Q1 2021 Eastgroup Properties Inc Earnings Call

Good morning, everyone and welcome to the Eastgroup properties first quarter 2021 earnings conference call and webcast.

All participants will be in a listen only mode should you need assistance. Please see the old conference specialist by pressing the Starkey followed by zero.

After todays presentation, there will be and opportunity to ask questions.

The ask a question you May press Star and then one using of Touchtone telephone to withdraw. Your question you May press Star and two please.

Please also note today's event is being recorded.

At this time I'd like to turn the conference call over to Marshall Loeb, President and CEO.

Sir.

Please go ahead.

Good morning, and thanks for calling in for our first quarter 2021 conference call as always we appreciate your interest Brent Wood. Our CFO is also participating on the call since we'll make forward looking statements. We ask that you listen to the following disclaimer.

Please note that our conference call today will contain financial measures such as P and L. A and S. S that are non-GAAP measures as defined and regulation G.

Please refer to our most recent financial supplement into our earnings press release, both available on the Investor page of our web site and two of our periodic reports 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.

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 19 and 33. The Securities Exchange Act of 1934, and the private Securities Litigation Reform Act of 1995 forward looking statements and the earnings press release, along with our remarks.

And are made as of today and we undertake no duty to update them weather.

As a result of new information future or 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 risks and R. S.

The SEC filings.

Thanks, Dana good morning, and thank you for your time, we hope everyone and their families are well.

I'll start by thanking our team for a great quarter. They continue performing at a high level and reaping the rewards and a very positive environment.

Our first quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market. Some of the results. The team posted include funds from operations came in above guidance up 10, 7% compared to first quarter last year and six cents ahead of our own guidance midpoint.

March 32 consecutive quarters of higher F F O per share as compared to the prior year quarter truly of long term trend.

On a quarterly occupancy averaged 97% up 20 basis points from first quarter, 2020 and a corner and we're ahead of projections at 98, 3% leased and 97.2% occupied our occupancy is benefiting from a healthy market, where the accelerating e-commerce and laugh.

Smile delivery trends.

Re leasing spreads were among the best and our history at 25, four and 8% GAAP and 16.1% cash for.

Finally, our same store NOI rose by five 9% for the quarter.

In summary, I'm proud of our team's results putting up one of the best quarters and our history.

Yeah.

Today, we're also responding to the strength and of the market for them and demand for industrial products, both by users and investors by focusing on value creation, the of development and value add investments and.

For we ended the quarter at 98, 3% leased our highest quarter on record to demonstrate the market strength or last three quarters have produced three of the highest for quarters and our company's history.

And then looking at Houston, where 96, 9% leased.

And that representing 12.8 per cent of our rents down 100 basis points from 12 months ago, and it's further projected to fall into the low for low 12 later this year.

There are still some unknowns about how fast and when the economy of truly reopens and recovers brown.

Brent will speak to our budget assumptions, but I am pleased and in spite of the remaining uncertainty. We finished the quarter at a dollar of 45 per share and F. F O and can raise our 2021 forecast by 11 cents to $5 79 per share.

Helping balance the uncertainty and achieve these results is thankfully, having the most diversified rent roll and our sector with our top 10 tenants only accounting for seven 9% of rents.

As we've stated before our development starts of fold by market demand.

Based on the market strength, we're seeing today, our forecast is for 210 million and 2021 starts.

And to position us following the pandemic, we acquired several new sites during the past two quarters with more on our pipeline along with value add investments and more details to follow as we close on each of these acquisitions.

And two perhaps preempt the question none of the development starts value add investments or land purchases are in Houston.

Brent will now review of variety of financial topics, including our 2021 guidance.

Good morning, our first quarter results reflect the terrific execution of our team strong overall performance of our portfolio and the continued success of our time tested strategy F. F O per share for the first quarter exceeded our guidance range of the dollar 45 per share and.

And compared to first quarter, 2020 of $1 31 represented an increase of 10, 7%.

The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly the quick releasing of vacated space during the quarter.

From a capital perspective during the first quarter, we issued 45 million of equity and an average price over 141 per share and we closed on the $50 million senior unsecured term loan where the four year term and an effective fixed interest rate of 1.55 per cent.

Also during the quarter, we agreed the terms on the private placement of 125 million of senior unsecured notes with a fixed interest rate of 2.7, and 4% and the 10 year term debt, we anticipate funding and June.

Lastly, we retired of $41 million mortgage loan that had an interest rate of 4.75 per cent.

That activity combined with our already strong and conservative balance sheet has kept us in a position of financial strength and flexibility of our debt to total market capitalization is 18% debt to EBITDA ratio dropped below five times and our interest and fixed charge coverage ratio increased to almost eight times.

Our rent collections have been equally strong we have collected 99.5 per cent of our first quarter revenue and we have collected $1.2 million of the 1.7 million of rent deferred last year.

Bad debt for the first quarter of a net positive $78000 was the result of tenants, whose balance was previously reserved but brought current exceeding new tenant reserves.

Looking for F. F O guidance for the second quarter of 2021 is estimated to be and the range of $1 42 to a dollar of 46 per share and.

And $5 74 to 584 for the year.

And of 11 cent per share increase over our prior guidance.

The 2021 F F O per share midpoint represents a 7.6 per cent increase over 2020.

Among the notable assumption changes that comprise our revised 'twenty 'twenty. One guidance include increasing our average month and occupancy to 96, 6% increase and the cash same property midpoint from four per cent to $4 four per cent and decreasing bad debt by 700000 to 1.1 million.

And which represents a FERC forecasted year over year of bad debt decrease of 61 per cent.

In summary, we were very pleased with our first 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 through the year now Marshall will make some final comments.

Thanks, Brant and closing I'm excited about our start for the year were out of the gate ahead of our forecast and are still feeling that momentum and the second quarter, Our company our team and our strategy and are working well as evidenced by our quarterly stats as the economy further stabilize it's the future that makes me most excited.

And for Eastgroup.

Our strategy has worked well the past few years coming out of this pandemic, we foresee and acceleration and a number of positive trends for our properties and within our markets. Meanwhile, our bread and butter traditional tenants remain and will continue needing of 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 we will now open up the call for questions.

Okay.

Ladies and gentlemen at this time, we'll begin the question and answer session.

And I ask a question you May press Star and then one using a touchtone telephone if you are using a speaker phone. We do ask that you. Please pick up the handset before pressing the keys.

So what's your all your questions you May press star and two.

Our first question today comes from Elvis Rodriguez from Bank of America. Please go ahead with your question.

Good morning, gentlemen, and congratulations on the quarter just a couple of questions. One on the lease termination income increased by a little over a third quarter over quarter.

It was about a penny and a half of the beat and <unk>.

Does your guidance anything you can share on that is the one specific tenant the drove that or one specific market.

Good morning, and all of us. Thanks.

Thanks, and good cash.

And the tight and there really was one specific tenant and really one specific building all of them.

And if you remember last quarter, we had a fairly large straight line rent write off on it.

The other than in and out of bankruptcy, we terminated their lease and then there was another tenant and that same building and south San Diego and East Lake area.

And they had closed down during the COVID-19, we collected the.

Roughly of $500000 termination fee from them and first quarter and.

And then I'll tie it in the different pages and ourself on that you saw Amazon and come into our top 10 tenants.

So they took the same each like building basically what we were trying to do with what's kind of those chess moves was clear of the building out and we signed 191000 and for at least with Amazon, which was top of the fifth.

Building and that's sort of a 10 plus year lease with them. So we're happy about the outcome.

And on credit the team for doing it it was a lot of moving parts to free up the building, but we were able to improve the credit quality and and took the write off and fourth quarter, and then were able to negotiate the term fee and first quarter and get that done.

Great. Thanks, and my follow up question was going to be on Amazon.

During our quarterly call with the J O L. They noted the Amazon has been more active and sort of of the you know the and sales lash midsized Si.

<unk> and I just wondered if you know your conversations with them are increasing either and any of your existing markets or even any markets that you may potentially expand too and the near future.

And anything you can share from that and it could be very helpful.

Sure happy to and and we would agree with Jay L. L and at the same slide kind of a go.

Globally. Most people on initially makes sense on the ecommerce side worked on getting goods through the force of L, a and long range or whatever ports and say so.

And on to you and New York to Chicago or the other major cities and the last couple of years, and it's really focus more and more on that last mile which we're excited about of as one broker described anything that speeds up when someone hits click or hangs up the phone until that gets delivered is one of the world's going so our.

The conversations with Amazon, where we were happy to get in on.

The transaction across the finish line, we're having other conversations with them and they certainly picked on where the where the weather they pick us or somebody else's building.

And we'll see how those play out, but we are seeing them being more active and I'll say they are and.

And they say I'm incredibly busy and we think there I know people have asked because that is the demand going to slow down and when Amazon and slows down and one we're not it doesn't for higher SaaS, which is where the long way from Seattle doesn't feel like they're slowing down.

And then two we think there's a lot of other companies that will have to keep up with Amazon and to maintain their market share and much less grow it.

Thank you and congratulations again on the quarter sure Thanks, and thanks Thomas.

Yeah.

And our next question comes from Tom Catherwood from <unk>. Please go ahead with your question.

Thanks, and good morning, everybody.

Hum.

Taking a look at your value add acquisitions and recent trends have been towards more recently completed buildings, where you're taking on the lease up of risk.

But as you look at your portfolio of value add projects, how much is that kind of on stabilized developments the as compared to assets that maybe the capital improvements or repositioning and is there a yield difference between those two types of value add.

Oh good morning, Tom.

Good question and.

And really I'll give Brent and credit when we started buying these value adds it was similar and that it was of partially leased new development and and we like those as of wages and competitive and the lowest cap rates have gotten for laser products as a way to.

And to create that value somewhere along the spectrum between and acquisition and development of internally most everything we thought and that value add bucket has been a vacant building and and really the guys on the field and I've done a nice job, where we've acquired things really when the certificate of occupancy has been delivered.

And or for the developer or when we get of lease signed and so you saw that the last.

Two quarters, and Atlanta, and they were able to get those buildings leased by the time of the certificate of occupancy was the lever. So they really came and latest rainfall we bought the building and got a couple of leases signed there and have good activity and.

And 70% and I can really only think of one and it was a couple of years ago, and South Florida that was really on the western area and it was really on on older building and we we did some capital work on that but we're happy with the yields and the and we've been on the six is the high six's right now on our development pipeline and so it's harder.

And I think the markets and are less and less afraid of vacancy it sounds like each quarter, but we like those and.

And I was looking at our supplement today and a 6% of yield and if we can get the lease and Don timely as we underwrite them. We think the values are and are depending on the market, but call. It for the quarter something like that and I will say, we did one of I forgot and and last year near the Ontario Airport Rancho Cucamonga Youre right.

It was on owner user of that sold the building to us they were they downsize state and the building we got the balance leased and so there we felt like the waiver of probably 75 to 100 basis points above the market cap rate on the idea was a lower yield than and the sixes, but where we are in the high force.

And the market for buildings like that are probably high threes today and southern California.

Got it the pre appreciate that color and and you know some very significant.

The value creation, there, which kind of ties into your ground up developments as well you know over the course of the past year. There has been you know maybe 10 basis points of contraction and your yield the so you're still at seven 2%.

When we look at kind of the material increase and construction costs, especially recently how are you mitigating this to maintain your development yields.

Yeah, Good question and.

And the short answer would be not as of late.

We are seeing especially steel price has come rise thankfully, we don't need as much lumber and except for out west. So lumber prices are high and PVC Castor on although we are hearing those rule will moderate and time.

As we step back I think it all means we've seen land prices increase as more and more people get into industrial other thankfully they still when they enter the market. They typically go into big box development, but.

I think all of that.

Given how tight land is for industrial and a fast growing sunbelt market. The way struggled to find those sites I think it's kind of all continue to put upward pressure on rents. So I don't know that we'll look I'd love to say, we're going to go from seven to seven three yield on our development yields, but I think hopefully with our.

The development spreads are as high as they've ever been and our company's history. We would typically historically say 150 basis points above the market cap rate, which would put us about them and depending on what cap rate you use of call. It a 5657 today and we're at 7%. So we've got room to come down, but I hope, we don't and.

The team continues to figure.

Figure out ways to get to the seven percents and we.

We underwrite today's rents and typically by the time, we build the building and get it leased up and we've been able to beat our rats on what we originally underwrote and a rising market the last few years and I.

I think it will accelerate now and with higher land prices and higher components and I think at least for 12 months supply is going to be constrained because even if you agree to pay those higher steel prices. It takes a while to get deliveries.

Understood. We've we've heard the the same and in multiple areas and sticking with land just one last question one parcel of popped up in your perspective, the development list 42 acres in San Diego, California, We didn't see anything come off out of the operating portfolio.

And you've acquired recently and what what what is that parcel.

And now good kind of good I and again good.

And good duration one of the cycle.

As of late 2019, we bought this side of it was up a couple of sites and San Diego and this one is <unk> so really.

Near the Mexican border the border with Mexico between the two border entries of the existing one and Theres one under construction today that we plan to start construction and that was a salvage yard and as we've worked through with the county of San Diego to get that ready for development.

Since it has income coming off it was an operating property and but as we've as we get closer to being able to break ground. We cleared the salvage yard tenants, which are really their month to month and so it really a good cash, but it's really us getting ready to hopefully break ground this year and well <unk>.

Facing some build to suits, that's the strong market and oral <unk> spec development, there along the border and.

Similar there's one other asset that falls in and San Diego and the Miramar area, we bought.

What was a car a lot along the along with the five right across the freeway from La Jolla, That's a covered land play its parking for the Miramar.

Navy base today for the VA hospitals. So we have a couple of those which is of great way to kind of carry the land until we're ready to start development, but that's what happened and what that 40 acres and we liked the mark of a lot and it just takes a debt to get through all of the improvements and entitlements and San Diego the Whereabout there.

Got it that's it for me thanks, everyone and okay.

Thanks, Tom.

And our next question comes from Daniel Santos from Piper Sandler. Please go ahead with your question.

Hey, good morning, Congrats on a great quarter and I was wondering if you could give us a little bit more commentary on Houston, and and rents and what you think rents will do over the next few quarters.

Okay sure good morning, Dan and thanks for the complement on the quarter. If it helps a lot on I'll start with the Houston market, and then maybe jumped and at the eastgroup, but and.

I apologize and I'll throw some stats on you, but the the vacancy rate Houston and and this is from CBRE, where I'm quoting is down to six 5%. So that's we think the market overall is improving all of it is improving and Houston continues to grow vacancies and six 5% and Thats fall on the last.

And two quarters constructions, right and $21 million and that strength for the 65% leased or pre leased.

And J O L is tracking just over 21 million square feet of requirements. So hopefully those requirements turn into leases.

And and that continues to stabilize that market and then with and Eastgroup as you saw and where we're 96, 9% leased we at quarter and we had eight 7% rolling that's down to just over 7% today and with us.

Large portion of about 40% of that rolling at year end. So you know kind of as we've been saying Houston is not our best market, but its certainly a stable market and it continues to shrink within eastgroup. It was it's down 100 basis points from 12 months ago, and will probably do similar to that and the next 12 months.

I think of credit the team they've got a lot of leasing done during the first quarter, the rents compared to where the prior rents with the annual box roll down where the market is but the market is improving I think those are we believe those negative numbers that you see and first quarter will moderate and improved by the.

And of the year, but that's a market that's still recovering a little bit less debt.

Definitely the and with COVID-19 has slowed down but it is improving and.

But we think we'll be fine will be stable and Houston this year and it will improve but it won't be our it's not one of our hottest markets, but at 97% with 7% Rolling and.

The activity and we've had there and we feel pretty good about Houston going forward long term.

Great. Thank you that is super helpful. So my next question is on occupancy and maybe the kind of feeds into a larger question on guidance and being conservative.

Kicked off the year. It seemed like you know the team was fairly cautious on occupancy and and was that was the case last year and and yet both this year and last year and turned out to be better than expected I would say so I guess my question is you know are you still cautious on occupancy.

And was that driven by sort of a general view or did you have sort of key leases and mind and is that sort of driving your conservative and is on the guidance given that you beat us by <unk>, which would imply a better year than the elevens and <unk>.

The increase.

Hey, Dan and where and this is Brent Yeah, I think the.

What proves to be conservative maybe doesn't quite feel as conservative when we go out there I mean, finishing the quarter at 98, 3% leased which again was a record high lease percentage on top of the prior quarter, which had been the prior record. So the team continues to do a terrific job I would say one thing that was that was real satisfying this quarters that we had some known vacates.

And I'll say, especially in Houston.

But we had space role and then yet it immediately turned and and got re let and you see our renewal percentage. This quarter was a little bit low at right around 59, and 60%, but would point out that we had released a significant part of that for various reasons tenant that didn't renew and so we wound up taking care of 93 per cent of that space within the quarter.

And we just didn't anticipate among other things, but we didn't anticipate taking care of the vacated space. So quickly and so everything from that regard this continues to.

The hit a well if you look at our midpoint of our average month and occupancy is within 10 and 20 basis points of what we've.

The average the last couple of years.

And we're certainly off to a strong start to the year first quarter, we hope you're right. We we hope that the midpoint, we have now proves to be conservative yet again, but when you start getting into these sorts of percentages and figures its harder than you think the pressure sift start getting toward you know forecasting lets say, we're gonna of another record quarter next quarter and so.

We have good momentum will keep going with it teams executing terrifically.

But we feel it and you know that said we feel good about the numbers and you know April is looking strong coming into the beginning of the second quarter. So we.

We will just continue to to execute as best we can.

Great I appreciate that congrats again and that's it for me.

Thank you.

Yeah.

And our next question comes from Manny Korchman from Citi. Please go ahead with your question Hey.

Hey, Marshall.

Given the commentary so far on the call about how competitive the industrial markets have have become hum.

Should we expect sort of have you given your your team any new tools or sort of maybe card rails about what they should be out there looking for or if not how do you expect to keep growing the company.

Sure I mean, I think maybe it's a good question and good morning.

And then maybe broadly speaking, we want to keep growing our and when we say growth we want to keep growing our earnings of our <unk> per.

And for sure but in terms of just absolutely growing.

Volume in terms of of assets of we've tried to shy away from that.

Want to have the appropriate amount of float and our shares and things like that for our investors, but we really never said, we've got of grow by X number of millions per year, because I think that leads us to be and on disciplined investors. We can meet those goals those are usually pretty easy, but it's all the things you may be picking on us about and two or three years one word.

Struggling with them, but that said I mean, we do talk about our cost of capital and are regularly with the team and I have tried to staff up and give them.

The people under our three regionals that they need and and really our best opportunities as we've said we've tried to reduce administrative time and.

And our internal reporting we've changed the way we've done that a fair amount over the last call. It two to four years and.

Learned the phrase from one of our directors of corrupted sales time, so we want.

And we're telling our team and our go ride around go to launch for brokers go the happy hour with brokers hosted do things like that because we think non listed properties of the best opportunities like the the sell leaseback that we bought at the Ontario Airport by the time one of the brokerage group's gets it and Theyre also good and marketing yet.

Does become a bit of a feeding frenzy and every once in a while we'll buy one of those strategically so they they're aware that we can go to a lower <unk>.

Yields than we could a handful of years ago, and where we bid on the law, we just don't buy a lot and and given where the world is and.

Cbre's phrase Theres, a global wall of capital of it wont U S industrial and so we've tried to tell ourselves rather than out bad debt global wall of capital of everybody's got a check book to everybody and walks it we're better off creating and then outbidding people. So we like development a lot we like value add where it makes sense.

And won't pick up some acquisitions here or there I know, we lowered our guidance. This year, it's not that we're shying away from acquisitions will chase on just as much but it is and that represents a property we have under contract and one of our submarkets, where and our due diligence on it and I hope that's the number we beat the way.

Sure recognize.

Just when we think it's competitive debt next year. It gets more competitive of the phrase. We've heard is the top 20 markets are now and.

For now and the top 40 markets out there so it's sort.

Surprising how much competition, there is and Tampa and Denver, and Las Vegas, we expected and L. A Atlanta Dallas those major markets, but even on what people would call kind of our next 10 to 30 markets around the country are incredibly competitive we were recently and Greenville, South Carolina, and which is certainly.

And a smaller market and just the number of players there and outbidding for properties and how cap rates have come down and we'd like the market a lot, but and I.

Well just be and.

Our best serve for our shareholders is to be patient.

Patient and disciplined investor and we will find our opportunities here and there and and Luckily doing that the company continues to grow and.

Maybe in spite of heart of conservatism at times.

Great I appreciate that and maybe maybe the complete opposite of that you talked about leasing up the the building and San Diego to Amazon on the on what sounds like a whole building basis.

What's the thought process between the are there keeping that in the portfolio of long term and and sort of whats the upside of them doing that versus selling that to fund some of this more expensive and position of the development activity.

That's the adult.

And I guess the way, we just got the lease and so we thought we'd be a little bit of let the inc. Driver for we come up with our plan, but yes for the right on the market no time.

[laughter] I hear you again.

And we just wanted to signature we can't and we were going to order a set of fans and have them delivered with Amazon Prime and Seattle and things like that and trying to get the lease signed and and so yeah. We do.

And there was I mean, arguably as we kind of created as much of its 50 cents a share of NAV all credit the team for getting that done in terms of cap rates swing on that building and its one we could sell all of them.

And it's one we've owned for 20 years I'll take the blame of the credit. It was one I had acquired even way back when and when I was out west and the 19th so we like the asset we like the location Theres really no value. We can add for a number of years. So for me the dispositions, it's always the batting order and <unk>.

One of our weaker assets and there's so little land and San Diego.

Let's talk about it at the next city conference I would argue on the it's a over a 10 year lease that when this Amazon lease burns off and over 10 years, there's going to be that much land left and San Diego between camp.

Camp Pendleton on them.

Pacific Ocean, and Mexico, and mountains that we liked that infill southern California market like San Diego, but that's probably a good discussion, we'll have and we're happy to get the leases.

And I promise, we'll get back to work and not take time off and figure out what do we know that we caught the bus what do we do with it.

Thanks, everyone.

Sure. Thanks, Thank you.

Our next question comes from Vince the bony from Green Street Advisors. Please go with your question.

Hi, good morning.

The question on your full year guidance for the reserves for uncollectible rent I'm curious if the guidance revision was solely due to the kind of unexpected recoveries in the first quarter of previously written off rent or of your views on overall tenant health changed over the past few months.

Yes, and events, probably a combination of of both the first quarter and <unk>.

And we actually turn out to be a positive 78000 as it comes to bad debt and that was simply we had reserved a few tenants that we had deemed and thought with the uncollectible at 12 31, and it turned out those tenants fault and got current and so we basically were reversed what we had previously allowed for.

And then that does wasn't back filled with new collection.

Collection concerns and so for the first quarter that turned out to the.

No bad debt and so we did ratchet back the second quarter with.

For the total we brought down to 1.1, but we will look at the second quarter.

We had put about 225000, there and then about 500000, and the third and fourth quarter and.

Feel good even through April here, we're looking good collections have been very very strong we collected and the mid 99% our first quarter of rents, which is basically the same as we did last year and.

And so we feel good about collections, we had the to bring it down lower and just you get two or three tenants you know when you've got 16, and 1700 customers and when you're saying that and just a handful could absorb the number you have and there you're hesitant to take it down even further but we.

We feel good.

Obviously, the real pause about first quarter and those arent tenant specific our allowance is just general again, given that many tenants assuming something will happen, but you know hopefully we can continue to unwind that it's at the 1.1, we're already down just over 60% are forecast to be down just over 60% from what the prior year was so again of.

And just a testament that arb.

Multi tenant of ours quote smaller tenant base has held up just fine and.

We don't want that to get lost on folks because it always seems that when there is some economic reaction that people tend to look at us and smaller tenants and that didn't happen and the great recession and that didn't happen here.

And we'd like to think we've bumped that theory, but I'm sure it and for US. It comes around again, the they'll come and look for us, but the more we can build a track record hopefully the more of that of lais those fears.

Got it and that's really helpful color on one more for me or the are you seeing any material differences and tenant demand or just kind of fundamentals between the markets that are now fully open from of COVID-19 mandate perspective versus those where there are still some restrictions.

And place.

Good morning.

And if I'm understanding your question correctly, and I would say it probably feels more.

Like the everything shut down call it a year ago and almost all of our markets and then is for them.

And really thankfully the southeastern markets.

Georgia, and Florida, Carolinas opened up the Texas, a little bit first we felt that activity and now it feels a little more broad based on areas of California.

We struggled placing some vacancy and the bay area and the market was always strong. It was just not many people out looking for space say compared to Tampa, there for a couple of quarters and and we've seen it even though and we feel better and we will get there on the Miami development, where we built the third building and apart the first two leased up before.

We could complete them the Miami was another market, where it felt like with COVID-19. It had slowed down so it does feel like more and more of our markets are really fully open a little more even now I guess, maybe another way to to say and we're sending out more proposals than we have traditionally and and that's made.

And partly why we saw so much new leasing.

Say that the flip side of that is still still take a while to get done so.

And it's a slow process and maybe the best answer to that I've heard is our rents are higher than they were a few years ago and spaces have gotten a little bit larger for our tenants of the level of approval of the amount of scrutiny has gone up so there's a lot of deals that that will happen, but they'll stall out kind of on the Red zone until we get until we get.

Signatures, but.

The <unk> more and more pickup and the market in terms of activity and then and Youre right. It really depends on when kind of the government and let those markets reopening of all of that over the last year and each quarter of total now. They also liked there pretty much open although some of them and felt like they just reopened and on here in the last 90 days is more shot Scott and <unk>.

Arms.

Great. Thank you.

Sure. Thanks Vince.

Our next question comes from Dave Rodgers from Baird. Please go ahead with your question.

Hey, guys. This is Nick on for Dave I had a question if you've been hearing anything from tenants about employment shortages and it might be impacting their business.

Certainly <unk> seen that around the country are and it feels like I've heard more about it and service businesses than I have within our our tenants as well, but it does feel like people are having.

The hard time hiring workers, which is crazy right now, but the hiring people and it probably hits the larger of the space the more people intensive and some of ours arent quite as enough and 800000 foot and industrial building is going to have a lot of people on it and labor is kind of a key decision.

And maker part of their decision with hours, where it's really that last mile quick delivery I know theres of I've read about the swatch and a shortage of truck drivers and things like that.

And I think that was all going to lead companies more and more towards automation we're on.

Already saying that but that will pick up and we're not hearing it as directly but we arent glad to see our our customers starting to expand and that's really had slowed down that partially ladder of Brent commented on on our retention rate, but that was one was our tenants are actually starting to expand but I do.

Worry about the labor shortages that are out there of all of it it seems more service oriented and.

Warehouse, but it's gotta be of a little above.

And then just one quick follow up on something you guys said earlier land as a percentage of construction costs, where did you guys take that today.

The land as a percentage of probably it's probably around.

25% to 30% and and maybe slightly growing although as Marshall said there is some component costs like steel debt that are increasing and the question earlier about the the yields and the impact on how we're mitigating that some of that really is going to be the challenge. This year of lot of what's in that pipeline is kind of pre baked with some of these supply.

Jane Conundrums, but and it.

It generally and it can vary in different places, but generally going to be and that 25% to 30%.

Range of of total all in.

Great. Thanks.

Okay.

Yeah.

Our next question comes from Michael Carroll from RBC Capital markets. Please go ahead with your question.

Yeah. Thanks, I guess Marshall over the past several quarters I mean, you've detailed how perspective tenants and it's kind of broadening out for ya, including a much bigger pool of national players looking at your your properties.

Combined with the smaller local players.

And obviously this has changed your top 10 tenant list and you know these national players more active today than the local players and we should continue to expect that the top two atlas to continue to two of ball.

I think it will continue to evolve and and you did see of I guess of couple of new names and it.

And this quarter that we've moved into.

And I hope we've kidded our on board I Hope we have the issue of how big is too big for one of our tenants are alive and people certainly.

And get on my Soapbox for a moment as people focus on Houston and for US and concentration there where I think geographic concentration is an important for us to manage risk, but I also think tenant concentration as another great way to manage risk and we really I don't know the people focus on that as much I like that.

A hair below 8%, but I do see of some of our tenants those national tenants work and what's been interesting to me is we'll see them and Tampa Orlando and our market and next thing we know there and we're sending out proposals to them.

Throughout the portfolio of debt.

I hope we have the issue is how much is too much home depot are best buy on one of those or Amazon or wait for any of those tenants. So I do I think as they all work on their supply chain, and and logistics and and they've all been called without inventory, especially this past year. So we think it will also lead to.

Is there logistics move our way and the <unk>.

And will likely carry more inventory as well, we're reading and hearing about over the next few years.

I think it's a good prediction that we'll be managing the size of some of those tenants and maybe I'll go back to Manny's question worst case, we create so much value with Amazon and they are so concentrated and we need to sell on Amazon building or two but.

They are great of World class problem to deal with when and when and if we get the first we need to get the leases signed but I think you're right I think we'll end up with.

A little more tenant concentration over time other than we like and we will try to manage that number and keep it low as best we can.

Many of you have great tenant diversification today I mean, what is too much I guess whats that number at 5% of of brands or I mean is there a number that you are thinking about right now.

And theres not as we've talked about it not a specific number for you know the other thing is we've got and you're right and thank you and it's not a problem today, but you don't want to wait until it is a problem. The other thing I thought we should.

Later, and as we look at that as one of the terms of the leases I mean on a like say on Kona and auto is one of our top 10 tenants good company, but there <unk> typically of shorter term lease if someone's, 5% and everything's a three year lease that's a different model there and if we've got someone in and.

And how many locations is that too I feel better about having multiple locations because you're probably not going to lose all of those locations and wants to talk to me it would be on.

And I'm I'm good at over analyzing things.

Personal therapy comment.

How long of the lease terms, how many locations and who the tenant is and I think that's probably as we get to each one is probably how we should that should be the framework we look at.

Okay, and then I guess switching over to developments I guess, what's the governor of starting new development projects as the the ability to find land or is it that you're just trying to manage risk you don't have too much on leased of developments and process at any point in time.

It's really.

Good question, what I Love about our model is it's not Brent and me, saying go really the governor of I would put it back on the market. If the fire guys can find the right land sites and we wouldn't build two competing parks within the same submarket, but we could be and we're active and several submarkets in Dallas and Atlanta.

And we what could be and San Diego and some of our larger markets. Its really how fast did your last phase of that building lease up and did it kind of meet or exceed our pro forma and as fast as.

We've told the team as fast as you can deliver them and get them leased up we're ready to go with phase two so the market really pulls our supply. So the Atlas how are stark Scott. So far out ahead in 2019 of where the we thought they would be our hope we have that issue as this year as it plays out although we've got to get the steel.

And for it and all of the components and things like that I can see some delays that way but.

It's really as you know.

And we'll build phase for as fast as you can lease phase three and I've always kind of thought of almost like a retail store, where we're restocking the shelves as fast as you can sell it and looked at it.

I like our model will build of roughly a $12 million building, where our yields are versus market cap rate and so it'll come out of being worth about 19 million, which is of great net asset value creator and how many times can we do that before we run out of land or get too far out over our skis.

But if we can do that and as many markets where the demand is there and that's why you saw us buy.

The side and El Paso, where we Havent built and years was that the market strength was there we had internal tenants who wanted to expanse of the team found of contiguous side to some buildings that we owned and we will break ground. There later this year. So we'll go as long long winded way of saying, we'll go as fast as the market lots of Scott.

Okay, great. Thank you.

Youre welcome.

And our next question comes from Craig Mailman from Keybanc Capital markets. Please go ahead with your question.

Hey, guys, just maybe circling back of the acquisition question and I appreciate your commentary there.

You don't want to just.

Go to the reckless abandon and given our positive cost of capital here.

But you know what we've seen in the last decade, almost as ray everyone's been conservative on on underwriting rent growth and thinking that people that are winning bids are crazy only to see rents grow faster than the expected and cap rates compressed rate and then you have.

The rewards of not being more aggressive I'm just kind of curious as you guys sit there day and underwriting committee, how much debt factors in particularly for well located product, where you know how much you're willing to stretch.

To get the foothold and some of these markets, where you on a bigger exposure versus not wanting to be you know as you said Les ambassador and two years, if something goes sour right.

So I'm just kind of curious on on your thought process, there and I guess.

Putting something else and the mix to your markets.

And now seeing more national tenants come in and those tenants tend to be less price sensitive so kind of how does all of that fit and to when you guys are saying and they decided to allocate capital.

And which I know, it's tough when you have 400.

Three to 400 basis point spreads on the development, but there's only so much land to buy.

Sure Okay. Good.

Good good thought process and the breadth and the finance team right now.

And we're thankfully not we don't feel capital constrained and on the equity markets are attractive the debt markets. So where we're not really looking of do we build a building or do we buy a building and thankfully we have the luxury of we can do both.

And is that one particular market doesn't get outsized like you'd manager stock portfolio and and.

And we do feel likely stretch and I've always thought and our best decisions when you're buying something and it's.

It's half of analytical and we certainly see some people that it's there.

And there are so focused on the computer and the model that you Miss really we have the luxury also of being a long term owner of what do you think about this location and where do you think it will be and 510 15 years, where non private equity, where we need to be thinking about ex exit whether or not just the handful of years I think that's all.

Got harder way to buy and Youre right thankfully the market's gone.

Our way all of the industrial owners of life and full of year, So where we felt like we're stretching and well keep chasing those SaaS and and we bid on a lot and maybe we should stretch more than we do but we kind of we try to come up with a number of early on and we say on right at this price before you get.

Two heavily involved and when you're in the third round of bidding and the buyer interview.

Including me it becomes more emotional and we've said on how much do we want to pay for this asset early on and once our bidding strategy and we've tried to stay pretty pretty self disciplined around that because you can get on the bidding and you want on when and where all competitive.

And I don't know the winning out of 'twenty betters is really winning and just betting on the market and.

And it keep setting new highs, but I hate to bet keep adding that its kind of go to another high and look and if it does we've got 47 million square feet that will bend and today that will benefit will benefit from that as well. So we'll we'll buy some things, but we try to not buy based on what our stock price is today, but if it.

And asset, we like and it's strategically fits where we're trying to grow and Jacksonville are Austin, Texas and things like that.

The car companies.

Probably two five times the size it was three or four years ago. So we feel like we are growing and we were under $3 billion and some of that stock price growth things like that we've grown pretty rapidly and our development pipeline and used to be 100 me on a year. So it's grown as well would grow as fast as we feel like we can but we.

Don't Wanna and.

I don't want to blow off of perfectly good 30 year old re because we wanted to grow too rapidly or things like that we'd rather find that value for our shareholders and we will.

Go as fast as we felt like we can reasonably find those opportunities.

And I want to stay out of that Craig that like Marshall said, there we view that were being paid to create value and we don't necessarily view as our key role at the component, but not a key role of being a role of per se, but yeah. One thing I think maybe gets it gets lost with Eastgroup you look at our yields relative to perhaps the the peer group given our smaller build.

The multi tenant approach, which has less competition and some competition, but less but and the last for years, we've converted the of development value add $725 million at cost. That's worth if you put a four and a half cap on it which probably conservative there and is worth over $1 2 billion. So we're making of $60, 65% return on the last.

And for years and those two buckets. So we spend a lot more time on those frankly relative and we look at acquisitions and every market, but we view that as far less accretive to the shareholder. So it's a component, but with today's cap rates. We just don't view it as a key component.

No no that's fair and helpful on your thought process.

Just on and maybe one quick follow up to that when you guys do kind of not end up being the winning bidder how far off generally are you versus.

The winter.

It depends where you and I have debated is it better to get which sometimes we don't make it to the second round and the rollout of that kind of we werent going to be close of the market see something there and then and it varies sometimes where.

We're right there when we do a lot and I usually have a first round bids they narrow it for a second round. The then you have of buyer interview and.

And then you get a call from the broker, saying youre bidding against yourself this entire time of.

If you can come off of $100 on or depending on the size of the project 400000, you can get the property. So those are the ones, where you want of a little more discipline, but we.

It's a range will usually as if it's something we lie for us on almost always make at end of the second round of the brokers will guide.

Guide you through the process of little bit of where you need debate and make the second round of the buyer interview and sometimes we we simply cry out uncle, but its amazing how and then.

Last couple of deals where the ball honestly the even after we were awarded at people came in with the higher bad Theres, one in California, and the last year and we were on the $20 million and even after we were awarded if somebody came in with a me and more within their offer and thankfully the seller sought to the.

Their word and I and honored and but it's.

I guess the good news Bad news is it's awfully competitive on acquisitions, and we can get close on them and I guess, that's the good news, we can have a high stock price and have people not want to own the industrial so.

It really pushes us as Brent said, rather than me and asset aggregator.

And rather create that value and again when you can create value by raising rents, we admit but we'd rather build it or buy it vacant and or push rents along the way so weak.

I think we'll buy more than $10 million, probably by the end of the year, but as we came up with our guidance. This year, we stuck with $10 million because thats, what we have under contract and.

And we'll be we'll be patient and we will find it and that's the.

Hard one to predict is the other reason, we predicted 10 may and because everything gets multiple bids for these days.

That's helpful. And then just hopefully a quick one here you know going back to the the talk about maintaining development yields and the apologies we haven't been able to go out and see any new developments lately, but are you guys. You guys. Historically have had more office component and some of your shallow bay than traditional just the.

Distribution is that mix changing at all which is kind of supporting other.

On the yields a bit for you guys kind of sticking to the same office percentage historically on office percentage of stage similar and we're and we're proud of the 10% to 15%, which you're right would be bigger than.

A large box building just by its nature, but were office percentage of similar if theres anything we've seen and it's probably of debt.

The nature of where we are and in Arizona and Las Vegas, we've seen more air condition and warehouse uses and if somebody has some kind of line of assembly or depending on.

We lease space and Las Vegas, where near the strip and it was of Candy company. The distributes to the strip so it makes sense.

And I appreciate it's hard to store chocolate and the desert and July without of being air condition, but we are seeing more and more demand for that from tenant and so if you said what of what we've added more parking we've added more trailer storage over the last few years I don't think thats really the.

And that helps you stand out when people are looking for spaces, but I don't think it helps our yield of if anything will end up same amount of office and maybe a little more air condition of warehouse space and we then we had six or seven years ago.

Great. Thank you.

Sure sure.

And our next question comes from Bill Crow from Raymond James. Please go ahead with your question.

Good morning, guys.

Marshall a couple of questions on the the larger national tenants.

You talked about the maneuvering you had to do and San Diego to move of Amazon.

And I assume the Amazon and a bunch of these other big bigger national.

On the tenant's prefer.

Not to be and multi tenant properties.

Do you find yourself contemplating more.

Larger single tenant buildings.

And to accommodate these larger tenants as you go for it.

Probably not.

The short answer would be that building was 190000 feet and thats on the large and of what we own.

And we do see.

The home depot, and they've come into the best buy and of 40000 foot and Charlotte and <unk>.

Multi tenant building, so and I think most tenants ideally would like their own building, but it's really been more of a last conversation I had on it was on the lowest projects. They were looking on one of our markets about number of dock doors and trailer storage. So I don't think we'll really.

And we've grown the size of on average building slightly over the years, but we really.

We like where we fit and the food chain of I like our yields at 7% compared to some of the big box yields where I'm, saying kind of mid fives to six that people have reported and so we'll probably keep building the same buildings, it's really getting the.

The location and doctors and trailer storage.

And Youre right, there and they've been and what they are less price sensitive as you can deliver the right real estate and and for Amazon and it really works and San Diego, We had the right and square footage and the right location for them, but just sticking with them and and you see it on our top 10 debt.

It took 10000 and say just using the Amazon example, and and Tucson, a year or two ago. So that one was.

Kind of interesting and maybe.

Educational for me that to deliver bulky items that they would be willing to go to that that small, but we have the right location that they needed and Tucson.

Oh are you the follow up question here are you getting the inbound request from the tenants.

To take care of their needs and the other markets, whether you are in those markets or not or are they starting to to generate more leads.

And we work on that and then we have had some you know we're thankfully we develop those relationships and our credit our team and the fields, where we'll go to their corporate office or have those conversations and.

And companies like.

Lowe's and home depot, where I think they are used to and this is me assuming as much basketball.

Retail leases that you are much longer in length, the earth than on a typical industrial lease so.

Simply having gotten through the lease process. If we can use one of our conforming leases and take what we did and Charlotte and move into Austin I think it makes it easier on the real estate teams because all of those companies also the same day made of a incredibly busy and understaffed right now on broadly speaking, but.

I think we do have that advantage and and even one tenant was looking at going into a new market they'd rather leased and owned but they presented us with that building and that case. It didn't work out we really didn't like the building that much but it was.

Not retail related but a solid and a tenant that we have elsewhere and they've.

Approached us on buying the building the lease it back to them. So.

I love it when things like that happen and I think if we can kind of keep managing those relationships and <unk>.

Good men was another company large AC contractor when we went to Fort worth of their work with us and Dallas and kind of made the comment that the traffic was so bad and Dallas they needed of Fort worth locations. So we were able to accommodate them and take them to fort worth as well for example.

Alright, Thanks, Good times, a day and industrial depreciate against the.

Great. Thanks Bill.

And our final question today comes from Keybanc Kim from <unk>. Please go ahead with your question.

Thanks, and good afternoon, a lot of good questions have been asked already so just a quick one here how.

How would you describe the changes and your overall tenant credit profile and your portfolio and I don't mean, you know how many more tenants are rated by REIT and messing grade by Fitch, and Moody's, but kind of amount of real world credit.

Okay.

Yeah and that's.

I guess and interesting question, keeping I mean, we've got 16 and 1700 customers I think you know, obviously, we analyze especially when you're signing of new lease we have of processed at all of our asset team follows in terms of analyzer.

Analyzing the credit of attended various things go into that I mean, the credit view on and as his deal where no T. Our capital is required and we may look at slightly different than say a build to suit where you are committing and lots of dollars and perhaps the long term lease but.

We revisit those we run D&B reports for those tenants and that type thing, but keeping I guess, what I would point to and I mentioned earlier is.

I think the the greatest Testament to our our tenant credit profile is how we performed relative to say comparison to big box peers, and or how we've performed and economic downturns, where you compare.

Some companies that focus on one size versus the other.

And again, what we've seen is that there is there is not a disconnect between.

How big tenants perform relative to smaller tenants in those situations and as we've said before it being and a smaller space doesn't necessarily mean that you're lesser credit.

We think the focus more on what is the business that the tenant does that mean theres plenty of very very large companies.

Publicly traded companies out there and the world today that are that are struggling for a myriad of reasons and some of them none of their own doing with the pandemic, but nevertheless, they're struggling and.

So, yes, we spend a lot of time and in and focus on that and again, especially in new leasing but.

We feel like we put down the track record to show that you know within the multi tenant space, where the where the high rent provider, we and our markets. We are the class a multi tenant we're not with we'd say in the field, we're not shade and shelter sort of landlord. So along with that comes of better credit profile, because they're having to pay up.

For the quality space so.

Hopefully that answers it came in but it's you know and we feel like we've laid down the track record shows good a good credit profile.

Yes. Thank you.

Welcome.

And ladies and gentlemen, with that we'll conclude today's question and answer session I'd like to turn the floor back over to management for any closing remarks.

Thank you.

I appreciate everyone's time. This morning, thanks for your interest and for a number of your ownership as well within the Eastgroup and we're happy with the quarter and we will get to work on second quarter and look forward to speaking to you and <unk> and three more months take care.

Yeah.

Okay.

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending you may now disconnect your lines.