Q4 2024 EastGroup Properties Inc Earnings Call
Bye, see you next time.
Speaker Change: Good morning, ladies and gentlemen, and welcome to the East Group Properties Inc. 4th Quarter 2024 Earnings Conference Call and Webcast. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, February 1st.
February 7th of 2025.
Speaker Change: I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.
Speaker Change: Morning, and thanks for calling in for our fourth quarter 2024 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.
Speaker Change: Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G.
Speaker Change: Please refer to our most recent financial supplement and to our earnings press release both available on the investor page of our website and to our periodic reports furnished or filed with the SEC.
Speaker Change: for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.
Speaker Change: 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, and the Private Securities Litigation Reform Act of 1995.
Speaker Change: Forward-looking statements in the earnings press release, along with our remarks, are made as of today and reflect our current views of the company's plans, intentions, expectations, strategies, and prospects based on the information currently available to the company and on assumptions it has made.
Speaker Change: We undertake no duty to update such statements or remarks, whether as a result of new information, future or actual events, or otherwise.
Speaker Change: Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Please see our SEC filings, including our most recent annual report on Form 10-K, for more detail about these risks.
Keena: Thanks, Keena. Good morning. I'll start by thanking our team. They worked hard throughout 2024 in what wasn't always a consistent, cooperative environment. I'm proud of the results they achieved within this backdrop.
Keena: Our fourth quarter results demonstrate the quality of the portfolio we've built and the continued resiliency of the industrial market.
Keena: Some of the results produced include funds from operations rising 5.9% for the quarter and 7.9% for the year, excluding involuntary conversions in each year.
Keena: For over a decade, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year. Truly a long-term trend. Year-end leasing was 97.1% with occupancy at 96.1%.
Keena: Average quarterly occupancy was 95.8%, which although historically strong, is down over 200 basis points from fourth quarter 2023.
Quarterly releasing spreads were 47% gap and 29% cash.
Keena: Year-end results were 50-30% and 36% gap in cash, respectively. In cash, same-store NOI rose 3.4% for the quarter and 5.6% for the year, despite occupancy declines in each period.
Keena: Finally, we have the most diversified rent roll in our sector, with our top 10 tenants falling to 7.2% of rents, down 70 basis points from year-end 2023, and in more locations.
Keena: We view our geographic and revenue diversity as strategic paths to stabilize future earnings growth regardless of the economic environment.
Keena: In summary, we're pleased with our 2024 performance, including a record amount of square footage leased within the operating portfolio this past quarter. Alongside that, we're seeing an uptick in prospect activity.
Keena: We need to convert these into signed leases, but are optimistic about the prospects for an improving economy with a lack of new supply.
Keena: We're focused on value creation via raising rents, acquisitions, and development. This allowed us to end the quarter 97.1% leased and continue pushing rents throughout the portfolio.
Keena: We're excited about the acquisition opportunities we announced, which closed late fourth quarter. In Dallas, we acquired four fully leased buildings adjacent to the DFW Airport, increasing our ownership in the sub-market to roughly 2.7 million square feet.
Keena: In late December, we closed on four fully leased buildings, growing our presence in the southeast valley of Phoenix.
Keena: Overall, our acquisitions are guided by two criteria. One, to be immediately accretive, and secondly, raising the long-term growth profile of the portfolio, thus creating NAV for share.
Keena: Additionally, in each of these cases, they allowed us to grow our presence within an existing, fast-growing, land-constrained submarket.
Keena: As we've stated before, our development starts are pulled by market demand within our parks.
Keena: Based on our read-through, we forecast 2025 starts of $300 million.
Keena: We're projecting the majority of the starts in the second half of the year. While activity within our development program is improving, decision-making remains methodical with prospects focusing later in the construction process.
Keena: In terms of starts, we'll ultimately follow demand on the ground to dictate pace. Longer term, the continued decline in the supply pipeline is promising.
Keena: The construction pipeline is at its lowest level since early 2016. Assuming reasonably steady demand, the market should tighten in 2025, allowing us to continue pushing rents and create development opportunities.
Keena: 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.
Keena: Brent will now speak to several topics, including assumptions, within our 2025 guidance.
Brent Wood: Good morning. Our fourth quarter results reflect the terrific execution of our team, the resilient performance of our portfolio, and the continued success of our time-tested strategy.
Brent Wood: FFO per share for the fourth quarter was $2.15 per share compared to $2.03 for the same quarter last year, an increase of 5.9%.
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 $159 million, settled forward shares agreements for gross proceeds of $308 million, with an additional settlement of $37 million after quarter end.
Brent Wood: Collectively, the shares issued in the fourth quarter transactions were initiated at an average price of $178 per share.
Brent Wood: As of today, we have $30 million in outstanding forward agreements and full capacity on our $675 million credit facilities.
In December, we repaid two unsecured notes totaling $120 million.
Brent Wood: After quarter end, we refinanced $100 million unsecured term loan, reducing the credit spread by 30 basis points, resulting in savings of approximately $1.5 million over the remaining five years of term.
Brent Wood: Although capital markets are fluid, our balance sheet remains flexible and strong with record financial metrics.
Brent Wood: Our debt-to-total market capitalization was 15%, our debt-to-EBITDA ratio is down to 3.4 times, and our interest and fixed charge coverage ratio is 11.5 times.
Brent Wood: Looking forward to 2025, FFO guidance for the first quarter is estimated to be in the range of $2.05 to $2.13 per share and $8.80 to $9.00 for the year.
Brent Wood: Please note that approximately 37% of the estimated annual G&A expense is expected to occur in the first quarter, primarily due to accelerated expense for employees who are retirement eligible under our Equity Incentive Plans.
Brent Wood: Our rent collections remain healthy, with tenant defaults being contained to a handful of larger customers. With our tenant watch list holding steady, we anticipate a typical run rate of approximately 30 basis points of revenue for uncollectible accounts in 2025.
Brent Wood: 300 million in new development starts and $150 million in strategic acquisitions. Our projected capital proceeds of $450 million are budgeted to be a combination of equity issuance and revolver use.
Brent Wood: There are four dead instruments scheduled to mature in 2025 for a modest total of $145 million.
Brent Wood: In summary, we are pleased with our solid 2024 results, and thank you East Group team members that are listening to the call today.
Brent Wood: As we turn the page to 2025, we will continue to rely on our financial strength, the experience of our team, and the quality and location of our multi-tenant portfolio to lead us into the future. Now Marshall will make final comments.
Marshall Loeb: Thanks, Brent. In closing, I'm proud of our 2024 results, and I'm excited about the landscape for 2025. Internally, we continue growing earnings while strengthening the balance sheet.
Speaker Change: Others have described the environment as turning, which feels about right. Within this backdrop, we're doing three things. First, we're working to maintain high occupancies while pushing rents.
Speaker Change: Second, we're continuing forward with development starts where 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 expensive and a steady market.
Speaker Change: 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.
Speaker Change: near-shoring and on-shoring trends, evolving logistics change, and historically lower shallow bay market vacancies.
Speaker Change: We also have a proven management team with a long-term public track record. Our portfolio quality in terms of buildings and markets improves each quarter. Our balance sheet is stronger than ever. And we're upgrading our diversity in both tenant base as well as geography.
Speaker Change: Finally, I want to take a moment to congratulate our friend and board member, Eric Bolton, on his upcoming retirement from MAA.
Speaker Change: Not only has Eric made a positive lasting impact on MAA, but in his spare time he's done the same here at East Group. We'll now open up the call for any questions.
Speaker Change: At this time, I would like to remind everyone, in order to ask a question, please press start and the number 1 on your telephone keypad. Again, that's start and the number 1 on your telephone keypad. Please be reminded to limit your questions to 1. We'll pause for just a moment to compile the Q&A roster.
Speaker Change: Our first question comes from the line of Andrew Berger from Bank of America. Your line is open.
Andrew Berger: Hey, good morning and this is Andrew on for Jeff Spector. Marshall, you mentioned the word green shoots earlier and just curious if you're seeing this in any particular markets.
Hey Andrew, good morning.
Marshall Loeb: I wouldn't say, thankfully no, I mean yes and no, it's not limited to any market, it
It felt pretty broad-based, really kind of.
Marshall Loeb: late last year where prospect activity, and again, it's got to start somewhere, seemed to pick up. And thankfully, that's continued into this year. So
Marshall Loeb: Even in, as we've said before, California's had some credit challenges for us.
and Dr. Craig.
Marshall Loeb: tours and proposals and letters of intent and to sign leases. But I'm encouraged that it's not in just Florida or just Texas or anything like that. It's pretty broad-based across the portfolio.
Speaker Change: Got it. Appreciate that color. And maybe it's just a follow-up. I know your portfolio is more focused on consumption, but obviously with tariffs being pretty topical over the past several weeks, I'm curious if that's come up in any conversations with your tenants and, you know, any themes that are worth calling out.
Speaker Change: It's not come up in any tenant conversations that I'm aware of. I do think it's got to affect how people think about them, and we can talk a little later in the call as well about it. To us, it really affirms what we're trying to do.
Speaker Change: As you mentioned, this is why we want to be near the consumer. Look, if your shoes come made in China or Mexico or in the U.S., we just want to be near where...
Speaker Change: That customer is buying their goods and services, and that's why we try to have historically steered clear of ports.
Speaker Change: Steer clear of the port because that seems much more volatile where that end user last mile consumption is much more sticky. And so we view it as a way to really kind of smooth out or avoid earning shocks by staying there ideally near the consumer and ideally, which in most cases we are a growing consumer base.
Great. Thank you very much. Sure. Thanks, Andrew.
Speaker Change: Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Your line is open.
Alexander Goldfarb: Oh, hey. Morning. Morning down there. And I forget if it's one or two questions, but it sounded like it was two. So just with that in mind.
Speaker Change: Marshall, on the development side, I think you said it was record leasing for the operating portfolio, but the development leasing was a little bit slower. But then you commented that you want to ramp development. So
Speaker Change: Are you anticipating a return of eventual development demand or are you seeing it real-time where your positive development comments are supported by increased expansion demand by tenants?
Speaker Change: Good morning. Yeah, our preference, just great news is we have a lot of analysts that follow these groups. So we were trying to keep it to one just to.
Keep the train moving.
Speaker Change: I'll keep it to one, I'll keep it to one. All right, thanks, Alex. But, you know, our thoughts, our development, we... Look, last year, we brought our development starts down. That's the first time we've done that.
Speaker Change: in several years, but we didn't see the leasing in the market.
This year, if you looked at our timeline, our...
Speaker Change: We started several in fourth quarter. It's really sub-market by sub-market. Our development starts are projected to pick up kind of from the field this year. Most of those are the back half of the year, and it's a combination of
Speaker Change: Supply today is at an eight-year low. If anyone wants to, in our investor road show, there's a slide, I believe it's about page 16, that'll show where vacancy is by product size and it really speaks to the lack of supply or the lower supply in Shallow Bay.
Speaker Change: So, there's not a lot of supply, there's not a lot of vacancy in our sector, and starting late this year, again, giving it...
Speaker Change: Call it 9-10 months to deliver the building. We'll underwrite a year to lease it up. We think starting later in the year, given the activity we're seeing today, demand's going to tighten, and it'll be a good time to step on the gas again for a while on developments. And that's really what's modeled in.
Speaker Change: Our guidance is probably tenants moving into developments later this year, second half, a lot more frequently, and development starts picking up in the second half of the year as well.
Thank you.
You're welcome.
Speaker Change: Our next question comes from the line of Craig Mailman from Citigroup. Your line is open.
Hey, good morning.
Craig Mailman: Just want to touch on the de-levering you guys have been doing. When I look at the balance sheet, right, you guys are down to 3.4 times.
Craig Mailman: Debt to EBITDA, and you issued some equity that was, you know, relative to us, a little bit below NAV.
Craig Mailman: Just kind of trying to get a sense of Are you guys trying to position the balance sheet to do a bigger transaction?
Craig Mailman: or is the capital deployment on the development side just not pencil with where debt rates are today? Just try to get a sense of where you think the optimal leverage is for you guys or is this just kind of building capacity for the future?
Speaker Change: Yeah, I'll jump in. Hey, Craig, good morning. Yeah, it's not intentional that we're trying to drive the balance sheet down for any particular purpose or de-lever the balance sheet. We certainly have ceilings, which we're nowhere near, but, you know, metrics on the top end that we don't want to be above for a healthy balance sheet.
Speaker Change: It's really been the byproduct of an unusual but an extended period where we have viewed equity as being the best cost benefit spread investment capital opportunity relative to debt or even in past years even compared to something like the revolver even.
Speaker Change: on the, you know, probably at the lowest end of where we'd ideally want to be.
Speaker Change: We view it, without getting into our NAV, but in and around NAV.
Speaker Change: That's obviously not an exact science. There's quite a range if you look on FACTSET or S&P amongst the groups that follow us.
Speaker Change: There's probably at least like a $50 per share differential there in thoughts, but but we're really more looking at the cost spread and I guess I'd point out
Speaker Change: The really the reason we're issuing is thankfully our team has continued to find via acquisitions like the fourth quarter where they three stellar acquisitions.
Speaker Change: and the development. So we've had good reason to go raise capital. We're really trying to be able to execute on those opportunities that they're pulling up. So our goal is certainly, Craig, I think this year in our guidance.
Speaker Change: We're budgeting for the first time in a couple of years more of a mix between using the revolver which is at a low five right now
Speaker Change: But look, it's fluid, and ideally when rates, and there's not a lot of hope early part of the year, but somewhere down the line...
Speaker Change: If rates come more into check with what we view the revolver end or equity cost-wise, we view that as looking long-term in each group as a great opportunity and a great tailwind for us where we can unleash a lot of capital and a lot of opportunity. But a summary of that is it's really just been the byproduct of
Our evaluation and not anything intentful.
Alexander Goldfarb: Okay, that's helpful. Just I'm going to sneak a second one in here on your comment Marshall around kind of development decision-making is later in the process
Thank you.
Speaker Change: You know, I know historically that had been the case in this last cycle. You know, pre-leasing was happening Just can you give us a sense on on? You know the tenant pool For the the available development space you have and even you know, the starship space and con space you guys got back
Speaker Change: Sure, a little of both. I would say the tenant pool...
which is felt better, maybe I'm organizing my answer.
Speaker Change: When you think about why tenants are taking a little longer, when supply picked up to such a degree,
Speaker Change: Every prospect has a tenant rep broker, and they want to make sure the space is ready when they're telling their client it's available. So now with.
Speaker Change: finished options or second-generation options, they don't want to, you know, their avoidance is, we don't want to say you're...
Speaker Change: Craig, your space will be ready in June, and it's not ready until August.
Speaker Change: So they've had the luxury of being able to wait and kind of during the peak their fear was missing out on space So it it really ramped up our own development because everything we were building was was finishing out We've always underwritten a year to lease up
Speaker Change: decision-making has run up. I've seen some graphs from one of the brokerage groups where it was about nine months to make a decision. I think it's...
Speaker Change: First half of the year, slowly turning. For the first time, I can think of a couple of spaces we've had in the last
Speaker Change: 30 to 45 days where tenants have lost out on space, and I always...
Paul Huntington, EAC Chairman
Speaker Change: that it's going to cause those tenants to feel a little more sense of urgency. And then on our, again, that's our opportunity set, if I think of this year, is really at one.
Speaker Change: We budgeted what we expect will happen as things get better and signed and move in the back half of the year.
Speaker Change: We feel good about the activity today. If it happens earlier, we'll build more, and if it doesn't, we'll do what we did last year and develop a little less. And even on, say, the contents, which is, I guess for other listeners, 300,000 feet in Charlotte.
Speaker Change: And we had Starship, which is 260,000 feet in South Bay, near the ports of L.A. and Long Beach that went.
Speaker Change: We had bankruptcy issues both in fourth quarter, so we don't have that many large tenants, but we have 20 tenants over
Speaker Change: Say 200,000 feet and a little bit of a perfect storm where...
Speaker Change: Two of them went bankrupt both in fourth quarter struggle during the year and then went bankrupt, but we've got good activity without getting too far over my skis that we've got they're good buildings.
Speaker Change: And we've got a really good team on each of them. And there, we have active negotiations on both spaces.
Speaker Change: If I cross my finger, as soon as we get anything signed, you'll hear me yell, we'll put something out.
Speaker Change: optimistic, cautiously optimistic on both spaces given the activity we have today and that's kind of how we're viewing the year. Look, I love the tours we just need to get people to the cash register.
Great, thank you.
You're welcome.
Speaker Change: Our next question comes from the line of Todd Thomas from Key Bank Capital Markets. Your line is open.
Hi, good morning.
Good morning, this is AJ Peacon for Todd.
Speaker Change: So, just to piggyback real quick off of Craig's question, could you just quantify a little bit?
Speaker Change: the development leasing in regards to, I think back in November you said that the decision making is taking, you know, 15 to 16 months. You know, previously it had been, you know, within that 12-month time frame. Could you just quantify or is it still kind of that 15, 16-month time frame?
Speaker Change: I think it's more similar. I think it's slowly turning and what's been, you know, I guess telling to us a little bit and our development pipeline really is page 11 and 12 in our supplement, but when I look at what we've
Speaker Change: Finished for the last couple of years, even with kind of a elongated completion time where things rather, we'll underwrite 12 months, but maybe they went from taking six.
Speaker Change: to 15 to 16, what we delivered last year came in at a 7.8% yield, which is higher than we underwrote, even though it took it had more carry in it. So it's not that
Speaker Change: We're getting so much pushback on rents and TI and kind of economics. It is just getting someone to say, we're ready to go. Renewals is a percentage of leases signed or up nationally. They're kind of in the 30-something percent where they were running in the 20s for the last year.
Speaker Change: I think that will come down and it feels like it's turning, but we're an early inning on that turn, and I think it'll take people
When they
Speaker Change: some of the challenges, I think, that we have in Los Angeles today, and it was really the outlier on that kind of frenzy, and everybody got into industrial development, but hopefully it doesn't get overheated, but it feels like, look, we're in a cyclical business.
It's slowed down and it feels like this year is...
Speaker Change: turning, and we've been seeing that activity in the last couple of, you know, mid-fourth quarter through today. We're happy with how the year started. We're a little ahead of where we thought we would be, and I hope we can keep that momentum up later in the year.
Speaker Change: Okay, that's helpful. And then just real quick, how are you thinking about rent change in 2025? I guess what sort of range would you expect to achieve on new and renewal leasing, and how far through the 2025 lease expirations are you?
Speaker Change: And, you know, what is rent change looking like so far year-to-date on that pool?
Speaker Change: Yeah, in terms of, and I'll let Marshall maybe touch on what he's thinking on rent changes for the year, but I'd point out that our expiration schedule for the year, we've decreased that even since putting the supplemental together.
Speaker Change: That's down to just 8% turn remaining for the year of 2025 expirations. We report rent change as we sign leases, so a lot of the lifting on the 2025...
Expirations and renewing those tenants occurred in 2024.
Speaker Change: As we signed those leases, we reported the results. I would just say we've been pretty consistent here. It's plateaued, but it's at a very good level. We still are seeing strength in our rental rates.
Speaker Change: We're running that 50% gap increase, and we're seeing that beginning of the year, pretty consistent with that. So we're not feeling headwinds, to Marshall's point earlier, it's been more...
Speaker Change: Once you get somebody that needs the space and you get the foot trap somebody committed Getting the rate that you need really hasn't been the obstacle because of the tight supply
Speaker Change: It's just getting the traction and the showings increase, which is good to see the signs of that picking up. But, so we're seeing, well, what I would describe maybe is...
Speaker Change: On the average at the end of the year, if you tell me it would come in slightly below what we've ran in the last couple of years, that wouldn't surprise me, but it still feels like that's a pretty strong category of rent change, that is.
All right. Perfect. Thank you, guys.
Thank you.
Speaker Change: Again, please be reminded to limit your questions to one. Thank you. Our next question comes from the line of Rich Anderson from Whitbush. Your line is open.
Speaker Change: Okay, just a five-part question here. Just kidding. I'll toe the line. You know, Marshall, I just want to make sure I better understand sort of the cadence of your developments and the 300 million of starts.
Speaker Change: In the past, you know, one development informs the next, just from the on-the-ground, you know, activity that you saw, and it gives you the confidence to go forward. Is that sort of...
Speaker Change: motif not exactly happening yet but what you see is so much less supply so you want to be in front of it before and prepared for that perhaps to start to start to come together later this year so is it sort of like
Speaker Change: Sitting in the abstract a little bit right now in terms of how you typically start developments But you feel like it's going to come eventually so you you're sort of talking about starts In the 300 million dollar range it do I have that kind of right? Maybe you can sort of fill in the blanks
Speaker Change: Good morning, Rich. I'll give you a five-part answer. It's mainly the former. Look, I think one of the beauties of East Group, it's a pretty simple model so people like Brent and I can manage the company.
Speaker Change: Once the building's pretty much finished, we'll build the next one, and that's what we stuck with, you know, when things are good, and last year when things were a little...
Speaker Change: We started in fourth quarter and you're right, it really is on the ground. It was sub-market by sub-market. We started several buildings in fourth quarter even though things were slow, but of the five, one was
Speaker Change: The second building in Tampa, because the first building the team got 100% leased.
Speaker Change: And then the other were markets where, and similar, in Greenville, South Carolina, Greenville-Spartanburg.
Speaker Change: where we didn't have development, an active development, and we certainly don't want to lose, and that we've lost, within our top 10, we lost one of our spaces with a tenant because they outgrew us and we didn't have the development.
Speaker Change: ready in time to accommodate them. So it's mainly that pulling the next ticket as inventory starts to decline in that sub-market.
Speaker Change: And then a little bit where maybe you're right, we're back into the year. There's a little bit, that's maybe the science where there's a little bit more alchemy to it is that we do think.
Speaker Change: Harder than it's ever been for industrial today, so that will take them time. And we think there'll be a period, especially early on in the shallow Bay world.
Speaker Change: where there's not much private competition and we want to be able to one, accommodate our own tenants growth or the tenants that are around the corner and down the street. So there's a little bit where I think the market will.
Speaker Change: Give us a nudge on development starts towards the end of the year and our own just in the team in the field feels like we're going to finish
Speaker Change: Welcome back everyone. Today's session is presentation of the phase 2 role um role to page phase 3. This is back-end weighted. It's pretty easy to see our task at hand looking at our presentation.
Speaker Change: In under construction schedule, there's some number there's a lot of space there, but that's our that's our opportunity. If we can get out ahead of that and have some leases come in earlier, given the activity than what's in the budget, but we'll, we'll do our best and the teams on it. But it's.
Speaker Change: We'll follow the field and when the market's saying it wants more supply, but I think you're right. Our sense is there's a squeeze coming, and I've been...
Speaker Change: Predicting it too early, I would have thought it would have happened last year, so I've been wrong before, but it feels like it's coming a little bit late, you know, back half of this year.
Okay, great. Thanks.
Bill Wurtz-Ridge
Speaker Change: Our next question comes from the line of Nick Dillman from Baird. Your line is open.
Speaker Change: Thank you. Maybe just wanted to touch a little bit on the pickup and leasing costs in the quarter. Obviously, some of it could be related to just mix with the more new leasing, but wanted to get a little bit more color on that. Was there any individual leases that were pulling that number up? And then also, Brent, maybe just any comments you have on expectations for retention.
in 2025. Thank you.
Yeah, I'll jump in, Nick.
Speaker Change: It really was just the, if you look over the last couple of years, we've been pretty consistent looking back at our cost per lease, per year of lease being around just under a dollar, around 90 cents or so for 22-23.
Speaker Change: That, for the year, increased to $1.08. It was pretty equal between the tenant improvement and leasing commission component.
Speaker Change: We've been very thankful, we talk about these 50% increase in rent, that goes hand in hand with you apply a percentage of leasing commission to that rent, those have been going up.
Speaker Change: with that as well. So I would say that's just been operational, nothing specific there. You know, I think if inflation can settle out and it...
Speaker Change: I hope the leasing commission side continues to tick up some. It would basically mean that we're pushing rents and you're applying the same percentage to it and that goes up, but nothing there. We had a good year, a good fourth quarter at 78% retention.
Speaker Change: For the last couple of years now, we've been right at two-thirds as an average.
Speaker Change: We don't have anything at this point that would make us think that that's a pretty standard run rate. It wouldn't be uncommon to see that get in the 70s probably. But we don't have any, I guess I'd take this time to point this out, we don't have any specific large tenant that we're quote,
Speaker Change: worried about per se in terms of a known vacate or that type thing. Obviously we have a couple of the spaces that went vacant in fourth quarter that Marshall talked about, but so I would expect similar cadence across the board on all those topics to what we've experienced last couple of years.
Thank you.
Yep, thanks Nick.
Speaker Change: Our next question comes from the line of Eric Borden from BMO Capital Markets. Your line is open.
Hey, good morning, everyone.
Eric Borden: Brent, I just wanted to go back to your comments around the bad debt guidance assumption of 30 basis points. It sounds like that it's just general conservatism for the year or, you know, correct me if I'm wrong, is there any, you know, specific tenant that that, you know, is allocated to? And then I was just curious if I get your thoughts on your current thinking for lease termination income for the year. Thank you.
Brent Wood: Sure and we did get some inquiries about I guess I'll just address this here about
Brent Wood: Not having the specific line items of term fee income and bad debt that we've had in the past. We have pulled some specific line items of that back and more to come later in the quarter, but us and some of our key peers are continuing to work on our harmonization efforts.
Brent Wood: It may predate some of you, but going back to 2017, us and some of our peers synchronized all of our, you know, proactively aligned our definitions of how we define things and report things for non-GAAP measures.
and others.
Brent Wood: Looking at 25, the 30 basis points, and that comes in at around 2.2 million or so that we have dialed in pretty evenly through the year. It's not tenant-specific.
Brent Wood: That's actually about a third less than what we incurred in 24. A couple of things to note there, our tenant, I would describe 24 as a frustrating year from an uncollectible rent standpoint.
Brent Wood: 4 tenants that really drove the Brad debt, one specific, the Starship tenant fourth quarter, that wound up being about 30% of our bad debt for the year with that one tenant out of a portfolio of over 1,400 different tenants.
Speaker Change: and then about the top four tenants comprised about 70% of our bad debt and as Marshall touched on, it's atypical for us but some of the tenants in the larger spaces contributed to that. I would just note so we're
Speaker Change: We anticipate, you know, sort of a similar watch list, we just aren't budging or hoping for, not anticipating.
The stars aligning on some of those bigger tenets coming.
Speaker Change: through there, and I would just point out, as of today...
Speaker Change: and the four tenants that did drive that last year, in one way, shape, or form, we've resolved those issues, and those aren't lingering and going to drag into uncollectability into this year. So, with all that said, yeah, so we're at...
Speaker Change: About $2.2 million dialed in for bad debt for the year, about $1.1 million of term fee income. That's not specific to a tenant either, that's just what we have dialed in.
Speaker Change: When you net the two, you're really at about two cents a share net. Again, another reason that we kind of pull those line items back. But the net between the term fee income and the bad debt we've got dialed in is a couple of cents a share. So we're cautiously optimistic from what we're seeing so far in having cleaned some of those.
Speaker Change: Trouble tenants up that we're you know looking for more of a historical run rate at that 30 basis points this year
Thank you. I appreciate it. I'll leave it there.
Thanks, Eric.
Thank you. Thank you.
Speaker Change: Our next question comes from the line of Lane Heck from Wells Fargo. Your line is open.
Lane Heck: Good morning. We saw some interesting and maybe counterintuitive moves in the operating portfolio lease rate in some of your markets quarter over quarter, so I was hoping you could comment.
Lane Heck: on the decreases in Texas markets, San Antonio and Fort Worth in particular.
Lane Heck: And then increases in California, where San Francisco, L.A. and San Diego saw a pretty significant positive movement. Whether those are driven by specific situations or maybe more indicative of any trends that you're seeing in those markets?
Lane Heck: Good morning, Blayne. It's Marshall. I'm kind of organizing. In San Francisco, the team did a good job of backfilling some vacancies there. So we're
Lane Heck: really for the moment when I think of as I think of California we've got
Lane Heck: We've talked about the 260,000 feet in Dominguez as a vacancy, and then we've got, which was another bankruptcy.
Lane Heck: 68,000 feet in North County, San Diego. And those are really our main.
Lane Heck: Vacancies are kind of our task at hand this year. We're pretty full at the moment in California. There's a lot of tenants and there'll be some moving parts throughout the year so that feels pretty good.
Lane Heck: Charlotte, I guess as I think about bankruptcy still, it took a pretty good hit on its occupancy in fourth quarter. But that was really the 300,000 foot cons bankruptcy. At the moment, we're
Lane Heck: Our prospect list for both is they could both be subdivided into
Lane Heck: Really two in LA and maybe three tenants in Charlotte. We're talking to one tenant
Lane Heck: We'll get those back filled. It's probably more a function of just that space and that market. In each of those cases, it was a perfect storm. Two big tenants went bankrupt and pulled our vacancy down, and our deliveries and some
Lane Heck: Texas markets, I'm thinking like in Austin, for example, we delivered Stonefield. It's just south of Austin in Hayes County, a good location, good building. It's near the buildings we acquired last year around the corner from those. We like the sub-market. It just has a lot.
Lane Heck: There's a lot of, if you said, what markets have you watched the developments?
supply more closely, we would say Austin and Phoenix.
Lane Heck: And so we're kind of caught there, and we like Austin a lot long-term. That Hayes County market has a lot of supply right now, so when we delivered there, that pulled that vacancy rate down. So those are kind of some of the moving parts, and then others are just kind of...
Tenants moving backward.
Lane Heck: We've got some space out in Fort Worth. It's not a big denominator in Fort Worth, but in our
partnered project. We'll get it laced and...
Lane Heck: We're making headway out there, but it's really a space here, or maybe a long-winded way of saying a space here or a space there, and the markets kind of jump back, kind of like they did in San Francisco. One or two tenants can move the needle pretty materially within our portfolio.
Lane Heck: Okay, great, thanks. Sounds like more specific situations, which makes sense. I'll respectfully leave it there.
Speaker Change: Thanks for articulating it much more concise and for leaving it there.
Speaker Change: Our next question comes from the line of Steve Saqua from Evercore. Your line is open.
Steve Saqua: Yeah, thanks. Good morning. I was wondering if you could just provide a little commentary around the pricing on the acquisitions in the fourth quarter.
Steve Saqua: and maybe just, you know, the capital flows that you guys are seeing and, you know, I know, you know, acquisition cap rates can kind of be all over the board, but, you know, do you think about unlevered IRRs and, you know, where do you think unlevered IRRs are for industrial today? Thanks.
Speaker Change: Good morning, Steve. Maybe a couple of thoughts. I'll say that the team did a good job of finding these three acquisitions, all a little bit, each was a little bit different, and that
Starting in 23 and through 24.
Speaker Change: A number of the acquisitions we bought were really the second time it came to market that something had happened, it came back to market, and that's a little bit what happened in the Phoenix, or that is what happened in the Phoenix acquisition. It's a good infill site.
Speaker Change: Mike Sacco, who runs Arizona for us among his markets, really had approached the seller and stayed in touch, and we were able to tie it up.
Speaker Change: Kind of sticking within our confidentiality agreement a little bit, reminding that on all three. They're all what we liked about it. Atlanta, Dallas, at DFW. It's the same seller we acquired.
Speaker Change: We're right at the Cargo Terminal, what we like about it, at DFW, and just to the north of us are Frisco and some pretty strong higher-end residential communities. So those buildings...
Speaker Change: We've got a little over 2.5 million square feet in that sub-market, and strategically, we were able to buy the buildings right across the street from four others we own. So in terms of accommodating tenant growth, we like that.
Speaker Change: Blended on a net effective rate, we're probably, so maybe on a straight line rent, we averaged a little north of a six yield. I think those were all above market. In hindsight, we saw the acquisition market really tighten up.
Speaker Change: The second half of last year, surprisingly fast, at least to me. I would say we saw cap rates sub-4 and well into the 4s, so we were happy we got these.
Speaker Change: Stabilized yield is probably in the mid sevens on the three we bought, which again, I think is much better than where the market is. And we started, we were able to buy things that were a little bit distressed, whether it was land or acquisitions, were not
Speaker Change: Seeing those opportunities right now and as we underwrite if it helps we'll look at
Speaker Change: that the cash return immediately, what the straight line or gap returns are, since that's what we'll report, and then what the mark-to-market is. And ideally, that mark-to-market the first few years, because we...
Enough.
Speaker Change: I respect the people and we do look at an unlevered IRR, but as our founder used to kid, I've never met a pro forma I didn't like. When you get to a 10-year IRR, there's so many assumptions. And I think if I had run
Speaker Change: And I also think one of the other beauties of industrial having worked in other sectors is our...
And so that helps you not...
Speaker Change: Lessons that need. We're not replacing elevators or redoing the lobby or some of the things you run into on retail in terms of CapEx. So it's easier for us. We won't run an IRR because we wouldn't have gotten it right on a lot of our acquisitions, but we will look at that first.
Thank you. That's it for me.
Okay. Thanks, Steve.
Speaker Change: Next question comes from the line of Nikita Belli from J.P. Morgan. Your line is open.
Loeb, single digits this year.
Speaker Change: Good morning, this is Marshall. I would almost, if I could bifurcate our portfolio between
Speaker Change: East of California, which is everything, and then California. I think the L.A. market especially is still stabilizing. San Diego and San Francisco are a little more stable, but those are the markets where, the only markets, thankfully, that we've actually seen negative absorption. And so rents maybe are still finding their footing in those markets.
That said, all told, and certainly Nevada, Arizona, East,
Love you! Bye!
Speaker Change: I would expect, and our expectations are probably inflation, you know, a little ahead of the inflationary rate.
for the first
Speaker Change: At least the direct vacancy, about 4%. So I think there's a chance we could have some higher level rent pickup for the back half of the year heading into 2026, given that it's going to take...
Speaker Change: Especially private peers a little while to get mobilized and start delivering product again, so I think we'll have
Speaker Change: But the Southern California is probably still flat to negative for the full year, right?
Speaker Change: I, yeah, I think that when I say really LA, I'd exclude say, if I could pull San Diego out of that, because it's just a little bit different in Orange County is a little bit stronger, but LA still feels like it's.
Speaker Change: You know, it could be moving backwards a little bit. We don't have a lot of.
data compared to our peers there, but that market...
really.
Speaker Change: It took off at a crazy rate, faster than any of our other markets and it seems to be the market that's going backwards pretty dramatically and still has had negative absorption pretty materially for the year and doesn't quite have its footing. I do think rents are probably still moving in a negative direction in LA.
That's a big market, but that's our sense.
Speaker Change: Our next question comes from the line of Michael Carroll from RBC Capital Market. Your line is open.
https://www.youtube.com.au
Michael Carroll: Marshall, I wanted to touch back on your prepared remarks that you're seeing an uptick in prospect activity. I mean, can you give us some color on what this means? Is it just that you're seeing increased TOR activity, or are these prospective tenants further along, like your trading paper, and they're now ready to make decisions where before they weren't?
Thank you. Thank you. Thank you.
Speaker Change: Hey, Michael. Good morning. A little of both. I mean, I think where what we've seen is, you know, just the pace. First, we saw the pace of touring, you know, the brokers are showing someone through the space and look at
space tours you know from the tenant rep brokers
Speaker Change: started picking up, and we're still seeing that. And then on the back half, there are a number, and look, we'll keep you updated as quickly as we can in terms of things turning into signed leases.
Speaker Change: A little unusual quarter in a good way and that we signed more and within the portfolio more square footage of leasing that we have
Speaker Change: and the company's history in fourth quarter, so that was a great sign. It was a little bit...
It was a slow quarter for development leasing.
Speaker Change: But a record quarter for the portfolio leasing, but I'm glad in both cases that we've seen the number of tours going up. And yes, we do have a number of.
Speaker Change: letters of intent that are out that are signed and a number of leases that are out being negotiated so again those can
Speaker Change: and they change at times pretty quickly. They may not come back signed, but they're out and the terms are agreed to, the attorneys are going back and forth, so that's what we feel better in terms of kind of maybe...
Speaker Change: That activity below the water, looking at an iceberg, that has really picked up in the last, call it 45 days, and we hope we can...
Speaker Change: The two things continue that and then convert that activity that where we are trading paper today
Okay, great, thank you.
You're welcome.
Speaker Change: Our next question comes from the line LaFronta Camden from Morgan Stanley. Your line is open.
LaFronta Camden: Great, just a quick one, the Occupancy Guide of 96, I was wondering if you could talk about sort of the cadence of the year.
LaFronta Camden: You have a seasonal dip in one cue and then you build.
LaFronta Camden: And then the second question, or the follow-up, would just be on the, we'd love to get an update on El Paso, Phoenix, and San Diego, which are some of the nearest shoring and non-shoring markets, and just what your expectations are for this year and what you're seeing on the grounds there. Thanks.
and then let Marshall speak to those markets.
stays.
A little dip here to begin the year.
LaFronta Camden: Some known vacates in spaces like the Kahn's and Dominguez building that we knew we had coming back.
and then making some progress.
kind of
staying.
LaFronta Camden: Pretty steady through the first half of the year and then showing that begin to Crescendo some and then you know get up and bring that average up on the back end of the year So I would say that's more back half weighted in terms of the gains but we're really not showing once we get going into the year not showing much more deterioration just kind of a Continue to work in those levels and then build it up from there, but I'll let Marshall speak to those of markets You asked about Ron
Speaker Change: Hey Ron, good morning. And I think, you know, in terms of on-shoring, near-shoring, I think it, you know, my expectations are that will continue its long-term trend, especially some of the negotiations with
Ron: Terrace with China and things like that although obviously you know one day this week Mexico had a 25% tariff it's on hold I think that has to make it very difficult for manufacturers to plan on you know building and Juarez and Tijuana and things like that
Ron: Maybe an order. Phoenix had some, the most supply, but it feels like our product type, and really our team, and then our product type, have done a really nice job of keeping us full in Arizona, not just Phoenix. And Phoenix is...
Ron: One of our stronger markets I think probably surprisingly to people think you know if I said what markets would I Would we say are strong markets that people reading headlines would actually Phoenix in Houston Would be two of our better markets that probably would
Ron: Raise eyebrows, and I think Phoenix just the market itself is good
And then I think...
Ron: There will be, you know, development in Nogales and that will, you know, will help us in Tucson and in Phoenix and that will move there. El Paso is doing well. It's not as strong as, say, Dallas or Houston are compared, but it's.
Ron: And so you see prices rising pretty quickly in El Paso. They've more levelled out in the last 12 to 18 months.
Ron: I think I read the stat, there were small numbers that have had about 10 quarters of negative absorption in a row, or 10 consecutive quarters.
Ron: So San Diego has been slow. I think it will feel like it's picking up. We've got one vacancy there today. We've got another tenant that will probably vacate later in the first quarter, about 60,000 feet, and we'll backfill it. But in order of those markets, we probably feel the best about.
Ron: Phoenix, then El Paso, which is good, not great, and then San Diego. I'd love to see the market move to net absorption. That's been the unique factor for the California markets that we just haven't.
Ron: seen in our other where Dallas and Atlanta have had 40 and 50 consecutive quarters of positive absorption, they've had a few quarters of negative absorption in California.
Super helpful. Thank you.
Sure, you're welcome. Thanks, Ron.
Speaker Change: Our next question comes from the line of Omokayo Okusanya from Norrisha Bank. Your line is open.
Operator, if we could...
Oh, move please. I think we've missed Taya.
All right, can you hear me?
Oh, yes. Marshall? Hey, Dale. Yeah, hey, how are you?
Speaker Change: Good. How are you? Good. So I just wanted to kind of go back to guidance for a quick minute. Some of your comments around just, again, rates moving higher in fourth quarter and some tightness in the acquisitions market, I guess that helps to understand.
Speaker Change: Acquisition guidance a little bit better versus how much you did in 24, but I guess from the occupancy perspective...
Speaker Change: Again, you're not really calling for any increase in occupancy in 25 versus 24, but there's been a lot of commentary on the call just around green shoes and...
Speaker Change: improved tours and things like that. So I'm just curious, why not a better occupancy guidance and maybe there's some offsets towards some of the green shoots in demand that you've been talking about.
Speaker Change: Okay, hey, Atteo, thanks, and I think maybe a little on both of...
One, acquisitions are...
Speaker Change: If it's not the hardest budget line item, it's one of the hardest for us. Again, we want to we'll acquire things that make sense, assuming the capital markets are their debt or equity. And as Brent mentioned, we certainly have the debt.
Capacity on our balance sheet.
Speaker Change: That's one I'll take the blame. Last year at this time we forecast $130 million in acquisitions and I think we finished at what $390 million. So I missed that one. I hope I miss it that widely again. And we can certainly make the goal, but we want to make the goal.
Speaker Change: and make smart investments for our investors. So we'll watch the market again. It does feel like the distressed.
Speaker Change: opportunities have about dried up. We'll find them if we can.
Speaker Change: Think about it, I guess, or as I think about it during the year, there's the letter of intent. Then, by the time you get the lease signed, and then there's a.
Speaker Change: Depending what all is happening in the space, a couple of months of build-out, and then the tenant moves in, and I'll let Brent chime in, but certainly the back half of the year, or towards the end of the year, our occupancy, our same store NOI,
Speaker Change: during the year as we backfill the space, as does our occupancy. So maybe it kind of meanders around for the first part of the year and then builds in the back half of the year. So the last quarter's occupancy is.
Thank you.
Speaker Change: materially or higher, I say materially, it's higher than it is
Speaker Change: today. It's pretty high today already at 96, but it builds from there, but it all takes a little bit of time. I'm envious of the hotel reach, where it takes us, by the time we reach agreement, sometimes it feels like forever before we can, for us, probably to get the tenant moved in. Yeah, the only thing I'd add to that, Tao, just a reminder.
Speaker Change: The con space of 300,000 feet and then the starship space to me is 260,000 feet, and that's a little over 1% of occupancy right there.
Speaker Change: That's taking a little bit of the luster off some of the activity, I guess we're describing, and then obviously the teams building in, leasing that space up later in the year, not coming right out of the gate, so that's putting a little bit of a governor to the rate at which it moves up beginning of the year as well.
Helpful. Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Vince Thibaud from Green Street. Your line is open.
Vince Thibaud: Hi, good morning. Could you discuss how much incremental NOI from development projects that are currently unlet is baked into 25 guidance? I'm just trying to get a sense of how much spec leasing volumes and the timing of that and like what's exactly kind of incorporated within guidance.
Vince Thibaud: Yeah, I think that's good morning. It's Marshall. It's kind of consistent. It builds during the year. The vast majority, and again, we have probably our most coming in in fourth quarter, probably a little, I'll call it 40%, maybe not quite that in fourth quarter.
Vince Thibaud: around 30% in third quarter. So in total dollars you're probably, I'm adding this up as I'm looking, you're probably looking at around
Vince Thibaud: Six million or so in the development pipeline of lease up this year. A little more of that is
Vince Thibaud: sign leases today, and the other, call it 45%, is spec leasing. And it really kind of falls in line to mostly the back half of the year. And that also mirrors if it helps why our starts are higher in the back half of the year, that as those buildings get...
Vince Thibaud: You know, leases signed and move-ins happened, that kicks that next level, that next phase of the park. So again, maybe all told about six million and the majority of that is the back half of the year.
And that's our chance, look if we can...
Speaker Change: I'm sorry, go ahead. No, no, go ahead. I didn't mean to cut you off, Marshall. Sorry.
Vince Thibaud: That's our opportunity. Look, if we can get out ahead of that timing, that's our opportunity in terms of where, you know, this is our budget at FFO and our goal is to beat it where it comes out. And I'm sorry, you had a comment, Vince.
Vince Thibaud: No, I just wanted to confirm, because there are a lot of helpful numbers and I'll have to look at the transcript, but the six million that you mentioned, that's like incremental leasing. That's not any leases that were signed in 24, you know, thus far. I just wanted to confirm that's kind of the...
Vince Thibaud: Yeah, Vince, this is Brent. Just to jump in, we've got about $15.8 million dialed in for the year and it's roughly about half of that is already signed leases spoken for and it, again, we've got to get those tenants in and commence, but about half of that is more speculative leasing to occur. And as Marshall pointed out, that's more heavily weighted in the third and fourth quarter.
Vince Thibaud: And so, just to put exact percentages to it, about 53% of that 15.7 is already signed into the books and then another 47% of that is in the back end of the year to be done, to be executed.
Perfect. No, that's great detail. Thank you.
Sure, thank you.
There are no questions at this time. Presenter, please continue.
Thank you. Thank you. Thank you.
Brent Wood: Thanks everyone for your time this morning, thanks for your interest in East Group. If we didn't get to your question, Brent and I and the team are certainly available and we hope to see you in the next month at the next conference. Take care.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.
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