Brent Wood: Yes. We show — Ronald, we basically show just based on our lease-by-lease assumptions and we roll it all up, but we basically show our same-store portfolio basically kind of just meandering down some through the mid part of the year before kind of picking back up for the end of the year. Again, it’s – that is just budgeted assumptions. Obviously, we would hope to outperform that. But when you look year-over-year, we are projecting at least or budgeting about 120 basis points of decline in same-store occupancy. We obviously are projecting to a solid same-store end result, but that lower occupancy is just offsetting some of the prolific rent increases that we’ve enjoyed. And even first quarter, we were up 58%. So still seeing the strength there.
But it’s just — the guys in the field, they are so consciously or constantly influenced with this sort of what they see relative to the tenor and the pace at which they’re leasing. And so that can ebb-and-flow a little bit, but we hope that it proves conservative, but that’s basically just as we have it dialed-up. And again, I repeat it’s not really being driven by one or two known large move-outs that could sway it a lot one way or the other. It’s more granular than that. So we’ll take a quarter in time. But Marshall we’re still seeing activity. And so we’d like to think we could beat those. But we’re pleased with showing — you think about it, showing 120 basis point or 130 basis point projected or budgeted decline potentially in same-store occupancy yet still showing that good of the same-store strength, which again, I think speaks to the portfolio and the rental rate strength that we continue to enjoy.
Ronald Kamdem: Just beyond the leasing activity. Last year, you did over 8 million square feet, 40% cash spread starting the year with $2 million and 40%. Just what’s sort of baked into for the rest of the year in terms of volume and spreads. You could speak high level if that’s easier.
Marshall Loeb: Good morning. I’m pleased that first quarter this year, actually I think we are $1.6 million or a little north of that a year ago and up to $2 million. So I think, will be similar this year, and I’m really not seeing a slowdown in rents. I mean maybe — as up two part answer. I think, market rent growth has slowed. But I think it’s going to pick back up again pretty quickly. But I don’t — I think our re-leasing spreads have hung in there. Look, we have been fortunate to have six consecutive quarters where our GAAP rent growth has been north of 50%, which I never really thought — I wouldn’t have told you five years ago or however many years ago, that was possible. So I feel pretty good about the leasing volume, and we’re making progress on development leasing.
We are about two-thirds leased or roughly are moving towards that on what we are delivering this year in our development pipeline and have those prospects. So I think leasing will be similar. It is probably vacancies are sticking around, as Brent talked about on the occupancy, maybe a month or two longer than they were at the peak. But that said, last year was a record for occupancy. So part of our same-store challenge this year was — it was great setting the record last year. It is not so much fun competing against the record, the balance of this year. So — but I think we’ll have certainly a solid year of leasing, it’s just off of record pace a little bit, but the best news maybe of that is when you look at the construction starts numbers and things like that — and that in our product type, the Shallow Bay, there’s always historically less availability in it, and that will continue to be the trend.
So I think, it will tighten when it turns fairly quickly.
Ronald Kamdem: Thanks so much.
Marshall Loeb: Sure, you’re welcome.
Operator: Your next question comes from the line of Jessica Zheng of Green Street. Your line is now open.
Jessica Zheng: Good morning. Could you please touch on the sub-leasing trends in your portfolio? Are you seeing any elevated levels here?
Marshall Loeb: Okay. Jessica, good morning. No, really not. I mean, it’s been mainly some small spaces here or there. And in most cases, maybe another way to watch for it that prospect would usually rather have a direct lease. So it kind of watch our term fees, which are low. So we are not seeing a lot of subleases. We did have — we’ve got one that I would say, is a little bit larger than picked up in Charlotte, but the tenant just did a five year renewal and their rents are pretty — I’d say just their rents are pretty far below market, and we’ll participate in the profits, if they do sublet that. So in pending the lease, we either participate or capture those rents and the prospect would always rather have a direct lease.
So in a lot of cases, especially if there is any improvement allowances. So it feels certainly manageable to not out of any kind of historic norm right now within our portfolio. But we’ve seen it, but we’ve got it. It’s mainly smaller spaces, absent one that I can think of. And thankfully, that one rents are pretty materially below market.
Jessica Zheng: Great. Thank you.
Operator: Your next question comes from the line of Samir Khanal of Evercore Canada. Your line is now open.
Samir Khanal: Sorry, it’s Evercore ISI. So Marshall, just on this — when I look at your renewal page in the supplement, the average retention rate came down quite a bit, it was like mid 55%. And you look back 70% 1Q of last year sort of in the 90% in 4Q. Maybe just provide a bit of color. Is that just a function of kind of what we’ve been talking about, tenants not committing, and how do you think that retention rate sort of plays out for the year?
Marshall Loeb: No. It’s interesting. Good morning. I’m glad you asked and that a few of your peers mentioned retention and that was one — at least in the near-term, I viewed it as good news. And here is my logic is that, if you’re building a model on EastGroup or probably any of our peers, I’d say 70% to 75% retention is kind of historic run rate, a normal run rate. Last year, we — for the year, we were 79%. And that, to me kind of is people are sitting tight. The last time we saw retention rates as high as we had was really during COVID. So I was — I’m encouraged, look I wouldn’t want to run for the year at 56%. There would be more expensive TI and leasing commissions and things like that. But the fact that we could get 2 million kind of we did more leasing volume than we did a year ago in first quarter, materially and that retention rate means to me, maybe the market might be loosening up a little bit or maybe at least initially in the year, people felt better thinking there was going to be a March rate cut or at least to June and things like that.
The things feel like they’ve gotten a little bit worse at the back end of the quarter than initially. So we will look at our retention rate over a trailing four quarters to kind of get a more measured response, and that’s still on the high-end of our range. It’s probably come down to about 75% or 76%, which is still historically high. But when it was at its lowest was during 2021, things like that when the market was really booming. So again I kind of hope that it doesn’t stay at 80% that people start — some of that is people moving into new spaces within our parks and things like that. So I was — I’m pleased with the quarter, and we’ll see how the next one shakes out, but a really high retention rate is another way of saying people aren’t making leasing decisions.
Again, if you get a chance and you want to look on our website within — I think it’s Slide 14 roughly. You’ll see that renewals, this is a CBRE chart have run historically high that they typically are in the mid-20s, as a percentage of the leasing and the last four quarters they’ve been in the mid-30s, which again is kind of another kind of signal to us that people are taking a wait and see. So I was happy with the 56%. I don’t want to do it long-term, but a little bit of tenant movement is probably what we needed.
Samir Khanal: And then if I can just ask one more. This is more of a modeling question. But when I look at your expenses, the property operating expenses in the quarter, they were up sequentially and year-over-year. I guess how should we think about that sort of for the balance of the year? Thanks.
Brent Wood: Yes. We’re — just a reminder, we’re predominantly pretty much everything gets passed-through. So we have seen real estate taxes and insurance go up. And so that certainly drives expenses up. But correspondingly with that, we are getting that reimbursed from tenants at 97%, 98% occupancy, you are getting that percentage back. There was one chart in the supplemental that I think shows the expenses rising 14% to 15%, but the income rising less than that, say 7% or 8%. But a reminder, that income line is rent and CAM. So A very small percent of that line item is obviously base rents, not impacted by CAM reimbursement, the CAM portion is. So if we had that income line broken out into two pieces, you would see the CAM reimbursement percentage increase matching up with the expense increase.
But yes, for modeling purposes, it would have a de minimis impact just because if you want to say expenses are going to increase 8% or 16% if you’re showing a 97% or so occupancy, then you’re getting whatever percent that you say there, you are getting that back via CAM reimbursement.
Samir Khanal: Okay, thank you.
Operator: Your next question comes from the line of Ki Bin Kim of Truist. Your line is now open.
Ki Bin Kim: Thanks. Just sticking with that last question. Typically, the expense reimbursement don’t come back in the same exact quarter. Should we expect a bigger reimbursement rate sometime down the line this year?
Brent Wood: No, we accrue and match that and adjust on the books to keep that, whether you are collecting or not, we accrue it pretty evenly. So I think, you’ll see that be very consistent through the year, and it has been it tracks. Again, if you break Kim and reimbursable expenses with reimbursable income up, it matches very closely. And again, true-up in billings at year-end and that type of thing, just being on an accrual basis, ideally you’re keeping that in tandem as you go through the year so that you don’t have those big swings. So to that I would say no, it would — the expense on property level is really not going to have any impact on the bottom-line other than the very small percent you don’t collect due to vacancy.
Ki Bin Kim: Okay. And on your balance sheet, I mean it’s in great shape in a very enviable position at 3 times leverage. That provides a significant dry capital. And typically, we haven’t known EastGroup to be very active and kind of large-scale M&A. But just curious about your kind of overall views on your balance sheet, your dry capital and how over time, we should — if we — that change, whether that be through acquisitions or development or M&A?
Marshall Loeb: Good morning Ki Bin. Look, we’ve had — the way we view it is — we’ve probably driven leverage down lower than our target for a while they’re kind of 2017, 2018, 2019, as we stepped up development, we wanted a little bit stronger balance sheet and the equity markets were there. Last year, we saw our implied cap rate on our equity and attractive long-term uses of it. So — and the debt markets have been expensive. So we’ve leaned into equity while it was there, and we will probably continue to do so, but pretty flexible just pending again kind of which window opens. I do like the fact a little bit longer-term kind of near-term, when the interest rates do come down, given the strength we put — Brent and the team have put behind our balance sheet, I think we’ll be able to add a fair amount of leverage at hopefully attractive rates at that point in time without needing to go to the equity market.
So the fact that we’ve been able to lean into equity, I think it will flip to the other side, but we will be patient on that. And I don’t know, in terms of M&A and things like that, it is always — it’s harder even on the portfolios. I know, we bought the Bay Area portfolio a few years ago, and we look at those things, and we’ll – again we’ll be patient. There is always a good portion of what you look at that you like and then there is another portion that always feels like that we feel like would slow down our growth. So maybe we are being too selective, but we’ll be patient, and I’m glad we were able to grow the company, as rapidly as we have been without. We try to give our shareholders a solid and certainly attractive industrial rate of return with a whole lot less risk, I believe through a handful of ways compared to some of our peers.
So that would ideally be our goal, unless we saw something that was really attractive, and we needed to move on it, but that’s just kind of in your question, that’s usually not been the case.
Ki Bin Kim: Thanks for that. And Brent just out of curiosity, you guys did a forward — what you should raise equity through a forward offering. How much more expensive is it to do a forward versus just the ATM? And why a forward, if you could just raise equity now and earn — I would assume a higher accretive return on your money market account or something like that versus doing a forward?
