Q1 2022 Eastgroup Properties Inc Earnings Call
Good morning, and welcome to the Eastgroup properties first quarter 2022 conference call and webcast all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone.
Phone to withdraw from the queue. Please press Star then two we ask that you limit yourself to one question and one follow up if you have additional questions. You may reenter. The question queue. Please note. This event is being recorded 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 first quarter 2022 conference call as always we appreciate your interest Brent Wood. Our CFO is also participating on the call and central make forward looking statements. We ask that you left.
The following disclaimer.
Please note that our conference call today will contain financial measures such as quinoa SSO that our non-GAAP measure as defined in regulation G. Please refer to our most recent financial supplement and to our earnings press release both of them.
Favorable on the Investor page of our website.
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Please also note that some statements. During this call are forward looking statements as defined in the safe harbors under the Securities Act of 1933. The Securities Exchange Act of 1934 in the private Securities Litigation Reform Act of 1995 forward looking statements in the earnings press.
Based on the information currently available to the company and on assumptions. It has made we undertake no duty to update such statements or remark, whether as a result of new information future or actual events or otherwise.
Such statements involve known and unknown risks uncertainties and other factors that may cause actual results to differ materially. Please.
Please see our SEC filings, including our most recent annual report on Form 10-K for more detail about these risks.
Thanks, Laura good morning, and thank you for your time I'll start by thanking our team for another strong quarter Theyre performing at a high level and capitalizing on a sustained positive environment.
Our first quarter results were strong and demonstrate the quality of our portfolio and the strength of the industrial market. Some of the results the team produced including funds from operations coming in above guidance of 15, 9% for the quarter well ahead of our initial forecast since March 36 consecutive.
Quarters of higher <unk> per share.
There are to the prior year quarter truly a long term trend.
Our quarterly occupancy averaged 97, 3% up 30 basis points from first quarter 2020 . One at quarter end were ahead of projections at 98, 8% leased and 97, 9% occupied.
For perspective, this quarter and results matched our highest percent lease.
It is our highest percent occupied.
Similarly, the quarterly re leasing spreads were strong at 33, 5% GAAP and over 21% cash and.
And finally cash same store NOI reached a record eight 5% for the quarter in summary, I'm excited about our first quarter results and the positioning this gives us for the year.
Today, we're responding to strengthen the market and demand for industrial products, both by users and investors by focusing on value creation via development and value add investments.
I'm Grateful we ended the quarter at 98, 8% leased to demonstrate the market strength, our last six quarters have each been among the highest quarterly rights in the company's history.
Another trend, we're seeing is more widespread rent growth, while first quarter releasing spreads are consistent with 2021, we're seeing the impact across a broader geography.
I'm also happy to finish the quarter at $1 68 per share in FY <unk>.
And raising our annual guidance by 12 cents at the midpoint to $6 75 per share up 10, 8% from 2020 one record.
Helping us achieve these results is thankfully, having the most diversified rent roll in our sector with our top 10 tenants only accounting for nine 4% of rents.
As we've stated before our development starts are pulled on market demand within our parks.
Based on the market strength, we're saying, we're raising forecasted 2022 starts to 300 million.
We closely monitor our leasing results along the way and expect to update our starts guidance throughout the year.
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 speak to several topics, including our updated projections with them in 2022 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 S. S O per share for the first quarter exceeded our guidance range at $1 68 per share and compared to first quarter 2021 of $1 45.
Five represented an increase of 15.9% 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 first quarter, we issued $75 million of equity at an average price over 194 per share and refinance a $100 million senior unsecured term loan reducing the effective fixed interest rate by 60 basis points, while the term remained unchanged.
We also closed on a $100 million senior unsecured term loan with a total effective fixed interest rate of three point or 6% and a six and a half year term and repaid a maturing $75 million unsecured term loan with a 3.0% to 3% interest rate.
After quarter end, we closed on the private placement of $150 million of senior unsecured notes with a fixed interest rate of 3.0% to 3% and a 10 year term.
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 15%.
Debt to EBITDA ratio dropped to four seven times and our interest in fixed charge coverage ratio increased to a record high 9.6 times.
Looking forward <unk> guidance for the second quarter of 'twenty 'twenty. Two is estimated to be in the range of $1 63 to $1 69 per share and $6 69 to 681 for the year of.
12 cent per share increase over our prior guidance. The 2022 episodes per share midpoint represents a 10, 8% increase over 2021 .
A few of the notable assumption changes that comprise our revised guidance include increasing our average month month, and occupancy 50 basis points to 97.5%.
Increasing the cash same property mid point from five 6% to seven 4% decreasing bad debt by 500000 to a million increasing development starts by 20% to 300 million and increasing common stock issuances to $250 million in summary, we were pleased with our first quarter was.
<unk>.
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 final comments. Thanks Fran.
In closing I'm excited about our start to the year and the momentum we experienced in 2021.
Is continuing and is more widespread within our markets our company our team and our strategy are working well as evidenced by the results.
And it's the future that makes me most excited for eastgroup.
Strategy has worked well in the past few years, we're seeing an acceleration in 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 opera.
<unk> strategy and our markets has us optimistic about the future and we will now open up the floor for any questions.
We will now begin.
The question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two we ask that you limit yourself to one question and one follow up if you have additional questions you may reenter the question queue.
The first question comes from Jamie Feldman of Bank of America. Please go ahead.
Thank you good morning, everyone. So you'd made the comment that you're seeing rent growth spreading across a wider geography I was hoping you could provide more color on you know how strong it is and across your markets.
And then can you provide a mark to market on the current portfolio.
Hey, Jamie good morning, its Marshall.
Now last year.
Bottom line kind of in mind I'm talking just GAAP increases was around 31% and we were a little above that first quarter.
Last year, we had some large leases in southern California that really helped drive that number and while California is still a very strong market in terms of rent increases we've seen.
Vegas, Phoenix, but some of the Florida markets Austin, El Paso, and a number so it makes me feel like it's more sustainable or it is more sustainable because it's really not kind of waiting for the mix as much as it was last year. So it does feel like there's you know with inflation and limited land <unk>.
Fly and and then it's harder to deliver the supply that there's more upward pressure on rents than there's been in there are certainly more dynamic in terms of mark to market, but you know what when you kind of as we think about our portfolio, we've been running at that kind of high teens and this quarter low twenty's cash.
And then the low thirties and gap I don't kind of as we just mentioned I don't see that fading and in fact, I think there's more upward pressure on rents given the demands here today supplies constrain supply chains sure feel like Theres still a mess and will be on this for a while.
And then really on a portfolio basis, we always hesitate a little bit and just that we don't the way we've always viewed it we don't calculate it we felt.
More in terms of really if you think of headlights, I've really what rolls in the next couple of years because beyond that it really if if someone has a lease rolling in four to five years the market will change a number of times before it we get it we get that and we've really seen the market, it's been more dynamic than ive ever.
Seen at career wise in terms of we've had a few tenants who have hesitated and I won't say hesitated for long, but for 60 90 days three or four months.
A new lease or renew all and we've been able to go back and push rents on those.
<unk> Sirona new lease so that yeah that that does make me also a little more positive if things do slow down debt to have embedded rent growth. We've got and it's really we're just trying to take advantage of each at bat as they come up we'll have about 7% of our leases expiring in just over that for the balance of this year.
And really the 1% of vacancy so it's really in our developments, where we're able to push rents as much as well if that helps.
Yeah. That's very helpful. Thank you so but you haven't looked at the portfolio and said all right. If these rents were at market rents today.
It will be X percent higher.
We don't have that exact number and I always hesitate I mean, we'll talk internally and you hate I guess, we do put out projections, but I always hesitate when it gets its data and we really don't use it except in those leases there roll kind of a near term and it's such a broad estimate that I you know.
There is so much in what we just released yesterday that's.
The accountants do it gets reviewed our auditors look over it versus.
Me and the team so we hesitate to put a number out there and it gets it it'll be data the next day.
Okay. No. That's fair and then you made the well you didn't make the comment you just in your response you had said you know things slow a little bit I guess.
That front can you just talk about how.
How you think about your portfolio credit quality today in your tenant credit quality today versus prior cycles. If we do start to see a slowdown I mean, what do you think it would be different this time around.
Can you give me your occupancy and credit risk.
I'd love to think one.
A couple of things and I'll. Thank you and your team are kind of or one of the groups that have kind of compiled the top 10 list. When we look at our peers. So our top 10, but they came up this quarter and when we delivered some Amazon buildings, but its just over 9%, which is running about half of what the industrial our sector averages. So we have more tenant.
Diversity and then in the last downturn, if I used COVID-19 , we kept waiting for a downturn and it really the portfolio.
As a result of Covid it things slowed there the first few months, but then really picked up steam.
I did I didn't have the nerve to do it but we should have kept developing through the entire COVID-19 downturn looking back in hindsight, we would've been better off so and last year, we moved a number of our rent relief customers.
Out of our portfolio. So those were some of the little bit lower retention, it's not always bad and then in some of those cases.
When the markets this fall and where does this fall is the best time to kind of upgrade your credit quality we've.
Thankfully run the last five quarters I believe we've each had a negative.
Bad debt for covered more than we've written off so it'll that said I mean, we wouldn't drop in occupancy, but we've been over 95%, which is what we've always historically viewed as full for multi tenant industrial since mid 2013, and its lowest we got in the great financial crisis I'm doing this.
From memory was about 89% and I'd like to think we'd fare a little better than that and another downturn. There's so much more demand than supply out there you see it saw him in our development pipeline of well.
We've been pleasant lately I've been pleased with how fast our new developments are leasing earlier in the process with the with that limited supply, especially for limited supply for the product type rebuild.
Okay. Thank you and then I guess just to follow up on that though.
Just thinking about.
The composition of the tenant base I mean would you would you say, it's significantly stronger than prior cycles.
Yeah.
Yeah, Yeah, I always say this is Brent Jamie.
I would say as you know we performed very good in the past. So I don't know that we had a lot of need or room necessarily to significantly enhance the credit if you look back even going back to around.
Around 2000 during the the knot Com recession, and then as Marshall mentioned you go forward to the financial crisis. You go forward to Covid, we performed in line with peer groups and peers that are often viewed as well they've got bigger tenants. So it must be bigger credit or better credit.
There's never been a correlation or a disk correlation between.
Our multi tenant versus big tenant when it's come to bad debt occupancy or anything else. So I think it would fare very similarly relative to the other peer groups and we think overall it would as Marshall said wood with fair very strong and I think.
I know, there's a lot of tailwind I think you.
You know a recession no one's going to be completely insulated from the impacts of that but I do feel like there's some.
Positive that would would help industrial companies like eastgroup perform above normal or better than average through a period like that but our tenant credit quality has been good remains good and we project as Marshall said, we've strengthened it some but it's been more on the fringes just because we've got a good tenant.
Credit tenant base.
Okay, Alright, thanks, Brian .
Marshall.
Welcome.
The next question is from Alexander Goldfarb of Piper Sandler. Please go ahead.
Hey, good morning, good morning down there.
So just your question on Marshall for quite a while.
For more than a year year year or two you guys have been pushing the occupancy and you always had previously spoken about expecting a drop off but it sounds like you're not.
Back then yet and certainly 20% cash spreads.
It sounds pretty healthy the reason that in your view that the occupancy is just staying north of 97, it doesn't sound like you're shy on pushing rent. So is that just lack of any space for tenants to go where the tenants are figuring out ways to use the existing warehouses.
Much more efficiently such that you know normally when you push rents you'd see some churn, but now maybe just because of you know issues whenever those issues are just relocating or finding space or whatever tenants are using their their their assets more efficiently, which means that you may have even been better pricing power going forward.
Yeah.
Good question I think is.
Maybe the answer is yes, so I've got kind of.
The fork in the road.
There is less space available less space out there and I think where we're benefiting from that and how payers are been benefiting from it and even what is getting delivered and we deal with that.
Land is more expensive.
The steel the roofing materials electrical panels all of those things are more costly and take longer to be delivered to complete. So that's that's hindering supply and that said I do think our.
Our tenants I am sure, especially with rising rents are always working to find ways to kind of maximize their efficiencies in the space I think will kind of isn't as we project ahead or some of the things you read or think about I think we will see more and more with the labor shortage more and more robotics within our warehouses, it'll probably start with the law.
Tenants are little more well capitalized and can afford to make those type of investments. So I think there'll be more upgrades within the space, which I should make those tenants, even stickier too because they're a little more heavily invested in our space as well, so I and I think as companies move to <unk> and different thing.
As you try to wring costs out of your own system.
We're a cost effective efficient box compared to brick and mortar retail and other types of distribution. So I think the more people can utilize industrial space in their supply chain and their omnichannel kind of marketing the better off they'll be because our gross rents are so much lower than than some of the other.
Service center or traditional brick and mortar retail.
Okay and then the second question is you talked about the broadening of the rents which is great to hear I'm curious are you seeing it is truck parking are helping to drive some of that expansion of rent growth such that as communities pushed back on having trailers you know one roadside.
Shippers and others try to have more product in stock versus you know port delays or supply delays are you seeing a benefit more broadening from truck parking or is the rent growth that you're talking about purely from the actual box itself across across your market.
It's really the <unk>.
The box itself, that's where we're able to push the rents that said if when we do our development or you know one of the things. We liked we bought the buildings at DFW Global which was really adjacent to the Dallas Airport DFW Airport cargo terminal, whether its got a lot of trailer storage there and in parts of L. A it.
If we can work trailer storage in it it certainly lowers our coverage ratio on our site, depending on where that extra land is but the demand for that continues to go up from our tenants and if if the space works, especially the national tenants. If we've got space that works and they need the trailer storage rent is less.
You know it's down their priority list on decisions. If you have the right space. What we've seen is companies will pay the rent they need because it's a small item within their overall chain versus labor and how the space works for them. So we'll continue to add trailer storage or we look at it as being very attractive when we look at.
<unk> our value add if you have that ability to have car parks or trailer storage that's up at.
If the tenant needs it needs that it allows you to push rents that much harder.
Okay. Thank you.
Sure.
The next question is from Manny Korchman of Citi. Please go ahead.
Hey, Chris Mcquarrie on with Manny just a quick question I noticed the lease termination income was up in the guidance and is now expected to be up year over year could you just give us a little more color as to what drove the increase determination expectations.
Yeah, Hey, good morning, Chris Brent here, Yeah, we had oh that basically consist of some known Vacates, we had seven terminations during the quarter.
Three of those consisted of the most of it one of them was a half million dollar early termination fee, but almost in every case a five of the seven in fact and with it represented almost all of the termination fee income were situations, where we had replacement tenants that in hand, and basically negotiated an early termination.
Fee and then replaced with a back existing tenant so that you're in those cases, we were getting a higher rent back feeling for more term and then with the term fee you're getting.
Excess income for that short period of time, so it's ones, where our guys in the field, where more coordinated and working with tenants that needed more space versus tenants that maybe we're willing to let their space go and then you know.
Negotiate the deal and come out on top of it so.
It would just you know several of those this quarter they were very strong and beneficial and so we executed on those we typically don't.
Budget much in the way of termination fee income if it's not known them just because they can be.
Cyclical and can vary quite a bit quarter to quarter. Yeah. We certainly expect more term fee income honestly over the course of the year just from doing business, but I'm not quite as strong as that quarter is that was a you know a little bit larger than normal quarter. Although again in all those situations. It was a net positive for the company.
And again something that we reacted to it and basically helped conduct an aryan.
Got it yeah. It makes sense and then could you give us some color on the Fort Lauderdale sale, specifically, the strategic rationale behind selling in Florida was the pricing attractive enough to leave this market or could you just give us some of your plans for the Florida market.
Sure sure and I guess, Chris It's Marshall, we certainly like the state of Florida, and then as we kind of zero in like the.
The state a lot and like South, Florida, and so on.
Hope and really plans, we're continuing to build out our gateway Park. There we bet on some other land sites and other opportunities kind of in our within our pipeline within South Florida. It was really more asset specific for this it was what it was two buildings about 55000 square feet.
It's really more service center and a little more office product that we had acquired in the mid nineties.
And similar to what we saw and it was on a ground lease. So it was similar to what we sold in Phoenix early in the year as we're kind of always I think.
A good time to be a seller, where the markets are and we felt this is an asset that's going to really drive outgrowth or performed the same level as the balance of the portfolio nothing wrong with the asset but it didn't have the dock high distribution, that's our kind of bread and butter type products. So we said this is a good time to prune.
This asset and we've got you know I think we should always be doing that a few more in the pipeline that we're working on not a lot, but you know, we'll keep we'll keep managing the size of our Houston.
<unk>, we like that market too and it was really asset specific much solely rather than market specific here and so we'd like to be bigger in south, Florida, but we were willing to part with this asset.
Got it thank you.
Welcome.
The next question is from Vince to bone.
Green Street Advisors. Please go ahead.
Hi, Good morning could you provide a little bit more color on the exact contributor to the increase in cash same store guidance. It looks like you know the change in occupancy and bad debt assumptions drove about a about half of the 180 basis point raise what what.
Drove the rest.
Yes, it's Brent its really.
Rent increases are you know they continue to exceed our expectations in terms of what we're budgeting in.
And then you saw we increased our occupancy guide on same store a little bit as well. So it's really the increase there obviously the first quarter beat was quite a bit bigger than we had budgeted in so that 25% being already quote actual and done.
You know that unwound.
You know some beat and raise right there already so it's really in those factors again, you see the occupancy increasing the rents greater than normal but outside of that we don't report term fee income in there. So that was not a component of it and.
It's just really strong.
Operations and you know.
Across the board there as Marshall mentioned, Theres more and more depth to it although the California markets continue to be you know just eye popping from a from a rental standpoint, but.
It's just one of those deals Vince Webb.
You add it all up and then some of it just becomes a little bit greater in total than initially.
Initially anticipated or expected.
That makes sense, just really quick follow up on that I mean, do you think your expenses could contribute to same property to this year just looking at the first quarter expense growth lag revenue growth and that kind of the.
Benefited same property NOI, let's say about 110 basis points in the first quarter like is that something that's going to persist or is that just like a timing thing.
Martin timing within our same store in that.
I don't say all of them, but 99.
<unk> plus of our leases are triple net.
And with full occupancy so we really we.
We manage the expenses because they they certainly flowed through to our tenants, but it really won't.
I like where you were heading but it really won't help us with our same store results as much as it is Brent.
Brent said that just higher rents than we thought we'd be getting the market's moved we expected the market to move up but it's moved faster than we anticipated and we had less vacancy than we anticipated, especially in first quarter, which is usually a little bit of a drop off after the beginning of the year.
Got it. Thank you one more for me I mean could you just discuss any recent trends you're seeing in the transactions market for light industrial product like specifically, how do you think higher rates are impacted bids from from the private players are competing with.
Maybe a two part answer what we're seeing on the type of products, where we typically chase.
We've been hoping cap rates may rise and then we've seen nothing to date, we just lost out on a package yesterday or a couple of buildings, where we're bidding on that'll go into the low threes.
<unk> threes and the reasoning, we're hearing from brokers that even though.
It may be up there so much of the acquisitions or equity that a large portion of it is is dry powder in the form of equity and then really probably the primary reason again as.
People are viewing cap rates much more so as a point in time and that your cap rate may be low going in but where rents are moving especially if you've got some near term role we used to view near term role as a downside on an acquisition and now it's it's upside because the market is moving up so quickly. So people can are.
Underwriting and accept and kind of the lower cap rates, but knowing as soon as those leases start to expire they get a chance to adjust that the one area and I'm kind of repeating what one of the brokerage groups were telling me, where they have seen cap rates come up and it makes sense or the long term bond like projects, where it's a triple net.
Alternative asset on a long term lease.
You know you don't have a chance to take advantage of a rising market and I have heard I don't know that I don't believe it's anything dramatic but that those cap rates are starting to creep to creep up and I would expect I expect higher interest rates and I would expect those would continue to affect those type of assets are little more predominantly.
Great. Thank you.
Youre welcome. Thanks.
The next question is from Conor Seversky Fehrenbach. Please go ahead.
Good morning out there thanks for having me on the call I just want to bring this topic back from one of the earlier comments, so or are you already seeing a sustained push to rollout more automation within your facilities and if so what does that cost look like from a tenant perspective, and then what could that look like for E. G. P. In terms of a potential tenant improve.
And costs.
It didn't really good morning, Conor it's Marshall it really varies by you know it'll really be tenant driven so we're seeing.
Some of that and probably the most extremes, we just delivered two buildings by Amazon and they've.
They've put a lot of us.
We've seen that the robots in the fourth.
Facilities.
You know I'm I'm estimating they've got about as much in the building as we do probably at this point, especially between the and some of the tenants will have the racking and conveyor systems and things like that so we are seeing more and more of it it's really tenant driven where.
I will say, where we've been impacted or where we're feeling it as we build a building, especially in markets like St. Las Vegas, the Phoenix market. It makes sense air condition warehousing, where people are competing to hire employees and we view it as a long term improvement to the building, we're seeing more and more of that and if there's any.
Kind of light manufacturing going on.
We've added more of that it really hasn't impacted our tenant improvements as much but maybe as we're retrofitting a space or a new development, we've had a little more.
See in the warehouse and.
I think depending on how they use the space and how many dock doors are open at any given time that are kind of like additional truck court market and that's a trend we've seen.
Okay. That's interesting thanks for the comments there and then.
Thinking about the aggregate development pipeline in the United States and understanding that the current demand environment is strong enough to still be able to push rents in these development projects.
Do you have a sense of when it would make sense maybe to dialed back development activities is as that supply demand dynamic becomes more elastic.
Good good.
Question, It's all about the way maybe this helps the two ways we viewed it.
One when you look at the supply numbers I would say a general rule of thumb for our markets and in some cases, it's been less.
Les it's C D up I'd say, 10% to 15% of new supply in Dallas, Atlanta, I'll pick the market Houston Phoenix is really comparable product that we might compete with that by end of the vast majority of what's getting built especially with rising cost I think construction costs, that's pushing people more than.
More to develop big box and not really kind of move away from our area of the playground. So we like like that impact and then as we think about our own development pipeline and I don't think I'll put it on me I don't think I've articulated to the street as well as we could.
Good, but really our development model will.
Because it's within a park and because it's really say buildings, two and three leased up well, we'll let the park really pulled the next project and so my.
In the worst way, we could do it would be Marshall and Brent.
Read an article or see something on the news and decided to slow down the development pipeline that I'll likely we've really got a self regulating development pipeline of what we're building within our park is leasing well, we'll add a little more inventory to it we won't build out apart all at once or anything like that and but by the same joke.
And if what we just delivered is leasing up slowly and at rates below what we expect we certainly won't construct can start construction on the next project, that's where really if you say I'm and I'm glad we were able to up our development starts this year, but it didn't come from corporate it came from if you look down our development.
Schedule, how many buildings are 100% leased are fairly well leased and and the lead time to getting the supplies to deliver the new building, that's probably where our stress is it's.
It feels like it's more stress and talking to our teams in the field and getting getting the land and getting things built at an affordable price than leasing right now and so what kind of keep going until the market.
Tells us to slow down and we've always said one of the this is helpful. A kind of a canary in the coal mine to watch for is as things roll into our portfolio. There can be any given project thats, not 100% leased or 90% leased but if we start to see a number of those then you know the market is slowing down and we'll start to tap that.
Brakes on development and we have done that in certain markets over the time, but right now the market feels good and we like the spreads on what we're delivering in first quarter. We delivered about 80 $590 million in two projects at all seven yield and the market's probably half that today, so I like that.
The value creation of new <unk>, we don't have to have a 100% profits, but I'll take it in any one quarter and we'll just kind of keep going until the market tells us it's slowing down, but where we're actually seeing it speed up right now we're seeing more activity.
Earlier in the development process than we did a year ago.
Got it appreciate the color I'll leave it there sure.
The next question is from Michael Carroll of RBC capital markets. Please go ahead.
Yeah. Thanks, I just wanted to touch on your acquisition strategy I mean, it looks like the company completed a number of strategic deals.
This quarter, our year to date, focusing on acquiring buildings in adjacent land site.
I guess, if you could build a bigger campus I guess is that a fair statement and does that allow the team to be more aggressive bidding on these types of projects and an increasing likelihood of winning those deals.
And I guess I'm trying to follow in Brent jump and ideally on our acquisitions I would say, even if it's adjacent land.
Two and a successful path that's our that's our ideal preference and when we finish up a park if its the land around the corner so to kind of keep a good simply but keep a good thing going.
The other side and we've seen that window I won't say close but just at outflows. We we were able to buy some vacant newly constructed buildings from kind of local regional developers and get what we felt like we're good returns taking the leasing risk on in those projects the market doesn't feel as afraid.
A vacancy as it used to are probably in a lot of cases as we think it should we bowed out of some bidding processes on value adds but that's really our preference there and if it's strategic within an existing market or like you say around the corner, we bought two of our kind of core acquisitions there.
Only two we made last year earlier two of them were really adjacent to buildings, we owned and were somewhat off market everything seems to have a little bit of competition right now, but if it's not a <unk>.
Fully marketed mass e-mail flyer those are the hardest most competitive things to buy in.
So we've kind of Kidded us having a check book is not a competitive advantage a differentiator in the market. So we.
Certainly chase those and we lose an awful lot of those as well.
And then can you provide an update on how you kind of view in Houston I mean, obviously the market has kind of firmed up Augusta across the board and then I think earlier you kind of highlight it you still want to rationalize your exposure there, but in March you did acquire a few buildings and some land sites.
I guess, how should we think about that exposure going forward. It still seems like you kind of like the market and your position there.
Yes, we do that's that's.
Well I think he's got a good team in Texas and in Houston, It's kind of have said, let's keep creating value and what we're developing and the value add we acquired the one you know a couple of developments one was a pre lease at world Houston.
If we can develop into the sixes in southern type returns and at the same time sell some poor and stabilized assets in Houston and.
I think we're down about 70 basis points from a year ago I was looking at in terms of our Houston as a percent of our rent. So that continues to drift down and in and it should but there are some couple of Houston assets. We're looking at exiting later this year.
Market permitting so.
We'll grow elsewhere, maybe a three part answer we've continued to grow in other markets.
I don't want to just I don't think it makes sense for us to shut the spigot off in Houston, if we can develop and create value, but maybe it's a little bit build one or to sell one or two in Houston and let the rest of the portfolio grow.
I, even think as much activity and as strong as the Dallas market is if I go out a couple of years I would expect Dallas.
We're doing a lot in Atlanta. It was a later start but I think Dallas will overtake Houston and will come our largest market down the road and it's not a negative on Houston, so much as all.
All of the act as big as the Dallas market is on all of the activity we've got going there.
Okay, great. Thanks Marshall.
Sure you're welcome.
The next question is from Dave Rodgers of Baird. Please go ahead.
Dave Rodgers with Baird. Please go ahead.
Is your line muted.
Well move on to keep being kin. That's truest. Please go ahead.
Thanks, Good morning out there.
I just wanted to go back to your development.
You've done some very.
Favorable leasing and improving that timeline has been moving up.
<unk> this quarter.
As you do that in the capital at risk comes out I mean, what's the likelihood that we can see your development start guidance moved beyond $300 million Oh starts this year.
Yeah.
I Hope we did good question good morning, and I Hope, we do look we were last.
Last year, we did $340 million in starts as we kind of started the year. If it helps but we have the 90 million Amazon kind of well in the system.
Delivered in first quarter. So I thought we would drop this year, but really as you point out and pointed out in your piece the activity.
His picked up early and that's really what's polls are all of a sudden you know I'll get a phone call and it's like Hey, we were under construction and at least the building and now.
Scrambling to get new inventory because if there is someone out there looking for 50 80000 square feet.
We don't have the inventory so the tenant rep brokers are going to move on to the next project down the road. So I'd like to think where the market is today.
The demand is there that we could bump the $300 million higher.
Dart number higher I think.
Caveat to that is the other.
What's holding us up and what's holding the market up a little bit as the steel deliveries and all the other things that there could be some projects, especially as we get later in the year that we'd like to start in the markets there.
We'll be we're in line can we get because you hate to we could start it. But then you don't want the GC to stop and wait for an every week and locating one of our construction people, there's a new delay and some.
A portion of what goes into our buildings. So just trying to get all the parts at the same time is much harder than it used to be in and building deliveries for forever. We're about six months and now they're up to probably eight to 10 months.
So that could be.
Some of it could just be bottlenecks, but those will that then they'll turn into 2023 star showed in 2022, but we don't.
Still got time don't sense that yeah, and I'm optimistic maybe that 300 goes up but there is some level later in the year, where we'll get pushed to 2023.
And in terms of your land Bank you have about 11.3.
3 million square feet that can be volatile what does that translate to in terms of.
The pool of dollars that are deployable because I think this is one of your kind of key strength that you do have to bear.
Very favorable end large land bank as the size of it as it pertains to the size of the company.
And then second to that as are most of these sites entitled and ready to go.
Most everything on our schedule as we get them.
And the film will say their jobs to have the permit in hand for the next building. So those are the zoning entitled ready to go we're usual permits will get will expire. So we'll pull permits for the next couple of buildings within apart, but those are ready and then.
The other side I would say to what you see on our schedule of it's almost like an iceberg that any given time, we're pulling from this land bank quarterly but theres also.
If we're doing what we should do theres another handful of land, what's coming into the land bank, what you're seeing is what's closed not what we have under contract that we're working through that zoning and permitting and moving towards closing two and.
Keeping on that schedule, there's about $6 6 million that we haven't actually but you know placed into under construction or in lease up that 11 million number includes those items that including the ones that are already underway, but if you look at that $6 6 million of potential you know based on a per square foot of 150 to 200 very below or.
Above that potential where you are but youre looking at 1 billion to 1 billion half of cost and Marshall alluded to earlier, we've been running.
75% to over 100% in value creation or toward a return. So you may be looking at two to 3 billion in terms of total value. So.
Thank you or good observation there keeping that that's continued to be where we've created the most value basically doubling our money.
Via the development pipeline and so the guys, especially recently done a really good job back filling some markets with some some nice wins on the land inventory side and as you know they're out there daily a perpetually working on that so it's tough markets, but those guys are seasoned and continue to to.
To bring good land inventory into the bank.
Okay, great. Thank you.
Okay.
The next question is from Dave Rodgers with Baird. Please go ahead.
Hey, good morning, Marshall and Brian you've covered a lot already.
But I was curious about what youre underwriting acquisitions and actually closing on those transactions, how do those compare to replacement cost and I guess, it's a pretty prolific developer. How do you guys think about closing on acquisitions and kind of this rising inflation environment and kind of paying above replacement cost, but still replacing an asset much quicker and <unk>.
And in the cash flow stream do you spent a lot of time thinking about that.
We do and I would say it varies.
I'll pick like the project, we bought in Hayward this quarter.
And we're actually even more because lands moved up so much that it's hard it's hard to get above replacement cost in some of these markets. So we do look at that and where I was going with Hayward, there's simply no land around us and in fact, some of the existing supply in some of our markets is getting repurposed.
Two life Science creative office things like that so we certainly I'm less concerned or weird little less concerned about replacement costs, where there is no available land left I think where it would really be more of an impact and it's not where we typically want to play is on the edge of town. If you were building a big box in there.
There were three or four that were sitting there vacant or things like that where it's more of a commodity product that's where the replacement cost cost would really scare me. The other thing where we've probably struggled more with of late are certainly in our acquisitions is looking at.
We use current market rents I know some of our peers do the same but but theres certainly more private peers out there that will use projected rents.
So far they are projected to be more accurate. So it's hard to compete with someone who's raising rents, but at some point, we can back into whatever the rent. We want so we said, let's look at current rents and what's our yield and then do look at what's that per square foot, but theres certainly been some land price trades and even something certainly industrial building.
Trades that.
What I used to think of as office buildings are even higher.
It's pretty jaw dropping ware.
Land prices at $70 $80 $90, a foot for industrial and buildings trading for if there was one in L. A that traded for recently $600, a foot, which I never.
Having been in industrial longer than I Wanna add up over the years that those are numbers I didn't think I would say.
No. Thanks for that and then just one follow up I think when we talked to some of the bigger box companies they'll say land at market today, maybe 50% of overall construction costs and development.
You build a different product does that math change at all for you guys.
It certainly would be probably accurate the further out west almost you've got them in California, It would be those type numbers.
It's probably still more 25, 30% for us on average, but youre right and Theres any number of cases by the time, we will.
Thailand try to get as far through the permitting and zoning entitled before we can close that.
For example, I'll use it up and.
And I believe it's closed the piece we closed in Phoenix, there's a comp at what we viewed as a slightly lesser location that just traded someone flipped it for about twice what we paid so we're hearing numbers by the time, we close that.
The land value, if we were private you'd be tip attempted to sell the land rather than develop it because values have moved that fast on industrial land in it I guess the other thing it certainly speaks that theres more industrial developers out there than there were a handful of years ago and in reading some of the market report chiefs.
We see it in Atlanta, and Dallas and some of the markets. What's the just the size of the industrial market is further out there I believe it was CBRE in Dallas included three new Submarkets. This quarter. So people are getting further and further and further out of out of the market what was it.
The Dallas construction, the number that jumped out to me in their report just over 70% of the construction or isn't what CBRE called edge markets, which are major pretty far out of central Dallas and that just shows how limited land supply is and I think <unk>.
Zoning and entitlement permitting is getting tougher because people see the number of trucks and things like that so there's kind of that everybody wants their delivery Amazon prime and an hour, but nobody wants it to originate from their neighborhood sometimes.
Yeah.
It sounds like a good thing for you guys. So thanks Marcia.
Just hard when youre developing as far as an owner, yes, as a developed or not yet.
The next question is from Todd Thomas of Keybanc Capital markets. Please go ahead.
Good morning, everyone. This is already Cameron on for Todd.
Just broadly about demand I know a lot of demand for industrial cyclical, but we also have a lot of secular demand stemming from e-commerce and the resetting of the supply chain is everyone's seemingly playing catch up do you think in the event of a broader macro slowdown or recession that users would be more active in absorbing space relative to maybe what we.
Seen in prior recessions.
Okay.
Speculating and I'm, an optimist, so with that safe Harbor disclosure I would say, yes, yes, I think so because I think.
I think we're a low cost flexible alternative as we kind of mentioned a little bit to using kind of more service center, our flex product and especially brick and mortar retail. So I think as things slow down any way people can RIN cost out of their supply chain that will lead more and more towards industrial and.
We still think given the supply chain and inventory levels are low and that people.
Want to have just in case inventory, but the supply chain has not really allowing that yet so I think that really that's still coming in and then there's a.
A handful of good secular reasons, we get and we kind of hint at that we're excited about our portfolio, but I think with the supply chain bottlenecks the port bottlenecks in China in L. A and long beach and tensions with China I think it's a longer term play, but there'll be more manufacturing brought back to the U S and or near shoring.
And we may not end up with that manufacturer, that's typically not our building, but we will benefit from the suppliers near that manufacturer.
Yeah, and I would just add to that too already that you know the thing that saw a report the other day that the light where e-commerce as a percentage of retail sales that accelerated obviously, some degree COVID-19 , but like from the mid teens to 19%.
And that is projected to increase from 19% up to about 32% over the next 10 years. So a 68% increase projected over the next 10 years relative to that so certainly if that happened I think that would be.
Other tailwind over that period of time, I think that would equate to more absorption of our type space. So do.
Do you feel like Theres as Marshall said, some some tailwind there that wouldn't be totally insulated from a slowdown but feel like there would be enough momentum behind it where it wasn't totally wane away hopefully.
Got it thank you.
Sure.
The next question is from Ronald Camden with Morgan Stanley . Please go ahead.
Hi, yet to be mined for them all cambium, just maybe a follow up to your previous comments.
The question for me.
I think you mentioned.
Do you think about Covid.
Kind of a great start.
Stopping your you know a lot of the.
Starts that you had previously planned just because of.
The man that came in and maybe that was more than expectations.
Kind of as I think about inventories building today.
The macro backdrop do you.
Kind of see yourself in a position where.
Starts won't necessarily stop today, because you think inventories could build kind of irregardless of where retail sales go or where you know the general macro backdrop is.
They could and it was really more maybe two part where I was saying that I think.
People would have thought we were crazy I was crazy if we had kept building during COVID-19 and it's kind of one of those hindsight 2020, how short the pause was in industrial and we could have gotten a lot of materials really cheap we did tighten up a bunch of land during early on during Covid, which I'm glad we did we kept that.
Mark going but not to start and I think if there's a slowdown.
Again, I would probably still we will really look to the field of if that demand is there we try to not regulate it if it's there we'll we'll add a little more inventory I guess I view, it as pretty on which I liked it sounds cliche, but a free market demand when the demand is there we will go as fast as the Mark.
That will lead us in terms of building out buildings, and finishing up a park and by the same token if we're struggling to get to.
Projects leased up we're going to slow down too. So I'd like to think if there is a macro slowdown, but if people still want <unk>.
Just in case inventory and things like that or we've got people that are willing to move forward leasing will <unk>.
We'll move I think Covid was such an extreme example, even though it would have been the right decision in hindsight it would have been.
Crazy amount of risk to take on to take that for you.
It's something that none of us had an experience like.
Pandemic, so I think.
Sitting on our hands it didnt harmless as just in hindsight, we could have kept developing and it would've look smart, but we would have been.
I think our risk reward would've been outsized on that.
The next question is from Vikram Malhotra of Mizuho. Please go ahead.
Hi, Good morning, this is amit in for Vikram.
My question is are you seeing any new sources of demand.
Yeah, There's always yes, yes, I was trying to think of who we've seen of.
Of late there.
For a while.
And it hasn't gone away the online pharmaceutical fulfillment was a little bit of an atypical type tenant and then we've seen more energy related but more green energy related where someone converting.
Trucks and buses to electrical powered or they're making batteries and things like that so I don't know that its.
Not necessarily.
Necessarily new new but maybe newer within our portfolio the number of startups and you're working through the credit and things like that with those but we've seen.
A handful it's not a huge amount of our portfolio, but I'm thinking of them, new and creative uses we've seen more and more of people.
Within Green energy, taking space, whether it's producing batteries or doing different things like that.
Got it and have you seen or has there been any changes to your watch list from the last quarter.
Yeah. No. This is Brent there have not been.
All of our top 10 are current and as you see from our bad debt or lack thereof, our collections continue to be very very strong.
We had yet another I guess, you would say net positive bad debt, meaning we had more recoveries of previously written off accounts than we did with newly reserved account so.
Our <unk>.
Collections remain very very strong in our watch list the only has.
A dozen or fewer tenants and you were talking about that have a customer base of over 700 customers. So.
Thankfully that continues to be very very strong.
Got it thank you.
Yeah sure.
This concludes our question and answer session I would like to turn the conference back over to Marshall Loeb for closing remarks.
Thanks, everyone for your time this morning, and thanks for your interest in Eastgroup, We're certainly available for any follow up questions comments, and all and look forward to seeing many of you at NAREIT here in about just over a month. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.