Q3 2022 Eastgroup Properties Inc Earnings Call
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I would now like to turn the conference over to Marshall.
Hello.
Okay.
Please go ahead.
Good morning, and thanks for calling in for our third quarter 2022 conference call.
As always we appreciate your interest Brent Wood, our CFO is also on the call. This morning.
And since we'll make forward looking statements, we ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as T. N O Y and SSO that are non-GAAP measures as defined in regulation G. Please.
Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website and to our periodic 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.
Please also note that some statements. During this call are forward looking statements as defined in and within 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 release, along with our remarks are made as of today and reflect our current views about the company's plans intentions expectations strategies and prospects.
Based on the information currently available to the company and on assumptions. This is Mike.
We undertake no duty to update such statements or remarks, 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 see our SEC filings, including in our most recent annual report on Form 10-K for more detail about these risks.
Thanks, Dana good morning, and thank you for your time I'll start by thanking our team for another strong quarter. They continue performing at a high level and capitalizing on opportunities in a fluid environment.
Our third quarter results were strong and demonstrate the quality of our portfolio and the resiliency of the industrial market.
Some of the results produced include funds from operations coming in above guidance up over 14% for the quarter ahead of our initial forecast. This march 38 consecutive quarters of higher F. F O per share as compared to the prior year quarter truly a long term trend.
Our quarterly occupancy averaged 98, 3%, which was up 120 basis points from third quarter, 2021, and a quarter and we're ahead of projections at 99% leased and 98, 5% occupied matching our company record occupancy.
Similarly quarterly re leasing spreads were strong boats above 39% GAAP and 23% cash.
Year to date, releasing spreads are similar at 36% and 22% cash GAAP and cash respectively.
Finally cash same store NOI reached eight 7% for the quarter and stands at eight 9% year to date in summary, I'm proud of our year to date results and our positioning this gives us to finish the year.
And today, we're responding to strengthen the market end user demand for industrial products.
Okay thing on value creation via raising rents and new development.
Four we ended the quarter, 99% leased.
To demonstrate the market's strength over the past two years have produced a number of quarterly records for the company.
Another trend, we're seeing is more widespread than rent growth.
Releasing spreads have trended higher than in 2021, and more importantly across a broader geography.
I'm happy to finish the quarter at $1 77 per share in F. F O and raise annual guidance to $6 93 per share up 13, 8% from the 2021 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 eight 9% of rents.
And as we've stated before our development starts are pulled by market demand.
Then our parks.
Based on our read through we're adjusting forecast 2022 starts to 375 million.
Through September 30, we've completed 11 development and value add projects with 10 of those rolling into the operating portfolio fully leased at an average yield of six 6%.
In addition to these we have another eight projects, which are 100% leased prior to construction completion.
We're happy with the consistent value creation. These represent and we will continue to closely monitor our development progress given heightened economic uncertainty.
Given the shift in capital markets early second quarter, we're taking a measured approach on new core investments.
We're also carefully evaluating each new development side, given the level of demand and longer timeframe offered required to put these sites under production.
Brent will now speak on several topics, including our updated projections within the 'twenty to 'twenty two 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 was on the high end of our guidance range at $1 77 per share and compared to third quarter 2021 of $1 55 represented an increase of 14.2%.
The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth.
From a capital perspective macroeconomic concerns have caused the stock market to further decline, including our share price and as a result, we only issued 1 billion of equity we have been intentionally deleveraging the balance sheet over the past several years, placing ourselves in an advantageous position to pivot to debt proceeds.
For capital sourcing.
During the third quarter, we closed on 125 million of senior unsecured notes with a weighted average fixed interest rate of 4.0% to 4%.
This issuance included two tranches, one for 75 million with a five year term and another $50 million with a two year term.
We also agreed to terms on the private placement of two senior unsecured notes totaling a $150 million.
One note for $75 million has an 11 year term and an interest rate of 4.9%.
And the other 75 million dollar note has a 12 year term and an interest rate of 4.95%.
The notes were issued unfunded after quarter in Azure.
As a reminder, the company does not have any variable rate debt. Besides the revolver facilities and our near term maturity schedule as light with only 115 million scheduled to mature through August of 'twenty 'twenty four.
Although capital markets are fluid and have risen in cost our balance sheet remains flexible and strong with healthy financial metrics our debt to total market capitalization was 21, 3% unadjusted debt to EBITDA ratio was down to 4.88 times and our interest in fixed charge coverage ratio is at.
At 8.9 times.
Looking forward <unk> guidance for the fourth quarter of 'twenty 'twenty. Two is estimated to be in the range of $1 73 to $1 77 per share and 691 to 695 for the year, a three cent per share increase over our prior guidance. The 2022 F F O per share.
I'd point represents a 13, 8% increase over 2020 one.
In closing we were pleased with our third quarter results.
And as we have in both good and challenging times in the past we were allowed our financial strength the experience of our team and the quality and location of our portfolio to lead us into the future.
Before I turn it back over to Marshall I want to note that Fortunately, our Florida portfolio sustained minimum damage damage as a result of Hurricane E N in September .
With the aid of insurance proceeds we will replace two older roofs on buildings in Fort Myers, we do not anticipate any meaningful financial impact to the operating portfolio because of the storm.
Now Marshall will make final comments.
Thanks, Brad I'm proud of the results our team created year to date and the position it leaves us in for the balance internally operations remain historically strong.
Results indicate.
That said the capital markets and overall environment are volatile.
While never fun to live through a couple of thoughts that may prove helpful. First our team has worked together through several downturns and forecast downturns before.
Our strategy shifts, but it's not unchartered waters.
Secondly, the industrial market has been red Hot the past few years. So some level of market concern we view longer term is healthy for sustained positive environment.
Meanwhile, our buildings are as full as they've ever been and rents are rising throughout our portfolio. We will work to keep occupancy high continue pushing rents and listen to tenants and prospects to accommodate their demand in the market as we've always done in good and bad markets.
And longer term I remain excited for east group's future there're several long term positive secular trends occurring within last mile shallow bay distribution space and sunbelt markets that will play out over years, such as population shifts evolving logistics change et cetera, which we are well positioned.
And for.
I will now like to open up the call to take your questions.
Okay.
Okay.
Yeah.
Thank you Mr. Marshall Loeb, President and CEO , we will now begin the question and answer session to ask a question you May Press Star then one when you touched on Sun.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Craig Mailman from Citi.
Please go ahead Greg.
Okay.
I I know Brent He said there was no real impact from the hurricane, but anything on them just development timelines or impact on four fourth quarter recognition that we should be aware of.
Hey, Craig a little bit of Oh. This is Marshall I'll comment good morning, I'll, let Brent chime in.
We were fortunate with hurricane and and that we we didn't have a lot of expense damage, where you know a couple of rows were going to work on that we're already but in next year's budget to begin with it was more of a there is some revenue loss in fourth quarter and that.
If you look at our development schedule in our supplement there's three buildings in central Florida, They're now scheduled to deliver in January there's two in Fort Myers that are 100% leased and one and in Orlando and all of those with the had partial revenue budgeted or expecting it.
Fourth quarter and now we've pushed that back into early next year with with Hurricane and rightly. So all the utility companies and the inspections are focused on residential first with commercial satcom. So we've fallen back in queue and well hopefully we can maybe get those online still this quarter, but we pull.
Those out of our budget and so that was really the more the more impact to US was we were trying to deliver fully leased buildings and long term, it's not a problem, but fourth quarter. We lost a couple of cents or more that we were expecting to have data through hurricane a M on timing.
Okay. That's helpful to know no anticipated kind of impact of the 23 run rate is just a.
A shift from four Q1 Q is how we should think of that.
Yeah that the yields on the assets are fine and they're leased it's more timing and we'll have maybe.
Some number we had some cleanup and things we will have 100000 in expenses, maybe in fourth quarter from Ian but that's more gutters and clean up and some of that'll get capitalized as well, but in terms of run rate. Your short answer is no.
Perfect.
Then just moving to the development pipeline. This has been sort of a big engine for you guys over the past couple of years.
And I'm just kind of curious as.
Your yields have kind of stayed in the high 6% range, but now your cost of capital is kind of creeping up narrowing that gap. So I know that historically you guys have had sort of a pool. That's a good demand from the ground, but I mean is there a thought process and even if there is that pull from your local guys that may be you.
Do you kind of a halt until yields reset higher to give you that more comfortable spread between our financing and and just returns.
That's a good question.
Correct, too and that we're still thankfully, saying, the pall and demand, but unfortunately cost of equity and then cost of debt and even availability of debt have gotten tighter throughout this year I would say early in the year and certain markets. We probably would have developed and thankfully, we didn't need to but we would've gotten into the <unk>.
Lives are you know even low fives, maybe in certain markets, where cap rates were in the threes with cap rates moving and costs moving now where she said we're what we're what's in the pipeline is at a projected six 8% what we've come out of the pipeline is a six six so we're certainly looking harder at our development.
Pipeline and where those returns and then pushing those a little bit higher now I would say maybe the other good news thing we can say as we think about it is we use current construction pricing and current rents in our pro forma and rents have even with the kind of shaking us or uncertainty this year rents as.
<unk> decline in our markets.
And with the volatility there's so many of the local and regional merchant developers that have been pulled out of the market. So we're expecting a pretty steep decline and construct Shannon and supply probably starting second half of next year. So that that makes me hopeful, we're saying a little bit of pickup and delivery time.
And I think construction pricing and deliveries, but it's going to take some time to work through the system will come our way because I think there'll be a lot of construction companies that whether it was industrial construction or hotel or office or any other product types, that's going to really slow down into 'twenty two 'twenty three.
Just now you make the point that quite supply you know, there's a lot of concern about industrial supply, but it seems like you guys may pull back in the near term some of your competitors. They pulled back the merchant builders are pulled back and so that just continues to put more upward pressure on market rents in the absence of availability.
A year and a lot of markets I mean familiar conversation with brokers and tenants in the market do they acknowledge that email rent well it has to.
Possibly accelerate from here.
To make development pencil to get the available that they may need to grow their supply chains, and it's sort of a circular argument, but yeah I'm I'm just kind of curious if the market participants are starting to talk about this as a potential you know byproduct.
I think and I'm sure I'm. Following you I think people are certainly step back where you used to you know you may and Brent could've had a site and once we got it zoned and entitled and got plans, we could have flipped it or if you're early in construction and all of that and we really stepped down to the boards and the acquisitions beginning in about May.
So we've not actively been on those but people weren't afraid of vacancy and we lost you know any number of those that we bid on because you can underwrite whatever rent you want when it gets delivered in eight months to a year and that's come to a halt and so I do think you're going to say certainly what we will see less supply.
Once things move out of this pipeline that's under construction.
And I think because of People's cost and where land costs have gone right before the kind of things ground and a price discovery and second quarter, you'll see higher rents, but I guess, the caveat or what makes me hesitate there thinking it through is just where demand goes right now I think tenants you know look we're now as of today, we're about where.
We ended third quarter, we're still 99% leased 98% occupied thankfully where state full but every tenant has to be watching the news in reading the newspaper too and so everyone's got to be a little bit uncertain and so I just don't know if things get bad or how bad they get so there may be.
We're kind of keep waiting for the demand to slow down really since April and Amazon's announcement, but thankfully. We haven't you know kinda each month, we kind of keep waiting for cracks in the system and haven't seen it but with a lack of supply if demand can hang in there it'll be really a great market to be in in 2024 I'm hopeful.
Great. Thank you I'll cede the floor thanks, guys.
Thank you.
Yeah.
And at this time I would like to remind you. If you would like to pose a question Press Star then one and try and limit your questions to.
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And our next question is coming from Camille Bonnell from Bank of America. Please go ahead Camille.
Yeah.
Yeah.
Pipeline in markets like Phoenix, and Dallas are not directly competing with your asset.
Can you comment more specifically, if you're seeing any change in appetite for location, where tenants are facing their operations just given the tightness of the market.
Are you seeing them move out further to the south merits or relocate to other markets with them.
Better.
Pricing.
Yeah.
I guess, maybe two type tenants and Camilo. This good morning. This is Marshall the larger box buildings, you know they'll usually say in a market like Atlanta, or our Phoenix, they'll do a market wide search.
That's usually why they end up pretty far out in the suburbs, that's where that makes sense, that's where the land is cheaper and they're more price sensitive.
We it ends up being a little more of a commodity business and so you can have several guys with.
Big box deliveries and that's.
It's it's very price sensitive student tenants, we like tenants there has to be you know ideally near their customers' infill and even though you see markets like Phoenix or Atlanta, where people talk about supply I think that maybe speaks to the difference of our product that we're 100% leased thankfully in both of those markets.
And where do we do shift away from the city Center, maybe like Anna I'll stick with Phoenix, and Atlanta, where where the population growth is to say that and we've spread out a little bit in Atlanta, but that Golden triangle between say 10 o'clock and two o'clock in Atlanta and in Phoenix, a lot of the new deliveries are out south well.
West that's where the land is less expensive and we've preferred the east Valley of Phoenix, an idea, it's really the South East Valley, and that's where the residential growth is so and those customers there suddenly everybody's rent price sensitive, but theyre looking more at at hiring availability and the type of work force you can hire and then.
Really the transportation cost and and we've seen a number of tenants.
Thinking in Dallas, where we had train and Red Bull recently, both signed leases in two different parts of Dallas with us thankfully because they needed to be near their customers and because they didn't want their drivers tied up on the road because some of those cities have gotten so large you can spend all day, even with a cheap location with drivers on.
The road and the transportation costs will offset the rent savings.
Okay and for my second question could we please discuss Houston.
Portfolio occupancy has been very strong in recent quarters, but it looks like some space was given back this quarter just given that this market represents 14, 14% of leases expiring in 2023 can you update us on how demand the demand pipeline is looking here.
Yeah, Houston, Yeah, you're right, we've got a fair amount of role by the time, we finished the year, Kevin and the team there that'll probably come down and that's about an average year for us at 14% were a little bit higher today than where we finished.
The third quarter in Houston, so that the teams already done.
Nice job back filling some of that space. So we've said it's been a it's a market that has always made people nervous because of the volatility of oil prices, but we've historically stayed you know kind of 94% to 97% leased there, so where I wouldn't call Houston.
One of our top handful of strongest markets, but it's also a very stable market, but fifth largest city in the country things like that much more diversified than I think people outside of Houston or outside of Texas view that market. So were comfortable there we've come down we were north of 20% in Houston in term.
Of revenue now we're below 11% the team does a good job of creating value via development and we've got a couple of Houston assets that were looking to exit so we'll keep building there but probably.
Develop a building to high sixes ideally in and in the past, we've been able to sell things and.
In the fourth or so even in the fives now today, if we had to but well keep kind of letting the rest of the portfolio grow manage the size of our portfolio in Houston and feel pretty good that its a solid stable market is as much as any market can be given that the national headlines today.
Thank you.
Youre welcome.
And our next question is coming from Alexander Goldfarb from Piper Sandler.
Please go ahead Alexander.
Oh good morning, good morning down there. So two questions are first.
Marshall just appreciate your comments on the overall demand north of 98% occupied literally you know incredible statistics.
Others in REIT land, you know, we're talking about slowdowns.
Nothing is at all.
Assume that you guys were looking carefully for cracks, but nothing that's going on so you know as you look across the tenants whether its you know people who survive a homebuilder oriented or maybe tech oriented or you know.
Some of the areas that may be impacted by higher rates or pullback in corporate spending are you not seeing any impact at all or is it that whatever area or industry has pulled back its been more than offset by other tenants.
Good question and good morning, it's probably a little more of the ladder and that you know.
Certainly where you have one you mentioned homebuilding, we've been concerned about that and especially in the Sun belt, you're in some markets where there's <unk>.
Thankfully a lot of population movement to those markets, but that also leads to homebuilding activity. So we're watching those although if you asked me to list. The homebuilder bankruptcies, we've had I couldn in them in earlier in the year when Amazon made news, but we really had not pursued Amazon on new leases for a number of quarters.
Fedex has been in the news of late and in both of those are top 10 customers.
But neither one but combined they're about 3% of our revenues. So we've been able to offset if Amazon slows down and Fedex, it's not that it's a huge portion of our business. There's a lot of tenants taking that space. Our bad debt. This quarter was it was a tenant who's it's in the pharmaceutical.
Business day without.
Getting too much into their business. They lost a lawsuit and immediately filed chapter 11. So that was another one of the hits to our fourth quarter is that a.
A tenant that filed chapter 11 and were working to either collect the rent or get that that's about a little over north of a penny a fourth quarter loss. The good news is if we do get the space back where their rent set it's about 50.
50% below current market rent, so we'll be able to push the rents there hopefully pretty handily, but that was it.
Literally 95% of our bad debt in third quarter was a tenant and they lost a lawsuit to a competitor and filed chapter 11, but so we're watching for it and trying to be attuned to it and.
And I would say our bad debt historically has run about maybe 20 to 25 basis points of revenue. So I think that's what.
It seems like a concern we hear from the street is smaller spaces must mean.
Smaller tenants, but I think our bad debt in our history doesn't prove that out and at this quarter. It was a tenant and we will say it was six to 800 tenants alike that are kind of I mentioned in the call. Our top 10 tenants are under 9% of our revenue and most of those are in multiple or several of those multiple locations. So if we did no we're not.
Aware of anything did lose a fedex or an Amazon or consolidated electric we wouldn't our lows we wouldn't lose them in every location you might lose them in a location.
Okay and the second question is you mentioned on in the response to the last question on cap rates and you mentioned, maybe Houston is now sort of in the fives can you just talk overall about cap rates I mean, you bought a bunch of land in the third quarter.
Development yields have come down it sounds like a little bit, but curious to hear what's going on in the cap rate side of the equation.
Yeah.
We're watching it and yeah I wouldn't call Houston in the Fives right now we're still.
It's been the several months of price discovery, and maybe what the bigger preference we step back from actively bidding on acquisitions and even value add acquisitions in may. So what you know most of what I know is anecdotal we talk to brokers, often but we're not in the bidding process where cap rates.
We have moved the most material is a single tenant long term lease it makes sense, it's more like a bond. So those cap rates have moved up if its multi tenant say, it's a multi tenant project with shorter term leases and odds are those are going to be below market, given where market has been the last couple of years those cap rates have been.
Stickier, they've moved up but they've held in there.
We've got a few smaller assets on the market, there's definitely fewer buyers out there there's price discovery.
And what we're hearing is there's a lot of institutional demand for industrial product, that's attractive compared to the other property flavors at long term for a number of reasons and it's really where yeah things just aren't trading as much there's a lack of debt. So there's very few portfolios.
On the market and nothing is trading.
And I think with the lack of debt and equity it's going to stay that way.
For a little bit of time, and so that's what's made us be very cautious and careful on our development, although still in the high sixes in and the way we look at especially where you have a park that we need to get each one justify the next development based on its return, but we're as you mentioned, 99% leased as a company and $100.
At least and probably a good half dozen of our active development markets. So if an existing tenant need space. We've always said someone will deliver them that space and I'd, rather move them within our park and we can backfill their existing space, whereas the markets. This tight at a higher rent than we're collecting today. So we're sure.
Certainly more we were careful I like to think earlier in the year and we're even more careful right now just watching for a slowdown, but we're watching for it but really havent knock on wood been impacted through October 25th.
Thank you.
Sure.
Yeah.
Our next question is coming from John Mccool, Dennis from B T. I G. Please.
Please go ahead John .
Hello, Thank you and good morning, Marshall and Brent I'm, just a quick question regarding sort of return hurdles, you're looking at when making acquisitions or any of your developments. Just was curious if there are any changes for your team. There you know given the current market conditions that you said you haven't been impacted as much but just anything you're monitoring there or any change.
As you've made sort of over the past few months.
I would think a good good question and again, we probably earlier in the year. If you had called US on a new development in the right market and the right more importantly, right Submarket, we would've looked at the development and the fives, just given the long term growth prospects of that.
And now we would probably move that well enter the sexes getting towards that cost of capital has gone up.
We never have needed to go there on our development pipeline, but a couple of value adds we were <unk> and <unk>.
That's where we avoid the construction risk that take on the leasing risk we've looked at those at the fives and even I think we did one last year in California and are kind of in the in the fours, we would probably look more carefully we've stopped the value ads altogether and probably moved our own development.
Kind of a hurdle up by 7500 basis points, just because our own capital is all in a little more process, given where pricing as.
We want to keep some dry powder, because we think there's going to be some opportunities as these small local and regional developers I don't think there'll be a lot of distress out there and some of it may come via land and we've been able to acquire a land site.
Couple that we're working on that one we've closed one we havent where it was the person that had it under contract was unable to perform and we were able to get repricing on air So we're.
Trying to be cautious with our capital and we have moved our development yields up over the course of this year and we'll just see where and I don't think interest rates are coming down Unfortunately, with the fed and everything else anytime soon and I hope I'm, probably worry more about our our own existing tenants and the impact on them as that plays out too.
Great. Thanks, so much Marshall that is Super helpful. And then second one for me.
I know, we've seen sort of more macro headlines about a shift from port activity sort of from the west coast over to the East Coast Snow Houston would be a notable example of that that's due to several different reasons, but was just curious if this is something that you know you've seen impacting your business and if so how are your business and your tenants I guess.
Yeah, we haven't I mean, it's interesting to watch and we we haven't really and that.
There is a good industrial development or ownership play at the porch out here.
Kind of like you, we read about it I hear the port of Savannah, Georgia has done very well in and certainly the port of Houston, and we probably benefit indirectly, but we've avoided the port in a really directly port related buildings in terms of development and acquisitions and my fear is it's it it's just not a world.
We've played in it you get more into logistics, and how that works and and I I guess.
Personally I remember watching a video of how the port of Jacksonville had really improved their port and I'm getting excited and then it hit me, there's probably one of the video just like this for Virginia Beach, and Savannah in Miami, and I always assume theres someone in bentonville, Arkansas or somewhere like that deciding where the best place to ship their goods.
And so I think in terms of.
We've avoided port Submarkets, where we do think will benefit and we're seeing that benefit is more onshoring or near shoring of manufacturing in south San Diego. We've we've benefited there its not really ports, but it's you know maybe port of entry and where they are.
Amazon delivery earlier this year, we bought several buildings that were 50% leased I'm from an institution at end of last year El Paso has been a good market Phoenix Tucson, but that's if I think about ports were probably along the border and.
The shift to from manufacturing, especially in technology, we're benefiting with Tesla coming to Austin, and Samsung and things like that we're bullish on Austin long term and we've seen not so much the manufacturers, but to suppliers both in Austin and San Antonio we've benefited from that so.
Pulling ports domain.
[laughter] ports of entry not seaports, but hopefully that's helpful.
No that's really helpful. Marshall Thanks, so much.
Youre welcome.
And our next question is coming from Jason Belcher from Wells Fargo.
Jason Please go ahead.
Oh, hi, good morning.
Just wanted to ask about the horizon West two and three developments I noticed you transfer those into the operating portfolio in Q3 upon reaching the one year post completion threshold ahead of that otherwise, 90% occupancy threshold trigger but all in all the other developments that went into the portfolio in Q3 are fully.
<unk>.
Just wondering if you could give us an update on the the horizon west developments in and maybe comment on any drags on occupancy there that you can share.
Yeah, No, we're happy with Orlando and it's a strong market there we like the park its about 50000 feet and you're right I guess you know.
I, usually have conflicted emotions I believe we've transferred 11 buildings and this year and 10 of those are fully leased in horizon, two and threes, where we missed it a it's more of timing will be fine on horizon West Horizon West for Us a big box building. That's one that we'll deliver in January that one is 100%.
At least for the park is doing well and well you know as long as the demands there continue our development, but you're right, that's one and and and I guess bigger picture I say conflicted you know I always think too if if we're hitting on 10 out of 11 and the profits are there and again now with a little more uncertain timing pardon.
He says if I've given the profit spread should we be hitting on <unk>.
12 of 16, because you're you may be better off in <unk>, and look where it may take us an extra quarter to lease it but at the end of the day. It that may be a 10 basis point return difference on a on a good asset. So we'll be we're comfortable with horizon West two and three comfortable with the park in Orlando. It. Just this is one that took.
A little longer to lease up than than some of the others in that park Av.
Understood. Thank you.
And then Oh I guess for my second one I know youre, not giving guidance yet for 'twenty, three but just given the rising rate environment and its impact on the investment sales market, maybe if you could.
Just talk maybe big picture, how youre thinking about acquisitions versus development going forward to what extent do you anticipate the pipeline for acquisitions, you know at least at attractive pricing.
Could expand over the next year.
When we.
The last several months and a handful plus we've not been active in the acquisition market.
That said you know I think it would need if we if we bought something that would need to be a unique situation of building around the corner in a sub market where in next door or something like that.
And at some point, if if the market stays this kind of volatile if we could find the right acquisition and really that Delta say if were still developing to call. It a six eight and you could get a unique acquisition to step down on timing, we might but it would probably need to be a unique acquisition for.
Or a core acquisition that said, we would we've stepped down a couple of times on land pricing already where it's been land, we really like where one was a local developer was running out of time couldn't raise the capital we stepped in and they made some money, but not nearly what they were hoping to.
And we've been renegotiating a number of our land acquisitions and we're careful on land I would say on the land acquisitions, we've dropped some peripheral land sites theres. Some we've dropped the more expensive ones, we've dropped our peripheral land sites, but if we can find a good infill land side that we really know.
Like I'd, rather not care, yet, but if we had it and its a mild downturn I think that that's the one part that's really been our bottleneck. The last few years is finding good land sites and I think they'll be and what we're hearing from brokers any number that where the contracts have been extended in the contracts will be dropped and we've.
Dropped a few of them ourselves, probably it's always a little bit painful, but they're still out there and we can always circle back to them at the right.
Time hopefully.
Thanks very much.
Sure you're welcome.
Yeah.
Our next question comes from Dave Rodgers from Baird. Please go ahead Dave.
Hey, guys, it's Nick on for Dave I kind of wanted to touch on something from the prepared remarks on the widespread rent growth across the nation, maybe somewhat what are some of the markets that you were kind of surprised at the rent growth numbers, just looking across the portfolio.
Yeah.
Good question I guess surprise.
It all goes back to what are your you know to me for I'm kind of looking at that and I like year to date because in any you know with our size portfolio in any quarter, you can get an odd mix, but Tampa, Florida. All in all has been a strong market north of.
40% Tampa at 50%.
You know when I look kind of throughout our portfolio, our new Las Vegas has been a strong market and I'm looking at GAAP numbers it at 66%.
I think that were 39% for the quarter, 36% for the year is a really strong number for us and really all of those markets.
We've been happy with Austin.
Yes, I'm not shocked at north of 50%.
As I mentioned earlier, we like Austin front, yes, it's the capital it's a university town Theres. Some topography issues, there's technology and its hard you really can't build on the west side of Austin because of the aquifer and the demography. So we think that's going to be a really strong market. So thankfully, there's any number of them last year, we had.
We were in the low thirty's on a GAAP basis, which was a record year for us, but we had some large leases in California roll that really helped us get there. This year, we haven't had the benefit of that.
But yet we've had a better year. So that's what it feels to me more lasting and more probably more indicative of the market of just where.
We've said before I think people.
Wall Street gets the lack of land and maybe the coastal cities, but cities like Dallas, where there is supply in Dallas, but reading the CBRE reports the new supply in Dallas, It's a big number at 65 million square feet, but at 73% of that is and what they've classified as outlier.
Markets, where we're not so those are the things that.
Surprise me or you realize just how little land there is as big as Dallas is as big as Phoenix as Big as Atlanta is where you look at where the new supply is so if you can find those sites. So.
Where we're happy with where your rent growths growth has been it may you know who knows with the economy. It may slow down a little bit, but I'm grateful that we have the embedded rent growth, where we've been I was just reading, where Atlanta rents are up 18% year over year, So if that slows or even pause as we've got some room to continue pushing.
Rents until hopefully we get to the other side of whatever if we do go into recession. It's we can get to the other side of that and still show growth through that through pushing rents.
That's helpful. Marshall and then maybe a question for Brian are with the current stock price you guys said, you're probably not going to be issuing equity, but you did mentioned incremental debt and kind of flexing the balance sheet. So what for like leverage parameters like where are you flexible taking leverage at this point I'm just looking at development opportunities and few.
Acquisitions.
Yeah. Good morning, David you know we are flexible in that you know we've we've obviously put ourselves in a position to be able to add that I think going back six months ago, we realized that would double in cost.
Over the course of the year, which is obviously caused a problem, but yeah. We were really proactive intentionally early in the year. You know we've issued $525 million of debt, so far and like I say, we were intentionally proactive in the first half of the year with expecting rising rates that we've been able to do that at a at a three eight so we've been able to provide.
A lot of runway for ourselves, where you know very low draw on our revolver currently.
And so we're in good position to go out into next year and as Marshall has been saying from both a leasing standpoint, and a capital access standpoint, we'll just have to see how that plays out.
But we're also looking at less.
You know less expensive options that we can do where it works you know pursuing maybe exercising a portion of our accordion on our revolver you. All revolver total capacities is 425, which is relatively small given our size and we benefited from that because it's been low cost to us.
You know for a long long time, but maybe expand that just to give us a little more liquidity and flexibility in timing a few holes in our lateral that would be shorter term in nature.
So you know trying to pull all the levers early that we can that give us that.
The best cost, if you will or at least expensive access to capital.
We're in a good position to get out into next year and we'll just have to see how it plays out you know the price come back a little bit low 150 as.
You look at in a vs and that ranges from $1 36 to 216. So I think it's safe to say consensus N. A V. Right now has an average of I'm not sure and I don't knows and we don't know either and so you know we haven't totally given up the idea it and we're not dialing in into anything we're forecasting but we we haven't.
Given up on the idea of accessing equity potentially at some point over into next year. If you know if if the fed could say theyre backing off and if are you know if the company is still doing strong and depending where the share price is how much cap rates move where people think an a b is at the moment. So we're in a good position as we always tip.
We are we're in a good position to be able to be very measured in what we do and so that's what we'll do we're in a good spot going into next year I'd also point out on our development pipeline sheet, you see 600 million of total development a lot of projects there, but theres only $190 million of spend left to put all of that 600 million 600 million at cost it's more.
You know the value, that's probably closer to $1 billion, but we've only got to spend $190 million left unlock that so.
Yeah, we're in a good position to take care of that and you know again as we get out into 2020 three we'll just see what the market is dictating to us and we won't fight it will respond to it as best we can.
All helpful. Thanks, guys.
Yes.
We now have a question from Bill Crow from Raymond James. Please go ahead Bill.
Yeah. Thanks, Good morning, Marshall everybody.
Especially as you think about what's happened to rent growth over the last I don't know 10 years, when you think about.
The mark to market of your reporting this year.
Next year at what point, we had really tough comps in other words when did the real acceleration take.
Take place or is that kind of an 18 event 17 or I'm just trying to think of your average six or seven year lease term.
When do we start to see those.
More difficult comparisons.
Okay. Good question.
I'm thinking as I'm answering your question or not.
I believe this is our and I may be off a year, our eighth year of double digit rent increases. So you think you know, usually where four or five year leases and that and again it hasn't always been in the thirties. It started out in the low teens to high teens and and all that said.
And you know and this is anecdotal with one of the I mentioned the spaces, we released in California last year.
For an example, we we had about a two thirds rent increase on a big space. This is down near the Port last week I was in California with a couple of our team and they were just some of that space and they think our rents are 50% below market. So even though we raised rents by two thirds.
Wishing we had signed a one year lease nine.
Five year lease because the rent and the market has doubled since we signed it so I've been I guess I'd say personally and maybe this is the <unk>.
Brent and I have both been in the industrial market, probably combined more years, and we really want to sit down and add up but I never expected industrial rents to do what they've done in the last handful of years, we will start to run into higher comps, but.
Maybe just given that how people deliver and demand for I want to order or I won't whether its ordering online ordering by phone, however, and I want it delivered more quickly or sunbelt cities have grown so much traffic has gotten so bad that you need multiple sites.
You know in different parts of the city and thankfully I rents or just a low part of the cost structure makes me feel pretty good I've, given where you know I feel for our tenants given where their employee wages have gone in the last few years, and where transportation call star. It feels like it gives us room to push rents and we can't you know look we'll push right.
But we can't set market rents, we're following where the market takes us, but it's been pretty broad spread if you have well located well designed product. It's there's a million ways I guess, there's 1600 ways to use our buildings as our tenants show us I feel pretty good going forward about our.
<unk> to produce rent growth, even if the market takes needs to take a minute and pause because of the economy, So, but where we're probably already into some of those hard comps to a degree in that were you know eight years and the double digit rent growth. Yeah, I would just add to that Bill I think if you figure any given market, depending where you are as inquiry.
And year over year of five 8% over.
Over the course of a five year lease when you're looking at 25% to 40%. So I don't from a comp comparable standpoint, I don't know like coming out of the great recession, where you might've had some of those comparables.
If the market can maintain or it has maintained that sort of gross I don't know that there was anything that was quote left behind or that was pre a certain hard date like it was in the great recession, but yeah I think it really comes down to demand and the health of the market in a big you know whether or not it can stay in that I think the comps as marshall's, saying if kind of just continued to.
Kind of step on each other moving up and up and not necessarily you're not having a soft spot to look back too.
You know it may be if supply comes down next year's Marshall alluded to it maybe some of the developers becoming more.
And the inability to access capital and slow that down and if demand can hang in there then hopefully those get some be some drivers to you know help rents hang in there. So if demand hangs in I think will the comps will be there.
Yeah, No I appreciate it I want one of those two follow up questions.
A two parter hopefully short answer sure dummies up too much time, but on.
The construction environment any change in our knee dressed as a little bit.
On the horizon.
But any change in the lease up duration on average.
Of your new development pipeline and then second of all.
I'm, assuming the cost overall to build or at least starting to come down if they haven't already come down when do you think about land and do you think about Oh some of the construction materials. How far are we off of peak if we are off of peak pricing. Thanks.
No I think and maybe I'll answer.
I answer them in reverse order I think where we're maybe slightly off of peak were seeing faster delivery times, a little bit. So that's been that's the good news and that'll help fan out the supply pool.
One thing it just takes longer for everybody to finish construction. So the supply numbers have gone up just because of the gestation period to deliver buildings and we've seen some pricing come down theres been some offsets what I'm hearing is roofing materials, and this or that or down the concrete prices up so were maybe.
Five no more than 10% off the peak pricing I think that will take another quarter or two to really start to play out hopefully.
And then on demand, we still feel pretty good our demand for our development. Yes, Yes, we you know and to me we missed a spot on horizon West and it was a good question, but that's that's really one tenant you know look if we're 50000 feet. We would've been 11 for 11, so I wouldn't I would hesitate to take that as you know I would take our.
99% leased as a better read on market industrial and I know I'm selling here, but that's.
Truth, that's over a larger pool of assets than the one building, where we got 50000 feet. So we feel still pretty good we leased over half a million square feet this quarter and our development pipeline. We've got some other pre leasing I think as tight as the markets are it'll be interesting I think the push coal will be.
What we're hearing is there's really the lack of available space you know I had dinner with a tenant rep broker the other night and they were complaining how their business isn't fun, because theres not many options to show their tenants and everything they show them, there's competition for and things like that and then the other flip side of that.
That is every tenants, taking a little bit longer to make a decision. What we're hearing as leases are still getting signed but the decision, making probably rightly so given the economic climates, taking a little bit longer. So we'll keep watching the development pipeline pretty closely we think it's been a great way to create.
Earnings create N a V over the years for us and we will.
You know trying to really let the market tell us where we need where we need to take that next year. We've we've certainly built more buildings to last couple of years than I would've estimated to begin the year and if the market slows will slowdown our development pipeline and as we mentioned we've already kind of pushed the yields we need to given where our cost of capital has moved during the year.
Okay.
Thank you for the time.
Sure. Thanks Bill.
We have a question from keeping Kim from truest. Please.
Please go ahead.
Thank you good morning.
Good morning, Marshall I wanted to go back to your comments about smaller speaking perhaps not.
Equating to higher risk or more fallout in a recession I was wondering if you could just provide more color around that.
And.
How has your portfolio I'm sure it has changed over the years.
How has that portfolio.
Handled a moderate recession.
Yeah, I guess going back we've been good question.
A couple of items when we look if if if.
These are you know look at our top 10 tenants in some of those names are I was really looking at some of the leases. We signed this quarter, where I think I think people think of smaller spaces. Its key band Brenton Marshall, We just left our garage and opened a space, but we've you know within our development pipeline I mentioned train.
And Red ball HD supply Frito lay Walmart those were all in the last month to two of some of the leases we.
We historically have quoted bad debt I would have probably told you two or three years ago 40 basis points of revenue and that's really moved down in the last call. It 10 years and down too.
Kind of in the 2020 basis points. So some of that with the market. This tight where tenants are in trouble, we can backfill their space at a higher rent and get the term fees is what our team has done a good job. If I go all the way back I'm kind of looking at our bad debt numbers in 2008 2009, we were probably.
Reached about 100 basis points.
And then since then it isn't it dropped dramatically so probably the great financial crisis, we were a much different company in terms of size in and probably tenancy to we wait it out a lot of.
A lot of our rent deferral customers during the Covid time line, we were able to replace thankfully in a strong market. That's a great time to improve your credit so at the peak and then in 'twenty 'twenty during Covid.
Yes, looking at that all we were about 75 basis points of bad debt, but last year, we had negative bad debt. So that we recovered a lot of the tenants weighted reserves and most of that like this quarter. The bad debt was a tenant and even then it was a straight line rent write off not a cash not back rents that we had right.
So that's a lot of stats in a short period of time, but I hope that's helpful.
Yep.
If you think about the GSE.
So you're not alone in this but you guys did lose occupancy, but maybe not that bad but you have a lot of them.
Yeah, I'll put in quotes a lot right, it's all relative but you had kind of.
Not renew and your occupancy went down a couple hundred basis points. So I'm just.
I guess can create.
Portfolio composition today versus maybe the GSV is there something structurally different about it do you have left like housing related tenants.
Any kind of color you can provide around that.
I think and Brent chime in what I would say is <unk>.
Some of our markets are that much more infill that much bigger cities Dallas Phoenix Orlando.
So we went to those markets. They were growing in 14 15 years later, they're that much larger so that and that I think will do a little better we've got a little more you know that there's much more to the city then there was.
I know, we talked about Fort Myers, and someone said in the last downturn homebuilding was 105% of the GDP in Fort Myers and areas like that and it's still a fast growth area. So I feel better about the cities. We're in you know back then we were more concentrated in certain markets that were more we've spent a lot of time to.
Last handful of years spreading out our geographic diversity. So I think that you know the tenant diversity and the geographic diversity and you know I was talking to one of our one of our peers. The other day and their comment was during the GSA occupancy dropped I believe it was maybe 400 425 basis.
And one difference today, one if we go into something that severe so I guess, there's that if the the good news is market wide occupancy we're probably.
500, 600 basis points higher Pik pending which market you pick the markets are that much more full than they were heading in to the financial crisis. So this one feels more government induced then homebuilding induced and things like that in terms of just raising interest rates to finally.
For pole inflation in line and I'm glad that you know well.
Whether our portfolio is at 99% and our markets are at you know.
95% to 99% leased as well I felt a little better.
It may not be as severe as the financial crisis, and I think supplies, but I mean, we're probably that Mike rahm rambling, but that much more institutionally owned and all of these markets. So I think even if it's a local developer they've got an institutional financial partner, so they've probably already stopped merchant developing actually they have stopped in the <unk>.
Forwards and things like that I think supply will shut off faster than it probably did and say Oh seven O eight.
Okay. Thank you Marshall.
Sure.
Yeah.
Our next question comes from Michael Carroll from RBC Capital markets. Please go ahead Michael.
Yeah. Thanks, So I wanted to touch on your your current market rents today given that your portfolio is a little unique with the infill shallow bay type exposure I mean, how different is rank growth within your portfolio versus the rest of the market. I know you said earlier that Atlanta ranked growth was up I think it was 18.
Percent, what was your portfolio's market rents up compared to that in Atlanta compared to that 18% number that you highlighted.
Good morning, and just looking back or not.
I'm not this under 18% was what I was quoting from C. B R. A N a.
I'll promise, we didn't rehearse. This we were 25% just north of that cash in Atlanta year to date, a little over 31% GAAP and then Atlanta, maybe it helps too.
That same CBRE piece, the market vacancies four 2% and shallow base three 4%. So typically what we say theirs.
You know, it's helped that our peers are larger and mostly they are private you know what's the pension fund advisors, they've got so much capital to put out and it's easier to build because of the because of the land availability and the zoning on the perimeter of our city than on an infill site.
That's where the big boxes. The average building for example in Atlanta is about 325000 square feet and so most of ours are you now maybe 90 to 150, so it's a little bit different product being delivered and and I think that helps us avoid being commodity and hopefully allows us to push for.
Hence we've seen even smaller spaces, one O one of our it was.
One of our private peers was talking about there.
Basically the demand they're seeing in like 15 to 25000 foot space as our average tenant size is in the low 30, so a little bigger than that but we've seen some doubling of rents in it that's as much a function of just to build those spaces out the tenant improvement allowance given construction cost you need to have rents like that no one can afford.
Word to build out a building out a 20000 foot space by the time, you get the office and the restrooms and the warehouse line and gets awfully expensive so that that should help us to push rents and it steers a lot of our peers away from it because it is just as much work probably to build an 80 almost to build a 19th out 80 90000.
Building as it is a 600000 foot building on the edge of town, probably harder to go through the zoning.
Okay, Great. Thanks, Marshall and then you mentioned earlier in your prepared remarks that you're underwriting for development has changed I think you touched on a longer a longer timeframe. He did I hear that correctly and were you referring to the construction timeframe or or on the lease up of developments that you've been.
<unk>.
It is it's really more and I apologize if I Miss spoke at <unk>.
Well, maybe where we've looked at the yield you know kind of the yield hurdle for new developments. We were we would have looked in the fives, maybe on the right right market right Submarket now we're in the sixes I think you know our lease up of development will still pull buildings into the portfolio at the earlier of 90% occupancy or a year past.
<unk> certificate of occupancy and thankfully those have been rolling out and its been the later of Hey, where we're 100% leased we're moving in the portfolio all but the one we stubbed our toe a little bit this quarter. So no changes other than given our cost of capital and the market cap rates, even though it's still pretty fuzzy where cap rates are.
Are aware theyre going to subtle ultimately we've pushed the route our yield requirements up and that's what we still underwrite to current market rents and current construction cost and all the things like that that we've historically done.
Okay, great. Thanks.
Youre welcome.
Okay.
We now have a follow up question from Craig Mailman from Citi. Please go ahead.
Hey, guys. Thanks for taking the question just quickly Marshall I apologize if I didn't hear that did you provide a kind of an embedded mark to market for the portfolio either for about 23 roll or just kind of in general would have won that you could provide.
Yeah, we I know a couple of our peers do that end.
We've looked at it we just haven't been that that great and in portfolio. We've always said, we haven't done it for 2023. So short answer is no. We haven't done that we've always hesitated taking that you know the time, if a lease doesn't roll for 345 years and market rents changing so much. So it's something we've discussed and it's.
That's something we really I don't see the market changing much from where it is today unless demand really unwind, but we've not formally disclosed a mark to market.
Okay, and then just second yeah, I know, we've talked a little bit about the development pipeline and maybe some slowdown here just Brent as you look out at kind of what's delivering what maybe starting I know maybe early for that in the budgeting process, but.
Do you feel like cap interest burn off is going to be material in any point or because things are coming on so well at least from an earnings impact, it's not something to be that concerned about yet.
It would be it really wouldnt be something we'd be that concerned about credit analyst, but you know if the market dictated such either.
Slow down leasing or excess cost of capital whatever if we you know whatever our development starts might be this year I think we're projecting 375, if that number were to come down next year as it you know that would have an impact on capitalized costs. Obviously, you would be doing it on a smaller number whether its cap interest or you know the capitalized cost at all.
Offset.
Overhead and G&A.
Yeah. So at this point, but it doesn't feel that it would be that way, but that would be the you know the thing to watch Craig It would be you know kind of a proportionate and we just closed those capitalized numbers you know and the tables.
But you know if that number were to be 275 or whatever the number is versus 375, then those capitalized numbers would come down as well they would move in a in a proportional sort of movement.
So that would be something to keep an eye on certainly that sort of ancillary side notes I mean really what's going to drive our decision, making is the strength of the market and access to capital and like I say, we're in a good position to.
Enter the year in 'twenty, three kind of continuing where we are but it's just something we'll have to closely monitor both from a continued hopefully strength in leasing and then also from.
What's our access to capital and what does that cost and so we'll make those decisions as we get there but.
If it were to be lower and wound up being lower than that would have some some bottom line impact certainly.
But like you say a little too early to tell at this point, you know where that will shake out.
Thank you.
Yep.
Yeah.
We have a question from Ronald Camden from Morgan Stanley .
Please go ahead.
He is calling in for Ron.
Wanted to follow up on some of the earlier cost of capital questions I understand yes.
And get some debt offerings and more recently.
I think those are priced.
Second quarter of the year. So just if you were to offer the same type of debt today.
What would that be relative.
Relative to the under 5% cost.
On a blended basis previously.
Yeah. It would certainly be higher I mean, obviously cost moves and you're right. We like I say, we intentionally been pretty I guess I would say.
Aggressive into the early part of the year with anticipation of higher B a movement in cap rates and certainly we were we're right in that but if we were to look at long term debt today for us and again I'm talking more estimated because we haven't been in the market recently and it can move it moves while we're on the phone call today and that is how much it can move but.
Yeah, I would say it would probably be somewhere around that six area for us on long term, that's like 10 year plus fixed rate debt, but as I mentioned earlier, we're looking at some shorter term options that give us flexibility as I mentioned, maybe exercising a portion of the accordion to expand our revolver balance.
Looking at a few holes in our lottery, where maybe it would be shorter term debt maybe priced a little more favorably. So we've still got a few other levers that we're looking to pull in process.
But if youre looking at longer term dead I mean, it certainly has moved up it continues to move up and you know as we've been talking about this morning is one of the one of the factors as we get out into next year that we're gonna have to monitor in relation to our cost of it relative to what we can.
Invested at.
And it makes sense and then just on internal.
Growth.
I think some of your peers talked.
<unk> talked about.
There's a big spread between.
Leasing spreads on commenced leases versus sign leases or are you guys seeing that within your own portfolio as well.
And just on a cash basis and on a GAAP basis.
I'm not sure I follow that I mean, our our numbers have been pretty consistent for a number of quarters now in terms of cash rents being strong is still slightly inclining or increasing it than GAAP numbers increasing.
From signing to commencement generally for development there could be a few months and for our vacant space is generally pretty quick turn so I don't know that we've seen any big change from signing to commencement I'm not sure if I totally followed the.
The question I don't know if that helps.
Yeah actually my question, Yeah, just if there was kind of a big.
Big jump in market rental rates.
The past couple of months given there is kind of like he said three to six months lag between them you know when your comments are on a right versus you know when you sign the right.
I know.
Yeah.
Our fears historically have waited till they've delivered buildings.
To really start leasing and in it look that's paid off the last few years, we've we'd like to ideally we want to run out of land in a park and things like that so we've been maybe a little more chicken usually if a tenant is ready to things get bad they turned bad quite play so if somebody's ready to sign a lease and we're a long term owner will.
Go shape, the rent hard, but fairly but we'll go ahead and sign a lease when the when the tenant is ready to lease or when they're ready to renew and do it almost is dollar cost averaging if we've got 3 million square feet or 4 million in a market. We're going to have some expired a good time and some at a bad time in the market. So we will we will go ahead, but I agree with Brendan.
And your comment earlier thankfully they've been moving up the last several years and continue to have that upward pressure today.
Great. Thank you guys.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Longe for any closing remarks.
Thanks, everyone for your time, if there's any questions or follow up questions certainly Brent Stacy Tyler and myself are available and if not we look forward to seeing an awful lot of you at NAREIT in just a couple of weeks in San Francisco, Thanks for everyone's time.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.