Good day, and welcome to the EastGroup Properties, Fourth Quarter 2022 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 fourth quarter 2022 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call this morning and 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 and press release, both available on the Investor page of our website, and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the Safe Harbors under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements and 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 on our most recent Annual Report on Form 10-K for more details about these risks.

Good morning. I’ll start by thanking our team for a strong quarter and year. They continue performing at a high level and capitalizing on opportunities in a fluid environment. Our fourth quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial markets. Some of the results produced include funds from operations coming in above guidance over 12% for the quarter, and almost 15% for the year, well ahead of our initial forecast. This marks 39 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend. Our quarterly occupancy averaged 98.4%, up 110 basis points from the fourth quarter of 2021 and at year-end, we're ahead of projections at 98.7% leased and 98.3% occupied. Quarterly releasing spreads were robust at approximately 49% GAAP and 34% cash. For the year, releasing spreads were also a record 39% and 25% GAAP and cash respectively. Cash, same store NOI reached 8.7% for the quarter and 8.9% for the year, and finally, I’m happy to finish the quarter at $1.82 per share in FFO and the year at $7 per share, up 14.9% from 2021’s record. Helping us achieve these results is thankfully having the most diversified rent role in our sector with our top 10 tenants falling to 8.6% of rents. In summary, I’m proud of our 2022 results. Statistically, it was our best year on record, while the majority of the year was marked by economic uncertainty and capital market dislocation. We continue responding to the strength in the market and user demand for industrial products by focusing on value creation via raising rents and new development. I’m grateful we ended the year 98.7% leased, with the rent growth more geographically widespread in 2022, creating our record results. Another indicator of the market strength was our average annual occupancy of 98%, setting another record. As we've stated before, our developments are pulled by our market demand within our parks. Based on our read through, we're forecasting 2023 stocks of $330 million. In 2022, we delivered 19 developments, 18 of which are 100% leased. Even when including value-add acquisitions, the weighted average return was 7.1%. Last year's successes aside, we continue to closely watch demand with the goal of a balanced fluid response pending what the economy allows. Given this capital market volatility, we are taking a measured approach towards new core investments. We're also carefully evaluating development sites given the level of demand and the longer time frame often required to place sites into production. Brent will now speak to several topics, including our assumptions within our 2023 guidance.

Good morning. Our fourth 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 fourth quarter exceeded the high end of our guidance range at $1.82 per share and compared to fourth quarter 2021 of $1.62 represented an increase of 12.3%. The outperformance continues to be driven by multiple factors, particularly rental rate growth and the successful pace of our development conversions. From a capital perspective, macroeconomic concerns have caused the stock market to decline, including our share price, and as a result, we only issued $75.4 million of equity during the year apart from the Tulloch acquisition in June. Virtually all of that issuance occurred in the first quarter of 2022. We have been intentionally deleveraging the balance sheet over the past several years, placing ourselves in a position to pivot to debt proceeds for capital sourcing. During the fourth quarter, we closed on the private placement of two senior unsecured notes totaling $150 million. One note for $75 million has an 11-year term and an interest rate of 4.9%, and the other $75 million note has a 12-year term and interest rate of 4.95%. In January 2023, we closed on a $100 million unsecured term loan with a seven-year term and an effective fixed interest rate of 5.27%. Also of note, in January 2023, we successfully expanded the capacity of our unsecured bank credit facilities from $475 million to $675 million. We remain conservatively drawn on the revolver. This step was taken simply to provide additional capital flexibility in a volatile market. As a reminder, the company does not have any variable rate debt other than the revolver facilities, and our near-term maturity schedule is light, with only $115 million scheduled to mature through July 2024. Although capital markets are fluid and risk in cost, our balance sheet remains flexible and strong with healthy financial metrics. Our debt to total market capitalization was 22.4%, annualized debt to EBITDA ratio is 5.1x, and our interest and fixed charge coverage ratio is at 8.8x. Looking forward, FFO guidance for the first quarter of 2023 is estimated to be in the range of $1.75 to $1.83 per share and $7.30 to $7.50 for the year. The 2023 FFO per share midpoint represents a 6% increase over 2022. Some of the notable assumptions that comprise our 2023 guidance include an average occupancy midpoint of 97.2%, cash same property midpoint of 6%, bad debt of $2 million, $330 million in new development starts, common stock issuances of $100 million and issuing $350 million in unsecured debt, which will be offset by $115 million debt repayment. In summary, we were very pleased with our record-setting 2022 results. Thank you, EastGroup team members who are listening to the call. As we turn to page to 2023, we will continue to rely on our financial strength, the experience of our team, and the quality and location of our portfolio to maintain our momentum. Now, Marshall will make final comments.

Thanks, Brent. As Brent said in closing, I’m proud of the results our team created, and we're carrying that momentum forward. Internally, operations remain historically strong. That said, the capital markets and overall environment remain unstable, and I will note a couple of thoughts that may prove helpful. First, the industrial market has been red hot the past few years. So some settling of the market we view is healthy for a sustained positive environment. Secondly, this is leading to a marked decline in development starts. As a result, we expect construction costs to decline later in the year and a drop-off in new supply. In the meantime, we'll work to maintain high occupancies while pushing rents, and longer term I remain excited for EastGroup's future. There are several long-term positive secular trends occurring within the last mile shallow bay distribution space in Sunbelt markets that will play out over the years, such as population migration, evolving logistics change, on-shoring, near-shoring, etc., which we are well-positioned for. And we will now open the floor for any of your questions.

And the first question will come from Craig Mailman with Citi. Please go ahead.

Good morning, everyone. Maybe Brent or Marshall, I just want to kind of go through some of your underlying assumptions in same-store here, and as it filters into FFO. I guess you guys have the same-store side are baking in a little bit of a deceleration, but it seems like you guys have 50 to 75 basis points in there of a bad debt reserve, which you guys haven't really recognized much of in the past few years. But, could you go through some of the other puts and takes, maybe from what you're assuming from market rent growth or an embedded mark-to-market, at least on the 2023 roll, and whether you know the occupancy fall off that you have, if you're starting to see the seasonal decline in Q1 or if this is really just a placeholder, but just in case given Marshall, you know your commentary about the uncertain macro environment.

Hey, good morning, everyone. Good morning, Craig. Yeah, it's - I hate to call it a placeholder. We do, as a reminder, build our budgets from the ground up. So we literally go with the guys in the field space by space, on leases that are going to roll this year or vacancies, make those assumptions, roll that up. You know there's some tweaks made to that, but that did produce the 97.2% occupancy. It's more challenging than you might think to go through your portfolio and try to scrub it to a 98% number. Just as you go space by space to 97.2% as you're looking at it individually, it feels very full. But, you know looking back a year ago, we did guide to a 97% flat occupancy and the same-store about 5.6%. Of course, thankfully we were able to accomplish a 98% occupancy, which lifted same-store to an 8.9% on a cash basis. So certainly, if occupancy were to beat and get back, maintain that 98% range, you know certainly we feel like we could equal more to last year. We just – you know in the front end of things, we just didn't, I guess you would say, stretch or pull that number from 97.2% to 98%. It's not specific to a large tenant or two. We probably didn't push overly hard on our rent assumptions during the year in terms of new and renewal activity, but - so, that’s we hope there's upside. I’d point out too just to the group as well Craig that we made a lot of California adds to our NOI last year, which we are excited about. I think that'll be a tailwind to future same-store growth or just a reminder that, for example, that large Tulloch acquisition we made last summer, of our 7.6 million feet that we held in California at 12/31. There's 2.9 million feet of that or about 38% of that that's not in the ‘23 same-store calculation. So again, that will make its way in once we have full calendar year comparisons for that part of the portfolio, but – so you know I would say as we typically do, the grid, the assumptions we give and provide, those are basically the assumptions that produced the midpoint, in this case the 740, which was right basically on consensus. Certainly we can do better than those which we hope to do, then certainly there's upside there, but. I don’t know Marshall, do you want to talk about rents or mark-to-market I think he mentioned.

Sure. Hey! Good morning, Craig. And I agree with Brent. I would say if it's helpful, and usually we've been, thankfully to the low side the last few years in a row, we've been projecting kind of a reversion to the mean in terms of bad debt and occupancy, and we've been wrong the last few years. So we have occupancy coming down. We've got bad debt. If we're heading into a recession this year, which many people think we do, going back to kind of a historical comp. Last year we were under $140,000 in bad debt, so we've been fortunate. I know we get questions about smaller tenants and credit. In the last couple of years, we've had very minimal bad debt thankfully, but we've got that budgeted in. So well again, I hope we get a chance to beat it during the year. Really this year our occupancy and percent leased through yesterday is pretty similar to where we ended the year. Surrounding, call it 99% leased, 98% occupied, the team in the field is still pretty content, you know like I said robust, people out touring space, kicking tires all along the process from tours to leases out and things like that. So we don't have any thankfully known - large known move outs this year or anything like that we're worried about, but we just keep thinking, okay, last year was a record high occupancy for the company that we may go down from that. But we've got pretty good - we've got good embedded rent growth. Thankfully last year we saw that expand in California. We've had strong releasing spreads, but Florida and Arizona were both north of 40% GAAP releasing spreads last year and that doesn't feel like it's slowing down, and then if I jump ahead 12 months, we really saw supply and especially shallow base supply stop when the capital markets got so unstable. So many merchant developers are on the sidelines. So when we think as the supply pipelines kind of continue to drop each quarter, there's going to be a lack of new supply. So if we can hang on to this occupancy, you know hopefully a year from now or even more bullish assuming the economy and our tenants can just hang in there. So that's a lot of info for one question, but I hope that's helpful.

It is. I just wanted to circle back, because I know you guys don't come up with a portfolio market-to-market per se, but are you assuming at least in guidance on the roll-up that the blended mark-to-markets on a cash and GAAP basis for ’23 expirations are pretty similar to ’22 or is there a delta one way or another?

It's probably – you know we – the guys in the field as Brent mentioned, they'll budget each space. So if you said, what do you think, it feels like the mark-to-market, I'm expecting the last – this is on a GAAP basis. The last couple of years we've been low 30s and then high 30s. It feels like we'll continue. Assuming the economy just stays okay and doesn't retreat, that will match those numbers in terms of budgeting. They've probably budgeted a little bit light. We typically budget a little below where actual comes in. So they put the numbers on each suite. But I think in terms of our mark-to-market it was interesting, and I think that's more of the mix. We had a stronger fourth quarter than some of our peers, where they deteriorated and I think the market continues to move up. I’d even say for our peers, it was probably more of a mix of who had what leases and where they were in the fourth quarter. It's a better measure over a longer period of time. But our mark-to-market is still solid, and it should look – I would expect ’23 to look similar to ’22 does in terms of our ability to push rent so far in the year.

And then just turning to the development starts, you guys are flat year-over-year, and I know it’s an incremental build out of parks. I mean, can you kind of break out how much of that may be Build-To-Suit because people are running out of space and need more versus maybe tenant inquiries that make you feel comfortable? I know at 98% occupied, you basically have zero inventory, but just you know as we think about risk mitigation, how that stacks up?

Good question. I think maybe that's one difference from our peers. Almost all – we'll do a few Build-To-Suit or a pre-lease is probably more, but it's really all spec development. That said, if I use just Texas for example, just over a third of our development leasing is existing tenants. So whether it's tenants within the park or some buildings we have around the corner. So we're, as you mentioned at 99% leased we've always said, look, if we don't supply that space, and we do. A lot of the tenant retention we lose as we were able to accommodate someone's growth needs or have the right space in a quick enough time period. So an awful lot of that will go to tenants within our portfolio, but in terms of pre-leased buildings. At this point there's not many, although we've got a number of conversations, we've had more and more single tenant, single tenants take a multi-tenant building. So that's moved us more quickly through the park where some of them will come along and say, we'll take the entire building and then we're trying to move fairly quickly to the next building. The team in the field feels pretty strong about the $330 million. That was really where we felt coming out. But again, I hope that's a number. If the economy can stay okay, they would probably lower on rents than the market, and they are probably higher than the $330 million if we let them roll it off just on their own without kind of trying to throttle it back a little bit, and then some of our challenge right now is just the capital markets. So it's been a disconnect since the second quarter last year. The market is so strong, but debt costs are higher and our stock prices move around every time the Fed seems to meet or Chairman Powell speaks, our stock price jumps. So some of that challenge is probably more stress on Brent than it's been historically.

And just on that point, I know I'm over the two question limit, but if your equity price is not where you want it to be, Brent, as you look out to the end of ‘23 or ‘24, kind of your pro forma run rate on EBITDA with mark-to-markets and development deliveries? How much could you fund purely with debt without moving your leverage ratio beyond where you guys are comfortable?

We could fund, you know what we need to do this year with debt and keep our debt to EBITDA in a very good manner, I'd say mid-five or better and our goal has been throughout this to say we wanted it to always maintain a five handle and we really haven't pushed it on an annualized run rate basis. We haven't really pushed near that. But you know the equity has bounced back here recently, so if we could maintain that I think. You know we talk about debt and equity issuance in our guidance table, but I would say those are a couple of the most probably fluid numbers in the entire budget. And what I mean by that is we know we need capital and you begin the year and you plug something in. But the budget certainly won't dictate what we do when what we’ll do will be based on availability. And so, equity, our price is improved. So if we’re to maintain that, I could see us being much heavier on the equity issuance and lighter on the debt side. But to your point, if we had to go purely from a debt perspective, we could. You saw in the release, we added $200 million to our revolver capacity. We've always been a pretty light user of the revolver in terms of not maintaining a large balance, and we still want to keep that sort of prudent approach to keep plenty of dry powder so that we don't have to have any knee-jerk reactions to market conditions, but that just gives us more leeway too. So yes, I feel long-term interest rates for us in terms of long-term potential debt have – they are still high, but they've come down some from the peak. Like I said, equity is more attractive. So I'm more optimistic right now about our capital sourcing and the price of it than say three months ago.

Great. Thanks.

Our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey! Good morning down there. You guys have a track record of always coming out with very conservative guidance. Marshall, over the past few years you've talked about reversion to historic just given the outperformance of the portfolio. And this sounds a lot like it, and given the interest rates, given the issues that we've seen, headlines with the economy, you have exposure to housing markets like Phoenix, you have exposure to California. I mean you have exposure to a number of markets that conceivably would see some headwinds, and yet nothing in your commentary and nothing on the credit that you've spoken about as far as tenant health indicates anything of a let-up. So I’m just sort of curious, you know Brent, you mentioned that you do build the guidance space by space, and you're baking in that 80 bp decline, but nothing in what you guys have talked about really indicates that. So is it more just a cautionary element to the guidance of saying look, just given everything going on this year, we just feel this is prudent or are there actual tangible things that are causing you to consider the occupancy declines or that bad debt goes back to two million from only $140,000 last year.

Thanks, Alex. Good question and I think it's more prudent, call it measured conservatism and I look – I hope in hindsight we are conservative. There's no specific tenant issues, move outs, bad debt, things like that, that are driving our assumptions, so much as I do get concerned about debt cost, wage cost, all of the things like that, and it's – I think EastGroup's balance sheet is in a good spot. But with 1,600 tenants, I do worry about the tenants’ ability to make it through maybe the second year of economic doldrums or heading into a recession. So we keep waiting for signs and are paranoid of signs for cracks in the economy. But thankfully to-date we've not seen it, but we're trying to be a little bit anticipatory if it comes and maybe it's a little bit, look I think at some point things, nothing specific, but hopefully it's prudent to be a little bit conservative and look, we’ll certainly get several chances each quarter during the course of the year to give you our update and again, we'll do our best. This is – we always kind of internally say we have our budgets and then we have our goals. So this was our budget and our goals to beat it.

And then the second question is, as far as the supply picture, you said that you guys are being more cautious on how you think about new construction. And yet you also said that your competitors, presumably the merchant builders are pulling back, which is giving you more pricing power. So, I'm just trying to understand the two of those points. If your competitors are pulling back, wouldn't that make you feel more confident about investment in new starts? Or is it, again, your caution about the overall economy that independent of what your competitors on the development side are doing, you're nervous about committing new capital in the current environment. But at the same time, you are benefiting as your competitors pull back that it gives you more pricing power on your available space. I'm just trying to understand the two comments.

Look maybe - I'll throw an element out. You're right, we feel good that our competitors, a lot of them are on the sidelines. We're seeing instances where someone's tied up the site, gotten zoning, permitting and they are not able to get the debt and/or equity to move forward and we've been able to get some repricing. We stepped into a couple of different situations in Texas. One in Austin last year where we bought out private companies that weren't able to perform at the end of their contract. So that's optimistic. That conservatism is, okay, when we do deliver these buildings, and thankfully for our product type, especially shallow bay, it's a little bit shorter, but it's still nine months out. What type of economy are we going to be delivering into, and since it's mostly you know almost all state development, a little more anxious about the tenants. Are people going to start renewing and just staying put rather than continuing expansion plans? So we feel good about supply. We're hoping demand is there, and with our cost and things like that, we've actually – you know, one of the things that I will say, there's a lot of different metrics on our dashboard and I know a lot of your peers focus on the cash, same store NOI which we do too, but we're continuing to push our development yields up. So this year, of that $330 million, we've got specific buildings and you're pushing last year what we rolled in, including value adds came in just north of the seven. We're probably a six, seven this year in terms of development. Hopefully with rents continuing to go up, we’ll be able to meet or exceed that, so I'm proud of our development yields and the kind of instrument NAV creation that creates. So we feel good about development and/or maybe some opportunities where we're saying things here and there and are probably seeing them more than really chasing them hard at this point where people's construction loans have come due and things. So there may be some – I think there'll be a lot of distress out there, but we don't need a lot. There's going to be some people that get caught on the bad side of the capital trades, where we can either pick up land sites or partial lease buildings in addition to our development pipeline this year to create some value and FFO as well.

Okay. Thank you, Marshall.

Sure, you’re welcome.

The next question will come from Todd Thomas with Keybanc Capital Markets. Please go ahead.

Hi! Thanks. First question, I guess I just wanted to follow-up on that line of questioning a little bit as it relates to the company's cost of capital. Brent, you know the stocks off the bottom here, you know and your cost of capital has improved from where it was over the last several months. I mean how are you thinking about acquisitions today, and do you feel a little bit more optimistic about you know either, you know or both core investments or non-stabilized deals and are you starting to see deal flow begin to pick up a little bit.

Yeah, you know more so and there are obviously daily talk in tandem. As he said, it's unusual to have this much volatility, particularly in our stock price we’re not accustomed to it, especially when you basically put forth a historic record year from a positive standpoint, yet the equity side of it got cursed last year. So you know I think our sort of sideways guide on capital outlay via development or whatever else was more just a – we've got like a prudent, measured way to come out of the gate. But as you mentioned, if the equity price can hang in there and we can source capital that we feel is attractive and we can make a good spread from, which in today's market we feel good about that, that can change, you might say in a press conference these days, it seems like, but… So that's something that we talk in tandem. The guys in the field know to keep their eyes open for opportunities. If they can find them it’ll be like – we are pricing in that moment. We'd like to think there is upside to those numbers with – you know if we can match good cost of capital with good opportunities, then we’ll lean into it. But you know we didn't feel like coming out of the year just dialing in a bunch of opportunities, just kind of buttoned in and that type of thing.

Okay, that's helpful. And then I guess my second question, on the lease-up and under construction pipelines, just any additional comments there on sort of the pace of leasing, you know how that might compared to 2022 and just looking at those sort of pipelines for lease-up and what's under construction. I mean, do you see potential for some additional conversions to take place ahead of schedule? You had a couple this quarter. You know maybe some that are slated for ’23, later in ‘23, you know a little bit earlier, and perhaps some of the ’24 making their way into ‘23.

No, good point. Now we were happy, you know out of the ones that rolled in last year and really we were 18 of 19, and one of those, the one that's – it's in the 80s actually had some tenant issues, so it was – knock on wood, it was briefly at 100% and look, that's about it. It may actually be our only vacancy in Orlando is in the one that it’s a little bit shy right now. I hope so good – again, what's been interesting the last few years, we'll always design a multi-tenant building, but more and more frequently we'll have a single tenant take it and all of a sudden then it becomes a race to – for our construction guys, how fast can they deliver that building. So looking at what's under construction, there's a number of those I think that can move to 100%. Usually they are not you know the size of our buildings or projects thankfully, that we can move along fairly quickly. So I'm hoping some of those, which again could be upside to this year's budget, certainly will help next year. If we can get them delivered later this year with the tenants in tow, and that really we would have been a little better. In the fourth quarter I'm happy with how the year turned out, but hurricane Ian slowed down delivery of a couple of fully leased buildings in Fort Myers that we had last year. So yeah, we feel good, and the activity – I would say last year at this time it was, you know things were really red hot in terms of tenants moving and pretty rapidly worrying about finding space and things like that. And then probably about the second quarter, always think of you know, it's kind of the light switch when amazon kind of said, hey, we overdid it on our space growth over the last couple of years slightly, that's when things have slowed down. So there's good steady activity, but it's not parabolic. I've heard some of the brokers use what it was kind of late ’21, early ‘22, where it just felt so frenzied. That also makes us so feel, we've all done it long enough, a little bit nervous. But anything that you know takes off like a rocket usually lands as gracefully as a rocket. So it feels like there's prospects for every space, but not five or six or where a tenant rep broker was telling me his job wasn't fun anymore, because you know every space had a handful of tenants lined up for it. So we feel good. We just need to convert the LOIs and the signed leases, but we like the activity we've got in the pipeline.

Okay, great, thank you.

Sure. Thanks, Todd.

The next question will come from Jeff Spector with Bank of America, please go ahead.

Great, thank you. My first question is a follow up on the prior discussion. Just to confirm, has there been any change in tenant demand or discussions year-to-date, let's say versus the second half of ‘22. Can you characterize I guess what you're seeing year-to-date?

Good morning, Jeff. It feels pretty similar to what it – it took a little bit of a holiday pause was the way it was described and that kind of had our antenna up thinking, okay, is this the start of the downturn, but the way it was described that when you think back, this holiday season was the first time people could – given COVID, could really travel to see family and take vacations and do things. So whether it was the tenants or the tenant rep brokers or their attorneys and things like that, things slowed down for a couple of weeks. The second half of December, maybe the first part of January, but it's picked right back up and tenant activity feels the same as it did say third and early fourth quarter last year. So we feel good and our numbers are really consistent with where we were to you know, knock on wood, late last year. So it doesn't – we're not seeing any slowdown in activity, thankfully.

Great, thanks for confirming. And then on supply, I'm sorry if I missed this, but did you quantify or can you quantify the decrease you discussed? I think you said you expect to drop off in supply later in the year. So I don't know if you have numbers on kind of second half of '23 versus you know second half of '22 or '23 over '22 and then anything on '24/'23 at this point.

It's not as clear-cut as I would prefer, but my explanation regarding the pipelines suggests that the numbers remain substantial across the market. In our primary markets like Atlanta, Dallas, and Phoenix, the figures are significant. The challenge lies in the ongoing difficulties of obtaining electrical equipment and other supplies, which takes time. Consequently, the pace of new projects has slowed compared to before the supply chain disruptions. However, I anticipate this will improve soon. Contractors are still active, which is contributing to stabilization in construction costs, but for every item that decreases in price, another, such as concrete, tends to rise. Merchant developers are largely sidelined right now. Although there are still projects in development, feedback from contractors indicates they're not pursuing new bids as aggressively moving forward. As projects move out of the pipeline, they may not get replaced, leading to estimates of a 30% to 40% decline in certain areas. It seems that everyone is feeling this market tension, particularly regarding acquisitions. The disparity between seller expectations and buyer offers, known as the bid-ask spread, is notable. If I were a merchant developer, it would be challenging to proceed with construction given the uncertainty around exit cap rates. This situation complicates matters, especially in securing financing. I commend the efforts of Brent and his team for successfully expanding our line of credit, which has required significantly more effort than earlier in the year. Many real estate investment trusts have reported similar experiences, with major banks becoming hesitant to engage in real estate financing. This poses challenges for us, but it does indicate that many projects are being stalled. We have seen a number of projects where sellers previously would get sites zoned and permitted to sell for profit, but that trend has shifted. Our recent acquisitions were often newly constructed properties, yet we found ourselves priced out due to competing buyers who were able to support higher rent projections. Those inflated rents had been increasing by 10% annually, and we likely undervalued several of our bids. However, that trend has now reversed. I estimate our product type has declined by about 30% to 40%, and this may continue to decrease in the coming months. This outlook is also influenced by widespread economic uncertainty; difficulties in securing financing will further slow activities, while the price discovery process remains ongoing. We've reviewed many packages that were previously on the market but did not receive desired pricing, and sellers are considering reintroducing them. This reinforces the idea that there is a disconnect in development costs and pricing for existing assets, and until these discrepancies are resolved, the market will remain unsettled.

Great, thanks. Very helpful.

You’re welcome.

The next question will come from Ki Bin Kim with Truist. Please go ahead.

Thanks and good morning. I just want to go back to some of your questions on development. So obviously you guys have an excellent track record on development over a number of years and I realize that where you're developing in your own industrial parts and some markets may not directly compete with the larger supply deliveries that might impact the large MSA. But my question is, if things slow down, how resilient do you think the demand for your specific new development might be relative to the larger market that might see much more increased supply in markets like Houston, Austin or Atlanta. I mentioned those three because that's where it looks like you have the land cost to do with the next round of development.

Good morning, Ki Bin. I believe our demand will be more resilient because it is more consumer-driven. Our buildings are ideally located with great access to the freeway system and near growing populations in areas like Atlanta and the East Valley of Phoenix. While consumer spending may slow down, it tends to remain stable. We're focused on delivering goods locally, like air conditioning units around the Dallas to Fort Worth area, rather than moving products long distances. Our yields are significantly higher than those of merchant developers and big-box retailers, and our development risk is lower, even if we are sometimes building speculatively. We have activity in the market that indicates demand, whether from our tenants or tenant representative brokers, even if leases aren’t signed at the onset. If the economy slows, the teams in the field are the ones who usually inform me about inventory shortages and the need for new construction. They understand that just because one project, like Phase 3 in Charlotte, didn’t lease, it doesn’t mean we should rush to build more in future phases without considering market demand. We can halt development when necessary until demand matches our supply. We're aiming to meet our goal of $330 million and hope to exceed it. The teams on the ground are optimistic about our stock levels, and I believe consumer demand will remain more stable compared to supply chain fluctuations. That's why we have generally steered clear of port-related industrial developments, which can easily shift as investments in ports across the country have increased in recent years.

Okay. And any kind of broad commentary you can share on what you think cap rates are for good assets and good markets on stabilized assets and if the bid aspect has narrowed a bit here?

It doesn't feel like it's narrowed. We're not seeing a lot of transactions. We haven't been actively in that market for several months. We've looked at things and what we're hearing from the brokers mainly is that, if you've got a long-term, say single-tenant asset, those cap rates, and you've heard all us, those have moved up the most and it makes sense. Those are the more bond-like assets. So the most interest rate sensitive. But, if you've got a multi-tenant project and then everyone talks in terms of WALT price or weighted average lease term. So, if you've got below-market leases that are rolling fairly soon, you're probably still in the fours with those, you know pending the market may be threes in Southern Cal, low fours or high threes and then we heard of some cap rates in the fives in different markets, but you know it's one thing for us to hear brokers talk about those, and I know they're being sincere, but until we see some of those trade, and that's where it could get interesting. Look, if something – because there's this disconnect in the market and we can pick up a good asset or two and ideally add some value or add to our strategy in that market. I could see us taking some of our development capital and acquiring an asset or two. But with the drop-off in construction, we think we're expecting construction pricing to drop, but it will probably have to be the second half of the year, not the first half of the year. So, if we wait a quarter or four or five months to start a new development, I think there'll be a little bit of reward. Again, the demand may be, I don't want to miss the demand, but costs may work in our favor because everyone is on the sidelines.

Okay. Thank you.

Sure.

The next question will come from Samir Khanal with Evercore ISI. Please go ahead.

Hey Marshall! Good morning. I guess just going back to the demand side, I mean if you look at your markets or even from a regional standpoint, whether it's customer behavior, I mean are tenants taking a bit longer to make decisions or renew at this point. I know, so that the timeframe had gone elongated I think when we talked, maybe earlier. But has that started to stabilize at this point? Just wanted to kind of think through that a little bit.

Good morning Samir. Deals get through the pipeline, but you know you're right and maybe it speaks more to my own patience, but they do - tenants take a while. It feels like we get deals into the red zone and then getting them ramped up and maybe that's the attorneys and getting the TI pricing and all the I’s dotted and T’s crossed and the larger the tenant is, the slower that seems to take. And I get it, from there and the dollars are higher than they were several years ago. So, there's more, sometimes more layers of approval for people to sign off. But the good news is the output is still there, but it takes a little bit longer to get deals finalized. And then some of that which would make sense to me, I think if you're a tenant and you're not a little nervous about this economy, every headline you read will make you a little bit nervous. So, I don't think - unfortunately, I don't see that going away and I don't think there is a panic for missing space that people had maybe a year ago, although that could come back with supply dropping.

Right. And I guess just for my second question, I mean it looks like you acquired more development land in the quarter. Is that where you see more of the opportunity today as we think about in 2023 or sort of the next 18 months versus maybe operating assets where pricing is a little bit uncertain right now?

I would lean that way. And the ones we bought, a couple of them without violating the confidentiality, opportunities where people have things under contract and weren't able to perform. So we were able to pick up what we thought were attractive pricing. And so there are those opportunities out there. We've not picked up any existing assets or partially leased assets, although we've looked at a couple of opportunities and it's along the lines of someone. You know we'll build a park, one or two buildings at a time where someone may have built four to six buildings at once and their construction loan is coming due and the lender wants more equity. And we're hearing from banks that their roll off of their loans isn't what it was a year ago. So it's making their capital more precious and more expensive at the bank level too. So I think we have a chance to maybe pick up some acquisitions this year. We've seen it on land and been able to execute on it and I think that will probably be the case, but there may be, some people in a capital bind, and we're not wishing it on them, but if we can step in and help solve that problem for them with the bank and we get a good asset at the right price, I’m hopeful. We're seeing the opportunities, I hope we have the capital of ourselves and will be mindful of our own capital as we move through that.

Thanks very much Marshall.

Sure. You are welcome.

The next question will come from Bill Crow with Raymond James. Please go ahead.

Hey! Good morning guys, thanks. Hey Marshall, just two quick questions. Any markets out there that you're not seeing a drop-off in new construction starts?

Hey Bill! Good morning. If it is, its tiny markets where the new construction has always been. We've got two or three assets in Jackson or New Orleans, where the entire city is below sea level and things like that. But really, I mean probably what you mean the major markets, the Houston, Dallas, Atlanta, Phoenix, Orlando, the merchant builders is one of our guys has said, and I've relayed this story. He was in a broker golf tournament and all the merchant developers said we'll be a lot better when we see it next year at this event and things like that. So, I think supply is dropping off especially in, at least what we view as competitive, because usually, it's a local regional developer partnering whether it Clarion or Heitman, KKR or someone like that, and that debt and equity has gotten a lot harder to come by and it's a lot harder to pencil your exit than it was a year ago.

Yes, okay. The second question is on the margin, are you seeing your existing tenants were hesitant to make expansion space given some of the macro issues?

It seems like the deals take longer. But no, we're still seeing a fair amount of expansions and a number of our proposals. It's not uncommon, it's a proposal to a logistics company and they're waiting to hear back on a contract, and if they get it, they're going to either leave the space or need more space. So the deal time on the tenant side takes a little bit, but we're still seeing fairly good expansions within our portfolio and that's what makes us feel good about the development. I love the idea of taking the tenant from the park from building three to kicking off building eight because their lease if it's a couple of years old, which it is and that original building by now, it's 20% call it below market or whatever that number is, and we can hopefully backfill their space by the time we move them into the new building. So that's what the team's done a really nice job doing the last few years. It's just kind of moving that Rubik's cube and that's one of our big sales pitches to tenants. As everybody is determined, they're going to outgrow their space when they move in. But we have an entire park and we'll be flexible and move you within the park and can accommodate your growth needs.

Yep. All right, thank you very much.

Sure. Thanks Bill.

The next question will come from Yung Poo with Wells Fargo. Please go ahead.

All right, thank you. Sorry to go back to guidance question again. Just regarding your occupancy and bad debt guidance, are there certain industries or markets where you're being a little bit more cautious on your assumption?

Yes, this is Brent. Not particularly, I’d like I say, it's really a ground-up component. The bad debt is again more applied at the corporate level. It's not tenant specific or at the property level specifically. So again, those were sort of the culmination of what we put together, the bad debt number is more a reflection of the historical run rate of about 0.3% of our revenue. We've been well below that the last few years, and no reason to think that we could be below that again. I guess I would just put it onto the premise that you've got to start the year somewhere. And so that's where we are. We hope that goes positive as the year progresses, but we'll see. As Marshall mentioned, 45 days or whatever we are into the year, it feels good. It feels as good as we did ending last year. So we're still not seeing any headwinds to the story and so we feel optimistic about the year. But, when you've got four quarters to go, you put the budget together, again, you just want to start in a measured, prudent manner and then let the year play out and go from there.

Got it, that's good to know. And just one more, so it looks like the January job print on construction was a little bit better than expected. What are you guys seeing in terms of kind of the homebuilding sentiment or activity down in the Sunbelt?

It does feel like. Hopefully, home buildings and industry, we worry - obviously, with mortgage rates going up and things like that, and we're in a lot of the in-migration markets, the Florida, Arizona, Texas, all of those. We're more optimistic that the homes are coming and then a lot of - a fair number of our tenants come with the large company relocation. So we see, and a lot of it is we've got the tenants moving out of California to Las Vegas to Arizona to Texas. We've picked up some suppliers to Tesla in Austin and in San Antonio and I'm sure there's homebuilding that follows that. So, we're bullish long term about, look, these markets, we've got good sites and they're only going to become more near and dear over time, and there's still companies and people that are relocating. It's just how fast, after COVID it picked up really quickly to Florida and Texas, and it may slow with homebuilding, but with maybe with the mortgage rates moderating and things like that. It feels pretty good that there's enough companies. That pace of relocations to Texas and in Carolinas and things like that feels pretty steady at this point.

Got it. Thank you.

You’re welcome.

The next question will come from Dave Rodgers with Baird. Please go ahead.

Hey guys! It’s Nick actually on for Dave. A question on following up on land. Where is like pricing today on some of the land parcels that you're seeing versus maybe at the peak in 2022? You heard kind of that asset prices could be down 20% to 30%, but land could be down as much as 50%. And do you guys see any opportunity there?

Good morning! Good question. We've picked up some opportunities. And historically, we would say land prices are pretty sticky and maybe there's two different, at least two tow different types of land sellers where it's the long-term owner, you know we’ll get the farmer, they've owned it for a while and they intent to continue to own it. Where we've seen the opportunity is more someone else has come in, tied up the land. They had a good price and they tied it up and usually that contract's got extended a time or two and they've got some money at risk and things like that or even instances where you're seeing some where people have ordered the steel and the electrical equipment and now they can't get the takeout that they want a debt or equity or a forward sale and that's where the pricing has come down. And you're probably right, because it had run up so much, some of that pricing has come down 25%, 30%. We were able to get some pretty good price reductions where the original person that tied it up still made a little bit of money, but they – that’s the tricky part, their timing window closed, and those land prices have moved backwards pretty quickly. And that's probably another thing that's keeping people on the sidelines for new development, a little bit as movement, if you're a merchant developer, movement and land prices and construction prices, you'd probably want to wait a little bit to see before you started a new project and hopefully that’s where we can step in and build some spec developments and get it least, especially if it's within our own tenant fee or the tenants across the street, while the markets are a little unstable.

That's helpful. And then maybe one quick question on just rents. When you're beginning renewal discussions, are you getting - seeing on the margin anymore pushback on like the rents from the existing tenant.

No, thankfully. Our list of reasons when we track our move out, it's not that the rent was too high, and thankfully I think especially in a rising market like we've been in, 99% of our – even our renewals, if they have a tenant rep broker, so by the time they sit down with us, their own brokers educated them of okay, you can move and go through that cost, but you're going to be paying about the same rent. This is just where the market is and I appreciate that our rents are such a low component of their cost structure compared to their wages and transportation costs, that it's given us the ability to push rents. And I do emphasize with our tenants for their cost structure is going, whether it's energy costs, wages, rents going up, but knock on wood, so far we haven't gotten pushed back. Our move-outs aren't due to rent. It's more accommodating growth or consolidating locations or different kind of macro strategy reasons within the tenant more than your rents too high, because we're - hopefully if we're doing our job, we're at market or slightly above and can earn that premium.

Very helpful. Thanks Marshall.

You’re welcome.

The next question will come from Ronald Kamdem with Morgan Stanley. Please go ahead.

Apologies, I jumped on late, but just two quick ones. Just going back to the guidance question, I think the occupancy number sort of jumped out. Just trying to get a sense of what sort of conservatism is baked into that? What are you thinking about bad debt? What's actually driving that occupancy decline that's in the guide?

Yeah, good morning Ron. Just a recap on that, yes, basically again just a rollout that was based on space assumptions, and when you start looking at 80 basis points times a square footage, it's actually given our size, not that much square feet. But certainly makes you know an impact. If we can’t have, maintain 98% then certainly that's to the good. The bad debt again is more just a reserve, based on historical run rates, we've been well below that the last couple of years. You know I would remind everyone that your bad debt express potential does include straight-line balances. So a lot of times we may have – I say, a lot of times we've there came to an occasion where you have a tenant, but suddenly files for Chapter 11 had some happen, and they are current on their rent. So you're not even aware that they were in that situation, but you may have a straight-line rent balance associated with that tenant that you have to reserve. So hopefully, those numbers prove to be conservative like we did last year. But, as I mentioned earlier, just you got to start the year somewhere, and we thought just with good measured approach in this environment would be a good way to start, and then we'll just see how the year unfolds.

Great! And then my second one is you're talking to a lot of sort of tenants. Would love to hear your perspective of where we are in the inventory cycle. Do retailers have too much inventory? Have they gone through it? What are you sort of hearing from them on the ground? Thanks.

Hearing is that – you know unlike before where it was probably a pretty scary shortage for inventory, it's built back and it's gotten better. Maybe there is some retailers that have too much inventory, but could be characterized as too much of the wrong inventory and things like that. But we still think that kind of restocking and safety stock of inventory, all of our tenants haven't been able to achieve that yet, but they’re closer to it than they were a year, 18 months ago. So I think inventory levels are picking back up, and that's got to be – you know it's hard to know sometimes exactly on our expansions. Is it that their business is better and/or probably the answer is, yes or is it that they'd like to carry a little more inventory. We've certainly seen a lot of activity from the third-party logistics companies. So it tells me people are outsourcing more and more to try to get that inventory. So I think it's better than it was, but there's still room to run on that front to get to where they feel like safety stock needs to be. And we still seem to hear in the news about shortages, something that the shortage of isn't that shocking in the news and more things to every week a new shortage on something.

Great. Thanks so much.

You’re welcome.

Thanks Ron.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Marshall Loeb for any closing remarks. Please go ahead, sir.

Thank you. We certainly appreciate everybody's time and interest in EastGroup. We are available after the call. If we weren't able to get to your question or if anybody has any follow-up questions, and we look forward to seeing you soon as we dive into conference season next. Thank you.

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