Q3 2021 Eastgroup Properties Inc Earnings Call
Good day and welcome to the Eastgroup properties third quarter 2021 earnings conference call and webcast.
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I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.
Good morning, and thanks for calling in for our third quarter 2021 conference call as always we appreciate your interest Brent Wood. Our CFO is also participating on the call and central make forward looking statements.
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Please note that our conference call today will contain financial measures such as P. N O Y and <unk> that are non-GAAP measures as defined in regulation G. Please.
Please refer to our most recent financial supplement into our earnings press release, both available on the Investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.
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Forward looking statements in the earnings press release, along with our remarks are made as of today and we undertake no duty to update them, whether as a result of new information future or actual events or otherwise.
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Yeah.
Good morning, and thank you for your time and we hope everyone is enjoying their fall I'll start by thanking our team for a great quarter. They continue performing at a high level and reaping the rewards of a very positive environment.
Our third quarter results were strong and demonstrate the resiliency of our portfolio and the industrial market.
All of the results. The team produced include funds from operations coming in above guidance up 14% compared to the third quarter last year and ahead of our forecast. This march 34 consecutive quarters of higher <unk> per share.
Turning to the prior year quarter truly a long term trend.
Our quarterly occupancy averaged 97, 1% up 50 basis points from third quarter 2020, and at quarter end were ahead of projections at 98, 8% lease and nine.
Seven 6% occupied.
Our occupancy is benefiting from a healthy market with accelerating e-commerce and last mile delivery trends.
Quarterly and releasing spreads were at a record levels at 37, 4% GAAP and 23, 9% cash and year to date cause results or 31% GAAP and 18, 5% cash.
Finally cash same store NOI rose five 2% for the quarter and five 6% year to date.
In summary, I'm proud of our team's results putting that one of the best quarters in our history.
Today, we're responding to the strength of the market and demand for industrial products by both users and investors focusing on value creation via development and value add investments.
I'm Grateful we ended the quarter at 98, 8% leased our highest quarter on record and to demonstrate the market strengths. Our last four quarters, Mark the highest for quarterly rates in our company's history.
Looking at Houston were 96, 7% lease.
It now represents 12% of rents down 140 basis points.
From a year ago and is projected to continue shrinking.
Brett will speak to our budget assumptions, but I'm pleased that we finished the quarter at $1 55 per share in <unk> and are raising our 2021 forecast by 15 cents to $6 three a share helping us achieve these results is thankfully, having the most diversified rent roll in our search.
With our top 10 tenants only accounting for seven 6% of reps.
As we've stated before our development starts are pulled by market demand.
Based on the market strength, we're seeing today, we're raising our forecasted starts to 340 million for 2021.
This represents an annual record level of starts for our company.
To position us for this market demand, we've acquired several new sites with more on our pipeline along with value add and direct investments more details to follow as we close on each of these opportunities.
Brent will now review a variety of financial topics, including our 2020 one guidance.
Good morning, our third quarter results reflect the terrific execution of our team strong overall performance of our portfolio and the continued success of our time tested strategy.
<unk> per share for the third quarter exceeded our guidance range at $1 55 per share and compared to third quarter 2020 of $1 36, representing an increase of 14%.
The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth.
From a capital perspective during the third quarter, we issued $49 million of equity at an average price over $176 per share.
In July we repaid a maturing $40 million senior unsecured term loan.
And in September we closed on the refinance of a $100 million unsecured term loan that reduced the effective fixed interest rate from 275% to two 1% with five years of term remaining.
In our ongoing efforts to bolster our ESG efforts, we incorporated a sustainability linked metric into the amended terms.
That activity combined with our already strong and conservative balance sheet kept us in a position of financial strength and flexibility our debt to total market capitalization was below 17% debt to EBITDA ratio at four seven times and our interest in fixed charge coverage ratio increased to over.
Eight five times.
Our rent collections have been equally strong.
Bad debt for the first three quarters of the year as a net positive $346000 because of tenants, whose balance was previously reserved but brought current exceeding new tenant reserves. This trend continues to exemplify the stability credit strength and diversity of our tenant base.
Looking forward <unk> guidance for the fourth quarter of 2021 is estimated to be in the range of $1 54 to $1 58 per share and $6 <unk> to.
To $6 five for the year, a 15 cent per share increase over our prior guidance.
The 2021 peso per share midpoint represents a 12, 1% increase over 2020.
Among the notable assumption changes that comprise our revised 2021 guidance include increasing the cash same property midpoint by 8% to five 6%.
Decreasing reserves for uncollectible rent by $900000, increasing projected development starts by 24% to 340 million and increasing equity and debt issuance by a combined $95 million.
In summary, we were very pleased with our third quarter results. We will continue to rely on our financial strength the experience of our team and the quality and location of our portfolio to carry our momentum through the year now Marshall will make some final comments. Thanks.
Thanks, Brent and.
In closing I'm excited about where we stand this far into 2021.
We're ahead of our initial forecast and are carrying that momentum into 2022, our company our team and our strategy to working well as evidenced by the quarterly results and it's the future that makes me most excited for Eastgroup. Our strategy has worked well in the past few years, where further seeing an 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 meeting last mile distribution space in fast growing sunbelt markets. These along with the mix of our team our operating strategy and our markets has us optimistic about the future and we'll now take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Also ask that you please limit yourself to one question and one follow up.
Our first question today will come from Alexander Goldfarb with Piper Sandler.
Okay.
Hey, good.
Good morning, good morning down there.
So two two questions. Both are really on the development front earlier. This year you guys had talked about you know construction cost land.
Prices permitting delays and all that fun stuff.
Eroding your yields and your traditional seven would go down into the fixes.
Now back to seven.
Is the view that.
Either the cost increases of the permitting delays et cetera, we're not as bad as anticipated.
Or purely just the amount of rent growth that youre markets have achieved is is driving this increased yield and if that's the case should we expect yields to be even higher next year.
Okay. Good morning, Alex Good good question and it's not as a cost.
Cost increases and the delays we are there and are there I guess as we all see.
National news on the supply chain issues and things like that so where it.
It is it takes longer for us to deliver a building and land prices have gone up the prices construction prices may have moderated a little bit, but there is still much higher than the other materially higher than they were earlier.
It's probably more the latter of rents the way, we will underwrite we won't assume rent growth on our development. So we're typically especially as rebuild as youre thinking and phases will use as our kind of numerator over prior rents, we got within that phase, even though probably more so than at any point I can remember and two.
I believe there is rent growth in the market I hesitate or we hesitate to let people project rent so.
Pro forma rents have come we're coming down earlier in the year and thankfully to date, we've been able to maintain that kind of high sixes near seven developments I still think we could.
Have some.
Erosion on a little bit will stay on the fixes to hopefully and will hopefully continue to beat those mid sixes on our development yields and maybe the offset to that traditionally we've targeted 150 basis points spread over current market cap rates and given the demand for industrial which is why we like our development model.
The profits there have gotten even greater because we've seen cap rates come down into the.
Three to four is probably a high cap rate and about any of our markets. Today. So it's really more where underwriting is the same way, we always have and will have current cost and prior rents and the rents have been able to catch up with it by the time, we deliver the building and get it leased.
Okay second question is.
The tightness in the market is clearly you see that in L. A where you more than doubled the brands in the quarter, but also truck parking truck courts.
You know you seem to be increasingly almost more valuable.
Market than our than the than the box itself as you guys plan out new developments, new industrial parks and look at acquiring existing assets are you putting more emphasis on the truck court parking or your focus really remains more out of the box itself.
It's a good observation and still both I mean, we've always focused on the box itself, but you are right. If we can.
And that's what we like within some of our parks will have a piece of land kind of between some buildings youre not sure, which customer which tenant will use it but we will go ahead and pay that area, we adjusted that in Tampa and it can be trailer storage or it can also be car parking is something with e-commerce and some of those the head count within the within the <unk>.
<unk> can pick up so it's nice to have that flexibility and we've done that in Atlanta and another one of our parks.
And the acquisition you saw us make and Dallas in third quarter that DFW global.
We're in that sub market have a handful of properties, we're having strong leasing success I'll compliment our team in Dallas, but one of the things we really liked about the property, we bought probably two or three things, but it's <unk>.
Just besides the cargo airport at DFW Airport, So I guess, the fifth largest airport in the country, where write off near the cargo and airport and its lease but it has gotten a question or two about it about a third of the leases roll the first year, maybe another 20% so it's a little.
Bit of a value add which is odd because at least we think there is the ability to push rents there, but circling back to where I was going it also has a lot of trailer storage. There is some excess land on that side and for those freight forwarders that will that's pretty key and that's a pretty unique commodity to have in that submarket, where does that land constrained. So.
We're focused on it more and more and good observation.
Thank you.
Sure.
Our next question comes from Elvis Rodriguez with Bank of America.
Good morning, guys and great quarter. Congratulations quick question on on the under construction yield quarter over quarter.
Went down 50 basis points I know Alexander pointed you able to maintain yields but.
Given the higher spec starts this quarter.
The lower yield can you just share perhaps it's at higher land prices of these projects.
Struction costs labor.
Anything else you can add to your previous comments could be helpful. Thanks.
Good morning, and tell me if I'm wrong.
Making sure I'm understanding your question in terms of percent leased within our total under construction that that is down and that's really more of a function of just kind of where that those properties fall and so many of them. Just just got underway. This past quarter and then in terms of our stabilized yield and I think thats what.
Youre going that did come down and that's a function again as we touched on a little bit of cost increases.
Using current market or even prior and so thats been an existing park I hope, we can make up some of that 50 basis points, but at the end of the day, even if we if we don't have where it can and if we can do or what we expect.
Six 7% yield on what I would take that because there that's probably two.
275 to 300 basis points over market cap rate on there on those developments.
Cap rates coming down, but there is some downward pressure on our development yields and kind of as we've thought about it.
With the rise in pricing.
Challenge in getting materials delivered to sites that it's really hampering supply and any number of our markets and that's probably tough on this page in our supplement for the.
Two to 3 million square feet per year, we add it is going to pressure those yields a little bit but it is great news for the 51 million square feet that we own because the markets are tight and it's hard to build add new supply.
It should continue to enhance our ability to push rents and the flip side of that is it puts a little bit of approach on our development yields as well.
Yeah. It was I would just add to that question.
That's an average though each deal looking at our pipeline under construction that ranges just looking at some internal numbers here from five nine to <unk> 75, so that can fluctuate quarter to quarter.
What was our land basis, what markets certainly in Miami or something like that a little tighter yield and some other markets. So.
That's not just a stagnant number that is the same across all markets, obviously that fluctuates and depending where you start can influence that as well.
Thanks, Brent that that's very very helpful.
Just a quick question on in place rents.
Versus market.
Types, you can share what that spread is today and maybe where it was at the end of <unk>.
Yes.
No. We typically don't disclose that each space is a little different depending on.
Office build out in cap storage yard things like that but you saw us raise our rents in third quarter, maybe thats. The closest thing I can point to third quarter.
Cash rents went up 24% and year to date, they're 18 to 19. So we definitely are feeling that pickup and embedded rent growth within our markets and again, it's just.
This year has been out in a very positive way an atypical year for us.
Our development starts and that we really fluctuated between 98% to 99% leased on markets or fall and rents are rising. So that's led us to hopefully in a disciplined way SRAM will add space, whether we could <unk>.
Develop a building or buying vacancy, but we think there's still a fair amount of runway for rent growth.
Within within the industrial market within our portfolio and within the industrial market given everybody now is going in at a higher basis of everything that's getting delivered whether it's steel cost land cost components, a little bit higher than it would've been a year or two ago.
Thanks, guys.
Youre welcome.
Our next question comes from Emmanuel Korchman with Citi.
Hey, good morning, everyone.
Yes, Marshall in the past I think you've spoken about.
Your product type and maybe in Europe.
Your parks, even being a little bit under the radar of demand from other capital sources, just from a size perspective in building up the portfolio.
Is that statement still true or sort of everyone looking here and I think you mentioned that cap.
Cap rates in the threes and fours.
Did I hear that correctly.
Yes, good morning Manny.
Correct, it's really cap rates are about the same from big box to our shallow bay product those are probably call. It often.
And I wish there were some undiscovered markets, but as we learn going into unused Greenville, South Carolina, and our newest market lead times, maybe we can defend then it's maybe a little bit undiscovered, but theres a lot of good competition and good developers and certainly in Atlanta and Dallas.
They are out there as well as greenhill.
<unk> and Idaho.
This is a wishlist was a zoom call.
On our Investor presentation, if anyone's curious, we usually use with CBRE charm and it'll show 30 year average supply for big box and shallow bay and on that on our shallow bay and as they measure it as a 111 to 120000 feet and below in our <unk>.
Typical buildings may be 800 to 280000 to 200000 square feet shallow bay deliveries are still not back to where they were in the great financial crisis. There are certainly people looking at it but it's hard to find the land, it's usually trickier to get the zoning and the permitting because we are a little bit more infill.
Big box on the Salt far South Atlanta, far South Dallas, South West side of Phoenix.
And one quote I read thinking within Atlanta, and this is an extreme example limb.
But this is the third quarter CBRE report for Atlanta, but Theyre, quoting 34, and a half million square feet under construction in the Metro Atlanta area.
But that only and not on <unk>.
Hard time, believing is only a 126000 square feet of shallow bay.
Typically John <unk> here in a couple of weeks and iterate as 10% to 15% of whenever the construction as it will give a market without that jumped off the page at me went up.
Went down and that turned out a good firm that studies the market pretty well, so I like where we kind of offset sit in the food chain and helps us get the higher development yields it's harder and maybe a little bit slower to put out capital for us and that's why we probably tried to spread out geographically in our development pipeline as much but we're not going head.
To have with the big box developers on the edge of town versus those of work. The last few years and it's just it's just not what we do.
Thanks for thanks for the detailed answer Marshall and then.
Maybe on the flip side of that.
Does the Catholic compression give me the desire to sell.
Sell more or you sort of limited in the fact that it's harder to redeploy some of that capital.
Yes.
We've got a good problem to have we lockout.
Stock price compared to consensus NAV and we have the users we liked that.
Debt markets have been historically low in Brent and his team and taking good advantage of that and that said, we did bump our guidance for dispositions. We've got some really three older buildings that we're taking to market one in Tampa.
Knock on wood under contracts moving towards closing one in <unk>.
Phoenix both of these are a little more service center type oriented 30, plus years old one in Phoenix that were going through the bidding process. Currently on and then one where we've listed a service center down in Broward County in South, Florida. So yes, it's a good time to as hard as it is to buy every once in a while it's been fun to be on the other side of it.
The transaction, because we usually bid and lose so much as it's fun to get multiple bids on our properties and its a sellers market right now and we're.
Trying to prune the portfolio, which I think is something we should annually.
Annually always be doing.
Thanks Marshall.
Sure you're welcome.
Yeah.
Our next question comes from Dave Rodgers with Baird.
Hey, guys, it's Nick on for Dave just a question on development to start.
Could you say, how much more land youre looking to purchase I guess with four to 5 million square feet able to build on it with like 2.5.
1 billion under construction, that's kind of like two years of capacity. So it kind of your thoughts around that at this time.
Yes.
We're always chasing land than we would.
If you turn the question around and you said what keeps us up at night, we would say finding good land sites and it's it gets harder and harder as you think and we've talked about.
And we're usually the first guys to get priced out of the market because other product types and being industrial can go vertical compared to an industrial and just rents arent there except from a couple of markets nationally maybe to go vertical but I'll give you right. We've got a couple of years and we will go as fast as the market really allows us.
That said and you saw us announce a few closings this quarter.
I would take it a little bit.
This is like an iceberg. So you see the 5 million square feet that we can develop on and then the team in the field does a good job of car.
Constantly turning over stones, and we've got other sites that or value add buildings, where the yields are.
Right now at least close to as attractive as development typically they've been a little bit lower but where we can either buy.
<unk> vacancy and that's a good way to create but create value of our <unk> and <unk> for our shareholders and Theres a fair amount of land that we've got tied up in kind of quarter by quarter, we'll you'll see us announce that and then hopefully we can run through it as quickly as we can and I'd also add given where land.
Rice's are.
There's really no cheap land to buy and put on our books. So typically when we when we acquired the land and you saw that the team in Austin do that we'll buy it and then trying to be in the ground with development as quickly as we can but before the carry against going because.
Land prices are elevated.
Great. Thanks, and then a quick question for Brent can.
Can you.
Look at there's kind of a delta between cash and GAAP same store in <unk> relative to <unk> I guess like what's driving that through this quarter, specifically and then when can we expect that to reverse.
Yeah. Good observation for this quarter, particularly when we say a quarter really doesn't make a trend, but we had.
Elyse good a good transaction of musical chairs at our Eastlake property in San Diego earlier in the year, where we are taking a a lower credit and frankly, a problem paying tenant.
Let them out of their lease moved another tenet and we got a large termination fee over 500000 that we booked in the first quarter, but as part of that deal we backfill that almost 200000 square foot building.
With Amazon and as part of that they needed like five months construction time and since we were getting a term fee we offered a little bit of free rent just to help with the timing work for them.
And so in third quarter that 200000 feet had no.
Cash rent.
Although obviously, we had GAAP rent on it because the leases in place so.
And there was another.
Slight deal or two like that in smaller nature, but similar where we're moving and putting a tenant in but.
And each of those all of those cases will get significant cash rent increases.
That was just a matter of timing.
Having that gap that large gap.
Well, all the way through third quarter. So.
That will make its way through in the fourth quarter, and I think youll see that tightened back up to a more.
Normal normal range, but all in all it was a very good deal, we like I say, a large termination fee and significantly enhanced our credit.
The timing of it.
Great. Thanks.
Our next question comes from Craig Mailman with Keybanc capital markets.
Hey, guys, maybe just circle back on development here and that's been a hot topic today, but just.
Curious you know the $340 million of starts this year is a record for you guys, but the company has also.
Grown significantly market cap and just asset base I mean, as you guys think internally I know land availability is the governor but.
How do you guys think about how much development you want ongoing like is there a room from the 340 to go higher given your kind of risk tolerances or are you guys coming up to sort of an annual cap.
Yeah. Good morning, Craig its Marshall and I don't feel like we're getting.
A cap or anything like that and I'm happy we have okay.
Good news Bad news I am happy we got to $340 million is now that it's late October and you start to think about 2022 and you've got now how are we going to get back to that number.
Certainly construction and land prices are helping us get closer to those numbers just the pricing we're seeing in industrial.
Rising so we can get there, we'll build as fast as the market.
Allows and we've been fortunate this year.
Couple of pre leases like when you look at it are under construction where the.
The next building in Charlotte, We got and we went through two buildings quickly in our Steel Creek Park work are on about to be underway with our last two buildings in that park. The land we announced this quarter is down the street.
We did have the $90 million of speed distribution Amazon development.
In San Diego, So that that's a big one for us and we werent.
Planning on that but they wanted the entire site so that really put us in a.
Physician with a long term lease in that credit, where we did that and so I think we can do more we attain certainly can do more than $340 million, we're adding people to our team kind of in the field here and there is the market dictates and pricing certainly makes it.
A little bit easier, but between those and the value and it's that's the challenge of growing right. As we went up we got to keep the growth rates are the same but but we need to also say to stay disciplined and not buying things or develop things.
That only work in an up market.
That's helpful.
Maybe shifting gears a bit if you kind of just arbitrarily I guess look at your end of 2019 tenant list versus today, you clearly see a little bit of a change with Amazon and Fedex pop up on their and you guys have talked about just the kind of the tail from E Commerce now coming into your <unk>.
And considering your property type.
For deals I mean, do you feel like.
This shareholder or the tenant.
Kind of change will allow you guys to push rents kind of harder than traditionally and maybe you know maybe you can give a bigger boost to cap rates for your shallow bay versus what traditionally the spread has been versus traditional warehouse.
I now want to say, yes to your question.
But I don't think it's going to be the market I mean youre right.
I like when we go back to 2019, our tenant base is shifting around Amazon I guess foreshadowing.
So next year, we will deliver speed distribution. So they should move from number three the number one like there aren't a lot of our peers less but actually on a percent of our top 10 tenants has come down I can't remember exactly where it was at 2019, but it was probably in the 8% to 9% which is.
We'd like the tenant diversity and the geographic diversity with it.
Our portfolio of it but getting back to your question I really think it's the tightness in the market and you are right maybe with our tenant mix I can work my way to guess by saying.
The HVAC contractor the tile distributor with the homebuilder and what we've called our bread and butter.
The beverage distributor food and beverage medical supplies those tenants are still there and as Orlando grows or Austin grows or vintage grows.
They need space and there is tightness in the market.
And we're seeing more and more e-commerce tenants show up as an aside and we will see where it goes.
Hi, Justin.
Things were trying a retail broker to really that knows all the retailers to go out and call on them and turn over stones to see if we can kind of continue to develop that rather than wait for run an RFP from a brokerage firm in Dallas and we're in the competition. So.
We're working on pushing that and we have seen those tenants. If you have the right location and the right loading they are less rent.
Rent sensitive probably than the traditional tenants too so that when it works you can usually push rents pretty well in the markets moving that way and we're <unk>.
Doing our best to help them I think they're going to all have to keep pace with Amazon is Amazon is growing its footprint. So much if you're on a traditional brick and mortar retailer and you've got to figure out a way to keep pace with that delivery or you're losing market share.
That's helpful. Maybe if I could slip one third one in there.
Any color on the Orlando rent roll down in the quarter was that specific to a building or any color. Yeah. Yeah. No. It is it and maybe I'll mimic brand and.
And so you know it.
One lease we have aetna so it was up.
Our space within our one of our Orlando properties that have a little more office component in it. So it's a small sample size.
With the use of kind of insurance that had a little more office build out in it they moved out and as we released that we took some of that office out. So the tenant improvements we had worked into the space kind of went away. So.
The market in Orlando is fine and we like where our year to date are in Orlando and the.
20%.
<unk> and I think we're just at a small sample size quarter atypical tenant.
Great. Thank you.
Sure you're welcome.
Our next question comes from Michael Carroll with RBC capital markets.
Yes. Thanks, I wanted to go back to Craig's first question and the company has done a great job pursuing new development starts, but what's the biggest limiting factor breaking ground on these projects is it finding and acquiring.
Attractive land sites or is it the amount of spec risks the company is willing to take on.
Okay.
Okay.
Land is a factor I mean, if we just said next year, we want to build 300.
Pick a number $380 million in stocks, we could we could do it does not and we can hire the contractors and do that and it's really more.
I like the non model I feel like rather than Brent in may at corporate.
Siding, where starts should be if you flip it around but the calls that you usually get it would be Brent not saying, Hey, we built two buildings all use our settlers crossing in Austin for example, and we're 50% leased and we've got prospects and were ready to go and build the next couple of buildings work our way through the park.
Comparative all of it if you think about our retail store win when it goes to move off the shelves, we restock the shelves so.
We left the market really pulled the supply from us rather than corporate pushing this out so we could we could go build the square footage, but it's making sure that the market's there and and then the flip side of that and thankfully it doesn't work that way et cetera, crossing but had we not.
If you don't lease up buildings, one and two we don't go build buildings three and four until it until the market really absorbed that and we want to make sure. We work the way we saw that pro forma did so.
<unk>, maybe compared to our peers and maybe at times I don't.
Articulated as well, but I think there's less there's lower development risk to our model. The dollars are certainly lower and it's really feeding new supply and demand. So that's.
When I look back we started the year on one of them doing this for memory at 200 or $205 million in starts and we're going to end the year at 340, <unk>, but it was really more a function of the market was pulling that supply so much faster than we anticipated earlier in the year.
So I hope it stays this way I don't see it changing near term and then it will probably accelerate a little bit in that.
That's what's putting pressure on archstone, either find land <unk> by vacancy in certain markets.
Okay. No. That's helpful and then on the development leasing where rins coming in versus your initial underwriting I guess today and do you have offhand what that has been historically is our rents coming in much higher versus your underwriting than it has been historically.
Yes, a little of that I'm doing pending with a roller brush, but generally theyre coming in higher than we pro form it because we will typically look back a few months or current market and it takes a bit of it.
Oddly enough if it takes us a little bit longer to lease the building, we'd probably do better on the rents and on some of these cases we.
We've leased up pretty quickly.
Ill start the next phase, but all in all we are probably beating our development yields as a company of what we had underwritten.
I hope that trend continues and we just we don't want to change our underwriting disciplines. So that my problem is where we're understating our project some of our development yield projections, but but if the market slows and we only get those were still there.
Near a historic are near historic.
Development yields over market cap rates, because there's so much demand out there for for good industrial space.
I mean is there a way to quantify I guess, where they are coming in now versus where they had been coming in in the past three three years or so.
It's not huge but we're probably do it.
We're probably doing 10 to 20 basis points higher than where its underwriting on running a number of days and probably as you saw.
Looking back I think it's.
13 buildings that we've pulled out of our development pipeline year to date for example in 12 of those are at a 100% and one is it is it 80, 182%. So that gives you a sense for those that leased up quickly they're all rolling in full and we're typically doing anywhere from 10 to 25.
Basis points better than we anticipated.
Nothing rolling in and that's it.
If it's lower than anticipated it takes us a little bit longer and that usually means at some point.
We'll move away from our pro forma rent and make a deal to get it filled up but those have all moved in.
Really quickly to the 97% leased 7% yield.
Our development pipeline I would love to replicate that.
Okay, great. Thank you.
Youre welcome.
As a reminder, if you do have a question. Please press star one to join our Q.
Our next question comes from Jon Petersen with Jefferies.
Great. Thanks, Good morning, guys.
You mentioned earlier on the call you're happy with your cost of equity your cost of debt not necessarily surprising I guess I'm just.
As we look forward over the next few quarters or into 2022, how you guys decide.
Decide the split between.
Issuing equity and raising new debt, given where pricing is now for both of us.
Good morning, John Yeah, It's it's not scientific specifically I mean, obviously when both are priced attractively, which we viewed currently that both are.
We're going to tap into both.
We've obviously been a little more heavy handed on the equity side.
I would suspect going into 2022, we made.
Air If you will in that direction, our debt to EBITDA down to 467. This time, we're very very pleased especially given our propensity to have active development going at any given time that has a debt component, but not yet an NOI contribution.
We like that a moody's rating likes that so yeah.
There are some factors there that that bolsters up so well.
We will go both ways with it we only have about $75 million maturing between now and December of 'twenty. Two so that's not going to be a big factor in terms of having.
Maturing debt to replace with new debt so.
I could see it being pretty consistent the way we've been and that's.
Being a little more heavy handed with the equity, but but mixing in both.
Okay, Alright, that's helpful. And then I was just curious on the rent escalators. What are you guys pushing right now does it vary by market or tenant size.
You know I guess Where's your negotiating power now on rent escalators versus a few years ago.
And it is good.
Good observation, it's picked up used to be.
Twos threes, and that's probably and it does vary by market.
Probably threes to fours and I'd say it would vary by market and also the.
The larger the size of the space usually them.
Harder to push back on so I'll, let shallow bay to another plug for the larger the space and the longer the term of the lease it makes sense to tenants will push back a little harder on those escalations. So a 10 year lease with 4% escalators gets a lot more expensive to them that.
35, 40000 foot lease for on a five year deal so it.
They are definitely picking up and that's why we like it it's been interesting to see.
Noticed several of your peers focus we do look at cash releasing spreads, but we like gap because the GAAP re leasing spreads do capture that free rent and the escalators and we think those escalators moving into.
Into the threes to fours is going to be able to create a lot of value at this point in the cycle.
That makes sense alright, that's all for me. Thank you.
Sure. Thanks, John.
Our next question comes from Ronald Camden with Morgan Stanley.
Hey, Good morning. This is jose on for Ron here and congrats on another great quarter.
So they are heading into the holiday season have you guys seen any inventory restocking accelerate or has delayed supply chain kind of limited that and if you have seen that process for some of your retailers has that led to any expansion of space from those specific tenants.
Where we've seen some expansions and I think of it.
A little bit more theoretical I think last year, everybody put their expansion plans on hold and you probably felt like last year, we had higher than historical retention rates and this year, we started out with lower tenant retention to kind of bounce back. This quarter is usually in the 70% to 75% I would say to someone building a model in our company.
I think it's still the good news is I would say is where we're rounding where 99% leased October looks a lot like September did plus or minus same zip code and I think for our tenants, it's still aspirational to carry that.
Excess inventory or what people safety stock just in case inventory. So I think that's.
Still coming because people need it but arent they are struggling to meet current demand.
More than carrying extra inventory do they maybe they're taking a little more square footage in anticipation of that but I think there's another wave of square footage needs coming as people have learned the cost of carrying that.
Maybe we're seeing it at the fringes, but I think it's.
If you are out trying to buy things there.
May be an option of one our non or just here at the office year of everybody's running not able to buy whatever it is we're having to wait so that kind of anecdotally, we're seeing it and I think that it'll be a wave of.
Increased inventory coming in what weird.
Hearing you know one of our directors is a little bit closer to it with Fedex as its.
Probably misquoting him, but it's looking like it's going to be well into 2023 mid twenty's read up to a later before supply chain is really good straightened out and maybe the inventory gets to wear off home depot Lowe's at best buy some of them.
Any American tire distributors and things like that are able to get where they want to get to an inventory.
Awesome, that's very helpful. Thank you.
Youre welcome Sir.
Our next question is a follow up from the Elvis Rodriguez with Bank of America.
Hey, Marshall just a quick strategy question on development versus acquisitions or M&A large portfolio deals.
But this quarter you know you increase your guidance on operating assets and the value add and with the DFW acquisition in particular the Austin.
Nine acre acquisition that you plan to redevelop.
As it gets harder to acquire land and do development. How are you seeing those two opportunities.
Is that changing I know, you've always had a sort of a balance doing more development versus acquiring at market yields, but just curious on your thoughts given the activity in the quarter. Thank you yeah. That's good good good Don and are probably still in that order. If we can develop our especially developed within <unk>.
Existing park IV that risk return is very attractive and you know one of your peers had quoted recently that our development margin was an 80% development profit margin. So maybe I didnt see their math and maybe I didn't want to check your math, but that sounds about right, but if we can develop and make those kind of return.
<unk>, that's a and manage risk that's a great opportunity for our shareholders. We picked up some acquisitions this quarter two of the smaller ones, where we're really small buildings adjacent to buildings one in Phoenix, one in Atlanta to buildings, we already owned and they were pretty much off market.
Where maybe that seller came to us from one I don't think Canada broker, we knew the owner one had a broker and maybe they talked to two or three peat buildup. The Dallas one was interesting it are atypical and it's hard to call a 100% leased projects value add but in a way we felt like it.
It has a strong value add component because of the movement of rents that we were seeing within our.
Neighbouring 4% to five properties that we've got are there on the northwest side of DFW Airport.
<unk> Port development that we leased up quickly this year.
We saw rents moved pretty quickly on that so with the rent roll at DFW global.
Viewed which is atypical of 100% acquisition as value add so we will probably still like development and if we make an acquisition is hopefully an adjacent building that is lightly marketed or something like that or our value add I'll look at markets like San Diego, where we mentioned in our Amazon development. So we.
Quickly went from being land rich to Lam poor and so and we like that market, where we're you know we're back out in that market looking for land or vacancy if we buy a building I'd rather have them.
And I'd, rather have a value add component for you than just US say, we we outbid the other 20 bidders and going forward. We think the market is going to continue to go up and we don't say never say never but that's really our last.
Last choice and probably our last last choice would be.
M&A, but usually the bigger of the portfolio the more people underwrite the more competitive in pricing it gets because people like the ability to put that amount of capital out there. So certainly theres not.
None that I'm aware of and expensive industrial Reits out there today.
We probably will.
A portion of their portfolio in a portion of it wouldn't fit us and it would be up.
A bidding war with some pretty large peers that we like our cost of capital but.
Lake and PLD and a few others have even less expensive capital so M&A would be and I think.
That's a lot of underwriting and you hope you get it right. So we don't feel compelled to make big risky bets I'd, rather make build 20 buildings around the country in 10 different markets in probably 18 different submarkets and make a lot of calculated risk type. That's that's serving US has served us well over the years and that's where it will.
If we can find the land sites, where we'd like to be.
Thank you and congrats again.
Sure.
Yeah.
This concludes our question and answer session I would like to turn the call back over to Marshall Loeb for any closing remarks.
I appreciate everybody's time, thanks for your interest in following Eastgroup, we're certainly available for any follow up questions, Brent and offer any E mail or give us a call and look forward to seeing many of you in a.
Couple of more weeks that Mary take care. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.