Brent Wood: Yes. I guess two parts. It’s really not that much more expensive. It is very attractive from that standpoint. We only pay about a point. Now the forward. The final pricing varies a little bit just based on how long you take it down and dividends paid and interest expense and so forth. But the actual cost of issuing is only about a point the regular way or vis-a-vis forward. The thing we like about and you’ve got a good point in this environment, if we had money outstanding on the revolver, which variable rates say, it’s somewhere in the low to mid-6s right now. we wouldn’t do forward, we do rate a way to immediately pay it down. We’ve not gone so far as to issue and take down a bunch of cash and hold it in the money market and make — you’re right, maybe a very small return there.
But ultimately, we don’t feel like we are raising the capital to make that — to make that spread just on the money market. But the advantage of the forward, is it can be sitting out there and then you don’t have the share count counting against you until you take the capital down. And to your point, it’s not that punitive or you could even argue slightly accretive to do it the other way. But in this environment, I don’t think one way versus the other, there’s not a big difference, and we’ve — there toward the end of the quarter, like to just kind of stockpiling it in shares versus just cash. But you certainly could go either way. And we’ll – again — we’ll be flexible with that really more based on what’s outstanding on the revolver versus necessarily stockpiling it on the cash side.
Ki Bin Kim: Okay, thank you.
Operator: Your next question comes from the line of Nick Thillman of Baird. Your line is now open.
Nicholas Thillman: Hi good morning. Maybe starting a little bit with Brent here on just kind of the bad debt. You guys touched on the three tenants in particular, but I was just curious if those tenants were on the watch list prior.
Brent Wood: That’s a fair question. I don’t — I know that a couple of them were. I’m not sure if the perch was again, they only had under $100,000 cash outstanding. So I can follow up with you off-line on that specifically, but I don’t think they were. It just was more of a sudden, if a tenant keeps up with the rent and unbeknownst to us suddenly files bankruptcy, which does happen occasionally. You really got no clarity or lens or idea that that’s coming necessarily. And it was a bit that way with them. It was a bit more abrupt and not so much just the — over time, they’ve always been a problem and catch up and go back and catch up. So it was a little more, happened a little more suddenly with that with them. But again, overall, the watch list is very healthy and not growing at any unusual pace.
Nicholas Thillman: That’s helpful. And then maybe, Marshall, just you kind of touched a little bit about the demand surge in ’21 and ’22, and kind of occupancy levels today being above historical averages. As we kind of get this more normalized demand, do you see like longer-term occupancies within the portfolio getting back to like that pre-pandemic level of, say 95%, 96%. So it slowly will come down over time and maybe normalize around that level. Is that kind of what you guys are thinking longer-term?
Marshall Loeb: It’s a good question that we’ve debated it and that some of our longer tenured board members would always say 95% is full as you can get in our type product that there is always just some frictional vacancy from tenants moving around. But we’ve been thankfully north of 95% for over a decade now in counting. So to me, it kind of said at some point, the market’s just changed. And the last ’22 and ’23 were record years at averaging 98% occupancy. So I don’t know that we’ll average that high, but it feels like 97%, the new 95% that I think will stay that certainly for the near term, given — I think it’s going to take a while with demand is going to move more quickly than supply can address it. And that’s where I think it will be a lot of fun there for a little while.
That’s the optimist in me. So I think, we may not stay at 98%, but we won’t go back to 95%. And then I think there’s going to be a squeeze until all the private developers can kind of raise capital, get sites tied up, get permits in hand and start moving again. And we have a number of those in hand already and should be able to move more quickly than our private peers.
Brent Wood: And then just a quick follow-up to your watch list. Two of the three tenants that I mentioned that drove 83% to were on the watch list coming into the year and 1 was not. So what happened within the quarter. And like I say, really not uncommon either way.
Nicholas Thillman: Thanks for the follow-up Brent, appreciate it.
Operator: Your next question comes from the line of Vikram Malhotra of Mizuho. Your line is now open.
Vikram Malhotra: Can you hear me?
Brent Wood: Yes, we have you, Vikram.
Vikram Malhotra: So just my first question, you talked about dollar commitments for tenants becoming just very large. And I’m wondering if you can just elaborate upon that, but also just talk about what your prediction for market rent growth is in your main markets?
Marshall Loeb: Good morning. Yes, I guess the way we’ve had one of the tenant rep brokers describe it was real estate decisions used to be a real — again, we’ve had this great run in rents and even tenant sizes as they use their spaces have grown our average tenant size is still in the mid-30s, but that’s been up, and we’ve got certainly multi-tenant buildings where a single tenant has come along and taken it. So it’s moved from a real estate manager decision to a CFO decision. I thought a good way, one of our brokers described it. And I think market rent growth is probably — it’s absent the LA, and Bay Area is still more inflationary probably this year, we’ll be — call it, 3% to 4% market rent growth, maybe a little bit better in the Shallow Bay space because there’s so much less availability of it. So we’ve been saying if market rent growth is maybe, call it 3.5%, for example we’re maybe 100 basis points to 125 basis points north of that.
Vikram Malhotra: Got it. Just on your comment on acquisitions. If this pause or just moderation is a little bit extended, let’s say into ’25, you talked about relative to your cost of capital, you’re seeing deals in the initial five stabilizing, maybe six is, correct me if I’m wrong, but what’s the right — what’s sort of the risk premium you need to see if you have a more protracted normalization or a pause in demand?
Marshall Loeb: Yes. What we’ve acquired, and I’m trying to answer your question, it’s been — what we bought have been — all of them have been one-off buildings. So that’s where we’re seeing the opportunity rather than in a portfolio. And it’s been kind of mid- to upper 5s, but a going-in GAAP yield. So not stabilizing, but GAAP yields in the low kind of 6.25-ish kind of range, and we’ll look at that. And then we’ll look at what the mark-to-market is. And there have been such new buildings that there’s not a lot of embedded growth. But in most of them, there’s still embedded rent growth. So what we’ve liked is, we’re buying — new building, you take the construction and the leasing risk away and getting attractive yields and the buildings we really like for the long term.
So if that — you kind of said what’s some of our checklist, that’s it, and it’s — and those have been higher yields compared to closer to development yields than they’ve historically been. A couple of years ago, we would say we were developing to a 7 and market cap rates from to 3.5 to 3.75. So that’s when it really — okay, if that’s what the world wants, we’re better off being a developer than an acquirer. And right now, it feels like all of a sudden, on one-off unusual situations, failed marketing process, someone had tied up the building and couldn’t close. It was a over-leveraged owner-user, I’d say a leveraged owner user. Those have been the kind of things where we’ve stepped in and bought or a pension fund that needed liquidity and the — what we were told they couldn’t sell their office building.
So they needed to close that quarter on – on a new industrial building. So those have been the type of opportunities we found. And I don’t know, how many are out there, but we’ll keep turning over stones and I think interest rates staying higher means we’ll probably keep leaning in on that opportunity and then it will move away from us. And probably in a fairly short order as soon as people can get cheaper debt and work back to a levered IRR that works for them.
Vikram Malhotra: Got it. Just 1 quick one if I – one more, if I may. Just Amazon is known to be [technical difficulty] 3PL demand is percolating into smaller box demand on the Sunbelt market.
A – Marshall Loeb: Vikram, I apologize. We lost you on that. I heard Amazon and 3PL, but we lost — I don’t know if you were there. We lost you on that.
Vikram Malhotra: Can you hear me okay now?
Marshall Loeb: Yes.
Vikram Malhotra: Yes. I was just wondering, Amazon is known to be taken larger boxes, million square footers this first quarter in multiple markets. I’m wondering if Amazon specifically, or just 3PL, can you just comment on that demand percolating down to the smaller box of Shallow Bay markets that you’re in?
Marshall Loeb: Yes. No, it’s good to see Amazon back in the market. And you’re right, what we read about in Phoenix and in Inland Empire, taking a number of big boxes and 3PLs. And look, I think the — those are kind of the large boxes to move goods across the country. What we like, we like being near is near the consumer as we can, almost like a retail location without the visibility. And I like the long-term trend. I think Amazon will build out around those big boxes, and they’re our largest customer, but anything that speeds up the way it has been described from when you hit click or when you hang up the phone to get that service person that delivery that order, that’s where the world’s going. So you’ll need the big boxes to move things, whether it’s from Mexico or Asia throughout the country, even then really you’re going to need that last-mile delivery within Dallas, Phoenix, Atlanta, Orlando because the traffic is so bad.
So I usually think the big box is kind of or the early innings and then they’ll build out their network almost like a hub and spoke, but that’s where we’ll really pick up. And most of them have, to some degree, but I still think there’s a lot of runway on building out quicker and quicker delivery for people and probably rationalizing brick-and-mortar store count and moving to more — depending on what the item is, quick delivery. And we’ve seen it in the bulky items, and I hope it can — that what their SKU count will continue to evolve into more and more distribution or business distribution space and a little bit out of brick-and-mortar too.
Vikram Malhotra: Thank you.
Marshall Loeb: You’re welcome.
Operator: We don’t have any questions at this time. Presenters please continue.
Marshall Loeb: Thanks, everyone, for your time and for your interest in EastGroup. If we didn’t get to your question, Brent and I are certainly available. Post, if there’s any other color you want, and we’ll see you. There is a couple of conferences coming up. We hope to see you at those as well. Thanks.
Brent Wood: Thank you.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.
