Staci Tyler: Thank you, Ki Bin.
Ki Bin Kim: So Marshall, just wanted to go back to some of the comments you made. I mean, you guys have an excellent balance sheet and significant financial flexibility. And like you mentioned that your cost of equity is lower than your cost of debt. Going back historically, EastGroup has — I don’t think has ever been known to do very large-scale M&A or portfolio deals. But given that the situation is a little bit different for you guys does that change your thinking at all on larger-scale portfolio deals? Or is it more of a philosophical thing where when you buy portfolio you end up having to sell a decent chunk so maybe that’s not as attractive?
Marshall Loeb: Yeah. Good morning, Ki Bin. You’re right. That’s I think one we don’t want to make reckless moves, but I’d like to think look we did buy the San Francisco portfolio and that was a unique situation. We’re just about everything — 90-plus percent of the NOI was what we wanted. It’s usually twofold. We — either we don’t like enough of the portfolio to make kind of the net cost, when you think of the cost of selling those assets that you don’t want and things like that. Or probably, I’m being modest and the real reason we don’t — is we usually just get clobbered by somebody bigger that’s willing to underwrite higher rent growth and a lower levered IRR and things like that. So usually, we just — we ask the homecoming queen out a lot and we don’t get a yes.
So we — look I’d love to find if we can find opportunities to grow the portfolio smartly, we’re all about it. Usually, portfolios draw more attention and you get more people bidding on them to a certain scale, where it becomes maybe only ProLogis and Blackstone or Link. But outside of that you usually end up with a lot of competition and we don’t win those bids. But if we found one that lined up like we did in the Bay Area, we’re willing to roll up our sleeves and try to make it work at a number that works for what we think for our shareholders.
Ki Bin Kim: Do you think portfolio deals have a discount today? And approximately what does that look like?
Marshall Loeb: I don’t — they probably have a discount to where they were. Remember the broker is saying, if you put things together in a portfolio, they’re actually worth more. It’s hard because we’ve done better finding one-off kind of unique situations buying. When I look at — not every one of the six we bought in call it the last six months, but the majority of them there was something unusual about it and it was a timing situation or something where we’ve — I think we’ve gotten better value than the market really at that moment in time in most all of those. So, I still think — and where we bid on portfolios there was one in — I’d say, Georgia it was Atlanta. There was one in Texas fairly recently were a handful of buildings where we did not make it to the second round.
And so I still — I don’t think the premiums may be what it was, but there’s still a premium, or just there’s one on the market now and it’s a large portfolio. But even then and I’m sure they take an offer on all of it, they’ve broken it into about five different buckets that you can bid on. So usually people say, we’ll take an offer on all of it or any parts of it. But kind of human nature their preference is probably still to bundle it and get as much of it out the door to one buyer. So we will certainly — look I like your thoughts and we’ve got the balance sheet today. Thankfully, we want to be mindful of that. But if we can find a portfolio acquisition, I’d love to say, well you’ll be the first to know about it we’ll have it. It’s just historically we like two-thirds of it or three quarters, and we don’t like the other part and then we got to sell it and you have the transaction cost and your effective yield goes down with all of that.
Or we like it, but there’s 10 people in line that are willing to take on more risk than we feel it’s worth at that moment in time.
Q – Ki Bin Kim: Okay. Thank you.
Marshall Loeb: Sure. You’re welcome.
Operator: Your next question comes from Michael Carroll of RBC Capital Markets. Your line is already open.
Michael Carroll : Yes. Thanks. Marshall I just wanted to circle back on your comments regarding development. So for EastGroup to kind of be more aggressive pursuing new development starts, do you need to lease up your projects in lease-up right now or in process? Or do you need to see the broader competitive set see some leasing?
Marshall Loeb: Hi, good morning, Michael. Yes. Yes, I don’t mean to give a short answer, but a little bit of both. I mean, I think in Austin and Phoenix, as I mentioned, we’re watching the competition on the ground. And there especially in Phoenix, we’re full and we don’t have a development underway. But we said, let’s feel clear a little bit before we jump in the middle of it. Typically, it is — but it’s also our existing product. And the way it would work would be we’re in Phase 3 of a park. If roles reverse Staci and I will call you and say, hey, Michael we’re 50% leased, I’ve got another lease out. I’ve got three proposals out. I’m going to run out of the inventory. And the tenant rep brokers want to see that visibility that when they promise their customers, it’s going to be delivered.
So that’s why we build spec. And so we’ll get out ahead of that and started putting more inventory out there. And that’s really to me I like our model. It’s reactive to the market and it makes it really easier for me. Look, we know a Phase 3, isn’t leasing up kind of in your question, building Phase 4 doesn’t solve our vacancy issue. And Phase 3 is going really rapidly, we’ll try to get to Phase 4 as quickly as we can, and then try to buy the land adjacent to, or around that park as close as we can, because we know we’ve got a proven product, and it really becomes a manufacturing process of just putting similar buildings up, and hopefully, then you get a critical mass of tenants, more than you want to know and then we’re really helping our customers grow and moving them within the park.
So that’s really reactive to calls. But every once in a while like right now, we’ll say even though we’re full in Austin and we’re full in Phoenix, there’s a lot of people that are out there with space on the ground that we’d like to see that clear a little bit before we jump into those markets. And look if I picked two of our fastest-growing markets in our portfolio, if those aren’t the two they’re right there at it of historically top five growth cities in the country. So I think that inventory will get absorbed pretty quickly in those markets. And then we don’t need to be the third developer. We may not be the first developer to follow too early, but I don’t want to be the third one either.
Michael Carroll : Okay. And those projects that you’re kind of mentioning that you want to get leased up in the broader market, are those I guess shallow bay properties that are directly competitive yours? Or are they more outside the market kind of the larger buildings that might not directly compete with you?
Marshall Loeb: Yes. No good — if it’s big box that’s vacant that really doesn’t — it may as well be a hotel. That really doesn’t affect our thinking. In those markets, there’s a decent amount of shallow bay that’s out there that’s either delivered or being delivered enough to kind of tell us like look maybe the right long-term decision, let’s wait a quarter or two and there’s really not much downside to being patient. Hopefully, we get actually — hopefully, there’s a reward for being patient and seeing how things play out. Then, hey, we bought this land, we’ve got to go just because we put it on a sheet of paper that we said we’re going to break ground this quarter. So that’s kind of how we’re looking at it. We’ll monitor it. And hopefully, it picks up during the year. As soon as that starts to clear, we’ll get moving fairly quickly on those.
Michael Carroll: Okay. And then just last one for me like, what are you doing all the predevelopment work on your projects? I mean how quickly once you decide to go vertical can you have it completed and delivered?
Marshall Loeb: It got — it used to be six months was kind of our answer. During COVID, it got as long as a year. It’s probably back to nine to 10 months. Electrical equipment, construction costs have come down from the peak maybe 10% to 15% thankfully. And right now, we’re — I guess maybe it’s the push towards green energy getting the electrical equipment, transformer, switchgear all the things like that, we’ll order it but that’s still about a year lead time. So the supply chain is better, but it’s not perfect.
Michael Carroll: Yes. Great. Thank you.
Marshall Loeb: You’re welcome.
Operator: Your next question comes from Jason Belcher of Wells Fargo. Your line is already open.
Jason Belcher: Hi. Good morning up there. Just wondering if you could talk a little bit about any pockets of strength or weakness you’re seeing across your different tenant industries, whether or not there are any groups that might be more aggressive than others in taking space or if others have maybe decreased requirements more abruptly than others?
Marshall Loeb: Sure. Good morning. Food and beverage is kind of one that’s picked up off-late. Construction, a little bit, which is odd, but maybe it’s the government projects and things like that, homebuilding maybe some of that. So we’ve seen some construction some food and beverage. And then if it — and as I mentioned earlier, I think things hopefully turn later the first type tenancy that — usually the first in either direction are the third party logistics firms. So we’re still seeing activity from them. And I think when things turn, I think they’ll be the first ones out there picking up contracts and gobbling up space. But those that — we’ve seen kind of a lot more green energy within our portfolio, and maybe because it was we had so little, but someone storing batteries, distributing batteries, working some kind of conversion or energy related has been a new pocket of demand.
And I think food and beverage, also within kind of medical. We’ve seen a pickup in medical. As an aside one we have a number of tenants that basically, it’s an industrial building but a pharmacy, where you order prescriptions or medical products online. And so we’ve seen a pickup of that — a couple of them relocations from California to the Dallas market for example that we picked up.
Jason Belcher: Thank you. That’s helpful. And then secondly, can you just talk a little bit about your contractual rent increases or rent bumps and what you all are incorporating into newly signed leases there and whether you’re getting any pushback on that aspect of the lease agreement? And then if you can also just remind us where your average escalator is across the portfolio?
Staci Tyler: We’ve definitely seen that increase, say, where a couple of years ago we would have been working up toward an average of 3%, now our portfolio average would be in the 3s. And on new leases that we’re signing we’re seeing those 3.5% to 4%. In some cases, it’s been above that. But I would say the norm has been in the 3.5% to 4% range. So definitely, still seeing strength there. We have not seen any pullback from that recently. So continue — and our expectations would be for that to continue in the 3.5% to 4% range for new leases that we’re signing.
Jason Belcher: Got it. Thanks again.
Staci Tyler: Sure.
Operator: Your next question comes from Ronald Kamdem of Morgan Stanley. Your line is already open.
