EastGroup Properties, Inc. (NYSE:EGP) Q2 2023 Earnings Call Transcript

EastGroup Properties, Inc. (NYSE:EGP) Q2 2023 Earnings Call Transcript July 26, 2023

Operator: Good day and welcome to the EastGroup Properties Second Quarter 2023 Conference Call. [Operator Instructions] Please also note this event is being recorded. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Marshall Loeb: Good morning, and thanks for calling in for our second quarter 2023 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call. And since we’ll make forward-looking statements, we ask that you listen to the following disclaimer.

Keena Frazier: 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. 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 for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933 the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.

Forward-looking statements in the earnings press release, along with our remarks, are made as of today and reflect our current views about the company’s plans, intentions, expectations, strategies and prospects based on the information currently available to the company and on assumptions that have made. We undertake no duty to update such statements or remark whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Please see our SEC filings included in our most recent annual report on Form 10-K for more detail about these risks.

Marshall Loeb: Thanks Keena. Good morning. I’ll start by thanking our team for a strong start to the year. They continue performing at a high level and capitalizing on opportunities in a fluid environment. Our second quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial market. Some of the results produced include funds from operations coming in above guidance, up 11% for the quarter and 10% year-to-date. For over 10 years now our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year, truly a long-term growth trend. Our quarterly occupancy averaged 98.1%, which was consistent with second quarter of 2022 and quarter-end occupancy of 98.2% is up 30 basis points from March 31st.

Quarterly releasing spreads reached a record at approximately 53% GAAP and 38% cash with these results pushing year-to-date spreads to 51% GAAP and 35% cash. Cash same-store NOI came in up 6.4% for the quarter and 8.7% year-to-date. Finally, I’m happy to finish the quarter with FFO rising to $1.91 per share. Helping us achieve these results is thankfully having the most diversified rent role in our sector with our top 10 tenants falling to 8.3% of rents down 50 basis points from second quarter of 2022 and in more locations. In summary, I’m proud to our start of the year. Statistically, it was one of the best quarters on record all with continued recession concerns. We’re responding to strength in the market and user demand for industrial product by focusing on value creation via raising rents and new development.

This market strength is what allowed us to end the quarter 98.5% lease, average over 98% occupied and continue pushing rents through a wider and wider geography. As we’ve stated before, our development stocks are pulled by market demands within our park. Based on our read-through, we’re forecasting 2023 starts of $360 million. And while our developments continue leasing up, we’re closely watching demand with the goal of a balanced fluid response pending what the economy allows. What’s promising to see is the decrease in industrial starts, primarily due to capital market volatility and credit tightening. Starts have fallen three consecutive quarters with second quarter 2023 being almost 50% lower than third quarter 2022. Assuming reasonably steady demand, then turning into 2024, the markets will tighten, allowing us to continue pushing rents and create earlier development opportunities.

Given the capital market volatility, we’ve taken a measured approach towards transactions since mid-22. That said, when we find the right strategic opportunities, we pursue them. We’re seeing these windows mainly on the development side and being strategically opportunistic on core investment opportunities. Brent will now speak to several topics, including assumptions within our updated 2023 guidance.

Brent Wood: Good morning. Our second quarter results reflect the terrific execution of our team, strong overall performance of our portfolio, and the continued success of our time-tested strategy. FFO per share for the quarter exceeded the upper end of our guidance range at $1.91 per share, compared to $1.72 for the same quarter last year. $0.02 of second quarter FFO was attributable to an involuntary conversion gain recognized as a result of roof replacements that were damaged in a hurricane. Excluding the gain, FFO per share was at the upper end of our guidance range at $1.89 per share, an increase of 10% over the same quarter last year. The outperformance continues to be driven by stellar operating portfolio results and the success of our development program.

From a capital perspective, the strengthening in our stock price continued to provide the opportunity to access the equity markets. During the quarter, we sold shares for gross proceeds of $165 million at an average price of $169.72 per share. During this period of elevated interest rates, equity proceeds remain our most attractive capital source. In our updated guidance for the year, we increased our stock issuances assumption from $180 million to $475 million, $300 million of which is complete, and removed any unsecured debt assumption. As a reminder, the Company does not have any variable rate debt other than the revolver facilities, and our near-term maturity schedule is light, with only $50 million scheduled to mature through July 2024.

Although capital markets are fluid, our balance sheet remains flexible and strong with healthy financial metrics. Our debt-to-total market capitalization was 18%. Unadjusted debt-to-EBITDA ratio is down to 4.4 times, and our interest and fixed charge coverage ratio increased to 7.8 times. Looking forward, FFO guidance for the third quarter of 2023 is estimated to be in the range of $1.87 to $1.93 per share and $7.58 to $7.68 for the year and $0.08 per share increase over our prior guidance. Those midpoints represent increases of 7.3% and 9% compared to the prior year, respectively. Revised guidance produces a same-store growth midpoint of 7.3% for the year, an increase of 30 basis points from last quarter’s guidance. We also increased the midpoint of our average occupancy by 10 basis points to 97.8%.

This is the result of outperforming our budget expectations in the second quarter, along with continued optimism for the remainder of the year. In closing, we were pleased with our second quarter results and are well-positioned entering the latter half of the year. As we have in both good and uncertain times in the past, we rely on our financial strength, the experience of our team, and the quality and location of our portfolio to lead us into the future. Now Marshall will make final comments.

Marshall Loeb: Thanks, Brent. In closing, I’m proud of the results our team created. We’re carrying that momentum forward. Internally, operations remain historically strong and we’re constantly working to strengthen the balance sheet. Externally, the capital markets and the overall environment remain clouded. And while never fun to experience, this is leading to a marked decline in development starts. In the meantime, we’re working to maintain high occupancies while pushing rents. And longer term, I’ll remain excited for EastGroup’s future. There are several long-term positive secular trends occurring within last mile, shallow bay distribution space and sunbelt markets that will play out over years, such as population migration, evolving logistics change, on-shoring, near-shoring, et cetera, which we’re well-positioned for. And we’ll now open up the call for your questions.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Craig Mailman with Citi. Please go ahead.

Unidentified Analyst: Nick Joseph here with Craig. Marshall, you touched on what’s happening in the overall industrial construction market — in terms of new starts coming down, obviously, from recent peaks pretty materially. How are you thinking about your own new development starts and underwriting them just given current construction costs and also what you’re seeing on the demand side today?

Marshall Loeb: Good morning. Thanks Nick. We’re a couple of different ways. One, we’ve pushed up our development yields. I guess, maybe internally our goal, although the numbers were there. So we’re kind of high sixes to sevens, usually on new starts. I’ve always liked our model and that the way it works is as we build out a park. It’s usually the team in the field and it’s rather than corporate pushing out a start goal for the year or updating that goal, it’s really they will call and the conversations are typically, hey, we’re 99% leased in Dallas and the last phase leased up and we need to build a couple more buildings. And then oftentimes even the benefit is we’re talking to two or three of our own tenants in that sub market who need more space.

So we’ll taper that new supply into the demand and then really if one of our projects has not leased up, we won’t start that next phase. So we’ll wait until the market kind of fills the inventory and then restock. So that’s how we’re looking at it. I think a little bit and maybe where you were going with your question, what we like about this environment or what makes it a little atypical is some of the pieces that talk about, and we would agree that demand is maybe, the world’s kind of normalizing after COVID in terms of demand. We still think it’s pretty strong. It’s just not frenetic like it was at one point maybe in 21 or early 22, which felt was fun, but felt unsustainable. But what’s also a really unique environment is how hard it is for merchant developers, local, regional, the people that often were building our shallow bay type products are to get capital or know what yields to bill to then turn around and flip it where we have the advantage where we can hold it in a growing market so we’re really seeing supply taper off and so that’s got us more encouraged about development as we look into really start looking into 24 assuming there’s not some type of black swan economic turn but hope that helps.

Unidentified Analyst: Yes sure, very helpful. Thank you. And then just maybe on the increased cash same-store NOI guidance for the year you know it implies deceleration obviously in the back half of the year but you touched on occupancy and demand you’re still seeing. So can you just walk through how we get to the midpoint there in terms of the updated guidance?

Brent Wood: Yes, I’ll jump in there Nick. Good morning. This is Brent. Yes, it really comes down to and we’ve been a little bit ahead even we had anticipated the slower growth and same store NOI in the second quarter. As you saw we were down over first quarter but raised the guy because it came in second quarter came in ahead of what we were projecting, but it really comes down to the slowness. It isn’t really to do what’s rate increases which continue to be strong but it’s more on the occupancy side. We’ve had the benefit for many quarters of comparing favorably to the prior year’s quarter by 50 to up say 130 basis points first quarter for example where we have to be 11% increase. We were comparing a 98.7% average occupancy to a 97.4% so we had you know all the real rate growth, rent bumps plus the occupancy gain, but then you moved a second quarter and our same store compared a 98.4% to a 98.4% and so the occupancy side of that becomes flatter and then even looking at our budget calls for a few basis points here and they’re pull back in occupancy and the comparison metrics for third quarter for example of ‘22 is 98.5% same store occupancy and 98.8% for fourth quarter.

And so those will be the two benchmarks which we’ll be comparing to. So, I hope we do better than what we’re projecting at the moment. I mean it’s not out of the realm that our occupancy come in ahead of what we’re projected for the end of the year. But you still got a step comparison. So again, we’re still very pleased with the other components run the right growth. We’ve had — we’ve been able to accomplish higher annual rent bumps and our leases over the last few years. The guys have done a good job of leverage in the market there. But clearly, the occupancy side comparison is a – is a bit of the head wind and the overall statistics there, but as Marshall often says same store is an important component but it’s just one component of many that come and formulate to our bottom line and we’ve been very pleased with our bottom line FFO growth as evidence to getting close to 9% almost double digit per share again.

So we have a way of putting all our pieces together and making work to be very competitive at on the bottom line.

Unidentified Analyst: Thank you very much.

Operator: The next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Vikram Malhotra: Thanks so much for taking the question. So maybe just first you touched a little bit about not being concerned about the rent spread side or just I guess being more conservative on the occupancy. But as we look into the second half, you’ve definitely seen a broadening out in terms of the rental rate rental growth strengthening and the rent spreads pretty solid in parts of Texas and Florida. Can you just give us your updated view of how you see rent growth in the second half across some of your key markets and does that essentially imply rent spreads will continue to widen out into the second half?

Marshall Loeb: Good morning and good question. That — we’re broadly speaking kind of viewing rent growth this year and maybe that high single digits to lower double digits, call it 8%, 13%, 14% and it feels like it’s tracking there. Tenants are taking longer to make decisions, but we’re staying, staying full and you’re right. Now one of the things when we’ve gotten questions about our Southern California markets we still said they’re strong. The difference is when you look at our releasing spreads really over the last couple of years, Southern California still a good market for us, but so are the other markets the Delta isn’t nearly what it was three years ago type thing, and then I, and I don’t see that changing given the supply formula and the growth just population and business growth in markets like Texas, Florida, Georgia the Carolina’s.

I think that embedded rent growth is there and rents continue to grow. So we feel pretty good about our rent spreads. Look we had the best quarter and best first half of the year we’ve had historically. So that, in a period where we’ve been the most anticipated recession in history feels pretty good right now. And it feels like we’ll stay there and it’s going to be interesting to see what we’ve not seen supply come down like this since, it’s probably the GFC or something like that. So really it’ll be interesting to see how supply continues to come down. If demand can stay where it is, if I’m really an optimist, I could say there’s, more upward pressure on rents in 24 than there was in 23.

Vikram Malhotra: And just to clarify that last comment is more specific to your sub-markets, in Texas, etcetera, or you’re just talking more broadly?

Marshall Loeb: Like, maybe I was laughing just saying my answer is maybe yes. I think supply is coming down nationally, but I certainly like having maybe the combination of ours and the markets we’re in, we’re in on purpose. I like that supply is coming down nationally. And I especially like it if we can double in what I’ve thought in some of our markets, we don’t need a great economy given, the growth of e-commerce, population growth, job growth, onshoring, all the things like that. We just need an okay economy. And we’ll gain more than our fair market share based on what we’re evolving logistics, change, things like that. But if you can mix in falling supply and growing demand, it was kind of where I got to my short answer of laughing with a yes. So thank you. I like the markets we’re in. I think they’ll benefit a little more than the national average.

Vikram Malhotra: Makes sense. And then just to clarify, you referenced sort of near-shoring, on-shoring a couple of times and, El Paso’s rent spreads were very solid. I’m just wondering any, can you give us any more like specific anecdotal evidence that this trend is finally building? We’ve been talking about it for three, four years since the start of COVID. Other data points suggest there’s probably more activity, but I’m just wondering, are you seeing it translate into a warehouse demand?

Marshall Loeb: Mostly what we’re, you’re right. We’re seeing it within our releasing spreads and occupancy out in our main two markets, or maybe two and a half to three, we’re seeing, rental rate growth in El Paso that’s historically strong, where it’s really kind of California-like markets where it’s triple digits. And we won’t go to the other side of the border, but in reading about Juarez and Tijuana, both have incredibly low vacancy rates, and that will continue to drive those markets. So El Paso feels strong. It feels like there’s, every quarter, there’s a new company, there’s new demand. What we like about San Diego, and a good portion of our San Diego portfolio is really an, excuse me, a sub-market Otay Mesa that’s right there on the border, and that continues to have strong demand.

Every Fortune 1000 Company Transport 3PL is in that Otay Mesa area. And then the other market, we’re 100% leased in Arizona. So Nogales, Mexico’s not quite as big a market and a little bit further away, but we still see strong demand in Arizona. So it feels like it’s, it’s not a light switch, but it incrementally builds in those markets, which feels more sustainable as well.

Vikram Malhotra: Makes sense. And then just last, if I can sneak one more, and just, your cost of capital, you referenced the equity you’re raising, taking advantage of where you are, but also, I guess, relative cost of capital to public and private peers, it’s pretty wide today. So I’m wondering apart from sort of the deleveraging like you outlined or maybe better development spreads, is there anything else you’re monitoring or looking to take advantage of as you have this relative cost of capital?

Marshall Loeb: Maybe a little bit, and Brent jump in too. I think one interesting trend we’re seeing on, really, part of it is cost of capital, but more importantly, access to capital, and that where we’ve seen opportunities in the market, and that’s pushed us to the equity. I mean, maybe a lot of different reasons. When you’re not sure where the economy’s going, I’d rather have a safer balance sheet than an unsafe balance sheet, but a lot of our peers that build what we build are local, regional developers, and we’ve had a number of them come to us in several markets, and hopefully we’ll, we’ve closed on a couple of these, and hopefully we’ll have a few more down the road that we’re evaluating. And the conversation is generally that I’ve had this site tied up for two to three years.

It’s hard to raise equity debt. It’s more expensive. Would you step in, and maybe we give them some promote feature, or they participate on the development or some fee, and really it’s shovel ready sites that we’re finding. And so that’s where, where it’s a year or two years ago, they would have had a line of betters when you have a site ready. You really didn’t have to break ground, and you could have made probably a few million dollars spending the market. Now, those developers and a type financial spot. I think it’s going to get, it’s not me guessing. I think it’s going to get worse before it gets better given some of the ripple effects through commercial banks and things like that, is their exposure to real estate. And so that’s where we’re seeing the opportunities is development sites where someone else has gotten through the zoning, the permitting, all the things that usually are measured in a year or two of headwind before we actually close on the site.

Well, we’re having a chance to maybe, jump, cut in line basically closer to the start of the race than have to do that legwork on the front end.

Vikram Malhotra: Makes sense. Thank you.

Marshall Loeb: Sure.

Operator: [Operator Instructions] The next question comes from Nick Thillman with Baird. Please go ahead.

Unidentified Analyst: Hi, this is Daniel Hogan on Nick. So looking at your development pipeline, looks like you’ve pushed back some version dates after your project for springwood and stone code. Those are larger buildings. Only push back the quarter, is that function of longer development times or slower lease up assumptions.

Marshall Loeb: It’s really development. Yes, the lease are — the projects are going fine. I would say, it’s two parts. One, weather can definitely play a factor of pending where you are, and those are early enough in construction, and it’s probably a little bit of weather delay and then overall in construction and talking to our construction team, it feels like delivery times have normalized for the most part. I’ll overuse the word normalized on this call but for electrical equipment. So the transformers, the panels, all the things that people have pushed to green energy that if you said where are we having issues within our construction, and I think it’s everyone, it’s the lead time on electrical is about one year.

So it could be on those to a little bit weather related and probably a little — I know where our construction guys, their stress level is, is getting any kind of electrical equipment and delivery. I don’t think it’s a pricing issue so much it’s just availability.

Unidentified Analyst: Got it. And then given that you talked about seeing less Shallow Bay competition in the past on the supply front, have you seen any instances of mid or large box developers putting in the capital to try to break up their spaces and compete with your space? Or is it still a similar trend?

Marshall Loeb: I think it would — look, you would probably — they’ll have financial pressure on where the market is to do that. I think the challenge — and I guess I could maybe get on the margins, depending on the size box you built. Our average tenant size is in the 30,000 square feet, 75% of our revenue comes from tenants under 100,000 feet. So if — but if you and I have built say, an 800,000-foot building much less the $1 million-plus. The dimensions of those buildings, it is such a deep building that if you try to cut it up for a 50,000 or 70,000 foot tenant, you end up with such a long but narrow space, you can’t compete on dock doors and things like that. So our — it becomes very inefficient space for the tenants because you don’t have enough loading doors at the back of the space if you kind of picture cutting off the rectangle.

And then the other thing that would happen to you on the landlord side is you have to build a fire-rated demising walls kind of from ceiling to deck. And so that gets awfully expensive. So I think the tenant improvements wouldn’t work. So that’s why the big boxes, they can maybe — they don’t have to go to one or two tenants, you can maybe cut it off a little bit, but probably not in small enough piece is still that it would really compete with 120,000-foot building, because the tenancy when you’re having those kind of deliveries and loading and unloading, it just physically wouldn’t work for you.

Unidentified Analyst: Thanks for the clarity.

Marshall Loeb: Sure, you’re welcome.

Operator: The next question comes from Connor Mitchell with Piper Sandler. Please go ahead.

Connor Mitchell: Hey good morning. Thanks for taking the questions. So you guys have talked a little bit about the merchant builders and regional developers having trouble access to capital and reaching up to you, guys. So I guess I’d just like to ask about maybe what do you see in the near term and maybe a little bit longer term with whether these kind of competitors maintain and stay on the satellites for a bit longer? Or is it possible they find capital soon to be able to jump back in the mix?

Marshall Loeb: Yes, good morning, Connor. Good question I think. And let’s say it’s a harder one to –good question, another one other way to say it’s a hard one to answer. I think the pro for industrial, there’s a lot of capital that still would like to be in real estate. And I think industrial is attractive compared to some — it’s offices sounds like it’s incredibly hard right now. Retail, where do you go multifamily is still strong. So industrial is attractive as an alternative so you can get capital there. I still think it’s hard to know, and I guess we’ll not learn a little more today when the Fed finishes raising interest rates, much less lowers them to know where cap rates are because so many of these developers are merchant developers and they’ve been willing to build on a pretty thin margin.

And until you really know where capital settles out, it’s hard if it were — Me and Brent to build it and know where we can flip the building in 12 to 18 months. And I think as we’ve talked to the banks that we work with, it still sounds like what regulation may come out or what pressures they’re going to have to reduce their commercial real estate exposure, which isn’t industrial so much but we get thrown into that bucket with every other product type. So I think loans are going to be harder to come by in the near term than the in the last couple of months. And the interest rates sure feels like it’s going to be a little bit harder. So I think those developers are going to be on the sidelines for a while. We’re not seeing the forward sales or the land sales that we had and the demand was great in ‘20 and ‘21 kind of early ‘22, and maybe that’s moderated but supply has adjusted as dramatically, at least in our portfolio, much more dramatically than demand has to date.

And you still got a lot of things in the pipeline, but as that empties out, there’s not much coming back into that pipeline. And I don’t see that changing for the next few quarters until the capital markets kind of settled down a little bit more.

Connor Mitchell: Thanks, appreciate that. And then just a second question. Regarding the rise in the homebuilders and demand for new houses, which we haven’t seen in a while, maybe even past 15 years or so before 2008. Just I was wondering how has the rise in the new housing demand and the homebuilders impacting the warehousing demand, like is it showing up materially overall in the industrial market? Or can it be more attributed towards the growth in the Sunbelt and maybe some newer markets?

Marshall Loeb: Yes, it’s a little — a little hard to differentiate exactly, but I think we’re definitely seeing it. It’s not driving our business so much as it’s a positive contributor. Certainly, we’re reading where Florida. The population growth Florida has had, the Carolinas Maricopa County, Phoenix, Arizona, a huge population with Austin, Texas. So we definitely have our share of whether it’s train, air conditioning or Home Depot, Best Buy, Lowe’s, all the tenants like that and then some of the tile companies things like that where we’re benefiting from their growth. And they’ve taken a couple of our developments. I can think of a couple in Fort Myers, where it was people homebuilding related appliances, things like that where we — it’s a nice benefit, but I like that tenancy is so diversified.

To me well, I wouldn’t want to get too reliant on homebuilding because it is so cyclical. But right now, it seems to be picking up. There’s a shortage of homes, it sounds like, as we read about it and it’s kind of one more tailwind that we’re thankful to have.

Connor Mitchell: It’s great color. Thank you very much.

Marshall Loeb: Thanks, Connor.

Operator: The next question comes from Jeff Spector with Bank of America. Please go ahead.

Jeffrey Spector: Great. Thank you. Just big picture, Marshall, just appreciate all the comments on the different drivers of demand and there is a lot of debate or angst over some of those drivers and I guess, where we are, let’s say, in the cycle or what inning we’re in per driver of demand. I guess just big picture, what are your thoughts here on the various drivers? I mean, is there still a nice balance between all of them that you would still characterize the demand for some of these drivers is still early, mid, late innings? Like how are you thinking about it?

Marshall Loeb: Hey Jeff, good morning. I like that we’ve got any number of drivers. I think we’re still early innings and kind of picking them apart on — it’s hard to call e-commerce early innings, but I do think last mile delivery and kind of how retailers I think they — as they continue to rationalize store count and things like that. I do think we’re earlier innings in terms of how they or curbside delivery, things like that, I think there’s more to go there. I think we’re early innings on onshoring and near-shoring because that would strike me as a multiyear process to move a plant out of China or China plus one manufacturing. I think it’s happening, but we’re early on there. And I think some of the ebb and flow like our last question on homebuilding and things like that.

So I like that there’s that many. And I think e-commerce is just also just the penetration, a continual drip, drip, drip versus brick-and-mortar. I don’t think brick-and-mortar is going away. But I do think e-commerce every year seems to gain a little more market share just as they get better and faster and faster with their delivery. So I like that there’s — to us, we’re very flexible, low-cost real estate in infill locations. Our top 10 tenants are just over 8%, our revenue is 8.3%, which is actually down 50 basis points from a year ago. So I like that there’s a million ways to use our buildings. And I know you all have, I would encourage any of the investors if you’re out and you want to take a tour, join an analyst tour, you really get a sense for just the variety of ways people use good industrial buildings.

And every few years it seems like green energy is a new one, we’ll lease to a number of tenants that are doing something with green energy that we wouldn’t have had any three years ago, and now we’ve got 10 or 12 tenants and there’s one or two new prospects every quarter it feels like. So I like that our pie [Ph] continues to widen. And it’s — as one of these tailwinds may die down or if it reaches a late inning it feels like there’s a new tailwind that we pick up the type of tenancy we hadn’t seen before, but then online pharmacies were something we didn’t have several years ago, and now we’ve got several of those as your insurance companies push you to order recurring prescriptions online rather than say to a, [indiscernible] or CVS or it’s brick-and-mortar.

And so that’s a new type tenancy. So I won’t — we’ll take up this whole hour of the list of tenancies, but I like that our tenant base or prospect pool continues to grow. And then in the meantime the full supply guys and Budweiser distributor and this and that. All those tenants are still there that we had for 20 years.

Jeffrey Spector: Thank you. Very helpful. And then my second question, more detailed then I’m sorry if I missed this. Did you explain the bump in the stabilized development yields? If you didn’t, if you can, please?

Marshall Loeb: Okay. No, I guess it’s a little bit there. I’m glad we had it. It’s really where rents — we’re able to get rents. It’s higher than what we had — what we had pro forma. So we — when we do the underwriting, we’ll underwrite to current market rents and the construction costs we have hand-in-hand and a lot of times, as we lease those buildings, couple of things that can help us get better yields will be, one mainly getting rents that were a little bit higher than the market was at the time when we kind of said, okay, let’s break ground and go. And then the other thing we can usually pick up on two, would be getting the building leased up faster. So our carry is a little bit less. So a combination of those, but the bigger driver would just be how the market continues to rise.

And so I’m glad that the buildings that we had under lease-up TikTok, and I’m hopeful by the time they move out that what we’ve got under construction can maybe pick up a few basis points between now and then. If it gets leased up quickly or a single tenant takes it and we can get better rents, we’ll keep trending higher. And look, if we can raise capital at the right way and again, as Brent mentioned earlier, we think things like same-store NOI and all those are very important, but our successful development program has been a huge driver to our FFO growth and our NAV creation. So it’s great to see those yields coming up.

Jeffrey Spector: Great. Thank you.

Marshall Loeb: Sure. Thanks Jeff.

Operator: The next question comes from Samir Khanal with Evercore. Please go ahead.

Samir Khanal: Hey good morning Marshall. On the one hand you talk about market strength, operations being strong and then you talked about demand drivers still intact. But then when I look at your development starts, it’s up modestly, right? So I’m just trying to understand like what’s holding you back from pushing that number higher? I guess what are the guideposts you’re looking at to kind of get — be a little bit aggressive on that?

Marshall Loeb: Ours is really — we feel like for us, over the years $360 million is a pretty good start rate for us. I’m we’re happy with that. And I don’t — really holding us up — with two things we’ll look at if this is helpful. We have our starts that we’ve dialed out for the year, which is that $360 million and then when we look at the pages internally, we’ll call it a shadow pipeline of if we get lucky, here’s the next batch of the next phase and a part typically, here’s what could happen. And really, the $360 million we feel pretty good and solid about it, they’re going to happen this year, and we’ve raised it a couple of times this year. I hope the market demand is there. And we’ll go — I’ve always tried to take an approach to it for our investors, we’ll go as high or as low as the market tells us to.

I’m glad we’re 98.5% leased and the demand is there. But if Phase III and a part doesn’t lease up, I would act like I think it’s the right decision. I’d be comfortable going from $360 million to $380 million or much below that, if we’re not leasing up what we built, but hopefully, if that $360 million number rises, it’s really the team in the field finding tenants for our current development and will — our task at corporates really to help them get the capital — to capitalize on those opportunities. So we’ll go as fast or as slow as the market demands and really through, call it, late July, we’re forecasting $360 million. But look if it becomes $400 million, then great, that means re-leasing up our buildings and the markets pulling the next phase of the park faster and faster.

And that’s really what’s happened in the last couple of years, and we’ll see how this year plays out.

Samir Khanal: Got it. And then I guess my second question is around your guidance. And I know this was asked earlier about sort of NOI growth implying that there’s going to be a bit of a slowdown in the second half. I know look, you’re coming off at a very high level, so I understand that. But maybe talk about some of the markets that are driving that, right? I mean, L.A., we certainly know that’s been — we’ve talked about that a lot. But maybe talk about your other markets, which is sort of driving that slower growth in the second half?

Marshall Loeb: I’m just kind of looking at where we are for the year. It’s typically — and I get it, the market that pulls you down this year is the good market next year. And it’s mainly more a function — I mean at Fort Worth, we had to move out. It’s not a big it’s a million square feet. There’s nothing wrong with the Fort Worth market, but the same-store NOI will be less. It’s more — some of those markets you’re coming off 99%, 100% leased and then we get a vacancy. San Francisco is a market where we’ve got a little bit of vacancy there. As I think about that, it’s not in our same-store NOI, but that will — it’s one of the properties we acquired last year. We’re backfilling a space where a tenant moved out.

So it should be a nice pickup next year. So it’s probably more a function, not in terms of market weakness that we’re seeing — that are above and below the average, so much as where is their vacancy rolling in and out of any market. I mean I think maybe if it’s more helpful when I look at our core market stats, I’ve always thought kind of the year-to-date, kind of GAAP rent growth and cash same-store NOI or where I look and when I see Phoenix, Las Vegas, El Paso, Dallas, GAAP rent growth, all much closer to what we used to achieve only in California for our portfolio. It’s great to see those widening. And then the same-store NOI in any given year, maybe we’re just not quite as big as some of our peers or one of our peers, in particular, that a move out here or there can make our same-store negative in one year and very positive the next.

Samir Khanal: Got it. Thanks so much.

Operator: The next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Michael Carroll: Yes, thanks. I wanted to touch on the development questions that you kind of commented earlier. I mean how — when you underwrite new development projects, I mean, how have those initial targeted yields changed over time? I mean, have the higher construction costs and financing costs has that pulled yields down? Or have market rents really kept those yields really unchanged over the past year or so?

Marshall Loeb: Good morning. It’s really more what we were probably why with capital market changes. When interest rates were probably at their — low in cap rates, we’re seeing things in the threes [Ph] we would have looked at a development — if it were in one of our major markets, and it’s probably as low as we would have gone at any given point in time, let’s call it maybe a 5 and, call it, 5, 7.5, something like that because we would have said, Hey, it’s still 200 basis points or more above a market cap rate, not that we would exit, but just where — cap rates. But as cap rates and interest rates have come up, really our floor has moved into the higher 6s in terms of kicking off a new development. The good news is we’re still achieving those, and we achieved those even though we would have looked at something, but it was as we competed for land, what were you willing to underwrite to, and we probably – two years ago, would have dipped below 6 where now that’s probably moved up a good 100 basis points.

And you’re right, construction costs have risen, but thankfully, rents have kept pace and so it’s been an offset to those two. And it really hasn’t sped up or slowed our development pipeline so much as some things — we would have said yes to, we’ll probably think we need to get a little bit better yield on or let’s kind of keep working on that or — if it was a lower yield, it would probably be — like if somebody pre-leased the projects or in bit of the project, we’d probably accept a little bit lower yield just because the risk is less.

Michael Carroll: Okay. And see if I heard you correctly, is like the 4 — your target is probably about 100 basis points higher than what it was but what about the exact projects? I mean, has those yields actually increased by that amount over the past year? Or has market rents really kept them in the high 6s, so you’re still achieving similar yields as you were last year?

Marshall Loeb: Yes, you’re correct. More of the — our target has probably risen — our threshold has risen by, I call it, a good 100 basis points, but rents have matched construction so that the yields have stayed pretty consistent in that high 6s, 7 type range.

Michael Carroll: Okay. Great, thank you.

Marshall Loeb: Sure. You’re welcome.

Operator: The next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Todd Thomas: Hi, thanks. I wanted to switch gears and ask about the capital raising in the quarter and the updated forecast for the year regarding common stock issuance. Brent, maybe within the guidance revision, I guess, first, can you just provide some additional detail around the impact — the increase in stock issuance had on the guidance. And from a timing perspective, how should we think about the remaining $175 million of issuance embedded in the guidance? Is that more heavily weighted toward the third quarter just given where the stock is today? Or do you assume that it’s more ratable throughout the balance of the year?

Brent Wood: Yes, I’ll start with the latter there. Yes, the $175 million, we pretty much have that equal weighted throughout the remainder of the year as our capital source. And just to back up for a moment, as we always do, when we’re looking at our funding sources from outside or funding that’s required. If you look back going to 2022, we had about $600 million of what I would say, outside or external source funding and that was about $525 million of debt. And we did that. If you remember, we got kind of what we felt like in hindsight we did get ahead of rate hikes. We did that $525 million at an average rate of 3.8%, which in hindsight is very good, and we only did $75 million of equity last year. But then you look at this year and as rates did go up.

Latter half of last year, ending this year, long-term debt for us today, given our BAA2 [Ph] you’re probably looking at somewhere around 6%. I mean the 10 years crept back up to 3 9-ish. So if you had 2, 10 somewhere in there is probably where we would be on top. And even the revolver which obviously has traditionally been in short term has been the cheapest debt by far at — 1.18 months so, we were sub-1%. And now the revolver is like 6% itself. So any dollar that you have sitting on the revolver now suddenly costing you a pretty meaningful percentage. So that’s why you’ve seen us this year pivot to the equity side. So out of a projected, call it, $575 million of external sourcing, we’ve kind of pivoted the opposite of last year. We’re projecting $475 million of equity, of which $330 million done and $100 million of debt, which we did back in January.

So we’ll continue to toggle back and forth in a short measurement period, it might look while they’re really leaning heavy into equity, which we are. But when you back up for a moment, kind of average everything out, we think it’s important to look at every avenue and to tap into each, you can’t lever yourself too much. You don’t want to get to delevered either. So we like where it is. The price has actually rebounded some since quarter end. So if it could hang in there would be — even incrementally more attractive. The good news is, is we continue to have good reason to raise capital. We’re not raising capital for retiring certain debt or this that and the other, we’re raising capital because our team continues to put this money to work at very — primarily be a development, but other avenues that make it still very accretive to do so.

And so right now it’s equity that could change. But yes, that $175 million that’s left — and again, that’s a flexible number. If the guys could — as Marshall said, if development starts climb because of good markets or if we continue to find some opportunistic buys kind of like we did with the Vegas property, you get a couple of those, then you may ratchet that number higher, but that’s kind of how we’re looking at it at the moment.

Todd Thomas: Okay. Yes, that’s helpful. Yes, I mean, I guess, in terms of the use of funding there, you have a little under $200 million of remaining spend for the development lease-up pipelines, so that makes sense. But in terms of investments, it was a relatively quiet quarter, I guess, maybe, Marshall, can you just talk about the pipeline today and maybe provide some color around what you’re seeing and whether you’re starting to see some better opportunities surface?

Marshall Loeb: Sure. Good morning, Todd. We’re happy with the acquisition we found in Las Vegas, which is on a strategic market that we want to grow in. It’s been another kind of strong rental rate growth market. We’ve tried to take the approach and we haven’t been as successful as I’d hoped of, given the capital market turn kind of — we’ve seen development opportunities to step into, but we haven’t seen the acquisition opportunities that there’s still a pool of whether it’s private buyers or this or that — we thought with debt higher, private equity is going to be stretched, the funds were having redemption challenges and things like that, that there’d be better core buying opportunities that have turned out on the market today.

That said, we continue to kind of make our offer here and there. We’ll be strategic about it. And the way we’ve kind of tried to take the mind set on it too, if this is helpful, if we don’t make any acquisitions, we’re okay. We’ll keep funding the development pipeline and grow at the pace we can. But if we can find some owners that are maybe having a little bit of distress or if it’s an off-market opportunities or — in a couple of cases, we’ve looked where it’s a owner-user selling a good multi-tenant building, and it’s a way for them to raise capital. That if we can get yields that where the spreads are not that far away from development or at least are attractive enough on a risk-return basis, that’s where we’ll step in.

So I hope we can make a few more acquisitions but we’ll be trying to be patient and disciplined about it. And the market definitely has firmed up a good bit, dramatically from where it was a year ago, which was meaning more of how bad the market was a year ago, but we’re certainly seeing trades not portfolios, which was really never where we were that active, but there still is a number of bidders in second and third rounds and we’ve come close but really only bulk to one property year-to-date. And we’ll — hopefully, we can find another one or two before year end, but we’ll be okay either way.

Todd Thomas: Okay, alright. Thank you.

Operator: [Operator Instructions] The next question comes from Jason Belcher with Wells Fargo. Please go ahead.

Jason Belcher: Hi everyone out there. I noticed your occupancy was up sequentially in the quarter, while lease rate was down. Both were flat just about 1.5 months ago when you provided your interim update on June 1 that will be a flat to the prior quarter at that time. Can you just give us some color on what drove that divergence over the past month or so?

Marshall Loeb: I’m trying to — I don’t have that — June, I think in terms of just watching it that maybe that a month ago. We’re happy where the quarter came out. And again, I know — I’m grateful our occupancy was up. The average quarter year-over-year was flat for the overall portfolio and actually for the same-store. And I’m glad we’re a little bit higher 30 basis points that we were at the end of the first quarter. And that’s — I don’t know if that’s indicative of the market just so much as a little bit of move here and there. The numbers almost the happiest with this quarter are a little better one of them with our re-leasing spreads getting to 38% cash and the 53% GAAP. And again, I’d say at least kind of looking at where things stand, maybe by the time we wrap up second quarter and get our release out we are virtually at the end of July.

So at least seven months of the year, it’s been a pretty consistent year. We’ve kind of stayed ebbed and flowed around 98% leased, 98% occupied. So the last five months are the trickiest and we’ll see how those shake out. But I’m grateful that seven months of the year have been pretty stable in what felt like a pretty unstable environment at times given — mainly the capital market fluctuation. So I know that’s not a very specific answer, but at least that kind of helps where at the end of the day, our second quarter was pretty consistent with last year, which was a as Brent said, we’re coming up against 40-year highs for our company in terms of where occupancy is percent leased. We used to think of — historically, 95% leased is fully leased, and we’ve been at 98% and 99% a couple of quarters, which is — there’s not much margin to improve on that.

So we’re happy that we’re hanging in there versus those comps.

Jason Belcher: Understood, thank you. And then secondly, you mentioned that the tenant decision time lines remain elongated. Can you just give us a little more color there and maybe comment on what that time line looks like today versus a year or so ago? And if that elongated time line as it is today, is continuing to widen out or lengthen or does it appear to have stabilized somewhat in recent weeks or months?

Marshall Loeb: It feels a little more stable. Maybe a couple of years ago, when things were so hot, it felt like people were afraid of losing space. And I remember talking to a couple of tenant rep brokers saving their jobs. Not much fun. They were going to tour and be told two or three other people are looking at the same space. And people felt in a rush to take space, and that’s maybe how you saw maybe a couple of large users commit to more space than they wanted and things like that, that had turned out later they said, we would have overdone it and things like that. And it probably — there’s almost — if I oversimplify it two buckets, and it’s the national, the larger the company and maybe the more legal back and forth happens on those leases and things like that, that it just takes longer.

And I’ve kind of told myself it’s just — it’s natural human psychology when you read the news or watch the news, there’s so much concern about the economy and waiting for a recession that it feels like large companies have — I think it’s probably more normalized. I don’t think it’s getting longer, better being patient and thoughtful about their space needs and the smaller companies maybe it’s an owner or regionally based, they’re still moving pretty quickly and maybe their process for all their approvals and things like that isn’t quite as cumbersome. The other explanation, if this is helpful, was one of the brokers explained it to me is rents have risen so much over the last few years and as their space requirements, the — what the tenants are committing to in terms of lease liability, the absolute dollars has risen so much that in a number of cases, it takes depending the company another layer or two of approvals before they can get there.

So that makes — at least made sense to me of why once you got into LOI, it took so long to get a lease sign just by — the bigger the company, the more approvals and the lease liability was triggering other layers of approval than it had maybe a year or two earlier.

Jason Belcher: Makes sense. Thanks very much.

Marshall Loeb: Sure. You’re welcome.

Operator: Next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Ronald Kamdem: Hey two quick ones from me. So the first is just on the same-store NOI, and I think we’re all trying to build a function for what that could look like next year? And if I’m taking your cash rise [Ph] up 38% in the quarter with — I see 13% coming due, 13% early next year. You easily get to a 6% to 7% number. So the question really is, is occupancy and bad debt, sort of the biggest delta that we should be thinking about next year and so forth?

Brent Wood: Yes. Ron, this is Brent. I would say you’re right on. And certainly, based on — we still feel good about that rental rate growth component, and we have annual escalators and the vast, vast majority of our leases, and that’s grown now to be — used to be like mid-2s on average. And now I’d say that’s grown just north of 3% as we’ve been able to lever that overall as well. I would say more of that component to look for next year would be occupancy side versus bad debt. Bad debt continues to be low, collection is good. And so not to say that couldn’t increase, but it feels at a manageable pace. The occupancy side again, as I just mentioned earlier, for example, the same-store bucket, the comparable occupancy for third quarter is going to be 98.5% in the same-store comparable for the bucket — for last year in fourth quarter is going to be 98.8%.

I mean that we know. I mean, that was the occupancy last year for our current same-store bucket. So those are going to be pretty hefty comparisons. And so I think that part of it would be — I agree with what you’re saying about the rental rate increases in that component of it being 6% to 7%, and then it’s a matter of where do you think occupancy is going to be. We continue to budget it slightly on basis point measurement slightly coming down, and it continues to — as Marshall said, continues to be pretty stubborn and hang around 98%. So if that happens — through the last two quarters of the year, we’ll do better than what we’ve got dialed up right now because we are showing just a slight bit of pullback. But — so we’ll see, but that is — I agree with you, that’s probably the biggest component going into next year is how might that impact one way or the other on to same store.

Ronald Kamdem: Great. And then my second one, just on maybe a little bit more commentary on onshoring or Fed storing and so forth. Just what sort of data are you hearing from tenants or are you seeing in the markets? We hear about it a lot of the news, but curious where that’s flowing through in the portfolio? Thanks.

Marshall Loeb: Maybe a little, I guess, on what we see — what we’re seeing is maybe twofold in Texas, we’re seeing companies, it’s more tech. And then maybe that’s not onshoring or nearshoring so much. It’s just — I guess — I’ve put in population shifts. I mean, Tesla has had a large impact not directly and indirectly within Austin and then even in San Antonio, we’ve picked up Tesla suppliers. So their relocation has been a pretty dramatic impact. And we’ve seen — where Texas seems to pick up is more technology and medical-related manufacturers, Dallas and Austin, where we’ve seen that pickup and prospect activity. Where we’ve seen it on and when we’re looking for that next opportunity in San Diego, we’re full there.

And we did buy four buildings that are 50% leased and quickly leased those up, but it was electronics, manufacturing and medical products and things like that, that are manufactured in Tijuana and then coming over the border. So as those markets stay tight and then in San Diego, you actually have the city pushing further and further south. Amazon, who was one of our big pre-lease opportunities, they wanted to be closer to the city of San Diego but couldn’t find the land. So it all gets pushed there together at the border. And then the other thing that I think really helped San Diego as they’re building a second border crossing that will be more technologically advanced. So it’s possibly a faster border crossing and a lot of our product is in between those two border crossings.

So we’re bullish on South San Diego. We need — I shouldn’t say that because we’re trying to find the next opportunity there, but it’s it seems to be slow build here and there. And when you look, I think the vacancy rate of doing this from memory, which is dangerous, but was under 2% and Juarez, Mexico and things like that. And I think Tijuana is about the same. So there’s just — those markets are tight and continue to grow, and that spill over continues to help us. And where we — and again, when we’ve seen it more companies — look, we hope California stays a strong market, but if people do leave California, we like that we’re balanced and that we’re picking up that tenancy in markets like Las Vegas and in Texas and in Arizona as well.

Ronald Kamdem: Thanks so much.

Operator: The next question comes from Ki Bin Kim with Truist. Please go ahead.

Ki Bin Kim: Thanks good morning. Just a follow up on that equity raise question. I’m just curious what we’re some of the decision inputs to get to that additional $155 million of equity in the second half. And if you — once you execute that, your leverage I think will be closer to 4 times. I’m just curious in your press release, it sounded like a little bit more defensive posturing, but — and I know you haven’t been known to do large acquisitions, but are there some deals or opportunities that you see in the horizon for larger-scale appeals?

Brent Wood: Yes, I’ll address the first part. Again, really, it’s a matter of us evaluating in the moment what we feel like is our best avenue. And as I alluded to earlier, 2022, that wound up being heavy debt early in the year about $525 million out of $600 million. And then this year, we’ve kind of gone almost the other. If you put the two together, we’re basically 50-50 debt to equity between ‘22 and ‘23. So we’re careful to try to be balanced on the long run, but certainly in the short run, it does continue to drive our debt-to-EBITDA and debt metrics down lower than you would say they got need to be there. But the one thing that’s been just interesting in this environment, Ki Bin, is like I say, even where you could short-term park capital per se on the revolver, and let that glide over time and then decide over a period of time, if you might want to do debt or equity, I would say that the highest rate of the revolver has kept us more immediately interested in issuing equity to basically fund as we go just because it’s right now, it’s such a big spread between, say, a low 4 or 4.25 versus a 6, just day one on an equity dollar versus a revolver dollar.

That will come down. And as it comes down, we may then begin to float our revolver a little bit more within the reason. But — so it’s — we take it as it comes. Certainly, there’s a point you had reached to where, do you want to continue to go lower? We look at other avenues. We’ve looked at even other avenues besides our traditional private placement. We’re looking at convertible bonds and some of that you’re seeing more out in the market amongst other companies today. So our role is to always be looking at those sources and then just tapping into it as best as it looks at the moment. Hopefully, that’s helpful.

Marshall Loeb: And Ki Bin, this is Marshall. I agree with Brent, and I would jump in and you did use the phrase, I remember you are facing the dry powder, and we’re seeing those opportunities on good development side. So you want to have the ability if you find an opportunity to execute on it. I keep waiting for good or better acquisition opportunities in the market has allowed now. And I don’t know if regulators at some point step in and the banks have some issues to get some loans off their books or things like that. And I’ve been hopeful we’d find those. It’s been me being more hopeful than reality, but I’m not sure that’s all played out yet as well. So if we do find those offer, if we don’t we’ll continue funding development and maybe worst case, we’re a couple of months ahead of what we needed.

And in the best case, we can find some good strategic acquisition opportunities, kind of long-term strategy, whether it’s a market we wanted to grow in or a building around the corner, ideally both. And we’ll have that ability to step in when other people may be capital constrained has been the goal.

Ki Bin Kim: And the second question on what you just mentioned convertible bonds. How does the pricing and the effective yield compared to like a straight bond? And is that something that’s more realistic to address your 2024 maturities?

Brent Wood: Well, the yield is lower than say a public bond, but then you’ve got the other components that go along with that though right, the conversion ability and what is that spread to convert — and so you’ve got costs associated with it that you have to dial in that adds to that initial coupon rate. So there’s some moving components there. Again, it’s something that we’re just keep ourselves apprised to. And again, just look at it as — you sort of look at arrows in your quiver and you want to keep — be completely cognizant and aware of all of them so that you can tap into the one that’s needed. I will say we don’t — we only have like $50 million coming this August and then a very low — the maturities next year, when you look at the schedule about, I think about $120 million of next year’s $170 million comes due like late December.

So we don’t have a lot coming due over the next 18 months so we don’t need big slugs [Ph] so the ATM continues to be, again, a good drip capital source for us. But yes, we evaluate it, evaluate it all and just kind of make the decisions as we go.

Ki Bin Kim: Okay, thank you guys.

Operator: The next question comes from Vince Tibone with Green Street Advisors. Please go ahead.

Vince Tibone: Hi, thanks for taking my question. Can you discuss the health of Bay Area fundamentals and specifically touch on some of the challenges leasing that the Hayward value-add acquisition that transferred to the operating portfolio this quarter? And also if you can touch on just how the Tulloch acquisition has performed over a year or so of ownership versus your original expectations?

Marshall Loeb: Hey Vince, good morning and thanks and sorry it took us a minute to get to you, so I appreciate the question. The Bay Area, it’s been interesting just as we watch the number of — and then there’s better stock wise tech lay-offs and things like that. I would say maybe two parts. The Hayward acquisition has leased up slower than we’d hoped. It was a value add and kind of what we’re learning on some of the value adds. The building was not institutionally owned great location, but older building. And so there was a few months of clean up, really kind of we painted the building, parking lot work, getting the existing office. It’s one vacancy. We’re knock on wood close to a lease that could start here in the next couple of three weeks.

So I’ll — you’ll hear me or I’ll drop you an e-mail if we can get that. So that’s taken a little bit longer, and it’s really 47,000 feet, one tenant. So we’ll get that and vacancy rate in Hayward is — I want to say, 2.4% was the last number I read from CBRE. So it’s a tight market, it just took a little bit longer and a change of brokers there to get that leased. And then Tulloch, all in all, I’d say the leasing we’ve done to date has been ahead of our pro forma, so we’ve been happy with that. We do have one vacancy within it on that North Shore or Venesia [Ph] submarket that we’re working on backfilling that with the tenant move out. But all in all, that’s the only vacancy within Tulloch. And to date, thankfully, the leasing we have done has been ahead of what we had underwritten as market rents at the time we made the acquisition.

So the seller has been a gentleman and easy to work with. He’s a big Eastwood shareholder, thankfully now, and we’ve been happy with that portfolio and still like the Bay Area although it is a market kind of like, I guess, all of California, you watch a little bit more closely than you do some of the other markets these days.

Vince Tibone: Yes, very helpful color. Just switching gears to my second question. I just wanted to get your thoughts on just the kind of the state of the private transactions market. And simply, are you starting to see any more deal activity in your market? Or is it still pretty quiet with wide bid-ask spread between buyers and sellers, more for core products?

Marshall Loeb: Yes. It feels like it’s picked up or picking up. That there is more smaller kind of one-off or it feels like people will break out portfolios. One of the comments I heard from one of the national brokers that a large portfolio is a discount now, and that was more a function of an inability to finance and things like that. So they’ll have market-specific portfolios, but we are seeing more activity on core acquisitions and bidding on those. And not very successfully, but we bid on a number of those, and it does feel like a year ago where things were just at, I stand still on bid ask that there is a little more transaction activity, not nearly where it was at the peak but better than it was a year ago and then kind of hopefully improving quarter-by-quarter.

Vince Tibone: Great. Thank you.

Marshall Loeb: Sure. Thanks, Vince.

Operator: The next question comes from Bill Crow with Raymond James. Please go ahead.

William Crow: Hey good morning, I guess good afternoon. Quick question. Thinking about the development side, the supply side of things, have we ever seen such a dramatic decline in starts when fundamentals have been so strong? And it makes me wonder whether — we’re not just at a time out that we look ahead 12 months or 18 months and all of a sudden, we got that 40% that we’re giving back now on the development side, all of a sudden starting again. Isn’t that quite possible?

Marshall Loeb: It’s certainly possible. Before when — I’ve not seen it, I guess, maybe in a something — I don’t want to sell on that old as old as I actually am. I would say that usually, when development starts drop, the fundamentals are bad. And we’ve gone really over a year. I know we kidded about the most anticipated recession ever where the economy feels shaky, but fundamentals are good. The capital markets have been bad, but the fundamentals are good. So I’ve never seen it. That’s what probably early in the year had us pretty stressed about the demands there, where are we going to find the capital to execute on the demands there, felt a little bit better today at certainly stock price wise and maybe that — you can get debt, it’s just expensive, as Brent said.

And I’m hopeful, look, I look back at COVID and then we would have — everybody would have thought I was crazy. I won’t put it as we should have kept developing right through COVID when it started, and we would have delivered products when the demand was there and gotten some really good construction pricing. And I don’t know that I’d compare this time frame to that. But I hope if demand can just hang in there will be — it will pick back up, but we may go a few quarters before private and those private developers can get their capital in order to jump back in the market to get supply back to a more normalized level, but demand at 90 — as we sit today at 98% leased and occupied, I’ve never seen supply falling as fast as it is. And I think third quarter will be lower — a bigger drop than second quarter was.

When we say it was half of what third quarter last year was, I think third quarter will — I’m estimating 60% drop, something like that in terms of starts.

William Crow: And the start you’re seeing today and the ones that you think may happen over the next year or so, do you think you’re seeing more like you? In other words, more multi-tenant Last Mile, Shallow Bay sort of product? Or has there been because clearly, it feels like you’re winning here. Is there…

Marshall Loeb: Maybe a little bit higher percentage. I mean, what we hear is the big boxes, and we’re not in that, but there are a lot of those in the pipeline, and that’s usually the Fortune 1000, and that’s where there may be — if I was listening to a call maybe a temporary blot of those, but because of the lack of supply following it eventually, those will get taken. It will just be longer hold periods than probably those developers underwrote. So we may have a little bit slightly higher percentage, but I think so many of the developers we competed with they are really the ones are aspiring developers that weren’t developers until industrial really kind of took off in 2018 and 2019 are completely on the sidelines.

And so the starts are it’s — there’s a few out there but not nearly what we had grown accustomed to seeing the last few years. And so I think it’s still a pretty mixed bag of probably what’s getting started, but not much. And a lot of that is probably for tenant specific. And we usually say within our markets of what’s in the pipeline, 10% to 15% is comparable in terms of what we deliver, and that number is probably holding true. Maybe slightly up just because big box is probably dropping faster than shallow bay, but it hasn’t moved materially.

William Crow: Got you. Thanks for the color. And appreciate.

Marshall Loeb: Thanks Bill.

Brent Wood: Thanks Bill.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Marshall Loeb for any closing remarks.

Marshall Loeb: Thank you for everyone’s time and interest in EastGroup this morning. We appreciate your I appreciate that. If we didn’t get to your question or if anything comes up later, feel free to reach out or e-mail Brent and me and look forward to seeing you soon. Thank you.

Brent Wood: Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.