responding to strength in the market and demand for industrial products by both users and investors by focusing on value creation and via development and value add investments I'm Grateful. We ended the year at 98% leased our highest corner and on record.
Houston, our largest market is 97, 2% leased with a 10 month average rent collection of over 99%.
Further Houston represents $13 one per cent of rents down 80 basis points from fourth quarter 2019, and is further projected to fall and of the 12 as a percent of our NOI This year.
Companywide and rent collections remain resilient for.
January thus far and we've collected approximately 99% of monthly rents there.
And there's still some unknowns about how fast and when the economy truly reopens and recovers.
Brown will speak to our budget assumptions, but I'm pleased and in spite of the uncertainty we finished 2020.
And $5.38 per share on F F O and forecasts $5 68 for 'twenty 'twenty one helped.
Helping balance the uncertainty is thankfully are having the most diversified rent roll and our sector with our top 10 tenants only accounting for 8.2 per cent of rents.
As we've stated before our development starts are pulled by market demand thus.
Thus, we halted starts for a few quarters last year, and Mccann again and fourth quarter.
Based on the market strength, we're seeing today, our forecast is for $205 million and development starts for 'twenty 'twenty, one and to position US following the pandemic, we acquired several new sites during the fourth quarter with more on our pipeline along with value add additions.
More details to follow as we close on each of these investments and.
And to perhaps preempt a question and none of the development starts value add investments or land purchases and Houston.
Finally, our strategic dispositions during the quarter or to sell the last of our four buildings and Santa Barbara completing our market exit along with another Houston asset.
I will now review a variety of financial topics, including our 'twenty 'twenty one guidance.
Good morning, our fourth quarter results reflect the resiliency of our team and strong overall performance of our portfolio amidst a very challenging year.
<unk> per share for the fourth quarter exceeded our guidance range and $1 38 per share and compared to fourth quarter 2019 of $1 27, representing an increase of eight 7%.
The outperformance continues to be driven by our operating portfolio performing better than anticipated, namely higher occupancy.
And from a capital perspective during the fourth quarter, we issued $17 million of equity at an average price just over 140 per share and as previously disclosed we closed on two senior unsecured private placement notes totaling $175 million with a weighted average interest rate of $2 six 5%.
And that activity combined with our already strong and conservative balance sheet has kept us in a position of financial strength and flexibility our debt to total market capitalization is 19% debt to EBITDA ratio was five two times and our interest and fixed charge coverage ratio increased to over seven two times on.
Rent collections have been equally strong we have collected 99, 6% of our fourth quarter revenue and we have already collected half of the total rent deferred early in the year at $1 7 million.
Bad debt for the fourth quarter of $1 1 million included a single straight line rent charge of $677000 as part of an ongoing process of replacing an existing tenant with a better credit tenant and a much higher rental rate and a California property.
Although the tenant was current on their cash rent we were required to write off the remaining straight line rent balance due to the probability of terminating their lease early to accommodate the new tenant.
As we have consistently stated the depth and duration of the pandemic and its impact on the economy is in determinable. However degree of potential tenant financial stress and loss of occupancy we had budgeted throughout 2020 never materialized.
As a result, our actual <unk> per share for the year at 538 exceeded our pre pandemic guidance issued a year ago.
Looking forward <unk> guidance for the first quarter of 2021 is estimated to be and the range of $1 37 to $2 41 per share and $5 63 to 573 for the year.
The 2021 <unk> per share midpoint represents a five 6% increase over 2020.
The leasing assumptions that comprise 'twenty 'twenty, one guidance produce and average occupancy midpoint of 96, 4% for the year and a cash same property increase range of three 5% to four five per cent.
Other notable assumptions for 2000, and 'twenty, one guidance include $65 million and acquisitions and $60 million and dispositions of $140 million and common stock issuances $250 million of unsecured debt, which will be offset by $85 million and debt repayment and $1 8 million and bad debt, which.
Presents a forecasted year over year bad debt decrease of 35 per cent.
In summary, we were very pleased with our fourth 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 2021 now Marshall will make some final comments.
Thanks, Brant and in closing I'm proud of our 'twenty and 'twenty and results and excited to pursue our 'twenty and 'twenty one opportunities our company and our team are working well through the pandemic as evidenced by a number of company Records set.
And as the economy stabilizes, it's the future that makes me most excited for eastgroup.
And our strategy has worked well the past few years coming out of this pandemic, we foresee and acceleration and a number of profit trends for our properties and within our markets. Meanwhile, our bread and butter traditional tenants remain and will continue and needing last mile distribution space and fast growing sunbelt markets.
These along with the mix of our team our operating strategy and our markets has us optimistic about our future.
And lastly, I'll speak for Brent myself, and our team to thank our founder Leland speed for his friendship Mentorship and the opportunity. He gave US Leland recently passed away and we will Miss his eternal optimism.
And with that we'll open up the floor for any questions.
Yeah.
Certainly at this time, if you would like to ask a question. Please press star and one on your Touchtone phone you may withdraw yourself from the question queue at any time by pressing the pound key and once again, we do ask that you keep your questions to one question and one follow up question.
Our first question comes from Elvis Rodriguez from Bank of America. Your line is open.
Good morning, guys and great quarter.
Just a quick question on on Houston, So the APR and continues to come down.
For that market, but similarly other markets are now increasing to the high single digits and low double digits, where do you feel comfortable longer term on sort of market exposure as you think about acquiring some land parcels and growth.
Okay and good morning, good question.
And I'd love to say there is a magic number and we thought well keep pulling Houston down and I think that and a low double digit is probably would be for any market and I'd love to run away and we kind of tell our guys on the fill you find the opportunity.
It's Brad and my job to kind of have that runway from here. So that we don't get oversized and any market and.
The good news away and kind of managing that it's much easier to sell a leased asset today and then it is to find those opportunities. So we can manage it but well keep shrinking here.
This year, we were down 80 basis points last year, and it'll fall and probably another 800 and thats without really dispositions dialed into this year's budget and will probably exited on other Houston asset or two this year. So I think if we stayed on that low double digit that's probably.
We value diversity within.
And with our tenant base is and what and as well as geography geographically as well.
And.
Great. Thank you and then just a follow up on balance sheet question.
Low leverage ticked up a little higher quarter over quarter, and it's slightly higher than the peer average how are you thinking about you know funding.
And your capital needs and I know you know youre doing some dispositions, but how how should we think about.
The cadence of when youre going to be issuing the equity and and.
And you know how you worked through lowering leverage throughout the year.
Sure.
And I'll take that and yes.
We like our access to debt and equity frankly, with and we think both avenues or are there and available to us obviously, a little bit of a move and stock price can impact your metrics, but.
We're very conservative very lowly levered and we are within our peer group, where there are a few peers that are extremely low levered.
So on a comparison basis.
I think high teens debt to total market cap and and some are even less and that but.
And I'll, let I'll wear and a very good position, we're not capital constrained so.
And we're more opportunity driven.
<unk> driven so if the guidance of the field can find those we.
Have access I think youll see us hang generally it was where we are with the debt metrics were comfortable there we're not necessarily looking to de lever further but we're not also you know.
Opposed to going down either past be that debt or equity. So I think youll see us do both.
And probably a little bit of debt and the early part of the year and also.
And given our current price where to stay there you'd probably see some equity as well so I think youll see us pull both levers.
Great Thanks, guys great quarter.
Okay. Thank you.
Yeah.
And our next question comes from Tom Catherwood from BTG.
And as open.
Thank you and good morning, everyone.
Core a couple of questions on acquisitions and so if we go back to.
You know the start of of or 'twenty 'twenty guidance, obviously, it was a very different time, but.
And back then was $65 million of acquisitions you guys ended up closing the year with I think something and the $122 million range and you've obviously done almost another 17 million and subsequent to quarter end and.
And it sounds like from your commentary on the on the call Marshall that the pipeline is looking pretty robust, especially in terms of value added and land acquisitions.
You know when you're looking at that 65 million and guidance. This year is that a placeholder because these can be chunky and it is hard to predict timing or you know are you actually seeing more and you're kind of shadow pipeline for acquisitions.
Good morning, and.
Good question.
Mix I would say the value ads and and two of those.
Closed already.
<unk>, which we announced and it really leads and our press release like on more of an acquisition, but and Atlanta. The two buildings, we bought one and the fourth quarter and one and first quarter and all.
And I'll brag on our Atlanta team they were able to get at least their new buildings and they were able to get that leased by the time, we close so they really rolled out on.
Never really hit our development pipeline that roll down is acquisitions. So the 35 million and guidance is identified so hopefully fingers crossed and moving to Asia. We can find the right opportunities to grow that number and acquisitions as more of an estimate a little bit and it's unusual the building we bought and.
And northeast Dallas, the rock that was developed as long term leases, we like the location well, we'll pull the trigger every once in a while on a strategic acquisition, but.
And what we're seeing on terms of cap rates and what we're hearing I think we're better serve for our shareholders. If we can really feed our developments and to the demand that's out there and find value add opportunities and we we liked that everyone's on them, we can find a local regional developer and acquire without the construct.
And Russ can take on that lease interest, we were able to get yields at the high sixes and Atlanta and market.
Market cap rates are probably mid to low force today, So I'll guess.
Same thing on the Rancho distribution center as you saw on volume fourth quarter, and Los Angeles, We was and owner user and we bought it with the leasing risk, but the team was able to put a couple of tenants out and so that buildings stabilized long term and we think we're 80 to 100 basis points above our market cap rate on that as well.
I appreciate that thank you for that and just kind of following on you mentioned, you mentioned and value add and Atlanta and.
It's tough it seems like there's some mixed messages in that market you know for the past two quarters and I know you know two quarters does not make a trend by any means but you've had some negative leasing spreads and the past two quarters, you've had a lot of success with value add there you've added land there.
And the third quarter, you mentioned cap rate compression and Atlanta as well.
And to give us your thoughts on on the market, there and maybe kind of square up what was happening leasing spread wise with what you're seeing demand wise on the market.
Sure Fair on.
And the survey showed and we like the Atlanta market and Ed and.
And a little bit higher level about the markets growing rents are growing there and for example.
Market vacancy rate of six 2% and then if you really look at what we build a smaller shallow bay buildings, it's lower and four 8% so.
We've been leasing buildings and doing well there and one of the buildings, we bought and that's probably why it has hit us and that same store pool. When we do it annually. So you've got it and we have to have held at all on 2019 and well as 2020 as we're just now starting to approach a million square feet. So it's on.
Newer market and as we grew and one of the buildings, we bought and we went in and I'm doing this from memory, which is dangerous but.
And north of a 7% yield and it was a pharmaceutical company that we knew was going to move out at the end of their lease and and re leasing yes, there were some rent roll down and we'd like the building.
A smaller footprint in Atlanta, Inc.
It can give you some kind of core key metrics like we saw and third and fourth quarter. So I think youll see it normalize and the market rents are girl on there and we got back on that long winded way of saying, we got back from above market space and a small small pool of assets and Atlanta.
Understood. Thank you everyone.
Sure.
And our next question comes from Alexander Goldfarb from Piper Sandler Your line is open.
Hey, good morning.
Two questions. The first one is.
On.
And just looking at your portfolio are there.
There's talk in other you know from.
Some of the other Reits about how everyone's trying to look at Nashville from multifamily side.
And just sort of curious is Nashville market that you would look at and then also some of your other lighter markets. I know you guys and tried Vegas for a long time, it's been tough, but like Denver.
So some of these other markets that are increasingly on the radar for other.
People to flock to our these markets and you guys are considering or is it the same rationale that hey, these are always markets that we're considering it's just we haven't yet found the right the right way to make and entry.
Yes, no good question and maybe.
Answering it and reversal and I'll come back to Nashville, and you're right.
Turning to Alex's question earlier, as we kind of manage our portfolio allocation. Among cities. There are some markets, we're under allocated and incredibly competitive we did acquire a project here in the Denver Airport, maybe maybe a year and a half I've had and our Airways business Center and what we've been happy with and we chat.
Chase to other projects and Denver. The problem is there's just so much capital after industrial right now, it's a little bit like the Bay area and L. A and where we're under allocated and same in Las Vegas.
We acquired a value add and Las Vegas, a balance of same about a year and a half ago down near the airport and near the strength and that's rolled and the portfolio and now to its lease, but we're looking for opportunities and those markets and being patient and our preference would be to that.
And the markets, we're already and to grow and those markets.
And I guess, a little bit on Colorado zone.
<unk> International team had a webinar yesterday on one of their comments about industrial as the.
Top 40, and the top 20 is now the top 40 with so much capital out there after and industrialization expecting cap rates on places like Orlando, and Charlotte and Phoenix Las Vegas to continue to compress because all of that capital can go and northern New Jersey, and L a and Chicago.
So I think it will only get harder for us to find opportunities, but we will probably keep doing either land or value add and things like that and Nashville is a market that certainly fits our footprint and we like it. It's got a number of our peers are already and certainly not undiscovered is probably the hard part so it won't be paid.
On a net one day, we may we may be in Atlanta and yes.
If we could go back and time.
Have things and Atlanta, and so we'll be patient and we'll keep trying to grow where we are but Nashville, as we've kind of identified a few markets and.
And we will do that when we go in and at least kind of like Greenville, Spartanburg, you saw us enter and we had studied it for a couple of years before we actually found the first and last out on some offers we made and until we kind of find the first thing that collect and now we're adding properties there so national and they get there one day, but youre right on.
And rather see us grow and Denver, and Los Angeles, and some other markets before we jump on a new market.
Yeah.
And then and then continuing that Marshall. So you know for quite a number of years, you and your peers and I've mentioned, how rents per warehouse users are just really not a big piece of the business that focuses on transportation and unemployment is the real cost pressures.
Just given all the capital pouring in obviously prices are going up which means rents have to keep pace to make the math work deep do you sense any.
Getting anywhere near any sort of pushback on rents or the view is that look rents still are a negligible part of the tenant's business and therefore, yes. It was.
And as values go up cap rates come down et cetera, the ability for you and appears to keep pushing rents just yeah remains unabated because of the other pressures with the tenants out.
Sure I won't.
I'm, an optimist and I don't know that I would go quite the unabated, but yes. As we mentioned this has been a great Rhonda has on again, we like GAAP rents because you capture the free rent and the rent bumps that we negotiate for but six years on a row of double digits and really the back half of those three have been higher than the first three and.
And I don't foresee that changing we're seeing some construction cost increases and things like that and land prices with everybody coming into industrial and <unk>.
And I was surprised to see new entrants and to our markets during a pandemic people moving because it's so hard to underwrite.
Not that we do it but I understand it so hard to underwrite retail and hotel and office right now that we are seeing new entrants coming on.
At the tenants and talking to our guys and the field typically we lose on because of size requirements, they're consolidating locations they've outgrown their space or their business has turned the other way and they're leaving the market, it's usually not over rent.
So on that.
And that I'm not quite on unabated, but I think we should be able to push rents pretty well this year.
Okay. Thank you.
Youre welcome.
And our next question comes from Emmanuel Korchman from Citi. Your line is open.
Hi, This is Chris Mcquarrie on with Manny just a quick follow up on investment activity. So you guys bought a lot of land and <unk> I was just wondering could you comment on some of your plans for the use of that land.
Sure Good morning, Chris Yes.
Really last year as Covid hit and our team did a nice job.
We said well we need the land is the one part and you can't really order for development and they can order the steel and.
Concrete the glass, but we didn't want to.
And the last couple of years. Prior we were trying to acquire the land really as quickly as and.
As we could and put it into production is quick so we pushed the land kind of our strategy shifted to less tie up this land and value adds but close really later as we were I guess, we all are hoping the pandemic would be closer to over and then it is but at least to the end of the year, if not into next year, and so and Atlanta, we acquire.
And last year kind of looking down on our press release and its really all first and second quarter development starts and so at 98%. We're happy where we are happy where we ended the year and really through first week and change in February and we are about the same place in terms of percent lease.
The first part of this year it doesn't feel much different and fourth quarter debt thankfully. So our plans are and kind of to start adding those new phases into our parks as our tenants and started talking about expansion needs and things like that again, and we've seen the leasing activity and get a little more broad based so what we acquired.
It's always been our goals and tried to put it into production as quickly as we can and most everything you saw us looking down on our list that we acquired in December we'll either start on plans or first or second quarter, just depending on how quickly we can get through permitting and design and things like that.
Got it.
And just a quick follow up on <unk> I was wondering if you could comment on some small tenant trends are there any specific industries that they're challenged or has the competitive landscape for some of your smaller tenants changed at all.
Yeah, I think a couple of things and.
I'm glad you brought it up on.
Interesting thing and I think on collections show is that I do think and I'll I'll say people and got wrong is maybe I'll I'll take the volume and say I didn't articulate as well we have smaller spaces, but on a lot of our tenants are small tests, we've got a song, but our collections really 99 and 5% for the <unk>.
Last kind of the length of Covid and show that so we have national companies and it just needs $3 40 to 50000 square feet and markets industry wise nothing jumps out the bankruptcies, we have has been more specific.
There is a dental company that we had and so during COVID-19 and where people went to the dentist last at the last I understand that.
And our company there are still there, but they have transfer people for the military it's a moving company and the military put a stop on transfers during COVID-19 and spend more.
People servicing the strip in Las Vegas, and things like that training has been a business I don't know that we have many printers left and our portfolio, but we had a few and evidently is a pretty tough business and then one on the flip side that we're benefiting from and I still think there's more runway to that.
Homebuilding and home renovation is that has picked up and.
Really and Sunbelt migration has helped us as well and we're seeing more and more demand from people with and within that industry and and then a lot simply from three pls and debt that may or may not be related to homebuilding, but that industry feels very active right now.
Got it good color. Thanks.
Sure and Youre welcome.
And our next question comes from Vince Timberland from Green Street. Please go ahead.
Hi, good morning.
You mentioned bad debt expense would be down about 35% in 'twenty and 'twenty, one, but how much did bad debt impact cash same property NOI for full year 'twenty and also if you could just touch on how you think about what are the normalized level of annualized debt bad debt from your portfolio as a percentage of revenue on a percentage of.
NOI and wherever you would budget for it.
Yes. This is Brent Vince, yes, we do forecast bad bad debt going down Thats, a component of a couple of things one feel like it'll normalize and we had a very good collection years Marshall alluded to were 99, 5% plus very pleased to have already collected 56% of our deferred rent. So there's only seven or 800.
And left and deferred rent to collect which the majority of that hopefully will collect this year.
In terms of its impact on same store.
And did impact that the one write off I alluded to.
And the call earlier.
And our prepared remarks was attended a single tenant and.
California, where we're repositioning and moving a lesser credit tenant out for a better credit much higher rent, but they had a straight line balance of around $680000. So that had impact, but we generally and budgeting events. We look at our historical trend of bad debt relative to revenue.
Obviously, 'twenty was and uptick year.
But our forecast next year and $1 8 million basic.
And basically puts us in the midpoint between.
And what we experienced in 'twenty and versus what our long term trend is so we're basically budgeting that to head back toward a more.
Normal a ratio that is between.
Revenue bad debt. So again, we're very pleased especially a shout out to Houston and the collections there have been exceptional our team. There has really worked hard Kevin and his team.
To keep those numbers up so.
We feel.
The debt coming down by a third as effort various reasons is very achievable.
Thank you for that color just to maybe follow up there help me frame the 35 per cent decrease a little bit better I mean, how much and just maybe going to contribute the same property and 21 is this a 20 basis point positive impact kind of coming off the easier comp in 'twenty that 50 basis point, and they're able to possibly frame it that way.
Yeah.
To cash you'll have.
A lesser impact.
Yes, most of that will occur and bad debt will be and same property I mean, they only day one but it is by definition. The only part of our portfolio that is not included in same property would be properties that have rolled into the portfolio. Since January one of 'twenty. So just inherently.
That decrease for the most part is going to be.
Felt and same store and I do think that as part of our upward forecast. We finished the year at about three 2% same store for 2000 and you saw our midpoint guide for next year being four O and some of that is driven by a part of that bad debt decrease.
Can't put an exact percentage to that Vince, but obviously most of that is baked in and just inherent with the portfolio.
Okay. Thank you one more from me could you discuss any changes you're seeing and the supply picture and your market for multi tenant properties given all the new capital coming into this space.
And more.
Most of it.
<unk> seems to flow and then and maybe thats.
And you said long term, we worry about finding good land sites that we can get there either have the right zoning or we can get zone and are at the right price that and don't have.
Topography that makes it impossible most of the new entrants that are coming and it's still thankfully for us mainly edge of town and Big box development and so if we looked at it that way. It is still in on South Atlanta, and South of Dallas Inland Empire East kind of within our markets. It will usually be someone comes in and.
And what you can put a lot more capital out that way on average buildings are about $12 million in terms of and investment and.
If you build up six 800000 square foot bomber on the edge of town and can share, but a lot more capital to work as you're trying to place money are up your industrial allocation. So that's really where we see that and and maybe like Atlanta, where you have that 140 basis points swing and vacancy rates debt.
Lot of what's driving that is the new supply typically comes on and its much larger buildings.
Great. Thank you.
Youre welcome.
And our next question comes from Craig Mailman from Keybanc Capital. Your line is open.
Everyone.
Marshall just on the land acquisition that you guys have closed and and ones that you're kind of chasing right. Now can you just give us a sense of kind of where you're able to underwrite yields today.
Assuming kind of flat rents.
And kind of versus the north of seven you've been getting and you know.
And just as a.
And I don't know if you guys do this and investment committee or not but just.
The layering and sort of the historic rent growth that you've got and over the last five years kind of what the ranges of maybe the underwriting at today's rents versus maybe where you've kind of been coming in and.
As projects have been.
Finished and leased up at these better rents share.
Thanks, Ed.
And I think I'll start with the numerator and work my way and the denominator on rent.
And.
And you kind of file it away at least on the back of your head, but we don't change. It we will underwrite rents and this is what I like especially if you're if you're delivering two more buildings and on an existing park. It is where the rents and the Ti came in on our most recent leasing so we will look at our peers and we don't factor.
And on rent growth that maybe I guess, you could say and hindsight, that's been too conservative and the last few years, but we won't factor and rent growth and then typically by the time. It gets to investment committee will have the land dialed in and we'll get it out to three different <unk> for the construction. So we will have have firm construction.
Members, and then you're and you're really just trying to manage our risk as anything so.
And where that risk from <unk> is how fast can we lease it off and on and honestly the tenant improvements and typically have tenant improvements start to get a little above normal then we'll adjust reps with that paying debt the term and the tenant's credit and things like that so for now and it feels like we're still and that kind of higher <unk>.
Thankfully Inc.
And that's helped us as cap rates, where we used to have what we typically have a target of 150 basis points for development risk has been on iron ore and we're getting closer to 300 is cap rates get into the low and a 50, if I round and use a salad and a cap rate of four youre getting to 250 to 300 basis points.
And hopefully we're delivering it a little bit higher rents than we underwrote.
On the project and L. A that we bought and we thought that what we use current rats and we thought we were going in and the mid fours and <unk>.
Finished 90 days later, and we were able to come in at the High Force for example, and that was that was on construction of the assembly and.
And we'll get better rents and we had underwritten.
Our marketing approach.
But that's that's helpful and just going back to your earlier comment too about 20 markets is now the top 40 markets.
And the pricing is starting to reflect that.
And even across kind of quality just you know as you guys look at the portfolio and I'm. Just curious are and ask you this and a while but are there kind of what's the bucket and non core stuff to be either just be you know.
On a standalone not and park setting that you guys use your like or wrong submarket or maybe.
On T is youre going to be higher that you might be able to accelerate given kind of the spreads or day and development that could.
Offset maybe a slightly higher cap rate, but from a portfolio quality and kind of growth accretion longer term it might just be the right time to.
Maybe try to offload some of these assets rather than on.
A more deliberate pace.
And now get when we.
<unk> done a fair amount for us really on the kind of <unk>.
17, 18 19 last year.
Kind of on and the pandemic here and really nothing traded for a little bit on multi nothing.
15 year lease with Amazon type credit and it was AAA things were about all that traded and third quarter and and the market seemed to open up so it's not a large bucket on glad where they were good assets and we had gains on glad and we're out of Santa Barbara and that those were really RMB two storey R&D buildings and not a.
A true distribution market.
You'll probably see this year and our dispositions and we're still working our way through and getting some broker opinion of value is maybe an asset or two and Houston, just as we manage its size and really.
Partly to a wall street's discomfort with Houston, where we are okay with Houston, but it clearly is.
And at 20% are on allocation alcohol brands and the team did a good job and create a lot of value and we needed to harvest some of that value may be another way to say it.
And then everyone here and they will have some older service center buildings, not a lot, but that's what we were selling and Florida and typically those are the ones. You mentioned they are single story and they are smaller tenants, where the vacancy will hang around a little bit longer as compared to industrial and the Ti is a little bit higher. So we've got a few of those where we're getting.
Some broker opinion of value to exit those but thankfully for the most part industrial has.
Those have hung in there at least and I think we should always be selling some things every year I think if you do that you can manage it and not let that bucket yet to backup you don't want to go to sleep on it but every year, we'll probably.
Whether it's $60 $80 million worth of sales whatever you can kind of a forward afford to sell that year and now is a good time to be exiting some of those assets you're right.
And if you would think 68 8 million a year, but if you had to rip the band aid off today, what do you think the value of that or percentage of that of the portfolio.
Yes.
So theres, probably some and I guess it depends on it I don't have a number on it because you really get into which industrial buildings. After that there is not.
Some of our older ones as we started looking at it like in the Los Angeles, and and the Bay area, they're older industrial buildings and they may not have the physical work.
Basically dimensions of Huawei, and we built a day, but they're really irreplaceable assets those would be.
I'll go back to our founder that I mentioned, our average hedge price was crown jewels for some of those assets that you win.
We want to sell so it's a handful of service centers may be five or six throughout the portfolio and modest.
And then some of our older industrial and we really have done that and Dallas, and Houston and and a number of markets as we scale back we've already we're basically down to just our parks in Houston and we even and then we've sold a little bit on the older product and world Houston, So thankfully not that much but I think we will always be true.
Okay.
What you pay us to do is always be trying to think of and then.
And in Houston, one of and that was a good part we had built but we felt like the neighborhood was moving away from us a little bit and so we exited that park.
Maybe a couple of years ago now.
Great. Thanks Chuck.
Yep.
And our next question comes from Bill Crow from Raymond James Your line is open.
And Bill your line is open can you check your mute function for us.
All right and we'll just move on our next question comes from Michael Carroll from RBC capital markets. Your line is open.
Yes, Thanks, I wanted to touch on I guess, the land purchases I guess, so far to date that you guys were kind of highlight and even earlier in the call and I guess Marshall did I hear you correctly in your prepared remarks that you are active looking for more land as they're more closures that we should expect to get done here over the next several months.
We've got a few yes.
Yes, we've got a few more as we're working through our due diligence, but a few more things tied up and.
And all existing markets and really trying to.
If we have a successful park and that's from maybe the one you saw us buy and create value for the next phase for example, the 11 acres, where the park leased quickly and we were out on land and if we can find ideally contiguous land or lease land nearby where we'll keep moving so we've got a few more parcels Andre <unk>.
Tracks, and we won't go crazy with land because it can become.
A drag on earnings and things turn bad but we.
The ratios the value one way, we think about it for example is.
And as I used to call. It 250 basis points to 300, if we can pull a successful development and off on our pipeline that will carry the really the land bank, where interest rates are and the taxes that will carry on our entire land bank for a year. So there is a low more offset and value creation and then land carry.
That said, we are mindful of the land carry on and that's why we tried to put it into production as quickly as we can so but to kind of keep feeding that development pipeline and we've tied up some other parcels and as we worked and due diligence hopefully.
<unk>.
Report back with some closings between first second and third quarter. This year and there are some markets, where we're out of land. If we can find the right side, we'd love to grab it.
And can you talk a little bit about the valuations of land right now and how much of those prices appreciated and then I guess just last one from me off of that the.
The development starts that you have planned to break ground on this year is all of those projects basically identified on land that you currently own.
Yes, all day.
And really we'll get that back from the field and by quarter of what what do you plan to build and where and what quarter.
Quarter, and then we will keep up shadow pipeline, which is a decent list and if that phase goes quickly what else could we deliver this year. So that's a pretty as you imagine a fluid pipeline, but theyre all identified and it I feel better on our 205 main and development starts it's mostly front.
And loaded so I feel better rather than hey, we've got to do a lot of leasing and then we'll break ground and late third quarter fourth quarter. Although there is some of that and there.
Over half is fairly early this year, so that certainly feels more certain and we have.
The building name and the park and the land and everything lined up and are working towards getting those starts off with construction bids and permits and everything else and land pricing it probably held stable and Thats, maybe what helped us tie up some of the parcels you saw us close and.
It really in December most all of them were and we're late in the year and then we tied up this year that there weren't many people out looking for land and that's probably changed and prices.
Hard to say because we struggle for us there's just not that many but maybe up 10% from where they were a year ago, which is pressuring us debt.
A little bit of and estimate that places like Dallas and.
Certainly Austin, Texas, which is a market we like there has.
And with Tesla moving there.
Some other technology companies, that's a market, where we've seen land prices and developers on glad with gas and things tied up and construction underway.
<unk> and prices and there's certainly and parts of as you would expect and also on Tesla comps to talent and builds a huge plant same thing, we've seen and certain parts of Phoenix and the South East Valley with a technology company is growing and the land gets gets gobbled up pretty quickly by April.
Okay.
Hi.
And.
Right and we will try Bill Crow again from Raymond James Your line is open.
And I appreciate it and good morning can you hear me.
Yes, yes.
Hey, Marshall I'm on a preface my question by just thanking you for the shout out to Leland, who not only was the powder.
Eastgroup and parkway, but really and early pioneer and the REIT space in general so.
I appreciate that and I think a lot of people on the phone and appreciate that.
My question really is whether youre seeing any material changes on.
And it investment levels and to your properties.
We also think about automation and being big box and I am.
I'm, just wondering if youre seeing anything that debt.
And any trend changes.
On your.
10th part and any changes and trends longer term trends on <unk>.
Thanks, Bill and I appreciate the comments on Leila and Ala and <unk>.
Well on this approach.
Too much on pace with everybody here and then.
I think the world is M and and.
And on the Ti side.
With our smaller spaces will probably see a little bit later than seven to 800000 foot building that said, we are seeing China is putting more of their money and.
And.
We've had more and more HVAC, where it's light manufacturing or pending the type of inventory that they're doing we've added parking and glass.
You said within our own building design, we've added more glass, sometimes that's been at the city's request or are nudging, along with with zoning and but we've added more car parks trailer storage and glass to our buildings and we did probably 10 plus years ago and where.
We're seeing that HVAC, and investing and racking and things like that so it and they.
They are getting a little more which we like I think that makes it trickier for them to move and stickier and the space. So it's not maybe quite as much automation as say Amazon would have and are there.
Boss building, but we are seeing that trend, where some tenants and it's usually the national tenants, where they have the capital to do and are putting more and more and of their space.
Yeah I appreciate it and that's it from me. Thank you.
Sure. Thanks Bill.
And our next question comes from Dave Rodgers from Baird. Your line is open.
Hey, guys. This is Nick on for Dave.
And just one quick question on the occupancy pickup into year and how much of that is related to shorter term leases and then how much if any is related to like reverse logistics or inventory return processing for ecommerce firms.
Uh huh.
Sure. That's a good question not to minimal we did have at least in terms of season. All I can really only think of two places both both with the post office, where they jumped up to.
Actually on our largest and that they had taken on some space and San Diego through the holidays, but we and ramp as they are delivering about a third of the packages for Amazon and so in Orlando and and San Diego and they took the space and Thankfully San Diego.
Underway with Ti we have the building leased it was on a value add we acquired at the post office was kind of a placeholder.
Got the leasing done and now the Ti work is being done and really reverse logistics.
And have not seen that I'm not aware within our portfolio Im sure Theres, some theres got to be some with and.
And the tenant spaces, but really anyone leasing space for us, it's probably a larger return warehouse and then we would typically see so it's maybe more.
Margin, all with entertainment space, but no tenants, specifically set up for a reverse logistics that certainly have read about it and follow on it and I think that will continue to.
Increased new demand within within the industrial sector.
Yeah, and then just a quick follow up for like expectations for 'twenty, and 'twenty, one or you're kind of expecting E commerce tenants more normalize this year.
And then you've mentioned other tenants such as like homebuilders and stuff and proving and demand do you think that there'll be able to like backfill.
And he holds there might be.
Hope between the two of those they will and when we.
And we think with a more stable environment and that's part of our optimism and once and some things just going on and whether it's.
E Commerce growth it won't have the dramatic growth that had last year, but we do expect it to continue growing and it's been interesting. We've even had some conversations and these are further down the road do you end up with some retail facing distribution build and as I said at times I do think order online.
And pick up on store is bigger competition for us and some of the other industrial rates and terms of how and where our properties are located on our size spaces. So we think we'll continue to see that curbside last mile delivery E Commerce will be a driver of demand for a loss and.
And on.
And I hope and again, our traditional tenants the homebuilding home services. The air conditioning, those type guys or are not going away and with a predictable economy, a more predictable economy, we think those expansions because there for a while and call. It 2018 2019, maybe as much as a third of our new lease.
<unk> on our part was coming from existing tenants growing and our retention rate was up last year hires usually about 70 low 70 as it finished the year about 80, but I think a lot of that which we appreciate was just people put their plans on hold until the world felt a little bit normal and so I think.
And our efforts to anyone's guess, but maybe by mid year, you will see we will start to see more of those expansions by our bread and butter tenants and our retention rate will normalize back to the low seventy's again.
Okay. That's it from me.
Sure. Thank you.
Thanks.
Yes.
And our next question comes from.
Nichrome Malhotra from Morgan Stanley Your line is open.
Hey, this is only now on from Morgan are perfect from thanks for taking the question. My first question is just on modeling how should we think about the trajectory of same store just throughout 2020 through quarter by quarter.
Elena and good to hear your voice.
Same store can fluctuate as you saw on fourth quarter. This year can fluctuate a little bit just based on the individual quarterly metrics over a three month period.
So there will be some fluctuation, but overall, we are viewing that to be pretty consistent within that range.
And we don't give a quarter by quarter same store forecast is because it does have those fluctuations, but as you see by our midpoint of guide we are.
And optimistic that that projection will be although it may have some up and down and it but the overall trajectory of it will be up.
Great and.
And then my second question just more bigger picture are you starting to see and any benefits from the larger trends like near shoring or higher inventory levels. They knew inventories currently are on their all time lows and and we're going to see those pick up a lot. So just wondering if any of that's manifested and any of your markets.
Oh, good question and let me.
Somewhat and then kind of what we hear about is people will move to I guess on the near shoring or our onshore in China, plus one strategy, where they may go elsewhere and you saw with one of the land parcels we acquired within El Paso for example, which is the first time on a while and we'll develop a building there and we will have.
Have a start and El Paso, but thats, a really low vacancy and strong market.
And a lot of that we believe is just near shore and same thing and southern San Diego, that's another market or sub market. We're bullish on it and so we're seeing low vacancy rates San Diego South actually benefits from that's about the only industrial and land left and that market, but El Paso is a strong market and.
And on the inventory carry we've had more conversations with tenants and I think we're probably a long winded answer of saying early innings on both I think.
And moving manufacturing plants will probably take a couple of years, we were guessing and carrying more inventory is probably starting to see it and feel it and as things stabilize later this year, we'll see more and more off add on is what we're expecting.
Awesome. Thanks, so much that's it from me.
Yes.
And our next question comes from Kevin Kim from interest.
Your line is open.
Thank you good afternoon, everyone.
And you talked about several demand drivers for industrial like homebuilding economy opening back up E commerce, but I'm curious just high level.
How much does the simple type population migration or corporate migration.
How much is that going to make an impact when you look over the horizon for the next couple of years and chemical demand drivers for your company.
Given your kind of sunbelt locations.
Yes, sure enough and good morning, and look where.
And that's really always been our long term strategy as our buildings, we would say typical traditionally serve their local market and we think on infill location in.
Orlando and Las Vegas, Atlanta is awfully hard to replace and helps you push rents.
It's happened over the years and we really felt like with Covid. It will accelerate we've same.
The numbers, we've read about and Florida and you see it on our numbers there a thousand to 1100 people moving to the state and and whereabouts.
Five major markets in Florida, I would imagine, we're capturing more than our fair share and those and those cities and and was just kind of anecdotally thinking our team and Dallas the other day.
We're showing it was on medical equipment manufacturer and where do we make the deal or not I am not sure, but they were relocating from Orange County, So we've seen.
Relocations, and Tucson, and Las Vegas, and some of those but.
We think long term that's been one reason we've been successful over the years and we expect that to pick up is.
And as work from home kind of ripples out and people are more remote and may move out of the east coast or out of California. We are the same people from the Pacific Northwest hearing stories, where they've relocated into central Florida and things like that as well. So I think all of that helps us whether it's.
Individuals' driving demand for from our customers or companies relocated and where we've had showings for people.
Looking to move and move out of California, and some and out of the northeast or the markets certainly seeing financial firms talk about our move to south, Florida and things like that as well.
Okay and just.
Second question and I look at your guidance for capital raises.
250 million and net of two 7% projected rate I'm guessing you might do better net but that's what you have pegged and.
And then and look at the net debt raising from some of your peers and the industrial set there.
Obviously, there is differences and the size of the company and how long you've been and unsecured debt market debt that would drive pricing.
I look at that part and I just wonder.
What are the debt investors looking for free.
And for you guys to get.
And maybe a little bit more benefit where you're not raising money at two 7% made Europe under to like some of your other peers is it just bigger size and noticed more history and raising debt and I know you haven't done a lot and Doug.
The unsecured bond market, but I'm just wondering if there's a second leg to the story where.
Your debt funding cost can go down.
Okay, Yeah, Kiva and that.
Very fair question and I can.
Can't say that at times, I'm, not jealous and against a much larger peers, but you look at some of the spreads they are able to accomplish.
And I do think hopefully, we're being conservative with $2 seven weighted.
And we've got budgeted on the front and having lower rates and that and then with some debt with budget and the backend weighted.
<unk> showed a little higher rate just out of being what hopefully proves to be conservative, but we've had a long history of dialogue with Moody's.
Since they initiated coverage on us going back.
789 years ago, now and we've been basically the same rating. So we're obviously quite a different company than we were then and so.
That would obviously help to get a rung up the ladder there would help tighten up some spreads.
The unsecured bond market that some of our peers have tapped into.
That has basically about a $300 million minimum threshold and we just haven't been.
And quite that aggressive on the debt side to get bytes that large and we really haven't been of the mind to try to lever up to the low.
Line, and and maybe align that with the maturity to try to get to that level.
And so we're still growing and that way, Kevin, but I do think we will hopefully better than what we have here but.
And we're looking for every angle, we can to get that data and hopefully over time, we will continue to benefit from our growth and and be awarded that.
I mean, it is interesting because your leverage excluding developments almost four times debt net debt to EBITDA, which is really low and your company has grown a lot. It just seems like the debt markets hasn't given you before and we expect that you guys deserve financing.
We're going to take you and annuities and the net.
We're going to take you to our next Moody's meeting in New York, even if we're going on replay that.
Yeah.
Alright, Thank you guys.
Thank you Youre welcome.
And with that I would like to turn it back to the speakers for any closing remarks today.
Good afternoon, everyone. I. Appreciate your time appreciate everyone's interest in Eastgroup, Brendan and I are certainly available for any follow up questions anyone has and hopefully we will see virtually soon and that the next conference. Thanks again and that's a good day. Thank you.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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