EastGroup Properties, Inc. (NYSE:EGP) Q3 2023 Earnings Call Transcript

EastGroup Properties, Inc. (NYSE:EGP) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good day, everyone, and welcome to the EastGroup Properties Third Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please also note today’s event is being recorded. And at this time, I’d like to turn the floor over to Marshall Loeb, President and CEO. Sir, you may begin.

Marshall Loeb: Good morning, and thanks for calling in for our third 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.

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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 it has made. We undertake no duty to update such statements or remarks 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, and I’ll start by thanking our team for strong quarter. They continue performing at a high level and capitalizing on opportunities in a fluid environment. Our third 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 13% for the quarter and 11% 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. Demonstrating the markets normalizing trend, our average quarterly occupancy and quarter-end occupancy are down from both third quarter 2022 and June 30.

The quarterly occupancy was historically strong at 97.7% just down from what were at peak levels. And our percentage lease, however, remained consistent with June 30 at 98.5%. Our quarterly releasing spreads reached a record at approximately 55% GAAP and 39% cash. These results pushed year-to-date spreads to 53% GAAP and 37% cash. Same-store NOI was solid up 6.9% for the quarter and 8.1% year-to-date. And finally, I’m happy to finish the quarter with FFO rising to $2 a share. Helping us achieve these results is thankfully having the most diversified rent roll in our sector with our top 10 tenants falling to 8.2% of rents, down 70 basis points from third quarter 2022, and in more locations. We view the geographic and tenant diversity as ways to stabilize future earnings regardless of the economic environment.

In summary, I’m proud of our year-to-date performance, especially given the larger economic backdrop. We continue responding to strengthen the market and user demand for industrial product by focusing on value creation via raising rents, developments and, more recently, acquisitions. This strength allowed us to end the quarter 98.5% lease and push rents throughout a wider portfolio of geography. Due to current capital markets, we’re seeing broader strategic acquisition opportunities. It’s hard to predict how large the opportunity may be, but we’re pleased with our ability to acquire newer fully leased properties with below market rents and attractive initial yields. As we’ve stated before our development starts are pulled by market demand within our parts.

Based on our read through we’re forecasting 2023 starts of $360 million. And while our developments continue leasing with solid prospect interests, we’re seeing more deliberate decision making. In this environment, we’re also seeing two promising trends. The first thing that decline in industrial starts, starts to fall in now for 4 consecutive quarters, with third quarter 2023 being roughly two-thirds lower than third quarter 2022. Assuming reasonably steady demand, and in 2024, the markets will tighten, allowing us to continue pushing rents and create development opportunities. The second trend we’re seeing is being with developers who’ve completed significant site work prior to closing with the forward so [ph] window tightening, it’s allowed us to step into shovel ready sites and several markets such as Tampa, Denver, Austin, et cetera.

And Brent will now speak to several topics including our assumptions within the updated 2023 guidance.

Brent Wood: Good morning. Our third quarter results reflected terrific execution of our team, the strong overall performance of our portfolio, and the continued success of our time tested strategy. FFO per share for the third quarter was $2 per share, compared to $1.77 for the same quarter last year. $0.05 of FFO were attributable to an involuntary conversion gain recognized as a result of roof replacements that were damaged in storms, along with related insurance claims. Excluding the gain, FFO per share for the quarter exceeded the upper end of our guidance range at $1.95 per share, an increase of 10.2% 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 strength 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 $177.14 per share. During this period of elevated interest rates, equity proceeds have been our most attractive capital source. And our updated guidance for the year, we increased our stock issuance assumption by $110 million to $585 million, $465 million of which is complete. During the quarter, we repaid two loans totaling $52 million, including our loan remaining secured mortgage. The company’s debt portfolio is now 100% unsecured. Also, we refinanced $100 million unsecured term loan with a 45 basis point reduction in the effective fixed interest rate, while the maturity date was unchanged.

That will produce interest savings of approximately $2.25 million over the remaining 5 years of term. Although capital markets are fluid, our balance sheet remains flexible and strong with record good financial metrics. Our debt-to-total market capitalization was 18%. Unadjusted debt to EBITDA ratio was down to 4.1 times, and our interest and fixed charge coverage ratio increased to 9.1 times. Looking forward, FFO guidance for the fourth quarter of 2023 is estimated to be in the range of $1.98 to $2.02 per share, and $7.73 to $7.77 for the year, a $0.12 per share increase over our prior guidance. Those mid points represent increases of 9.9% and 10.7% compared to the prior year, respectively. The revised guidance produces the same-store growth midpoint of 7.8% for the year, an increase of 50 basis points from last quarter’s guidance.

We also increased the midpoint of our average occupancy again by 10 basis points to 97.9%. This is the result of outperforming our budget expectations in the third quarter, along with continued optimism for the final quarter of the year. In closing, we were pleased with our third quarter results and are well positioned to close out 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 is creating. Internally, operations remain strong, and we’re constantly strengthening the balance sheet. Externally, the capital markets and the overall environment remain clouded. And while never a pleasant experience, it’s leading to further declines in starts. In the meantime, we’re working to maintain high occupancies while pushing rents. And in spite of all the uncertainty I liked our positioning. More specifically, our portfolio is benefiting from several long-term positive secular trends, such as population migration, evolving logistics chains, onshoring, nearshoring, et cetera. We have a proven management team with a long-term public track record.

Our portfolio quality in terms of buildings and markets improves each quarter. Our balance sheet is stronger than it’s ever been. And we’re expanding our diversity both in our tenant base as well as our geography. We’ll now take your questions.

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Q&A Session

Operator: Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Craig Mailman from Citi. Please go ahead with your question.

Craig Mailman: Hey, good morning. Just the market right now is clearly focused on sequential market rent growth. And, Marshall, I know you guys don’t give a mark-to-market, but I’m just kind of curious if you guys looked at kind of where your market and footprint stacked up from the sequential market perspective, and maybe what impact you’re seeing to kind of the trajectory of spreads or your embedded portfolio mark-to-market from some of the recent kind of movement?

Marshall Loeb: Okay. Good morning, Craig. Thanks for the question. I guess as we look at our kind of what the markets done recently on our mark-to-market maybe the good news now for trailing 12 months on a GAAP basis, again, we’ve got cash numbers have been high, but our trailing 12 months GAAP rental rate increases have averaged 50%, a little higher than that. And this quarter, in spite of all the interest rate increases and things like that, it was a record quarter for us in terms of cash and GAAP spread. So we’re in the mid-50s, and our year-to-date averages in the kind of combined 53. So a little better, not out of the park, but continually improving there. And then what we were looking at recently in terms of what the markets done this year, and some of our peers were estimating around 7%.

I saw a CBRE number in the mid-7s. And working with Cushman & Wakefield, we took their annual market growth rate and really market waited it based on our NOI. And that’s on overall market, and that gets you just north of an 8.5%, so we’re calling is the rent. Yes, it’s gone negative in LA, at least as we’ve had and things like that. But in our markets, using Cushman & Wakefield, let’s call it, 8.5%, a little above that. And then really, I would also encourage people if you’re curious, and I wish we had the ability to share a slide on our investor presentation on our website, if you’ll flip through it if you have a chance and go to about Page 12, there’s another chart that shows vacancy rates for 100,000 feet and below really have not moved much in a year that were what’s happened in the market, what’s moving the rents is big boxes getting delivered and those prospects are deliberate and it’s taken a little more time to lease though.

So that 8.5% for our product type, I’ll probably add 100 to 150 basis points to that just because the supply has not been there, and that’s why I was thankful you’ve seen our occupancy hold and our percent leased hold fairly steady this year at 98.5%. So we still feel like we’ve got good mark-to-market, although I would agree maybe with where you started the rent. It’s not hyperbolic kind of frenzy that it was post-COVID. But it’s still pretty solid rent growth. And a little bit longer-term we’re encouraged to see starts fall for the fourth consecutive quarter, I think, they’ll fall again in fourth quarter too, just given what’s going on in the world. So we can stay around 98% leased with supply falling as fast as it is, we feel pretty good about our ability to push rents going forward, assuming steady demand.

Craig Mailman: And I appreciate you guys haven’t given 2024 guidance yet. But as you guys look at what’s expiring next year is kind of a lot of 2019 vintage, right, pre-COVID leases. I mean, do you anticipate continued growth from kind of a mark-to-markets in the last couple of quarters? Before maybe received a little bit as you get into some of the COVID era leases or kind of – again, I appreciate your guidance, but just some framework as people are thinking about next year?

Marshall Loeb: Sure, fair question. Yeah, I’m an optimist. So I would say, I feel pretty good about – I feel good about our ability to push rents in the next year. And then, really, if I parse next year even more, I think the back half of the year, or we said I think as things get absorbed what little shallow bay, an average building size is about 95,000 feet, and our average tenant is about 34,000 feet. So, again, if you look those vacancy rates haven’t moved, I really feel even better about our ability to push rents, assuming the economy doesn’t have to get a lot better just doesn’t get worse. Or maybe the Fed eventually stopped raising rates or even drops it a little bit. I feel better about the second half of 2024, probably then the second half of 2023 in terms of our ability to push rents.

Craig Mailman: Okay. Thank you.

Marshall Loeb: Sure.

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

Jeffrey Spector: Very good morning. Marshall, can you expand on your comments a little bit on the acquisition market? I think in your opening remarks, you said there’s more opportunities, and I guess, what’s changed? Is there less competition? Or, again, somehow sellers are now being more active, what’s exactly changed?

Marshall Loeb: Good question. Good morning, Jeff. It’s been really a more dynamic acquisition market, or maybe market on the capital transaction than we’ve seen in a few years. And it’s almost two parts, where we’ve bid on portfolios, we’ve bid on a [couple of portfolios] [ph] of 3 to 6 buildings, we’ve been clobbered, and those are still traded. There’s some out there in the 4s, larger 1 below 4 type cap [ph] yield and things like that. But we’ve seen a few one-off transactions and the way we’ve looked at it whether we’re pretty indifferent between equity and debt, if all being equal. But this year, we’ve had the advantage of having our equity priced in kind of that low- to mid-4s implied cap rate, and we’ve been able to see we’ve closed on 3.

And then we have another 1 as we move that acquisition guidance that we are optimistic about by the end of the year, but the ability to buy new buildings and markets we’re in, sub-markets we want to be in and around them, call it, a 6 cap yield old, high 5, 6 cap and kind of a trend and I’m trying to not violate every confidentiality agreement, and below market rents. So those would have been 4 type cap rates or sub-4 18 months ago and that would have been a bidding frenzy, but all of a sudden with debt prices, where they are and some of the forms as we read about and hear about needing liquidity. And it’s also hard to sell office buildings, so they’re trying to get things closed by the end of the year. And industrial is the most as the brokers explain it to us the most attractive product to have on the market.

And all of these cases our pitch has been where we may not be your highest bidder, but where you’re most certain that we have the line of credit, we have zero outstanding of roughly a low balance on it most of kind of second and the third quarter, we have the ability to close and we know this market was submarket. And so that’s actually worked where our bidding average has been much lower and then just anecdotally talking to our three regionals. We have good relationships with the national marketing firms and brokerage firms, and we’ll get calls that the ratio of inbound calls is really increased all of a sudden were a more attractive buyer. And I think it’s just been our ability to kind of acquire so all of a sudden acquisition, and I don’t think the window will stay open terribly long.

But if our equity price where they are, it’s not today, but where it was an awful lot of third quarter if we can kind of buy new assets and below market rents and get that spread on investments, what we’ve lined up shut out a little more than $0.05 to next year’s earnings on a run rate, with $140 million. And the average building is probably literally 2 years old of those four that we’ve acquired. So we liked that model. And if we can pursue that strategy, we don’t have the capital today, equities not priced like that, and it’s below our NAV. But we’ll walk continue to watch that window. And so we’ve seen some interesting opportunities. And I think we won’t change what we’re doing. But in terms of products or markets, that I think we should pivot our strategy as the market gives us those opportunities.

Jeffrey Spector: Great. Thank you. Very helpful. My one follow-up is on, again, the comment you made in on declines in industrial starts. Are you able to quantify, I guess like the decrease in supply 2024 over 2023 in industrial, whether it’s national or in your markets, do you have any stats on that?

Marshall Loeb: Some of the best I could point, which I hate them, essentially we said this is one call, which we had a zoom call with slides, on our investor presentation, and we just set this up late yesterday. So it’s about Page 12 will show you the vacancy rates by size for anyone that wants to flip through them and about and I may be off the page, but I’m in the zip code, about Page 10, you’ll see national starts. And they fall in 4 quarters in a row, and the third quarter last year, which was the peak and we’re down to quarter-to-quarter of almost two-thirds this quarter. And shallow bay usually makes up and there’s another chart that I’m going to share with the shallow bay numbers on our webcast. It’s pretty far down, it’s usually 10% to 15% of supply, we felt like in any markets competitive.

So the whole thing was starts falling off and the supply construction pipeline empty now, they’ll be a vacuum for a bit, which should have may enable us kind of earlier question to really push them less. And then it’ll be a minute before we get there, but should also allow us with our parks, to really if I’m being an optimist hope up ramp up our development pipeline, because people will need expansion space, down the road in 2024, if they feel better about the economy. And usually that’s when our developments leased up quickly, when there’s lack of available product on the market that people have to go ahead and sign up pre-lease and things like that. So, hopefully, that’s helpful to you, you’ll see the start kind of graph. And then vacancy is, where our vacancy hasn’t moved very much what an average building size under 100,000 feet, where the vacancies really moved is kind of when you get to 300,000 square feet and above.

That’s where most of the new product, because that’s mostly what’s been built and where you could put a lot of capital work the last few years and it’s worked until all of a sudden, people got nervous about the economy. And that’s stopped and I’ve always said I like where we kind of fit on the playground.

Jeffrey Spector: Great. Very helpful. Thank you.

Marshall Loeb: Thanks, Jeff.

Operator: Our next question comes from Alexander Goldfarb from Piper Sandler. Please go ahead with your question.

Alexander Goldfarb: Hey, good morning down there. Marshall, two questions, I guess one question, one follow-up. First, on this supply dropping out there. Presumably this is helping you guys as one of the sole, people who can develop on your own, not having to borrow? So are you seeing this as increased opportunity? And you guys want to ramp it up? Or are the global concerns and sort of all the risks that we read about interest rates, et cetera, mean that you’re probably going to keep your development program at this level right now? Just trying to understand as we look out over the next year or two where you guys are thinking about putting their shovels?

Marshall Loeb: Yeah. That’s a good question. I think, we’ve always said we’ll go as fast or as slow as really the market dictates, Phase 3 and a park is moving slowly. We’re not going to roll into Phase 4, but if we run out of inventory, and especially if we have tenants telling us they need expansion space or neighbors will move pretty quickly, we always try to have permit in hand. So we’ll be looking into next year, I think the market will get tight, hopefully in the back half of the year tighter, because what comes out of the pipeline’s not being replaced, where we are seeing opportunities is, over the past few years, there’s been such an appetite for industrial product, that developers have been able to go through the permitting, zoning, all that kind of – it could take years, usually 1.5 years at a minimum, and in some cases, 3 years to get the wetlands every issue so that you’re ready to break ground.

And a number of cases those local regional developers have been flipped the land, or built the building and sold it on a forward basis and things like that, where we’ve seen in a couple of cases that Denver land acquisition we made recently, the one in Tampa, we’ve got another one that we’re optimistic about one in Austin, where those developers got to the end, and they hadn’t caught I guess I should have backed up where they’ve done all this work, while it’s under contract that haven’t closed yet. So that ability with the forward window tightening, then they needed to look for capital sources to move forward. And it feels like my analogy it’s been, we’ve been able to jump into the game in the fourth inning rather than the first inning.

And like in Denver, for example, they had worked on the site for several years. And we broke ground within I think, call it, 60 days of closing, and the same thing in Tampa and some of these were all of a sudden those opportunities we were getting out bid for years, because people want [Nuveen, Heitman] [ph], you name that different companies wanting to get capital out. Now, we’ve become a source for them. Well, again, we’ve said they’ve created all this work. And if they don’t close, the value they created reverts back to that seller. And so they’re looking for capital, and we’ve been able to step in, and I guess really circumvent an awful lot of that development cycle.

Alexander Goldfarb: Okay. And then so as a follow-up to that, sort of going back to, I think was Craig Mailman, who asked about sort of looking into the next year, you guys traditionally are always a cautious group. You always think that like this year was good, next year will be tougher, but you have the big COVID rent uptick that creates a wonderful mark-to-market in your portfolio, you’re the sole developer. So what’s really the risk here going forward? Is it that your stock remains depressed, thus, you can’t really issue equity and that slows down your growth? Or is it truly tenant issues, which so far have not seemed to be an issue? So I’m just wondering in a tangible way, what is really the risk here to growth? Is it more your equity price? Or potential for tenant challenges?

Marshall Loeb: Yeah, I’ll take a stab. And then Brent can correct me if he disagrees. To me, the risk is always that we’ve said for years, we’re way less about supply than we do demand given, not many people build what we build, and especially today that’s got an exclamation point at the end, I do worry about our October [ph] balance sheets with all prices higher, labor wages higher, interest rates higher, rents higher, it’s a lot on them. So I worry about the tenant demand. But if we can stay full, we do have land for development, we do have – I guess in reverse order, we’ve got the ability to push rents first and then organic growth, and then we can develop and fund it with dispositions or this or that, it’s great to have the equity when we do and we can take advantage of it in this market.

But I’d also say we don’t feel compelled, I think we’ve got a perfectly good company. And if we don’t buy a lot, we’ll be alright on that. It’s a way to accelerate our growth, but we’ll have growth one way or the other. And we’ll just, I think the way we’ve tried to view it is be nimble and what the market allows us, we’ll take advantage of it. And we want to change our strategy, but we may change the way we implement it. And for several years, when everybody wanted to own U.S. industrial, our attitude was it’s better to create it than outbid people for it. And now if there’s some good acquisition opportunities, we’ll pivot to that doesn’t mean we’ll stop development if it’s there, but we’ll pivot to those.

And then sometimes it’s okay to sit on your hands and wait for a window to open too. And thankfully, we’ve got that organic growth that you were talking about.

Alexander Goldfarb: Okay. Thank you.

Marshall Loeb: Sure.

Operator: Our next question comes from Nick Thillman with Baird. Please go ahead with your question.

Nick Thillman: Hey, good morning, there. Maybe touching on the acquisition opportunities. You guys were pretty active in Las Vegas recently. Are there any like specific markets that you’re kind of targeting where you’re seeing more opportunities in?

Marshall Loeb: Good question. As we think about it is really, we’ll look at our percent NOI kind of as a portfolio and then kind of where we are. And in that market, Las Vegas has been a really strong market, I’ll compliment Mike Sacco, our guy, who has been really push rents in Las Vegas over the last couple of years, and we’re under allocated, and it’s about looking back 3% of our NOI, so strong market, and really just the way our pricing worked out. And really our story, I’m not pretty positive on one, if not both of those that we acquired, there were higher offers, but again, we were the most certain buyer, we believe. And so the West Coast in the last few years, we’ve been under allocated to that market. And we try to look at it, what’s the right real estate, the right sub-market, and then also by market, we don’t want any market, we spent a lot of time bringing Houston down from 20% into the 10s as a percent of our NOI too.

So that’s part of its the real estate itself. And then part of it is how much we allocate to that market. And then we think having more of our NOI from Las Vegas positions as long-term to have higher cash same-store NOI, higher releasing spreads, all the things we get measured by each quarter. But that’s kind of one of the markets that really does high performing markets, you’ve seen us do a lot in Austin, El Paso has been a strong market, Florida has had a great run in the last couple of years as well.

Nick Thillman: That’s helpful. And then maybe you touching a little bit on development lease up. And you’ve really pulled demand from existing parks historically. Maybe just an update on kind of what you’re seeing from tenants in your existing parks like willing to expand? Are they a little bit more cautious today than maybe, say, 6 months from now? Or like 6 months ago? Like any commentary around that would be helpful?

Marshall Loeb: Yeah. No, we feel good about our development pipeline that we’ve pulled half dozen buildings in and we can maybe talk I’ll save it for later in the call and kind of parsing our development pipeline, answering your question, I would say, yes. And understand, really, so people are we have activity, and we’re getting leases signed, getting people, closing in once you get in the red zone seems slow. And I think it’s all about the economy, it’s hard to feel confident to expand your business, probably given the larger climate. So I appreciate – from a future bad debt perspective, I appreciate our tenants and our prospects being a little bit more hesitant than shooting from the hip. So, yes, it was felt a little frenzied kind of post-COVID to the point where you felt it made you a little bit nervous of brokers saying things they hadn’t seen in years in their career, revoking offers to tenants and things like that, because the time clock had passed, and things that people told us they’d never done.

So I’m glad it’s normalized a little bit. And now it feels like what the interest rates and two different wars and everything else I get while people are being a little slow and deliberate in their decision making.

Nick Thillman: That’s helpful. Thank you.

Marshall Loeb: You’re welcome.

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

Todd Thomas: Hi, thanks. First question, Marshall, you mentioned that you’ve been fortunate to issue equity in the low- to mid-4% implied cap rate range, and the stock has pulled back more recently. And I think you mentioned that you’re trading below NAV. I’m just – I’m a little confused by some of the comments around the go forward plan here, do you do pump the brakes on equity, or do you continue to issue at these levels vis-à-vis the $125 million of incremental equity issuance that’s implied in the guidance? That was the updated guidance issued last night?

Marshall Loeb: Okay. Brent?

Brent Wood: Yeah, I’ll jump in. Todd, this is Brent. Good morning. Yeah, the equity, our stock price has had some volatility just due to macro concerns. And so it’s moved around a lot. And even NAV itself has been very fluid this year. I mean, as most everyone on the call realizes that has been a moving target, but has been drifting down. So, we have full capacity on our revolver. We have just a little bit drawn under $675 million, so it would just depend, we’ve not been crunched for capital so far this year, as you can see, we’ve been very active on the ATM, somewhere around I think $465 million year-to-date issued is very good pricing. So we would take a pause, it’s current pricing, but the way it’s moved up and down, but look, if it were to shut us out for an extended period, then you’ve got to – maybe we won’t be able to do certain things on some of the good opportunities, Marshall alluded to maybe on some one-off acquisitions, or that could impact our decisions on starts next year.

But we’re just going to take that as it comes. Again, understanding we have plenty of dry powder to fund what we’re doing, it’s just a matter of the cost of funding. And, obviously, we’ve been very pleased with what we’ve been able to do this year. And so, we’ll just take it as it comes, the way that the markets been and look at my phone and see our price drop and say, [as Marshall] [ph] talked about higher, longer or in this odd environment today, you have good consumer news, which is bad, because we want the economy to slow for interest rates to come down to us all those factors that go into it. So as we’ve always been, let’s be flexible. And let if the market will allow us we’re excited about what opportunities are out there.

But at the same time, we’re not – as Marshall says, we don’t have to do anything, obviously, we’d have to unwind what we’re doing. But so we’ll just take it as it comes, we’re in a good position. And if the price raises its head up just for a little bit, we’re in a position to grab chunks and continue what we’re doing. So we’ll just take a wait and see approach.

Todd Thomas: Okay. And then my follow-up question on the development and value add pipelines look like some of the conversion dates moved around a little bit, some of the 2024 conversion dates, moved into 2025, for example, that does that reflect delays in the completion of construction or delays and your assumptions around lease up for those assets? And then, can you also just for clarification, just I’m curious when you stop capitalizing interest and cost capitalization on developments all together? Is that at the time of conversion?

Marshall Loeb: I guess, answering it reverse. Good morning, Todd. As we’ve always underwrite 12 months after completion to level it. Well, the earlier of when we hit 90% occupancy, or 12 months after completion. So thankfully, the outside date has been the last few years has been that 12 months after. The movement within completion dates, you’re right, it’s more construction timing related than us, stopping construction that we really didn’t do any of that, or things like that. Traditionally, it’s been weather and things like that could be one of the reasons. And things have certainly gotten better supply chain wise, post-COVID. But what we’re hearing kind of ordering switchgear, electrical transformers, those type things, that’s really gotten to be – that’s always the new item that takes a year now.

So we used to be able to deliver buildings in about 6 months pre-COVID, and now that’s stretched out. And that’s what’s kept the construction pipeline so far for a little bit longer than it normally does. But any kind of electrical equipment takes a while. And my guess is just the timing here, they’re on orders or concrete. I guess the good news in a number of our markets is where we’ve had the new semiconductor plants or some of the government work that’s done between whether it’s Dallas or Austin or Phoenix. The bad news is when we’re also ordering those same concrete and subcontractors, it’s awfully hard to get on their schedules on a timely basis to lead times.

Todd Thomas: Okay. But I guess, if we look at the under construction pipeline, and those conversion dates is that currently the schedule they’re set for when completion is anticipated or did you move them back though it’s related to construction completion being delayed, it is not related to a delay at all in your lease up assumptions. Is that correct?

Marshall Loeb: Correct.

Todd Thomas: Okay.

Marshall Loeb: And just to be clear, just on the side of being conservative, we typically always put into the anticipated conversion date that we list, they’re typically the 12-month date outside of what we expect to be completion. And then, we typically don’t narrow that window unless once it’s a built-to-suit obviously we would base that on delivery day or if a project begins to get leased up or to 100%, like you see on the schedule now, we have a project for the 100% leased, but still under construction. We will begin to tighten that window once it’s 100% in that case, it’s closer to delivery. But on the newer project started, we always start from a basis of 12 months outside of our expected completion. And so when those dates move around a little bit, as Marshall mentioned, is typically that the construction maybe is bumped back a month or two from the expected timeline.

Todd Thomas: Okay. Got it. Thank you.

Marshall Loeb: Sure.

Brent Wood: You’re welcome.

Operator: Our next question comes from Samir Khanal from Evercore ISI. Please go ahead with your question.

Samir Khanal: Hi. Marshall or Brent, this is more of a modeling question. Just curious, your G&A expense guide was down, which was about $0.02 on earnings, I guess what was driving that and just trying to figure out the right run rate to use going forward?

Brent Wood: Yeah, this is Brent, the G&A was down, actually our actual expenses for the quarter relative G&A were along the lines of our budget, but we actually had more capital overhead development costs than we anticipated. And so that that capitalization in that line item reduces G&A. So, yeah, I think where we are for the 3 quarters, year-to-date would be a good run rate number. For the third quarter, I say that quarterly number was a little bit low relative to the other two, and that was just, again, the capitalization impact of that particular quarter. But I would say for the 9 months, the total for the 9 months today is – has landed about where it should be. And fourth quarters, you can see we’re pretty much from that point forward. I think that year-to-date number we’re forecasting now is a good optimal 12-month G&A figure for us that pretty much maximizes the amount we can capitalize from the development side of things.

Samir Khanal: Got it. And, I guess, for Marshall, there’s been a lot of conversations around onshoring, I mean, maybe talk about what you’re seeing on the ground, how much of that is a conversation with your customers. And how much of that is sort of a demand driver in your market things?

Marshall Loeb: It’s definitely helping them and when we look at our activity in markets, especially some of the Texas market – I guess I’m lumping onshoring and nearshoring together and the number of – the building we acquired in Dallas, for example, it’s a tech company electrical equipment, and they are a supplier to the semiconductor plant in Sherman, Texas, which is suburb of Dallas. So, again, as we see those things, so many of the different kinds of semiconductor EV plants have been, Tesla go into Austin, we’ve picked up Tesla suppliers in Austin and even we’re in Northeast San Antonio, so just on I-35. There’s San Diego, we’re feeling the effects of Tijuana and Juarez, so that we’re going to stay on this side of the border have really picked up.

And then so many of the plant, whether and even Phoenix has the TSMC plant, and some things like that. So it’s picked up a number of those. So we’re – whether if we’re directly involved, we won’t be directly involved, if we are it’ll be as sub – we’ll have the suppliers to that plant, but it’s also helping push that economy forward. So I like, again, when I mentioned some of the sector drivers, whether it’s just e-commerce growing every year and more people moving to Phoenix, or Orlando, or Dallas, Texas, those that onshoring and nearshoring. It seems like the tech plants really come onto the U.S. and then you end up with a lot more activity. We’ve been looking for our next opportunity and patient with that end markets like El Paso and San Diego was an example.

It’s been hard. We’ve kind of we’ll wait till we find it. But we’d like to grow in those two markets, just given the pace of activity across the border. And I don’t think that’s slowed down. It really started with some of the trade tariffs with China and each quarter, it seems that the Mexican – the trade with Mexico seems to grow and China falls as a trade partner and again, we think between Arizona, Southern California and Texas we’re in a good position to try to grab our piece of that market share.

Samir Khanal: Thank you.

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

William Crow: Thanks. Good morning. Marshall, you’ve talked about the looming risk out there potentially being the health of the tenant, their balance sheets, et cetera. Wondering as you look ahead to the lease all next year, is that causing you to think about retention rates being lower than they were, say, this year?

Marshall Loeb: No, it’s interesting. Actually, what seems to happen is when things get bad like during COVID, our retention rate goes up and doesn’t make sense to me, as people are nervous to expand or things like that. So you might do a shorter-term renewal. I think next year is rollover, we’ve taken a big bite out of it from where we started, we’re down to about 11%. It should be an opportunity for us to push rents next year as we move those to today’s market. I guess, I just worry about all the compounding effect that, say, it may be twofold. At a high level, you think of all the things that are impacting any business today, and our tenants aren’t immune to that, and so that concerns me. But then when I look at our bad debt, and our watch list, it feels very manageable.

And it’s been actually each quarter, it’s been a little bit less than what we budgeted knock on wood. So we haven’t had the problems, probably then I would have expected at this point in time. I’m glad we have the tenant diversity we do and things like that. And, I think, the roll next year will give us an opportunity to push rents which are really benefit mainly – certainly kind of a mid-year convention 2025 even more will benefit next year, from this year’s rent increases. And as a hope our tenants as well as the tenants and the buildings next door can hang in there given this drops in supply.

William Crow: Is there any reason to think about a material downshift in same-store NOI as we turn the calendar to next year?

Marshall Loeb: Unless we have a lot of tenant bankruptcies, I guess, as I’ve tried to think about it mathematically, it has to be a pretty big drop in occupancy. And we only have 11% rolling and we’ll – any quarter can bounce around. But it always seems that we average some ways. And if you and I were picking up coverage of a company, I would model 70% to 75% retention rate that seems to be kind of on an annual basis about what we shake out at any time. And if the economy gets weak, we might pick up a little bit and a low number isn’t always bad, especially if we’re moving them into the next building enough hard.

William Crow: Yeah. Okay. That’s it for me. Thank you.

Marshall Loeb: Okay. Thanks, Bill.

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

Vince Tibone: Hi, good morning. It looks like the expected yield on third quarter development starts are slightly higher than the existing pipeline. Can you just confirm if that was the case, and also just discussed kind of where you believe market cap rates are today for new developments? And what profit margins you’re targeting on any new starts just given a lot of uncertainty right now around where cap rates may be and kind of what profit margins could be on some of these developments?

Marshall Loeb: Yeah, that’s a good point. We’ve typically will probably for a new start now look, ideally, I’d say, again, it would depend on if we had some pre-leasing an existing tenant or what city that, but the cap rates will vary, north of 7, we typically said as a rule of thumb, we’d like 150 basis points above a market cap rate to kind of justify the construction and the leasing risk of a new development. And I will say that cap rates, and you all study it more closely, probably than even we do it. It’s been a pretty fluid market. We’ve been able to buy one-off buildings at attractive cap rates. And we’ve gotten clobbered on some portfolio transactions. And, again, not big portfolios, meaning kind of 3, 4 or 5 building portfolios.

So cap rates think pretty fluid right now. And, ideally, we thought if we can start in the 7s, call it, we have high 6 to at least 7, you’re looking at our cost of capital, we’re creating value above the cap rate when we deliver the building and what I like about the REIT model compared to maybe private equity or merchant developer, our bid has always been they’ll be another half million people in Austin, Texas, 10 years from now. So if we can start with a good yield, it will only grow over time. So if that helps, that’s kind of how we think about it.

Vince Tibone: No, that’s really helpful. To me just clarify one point when you say kind of high-60s, low-7s, is that on a GAAP or a cash basis that yields?

Marshall Loeb: It’s usually about, I call it, 10 to 15, a slight quoting [ph] GAAP, and it’s usually about a 10 to 15 basis points for that.

Vince Tibone: Got it. No, thank you. That’s helpful. And then maybe one more for me. I mean, if you just discussed some trends in the market for development land. I know you guys bought few parcels in different markets in the quarter just how volatile that market, do you think values are down significantly? Or like the stuff you even bought in the third quarter? Do you think you got that at a much lower price than you would have 6, 12 months ago?

Marshall Loeb: Yeah, the short answer would be yes. And I think what – probably, and I can’t speak for the concept developer, the groups we worked with on those, they had tied it up a couple of years ago or more, and the markets and the prices had risen. But then it was they basically run through all of their contingencies successfully, thankfully, the zoning, planning, permitting all the things like that, and when it came time to close, the options were more limited. So that’s probably a trend we’re seeing is the ability to jump into projects that are pretty far a lot much further along than us acquiring a greenfield or site to start from scratch. And those land prices, they didn’t lose money on it. But we were really able to step in at about their bases.

Because their timing was they were under some time pressure to get the things closed and perform with their seller and buyer [ph]. So it was less than where it would have been at the peak, but they were able to get a successful outcome and move on or in one case in Denver, stay in partner with us on the project in a smaller way.

Vince Tibone: Got it. That’s really helpful color. Thank you.

Marshall Loeb: You’re welcome.

Operator: Our next question comes from Ronald Kamdem from Morgan Stanley. Please go ahead with your question.

Ronald Kamdem: Hey, just going back to the same-store NOI guidance. As we’re thinking about sort of 2024, maybe can you remind us, is the lease roll just as large as it was in 2023? And, obviously, occupancy could potentially be down, but just trying to figure out, what are some of the puts and takes as we’re rolling into 2024?

Brent Wood: This is Brent. The lease roll was very similar to be at around 11% at this point, it’s a pretty typical standpoint for us. Obviously, the occupancy we had if you recall, our original midpoint GAAP for this year was I forget the exact number now, but it was several 100 basis points lower than what we’ve achieved. And part of that is, we did anticipate having some occupancy headwind, we didn’t know we’d be sitting here in October and still be over 98% leased, we’re very appreciative and the team’s executed very well. So kind of get to the comment earlier that we feel good about the rental rate side of things, the ability to push rents, we’ve also been able to obtain a bit higher annual escalators in our leases, which add up over time that’s been more in the 4% area as opposed to maybe 2% or 3% in the past.

But the occupancy is the one bit of a wildcard in that factor that we didn’t incur that this year. So now we’re getting to a much higher almost an 8 midpoint on same-store. Next year, it just depends, if you want to factor in if we could be at that 97, 98 again, or do you give up a little bit of room or not, that’s just part of the fact that it’s hard to put your parts put your finger on at this point.

Ronald Kamdem: Right. And then my one follow-up is, just you guys are on the development side clearly focused on smaller shallow bay. So does that mean that datacenter development is completely off the table? Or is that something where on a one-off basis could pique your interest?

Marshall Loeb: I guess, it’s probably – never said always or never. So there are circumstances where we would do it. And we have, look, we’ve got a couple of datacenter, we’ve talked to datacenter brokers, it would be at the margin is not going to be a driver of our business, it won’t be a focus of our business. But if we had the right center, and either could sell the land or ground lease the land, get the right type transaction, then we would look at it or some things like that. But we’ve explored that just from the sense that like if there’s opportunities there, or we’re exploring it, we should take advantage of it, but it’ll be ancillary and minor to our – like we – I’d rather stick to what we do well and kind of do it over time and more markets are in the right submarkets then tell ourselves we understand datacenters, and Brent now we shoot [ph] ourselves or I would shoot myself in the foot a year or two down the road, but if we do one, it’ll be the starts aligned who rather than we really went out with a big net looking for data centers.

Ronald Kamdem: Great. Thanks. Congrats on a great quarter.

Marshall Loeb: Thanks, Ron.

Brent Wood: Thanks, Ron.

Operator: Our next question comes from Blaine heck from Wells Fargo. Please go ahead with your question.

Blaine Heck: Great. Thanks. Good morning. Can you talk about contractual rent increases or bumps and what you guys are incorporating in newly signed leases? And, I guess, whether you’re getting any pushback on that aspect of the lease agreement? And then also just remind us what the average escalator is across your portfolio at this point?

Brent Wood: Yeah, Blaine, good mooring. This is Brent. The mid-3 [ph], they’ve really done quite well there. Anytime you have the leverage as long as it’s been on the landlord side, that’s a win we’ve been able to make. And I would say, it’s probably been a little more pronounced maybe in Texas, where the annual rent bumps kind of lagged in the other markets, and that’s caught up some. But I would say that’s more in the 4% average on the portfolio, we’ve been able to move the average from opportunities over time to more toward that mid-3 on an average for the annual escalator. So as we turn through 18% to 20% roll a year, and we’ll continue to be in the strong landlord environment, that’s been some wins that we’ve made.

And, obviously, when you’re maintaining a high occupancy as we have, that’s important, because you need that, it’s great to have that stabilization. But you also don’t want it to be, it also needs to contribute, though, to help same-store growth. And so our team’s done a good job of executing that in the field and growing that and I’d say it’s a broader base now and across all of our markets versus it has been concentrated more so at one point, say California, Florida, and some of our other, call it, Texas or even some of our ancillary markets are catching up during this period.

Blaine Heck: Okay. Great. Thanks. And then, we’ve heard from some brokers that developers of large box properties have kind of reluctantly begun chopping them up into smaller spaces, as demand is smaller in that segment of the market. Have you guys seen any of that on the ground? And how do you feel about that potentially affecting the supply in your segment of the market?

Marshall Loeb: I think it’s – Blaine, it’s Marshall. I think it’s inevitable, I guess, if you don’t lease it, or depending on how long you want to carry it. Again, I think we could see some of that, but depends on how big the big box is, really, when we think of our average tenant size is 34,000 feet, we certainly have tenants that are larger than that. But if you’ve got an 800,000 foot building, for example, that may be 500 or 600 feet, 8 million square foot building, that depth is probably twice the depth of a large building for us. And so for that tenant, what you end up whether it’s a very long narrow space with very few dock doors. So it’s not efficient for those tenants, ideally, and you’re running the forklift, up and down and awfully long run.

If that inventory is going from one side of the warehouse down to where the two or three dock doors. So, I think, they will break those buildings up. But I think depending on how big they are, that’s going to be awfully expensive. When you think of the cost of adding that much more office in which wasn’t in their original plans, and then the demising walls where you build floor to ceiling, sheetrock fire rated walls, that’s going to be awfully expensive for those developers. And at the end of the day, the loading efficiency it’s not going to be ideal for those tenants. So I think some of it will happen. But the dies kind of cast, you’ve built what you’ve built, and you can maybe move it doesn’t have to be single tenant. But it’s probably hard to put 7 or 8 tenants in those buildings, the way they were designed to what they were designed for.

Brent Wood: Yeah, I would even add, Blaine, when you’re building some of those bigger box properties that sometimes an easy way to look at pretty much the maximum way to divide a large bulk building would be by 4. I mean, they don’t want to do it but you they probably say we did what we could do it into a quote quad, where you can put a divided into quarters, but even there, if you’re talking about a 500,000-600,000 square foot building, you’re still talking about 125,000 or larger minimum tenant size. So I like what Marshall said kind of that the die is pretty much cast once you commit to the bigger building. You could put a few tenants in it, but you’re still not going to get down into that 30,000, 50,000, 75,000 square foot tenant size like you would see in a multi-tenant type building, they still really aren’t going to cross pollinate very much.

Blaine Heck: Great. Thanks, guys.

Marshall Loeb: Thank you.

Operator: And our final question comes from Rich Anderson from Wedbush. Please go ahead with your question.

Richard Anderson: Final question. Sorry about that. So I do have a question as it relates to acquisition, specifically, you are unique and your disposition guidance came down and your acquisition guidance went up. So that is obviously specific to you guys. But when it comes to operating acquisition to operate property acquisitions, you mentioned some of the things that developers coming in the fourth inning, but specifically about operating assets, are you seeing any trends materializing there in terms of the nature of the seller or banks involved at all in any cases? I’m just curious if you can sort of give an idea or a picture of what the pipeline looks like of potential sellers of operating assets.

Marshall Loeb: Good morning, Rich. We’ve seen a couple that – no banks involved, although, we’ve been – we’ve seen a lot of distress, hopeful, that that might come in time. It’s been we have seen a couple of pension funds that we’ve either acquired from or had conversations or looked at portfolios and where they need – like I mentioned it earlier that you’ve needed to raise some liquidity and industrial is what you could sell kind of some of the funds that are raised are different things, whether it’s pension funds, or just to fund itself and they’ve wanted liquidity, and they were selling their industrial, on the dispositions. And against that there weren’t big numbers, what I would say, maybe the difference, the $60 million we had assets more of a placeholder a little bit, whereas this quarter, and I’m hopeful by the end of the year like our next update, we’ve got – it’s more specifically got funds at risk on a disposition.

We’ve got one that we’re looking to sell where the tenant is the buyer, and hopefully that gives me a little bit higher probability, since they know the asset better than we do probably at this point. And another under our letter of intent that really that we thought we might close this year. But as they get their financing, it’ll probably drift and hopefully January of 2024, they’ll get that close. So that’s what drove the drop. So it’s a 2, 3, 4 transactions that total that $40 million to $50 million, but I do feel better, call it 60, 90 days later of where we stand on those dispositions, in terms of just a little bit further down the road with those than we were last call. And we’ll kind of keep learning, it’ll be a good source of capital of equity stays where it is, I like the idea of trading some of our older assets.

And if we can find the right one-off acquisition to kind of move chips around to just kind of nudge growth at a little bit higher rate in the future.

Richard Anderson: Yeah, I was more interested in the acquisition side, but thank you for that color. And then the second question is, you talked about how all the development largely is in bigger assets that aren’t necessarily competitive with you and your 95,000 square foot average. But do you concern yourself with the secret getting out about this shallow bay model and if developers maybe want to dial down their cost profile and build something that’s not quite as expensive? Do they come into your market a little bit more in terms of being more competitive with you and you start to see some of that pressure? Or are you just not seeing that and why not? I guess, since I would think it would be an easier pill to swallow for a merchant developer. Thanks.

Marshall Loeb: Yeah, probably two or three fall, I mean, one at all. It’s hard to be a secret and have a public company and website, and got a Nareit and do all the other things we do. So I wish we could be more secretive than we are at times about it. So I think it’s out there. And certainly the number of developers ballooned kind of industrial development, everybody became an industrial developer, we said it was your Uber driver giving you stock tips you knew it was things were too hot, probably twofold that makes us comfortable as an adult, it’s not like it’s a well-kept secret. The big pension funds are larger public, private peers, they have so much capital to put to work in if our average developments maybe 14, 15 may end a building or the next phase.

You can stay awfully busy, but miss your allocation targets, doing what we do. So I think that’s one of the reasons and even talking to some of those kind of local, regional merchant developers, they’re working for promotes and things like that. So you can make so much more money flipping a half million square foot buildings and 100,000 foot building, and then probably I’m doing in reverse or the biggest reason is we struggle to find good infill land sites and it’s edge of town, low price point, bigger tracts of land, South of Dallas, South of Atlanta, Southwest Phoenix, Inland Empire East, it’s easier to find the land and put it into production more quickly, then go through all the zoning permitting issues that we deal with it can be measured in a couple of 3 years on an infill site.

And so I really think and it’s actually gotten worse. It’s interesting with the ecommerce. The dilemma is everyone wants the delivery or the repair person to their house immediately, but they don’t want it to originate from around the corner. So, I think, our zoning challenges have gotten harder over the last couple of years.

Richard Anderson: Yeah. Okay, sounds good. Thanks very much.

Marshall Loeb: Thanks, Rich.

Brent Wood: Okay. Thanks, Rich.

Operator: And ladies and gentlemen, with that, we’ll be concluding today’s question-and-answer session. I’d like to turn the floor back over to the management team for any closing remarks.

Marshall Loeb: Okay. Thanks, Jamie. Thanks, everyone, for your time, your interest in EastGroup. If you have any follow-up questions, we’re certainly available by phone, by email and we look forward to seeing many of you in a couple of weeks at Nareit.

Brent Wood: Thank you, everyone.

Operator: And with that, we’ll be concluding today’s conference call and webcast. We thank you for joining. You may now disconnect your lines.