EastGroup Properties Inc. Q1 2023 Earnings Call
Good morning.
And welcome to the Eastgroup properties first quarter 2023 earnings conference call and webcast.
All participants will be in a listen only mode for the duration of the call.
You need any assistance during that time, please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
To ask a question you May press Star then one on the telephone keypad.
And to withdraw your question for any reason please press Star then two.
In advance we ask that you. Please limit yourself to one question and one follow up for today's call.
Please also note that this event is being recorded today.
I would now like to turn the conference over to Marshall Loeb, President and Chief Executive Officer. Please go ahead Sir.
Good morning, and thanks for calling in for our first quarter 2023 conference call as always we appreciate your interest Brent Wood. Our CFO is also on the call 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 P and L. A and F. S that are non-GAAP measures as defined in regulation G. Please refer to our most recent financial supplement into our earnings press release, both available on the Investor page of our website and to our periodic report.
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 in our base.
We undertake no duty to update such statements or remark, whether as a result of new information future, our 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 included in our most recent annual report on Form 10-K for more detail about these risks.
Thanks, Dana good morning, I'll start by thanking our team for a strong start to the year to continue performing at a high level and capitalizing on opportunities in a fluid environment.
Our first quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial market.
Some of the results produced include funds from operations coming in above guidance.
Nine 5% for the quarter.
And now for 10 consecutive years, our quarterly <unk> per share has exceeded the <unk> per share reported in the same quarter prior year truly a long term trend.
Our quarterly occupancy averaged 98, 1% up 80 basis points from first quarter 2022, and a quarter and we're ahead of projections at 98, 7% leased and 97, 9% occupied.
Quarterly re leasing spreads were robust at approximately 48, 5% gas and 32% cash.
Cash same store NOI set a record at 11% for the quarter and finally I'm happy to finish the quarter at $1 84 per share.
Helping us achieve these results is thankfully, having the most diversified rent roll in our sector with our top 10 tenants falling to eight 5% of rents down 90 basis points from first quarter 2022.
In summary, I am proud of our start to the year statistically. It was one of our best quarters on record all with looming prospect for recession in capital markets dislocation.
We continue to responding to strengthen the market end user demand for industrial products by.
Focusing on value creation via raising rents and new development.
This strength is what allowed us to end the quarter at 98, 7% leased.
Average over 98% occupancy and push rents throughout a wide geography of our portfolio.
As we've stated before our development starts are pulled by market demand within our parks.
Just on this <unk>, we're forecasting 2023 starts a $340 million.
And while our developments continue leasing up we're closely watching demand with the goal of a balanced fluid response pending what the economy allows.
What's promising is to see the decrease in industrial starch.
To quantify starts as measured by square footage fell 25% from third to fourth quarter and 2022.
When comparing third quarter 2022 to first quarter 'twenty three starts dropped approximately 45% and I suspect this quarter will be a further decline.
Given the capital market's volatility we've taken a measured approach towards transactions since mid 2022.
That said when we find the right strategic opportunities we'll pursue them.
The disposition of World, Houston, 23, which further managers market allocation as an example, as well as our Las Vegas acquisition.
And Las Vegas, where we're able to invest in a newer well located building in an under allocated fast growing market and achieve development like yields.
We're hopeful the choppiness in the capital markets will present other attractive investment opportunities.
Brent will now speak to several topics, including assumptions within our updated 2023 guidance.
Good morning, our first quarter results reflect the terrific execution of our team strong overall performance of our portfolio and the continued success of our time tested strategy.
<unk> per share for the quarter exceeded the upper end of our guidance range at $1 84 per share compared to $1 68 for the same quarter last year.
<unk>, our first quarter <unk> was attributable to an involuntary conversion gain recognized as a result of roof replacements that were damaged in a hurricane.
Excluding the gain <unk> per share was near the upper end of our guidance range at $1 82 per share an increase of eight 3% over the same quarter last year.
The outperformance continues to be driven by stellar operating portfolio results and success of our development program.
From a capital perspective, we have long stated that we continually analyze all of our potential sources after a year more weighted towards debt issuances the stability in our stock price in the first quarter yielded the opportunity to access the equity markets.
During the quarter, we sold $133 million of shares at an average price of $163 51 per share as.
As previously reported in January we closed on a 100 million senior unsecured term loan with a seven year term and an effective fixed interest rate of 527%.
We also successfully expanded the capacity of our unsecured bank credit facilities from 475 million to $675 million.
This step was taken simply to provide additional flexibility and a capital constrained market.
We remain conservatively drawn on the revolver 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 50 million scheduled to mature through July 2024.
Although capital markets are fluid our balance sheet remains flexible and strong with healthy financial metrics, our debt to total market capitalization was 19, 8% unadjusted debt to EBITDA ratio was down to four eight times.
And our interest in fixed charge coverage ratio was at seven two times.
Looking forward <unk> guidance for the second quarter of 2023 is estimated to be in the range of $1 83 to $1 89 per share and $7 49 to 761 for the year, a 15 cent per share increase over our prior guidance.
Those mid points represent increases of eight 1% and seven 6% compared to the prior year, respectively. Excluding the involuntary conversion accounting gain.
Revised guidance produces an average quarterly same store growth midpoint of 7% for the year, an increase of 100 basis points from last quarter's guidance.
We also increased the midpoint of our average occupancy by 50 basis points from 97, 2% to 97, 7%.
This is the result of outperforming our budget expectations in the first quarter, along with continued optimism for the remainder of the year in.
In closing we were pleased with our first quarter results and as we have in both good and uncertain times in the past, we were allowing our financial strength and experience of our team and the quality and location of our portfolio to lead us into the future now Marshall will make final comments.
Thanks, Brent in closing I'm proud of the results our team created we're carrying that momentum forward internally operations remain historically strong and we're constantly working to strengthen the balance sheet externally the capital markets and overall environment remain unstable.
I'll never fun to experience. This is leading to a marked decline in development starts in the meantime, we will work to maintain high occupancy while pushing rents and.
And longer term I remain excited for each group's future. There are several long term positive secular trends occurring within last mile shallow bay distribution space and sunbelt markets that will play out over several years, such as population migration evolving logistics chains onshoring et cetera.
Which we are well positioned for we'd now like to open up the call for any questions.
Okay.
We will now begin the question and answer session.
If you would like to ask a question you May Press Star then one on your telephone keypad.
And if you are using a speaker phone we ask that you. Please pickup your handset before pressing the keys.
If you would like to withdraw your question you May Press Star then two.
Again, we ask that you please limit yourself to one question and one follow up for today's call.
At this time, we will take our first question.
Our first question will come from Bill Crow with Raymond James. Please go ahead Sir.
Hey, good morning, guys another great quarter.
Commercial is other people pull back on their construction pipelines and activities I'm wondering how you're thinking about yours I know, it's a different risk profile.
You do within your existing parks, but.
Is the is the risks.
Elevated enough to make you pull back and then maybe talk about the balance.
The shift in the balance between acquisitions and developments at this point okay.
Okay.
Sure. Okay. Yeah. Good question good morning Bill.
I think on development you're right we've.
While I try to remind myself is let the field tell us as much as Brent and me and the team here at corporate so it's Tuesday, it's usually within our parks and it's usually I'll use our Tampa parks, where it's now have light and then Simon Texas words tenant expansions or relocations within our portfolio. So I never want to be.
So hesitant to start that we lose a tenant.
With really the capital markets.
We've been pushing towards higher development yields that said last year, we came in north of seven we probably targeting would've dropped and the upper fives, a year ago or maybe just over a year ago and now we're probably a good 100 basis points higher at kind of our development threshold, where you kind of get that mid upper sixes.
And I think we've tried to just be flexible I know, we raised our development starts this year slightly from 330 to 340 million but.
I've told ourselves I'm perfectly comfortable if the market tells us that should be $200 million or 500 million will go in that direction of I'll say that if it grows we need to be smart about how we fund that but we'll react to the market.
And then really it's the guys in the field, calling saying I'm running out of inventory of usually got a prospect or two or an existing tenant and here's how things pencil out. So we'll go that way on the acquisition front and we were happy to find the Las Vegas opportunity.
I think given the capital markets theres going to be better and better acquisitions on the horizon.
We like the newer building, we were able to get a development that really looks more like a development yield than an acquisition yield on that and we've made in any given time of late we've had two or three kind of not very aggressive offers out there and just saying if we can find the right opportunity we will close on it and that could also be a.
Substitute a little bit if we could do both development and some smart acquisitions, we'd like to but if we slow down development because of the market. It may the acquisition market may give us the opportunity to replace that capital.
Thanks, that's helpful. If I could just ask a follow up.
Really.
The performance in that market.
We sense that it's a really strong market for the data the last couple of quarters.
Seems to have been a little bit weaker from your portfolio is there anything going on there.
It's really it's one okay. Good good catch one vacancy we had a bankruptcy and Broward County about 100000 foot.
Tenant lost a lawsuit filed bankruptcy.
So we've got 100000 feet there, we need to backfill and we just kind of internally have put another.
Person on it that's our really runs Florida for us. So I think we will get there. We've just been a little slow getting that space, where you felt so I don't think its indicative of the market. So much as one space that is subdivision hole that we just kind of nature.
What kind of work through our system.
Got it thank you.
Sure you're welcome Thanks Bill.
Our next question will come from Craig Mailman with Citi. Please go ahead.
Hey, guys.
Maybe following up on the on the development piece from our funding and yield perspective clearly.
Cost of capital has risen just trying to figure out how you guys are thinking about this internally had a price that capital either from a build to suit or speculative nature.
To capture the that phenomenon and.
Are you seeing any pushback on kind of market rent growth in the markets, where you're developing.
I'll start and Brent jump in on really no pushback on rents, where we have lost tenants. It always still seems to be predominantly they're combining locations or exiting a market or outgrown the space and we can't accommodate it. So again, that's why we like the park setting but.
It's not very regularly that we lose a tenant over rent.
Rents are usually at market or hopefully if it's a renewal you can get a little better and upbeat market by a little bit and in terms of returns. We're trying to think are kind of historic rule has been tried to be 150 basis points over an acquisition cap rate for development yields and again all of the kind of market yields have.
Pretty much in flux for a few quarters now, but we felt like we're still achieving that and I kind of think about it personally if we can get an attractive yield say, we're six five to seven type yield going in one of the advantages you have as a REIT. Unlike maybe a merchant developer or a private equity if it's a good location, we're going to be able to.
Hold that location or starting at say six and three quarters, and it's only going to improve over time as a market like Orlando or Phoenix or Austin continues to grow so we're getting a crew.
Creating some value on the development, which we're excited about and then hopefully that will show up later and same store NOI as well.
Yes, I would just add to that Greg. This is Brian I would just add to that we're continually evaluating our best.
Capital sources.
Last year, we were.
When our stock price initially fail, we were a little heavier on the debt, we issued $525 million last year of debt at an average of three eight we got kind of in front of that and head of rate hikes. We're very pleased with that result.
What turned out to be a difficult environment and only.
We did about 75 million equity first quarter last year and that pretty much we're not able to or didn't get back in the equity market, but as you saw in first quarter, we pivoted to equity.
Do you view that by far is our most attractively priced component.
Let's call it a mid four versus even the revolver now which is a mid mid five.
As a result, we lowered our debt assumptions a little bit as you saw in our guidance and increased equity and based on current environment pricing, we anticipate that would probably lean towards equity, but we're good balance sheet. We can go either direction.
Important thing to point out is that our guys in the field continue defined via development are as Marshall said strategic acquisitions, we continue to find good opportunities to put our capital to work at that still making a good risk reward spread and so that's really what's driving the need for capital. So we appreciate that we even.
No need to keep a close eye on it the guys are finding a way to use the money.
Okay.
That's helpful. And then as we think about you cited the pullback in construction starts.
It's.
Likely contracts further now given the financing environment.
Guys look at the land bank that you have the competitive landscape across markets, where maybe you know.
It is great that overdevelop now that pulls back a little bit where do you see the in that $3 40 of stars kind of Where's the best opportunity to start to monetize the land Bank, where you guys think you can kind of fill in the gap and fill that void or other developers are capital constrained and you are not.
Yeah. Good question I'm not sure I have a I wish I had as good an answer.
It will really play out in parks in Austin is a market.
I mentioned it earlier seems awfully strong the population growth there, we feel like Theres, some opportunities where we have a law.
Like our land bank that we have in Austin today, Atlanta is another market, where we're seeing pretty good opportunities. There's a lot of construction in Atlanta, but not a lot of shallow bay construction, there's a lot in the pipeline, but the number of starts was dropping pretty rapidly in Atlanta, two so I like when I.
Think of specific markets I think of those two I'm glad we bought the land in Tampa, Florida.
Subsequent to quarter end and that we were wrapping up our last park their Grand Oaks and weave.
It's been a lot of expansions relocations in Tampa for us. So we kind of need the raw materials to kind of keep going in that market as well.
I mean, those would be the three that would come to mind and again, it's we'll follow the markets, where kind of where the tenant demand is and I liked it it's pretty broad broad base within our markets.
If I could slip it.
Third here could you mentioned you can't land could you just it looked like your price per buildable square foot was pretty attractive there.
The piece you bought in San Antonio can you just kind of talk about the land acquisition market, what youre seeing from a pricing perspective and opportunity set.
Yes.
Good comment then yeah, we're excited about both of those acquisitions.
The land opportunity it seems like I would in my mind always put land sellers in two categories, there's the generational holders.
Armour someone like that and that those prices are pretty sticky and probably haven't moved a lot and if they hold it for a few more years theyre, probably fine with that where we found opportunities and one of a couple of the Austin acquisitions, we made where people were acquiring land getting it permitted zoned and then.
Flipping it or are selling it on a forward basis, Thats, where there is probably where the pricing has moved back maybe.
25, 30% things like that and just you have people that are running out of time and so we found a couple of those we've heard of a few more of those a couple out west that we've looked at and are looking at where it is.
Basically developers with usually the pattern is that don't have a lot a lot of experience and they've gotten out over their skis financing wise and they can't raise the debt or the equity because as a merchant builder you don't really know where you could sell the building 15 18 months from now unlike where you could have the last few years and then.
The acquisitions, we acquired and it seems like that with land or especially the better land sites. There is.
There is always a back story and that San Antonio land and I'll compliment our team it was.
It's an infill site in San Antonia right, along I 35, but it was a we've described it as a land rich cash poor church and so we help the church relocate to a corner of the side and we've probably worked on it for four years now so we like our land basis.
But that's we've looked at churches and water parks and horse stables.
Golf courses and you name it but that was on.
Unusual amount.
Read antero worn for helping build a church and ordered again.
Good Park land side, and then in Tampa.
Odd land sites, we have experienced and Fort Myers, where there was an ego onsite and you have to hire someone to observe the eagle and there are certain times of year, you can build and so we've lived through that in Fort Myers and that helped US on this site just outside of Tampa and that Theres, an eagle on the site and we will.
I'll Hope hope these days and we'll try to not disturb them and we have experienced kind of building around that but theres always on the good side Theres always something kind of atypical in both of those were.
You saw the closing.
This month in April , but they started three four years ago, and that's probably what I think most investors don't see as how long it takes us to get the zoning permitting and usually an unusual seller situation.
Great that's worked for us.
Sure. Thank you Brian .
Our next question will come from Connor Mitchell with Piper Sandler. Please go ahead with your question.
Hey, good morning, Thanks for taking my question.
I guess you guys are.
A good amount on developments transaction market. So I, just want to focus little bit on any pressure on the tenants.
So you had talked previously about a bankruptcy so I guess just one.
Do you see any other issues with your tenants.
With some of the retailer struggles and then.
As a follow up I'll include in this.
Are you seeing any pressure on your tenants due to banks pulling back on the credit.
Yeah, Hey, Conor good morning, this is Brent yes.
Pleasantly I guess, the overall summaries, our tenants continue to be very strong in.
Not really much payment issues in the first quarter, we did record 370000 of bad debt about two thirds of that was from one tenant from the situation. We described and predominantly most of that was the straight line rent balance and currently we only have 12 active tenants on our allowance list and that's 12, just a reminder, we've got.
About 1650, or so tenants. So that number is historically low it's very low all our top 10 tenants are current so as.
As far as the budget goes we had 370 in the first quarter. So we just maintain that 500, a quarter second third fourth until it came down a little bit to $1 nine.
Hopefully those numbers prove to be conservative, but as we saw in first quarter, you just get one tenant with a certain balance and that can that.
That can get a couple of hundred thousand dollars fairly quickly so.
But to answer your question no, we've not seen tenants reach out to us or any banking issues or funding issues.
We're not aware of any tenants that might have got caught out in California with a couple of banks that had troubles there.
So from a AR collections and.
Receivables and tenant stability standpoint, it continues to be a very resilient very strong.
Okay. That's all for me thank you.
Thank you and thanks counter.
Yeah.
And our next question will come from Nick Fillman with Baird. Please go ahead with your question.
Hey, good morning, guys, maybe I wanted to touch a little bit on same store, obviously best performance.
Company history at 11%, but the guide kind of suggest a little bit of a slowdown it looks like there was some concession burn off in the first quarter, but just wondering if there is any lumpiness as we're going through 2023 here.
Getting down to that 7% range.
Okay.
Good morning, its Marshall Youre right were really happy with our quarter I think part of our challenge and it's got great problem to have is as we as we move through the year, we're running up against better and better comps. So as we finished last year and 90 eights will it'll still be moving forward, but really we're not this quarter.
We picked up on rents and 80 basis points of occupancy so that 80 basis points of occupancy gain will drift down lower during the course of the year again, we're glad we were able to raise our occupancy guide for the year I think it is just coming up against harder comps and hopefully we'll hopefully we can continue to beat it look we're thrilled to be.
At 11, I think the quarter's going ahead will be a little bit higher mountains.
To beat.
But we still are showing positive dates and if our occupancy can hang in there and it has through the end of April and so far I've been the nervous one I've been very nervous.
Without the economy, given all the headlines for several months, but our day to day operations don't reflect that and I hope.
Im wrong for just eight more quarters of this year and will be good.
That's helpful. And then maybe one question just on your tenant base have you noticed any change in the amount of investment tenants are making into their space recently.
It does seem to be trending up.
And some of that to pay some of it you could say inflation and things like that I think with hiring one thing we've noticed in Arizona and some of the western markets.
And then Florida, two hvac's space that before you've had fans and things like that but more air conditioned space and I think thats and we've upped amenities at our parks and things like that given the difficulty hiring tenants of that probably made it more accommodating for for their employees in our spaces.
Then I think there are always working on finding ways to improve.
The efficiency of our buildings, the racking and things like that and that's where I've always still hope over time will pick up more retail distribution space just because of our buildings are so much more efficient than order online pickup at store option I don't think.
The retail format has the physical structure, we can offer retailers. So I think that mix will get that will be another source of demand, but I think thats going to play out over that started to play out over several more years still.
That's it for me thanks, guys.
Youre welcome Nick.
Our next question will come from Jason Belcher with Wells Fargo. Please go ahead with your question.
Yeah, Hi, good morning, one.
Wondering if you could talk about any additional demand youre seeing from near shoring or onshoring of manufacturing and production activity and which markets are seeing the biggest impact from those trends and maybe how we should think about that evolving going forward.
Okay.
To take a stab at it and we do talk about what we're.
Reading and seeing as kind of the China, plus one manufacturing and where we're seeing those benefits as you would expect or really Texas markets El Paso has been a very strong market for the past few years, probably the best three years or four years on El Paso or the 20 years, we've been there San Diego we've acquired several.
Opportunities there over the last few years and fill those out quickly so we still like.
San Diego and then Arizona has been a good market we've been active in Phoenix, a little less so in Tucson, but where we're 100% in those markets. So we like Thats where were seeing there.
The near Shoring Central Texas has seen a pickup in manufacturing and some of it with Tesla and the chip plants and things like that that have been built in.
And may say out in Phoenix, and the same in Austin, So, we're and we won't get the manufacturer, although im glad they are coming to our areas, where we pick up and we've even seen it in San Antonio is picking up the suppliers that are working with the plants that are getting built so it's another source I think it will play out over a number of you.
Here's our I can't imagine the process when you think of where do we open another plant and does it.
Go to India, or Vietnam, or do we go to Mexico, whether and how that plays out and it's been interesting some of the tours, we've had especially something of a couple of them.
San Diego, where you've had the Ceos come towards the space and it tells me to go lease 80, or 100000 feet. That's not something I would expect from a large company, but I'm thinking over analyzing it probably means a bigger supply chain decision and what are they doing in Tijuana and Juarez and how does that roll through there.
Apply change so.
We're trying to pick up sites, we're actively looking in El Paso, we are full in San Diego and have some land in Phoenix to keep working on that but.
Again as I mentioned glad that we've got several <unk> that I think will play out at different velocities over the next few years.
Yeah.
Thanks for all that color that's helpful and.
Then just one more from me if you could give us an update on what youre seeing in terms of materials and labor cost inflation I noticed the price per square foot, increasing your development starts guidance.
Maybe if you can just comment on the cost inflation front there yes.
And now let's say on our on our starch is helpful. Those are usually will have those specifically by project and as they get moved around sometimes you can get kind of a false positive, whereas we're going to build and Florida, rather than Arizona, and the price could be higher or lower but thankfully we've seen.
Struction costs come down a little bit the last couple of projects we bid out.
One in San Antonio one in Phoenix, where the shale costs have come in a good maybe 5% to 10% where they would have been at the end of the year. So it.
I'm hopeful with the drop in.
Construction starts although there is a lot of ins for truck infrastructure spending and things like that that we'll see some pick up as the subcontractors get less busy and things like that and I think the other thing that's helping us to us, especially like electrical panels and still were so problematic to just get deliveries.
When the market was really hot that we're seeing delivery times come down. So we can get our buildings to market. While it's good more few months more quickly and then hopefully the supply the pricing drops were saying well.
At least they flattened out thankfully after a few years of pretty heavy increases and we've actually seen a couple of drops and things up absent concrete that still seems to be a pretty extensive material and obviously that we use.
Awful lot of it in our buildings.
Yeah.
Thanks, a lot that's all for me.
Youre welcome.
Our next question will come from Jessica <unk> with Green Street. Please go ahead with your question.
Hi, Good morning, I'm curious to hear your view on how sensitive do you think the three tenants or to overall import volumes.
We've seen the import container volumes decline pretty significantly year over year in the first quarter has that driven any softness in demand at all.
I think it certainly will in time, if we say within our portfolio, we've not really.
Seen any movement within the three pls and thankfully the ones we have.
Everyone else on long term leases and things like that is a lot of consolidation within the retail world and and so far we've not had any issues of them wanting to buy out of their lease give space that things like that I think over time.
<unk> thought the three pls can be.
They are one of the first tenants to expand rapidly when things are good and they are also a pretty early tenant to contract. Obviously, it's not like their headquarters location and things like that and they'll have multiple locations in our submarkets. So there is maybe as you pointed out there, they're pretty twitchy tenants they'll move in one direction, one way or the.
But knock on wood, we have not really had any too many any abnormal amount of moving parts within our three PL tenancy.
Okay, great. Thanks for the color.
Youre welcome. Thanks.
Okay.
And our next question will come from Jeff Spector with Bank of America. Please go ahead with your question.
Great. Good morning, I, just wanted to clarify Marshall.
Your concerns over the recession is it more tied to kind of the economic forecasts like bofa, calling for a recession since last year.
Or have you actually seen anything.
Or heard anything from tenants anything it really is creating that concern on the recession.
Good morning, Jonathan and Youre right I mean, all I wasn't looking to blame it on the Bofa economists.
I hear them taken taken full response, but it really is more we typically use the phrase it with our own board Ed.
At 5000 feet things feel pretty good.
We're in a recession, and we are 99% leased and raising rents, 50% that fills that feels good and but when I read the newspaper or watch T V. It feels like Theres a lot of banks failing in the banks that have come through that are online and have called on US there is a lot of anxiety.
Out there so it's a long winded way of saying no it's more headline nervousness.
Paranoid trying to look around corners, which I think I felt like I should always be doing to some extent, but I don't want to do it to the point that we miss good opportunities so headline.
Headline anxiety and then when I talk to the guys in the field. They look at me like I've got two heads because they're trying to find space for tenants and things like that.
Thank you by the way I blame Bofa econ, all the time so.
It's all good.
And then second I just wanted to confirm.
On your comments on possible opportunities merchant builders.
Are you actually seeing anything today or again this is the whole debt.
If there that may be down the line there are some distress in eastgroup could take advantage.
Theres been a little bit and that in the sense that a couple of the land side, specifically that I can think that we bought late last year in Austin, We're moving parts one was.
Our newer merchant developer, where they needed to do something.
And we acquired that there is a couple of sites out West, Arizona, Las Vegas, where we've seen where it's again I think.
One we passed on but just youll hear their stories from the broker where they had the site. They had ordered one was the electrical equipment. Another was the steel and now they were scrambling trying to get their financial house in order either to a joint venture or solid things like that and Thats not something we have seen the last few years the property we bought in la.
Las Vegas, although there were other bidders one of the things we've really stressed the tenant was our ability to close using our line of credit that we could move and close in a little over 30 days and I do think that.
Without trying to violate our confidentiality agreement.
We were told we were not the highest bidder, but we were certain path to closing and so we were awarded the contract that way so.
We've not seen a lot of distress. If it shows up that may be more land opportunities, but and again I think on acquisitions, and I know and talking to <unk>.
Some of our peers.
A lot of respect for Blackbird and the Toronto team. They really think it's going to be a great acquisition environment and I want to believe Blake software trying to have some dry powder and NBA.
Be able when capital is going to be constrained and credit tightening and things like that if we can have some dry powder will either put it into our development pipeline, where the demand is there or if we can find the right acquisitions.
Something we hadn't looked at for a good two or three quarters, but we've really started sticking our toe in the water here in the last 60 days a little bit if we can find some distressed opportunities and pricing in Las Vegas. We think we were slightly below replacement costs on a newer building and got a development like yield so we felt like some.
That would have been sub four cap rate a year ago that if we can get close to the mid sixes.
On a GAAP return, that's a pretty good opportunity.
Okay, great. Thank you.
Youre welcome.
And our next question will come from Kevin Kim with treatments. Please go ahead with your question.
Thanks, Good morning.
Wanted to ask you a question about supply I realize the new supply out there for a shallow bay product for smaller buildings, there's only a small slice of the 600 million plus square feet of deliveries, but I'm curious if you look at that supply that's more comparable to your own product how would you describe that level of supply.
Historical context, I'm, just trying to gauge if its getting tougher or easier that level of supply relative to your portfolio.
I think if I'm, if I'm answering good morning, Kevin.
We've seen and I'll use that Atlanta, where I'm, taking it really just the CBRE numbers were a little more granular than some of the other markets <unk> talked about the average starts last year were 8 million square feet a quarter first quarter was under 2 million $1 7 million square feet.
And then maybe a couple of other stats they threw out in there what's under construction.
88% of it is in buildings 200000 feet and up and so 200000 feet.
Good sized building youre getting near the higher end for us.
Evan buildings that are over 1 million square feet or over so.
We've always been which unlike we've usually said 10% to 15% of what's in the pipeline as comparable product I do think stepping back a lot of our competition isn't it is a local regional developer with an institutional partner in AWS nuveen clarian someone like that and.
Those merchant develop developers have been hit harder than the larger institutions. So they've it's just hard to know where your exit is and to raise that capital via debt or equity on the cost of that debt certainly gone up a lot in the last year. So I think.
For example per CBRE have starts have fallen from third quarter last year to first quarter. This year, 45% I would imagine that it'll be a pretty material decline from that in second quarter. I think there is a bigger decline in shallow bay than there is in the overall market and Thats where.
After I talk about my anxiety.
With Jeff Spector I get excited about 2024, if we can hang onto our own tenancy, where youre 90, 899% leased and you get to the back half of this year and into 2020 for our markets are pretty tight where we are.
They're full and there is no new supply that I am hopeful that gives us some.
Pre leased development opportunities and ability to push rents as well I just hope.
I hope that the flip side of that bank credit tightening and Brent spoke about it earlier is that our own tenants thankfully theres over 1600 of them.
They make it through this credit tightening period as well.
Great and you guys reported at 48% of lease spreads this quarter I'm just curious if you had any thoughts on.
What we should expect for the remainder of the year.
That was about where we ran fourth quarter thankfully as well last year, we averaged about 40% it feels like a pretty good run rate at this point unless things really slow down in it on a link.
It's pretty spread out throughout our portfolio of that text before it was California, and California is still a strong market. Unfortunately, we don't Fortunately or unfortunately.
Pointed out key ban.
Your credit Theres, not a lot rolling which most years is a good thing and with rents rising like they are I wish we had a little more role in California than we do but thankfully other markets have offset that.
So I think thats, a pretty good run rate hopefully we can stay in the 40% and we will just.
What I like of putting those quarters back to back to back you're working your way deeper through the portfolio.
And rents don't seem to be slowing down yet that's the other nice thing in the market.
The demand fills normalized not frenetic like it was but rents continue to grow in most all of our markets.
Okay. Thank you.
Youre welcome.
Yeah.
And our next question will come from Todd Thomas with Keybanc Capital markets. Please go ahead with your question.
Yes.
Hi, Thanks, Good morning, I, just wanted to I guess follow up on the discussion around leasing and pricing power a bit.
Does the pace of development leasing pick up over the next several quarters as we think about 2024, just given the decrease in starts that you're discussing for for shallow Bay and should we expect.
The projected stabilized yields to continue moving higher.
I'd like to thank our yields will keep moving up I mean, I don't think dramatically, but they'll keep creeping up rents are going up and then hopefully as we bid out projects I'm optimistic the construction pricing will be flat to maybe slightly down we will say.
<unk>.
And.
We hope our development leasing we underwrite it we always have that it's one year from shell completion to to finish we've been beating that the last several years and we've had some some success with early leasing on projects. If the economy stays where it is today, we will continue that pattern and then again.
If you said what is your concern and it's not so much on supply I'd say supply has upside in a couple more quarters as the development pipeline.
These out it's really more tenant demand and.
If we're in a recession and how deep of a recession, but if.
Things can just kind of stay where we are hovering around the recession, we have enough.
<unk> two our last mile shallow Bay Sunbelt markets.
Our development program and I've always said, we don't need a great economy, we just need an okay economy. If we can stay. Okay. Then probably your thesis will hold up we should get we should be leasing fairly rapidly or kind of delivering like we did this quarter, 100% lease projects and getting good returns on those knock on wood.
Okay and then.
Second question back to acquisitions.
So the deal in Las Vegas for $34 million that you.
<unk> in April it sounded like you achieved a premium yield something in the <unk>.
Mid 6% range is that right and are there any portfolios that you're tracking that could transact anything of size in and is there appetite to do something larger to the extent that something.
There are dislocations or something becomes available.
Good good question you're right.
Description of Las Vegas, where it was kind of that yield and the sixers in a building that was about five years old right off the freeway.
Excited about yet and there's probably higher odds are that there is theres I think theres fewer portfolios in the market just because it's so hard to finance. It I think there's so much dry powder, but it doesn't feel like there's that many portfolio deals transacting, we've seen a few end and it always seems up.
We were excited to buy the Tal portfolio last year and that it fit us well, but it always seems like on the portfolios. We just looked at one recently and although the market's lined up well the quality of the portfolio.
We're biased, but it wasn't nearly what our portfolio is so we passed on it and there's always a couple of things that were kicking tires and if we can find one and the big if to that where where I think we were happy to transact with the stock price and where that came out on <unk> a year ago.
On a larger transaction, we would need a pretty good equity price to have that makes sense as well and have it be accretive to our own <unk>. So there is a few more hurdles and never say never but those are if acquisitions are difficult or portfolio acquisitions, and even longer long shot and look if we if we buy a building.
Every once in a while and we develop buildings each quarter I'm perfectly happy to just kind of grow slow and steady that method without keeping our shareholders up at night, but if every once and once in a blue Moon will find our portfolio and if we do we'll try to move forward with it but that would be the exception than the rule.
Alright, thank you.
Sure. Thanks, Tom.
And our next question will come from Michael Carroll with RBC capital markets. Please go ahead with your question.
Yes, Thanks, Marshall I wanted to touch on your comments about demand I mean, obviously I think you've been highlighting that it's still pretty healthy, but how big of a pullback has there been compared to last year. I mean is there a noticeable slowdown in activity just off of those record levels till today are not really noticed it that much.
The results are similar and where what we hear in the field from our team is there for a while it was the member of tenant Rep brokers, saying this isn't fun being a tenant rep broker I'll find a space and there's two or three other prospects for it.
That where you would have multiple showings for the same space and it felt frenetic and almost and it was fun, but in a scary way because it didn't feel sustainable where rents were going up parabolic was one Friday someone use.
Now, it's more there's one or two prospects and its it feels more of a manageable process than a scramble for study.
Or Amazon out running rapidly leasing up space and things like that that this.
It was fine, but it didn't feel sustainable. This bill is more of a normalized 2019 free COVID-19 market. So we have prospects just not multiple end and again.
Also in those days, everybody was becoming an industrial developer we've cut it it was like you're over driver when theyre, giving stock tips its time to.
Can move your money to bonds or cash I guess, but.
I think the number of active developers will slowed it is slowing down or have slowed down rapidly in our markets too and I think that thankfully feels more sustainable.
Okay. And then also you talked about your development yields that you thought that they might start ticking higher is that just due to construction costs dropping or is that due to rents improving and I guess, how does the whole financing costs to kind of get included in that calculation I mean with interest rates, where they are today I mean has that.
Pressured are reflected on your development yields at all.
It does and maybe I'll take the first half rent in the second half.
Yeah on the first part I really do I think we'll have some some slight improvements from against warehouse when we underwrote it on our on our numerator in that a little bit higher rents than we originally thought and then.
I think construction price and we've always done underwriting where we haven't projected rents will use current market rents are ideally last rents on the building we built in that part, but those rents continue rising and there may be a little bit of a drop in construction pricing too. So I think that's where we could pick up.
10 to 30 basis points, hopefully on our development yields although they were strong last year I think just what we're underwriting seems to creep up and we have because of the financing costs. We have raised our target development yields and Brent.
We look at avenues, Yeah as Marshall mentioned earlier, you know, we we had.
Historically said are typically said, we wanted that 150 basis point or so spread between our cost of capital and the yield we're getting in that I think over time kind of got lost in the shuffle, because we kind of got spoiled there we had a period, where we're basically doubling our money. We are building in a low to mid six in them said call. It a mid three to high three cap environment.
<unk>.
And that has tightened obviously with the increase of cost of capital, but we're still making what again on a historical basis, we'd call a good spread call our cost of capital.
When you blend equity and the debt together, maybe at around $5 somewhere in that area equity cheaper debt, a little more expensive than that.
But as Marshall said youre hitting that upper six to seven range, it's still a good spread still good opportunity. So we monitor it. It certainly gives you less wiggle room than you had when you had such a wide gap.
But we're still in a position where we're very accretive and continues to be a good NAV creator for us.
Okay, Great and just if I can sneak in one more.
That 150 spread I mean, how close are we to that $1 50 level right. Now I mean do you just need to get a development yield anywhere near and mid six and Thats kind of you can justify it.
That's that is reasonably every market will be a little different but I think brand new well leased building I think youre going to get five or below.
There's been as I said, we've looked at acquisitions and it's we bought a building in some land there's still people out there transacting and especially on the smaller assets and things like that so if it were a.
A building or two that we build they would be buyers out there I think we just saw like a four one.
Transaction and it was as we underwrote at cap rate in Phoenix, and some things like that one in San Diego that we bid on is going to go.
Ultimately priced much higher than we thought that we had where we were hoping so I think a 5% still feels like a safe cap rate in spite of where debt yields are in Israeli.
Based on how much industrial rents are outpacing inflation, probably compared to other property sectors.
Okay, great. Thank you.
Youre welcome.
And our next question will come from Ronald Camden with Morgan Stanley . Please go ahead with your question.
Hey, good morning, guys, Jimmy for Ronald Camden, and just a question on.
Some of the Houston dispositions that we've seen over the past couple of quarters I saw that.
Yes completed one this quarter I think the pricing was a little under $100 a foot.
Curious if that's kind of the pricing we could expect going forward for our Houston asset sales for the remainder of the year and beyond or if thats kind of one off.
Hey, guys looking at that.
I think that was a little more one off it was one of our earlier buildings in world Houston It was a.
Building for the tenant at the time. So there was some unusual features to that building it had been.
As we try to manage our Houston size, we're always kind of ask our team of for building were vacant what would you want to exit in this building had recently gone vacant as we were re leasing at we said all right. We've got a nice gain here. It's work we got a good yield on the initial development and we'd like to keep developing in Houston. So.
We can develop to a seven rounding and sell to a five or below we'd like that that model. So it needed a fair amount of work to re tenant it and we thought that was a good time to exit that so but I think you would expect I would expect more of our dispositions to still be north of $100 a foot and this was a little bit of a.
Tenant specific building that we had built.
15, 20 years ago.
Great and then maybe just to follow up on 99% occupied today, maybe just historically when you see that level of vacancy, whereas whereas market.
Typically been.
And just with that question.
What do you expect for the remainder of the year for market rent growth.
Talk about slowing starts.
So just curious about the outlook for that.
I would think probably prior wider range maybe call it <unk>.
Seven to 12, 15% rent growth market year over year for the balance of the year.
And at 99%.
Yes.
Brent and I have both been in industrial probably more years, when we both want to add up just because it wouldn't make us fill a hole, but I never thought you'd see rent growth that we've had in industrial in the last several quarters, but at 99% I'll remember the the rule of thumb early on someone told me anytime vacancies below 10%, it's a landlord mark.
And above 10% it becomes a tenant market.
Thank you.
Suspect that vacancies will pick up nationally it sounds like again most of that will be big box, just where deliveries will be this year, but I think we'll continue to have rent growth on especially in our product type I think will be hopefully sheltered from a lot of that supply as it comes out of the pipeline and so on.
Hope we can continue on the path we're on and.
And where we are probably every once while each market is a little different where youll see some that might drift one way or the other in a quarter it'll just be more on the mix, but I think all in all we were 40% last year, we're off to a heavy start this year at 40, I'm quoting GAAP numbers, because that gets the rent the free rent and the rent bumps in there as well where we've been able.
To increase the rent bumps the last few years kind of where it was a 253% market to now three and a half four plus market and which which market you're in.
Great. Thank you guys.
Sure welcome.
And our next question here will come from Vikram Malhotra with Mizuho. Please go ahead with your question.
Thanks for taking the questions.
I just wanted to clarify some of the comments you talked about the rent spreads and maybe.
I did not hear so sorry, if I'm repeating.
First on market rent growth you talked about the GAAP rent spreads, but can you just talk about where you see market rent growth across maybe the top two or three markets playing out in 'twenty three.
And then just specifically I think there were some comments around Miami I'm. Just wondering if you were to sort of you talked about normalization. If you were to sort of rank.
Youre markets, Miami thoughts with Texas, California, where are you seeing the most rapid normalization, where are you still seeing sort of trends above.
Uh huh.
And the 2022 levels. Thank you.
Okay and rent growth and then again.
My Crystal ball, if it were as accurate as I wish it was.
I'd be happy to take you on my ought to my island type thing, but.
We're thinking I don't mean to be too coy, but how.
High single digits mid teens level I think.
What kind of overall within our markets.
Think Miami, we've got a specific vacancy kind of the western Submarkets of southwest Broward County that will get backfill, but that markets are strong market and we felt we'd love to find some other opportunities in south Florida is still.
Our best markets and I've talked about Austin.
Central Florida markets fill awfully strong Dallas is a strong market for.
Phoenix people talk about supply in Phoenix, and I agree the numbers are big but we're a 100% leased in Phoenix and have had strong rent growth there the California.
The Bay area L. A orange County, San Diego are good markets are like our geographic diversity, that's something we spend a lot of time working on our tenant diversity in our geographic diversity to try to make it out as much of a bulletproof portfolio as you.
Ken in the real World type thing so.
Sure.
Before we would have definitely said, California are our best markets and there is still good, but we're seeing California type growth.
Last call. It 18, 24 months and at least in terms of rents and the major Texas markets, Dallas, Austin, El Paso event in Central Florida, and Atlanta, Charlotte some of those markets as well.
So just to clarify I guess Youre, saying you would have said, California is the strongest but.
Are you seeing that as a bit of a reversion, where California is strong, but maybe normalizing posture and then just to clarify if youre seeing 10, so on average 10% market rent growth.
What is your cash rent spreads accelerate through the year from Q1 levels.
They they would I guess it will depend on the mix of just how old the lease is that's rolling.
But youre right. It youre right overall, they should hopefully pick up in California isn't a bad market, we've seen a little bit of slowdown in the Bay area and I think part of that is every tech company is laid people off.
I'll say that we've got two vacancies were working on in the Bay area and we will get those back filled in the California markets that they used to be more standout markets to us, but some of the other markets have caught up with California.
Okay. Thank you.
Welcome.
Okay.
And this concludes the question and answer session I would like to turn the conference back over to Marshall Loeb for any closing remarks.
Thank you. Thank you everyone for your time. This morning, we appreciate your interest in Eastgroup, if we didn't get to your question that you have some follow up questions Brent and I are certainly available and we look forward to.
Just seeing many of you at NAREIT here in just over a month. Thank you. Thank you.
Okay.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.