Q3 2024 EastGroup Properties Inc Earnings Call
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Speaker Change: Good morning, ladies and gentlemen, and welcome to the Eastgroup properties third quarter 2024 earnings conference call and webcast.
Speaker Change: At this time all lines are in listen only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session.
Speaker Change: At any time during this call you require immediate assistance. Please press star zero for the operator.
Speaker Change: This call is being recorded on Thursday October 24th 2024.
Speaker Change: I would now like to turn the conference over to Marshall Loeb, President and CEO.
Speaker Change: Please go ahead.
Marshall Loeb: Good morning, and thanks for calling in for our third quarter 2024 conference call as always we appreciate your interest Brent Wood. Our CFO is also on the call 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 SSO that are non-GAAP measures as defined in regulation G. Please.
Marshall Loeb: Please refer to our most recent financial supplement into our earnings press release those avail.
Marshall Loeb: Available on the Investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.
Marshall Loeb: 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.
Marshall Loeb: 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.
Marshall Loeb: Based on the information currently available to the company and on assumptions. It is made.
Marshall Loeb: We undertake no duty to update such statements or remark, whether as a result of new information future or actual events or otherwise.
Marshall Loeb: Such statements involve known and unknown risks uncertainties and other factors that may cause actual results to differ materially.
Marshall Loeb: Please see our SEC filings, including our most recent annual report on Form 10-K for more detail about these risks.
Speaker Change: Thanks Keena good morning, before sifting through quarterly results I want to express our concern for everyone in our markets affected by the recent hurricanes.
Speaker Change: Our team and their families are thankfully safe and I greatly appreciate their quick professional response to help our tenants get back to business as usual.
Speaker Change: <unk> themselves. Meanwhile, had limited damages, especially considering the strength of these storms.
Speaker Change: Operationally I want to thank our team for another strong quarter. They continue performing at a high level and finding opportunities in an evolving market.
Speaker Change: Our third quarter results demonstrate the quality of the portfolio, we built and the continued resiliency of the industrial markets. Some of the results produced include funds from operations rising nine 2% when excluding in voluntary conversions.
Speaker Change: Over a decade now on a quarterly F. F O per share has exceeded the F. F O per share reported in the same quarter prior year truly a long term trend.
Speaker Change: Quarter end leasing was 96, 9% with occupancy at 96, 5%.
Speaker Change: Average quarterly occupancy was 96, 7%, which although historically strong is down from third quarter 2023.
Speaker Change: Quarterly releasing spreads were 51% GAAP and 35% cash year.
Speaker Change: Year to date results are slightly higher at 56, and 38% GAAP and cash respectively.
Speaker Change: And cash same store NOI rose five 9% for the quarter and six 3% year to date.
Speaker Change: Finally, we have the most diversified rent roll in our sector with our top 10 tenants.
Speaker Change: All into seven 5% of rents down 70 basis points from third quarter 2023.
Speaker Change: We view, our geographic and revenue diversity as strategic paths to stabilize future earnings regardless of the economic environment.
Speaker Change: In summary, we're pleased with our performance year to date and are optimistic about the prospects for an improving economy, along with a lack of new supply.
Speaker Change: We're focused on value creation via raising rats acquisitions and development.
Speaker Change: Wowed us to end the quarter at 96, 9% leased and continue pushing rents throughout our portfolio.
Speaker Change: On the acquisition front, we're excited to acquire <unk> Commerce center, consisting of two new 100% leased buildings.
Speaker Change: In South Austin.
Speaker Change: The property is near our stone infill development, allowing us greater flexibility long term.
Speaker Change: We have a couple of other probable acquisitions were working on and we'll happily share more detail on timing permits.
Speaker Change: Overall, our acquisitions are guided by two criteria one to be immediately accretive and secondly, raising the long term growth profile of the portfolio, that's creating NAV per share as.
Speaker Change: As we've stated before our development starts are pulled on market demand within our parks.
Speaker Change: Based on our read through we're adjusting our 'twenty to 'twenty four starts forecast to $230 million.
Speaker Change: While we signed several development leases during the quarter and have promising prospect interest decision, making remains deliberate and prospects are focusing later in the construction process.
Speaker Change: Terms of starts we ultimately follow demand on the ground to dictate pace as we always have.
Speaker Change: Longer term the continued decline in the supply pipeline is promising.
Speaker Change: The construction pipeline is at its lowest level since 2017.
<unk> reasonably steady demand the market should tighten in 2025, allowing us to continue pushing rents and create development opportunities.
Speaker Change: As demand improves our goal is to capitalize earlier than our private peers on development opportunities based on the combination of our team's experience our balance sheet strength existing tenant expansion needs and the land and permits we have in hand.
Speaker Change: Brent will now speak to several topics, including assumptions within our updated 2020 for guidance.
Brent Wood: Good morning, our third quarter results reflect the terrific execution of our team the solid overall performance of our portfolio and the continued success of our time tested strategy.
Brent Wood: <unk> per share for the quarter exceeded our guidance range at $2 13 per share compared to $1 95 for the same quarter last year, an increase of nine 2% excluding involuntary conversion games.
Brent Wood: The outperformance was driven by solid operating results successfully negotiating to lease terminations and lower G&A.
Brent Wood: From a capital perspective, we continue to access the equity market.
Brent Wood: During the quarter, we directly issued common shares for gross proceeds of $30 million. Several Ford share agreements for gross proceeds of $50 million with an additional settlement of 50 million after quarter end.
Brent Wood: Currently $204 million in Ford agreements are available for funding when needed.
Brent Wood: Collectively the shares in the third quarter transactions were initiated at an average price of $185.70.
Brent Wood: In August we repaid a $50 million unsecured term loan and have $120 million maturing in mid December.
Brent Wood: Although capital markets are fluid our balance sheet remains flexible and strong with record financial metrics, our unadjusted debt to EBITDA ratio decreased to three six times and our interest in fixed charge coverage increased to 11 six times.
Brent Wood: Looking forward, we forecast <unk> guidance for the fourth quarter to be in the range of $2.13 to $2.17 per share and.
Brent Wood: At $8.33 to $8 37 for the year of two cents per share increase from our prior guidance.
Those mid points represent increases of five 9% and 7.9% compared to the prior periods, respectively. Excluding insurance related gains on involuntary conversion claims.
Brent Wood: Our revised guidance includes increased acquisition opportunities and a corresponding increase in capital proceeds.
Brent Wood: Of the $780 million of capital proceeds forecasted for the year over 500 million has already been executed, leaving approximately $275 million for the fourth quarter.
Speaker Change: At closing we were pleased with our third quarter results and are well positioned to close out the year as we haven't been as good in uncertain times in the past, we will rely on our financial strength the experience of our team and the quality and location of our multi tenant portfolio to latest into the future now Marshall.
Marshall Loeb: Will make final comments.
Marshall Loeb: Thanks Brent.
Marshall Loeb: In closing I'm proud of our quarterly and year to date results and the value. Our team is creating internally we continue to grow earnings while strengthening the balance sheet and what's been an uncertain climate.
Others have described the environment as bottoming, which seems about right.
Marshall Loeb: Tenant leasing decisions or deliberate which when combined with tight capital markets has led to a seven year low and the construction pipeline within this backdrop, we're doing three things.
Marshall Loeb: First we're working to maintain high occupancy while pushing rents.
Marshall Loeb: We have slowed our overall development pace for continuing forward, we're sub market opportunities allow and finally over the past two years, we saw several attractive new long term investment opportunities something which is much more challenging in a steady market.
Stepping back from the near term I like our positioning as our portfolio is benefiting from several long term positive secular trends such as population migration near shoring and onshoring trends evolving logistic chains, and historically lower shallow bay market vacancies.
Marshall Loeb: We also have a proven management team with a long term public track record our portfolio quality in terms of buildings and markets is improving each quarter, our balance sheet is stronger than ever and we're expanding our diversity and both our tenant base as well as geography.
Now like to open up the call for questions.
Marshall Loeb: Okay.
Marshall Loeb: We will now.
Marshall Loeb: And the answer session.
Speaker Change: If you'd like to ask a question. Please press star followed by the one on your Touchtone phone.
Marshall Loeb: I ask that all participants limit themselves to one question.
Any further questions. Please return to the queue.
Speaker Change: Your first question comes from the line of Craig Mailman with Citigroup.
Marshall Loeb: Please go ahead.
Craig Mailman: Hey, good morning, just wanted to follow up on the acquisitions you know it.
It looks like you guys have close to 240 million implied in.
Craig Mailman: In the guidance there I know you said you'd give us a little bit more info as you get closer to closing but.
Craig Mailman: Maybe there's a just a little bit more than what you've already given in terms of timing.
Craig Mailman: Expected yields whether these are kind of stabilized versus value add just anything that you can can offer and I guess you know as a another part of that Brett you said $275 million.
Craig Mailman: <unk> capital proceeds.
Craig Mailman: In the balance.
Craig Mailman: What's the difference between kind of the acquisition guidance and.
And.
Craig Mailman: That spread is it just money to pay for could take your construction.
Marshall Loeb: Hey, good morning, Craig its Marshall I'll I'll take the first part of the question and then maybe kick it over to Brian.
Craig Mailman: On how we pay for that but.
Marshall Loeb: Yeah. We're we're excited it's been a.
Marshall Loeb: A positive in an atypical acquisition market the last couple of years.
Marshall Loeb: And our guidance we've got it's really it's three projects that we're working towards closing.
Marshall Loeb: They're all existing markets, what I like is there a newer buildings existing markets really complementary to our portfolio you're right there.
Marshall Loeb: Our stabilized assets with below market rents and in terms of <unk>.
Marshall Loeb: Yields maybe if I blend them, what what's made it an unusual acquisition market over the last couple of years, what we've been able to buy kind of on a one off basis here and there has averaged.
Marshall Loeb: I won't say 2000, twenty's construction and actually north of a six year old I think these three I'm not sure if we're quite that high but we're probably as well in the high fives and in new product too. So it'll be similar to what you've seen us buy over the last couple of years and so we're hopeful.
We'll get those closed they are all scheduled to close knock on wood, we're in due diligence through that by the end of the year. They won't help 2020 for a lot but in terms of F F O, but going forward there'll be.
Marshall Loeb: No great additions to the portfolio, we think and then that that market all of the acquisitions does feel like it's tightening fairly rapidly. So I'm glad we found days early before the window closes because the private market has come back to acquisitions and I'll, let I'll, let you talk on yeah, good morning, and on the capital pros.
Craig Mailman: Seeds are Craig, yes, we've to date.
Craig Mailman: We received about 307 million call. It and then we still have just over 200 million of outstanding AR forwards, which would represent about $510 million and as you noted or as I noted in my opening comments looking at about 270 $275 million.
Craig Mailman: In the fourth quarter.
Craig Mailman: The we upped our acquisition.
Craig Mailman: Guidance by 135 million and upped our capital proceeds by about 55 million more than that but that's just the culmination of various factors between development spending and just operating in general for you know from quarter to quarter, It's 90 days change.
Those kind of changes in your cash flow statement can vary a little bit. So there's nothing in particular, there I mean, the the main driver in up in the capital proceeds with acquisitions, but you have this other general operations flowing you know flowing through that they can can move that number a little bit from quarter to quarter.
Speaker Change: And just to clarify Marshall that higher 5% cap rate. That's if you roll the rents to market right, that's a stabilized yield.
Marshall Loeb: No and I'm glad you asked that that that's existing rents.
Speaker Change: And so these are newer assets.
Speaker Change: With a higher mark to market.
Speaker Change: Down the road each one a little bit different weighted average lease term or Walt is the brokers right, but I'd say blended initial cash cap rate is in that higher fives.
Speaker Change: Great. Thank you.
Speaker Change: Youre welcome Thanks for clarifying.
Speaker Change: Your next question comes from the line of Rich Anderson with Wedbush.
Rich Anderson: Go ahead. Thanks.
Rich Anderson: Good morning, everyone. So.
Rich Anderson: Last quarter Marshall you describe the environment is improving slowly and today and this this one you said the word choppy I'm wondering if there was a in your mind any kind of sort of reversal of trend between the second and third quarter.
Rich Anderson: And then related to that when you. When you mentioned you know sort of your optimism for 2025.
Rich Anderson: How are things trending into next year now versus how you viewed them trending three months ago.
Marshall Loeb: Okay, Hey, rich good morning.
Marshall Loeb: I guess, what I'm, what I'd say choppy are slowly improving there.
Marshall Loeb: It's not any real reversal there it's probably the same this year has felt like.
Speaker Change: Two steps forward, maybe one step back on the leasing front. It feels like it's improved I have heard of late and look there's always a reason.
Speaker Change: Well the way one of our brokers described it to me you're waiting on the election, everyone was waiting on interest rates, you've got two candidates that have.
Speaker Change: Totally different policies and so people may be putting things on hold waiting on the election turns so it feels like.
Speaker Change: There's always a reason why things are moving slower than we would like and that's the that's the most recent one the good news is for better or worse, the election will be behind us and a couple of weeks. So that'll take one more level away hopefully interest rate cuts will pick up steam a little bit things like that so that is where this year look my timing.
Speaker Change: They've been off personally I thought things would have been more improved than they've been but if I as Brett and I were talking in his comment was as you step back there's really not been in.
Speaker Change: Any positive economic news, whether it's global unrest or interest rate cuts that were supposed to start in March of this year or one of the most unusual elections I think any of us have seen in terms of candidates dropping out all kinds of things like that so there's.
Speaker Change: Has it been a real boost of confidence that said.
Speaker Change: Proud of the team, we're 97% leased we push rents and where I get excited and I'll tie it in maybe to my earlier answer in terms of what we're seeing in the private market on acquisitions I think the fundamentals are there and that we're for our size product type is about.
Speaker Change: If people have a moment in want to look on it on our own investor Slide deck page 16.
Speaker Change: If you look at space is 100000 feet and below there's about a 4% vacancy there is not much product available out there. So the fundamental setup is really strong in terms of with the delay in recovery what inventories out there.
Speaker Change: Pipeline continues to shrink there is not much inventory out there all we need is a little bit of a lift in business confidence and things will turn pretty quickly I think it will be more of a V.
Speaker Change: U shaped turn it's just waiting for that turn has taken maybe a quarter or two longer than I would've told you I expected earlier in the year.
Speaker Change: Yeah.
Speaker Change: Okay, great. Thanks, very much sure Youre welcome.
Speaker Change: Okay.
Speaker Change: Your next question comes.
Speaker Change: From the line of Andrew Berger with Bank of America.
Speaker Change: Go ahead.
Andrew Berger: Hey, good morning, just maybe following up on the last question.
Andrew Berger: Curious if you know the brokers have talked at all about excess capacity or slack in the system. If that's you know feeding into the slower decision making.
Andrew Berger: We've heard this a bit throughout the sector, but not sure if that's as big of a factor for some of the smaller spaces. Just curious if you have any thoughts on that.
Marshall Loeb: Hey, Andrew Good morning, its Marshall, Yeah, I don't think.
Marshall Loeb: Saying I've heard about that and read about it I think on that I mean within our size spaces.
Marshall Loeb: A 50000 foot 35000, our average tenant size is about 35000 feet, we really don't have that excess capacity, it's probably.
Marshall Loeb: I think it's.
Marshall Loeb: Donnelley pertains as the bigger box space, and then <unk> within a bigger box space. So we have not we've actually seen sub leasing come down a little bit earlier in the year and I don't think we've got excess capacity I think what we need is people to fill more confidence about expansions and that'll really ramp up our <unk>.
Marshall Loeb: And the pipeline because that's that's usually where our building that next building in the park.
Marshall Loeb: Our own tenants, expanding and Thats, what we keep kind of waiting to hear Oh, there is discussion of that but to hear it a little more confidently.
Speaker Change: Got it thank you very much.
Youre welcome.
Marshall Loeb: Okay.
Speaker Change: The next question comes from the line of <unk> with Evercore.
Speaker Change: Please go ahead.
Speaker Change: Hey, Yeah. Good morning, Marshall I'm, just in terms of market rents here.
Speaker Change: What's your updated view it you know like I know in the past you've talked about.
Speaker Change: Certainly being I think correct me if I'm wrong like mid single digits is that kind of where you are today or I guess sort of revise your views given given what youre seeing on the demand side.
I think that's fairly accurate if I moved it around at all and that May have been at it at your conference I'm trying to think when that was August September so not not long ago I still think this year will be a 4% to 5% kind of rent growth and our product type three and a half to five so somewhere in that.
Speaker Change: Mid single digit and then.
Speaker Change: I think when I look at the fundamentals.
Speaker Change: The delay in supply coming there'll be there'll be another ret squeeze like there was two years ago, where rents will get pushed higher because there's such little supply Dallas for example, where the construction pipeline has shrunk from about 76 million to under 11 million square feet.
Speaker Change: <unk>.
Speaker Change: There's going to be a supply squeeze if there is any kind of pick up so maybe my my analogy is it's almost like the ground just really dry it won't take much of a lightning strike to get a fire started and when that happens we'll be building pretty quickly and I think there'll be a push on rents but.
Speaker Change: At the moment this year for our product type and then again, maybe absent L. A southern California, which had the run off and it's going backwards, but were probably in kind of that 4% range for our portfolio absent Los Angeles.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of Todd Thomas with Keybanc capital markets.
Speaker Change: Please go ahead.
Todd Thomas: Hi, Thanks, Good morning, I wanted to ask about development and.
Todd Thomas: Development leasing you had a couple of leases signed in the quarter, but activity in the lease up portfolio.
Todd Thomas: A little bit relative to prior quarters.
Todd Thomas: <unk> generally been ahead of conversions with regard to leasing so far during the cycle do you see that changing as you look to the schedule for anticipated conversions and twenty-five which really starts to pick up a little bit.
Todd Thomas: Into the second quarter and then I'm also just curious if you could elaborate a little bit on on development starts as we.
Todd Thomas: Think about 2025, a little bit just vis vis your comments.
Speaker Change: Yeah, I mean, I think good morning, Todd will I guess, the good news on our development pipeline, what I, what a couple of things that I like I like that what we brought in has been averaging at fairly high returns that when we when we are rolling them out and we will average the 741 of the projects that rolled in last quarter was.
Speaker Change: The completion of hillside in Greenville, but we were able to get that to a 100% leased what were kind of really seeing on the ground is the.
Speaker Change: Tenants as we said deliberate or in a hurry. So it feels like at the peak, we were getting a lot of like our peers, we're too a lot of leasing during construction and now it's more of that tenants are looking at you as you're finishing the buildings that have the wall stilted and things like that so it's a little bit later, we'll roll them in.
Speaker Change: You're always out 12 months after completion.
Speaker Change: And a lot of cases will make it in that 12 months, but in a few it's more of a 15 16 month process. So.
Speaker Change: And that's just kind of where we are today I'm hopeful next year that you know again, if theres a little bit of lift in the economy. Some of the ones that roll in look I think long term, we're fine we're creating a lot of value.
Speaker Change: Just may take 15 months, rather than 12 is where we are today, but where we are developing into the sevens.
Speaker Change: And what we're seeing in terms of private market cap rates is getting pushed into the fours pretty rapidly. So we like the value creation. There. It's just right now we were leasing things out within six months of starting construction and now it's moved about 15, but I think it's cyclical it'll cycle back again and especially.
Speaker Change: Given how little product is out there.
Speaker Change: Yeah.
Speaker Change: Your next question comes from the line of Blaine Heck with Wells Fargo. Please.
Speaker Change: Please go ahead.
Blaine Heck: Great. Thanks, Good morning, Marshall you alluded to the election, a bit but I think the discussions around the impact to your industrial had been focused on potential impacts from increased tariffs. So just wanted to get your updated thoughts on the subject and whether you have any concerns about the potential impact to your business.
Blaine Heck: Markets or your tenants or on the flip side, maybe even think it could be an additional positive driver related to the near shoring and onshoring impact.
Marshall Loeb: Yeah, I think get good morning, I mean its hard.
Blaine Heck: Probably any political advice for me.
Blaine Heck: Should run from I guess, it would be one better my advice I think long term that uncertainty what where we are seeing in terms of I think just the certainty for our tenants having certainty about who's in office and who have controls Congress, maybe more importantly than the president's, saying, we will give them certainty to plan their businesses. So I think that is.
Blaine Heck: Positive and we're still bullish in terms of look I like that we've got e-commerce population growth onshoring near shoring.
Blaine Heck: We think that long term, maybe a couple of thoughts in terms of onshoring near shoring.
Blaine Heck: When we look at it it's really San Diego, I mean, Dallas, and Austin will benefit, but San Diego, Arizona, where Tucson, where Phoenix at El Paso those markets for us have all been well leased there re leasing spreads are above our portfolio average. So we're benefiting already from that and then a couple of other stats when we.
Blaine Heck: We were looking into onshoring Nearshoring. If you look at the chipset funding kind of at least in terms of the onshoring of manufacturing.
Blaine Heck: What the top five states, what's been awarded just going to Texas, and Arizona is about 60% to 63% of the top five states. Those two states so and that's still a work in process in terms of getting those plants built the ripple effects throughout the local economies things like that.
Blaine Heck: And then when we look at border crossings.
Blaine Heck: We were working with one of our groups and they went back comparing 2015.
Blaine Heck: So correct the border crossings at all of our markets, whether it's <unk> or Tijuana or Nogales, which is right next to Tucson or up over anywhere from a little over 100 up to about 140%. So it's.
Blaine Heck: Happening and I believe it will continue to happen regardless of the election.
Blaine Heck: And then what we do like about the election and I'm optimistic as I think just stability and predictability will help our tenants in terms of their space needs and their kind of customer planning and end up tariffs, we'll see how those all shake out with Congress and everything else, but in the meantime, we will.
Blaine Heck: It will go lease one development at a time, regardless of who's in office.
Speaker Change: Your next question comes from the line of Michael Carroll with RBC capital markets.
Speaker Change: Please go ahead.
Michael Carroll: Yes, Thanks, I wanted to dive a little bit deeper into the guidance that you provided I know there is two other updates that the lease termination income increased a decent amount and then also your reserves for bad debt increased a smaller amount can you provide some color on what drove the termination fees higher end and what's potentially driving bad.
Speaker Change: A little bit higher.
Speaker Change: Sure Michael and good morning, Yeah sure on the term fees and I'm happy to add clarity there. Our team there had a couple of what I would describe as successful negotiations we had in both instances. It was green energy type related tenants there were some calculated risk upon entering into those leases and one K.
Speaker Change: So on the larger of the 203000 square foot space to the tenant was never behind in rent. They just decided what they were doing was not going to be successful and they were winding down that location.
Speaker Change: The team there it put in a letter of credit to begin with there and the rents that we basically brought forward their represented about nine months of gross rent and they've got lease out for half the space another prospect for a quarter. The space. So I think in that situation, it's going to be a good win for us in terms of net cash.
Speaker Change: And then when you look at the other space.
Speaker Change: That was part of that drove the term fee income again, a similar situation wherein does that tenant did get a couple of months behind but again just negotiate a termination we had a large letter of credit that we could draw on and that represented about 15 months of rent and we've actually verbally agreed to terms with a replacement tenant there so.
Speaker Change: I think when the dust settles that'll be up seven figure win meaning by the time, we replaced the tenants at higher rents and the money we took in subtract a little bit of downtime and we're gonna have come out way ahead, just the oddity of it right now is it happening in the fourth quarter. You know we have the impact of getting the term fee and that pause a little bit of base rent out of.
Speaker Change: <unk> fourth quarter, because we've got a turn the spaces, but then the residual impact of re leasing it won't be till 2025.
That happened early in the year, we probably wouldn't be as much talking back. She would say you got the term fee quickly released and you could point all of the factors that once but.
Speaker Change: So we feel good about both of those instances that obviously the $1 7 million of term fee income obviously drove some of the bottom line here in the third quarter and then quickly on bad debt free.
Speaker Change: And frankly, it's been frustrating our collections have been good continue to be good or.
Speaker Change: Our active tenants with the reserves and on the watch list has remained small and pretty constant in terms of numbers.
Speaker Change: But we've got our bad debt year to date is contained within about four tenants that represent 70% of that year to date total.
Speaker Change: And although it's a slightly different mix of tenants are about 71% of that year to date bad debt has been from some of our California based properties and if you said is there a common thread amongst some of the few bad debt tenants. We have about half of those are in the kind of regional or local logistics three P. L type companies that have just seen.
Speaker Change: Contract business slow down not a lot different than what you've seen in some of the bigger box guys, but obviously when you're a smaller operation has more impact. So let's say it's frustrating. It's just collections had been good you just got these a handful of sticky situations here, but the guys are in some cases or we've moved most of those tenants out.
Speaker Change: Getting prospects to backfill, but.
Speaker Change: Again, it's all in all it's been good collect since we've just had had to navigate a little bit of of these tenants in California that we've had to deal with and it's not easy and it takes some time to move tenants out of space in California relative to other states for example, in Texas and so it prolongs the process, which prolongs your.
Speaker Change: Your bad debt attached to it because you just can't.
Speaker Change: Say in Texas. For example, you can lock attended out and terminate the lease much more quickly cut off the revenue cut off the bad debt and move on and it's a much more arduous process in California. So we've just had to negotiate that.
Speaker Change: Okay, great. Thanks, Brent.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of Alexander Goldfarb with Piper Sandler.
Speaker Change: Please go ahead.
Speaker Change: Hey, good morning.
So just sort of wrapping it all together.
Alexander Goldfarb: Brent sounds like bad debt is really not a big issue and it sounds like it's mostly in California specific tenants that you're dealing with and then overall demand for the portfolio overall sounds pretty good I didn't hear you guys talk about expectations for rent declines or your ability not to push rent. So is this really.
Alexander Goldfarb: Just sort of a macro thing where overall tenant demand is for the most part good you're a little nervous on development, just because tenants aren't there to prelease, but you're comfortable boosting acquisition. So really overall it sounds like the portfolio is performing well what you need to see is just some increased tenant confidence it doesn't sound like there's tenant credit issues.
Speaker Change: Is it just sounds like people are operating well and you're just looking for them to feel better about expanding it sounds like that's really the key.
Speaker Change: Yeah, I'll, let Marshall talk about activity, but.
Speaker Change: Anytime you've got bad debt I wouldn't describe as quote say not a big issue, but what I would say is.
Speaker Change: There, there's not been a rise in there's not been a what.
Marshall Loeb: Been pleased to see it throughout the year, there's not been a rise in well we have this number of tenants that we're watching and then it's moved up to this and it's moved up to this that's been pretty consistent and a very low range and the overall number of tenants there hasn't been like a lot of additions to that.
Marshall Loeb: It's just been a handful of situations like I say predominantly California base, where tenants just.
Marshall Loeb: I haven't made it through the slowdown out there and really related to the California.
Marshall Loeb: In certain markets, so would never describe it as not a big issue, but I would say, it's not been widespread and not something that we've seen as growing and ideally don't see it as growing but like I say, it's been frustrating because it's been driven by when you look at our portfolio of over 1300 tenants and you've got four or five that are kind of have driven it over.
Marshall Loeb: The last few quarters, it's a little frustrating but.
Marshall Loeb: No we just deal with it and re leased the space, but I'll, let Marshall talk about the sort of demand overall.
Thanks, Alex I think you're right I agree with.
Marshall Loeb: With Brad's comment Baghdad, it's been on a handful and it's made it a hit.
Marshall Loeb: You're here this year and he's right.
Marshall Loeb: Without getting into details it is harder.
Marshall Loeb: The regulations are harder in California than they are in the balance of our portfolio, but that's why we're diversified tenant wise and geographically.
Marshall Loeb: And then the fundamentals are setting up theyre better than what we've seen in a number of years Youre right an increase in demand or love where supply is a lot where vacancy is it's better than it's been in a handful of years and I think the private market, saying that so that we're excited about and on developments.
Marshall Loeb: We have names in prospects and proposals out there just not filling at quite the rate, but that's why you've seen us.
Marshall Loeb: Pull back on development, we've tried to be as nimble as we can be of developments arent leasing.
Marshall Loeb: Building the next phase of the part doesn't solve it if they're leasing more slowly we've pulled our developments down our starts down about 130 million. This year from last year, but the flipside of while businesses and capital has been a little more constrained or it's certainly expensive.
Marshall Loeb: It's open the acquisition window. So at the end of the day, we're going to own well located shallow bay multi tenant product, we've just had a better opportunities to buy it.
Marshall Loeb: And we'll still bill that just where our sub market window opens up and I think that market will be much im expecting it to be much more there and readily available into twenty-five than it's been in 24.
Marshall Loeb: That's why we kind of our starts this year fourth quarter. So thanks Alex.
Speaker Change: Hey, Thanks, and hopefully get some chicken soup for your throat.
Alexander Goldfarb: [laughter] you noticed Q sorry.
Marshall Loeb: Sure.
Speaker Change: The next question comes from the line of Nick Tillman.
Marshall Loeb: Yeah.
Marshall Loeb: Please go ahead.
Nick Tillman: Hey, Good morning, guys just wanted to touch on development because fourth quarter is still implies almost a $125 million of starts should we just view this as like.
Speaker Change: The field kind of seen the demand is there in your traditional Florida, and Texas markets, where the current pipeline is already starting to see a little bit broadening out the opportunity set.
Speaker Change: And so it's certainly Florida Houston has been a good market in Arizona, where we've got some aside there near the.
Speaker Change: Airport, so, it's a little bit spread out a little bit and but it's I'm trying to think what look with Greenville, where we moved the building that I'm trying to think of what else. We've got scheduled in the fourth quarter. We know now we're 100% leased in South Carolina. So we'll kick off the next phase of our park. There. So it's a little bit of a nice mix in those economies evolve.
Speaker Change: Done well and right now there's not much availability. So by the time, we start these buildings in fourth quarter and deliver we feel pretty good about the environment. When you call. It 10 months of construction plus another 12 months is what we'll underwrite to lease it up that there'll be some pretty good opportunities. There. So that's those are kind of the <unk>.
Speaker Change: Markets were looking at where our starts just kind of chronologically we'll hit the end of this year.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Mike Mueller with JP Morgan.
Speaker Change: Please go ahead.
Speaker Change: Yeah, Hi.
Speaker Change: Sticking with development it looks like your lease up developments have about a six eight yield expectation and what's under construction is about a 7.5%.
Speaker Change: I guess, how much of the pickup there is being driven by the movement in the 10 year.
Speaker Change: Versus kind of what you're perceiving for market risks and as a follow up to that is as youre thinking about new projects you maybe go into the ground on is seven and a half more in the ZIP code of what Youre expecting there.
Speaker Change: Oh, Hey, good morning, Good question, I think probably not as much 10 year driven on a yield but it would be really what type of thing. We've seen is with the construction pipeline really for all product types slowing down like it has the cost have come down so we still had some reps.
Speaker Change: Positive rent growth and costs have come down so that's what's happened and then really that's why I got it.
Speaker Change: Maybe the mix to a little bit what's under construction and what we have delivered both have or kind of are in that well into the mid sevens mid sevens and then the other way we will underwrite it when will approval a project to start construction.
Speaker Change: Started at about a 7% yield because we'll all what we want.
Speaker Change: Project ramps will underwrite to current market rents because it gets pretty dangerous if you let us project rents.
Speaker Change: It will be wrong as often as we arrived at least so and those market rents have grown by the time, we deliver and we saw it we actually typically if you look back the last couple of years, our development yields have been 80 to 90 basis points above what we initially thought they were because thankfully sometimes construction costs can comment on.
Speaker Change: Little bit lower and the bigger driver is rents come in a little bit higher than we had underwritten at that time and look we like that incremental yield and NAV creation because over time as a long term owner.
Speaker Change: Then those rents are just going to keep growing from there. So if if everybody's out buying industrial we've liked out tried to take the approach, let's create it rather than out there in the world has just been this rare a kind of a two year window, when we've been able to pick up some things at attractive yields, but we think that window is.
Speaker Change: Has gone away or is going away, we have seen any number of.
Speaker Change: Trey it's kind of in the mid to low fours here of late which is not as much less attractive to us.
Speaker Change: Got it okay. Thank you.
Speaker Change: Thank you Anna.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Jessica Zhang with Green Street. Please.
Speaker Change: Please go ahead.
Speaker Change: Good morning.
Speaker Change: <unk> done a few acquisitions and developments in Austin. This year and you also have a pretty large land bank there as well.
Jessica Zhang: Just knowing it's been a market with relatively higher supply deliveries lately could you. Please share some color around what you guys are seeing there.
Speaker Change: Yeah no yeah. Good good question and we've watched Austin, It's look I think it's a great market long term, we're really excited between them and again, it's like Raleigh, and a number in Nashville in a bigger way Phoenix and some of our other markets where you've got a.
Speaker Change: State capital S.
Speaker Change: Education presence and that educational present, she usually lanes kind of creates technology jobs and then because of the departure fan those markets. It's really limits development. So Austin is more of a kind of a linear and then out east market.
Speaker Change: It's had more development every developer in Texas went to the University of Texas. It feels like so they all go to Austin to build things we picked up some land sites in the downturn. So we're excited about what we were able to pick up at discounted prices there.
Speaker Change: But long term and we've got a good team there. So long term, we're really excited about our presence in Austin.
Speaker Change: And what we've started on development, we've got a project south of town.
Speaker Change: When we bought Hayes crossing there both that Hays County, just south of Austin couple of tenants that may need expansion space. So we like that clustering of assets and the flexibility. It gives us there and then north of town up in round rock, there's kind of timing of where our competition is and where its leasing up so too.
Speaker Change: Markets will always watch development.
Speaker Change: Development and kind of let the market absorb that but they have great growth long term, but that Austin and Phoenix, So you're smart you're right to pick up on those two really good fast growing markets, they've had a little more construction or development than we'd like.
Speaker Change: For our product type, but we're kind of trying to pick out of windows, where we can kind of.
Speaker Change: Sneaking a development within our submarket compared to what what else is out there and whats available.
Speaker Change: But like on both long term very much.
Speaker Change: Great. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Your next question comes from the line of John Kim with BMO capital markets. Please.
Speaker Change: Please go ahead.
John Kim: Thank you.
John Kim: Wanted to get back to bad debt, which it looks like it's about 65 basis points of APR. This year.
John Kim: Where does that compare to your historical average how do you see that trending next year and do you have any exposure to some of the bankers bankruptcies that have been out there including cons.
Speaker Change: Yeah. So.
Speaker Change: On our bad debt as far as historical trends were.
We're running the third quarter was around 68, if you look for the year and include what we budgeted for the fourth quarter for the year were running about 50% or 50.
Speaker Change: <unk>, 5% or 50 basis points of revenue that's slightly above if you look at our longer term average it's been in that 30 to 40 basis points. So it's of course factored into that was two or three years post pandemic, where we have virtually zero.
Speaker Change: So I would describe it as a fairly at this stage is it somewhat at or slightly above average.
But again, it's been it's been amongst a handful of tenants and hasn't been.
Speaker Change: Pervasive at this point so.
Speaker Change: In terms of I'm trying to think of the second part of that question John that you had.
John Kim: Similarly is there a second part of bankruptcies.
John Kim: Yeah on the bankruptcy side the kinds yet so.
Speaker Change: They were in two spaces, the smaller space 26000 feet. A first we'll start with St. Conscious current through October so it was a bit their retailer not as sprouts are struggling but it was a bit of a surprise when they filed their their bankruptcy paperwork's. They were current with us.
Speaker Change: Both spaces through October.
Speaker Change: We do they have rejected the small lease of 26000 feet, but to date. There is still in an occupying the much larger space, which is 300000 square feet in Charlotte.
Speaker Change: So their current through October November and December rent remaining for the year represents about 300 call. It $40000 for those last two months and so our nearest is something we'll keep an eye on and keep an ear out too in terms of.
Speaker Change: What they anticipate doing there but.
Speaker Change: All in all the good that space is divisible and can be re tenant it is more than one user if we needed to in that building at a higher rent. So we'll just see what happens there but.
Speaker Change: That's that's kind of the status there with Collins.
Speaker Change: If I could just follow up do you have like a watch list that you could share with us and how that's trended.
Speaker Change: Yeah, The watch list.
Speaker Change: I would say, it's a combination of tenants that we have actual active reserves with and then tenants that we don't reserve, but we're watching for whatever reason you have to do to slow pay or maybe comments from the field, but that's been very consistent within a range of four to five tenants in total numbers.
Speaker Change: Youre looking at somewhere in the 16 to 20 tenant kind of category and that's been steady keep referencing but that's been steady for consecutive quarters now and so that hasnt been something thats been growing in number.
Speaker Change: It's just that some of the tenants that you watch you know actually again more related to California based tenants.
Speaker Change: Have gotten more into that.
Speaker Change: Our area to where they're far enough behind that you just deem uncollectible and we tried to re tenant spaces and that's what our team is doing there and we again I would describe collections is good.
Speaker Change: You just have to in this environment you'd have to be with this many tenants have to.
Speaker Change: To deal with these few instances as they arise and try to get about it as quick as you can as we mentioned earlier, it's just a little.
Speaker Change: As a much slower process doing that when you when it's based on a California type tenant just because of the process that you have to go through and the timing of that.
And I guess I would add if it's helpful. I agree with what brents comments it's.
Speaker Change: It's really as much about timing of where in the area. That's been a noisier quarter I think it was a good quarter with the bad debt and some of the terminations.
Speaker Change: Loud or the team with the letters of credit. If these had happened earlier in the year as Brent mentioned earlier it would be fine. It's it's noise. The rent the space, we will get back a good spaces. There was no atypical build out and the rents are below market, but because of the timing.
Speaker Change: Right at the end of the year those created some downdraft on our occupancy as we forecast.
Speaker Change: 10 basis points drop there in a little bit on our same store NOI. So it's not a systemic problem. It's much as if we if we had six or nine more months of the year, we probably could have averaged out and gotten it back and that'll be upside to 2025, because we will we'll re lease those spaces at market rents that are typically.
Speaker Change: 30% higher on average than what we got back it just created some noise within our numbers and on a short term being mainly one quarter. It created some noise in the system, but it's not a long term systemic problem by any means.
Speaker Change: Alright, I just wanted to follow up so.
Speaker Change: Just wanted to clarify what you mentioned earlier, Brent, but its cons included in the in the bad debt reserve for the for the year.
Speaker Change: They are not I mean, there are current as of October. So there, there's there's literally nothing to reserve.
Speaker Change: Alright, okay.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Your next question.
Brendan Lynch: Brendan Lynch with Barclays.
Speaker Change: Please go ahead.
Speaker Change: Great. Thanks for taking my question. This is bill.
Brendan Lynch: Been a topic with some of your peers and I was wondering if you could talk about the potential for converting some of your land bank into data center assets, what markets that might make sense and what are the considerations you're balancing when thinking about these opportunities.
Speaker Change: Yeah, It's a good question and it's something we've done.
Speaker Change: We looked at and we've actually engaged with a couple of few different data center brokers, we work with a lot of industrial brokers, but and talk to directly with a couple of the data center companies as well kind of how we viewed it as listed on land we own we like it for industrial development.
Speaker Change: But if there's an opportunity to sell the land or do you know are open if we could structure it right without putting eastgroup at risk to get outsized returns, we could look into that it's been markets I'm trying to think of.
Speaker Change: Dallas, Austin, Phoenix, Charlotte things like that and so you need the power there you need theres clear height issues and things like that that we've run into so nothing eminent I mean, I wouldn't well, we'll stick to our our key business, which is industrial space, but.
Speaker Change: Maybe I'm a bad analogy if we found out there was oil under our land, we're willing to flip the land or data center development, and we'll find another value add or acquisition or land site to work with but but that said, we're exploring the opportunities out there and one may turn up and what I don't want us to do is or what.
Speaker Change: We don't want to do is build a big data center and learned the hard way some things that you know that's a business we're not in today that our shareholders. If we can however, we can create net asset value and grow earnings. We're all about that and I don't want to take risks and things that we that we kid ourselves we know what we're doing on but.
Speaker Change: That said, we're going to we're trying to see.
What all opportunities are there out there.
Speaker Change: Maximize the value of our land, whether it's a data center or a shallow bay industrial development.
Great. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Yeah.
Speaker Change: Oh, I'll turn the call back over to <unk>.
Marshall Loeb: Marshall for closing remarks. Please go ahead.
Marshall Loeb: Thank you everyone for your time and your interest in Eastgroup I Hope, we got to everyone's questions if not Brent and I are certainly available after the call.
Marshall Loeb: And we look forward to seeing most of you at NAREIT coming up here in just a couple of weeks. Thanks again, thanks everybody.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.
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Speaker Change: Yeah.
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