Eastgroup Properties Inc Q3 FY2021 Earnings Call

Good morning, and welcome to the EastGroup Properties Third Quarter 2021 Earnings Conference Call and Webcast. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Good morning, and thanks for calling in for our third quarter 2021 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating in the call. Since we will make forward-looking statements, we ask that you listen to the following disclaimer.

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 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 we undertake no duty to update them, whether as a result of new information, future actual events, or otherwise. Such statements involve known and unknown risks, uncertainties, and other factors, including those directly and indirectly related to the outbreak of the ongoing coronavirus pandemic that may cause actual results to differ materially. We refer to certain of these risks in our SEC filings.

Good morning, and thank you for your time. We hope everyone is enjoying their fall. I'll start by thanking our team for a great quarter. They continue to perform at a high level and reaping the rewards of a very positive environment. Our third quarter results were strong and demonstrated the resiliency of our portfolio and of the industrial market. Some of these results that the team has produced include funds from operations coming in above guidance at 14% compared to the third quarter last year and ahead of our forecast. This marks the 34th consecutive quarter of higher FFO per share as compared to the prior year quarter, truly a long-term trend. Our quarterly occupancy averaged 97.1%, up 50 basis points from the third quarter of 2020, and at quarter end, we are ahead of projection at 98.8% leased and 97.6% occupied. Our occupancy is benefiting from a healthy market, with accelerating e-commerce and last-mile delivery trends. Quarterly leasing spreads were at record levels at 37.4% GAAP and 23.9% cash, and year-to-date those results are 31% GAAP and 18.5% cash. Finally, cash same-store NOI rose 5.2% for the quarter and 5.6% year-to-date. In summary, I'm proud of our team's results, putting up one of the best quarters in our history. Today, we are responding to the strength in the market and demand for industrial products, both by users and investors, by focusing on value creation via development and value-add investments. I'm grateful we ended the quarter at 98.8% leased, the highest quarter on record. To demonstrate the market strength, our last four quarters marked the highest four quarterly rates in our company's history. Looking at Houston, we're 96.7% leased. It now represents 12% of rents, down 140 basis points from a year ago and is projected to continue shrinking. Brent will speak to our budget assumptions, but I'm pleased that we finished the quarter at $1.55 per share in FFO and are raising our 2021 forecast by $0.15 to $6.03 per share. Helping us to achieve these results is thankfully having the most diversified rent roll in our sector, with our top 10 tenants only accounting for 7.6% of rent. As we've stated before, our development starts are pulled by market demand. Based on the market strength we're seeing today, we're raising our forecasted starts to $340 million for 2021. This represents an annual record level of starts for our company. To position us for this market demand, we've acquired several new sites with more in our pipeline, along with value-add and direct investments. More details to follow as we close on each of these opportunities. And Brent will now review a variety of financial topics including our 2021 guidance.

Good morning. Our third 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 third quarter exceeded our guidance range at $1.55 per share, and compared to the third quarter of 2020 of $1.36, represented an increase of 14%. The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth. From a capital perspective, during the third quarter, we issued $49 million of equity at an average price over $176 per share. In July, we repaid a maturing $40 million senior unsecured term loan. And in September, we closed on the refinance of a $100 million unsecured term loan that reduced the effective fixed interest rates from 2.75% to 2.1%, with five years of term remaining. In our ongoing efforts to bolster our ESG efforts, we incorporated a sustainability-linked metric into the amended terms. That activity combined with our already strong and conservative balance sheet kept us in a position of financial strength and flexibility. Our debt to total market capitalization was below 17%, our debt-to-EBITDA ratio at 4.7 times, and our interest and fixed charge coverage ratio increased to over 8.5 times. Our rent collections have been equally strong. Bad debt for the first three quarters of the year was a net positive $346,000 due to tenants whose balance was previously reserved but brought current, exceeding new tenant reserves. This trend continues to exemplify the stability, credit strength, and diversity of our tenant base. Looking forward, FFO guidance for the fourth quarter of 2021 is estimated to be in the range of $1.54 to $1.58 per share, and $6.01 to $6.05 for the year, a $0.15 per share increase over our prior guidance. The 2021 FFO per share midpoint represents a 12.1% increase over 2020. Among the notable assumption changes that comprise a revised 2021 guidance include increasing the cash same property midpoint by 8% to 5.6%, decreasing reserves for uncollectible rent by $900,000, increasing projected development starts by 24% to $340 million, and increasing equity and debt issuance by a combined $95 million. In summary, we were very pleased with our third quarter results. We will continue to allow our financial stream, the experience of our team, and the quality and location of our portfolio to carry our momentum through the year. Now, Marshall will make some final comments.

Thanks, Brent. In closing, I'm excited about where we stand this far into 2021. We're ahead of our initial forecast and adhering to that momentum into 2022. Our company, our team, and our strategy are working well, as evidenced by the quarterly results, and it's the future that makes me most excited for EastGroup. Our strategy has worked well over the past few years. We're further seeing an acceleration and a number of positive trends for our properties and within our markets. Meanwhile, our traditional tenants remain and will continue needing last-mile distribution space in fast-growing Sunbelt markets. These factors, along with the mix of our team, our operating strategy, and our market, have us optimistic about the future. And we'll now take your questions.

We will now begin the question-and-answer session. Our first question today will come from Alexander Goldfarb with Piper Sandler.

So two questions, both are really on the development front. Earlier this year, you guys have talked about construction costs, land prices, and permitting delays eroding your yields, and your traditional seven would go down into the sixes. It's now back to seven. Is the view that either the cost increases or the permitting delays were not as bad as anticipated, or is it purely just the amount of rent growth that your markets have achieved that is driving this increased yield? And if that's the case, should we expect yields to be even higher next year?

Alex, good question. The cost increases and the delays were there and are there, as we all see in the national news on the supply chain issues and things like that. So it takes longer for us to deliver a building, and land prices have gone up. The construction prices may have moderated a little bit, but they're still materially higher than they were earlier. It's probably more the latter of rents. The way we will underwrite, we won't assume rent growth on our development. So we typically—especially as we build, as you think in phases, we'll use as our kind of numerator of the prior rents we got within that phase. Even though probably more so than at any point, I can remember, intuitively, there is rent growth in the market. I hesitate to let people project rents. So our pro forma rents have come down earlier in the year. Thankfully, to date, we've been able to maintain that kind of high sixes, near seven developments. I still think we could have some erosion a little bit, we'll stay in the sixes to hopefully continue to beat those mid-sixes on our development yields, and maybe the offset to that is traditionally, we've targeted a 150 basis point spread over current market cap rates. Given the demand for industrial, which is why we like our development model, the profits there have gotten even greater because we've seen cap rates come down into the threes to fours, which is probably a high cap rate about any of our markets today. So it's really more we're underwriting it the same way we always have, and we'll have current costs and prior rents, and the rents have been able to catch up with it by the time we deliver the building and get a lease.

Okay. Second question is the tightness in the markets. Clearly, you see that in L.A. where you more than doubled the rents in the quarter, but also truck parking, truck courts seem to be increasingly almost more valuable in some markets than the box itself. As you guys plan out new developments, new industrial parks, and look at supplying existing assets, are you putting more emphasis on the truck court parking, or does your focus really remain more on the box itself?

It's a good observation and it's still both. I mean, we've always focused on the box itself, but you're right, if we can—and that's what we like within some of our parks, if we have a piece of land between some buildings, and you're not sure which customer or tenant will use it, we'll go ahead and pave that area. We just did that in Tampa, and it can be trailer storage or it can also be car parking at some— with e-commerce and some of those the headcount within the boxes can pick up. So it's nice to have that flexibility. We've done that in Atlanta and another one of our parks. The acquisition you saw us make in Dallas in the third quarter, that DFW Global, we're in that submarket, and we have a handful of properties. We're having strong leasing success; I'll compliment our team in Dallas, but one of the things we really liked about the property we bought—probably two or three things—but it's just, besides the cargo airport, the DFW airport, so it's fairly the largest airport in the country. We're right off near the cargo and airport. And it's leased, but it has— we've gotten a question or two about it, about one-third of the leases rolled the first year, maybe another 20%. So it's a little bit of a value add, which is odd because it's leased. We think there's an ability to push rents there, but certainly, back to where I was going, it also has a lot of trailer storage. There's some excess land on that side. And for those freight forwarders, that's pretty key, and that's a pretty unique commodity to have in that submarket where it's land constrained. So we're focused on it more and more, good observation.

Our next question comes from Elvis Rodriguez with Bank of America.

Great quarter, congratulations. Quick question on the under construction yield quarter-over-quarter went down 50 basis points. I know Alexander pointed that you were able to maintain yields. But given the higher spec starts this quarter and the lower yield, can you just share perhaps if it’s higher land prices of these projects, construction cost, labor? Anything else you can add to your previous comments could be helpful.

And tell me if I'm making sure I'm understanding your question. In terms of percent leased within our total under construction, that is down, and that's really more of a function of just kind of where those properties fall and so many of them just got underway this quarter. And then in terms of our stabilized yield, I think that's where you were going; that did come down. And that's a function, again, as we touched on a little bit of cost increases and us using current market or even prior rents if it's in an existing part. I hope we can make up some of that 50 basis points. But at the end of the day, even if we don't, if we can do what we expect and get a 6.7% yield, I would take that because that's probably 275, 300 basis points over our market cap rate on those developments. Just with cap rates coming down, but there is some downward pressure on our development yields. And kind of as we thought about it, with the rise in pricing and the challenge in getting materials delivered to sites, it's really hampering supply in any number of our markets, and that's probably tough on this page in our supplement for the 2 million to 3 million square feet per year we add. It's going to pressure those yields a little bit, but it's great news for the 51 million square feet that we own because the market is so tight, and it's hard to add new supply; it should continue to enhance our ability to push rents. The flip side of that is it puts a little bit of pressure on our development yields as well.

I would just add to that the question—that's an average. So each deal, looking at our pipeline under construction, that range is just looking at some internal numbers here from 59 to 75. So that can fluctuate quarter-to-quarter. What was our land basis? What market? Certainly at Miami or something like that, a little tighter yield than some other markets. So that's not just a stagnant number that is the same across all markets. Obviously, that fluctuates and depending on where you start can influence that as well.

Brent, that's very, very helpful. Just a quick question on in-place rents versus the market. Perhaps you can share what that spread is today and maybe where it was at the end of Q2?

Yes. We typically don't disclose that. Each space is a little different, depending on office build-out in the camp, storage yard, and things like that. But you saw us raise our rents in the third quarter. Maybe the closest things I can point to in the third quarter, our cash rents went up 24%, and year-to-date they are '18 to '19. So we definitely are feeling that pickup in embedded rent growth within our markets. And again, this year has been, in a very positive way, an atypical year for us. You see it in our development starts, and that we've really fluctuated between 98% to 99% leased, and our markets are full, and rents are rising. So that's led us to hopefully, in a disciplined way, scramble to add space, whether we could develop or build and/or buy vacancy, but we think there's still a fair amount of runway for rent growth within the industrial market and within our portfolio, given everybody now is going in at a higher basis of everything that's getting delivered, whether it's steel cost, land cost, every component is a little bit higher than it would have been a year or two ago.

Our next question comes from Emmanuel Korchman with Citi.

Marshall, in the past, I think you've spoken about your product type and maybe your parks even being a little bit under the radar of demand from other capital sources, just from a size perspective, building up the portfolio. Is that statement still true, or is sort of everyone looking here? And I think you mentioned that cap rates are in those threes and fours. Did I hear that correctly?

Yes. You're correct. It's really—cap rates are about the same from big box to our shallow bay product. Those have probably caught up, and I wish there were some undiscovered markets. But as we learned going into unused Greenville, South Carolina, our newest market, we thought maybe we could dip in there, and it may be a little bit undiscovered, but there's a lot of good competition and good developers. Certainly, in Atlanta and Dallas, that are out there as well as Greenville. And on our— I guess I wish this was a Zoom call; on our investor presentation, if anyone's curious, we usually use a CBRE chart, and it will show 30-year average supply for big box and shallow bay. On that, our shallow bay, as they measure, is 120,000 feet and below. Our typical buildings may be 80,000 to 200,000 square feet. Shallow bay deliveries are still not back to where they were at the great financial crisis. So there are certainly people looking at it, but it's hard to find the land. It's usually trickier to get the zoning and the permitting because we're a little more infilled than, say, a big box on the south, far South Atlanta, far South Dallas, and the Southwest side of Phoenix. One example I read thinking within Atlanta, and this is an extreme example. This is the third quarter CBRE report for the Atlanta area. They're quoting 34.5 million square feet under construction in the metro Atlanta area. But of that, only— and I had a hard time believing this, only 126,000 square feet of shallow bay. We would typically tell you here in a couple of weeks, it's 10% to 15% of whatever the construction is in a given market. But that jumped off the page when I read that, and that's from a good firm that studies the market pretty well. So I like where we fit in the food chain; it helps us get the higher development yields. It's harder, and maybe a little slower, to put out capital for us, and that's why we're probably trying to spread out geographically our development pipeline as much. But we're not going head-to-head with the big box developers on the edge of town. Those have worked the last few years, and it's just not what we do.

Marshall, and then maybe on the flip side of that, does the cap rate compression give you the desire to sell more, or are you sort of limited in the fact that it is harder to redeploy some of that capital?

Yes, we—a good problem to have. We like our stock price compared to consensus NAV, and we have the uses. We like the debt markets have been historically low, and Brent and his team are taking good advantage of that. That said, when we did bump our guidance for dispositions, we've got some really three older buildings that we're taking to market; one in Tampa, that's knock on wood, under contracts moving towards closing; one in Phoenix that we're going through the bidding process currently; and then one where we've listed a service center down in Broward County, South Florida. So yes, it's a good time to—as hard as it is to buy, every once in a while, it's been fun to be on the other side of the transaction because we usually bid and lose so much. It's fun to get multiple bids on own properties, and it's a seller's market right now. We're trying to prune the portfolio, which I think is something we should annually always be doing.

Our next question comes from Dave Rodgers with Baird.

It's Nick on for Dave. Just a question on developmental start. Could you say how much more land you're looking to purchase? I guess with 4 million to 5 million square feet, able to build on it, with like 2.5 million under construction. That's kind of like two years of capacity, so kind of your thoughts around that at this time?

Yes. Well, that—we're always chasing land, and we would—if you turn the question around and you said, what keeps us up at night? We would say finding good land sites, and it gets harder and harder as you think. We talked about—we're usually the first guys to get priced out of the market because other product types in industrial can go vertical compared to industrial, and just rents aren't there, except for a couple of markets nationally, maybe to go vertical. But you're right, we've got a couple of years, and we'll go as fast as the market really allows us. That said, you saw us announce a few closings this quarter. I would take it a little bit—I kind of thought of this just like an iceberg. So you see the 5 million square feet that we can develop on, and then the team in the field does a good job of constantly turning over stones. We've got other sites that—value-add buildings, where the yields are right now at least close to as attractive as development. Typically, they've been a little bit lower, but where we could either buy vacancy, which is a good way to create value or NAV and FFO for our shareholders. There's a fair amount of land that we've got tied up, and kind of quarter-by-quarter, you'll see us announce that. Hopefully, we can run through it as quickly as we can. I'd also add, given where land prices are, there's really no cheap land to buy and put on our books. So typically, when we acquire the land, you saw the team in Austin do that—we'll buy it and then try to be in the ground with development as quickly as we can, before the carry gets going because those land prices have elevated.

Great. And then a quick question for Brent. Can you look at—there's kind of a delta between cash and GAAP same-store in Q3 relative to Q2? I guess, what's driving that for this quarter specifically, and when can we expect that to reverse?

Yes. Good observation. For this quarter particularly, that’s what we said a quarter really doesn't make a trend, but we had at least a good transaction of musical chairs at our East Lake property in San Diego earlier in the year, where we were taking a lower credit and frankly, a problem paying tenant, let them out of their lease, moved another tenant, and we got a large termination fee of over $500,000 that we booked in the first quarter. But as part of that deal, we backfilled that almost 200,000 square-foot building with Amazon. They needed like five months of construction time, and since we were getting a term fee, we offered a little bit of free rent just to help the timing work for them. In third quarter, that 200,000 feet had no cash rent, although of course, we had GAAP rent on it because the lease is in place. There was another slight deal or two like that in smaller nature but similar, where we’re moving and putting a tenant in, in each of those—all of those cases, we've got significant cash rent increases. That was just a matter of timing, having that GAAP, that large GAAP roll all the way through Q3. That will make its way through in Q4, and I think you'll see that tighten back up to a more normal range. But all in all, it was a very good deal. We saved a large termination fee and significantly enhanced our credit, just the timing of it.

Our next question comes from Craig Mailman with KeyBanc Capital Markets.

Maybe to circle back on development here. I know it's been a hot topic today. But just curious, the $340 million of starts this year is a record for you guys, but the Company has also grown significantly, market cap and just asset base. I mean, as you guys think internally, I know land availability is a governor, but how do you guys think about how much development you want ongoing? Is there room from the $340 million to go higher given your kind of risk tolerances, or are you guys coming up to sort of an annual cap-ish?

No. Craig, it's Marshall. I don't feel like we're getting to a cap or anything like that. I'm happy we got the good news, bad news. I'm happy we got to $340 million. Now that it's late October, and you start to think about 2022, and you go, how are we going to get back to that number? Certainly, construction and land prices are helping us get closer to those numbers, just the pricing we're seeing in industrial rising. So we can get there. We'll build as fast as the market allows. We've been fortunate this year with a couple of pre-leases, like when you look under construction, where the next building in Charlotte, we got—we went through two buildings quickly, and our Steele Creek park kind of work is about to be underway with our last two buildings in that park. The land we announced this quarter is down the street. We did have the $90 million Speed Distribution Amazon development in San Diego. It's a big one for us, and we weren't planning on that, but they wanted the entire site. That really put us in a position with a long-term lease and that credit where we did that. So, I think we can do more. Our team certainly can do more than $340 million. We're adding people to our team in the field here and there as market dictates, and pricing certainly makes it a little bit easier. Between those and the value add, it's—the challenge of growing, right? We want to keep the growth rate the same, but we need to also stay disciplined and not buy things or develop things that only work in an up market.

That's helpful. Then maybe shifting gears a bit. If you kind of just arbitrarily, I guess, look at your end-of-2019 tenant list versus today, you clearly see a little bit of a change with Amazon and FedEx pop up on there. You guys have talked about just the kind of the tail from e-commerce now coming into your market and considering your property type for deals? I mean, do you feel like this shareholder or the tenant kind of change will allow you guys to push rents harder than traditionally and maybe even give a bigger boost to cap rates for your shallow bay versus what the traditional spread has been versus traditional warehouse?

I know I want to say the answer to your question, but I'm looking at—it's going to be the market. You're right. What I like is when we go back to 2019, our tenant base is shifting around Amazon, I guess, foreshadowing into next year, we'll deliver Speed Distribution. So they should move from number three to number one, like they're on a lot of our peers' list. Factoring in a percent of our top 10 tenants that has come down, I can't remember exactly where it was in 2019, but it was probably in the 8% to 9%, which we like the tenant diversity and the geographic diversity within our portfolio. But getting back to your question, I really think it's the tightness in the market, and you're right, maybe with our tenant mix, I can work my way to yes by saying the HVAC contractor, the title distributor with the homebuilding, what we've called our bread and butter, the beverage distributor, food and beverage, and medical supplies—those tenants are still there. As Orlando grows or Austin grows or Phoenix grows, they need space, and there's tightness in the market. We're seeing more and more e-commerce tenants show up as an aside, and we'll see where it goes. We hired—we're trying a retail broker to really that knows all the retailers to go out and call on them and turn over stones to see if we can continue to develop that rather than wait for an RFP from a brokerage firm in Dallas, and we're in the competition. We're working on pushing that, and we are asking those tenants, if you have the right location and the right loading, they're less rent-sensitive than the traditional tenants too. When it works, you can usually push rents pretty well, and the market's moving that way, and we're doing our best to help them. I think they're going to all have to keep pace with Amazon as Amazon's growing its footprint so much. If you're in traditional brick-and-mortar retail, you've got to figure out a way to keep pace with that delivery, or you'll lose your market share.

That's helpful. But maybe if I could slip one—third one in there. Any color on the Orlando rent roll down in the quarter? Was that specific to a building or any color?

Yes, maybe I'll mimic Brent and say, it was one lease. We had Aetna. It was a space within one of our Orlando properties that had a little more office component in it. So it's a small sample size with the use of kind of insurance that had a little more office build-out in it. They moved out, and as we re-leased it, we took some of that office out. So the tenant improvements we have worked into the space kind of went away. The market in Orlando is fine, and we like where our year-to-dates are in Orlando in the 20%—in the 20s. I think we just had a small sample size quarter and atypical tenant.

Sure. Our next question comes from Michael Carroll with RBC Capital Markets.

I wanted to go back to Craig's first question, and the Company has done a great job pursuing new development starts, but what's the biggest limiting factor on breaking ground on these projects? Is it finding and acquiring attractive land sites, or is it the amount of spec risk the Company is willing to take on?

Land is a factor. I mean, if we just said next year, we want to build $380 million in starts, we could do it. It's not—and we could hire the contractors and do that. It's really more—we realize that our model, I feel like rather than Brent and me at corporate are deciding where starts should be, if you flip it around with the calls on you usually get, it would be Brent saying, hey, we built two buildings. I'll use our Settlers Crossing in Austin as an example, and we're 50% leased and we've got prospects, and we’re ready to go build the next couple of buildings to work our way through the park. We compared it a little bit. If you think about a retail store, when goods move off the shelves, we restock the shelves. So we let the market really pull the supply from us rather than corporate pushing us out. We could go build the square footage, but it's making sure that the market is there. The flip side of that, thankfully, it didn't work that way at Settlers Crossing, but had we not—if you don't lease-up buildings one and two, we don't go build buildings three and four until the market really absorbs that. We want to make sure it worked the way we thought our pro forma did. So I'll firmly say maybe compared to our peers, and maybe at times I don't articulate it as well, but I think there's lower development risk to our model. The dollars are certainly lower, and it's really feeding new supply into demand. When I look back, we started the year at $200 million or $205 million in starts, and we're going to end the year at $340 million, but it was really more a function of the market was pulling that supply so much faster than we anticipated earlier in the year. I hope it stays this way. I don't see it changing near term, and it will probably accelerate a little bit, and that's putting pressure on us to either find land and/or buy vacancy in certain markets.

Okay. No, that's helpful. And then on the development leasing, where are rents coming in versus your initial underwriting, I guess, today? Do you have offhand what that has been historically? Are rents coming in much higher versus your underwriting than it has been historically?

Yes, a little bit. I'm doing it—painting with a roller brush, but generally, they're coming in higher than we've pro forma because we'll typically look back a few months or current market. It takes a bit—oddly enough, if it takes us a little bit longer to lease the building, we'd probably do better on the rents. In some of these cases, we've leased-up pretty quickly, that's helped start the next phase. All in all, we're probably beating our development yields as a company of what we had underwritten, and I hope that trend continues. We just—we don't want to change our underwriting discipline. So that may—and I hope the problem is we're understating or project some of our development yield projections, but if the market slows and we only get those, we're still near historic or near historic development yields over market cap rates because there's so much demand for good industrial space.

I mean, is there a way to quantify, I guess, where they are coming in now versus where they have been coming in the past three years or so?

It's not huge, but we're probably doing 10 to 20 basis points higher than we've underwritten on any number of these. As you saw, we pulled out 13 buildings from our development pipeline year-to-date. For example, 12 of those are at 100%, and one is at 81%, 82%. That gives you a sense for those that leased-up quickly—they're all rolling in full, and we're typically doing anywhere from 10 to 25 basis points better than we anticipated. If something rolls in, and if it's lower than anticipated, it takes us a little bit longer, that usually means at some point, we'll move away from our pro forma rent and make a deal to get it filled up. But those have all moved in fairly quickly to be 97% leased and a 7% yield on our development pipeline. I'd love to replicate that.

Our next question comes from Jon Petersen with Jefferies.

Great. You mentioned earlier in the call, you're happy with your cost of equity, your cost of debt, not necessarily surprising. I guess I'm just curious, as we look forward over the next few quarters or into 2022, how you guys decide the split between issuing equity and raising new debt, given where pricing is now for both of those?

Jon, yes, it's not scientific specifically. Obviously, when both our prices attractively, which we view currently, both are—we're going to tap into both. We've obviously been a little more heavy-handed on the equity side. I would suspect going into 2022, we may err in that direction. Our debt-to-EBITDA down to 4.67x this time. We're very pleased, especially given our propensity to have active development going at any given time that has a debt component but not yet an NOI contribution. We like that. Moody's rating likes that. So there are some factors there that bolster that up. We'll go both ways with it. We only have about $75 million maturing between now and December of '22. So that's not going to be a big factor in having maturing debt to replace with new debt. I could see it being consistent the way we've been, and that's being a little more heavy-handed with the equity but mixing it both.

Okay. All right. That's helpful. And then I was just curious on the rent escalators. What are you guys pushing right now? Does it vary by market or tenant size? I guess where is your negotiating power now on rent escalators versus a few years ago?

Yes. It's a good observation. It's picked up. It used to be twos to threes, and that's probably—and it does vary by market, probably threes to fours. It varies by market, and also the larger the size of the space, usually the harder the pushback, so like shallow bay too; the larger the space and the longer the term of the lease, it makes sense, the tenants will push back a little harder on those escalations. A ten-year lease with 4% escalators gets a lot more expensive to them than a 35,000, 40,000-foot lease for a five-year deal. So they're definitely picking up, and that's why we like—it's been interesting to see. I've noticed several of your peers focused, we do look at cash releasing spreads, but we like GAAP because the GAAP releasing spreads do capture that free rent and the escalators and we think those escalators moving into the threes-to-fours is going to be able to create a lot of value at this point in the cycle.

Our next question comes from Ronald Camden with Morgan Stanley.

This is Jose on for Ron here. Congrats on another great quarter. Just heading into the holiday season, have you guys seen any inventory restocking accelerate, or have delayed supply chains kind of limited that? And if you have seen that process for some of your retailers, has that led to any expansion of space from those specific tenants?

We've seen some expansions, and I think that a little bit more theoretical. I think last year, everybody put their expansion plans on hold, and you probably saw—last year, we had higher than historical retention rates. This year, we started with lower tenant retention—it kind of bounced back this quarter. It's usually in the 70% to 75%, I would say, if someone is building a model on our company. The good news is we're rounding— we're 99% leased. October looks a lot like September did, plus or minus, same ZIP code. I think for our tenants, it's still aspirational to carry that excess inventory or people are safety stock just in case inventory. I think that's still coming because people need it but are—they're struggling to meet current demand more than carrying that extra inventory. Do they perhaps take a little more square footage in anticipation of that? But I think there's another wave of square footage needs coming as people have learned the cost of carrying that extra inventory is much less than missing out on sales they have. So we're—maybe we're seeing it at the fringes, but I think it's—if you're out and trying to buy things, there may be an option of one or none. Here at the office, you hear of everybody running, not being able to buy whatever it is or having to wait. Anecdotally, we're seeing it, and I think there will be a wave of increased inventory coming. What we're hearing, one of our directors is a little closer to it with FedEx is—I'm probably misquoting him, but it's looking like it's going to be well into 2023, mid-'23 up to later before supply chain really gets straightened out, and maybe the inventory gets to where Home Depot, Lowe's, or Best Buy, some of our—any of our tire distributors, things like that are able to get where they want to get to an inventory.

Our next question is a follow-up from Elvis Rodriguez with Bank of America.

Marshall, just a quick strategy question on developments versus acquisitions or M&A, large portfolio deals. This quarter, you increased your guidance on operating assets and the value-add and with the DFW acquisition, in particular, the Austin 9-acre acquisition that you plan to redevelop. As it gets harder to acquire land and do development, how are you seeing those two opportunities? Is that changing? I know you've always had a sort of a balance doing more development versus acquiring at market yields, but just curious on your thoughts given the activity in the quarter?

Yes. Good—probably still in that order. If we can develop or especially develop within an existing park, I mean that risk return is very attractive, and one of your peers had quoted recently that our development market was an 80% development profit margin. Maybe I didn't see their math, and maybe I didn't want to check their math, but that sounds about right. If we can develop and make those kinds of returns and manage risk, that's a great opportunity for our shareholders. We picked up some acquisitions this quarter; two of the smaller ones were small buildings adjacent to buildings—one in Phoenix, one in Atlanta to buildings we already owned, and they were pretty much off-market where maybe that seller came to us—one I don't think had a broker; we knew the owner—one had a broker, and maybe they talked to two or three people. The Dallas one was interesting or atypical in that it's hard to call 100% leased projects value-add. In a way, we felt like it had a strong value-add component because of the movement of rents we were seeing within our neighboring four to five properties we have up there on the Northwest side of the DFW Airport late port development that we leased up quickly this year. We saw rents move pretty quickly. We'll probably still like development, and if we make an acquisition, it's hopefully an adjacent building that's likely marketed or something like that or value-add. I look at markets like San Diego, where we mentioned our Amazon development. So we quickly went from being land-rich to land-poor. We like that market where we're back out in that market looking for land or vacancy. If we buy a building, I’d rather have a value-add component than just us say we outbid the other 20 bidders. Going forward, we think the market is going to continue to go up. We won't say, never say never, but that's really our last choice, and probably our last, last choice would be M&A. Usually, the bigger the portfolio, the more people underwrite it, the more competitive and pricey it gets because people like the ability to put that amount of capital out there. There's not—I'm not aware of inexpensive industrial REITs out there today. We probably like a portion of their portfolio and a portion of it wouldn't fit us, and it would be bidding war with some pretty large peers that we like our cost of capital, but probably, Link and PLD and a few others have an even less expensive capital. M&A would be—and I think that's a lot of underwriting, and hope you get it right. We don't feel compelled to make big risky bets. I'd rather build 20 buildings around the country in 10 different markets and probably 18 different submarkets and make a lot of calculated risk types. That's served us—has served us well over the years, and that's where we'll—if we can find the land sites where we'd like to be.

This concludes our question-and-answer session. I'd like to turn the call back over to Marshall Loeb for any closing remarks.

I appreciate everybody's time. Thanks for your interest and following EastGroup. We're certainly available for any follow-up questions, Brent and I for any emails, or give us a call and look forward to seeing many of you in a couple more weeks at Nareit. Take care.

Thank you.

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