Q4 2022 Eastgroup Properties Inc Earnings Call

Good day and welcome to the Eastgroup properties fourth quarter 2022 earnings conference call and webcast. All participants will be in a listen only mode should you need assistance. Please signal 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.

Press Star then one on your Touchtone phone and Swift draw. Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Marshall Loeb President and CEO . Please go ahead Sir.

Good morning, and thanks for calling in for our fourth quarter 2022 of the 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 the interlock and at that time and.

And our non-GAAP measures.

Regulation G.

Please refer to our most recent financial supplement to our earnings press release.

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 the Safe Harbor security back with Great team 33, The Securities Exchange Act of 1934 in the private Securities Litigation Reform Act 19 anytime.

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 information currently available to the company.

Assumptions you have made.

We undertake no duty to update such statements or remark, whether as a result of this new information future, our actual events or otherwise such.

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 our most recent annual report on Form 10-K for more detail about these risks.

Good morning, I'll start by thanking our team for a strong quarter and year. They continue performing at a high level and capitalizing on opportunities and a fluid environment.

Our fourth quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial markets. Some of the results produced include funds from operations coming in above guidance up 12 first over 12% for the quarter and almost 15% for the year well ahead of our initial fork.

Cash.

This marks 39 consecutive quarters of higher <unk> per share as compared to the prior year quarter truly a long term trend or.

Our quarterly occupancy averaged 98, 4% up 110 basis points from fourth quarter 2021, and at year end were ahead of projections at 98, 7% leased and 98, 3% occupied.

Quarterly releasing spreads were robust at approximately 49% gas and 34% cash.

For the year, releasing spreads were also a record, 39% and 25% GAAP and cash respectively.

Cash same store NOI reached eight 7% for the quarter and eight 9% for the year.

And finally, I'm happy to finish the quarter at $1 82 per share in F. F O and the year at $7 per share up 14, 9% from 2020 one's record.

Helping us achieve these results is thankfully, having the most diversified rent roll in our sector with our top 10 tenants falling to eight 6% of rents.

In summary, I'm proud of our 2022 results statistically it was our best year on record while the majority of the year was marked by economic uncertainty and capital market dislocation.

We continue responding to the strength in the market and user demand for industrial product by focusing on value creation via raising rents and new development I'm Grateful we ended the year 98, 7% leased.

With the rent growth more geographically widespread in 2020, two creating a record results.

Another indicator of the market strength was our average annual occupancy of 98% setting another record.

And as we've stated before our developments are cold bond market demand within our parks.

Just on a read through we're forecasting 2023 starts a $330 million.

And 2022, and we delivered 19 developments 18 of which are 100% leased and even when including value add acquisitions. The weighted average return of seven 1%.

Last year's successes aside we continue to closely watch demand with the goal of a balanced fluid response pending what the economy allows.

Given this capital market volatility, we're taking a measured approach towards new core investments. We're also carefully evaluating development sides, given the level of demand and the longer timeframe often required to play sites and to production.

Brent will now speak to several topics, including our assumptions within our 'twenty to 'twenty three guidance.

Good morning, our fourth 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 fourth quarter exceeded the high end of our guidance range at $1 82 per share and compared to fourth quarter 2021 of $1 62, representing an increase of 12, 3%.

Fourth outperformance continues to be driven by multiple factors, particularly rental rate growth and the successful pace of our development conversions from.

From a capital perspective macroeconomic concerns have caused the stock market to decline, including our share price and as a result, we only issued $75 4 million of equity during the year apart from the toll at Anatolic acquisition in June .

Virtually all of that issuance occurred in the first quarter of 2022, we have been intentionally deleveraging the balance sheet over the past several years, placing ourselves in a position to pivot to debt proceeds for capital sourcing during.

During the fourth quarter, we closed on the private placement of two senior unsecured notes totaling $150 million. One note for 75 million has an 11 year term and interest rate of four 9% and the other 75 million note has a 12 year term and interest rate of 4.95%.

Yeah.

In January 2023, we closed on 800 million unsecured term loan with a seven year term and an effective fixed interest rate of 5.27%.

Also of note in January 2023 we successfully expanded the capacity of our unsecured bank credit facilities from 475 million to 675 million, we remain conservative conservatively drawn on the revolver. This step was taken simply to provide additional capital flexibility in a volatile market.

<unk>.

As a reminder, the company does not have any variable rate debt other than the revolver facilities and our near term maturity schedule as light with only a 115 million scheduled to mature through July of 'twenty 'twenty four.

Although capital markets are fluid and Rosen cause our balance sheet remains flexible and strong with healthy financial metrics, our debt to total market capitalization was 22, 4% annualized debt to EBITDA ratio was five one times and our interest in fixed charge coverage ratio is at eight eight times.

Ames.

Looking forward <unk> guidance for the first quarter of 2023 is estimated to be in the range of $1 75 to $1 83 per share and $7 30.

To $7 50 for the year.

The 2023 F O per share midpoint represents a 6% increase over 2022.

So some of the notable assumptions that comprise our 2023 guidance include an average occupancy midpoint of 97, 2%.

Cash same property midpoint of 6%.

Bad debt of 2 million $330 million in new development starts common stock issuances of $100 million.

And issuing $350 million in unsecured debt, which will be offset by 115 million of debt repayment.

In summary, we were very pleased with our record setting 2022 results.

Thank you each group team members that are listening to the call as.

As we turn the page to 2023 we will continue to rely on our financial strength the experience of our team and the quality and location of our portfolio to maintain our momentum now Marshall will make final comments.

Thanks, Brad.

<unk> said in closing I'm proud of the results our team created and we're carrying that momentum forward internally operations remain historically strong.

That said the capital markets and overall environment remain unstable.

And while never fun to experience a couple of thoughts that may prove helpful.

First the industrial market has been red Hot the past few years. So some settling of the market, we view as healthy for sustained positive environment.

Secondly, this is leading to a marked decline in development starts as a result, we expect construction costs to decline later in the year and a drop off in new supply.

In the meantime, we will work to maintain high occupancy while pushing rents.

And longer term I remain excited for east group's future. There are several long term positive secular trends are occurring within the last mile shallow bay distribution space and sunbelt markets that will play out over years, such as population migration evolving logistics change onshoring.

Near shoring et cetera, which we are well positioned for and we'll now open the floor for any of your questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw. Your question. Please press Star then two please limit yourself to two questions and if you have further questions you may reenter the question queue.

At this time, we'll pause momentarily to assemble our roster.

And the first question will come from Craig Mailman with Citi. Please go ahead.

Good morning, everyone.

Maybe Bryan or Marshall I, just wanted to kind of go through.

Some of your underlying assumptions in same store here and there as it filters into SFO. You know I guess you guys are the same store side are baking in a little bit of a deceleration, but it seems like you guys have 50 to 75 basis points in there a bad debt reserve.

Which you guys Havent really recognized much over the past few years, but could you go through some of the other puts and takes maybe from.

What you're assuming from market rent growth or an embedded mark to market at least on the 2023 roll and whether you know the occupancy fall off that you have.

If you're starting to see the seasonal decline in one queue or if this is really just.

A placeholder, but just in case, given you know Marshall your commentary about the uncertain macro environment.

Yeah, Hey, good morning, everyone and good morning, Craig Yeah, It's yeah, I hate to call. It a placeholder we do as a reminder, build our budgets from the ground up so we literally go with the guys in the field space by space on leases that are going to roll this year or vacancies make those assumptions rolled that up.

You know there are some tweaks made to that but that did put to produce the 97.2% occupancy you know, it's it's more challenging than you might think to go through your portfolio and tried to scrub it to.

Ah 98 number just as you go space by space to 97, two as you're looking at it individually feels very full.

But you know looking back a year ago, we did guide to a 97% flat occupancy in our same store were about five six of course, thankfully, we were able to accomplish a 98% occupancy which lifted same store to an 8.9% on a cash basis. So certainly if occupancy were to beat and get back there or maintain that.

98% range you know certainly we feel like we could you know.

Equal more to last year, we just you know on the front end of things we just did.

Didn't I guess, you would say stretch or pull that number from 97 two to 98, it's not specific to a large tenant or two.

Yeah, we probably didnt push overly hard on our rent assumptions during the year in terms of new and renewal activity.

But so yeah. That's we hope there's upside I'd point out too just to the group as well Craig that you know we made a lot of California add to our NOI last year, which we're excited about I think that'll be a tailwind to future same store growth, but just a reminder, that for example that large tulloch acquisition, we made last summer of ARP seven points.

6 million feet that we held in California at 12 31, there's.

There's 2.9 billion feet of that or about 38% of that that's not in the 23 same store calculation. So again that will make its way and once we have full calendar year comparisons for that part of the portfolio, but so yeah I would say as we typically do the grid the assumptions, we give and provide those are basically the assumptions that produced.

The midpoint in this case, a 740, which was right basically on consensus.

Certainly as we can do better than those which we hope to do then certainly there's upside there but for Marshall if you want to talk about rents or mark to market I think you mentioned sure.

Craig and I agree with Brent I would say if its helpful and.

And usually we've been thankfully to the low side. The last few years in a row, we've been projecting kind of a reversion to the main in terms of bad debt and occupancy and we've been wrong. The last few years. So we we have occupancy coming down we've got bad debt, if we're heading into a recession this year, which.

April 10.

We do going back to kind of a historical kind of last year. We were under 140000 in bad debt. So we've been fortunate I know, we get questions about the smaller tenants in crowded in the last couple of years, we've had very minimal bad debt thankfully, but we've got that budgeted Ann so well again I hope we get it.

Chances to beat it during the year, but really this year or I can say, our occupancy and percent lease through yesterday is pretty similar to where we ended ended the year surrounding you know call. It 99% leased 98% occupied the team in the field is still pretty content.

I guess, a robust people out touring space kicking tires.

All along the process so from tours to leases out and things like that so we don't have any thankfully none no large known move outs this year or anything like that that we're worried about but we just keep thinking okay. It up last year was a record high occupancy for the company that we may go down from that but.

And but we've got pretty good we've got good embedded rent growth thankfully last year, we saw that expand California, we've had strong releasing spreads but.

Florida, and Arizona, where both north of 40% GAAP re leasing spreads last year and that doesn't feel like it's slowing down in <unk>.

And then if I jump ahead, 12 months, we really saw supply and especially shallow bay supply stop when the capital markets got so unstable. So many merchant developers are on the sidelines. So we think.

And as the supply pipeline is kind of.

<unk> to drop each quarter, there's going to be a lack of new supply. So if we can hang onto this occupancy you know.

Hopefully a year from now or even more bullish assuming the economy and our tenants can just hang in there. So that's a lot of info for one question, but I hope that's helpful.

It is I just wanted to circle back because I know you guys don't kind of come up with a portfolio of bulk to market per se, but.

Are you assuming at least some guidance on the roll up that you know the blended mark to markets on a cash and GAAP basis for 'twenty three expirations are pretty similar to 'twenty two or is there a.

Delta one way or another.

It's probably yes.

The guys in the field as Brent mentioned they'll budget each space. So if he said what do you think it it feels like the mark to market I'm expecting the last this is on a GAAP basis. The last couple of years, we've been you know.

Low thirties, and then high Thirty's it feels like well continue.

Assuming the economy, just stays okay and doesn't retreat that will match those numbers in terms of budgeting, they've probably budget it a little bit lighter than we typically have budget at a little below where our actual comes in so they put the numbers on each suite, but I think in terms of our mark to market.

It was interesting and I think that's more of a mix. We've we had a stronger fourth quarter than some of our peers, where they deteriorated and.

I think the market continues to move upward and even say for our peers. It was probably more of a mix of who have what leases and where they were in fourth quarter, it's up better measure over a longer period of time, but our mark to market is.

It is still solid and it should look I would expect twenty-three to look similar to 'twenty. Two does in terms of our ability to push rents so far in the year.

Okay, and then just turning to the development starts you guys are are flat year over year and I know, it's incremental build out our parks I mean it is.

But can you kind of break out how much of that maybe built to suits because people are running out of space to be more versus you know maybe kind of inquiries that make you feel comfortable I know at 98% occupied you basically have zero inventory.

But just you know as we think about risk mitigation.

How that stacks up.

Sure. Good question, you know ours and I think maybe that's one difference from our peers almost all will do a few build to suits or a prelease is probably more that but its really all spec development that said.

If I use just Texas for example.

Just over a third of our development leasing as existing tenants so whether its tenants within the park are some buildings, we have around the corner. So we're not as you mentioned at 99% leased but we've always said look if we don't supply that space and we do a lot of the tenant retention, we lose as we weren't able to accommodate someone's growth needs are.

I have the right space and a quick enough time periods, an awful lot of that will go to tenants within our portfolio, but in terms of pre leased buildings at this point theres not many although we've got you now.

A number of conversations we've had more and more single tenant.

A single tenants take a multi tenant building. So that's moved US more quickly through the park, where someone will come along and so I will take the entire building and then where we're trying to move fairly quickly to the next building and the team in the field feels pretty strong about the 330 million that was really where we.

We felt coming out, but again I hope that's a number if the economy can stay okay. They would probably you know probably were lower on rents in the market and there are probably higher than the 330, if we let them roll it up just on their own without kind of trying to throttle it back a little bit and then some of our challenge right now is just the <unk>.

Capital markets. So it's been a disconnect since second quarter last year of the market is so strong but that costs are higher and our stock prices moves around every time, the fed seems tomatoes, chairman Powell speaks our stock price jumped so with that some of that challenge is probably more stress on Brent than it's been historically.

Right.

And just on that point I know I'm over the two question limit but you.

If your equity price is not where you want it to be as a threat as you look out to the end of 'twenty, three or 24 kind of your pro forma run rate on EBITDA with Mark to markets and development deliveries how much could you fund purely with debt without moving your your leverage ratio.

Beyond where you guys are comfortable.

We can fund you know what we need to do this year with that and keep our debt to EBITDA in a very good manner, I'd say mid five or better and our goal has been throughout this to say we wanted it to always maintain a five handle and we really haven't pushed it on an annualized run rate basis, we haven't really pushed near that.

But you know the equity has bounced back here recently, so they could maintain that I think you know we talk about debt and equity issuance in our guidance table, but I would say those are a couple of the most probably fluid numbers in the entire budget and what I mean by that is we know we need capital and you begin the year and you plug something in but the budget certainly will dictate what we.

Do you know what we'll do will be based on availability and so you know equity our prices improve so with that.

Or to maintain that I could see us being much heavier on the equity issuance and lighter on the debt side, but to your point. If we had to go purely from a debt perspective, we could you saw in the release, we added 200 million to our revolver capacity, we've always been pretty light user of the revolver in terms of not maintaining a large balance and we still want it.

Keep that sort of prudent approach to keep plenty of block dry powder. So that we don't have to have any knee jerk reactions to market conditions, but that just gives us more leeway to so yeah.

I feel your long term interest rates for us in terms of long term potential that have they're still high but they've come down some from the peak like I said equities more attractive so I'm more optimistic right now about our capital sourcing and the price of it than than say three months ago.

Great. Thanks.

Again, please limit yourself to two questions. Our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey.

Good morning down there.

Yeah.

You guys have a have a track record of always coming out with very conservative guidance.

Marshall the past few years, you've talked about you know reversion to historic just given the outperformance in the portfolio and this sounds a lot like it and yes.

Given the interest rates given the issues that we've seen headlines with the economy.

You have exposure to like you know housing markets like Phoenix.

You have exposure to California, you have exposure to a number of markets that conceivably would see some headwinds and yet nothing in your commentary and nothing on the credit that you've spoken about as far as tenant health indicates anything of a let up so I'm just sort of curious.

Brent you mentioned that you do build the guidance space by space and you're baking in that 80 bps there.

Klein, but nothing in what you guys have talked about really indicates that so is it more just a cautionary element to the guidance of saying look just given everything going on this year. We just feel this is prudent or are there actual tangible things that are causing you to consider the occupancy declines.

That bad debt goes back to $2 million from only 140000 last year.

Okay. Thanks, Alex that's a good question and I think it's more prudent and call it measured conservatism and I look at I Hope I hope in hindsight, we are conservative there's no specific tenant issues move outs bad debt things like that that are driving our assumptions.

So much as I do get concerned about.

That cost wage cost all of the things like that and it's I think each group's balance sheet is in a good spot, but with 1600 tenants I do worry about our tenants' ability to make it through and maybe the second year of an economic doldrums are heading into a recession. So we keep waiting for signs and paranoid of science.

For cracks in the economy, but thankfully to date, we've not seen it but we're trying to be a little bit anticipatory. If it comes in maybe it's a little bit.

You know look I think at some point things nothing specific but hopefully it's prudent to be a little bit conservative in and look we will certainly get several chances each quarter. During the course of the year to give you our update.

And again, we'll do our best this is you know, we always kind of internally, saying, we have our budgets and then we have our goals. So this is our budget and our goals to beat it.

And then the second question is.

As far as the supply picture.

Hi.

Yeah.

You said that.

You guys are being more cautious on how you think about new construction and yet you also said that your competitors, presumably the merchant builders are pulling back which is giving you more pricing power. So I'm just trying to understand the two of those points. If your competitors are pulling back would that make you feel more confident about investment in.

And new starts or is it again your caution about the overall economy that independent of what your competitors on the on the development side are doing you're nervous about committing new capital in the current environment, but at the same time you are benefiting as your competitors pull back that it gives you more pricing power on your available space.

To understand the two the two comments.

No a little of work maybe.

Throw in a third element up Youre right. We feel good that our competitors are a lot of them are on the sidelines, we're seeing instances, where someone's tied up aside gotten zoning permitting and they are not able to get.

Debt <unk> equity to move forward and when we've been able to get some repricing.

We stepped into a situation a couple of different situations in Texas, one in Austin last year, when we bought out private companies that weren't weren't able to perform at the end of their contract. So that's that's optimistic the conservatism is.

When we do deliver these buildings and thankfully for our product type and especially shallow bay, it's it's a little bit shorter, but it's still nine months out what type of economy or are we going to be delivering into and since it's mostly <unk>.

Almost all spec development, a little more anxious about other tenants are people going to start renewing and just staying put rather than continuing expansion plan. So we feel good about supply we're hoping demand is there and with our cost and things like that we've actually won.

One of the things that.

I will say that.

Theres a lot of different metrics on our dashboard.

And I know a lot of your peers focus on the cash same store NOI, which we do too, but where we were continuing to push our development yields up. So this year of that 330 may and we've got specific buildings and you're pushing last year, what we rolled out including value adds came in just north of the seven we're probably a <unk>.

<unk> seven this year in terms of development hopefully with rents continuing to go up we'll be able to to meet or exceed that so I'm proud of our development yields and kind of instantly Navy creation that that create so we feel good about development and or maybe some opportunities where we're seeing things.

Here, and there and you're probably seeing them more than really chasing them hard at this point, where people's construction loans have come due and things. So there may be some no I don't think there'll be a lot of distress out there, but we don't need a lot there's going to be some people that get caught on the bad side of the capital trades, where we can either pick up land sites are partially.

These buildings.

In addition to our development pipeline this year to create some value in F O as well.

Okay. Thank you Marshall.

Sure Youre welcome.

The next question will come from Todd Thomas with Keybanc capital markets. Please go ahead.

Hi, Thanks first question I guess I just wanted to follow up on that line of questioning a little bit as it relates to the company's cost of capital and Brent you know the stock's off the bottom here.

You know in your cost of capital has improved from where it was over the last several months I mean, how are you thinking about acquisitions.

Acquisitions today, and you know do you feel a little bit more optimistic about you know either you know are both core investments or non stabilized deals and are you starting to see deal flow begin to pick up a little bit.

Yeah, It's Marshall that we're obviously daily talk in tandem as he said there yeah. It's unusual to have this much volatility, particularly.

And our stock price, we're not accustomed to especially when you basically have put forth a historic record year from a positive standpoint, yet the equity side of it got crushed last year. So yeah, I think our sort of sideways guide on capital outlay via development or whatever else was more just a we felt like a prudent measured way to come out of the gate, but.

As you mentioned, if the equity price can hang in there and we can source capital that we that we feel is attractive and we can make a good spread from which in today's market. We feel good about that that can change I mean like I said in our press conference. These days it seems like but so that's something that we talk in tandem the guys in the field now to <unk>.

Their eyes open for opportunities if they can find them, we like E. R. A pricing in that moment, we'd like to think there is upside to those numbers with you know if we can match good cost of capital with good opportunities there, we'll lean into it.

Yeah, we didn't feel like coming out of the year just dialing in a bunch of you know of opportunities just kind of button, Dan and that type thing, but so I hope that answers it but yeah. We will work in concert, but yeah. We feel good things have rebounded price looks more attractive more available to us interest rates, albeit.

Higher than we were used to have come down. So it's a good start to the year and we feel optimistic to have those chances to to use the capital.

Okay.

That's helpful and then I guess my second question.

On the lease up and under construction pipelines, just any any additional comments there on sort of the pace of leasing.

How that might compare to 2022 and just looking at those sort of pipelines are for lease up and what's under construction I mean do you see potential for.

Some additional conversions to take place ahead of schedule you had a couple this quarter you know maybe maybe some you know that are slated for twenty-three later in 'twenty three you know a little bit earlier than perhaps some of the 'twenty four is making their way into 'twenty three.

No. Good point that we were we were happy.

Of the ones that rolled in last year and really we were we were 18 of 19 in and one of those the one that's it's in the eighties actually had some tenant issues. So it was right now knock on wood it was briefly at 100%.

And look that's about it may actually be our only vacancy in Orlando is in the one that that's a little bit shy right now I hope so good again.

It's been interesting the last few years will always design, a multi tenant building, but more and more more frequently will have a single tenant take it and all of a sudden then it becomes a race too for a construction guys. How fast can they deliver that building. So you know.

Looking at what's under construction, there's a number of those I think that can move to a 100% usually they're not.

The size of our buildings are projects thankfully that we can move along fairly quickly. So I'm, hoping some of those which again could be upside to this year's budget certainly will help next year. If we can get them delivered later this year with the tenants and toe.

And then that really we would have been a little better in fourth quarter I'm happy with how the year turned out, but hurricane and slowed down delivery of a couple of fully leased buildings in Fort Myers that we had last year. So yeah, we feel good and the activity I would say last year at this time. It was things were really red Hot in terms of 10.

And it's moving pretty rapidly worrying about finding space and things like that and then <unk>.

About second quarter, I always think of it as kind of a light switch when Amazon kind of said Hey, we overdid it on our space growth over the last couple of years slightly that's when things have slowed down. So there's good steady activity, but it's not parabolic I've heard some of the brokers use where it was kind of late 'twenty one early 'twenty two.

Just felt so frenzied you that that also makes us although we've all done it long enough a little bit nervous that anything that you know it takes off like a rocket usually lands as gracefully as a rocket so.

It feels like there's.

Prospects for every space, but not five or six or where a tenant rep broker was telling me his job wasn't fun anymore. Because they are in every space had a handful of tenants lined up for it so.

Good we just need to <unk>.

Convert the LOI is end up signed leases, but we like the activity we've got in the pipeline.

Okay, great. Thank you.

Sure. Thanks, Scott.

The next question will come from Jeff Spector with Bank of America. Please go ahead.

Great. Thank you. My first question is a follow up on the prior discussion.

Just to confirm.

There have been any change in.

No.

Tenant demand or discussions year to date, let's say versus the.

For the second half of 'twenty two.

Can you characterize I guess, what you're seeing year to date.

Good morning, Jeff It it feels pretty similar to where it took a little bit of a holiday pause was the way. It was described in that kind of had our antenna up thinking. Okay is this the start of the downturn, but the way. It was described that when you think back to this holiday season was the first time.

People could given COVID-19 could really travel to see family and take vacations and do things. So whether it was the tenants or the tenant rep brokers or their attorneys and things like that things slow down.

For a couple of weeks the second half of December maybe the first part of January but it's picked right back up and tenant activity feels the same as it did say third and early fourth quarter last year. So we feel we feel good in our numbers are really consistent with where we were to knock on.

Late last year. So it doesn't we're not seeing any slowdown in activity thankfully.

Great Thanks for confirming.

And then on supply.

I'm sorry, if I missed this but did you quantify or can you quantify the decrease you discussed I think you said you expect a drop off in supply later in the year. So I don't know if you have numbers on kind of second half 'twenty three versus.

Second half of 'twenty, two or 'twenty through 'twenty, two and then anything on 24 over 23 at this point.

Yeah.

Well, it's not it's not as specific as I'd like it to be but maybe my description would be youll do the pipelines the numbers youll see youre still pretty full by market I mean, if you're looking at our major markets Atlanta, Dallas Phoenix some of those.

Typically if it's helpful. The numbers are big what trick.

Tricky as it's still difficult to get electrical equipment, you know HVAC C unit stock dock equipment that takes time, so what's in the pipeline moves more slowly than it did pre.

Pre supply chain issues, but I think that will start coming down pretty precipitously. The contractors are still busy. So we're seeing some leveling off of construction pricing, but for every one item that seems to drop in price. Another one comes up like concrete for example, and I think the merchant developers have really.

<unk> been put on the sidelines, there's still things in the pipelines, but what we're hearing from the contractors they are busy but they're not bidding new jobs as much looking ahead. So I think those things come out of the pipeline they won't get replaced or won't get replaced and I've heard numbers from say, 30% to 40% drop off.

And those type of that's kind of the numbers here.

Hearing I will say I think everybody is and you see it on acquisitions kind of the bid ask spread has been.

Price discovery and I think it makes sense, if if if if you may and Brent where merchant developers it would be hard to go build a building and know what our exit cap rate is so does that put them. All it's one it's more difficult besides finding your debt and equity and all complement Brent and his team for example for expanding our <unk>.

Line of credit, but that was heavier lifting by far than it would've been earlier in the year and we heard the same from a number of reach that a number of banks were just have been pencils down on real estate and pretty large banks as well. So that's tricky for us, but it's good news in that it is really putting things.

And their tracks and we've seen any number of projects where people though.

Forward sales, where someone would get a site zoned and permitted and you can flip it and make up a really good return in the last few years are going to building built we were buying our value adds were often will unleash buildings that were newly constructed but we really got priced out of that market because what we learned is another.

Meyer could underwrite rents at whatever number they wanted and rents were going up 10% a year. So we were we were being too conservative on a lot of those beds, but all that stopped so I think our product type, it's probably down 30% to 40% and probably.

We'll probably keep dropping each month from that I think I expect that number to grow I think a lot of people are nervous about the economy and if you can't get the debt and equity that's going to really slow things down and up.

Price discovery is still going on.

We've looked at any number of packages that.

Typically that it was on the market they didn't get the pricing they want it and they're looking at bringing it back out to market. So that's the story of we keep hearing two which just tells me the market. There's a disconnect on development pricing and Theres a disconnect on pricing existing assets took a pretty good degree and at some point that will settle out.

But it hasn't yet.

Great. Thanks very helpful.

Sure you're welcome.

The next question will come from Keybanc, Kim with Truest. Please go ahead.

Thanks. Good morning, just wanted to go back to some of your questions on development. So obviously you guys have a excellent track record on development over a number of years and I realized that where you're developing in your own indulge.

Industrial Park and good Submarkets may not directly compete with the larger supply deliveries that might impact a large MSA, but my question is if things slow down.

How resilient do you think the demand for your specific new development might be relative to the larger market that might be much more increase of pi in markets like Houston, and Austin and Atlanta.

I mentioned, those three because thats where.

It looks like you have to land plots to do the next round of development.

Yeah.

Good morning Keybanc.

You know look.

It's self serving but I do think our demand will be.

More resilient and that ours is more consumer related end and by that I mean, when you look at where our buildings are we ideally like to be you know in Europe , great access to the freeway system and near the end consumers, where the population is growing and Atlanta East East Valley of Phoenix, where the residential.

There's things like that in the consumer may slow down, but that's also pretty sticky. So we're not moving goods from China to New York. For example, so much is getting train air conditioning units delivered around Dallas Fort worth and.

Things like that so I think it'll be more resilient and then what I like about our model and I'll.

I'll put it on me, maybe I don't articulate well enough.

Like that our yields are much higher than merchant developer yields and and big box yields are higher than and I also thank our development risk is lower win where it may be a spec building, but we we know how the last building that we built in the park leased up and then typically we have.

Some activity and whether it's our own tenants or just tenant rep brokers in the market to kind of start that new building. So we may not have a lease signed but we have activity that we're delivering into and then the flip.

Flip side of that if the economy does slow it's pretty easy it's not corporate saying go build a building it's usually the team in the field, calling me, saying, Hey, I'm amount of inventory, we are I'm about to run out of inventory, we need to build the next one and if we know if phase III in Charlotte didn't lease for.

Sample, we know buildings.

Building. The next two buildings in phase four isn't the answer to solve phase III. So at any given time, we've stopped development are really hit pause in markets until until demand could catch up with our supply. So we will go as fast as the market will lead us and that's why we've kind of predicting that 330 million and I hope we beat that number the two.

<unk> in the field feels good about those starts and I think are a good point I liked your direction I'd like to thank the consumer's going to be a little more sticky than supply chain movements in that and that's why we've always kind of avoided ports and people can make a lot of money on port related industrial, but that's pretty easy.

To shift over time as everyone has spent so much money and investment.

Modernizing their ports over the last few years all around the country.

Okay and.

Any kind of broad commentary you can share on what you think cap rates are for good assets in good markets.

Stabilized assets and if the bid ask spread has narrowed a bit here.

It doesn't feel like it's narrowed we're not seeing a lot of transactions, we haven't been actively in that market for several months, we've looked at things and what we're hearing from the brokers mainly is that if you've got a long term say single tenant assets those cap rates and if it hurt.

All of this those have moved up the most and it makes sense those are the more bond like assets are the most interest rate sensitive, but if you've got a multi tenant project and then everyone talks in terms of Walt phrase our weighted average lease term. So if you've got below market leases that are rolling fairly soon.

Those are probably still in the fours with those pending the market may be threes in southern Cal.

<unk> is a high threes N and then we've heard of some cap rates and the fives in different markets, but you know it's.

It's one thing for us to hear brokers talk about those and another being sincere but in total we see some of those trade and that's where it could get interesting I've look if something if because there's this disconnect in the market and we can pick up a good asset or two in and ideally add some value or add to our strategy in that market.

I could see us taking some of our development capital and acquiring an asset or two but with the drop off in construction. We think construct we're expecting construction pricing drop but it will probably have to be the second half of the year not the first half of the year. So if we wait a quarter or four or five months to start a new.

Development, I think there'll be a little bit of reward again that demand may be I don't want to miss the demand, but our cost to make our work in our favor because everyone's on the sidelines.

Okay. Thank you.

Sure.

The next question will come from Samir Khanal with Evercore ISI. Please go ahead.

Hey, Marshall.

Good morning, I guess, just going back to the demand side I mean, if you look at your markets or even through a regional standpoint.

You know, whether it's customer behavior, I mean are tenants, taking a bit longer to make decisions or renew at this point I know that the timeframe had gone the lung data and I think when we talk.

And every time period, but has that started to stabilize at this point or just wanted to kind of.

Through that a little bit.

It feels like deals get through the good morning, Samira deals get through the pipeline, but you know youre right. It and then.

And maybe it speaks more to my impatience, but they they do it tenants take awhile. It it feels like we get deals into the Red zone, and then getting them ramped up and maybe that's the attorneys and getting the Ti pricing in air and all the I's dotted and t's crossed and the larger that tenet is the slower that soon.

<unk> to take and I get it from there and the dollars are higher than they were several years ago. So theres more sometimes more layers of approval or people to sign off but the good news is the output is still there, but it it takes a little bit longer to get deals finalized and then some of that which would make sense.

To me I think if you're a tenant and youre not a little nervous about this economy every headline you Reid will make you a little bit nervous. So I don't I don't think unfortunately, I don't see that going away and I don't think there is the.

Panic for missing space that people had maybe a year ago, although that that could come back with supply dropping.

Alright, and I guess, just my second question I mean, it looks like you acquired more development land in the quarter is that where you see more of the opportunity today as we think about 2023 or that sort of the next 18 months versus maybe operating assets were.

Pricing is a little bit uncertain right now.

I would lean that way and the ones, we bought a couple of them without <unk>.

By aligning our confidentiality you know at where opportunities where people had things under contract and weren't able to perform so we were able to pick up what we thought were attractive pricing and so there are those opportunities out there we've not picked up any existing assets or partially leased assets.

Although we've looked at a couple of opportunities and it's along the lines of someone will build upon one or two buildings at a time, where someone may have built.

Four to six buildings at once and their construction loans coming due and the lender wants more equity and we're hearing from banks that theyre roll off of their loans isn't what it was a year ago, so its making their capital.

More precious and more and more expensive at the bank level too. So I think we have a chance to maybe pick up some acquisitions. This year, we've seen it on land and been able to execute on it and I think that'll probably be the case, but there may be some people in our capital bond and we're not wishing it on them, but if we can step in and.

Help solve that problem for them in the bank and we get a good asset at the right price.

I'm hopeful.

We're seeing the opportunities I hope, we have the capital ourselves and we'll be mindful of our own capital as we as we move through that.

Thanks, very much Marshall.

Sure Youre welcome.

The next question will come from bigger Crow with Raymond James. Please go ahead.

Hey, good morning, guys. Thanks.

Just two quick questions any markets out there that you're not seeing a drop off in new construction starts.

Hey, Bill good morning enough. If it is it's it's tiny markets, where the new construction has always been in our bulk where we've got a few at two or three assets in Jackson, Our New Orleans, where the entire cities below sea level and things like that but.

And probably what you mean, the major markets of Houston, Dallas, Atlanta, Phoenix Orlando.

The merchant builders is one of our guys have.

I've sat in a related this story, they where he was in a broker golf tournament and all the merchant developers said will be a lot better when we see you next year at this event and things like that so I think I think supplies dropping off especially in or at least what we.

What we view as competitive.

Usually it's a local regional developer partnering whether clariant, our heitman KKR or someone like that in that debt and equity has gotten a lot harder to come by.

And it's a lot harder to pencil year exit then it was the first a year ago.

Yeah Okay.

Question is on the margin are you seeing your existing tenants were hesitant to take expansion space given kind of the macro issues.

It seems like the deals take longer, but but no. We're still seeing a fair amount of expansions and I you know a number of our proposals it's not uncommon. It's a proposal to a logistics company and they are waiting to hear back on a contract and if they get it they're going to either need the space.

I need more space. So the the deal time on the tenant side takes a little bit, but but we're still seeing fairly good expansions within our portfolio and that's what makes us feel good about the development of it.

If we I love the idea of taking a tenant from apart from building three to kicking off building eight because their lease if it's a couple of years old which it is and that original building by now it's 20% call it below market or whatever that number is and we can hopefully backfill their space by the time, we move them into the new building so that.

What the team's done a really nice job doing the last few years is just kind of moving that Rubik's cube.

And that's one of our big sales.

Sales pitches to tenants as everybody is determined theyre going to outgrow their space when they move in but we have an entire park and we will be flexible and movie within the park and can accommodate your growth needs.

Yes.

Alright, Thank you very much.

Sure. Thanks Bill.

The next question will come from young who with Wells Fargo. Please go ahead.

Okay.

Great. Thank you.

Sorry to go back to the guidance question again, just regarding your occupancy and bad debt guidance.

Are there certain industries or markets, where youre being a little bit more cautious on your assumption.

Component the bad debt is is again more applied at the corporate level, it's not tenant specific or at the property level. Specifically, so again those were sort of the culmination of what we put together the bad debt numbers more reflection of the historical run rate of about 3% of our revenue we've been well below that the last few years and no reason.

To think that we could be below that again are I guess I would just put it under the premise that you've got to start the year somewhere and so that's where we are we hope that that goes positive as the year progresses, but we'll see.

But as Marshall mentioned 45 days or whatever we are into the year. It's it feels good it feels as good as we did ending last year. So we're still not seeing any headwinds to the story and so we we feel optimistic about the year.

But when you've got four quarters to go you put the budget together again, you just want to start in a measured prudent manner and then and then let the year play out and go from there.

Got it that's good to know and then just one more so it looks like the January job on construction was a little bit better than expected. What are you guys seeing in terms of kind of the homebuilding sentiment or it can be found in the sunbelt.

It does feel like hopefully homebuilding as an industry we.

Are you worried obviously with mortgage rates going up and things like that and and we're in a lot of in migration markets, Florida, Arizona, Texas all of those.

We're more optimistic that the homes are coming and then.

A lot of.

A fair number of our our tenants.

Some with the large company relocation. So we see in a lot of it is we've got tenants moving out of California to Las Vegas to Arizona to Texas, We've picked up some suppliers to Tesla and Austin, and San Antonio and I am sure Theres homebuilding that follows that so where we're bullish long term.

Look these markets, we've got good sites and they're only going to become more near and Dear over time, and there's there's still companies and people that are relocating it's just how fast after COVID-19. It picked up really quickly to Florida, and Texas and it may slow with homebuilding, but but but maybe with the mortgage rates.

Moderating and things like that it feels pretty good that theres enough companies.

That that pace of relocations to Texas and.

The Carolinas and things like that feels pretty steady at this point.

Got it thank you.

Welcome.

The next question will come from Dave Rodgers with Baird. Please go ahead.

Hey, guys, it's Nick actually on for Dave.

Question on following up on land, whereas like pricing today on some of the land parcels that you're seeing versus maybe at the peak in 2022, we had heard kind of that asset prices could be down 20% to 30%, but land could be down as much as 50 and do you guys see any opportunity there.

We got good good morning. Good question, we've picked up some opportunities in.

Historically, we would say land prices are pretty sticky and maybe there is maybe there's two different at least two different types of land sellers, where it's the long term owner won't Kid the farmer there they've owned it for a while and their content to continue to own it where we've seen the opportunity is more <unk>.

One else has come in tied up the land they had a good price and they have tied it up and usually that contracts gotten extended a time or two and they've got some money at risk and things like that or even instances, where you're seeing some where people have ordered the steel.

And the electrical equipment and now they can't get the take out what they want a debt or equity or a forward sale and that's where the pricing has come down and you are probably right because it had run up so much some of that pricing has come down.

That's 25, 30%, we were able to get some pretty good price reductions were.

The original person that tied it up still made a little bit of money, but they there. That's the tricky part there timing window closed in that land those land prices have moved backwards pretty quickly. So that's and that's probably another thing thats keeping people on the sidelines for new development, a little bit as movement, if you're a merchant developer movement in land.

This isn't a construction prices you'd probably want to wait a little bit to see before you before you started a new project and hopefully that we can step in and build some spec developments and get at least especially if it's within our own tenancy or that the tenants across the street, while the market's a little unstable.

That's helpful. And then maybe one quick question on just rents when Youre beginning renewal discussions are you seeing on the margin any more pushback on like the rents from the existing tenant.

Now, we now thankfully unearned tip.

I don't know if our list of reasons when we track our move outs, it's not that the.

Rent was too high and thankfully I think especially in a rising market like we've been in.

99% of our even our renewables it they have a tenant rep broker so by the time, they sit down with us their own brokers educated them. Okay. You can move and go through that cost but.

Youre going to be paying about the same rent. This is just where the market is and and I. Appreciate that our rents are such a low component of their cost structure compared to their wages and transportation cost that it's given us the ability to.

To push rents and I do empathize with our tenants for their cost structures going you know, whether it's energy costs wages.

Thats going up but knock on wood, so far we haven't gotten pushed back our move outs aren't due to rent, it's more accommodating growth or consolidating locations or different kind of macro strategy reasons within the tenant more than your rents too high because we're hopefully if we're doing our job we're at market or.

Slightly above and can earn that premium.

Very helpful. Thanks Margo.

Youre welcome.

The next question will come from Ronald Camden with Morgan Stanley . Please go ahead.

Apologies I jumped on late but just two quick ones just going back to the guidance question I think the occupancy numbers sort of jumped out just trying to get a sense of what what sort of conservatism is baked into that.

What are you thinking about bad debt, what what's actually driving that occupancy decline.

That's in the guide.

Yeah. Good morning, Ryan Yeah. It just to recap on that yeah, yeah. Its basically again, just a roll up of a space by space assumptions and when you start looking at 80 basis points times, our square footage, it's actually given our size not that much square feet, but.

Certainly makes you know an impact if we can have maintained 98% then certainly that's to the good the bad debt again as more just a reserve based on historical run rates, we've been well below that the last couple of years.

I would remind everyone that bad debt expense potential does include straight line balances. So a lot of times. We may have let's say a lot of times there can be an occasion, where you have a tenant that suddenly.

Files for chapter 11, or has something happened and they're current on their rent so you're not even aware that they were in that situation but.

You may have a straight line rent balance associated with that tenant that you have to reserve, but so hopefully those numbers prove to be conservative like we did last year, but as I mentioned earlier, just a you've got to start the year somewhere and we thought just with good measured approach.

In this environment would be a good way to start and then we'll just see how the year unfolds.

Great and then my second one is you know you're talking to a lot of sort of tenants.

Would love to hear your perspective of where we are in the inventory cycle.

Retailers have too much inventory you have they gone through it what do you sort of hearing from from them on the ground.

Hearing is that unlike before where it was up probably pretty scary shortage for inventory.

It's built back and it's gotten better.

Maybe there's some retailers that have too much inventory, but it could be characterized as too much of the wrong inventory and things like that but.

We still think that kind of restocking or a safety stock of inventory.

All of our tenants haven't been able to achieve that yet, but they are closer to it than they were a year 18 months ago. So I think inventory levels are picking back up and that's got to be you know it's hard to know sometimes exactly on our expansions is that their business is better and ore is and it's probably the answer is yes or is it that they'd like to carry a little more.

Sorry.

We've certainly seen a lot of activity from the third party logistics companies tells me people are outsourcing more and more of them to try to get that inventory. So I think it's it's better than it was but there's still room to run on that front to get to where they felt like safety stock needs to be and we still seem to hear in the news about.

Shortages is that something that the shortage of isn't that.

Shocking in the news anymore. It seems to be every week I knew shortage on something.

Yeah.

Great. Thanks, so much.

Welcome Thanks, Ron.

This concludes our question and answer session I would like to turn the conference back over to Mr. Marshall Loeb for any closing remarks. Please go ahead Sir.

Thank you.

I appreciate everybody's time and interest in Eastgroup, we're available after the call if we werent able to get to your question or if anybody has any follow up questions and we look forward to seeing you soon as we dive into competencies in next.

Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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